TableThe actions we have taken are subject to continued review, supported by confirmation and testing by management as well as audit committee oversight. While we have implemented measures to remediate the material weakness, we cannot assure you that such measures will be sufficient to remediate the control deficiencies that led to the material weakness in our internal control over financial reporting or to avoid potential future material weaknesses. If we are unable to successfully remediate our existing or any future material weakness in our internal control over financial reporting, or if we identify any additional material weaknesses, the accuracy and timeliness of Contentsour financial reporting may be adversely affected. If we are unable to maintain effective internal controls, we may not have adequate, accurate or timely financial information, and we may be unable to meet our reporting obligations as a public company. Failure to comply with the Sarbanes-Oxley Act, when and as applicable, could also potentially subject us to sanctions or investigations by the SEC or other regulatory authorities. Furthermore, if we cannot provide reliable financial reports or prevent fraud, our business and results of operations could be harmed and investors could lose confidence in our reported financial information.As we acquire and invest in companies or technologies, we may not realize the expected business or financial benefits. These acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder value and ownership and adversely affect our operating results and financial condition.
As part of our business strategy, we have in the past and may in the future seek to acquire or invest in other businesses, products or technologies that we believe could complement or expand our existing platform, enhance our technical capabilities or otherwise offer growth opportunities. Acquisitions and investments involve numerous risks, including:
potential failure to achieve the expected benefits of the combination or acquisition;
difficulties in, and the cost of, integrating operations, technologies, services, platforms and personnel;
diversion of financial and managerial resources from existing operations;
Our directors, officersthe potential entry into new markets in which we have little or no experience or where competitors may have stronger market positions;
potential write-offs of acquired assets or investments, and principal stockholderspotential financial and credit risks associated with acquired customers;
potential loss of key employees of the acquired company;
inability to generate sufficient revenue to offset acquisition or investment costs;
inability to maintain relationships with customers and partners of the acquired business;
difficulty of transitioning the acquired technology onto our existing platforms and customer acceptance of multiple platforms on a temporary or permanent basis;
augmenting the acquired technologies and platforms to the levels that are consistent with our brand and reputation;
increasing or maintaining the security standards for acquired technology consistent with our other services;
potential unknown liabilities associated with the acquired businesses;
unanticipated expenses related to acquired technology and its integration into our existing technology;
negative impact to our results of operations because of the depreciation and amortization of amounts related to acquired intangible assets, fixed assets and deferred compensation;
additional stock based compensation;
the loss of acquired deferred revenue and unbilled deferred revenue;
delays in customer purchases due to uncertainty related to any acquisition;
ineffective or inadequate controls, procedures and policies at the acquired company;
challenges caused by integrating operations over distance, and across different languages and cultures in the case of any international acquisitions;
currency and regulatory risks associated with foreign countries and potential additional cybersecurity and compliance risks resulting from entry into new markets; and
the tax effects of any such acquisitions.
Any of these risks could have significant voting poweran adverse effect on our business, operating results and financial condition.
In addition, to facilitate these acquisitions or investments, we may take actions thatseek additional equity or debt financing, which may not be in the best interests ofavailable on terms favorable to us, or at all, which may affect our ability to complete acquisitions or investments. If we finance acquisitions by issuing equity or convertible or other stockholders.
As of March 12, 2018,debt securities or loans, or issue equity as consideration for an acquisition, our officers, directors and principalexisting stockholders each holding more than 5% of our common stock, collectively control approximately 21% of our outstanding common stock. As a result, these stockholders, if they weremay be diluted, or we could face constraints related to act together, would be able to exert significant influence over the management and affairs of our company and most matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This significant concentration of ownership may have the effect of delaying or preventing a change of control, including those that you may believe are in your best interests as one of our stockholders. If potential acquirers are deterred, you may lose an opportunity to profit from a possible acquisition premium in our stock price. This significant concentration of stock ownership may also adversely affect the trading price of our common stock due to investors’ perception that conflicts of interest may exist or arise.
In addition, under the terms of, and repayment obligations related to, the Investors Rights Agreement that we entered into in connection with our acquisitionincurrence of iSystems, holders of a majority ofindebtedness. See also the registerable securities have the rightrisk factor below titled “We may require additional capital to nominate one director to our board of directors until holders of the registerable securities no longer hold more than the lesser of (x) 5% of our outstanding common stocksupport business growth, and (y) 90% of the shares of our common stock held by such holders as of May 25, 2017. As a result of their ownership interests and director nomination right, holders of the registerable securitiesthis capital may have the ability to influence the outcome of matters that require approval of our stockholdersnot be available on acceptable terms, or to otherwise influence the Company. The interests of these stockholders might conflict with or differ from other stockholder interests.
at all.”
If we are not able to develop enhancements and new features, keep pace with technological developments or respond to future technologies, our business, operating results and financial results will be adversely affected.
Our future success will depend on our ability to adapt and innovate. To attract new clients and increase revenue from existing clients, we will need to enhance and improve our existing products and introduce new features. The success of any enhancement or new feature depends on several factors, including timely completion, introduction and market acceptance. If we are unable to enhance our existing products to meet client needs or successfully develop or acquire new features or products, or if such new features or products fail to be successful, our business, operating results and financial condition will be adversely affected.
Our products are designed to operate on a variety of network, hardware and software platforms using Internet tools and protocols, and we must continuously modify and enhance our products to keep pace with changes in Internet-related hardware,
software, communication, browser and database technologies. In addition, if new technologies emerge that are able to deliver a workforce managementHCM software at lower prices, more efficiently or more conveniently, we may be unable to compete with these technologies. If we are unable to respond in a timely and cost-effective manner to these rapid technological developments, our products may become less marketable and less competitive or obsolete, and our business, operating results and financial condition will be adversely affected.
If we are unable to release timely updates to reflect changes in tax, benefit and other laws and regulations that our products help our clients address, the market acceptance of our products may be adversely affected and our revenues could decline.
Our solutions are affected by changes in tax, benefit and other laws and regulations and generally must be updated regularly to maintain their accuracy and competitiveness. Although we believe our SaaS platform provides us with flexibility to release updates in response to these changes, we cannot be certain that we will be able to make the necessary changes to our solutions and release updates on a timely basis, or at all. Failure to do so could have an adverse effect on the functionality and market acceptance of our solutions. Changes in tax, benefit and other laws and regulations could require us to make significant modifications to our products or delay or cease sales of certain products, which could result in reduced revenues or revenue growth and our incurring substantial expenses and write-offs.
Our business depends substantially on clients renewing their agreements with us, purchasing additional products from us or adding additional users. If our customers do not renew their subscriptions for our services or reduce the number of paying subscriptions at the time of renewal, our revenue will decline and our business, operating results and financial condition may be adversely affected. If we cannot accurately predict subscription renewals or upgrade rates, we may not meet our revenue targets, which may adversely affect the market price of our common stock.
In order for us to improve our operating results, it is important that our clients renew their agreements with us when the initial contract term expires and also purchase additional products or add additional users.
Our customers have no obligation to renew their subscriptions for our services after the expiration of their contractual subscription period, which is typically one to three years, and in the normal course of business, some customers have elected not to renew. Even if customers elect to renew, they may renew for fewer subscriptions, renew for shorter contract lengths, or switch to lower cost offerings of our services. Moreover, certain of our clients have the right to cancel their agreements for convenience, subject to certain notice requirements and, in some cases, early termination fees. It is difficult to predict attrition rates given our varied customer base of enterprise, varied sizes orof our customers and the number of multi-year subscription contracts. Our client renewal rates may decline or fluctuate as a result of a number of factors, including their satisfaction or dissatisfaction with our products, our pricing, the prices of competing products or services, mergers and acquisitions affecting our client base, reduced hiring by our clients or reductions in our clients’ spending levels.
Our future success also depends in part on our ability to sell additional features and services, more subscriptions or enhanced editions of our services to our current customers. This may also require increasingly sophisticated and costly sales efforts that are targeted at senior management. Similarly, the rate at which our customers purchase new or enhanced services depends on a number of factors, including general economic conditions and that our customers do not react negatively to any price changes related to these additional features and services.
In addition, if we cannot accurately predict subscription renewals or upgrade rates, we may not meet our revenue targets, which may adversely affect the market price of our common stock.
Even if demand for HCM products and services increases generally, there is no guarantee that demand for SaaS products generally or our products in particular will increase to a corresponding degree, or at all.
The widespread adoption of our products depends not only on strong demand for HCM products and services generally, but also for products and services delivered via a SaaS business model in particular. A significant number of organizations do not use HCM products, and it is unclear whether such organizations will ever use these products and, if they do, whether they will choose to use a SaaS software service or our HCM products in particular. As a result, we cannot assure you that our SaaS HCM software products will achieve and sustain the high level of market acceptance that is critical for the success of our business.
Client funds that we hold in trust are subject to market, interest rate, credit and liquidity risk. The loss of these funds could have a material adverse effect on our business, financial condition and results of operations.
We invest our funds held for clients in high quality, investment-grade marketable securities, money markets, and other cash equivalents. However, these funds held for clients are subject to general market, interest rate, credit, and liquidity risks. These risks may be exacerbated during periods of unusual financial market volatility. Any loss or inability to access client funds could
have an adverse impact on our cash position and could require us to obtain additional sources of liquidity, and could have a material adverse effect on our business, financial condition and results of operations.
The markets in which we participate are highly competitive, and if we do not compete effectively, our operating results could be adversely affected.
The market for payroll and HCM solutions is fragmented, highly competitive and rapidly changing. Our competitors vary for each of our solutions, and include (i) enterprise-focused software providers, such as Ultimate Software Group, Inc., Workday, Inc., SAP AG, Oracle Corporation and Ceridian Corporation, (ii) payroll service providers, such as Automatic Data Processing, Inc., Paychex, Inc., Paycom Software, Inc., Paycor, Inc. and (iii) other regional providers, and HCM point solutions, such as Cornerstone OnDemand, Inc.
Several of our competitors are larger, have greater name recognition, longer operating histories, larger marketing budgets and significantly greater resources than we do, and are able to devote greater resources to the development, promotion and sale of their products and services. Some of our competitors could offer HCM solutions bundled as part of a larger product offering. In addition, many of our competitors have established marketing relationships, access to larger customer bases, and major distribution agreements with consultants, system integrators, and resellers.
Furthermore, our current or potential competitors may be acquired by third parties with greater available resources and the ability to initiate or withstand substantial price competition. As a result, our competitors may be able to develop products and services better received by our markets or may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, regulations or client requirements.
In addition, current and potential competitors have established, and might in the future establish, partner or form other cooperative relationships with vendors of complementary products, technologies or services to enable them to offer new products and services, to compete more effectively or to increase the availability of their products in the marketplace. New competitors or relationships might emerge that have greater market share, a larger client base, more widely adopted proprietary technologies, greater marketing expertise, greater financial resources, and larger sales forces than we have, which could put us at a competitive disadvantage. In light of these advantages, current or potential clients might accept competitive offerings in lieu of purchasing our offerings. We expect intense competition to continue for these reasons, and such competition could negatively impact our sales, profitability or market share.
Our clients could have insufficient funds to cover payments we have made on their behalf or credit that we have extended to them in connection with the services that we have provided, resulting in financial loss to us.
As part of the payroll processing service, we are authorized by our clients to transfer money from their accounts to fund amounts owed to their employees and various taxing authorities. It is possible that we could be held liable for such amounts in the event the client has insufficient funds to cover them. We have in the past, and may in the future, make payments on our clients’ behalf for which we may not be reimbursed, resulting in a loss to us. Further, if we are required to advance substantial amounts of funds to cover payment obligations of our clients, we may need to seek additional sources of short-term liquidity, which may not be available on reasonable terms, which could have a material, adverse effect on our business, financial condition and results of operations.
We grant credit to customers in the ordinary course of business, exposing us to the credit risk of our customers. In the course of our sales to customers, we may encounter difficulty collecting accounts receivable, which could adversely impact our operating results and financial condition. We maintain reserves for potential credit losses. However, these reserves are based on our judgment and a variety of factors and assumptions.
We perform credit evaluations of our customers’ financial condition. However, our evaluation of the creditworthiness of customers may not be accurate if they do not provide us with timely and accurate financial information or if their situations change after we evaluate their credit. While we attempt to monitor these situations carefully, adjust our allowances for doubtful accounts as appropriate and take measures to collect accounts receivable balances, we have written down accounts receivable and written off doubtful accounts in prior periods and may be unable to avoid additional write-downs or write-offs of doubtful accounts in the future. Such write-downs or write-offs could negatively affect our operating results for the period in which they occur, and could harm our financial condition.
If the banks that currently provide ACH and wire transfers fail to properly transmit ACH or terminate their relationship with us or limit our ability to process funds or we are not able to increase our ACH capacity with our existing and new banks, our ability to process funds on behalf of our clients and our financial results and liquidity could be adversely affected.
We currently have agreements with nine banks to execute ACH and wire transfers to support our client payroll, benefit and tax services. If one or more of the banks fails to process ACH transfers on a timely basis, or at all, then our relationship with our clients could be harmed and we could be subject to claims by a client with respect to the failed transfers. In addition, these banks have no obligation to renew their agreements with us on commercially reasonable terms, if at all. If these banks terminate their relationships with us or restrict the dollar amounts of funds that they will process on behalf of our clients, their doing so may impede our ability to process funds and could have an adverse impact on our financial results and liquidity.
Privacy regulations, existing and evolving regulation of cloud computing, cross-border transfer restrictions and other United States and foreign regulations could limit the use of our services and adversely affect our business.
Regulatory focus on privacy issues continues to increase, as federal, state and foreign governments continue to adopt new laws and regulations addressing data privacy and the collection, processing, storage and use of personal information. As these laws expand and become more complex, potential risks related to our handling of our clients’ personal information will intensify. California recently enacted legislation, the California Consumer Privacy Act (CCPA), that affords consumers expanded privacy protections relating to the access to, deletion of, and sharing of personal information that is collected by businesses. The CCPA and other changes in domestic laws or regulations associated with the enhanced protection of certain types of sensitive data, such as healthcare data, biometric data, or any personal information, could increase our cost of providing our services or prevent us from offering services in jurisdictions in which we operate. These and other requirements could reduce demand for our services or restrict our ability to store and process data or, in some cases, impact our ability to offer our services in certain locations impacting our clients’ ability to deploy our solutions globally. Additionally, the law relating to the ability to exchange data outside of jurisdiction borders is complex and subject to change.
The costs of compliance with and other burdens imposed by laws, regulations and standards may limit the use and adoption of our services, reduce overall demand for our services, lead to significant fines, penalties or liabilities for noncompliance, or slow the pace at which we close sales transactions, any of which could harm our business. In addition to governmental regulation, self-regulatory standards may place additional burdens on us. Many of our customers expect us to meet voluntary certification or other standards established by third parties, such as the International Trade Administration Privacy Shield as well as other audited measures and controls. If we are unable to maintain these certifications or meet these standards, it could adversely affect our ability to provide our solutions to certain customers and could harm our business. Even the perception that the privacy of personal information is not satisfactorily protected or does not meet regulatory requirements could inhibit sales of our products or services, and could limit adoption of our cloud-based solutions.
Our balance sheet includes significant amounts of goodwill and intangible assets. The impairment of a significant portion of these assets would adversely affect our business, operating results and financial condition.
As a result of our acquisitions, a significant portion of our total assets consist of intangible assets, including goodwill. Goodwill and identifiable intangible assets together accounted for approximately 40% of the total assets on our balance sheet as of December 31, 2019. We may not realize the full fair value of our intangible assets and goodwill. We expect to engage in additional acquisitions, which may result in our recognition of additional identifiable intangible assets and goodwill. We evaluate on a regular basis whether all or a portion of our goodwill and identifiable intangible assets may be impaired. Under current accounting rules, any determination that impairment has occurred would require us to write off the impaired portion of goodwill and such intangible assets, resulting in a charge to our earnings. In 2019, we recorded an impairment of goodwill amounting to $35,060, which was reflected as an operating expense in our consolidated statements of comprehensive income (loss). In addition, any future impairment of a significant portion of goodwill or intangible assets could have a material adverse effect on our business, operating results and financial condition.
Our ability to make scheduled payments on or to refinance our existing indebtedness (including the indebtedness under our Third Restated Credit Agreement and subordinated promissory notes) depends on our future performance, which is subject to economic, financial, competitive and other factors that may be beyond our control.
Our business may not generate cash flow from operations in the future sufficient to service our debt and support our growth strategies. If we are unable to generate sufficient cash flow, we may be required to pursue one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or on desirable terms, which could result in a default on our debt obligations, including under our current debt obligations. In addition, if for any reason we are unable to meet our debt service and repayment obligations, we would be in
default under the terms of our Third Restated Credit Agreement, which would allow our creditors at that time to declare all outstanding indebtedness to be due and payable. Under these circumstances, our lenders could compel us to apply all of our available cash to repay our indebtedness.
Our ability to incur debt and the use of our funds could be limited by the restrictive covenants in our loan agreement for our term loan and revolving credit facility.
Our Third Restated Credit Agreement with Wells Fargo Bank, N.A. provides for a term loan and revolving credit facility that contains restrictive covenants, including restrictions on our ability to pay dividends to stockholders, as well as requirements to comply with certain leverage ratios and other financial maintenance tests. These restrictive covenants and requirements limit the amount of borrowings that are available to us. The Third Restated Credit Agreement covenants may also affect our ability to obtain future financing and to pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions. These covenants could place us at a disadvantage compared to some of our competitors, who may have fewer restrictive covenants and may not be required to operate under these restrictions.
We may be required to incur further debt to meet future capital requirements of our business. Should we be required to incur additional debt, the restrictions imposed by the terms of such debt could adversely affect our financial condition and our ability to respond to changes in our business.
If we incur additional debt, we may be subject to the following risks:
our vulnerability to adverse economic conditions may be heightened;
· | our vulnerability to adverse economic conditions may be heightened; |
our flexibility in planning for, or reacting to, changes in our business may be limited;
our debt covenants may affect our flexibility in planning for, and reacting to, changes in the economy and in our industry;
· | our flexibility in planning for, or reacting to, changes in our business may be limited; |
higher levels of debt may place us at a competitive disadvantage compared to our competitors or prevent us from pursuing opportunities;
covenants contained in the agreements governing our indebtedness may limit our ability to borrow additional funds and make certain investments;
· | our debt covenants may affect our flexibility in planning for,a significant portion of our cash flow could be used to service our indebtedness; and reacting to, changes in the economy and in our industry; |
· | higher levels of debt may place us at a competitive disadvantage compared to our competitors or prevent us from pursuing opportunities; |
· | covenants contained in the agreements governing our indebtedness may limit our ability to borrow additional funds and make certain investments; |
· | a significant portion of our cash flow could be used to service our indebtedness; and |
· | our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or other general corporate purposes may be impaired. |
We cannot assure you that our leverage and such restrictions will not materially and adversely affect our ability to finance our future operations or capital needs or to engage in other business activities.
Unfavorable conditions in our industry or the global economy, or reductions in information technology spending, could adversely affect our business, operating results and financial condition.
Our operating results may vary based on changes in our industry or the impact of changes in the global economy on us or our clients. The revenue growth and potential profitability of our business depends on demand for enterprise application software and services generally and for HCM solutions in particular. We sell our software products and services primarily to large, mid-sized and small business organizations whose businesses fluctuate based on general economic and business conditions. In addition, a portion of our revenue is attributable to the number of users of our products at each of our clients, which in turn is influenced by the employment and hiring patterns of our clients and potential clients. To the extent that economic uncertainty or weak economic conditions cause our clients and potential clients to freeze or reduce their headcount, demand for our products may be negatively affected. Historically, economic downturns have resulted in overall reductions in spending on information technology and HCM software as well as pressure from clients and potential clients for extended billing terms. The recent outbreak of the coronavirus could impact our global supply chain network, cause extended shutdowns of businesses and the prolonged economic impact of the outbreak remains uncertain. If economic conditions deteriorate, our clients and potential clients may elect to decrease their information technology and HCM budgets by deferring or reconsidering product purchases, which would adversely affect our business, operating results and financial condition.
Existing or future laws and regulations could increase the cost of our products and negatively affect our reputation, results of operations or financial condition, or have other adverse consequences.
Our business is subject to a wide range of complex U.S. laws and regulations. As a provider of human resources outsourcing solutions, we process personal and sensitive data related to clients, employees of our clients, and our employees, and are subject to compliance obligations under federal, state and foreign privacy and data security-related laws. For instance, in the United States, the Health Insurance Portability and Accountability Act of 1996 applies to our COBRA, flexible spending account and health savings account benefits administration services businesses. We are also subject to federal and state security breach notification laws with respect to both our own employee data and client employee data.
Some of our solutions assist our clients in complying with certain U.S. laws and regulations that apply to them. For example, our HCM solutions help clients manage their compliance with certain requirements of the Patient Protection and Affordable Care Act in the United States. Our COBRA administration services and flexible spending account services in the United States are designed to help our clients comply with relevant federal guidelines relating to, respectively, employers’ benefits continuation obligations and certain requirements of the Internal Revenue Code. Changes in such laws or regulations could require us to make significant modifications to our products or delay or cease sales of certain products, which could result in reduced revenues, increased expenses and write-offs.
As part of our payroll processing solutions, we move client funds to taxing authorities, our clients’ employees, and other payees via electronic transfer and direct deposit. Some elements of our money transmission activities may be subject to licensing requirements under money transmitter statutes in some jurisdictions. The adoption of new money transmitter statutes in other jurisdictions, changes in regulators’ interpretation of existing state and federal money transmitter or money services business statutes or regulations, or disagreement by a regulatory authority with our interpretation of such statutes or regulations, could require additional registration or licensing, limit certain of our business activities until they are appropriately licensed, and expose us to financial penalties. These occurrences could also require changes to the manner in which we conduct some aspects of our money movement business or client funds investment strategy.
Failure to comply with laws and regulations applicable to our operations or client solutions and services could result in the suspension or revocation of licenses or registrations, the limitation, suspension or termination of services, and the imposition of consent orders or civil and criminal penalties, including fines, that could damage our reputation and have a materially adverse effect on our results of operation or financial condition. In addition, changes in laws or regulations, or changes in the interpretation of laws or regulations by a regulatory authority, may decrease our revenues and earnings and may require us to change the manner in which we conduct some aspects of our business. For example, a change in regulations either decreasing the amount of taxes to be withheld or allowing less time to remit taxes to government authorities would adversely impact average client balances and, thereby adversely impact interest income from investing client funds before such funds are remitted to the applicable taxing authorities. Changes in taxation regulations could adversely affect our effective tax rate and our results of operations.
We may be subject to claims, lawsuits, governmental investigations and other proceedings that could adversely affect our business, financial condition and results of operations.
We are sometimes the subject of claims, lawsuits, governmental investigations and other legal and regulatory proceedings in the ordinary course of business, including those involving, among others, breach of contract, tortious conduct and employment law matters. The results of any such claims, lawsuits, or other legal or regulatory proceedings cannot be predicted with certainty. Any claims against us, whether meritorious or not, could be time-consuming, result in costly litigation, be harmful to our reputation, impact licenses that are necessary or required to operate our business, require significant management attention and divert significant resources. It is possible that a resolution of one or more such proceedings could result in substantial damages, settlement costs, fines and penalties that could adversely affect our business, financial condition and results of operations.
We incur significant costs as a result of operating as a public company, and our management will devote substantial time to new compliance initiatives. We may fail to comply with the rules that apply to public companies, which could result in sanctions or other penalties that would harm our business.
We incur significant legal, accounting and other expenses as a public company, including costs resulting from public company reporting obligations under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and regulations regarding corporate governance practices. The listing requirements of The Nasdaq Capital Market require that we satisfy certain corporate governance requirements relating to director independence, distributing annual and interim reports, stockholder meetings, approvals and voting, soliciting proxies, conflicts of interest and a code of conduct. Our management and other personnel devote a substantial amount of time to ensure that we comply with all of these requirements. Moreover, new reporting requirements, rules and regulations will increase our legal and financial compliance costs and will make some activities more time consuming
and costly. Any changes we make to comply with these obligations may not be sufficient to allow us to satisfy our obligations as a public company on a timely basis, or at all.
To the extent that our pre-tax income or loss becomes relatively modest, our ability to conclude that a control deficiency is not a material weakness or that an accounting error does not require a restatement could be adversely affected.
Under the Sarbanes-Oxley Act of 2002, our management is required to assess the impact of control deficiencies based upon both quantitative and qualitative factors, and depending upon that analysis, we classify such identified deficiencies as either a control deficiency, significant deficiency or a material weakness. One element of our analysis of the significance of any control deficiency is its actual or potential financial impact. This assessment will vary depending on our level of pre-tax income or loss. For example, a smaller pre-tax income or loss will increase the likelihood of a quantitative assessment of a control deficiency as a significant deficiency or material weakness.
To the extent that our pre-tax income or loss is relatively small, if management or our independent registered public accountants identify an error in our interim or annual financial statements, it is more likely that such an error may be determined to be a material weakness or be considered a material error that could, depending upon the complete quantitative and qualitative analysis, result in our having to restate previously issued financial statements.
We depend on data centers and computing infrastructure operated by third parties and any disruption in these operations could adversely affect our business.
We host our applications and serve our customers through a number of external data centers. While we control and have access to our servers and all the components of the networks that are located in our external data centers, we do not control the operations of these facilities. The owners of such facilities have no obligation to renew their agreements with us on commercially reasonable terms. If we are not able to renew these contracts on commercially reasonable terms, we may be required to transfer our servers and other infrastructure to new data facilities, and we may incur significant costs and possible service interruption in doing so. Additionally, we rely on certain hosted infrastructure partners, such as Amazon Web Services (“AWS”) to provide a third party hosted environment for certain of our applications. Any disruption or interference at our hosted infrastructure partners would impact our operations and our business could be adversely impacted.
Our SaaS hosting network infrastructure is a critical part of our business operations. Our clients access our HCM software through a standard web browser and depend on us for fast and reliable access to our products. Our software is proprietary, and we rely on third-party data center hosting facilities and the expertise of members of our engineering and software development teams for the continued performance of our software. We have experienced, and may in the future experience, disruptions in our computing and communications infrastructure. Factors that may cause such disruptions include:
human error;
security breaches;
telecommunications outages from third-party providers;
computer viruses;
acts of terrorism, sabotage or other intentional acts of vandalism, including cyber attacks;
unforeseen interruption or damages experienced in moving hardware to a new location, including government-imposed travel restrictions;
fire, earthquake, flood, the spread of major epidemics (including coronavirus) and other natural disasters; and
power loss.
Although we generally back up our client databases hourly, store our data in more than one geographically distinct location at least weekly and perform real-time mirroring of data to disaster recovery locations, we do not currently offer immediate access to disaster recovery locations in the event of a disaster or major outage. Thus, in the event of any of the factors described above, or other failures of our computing infrastructure, clients may not be able to access their data for lengthy periods of time and it is possible that client data from recent transactions may be permanently lost or otherwise compromised. In addition, we may not have adequate insurance coverage to compensate for losses from a major interruption. Moreover, some of our agreements include performance guarantees and service level standards that obligate us to provide credits, refunds or termination rights in the event
of a significant disruption in our SaaS hosting network infrastructure or other technical problems that relate to the functionality or design of our software.
We may require additional capital to support business growth, and this capital may not be available on acceptable terms, or at all.
We intend to continue to make investments, including the acquisition of complementary businesses, to support our business growth and may seek additional funds to respond to business challenges, including the need to develop new features or enhance our existing products, improve our operating infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to engage in additional equity or debt financings to secure additional funds. If we raise additional funds through issuances of equity or debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including subordinated promissory notes we issued in connection with our acquisitions, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to satisfy our obligations under the notes and any future indebtedness we may incur and to make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance the notes or future indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on the notes or future indebtedness.
Volatility and weakness in bank and capital markets may adversely affect credit availability and related financing costs for us.
Unfavorable conditionsvolatility and disruption. If the disruption in these markets is prolonged, our industryability to refinance, and the related cost of refinancing, some or all of our debt could be adversely affected. Although we currently can access the bank and capital markets, there is no assurance that such markets will continue to be a reliable source of financing for us. These factors, including the tightening of credit markets, could adversely affect our ability to obtain cost-effective financing. Increased volatility and disruptions in the financial markets also could make it more difficult and more expensive for us to refinance outstanding indebtedness and to obtain financing. In addition, the adoption of new statutes and regulations, the implementation of recently enacted laws, or new interpretations or the global economy,enforcement of older laws and regulations applicable to the financial markets or reductionsthe financial services industry could result in information technology spending,a reduction in the amount of available credit or an increase in the cost of credit. Disruptions in the financial markets can also adversely affect our lenders, insurers, customers, and other counterparties. Any of these results could adverselyhave a material adverse effect on our business, financial condition, and results of operations.
Further, the interest rate on debt we have incurred under our Third Restated Credit Agreement is calculated with reference to LIBOR. LIBOR is an interest rate used in lending transactions between banks on the London interbank market. On July 27, 2017, the United Kingdom's Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. The maturity date of our indebtedness under our Third Restated Credit Agreement is after December 31, 2021. Our Third Restated Credit Agreement allows for an adjustment of the interest rate on such loans as a result of the phase out of LIBOR; however, we cannot guarantee that any replacement rate will be as favorable to us as the LIBOR rate and this may affect our ability to meet our debt service and repayment obligations or have an adverse effect on our operations.
If we lose key personnel, including key management personnel, or are unable to attract and retain additional personnel as needed in the future, it could disrupt the operation of our business, delay our product development and harm our growth efforts.
Our future performance depends largely on our ability to continually and effectively attract, train, retain, motivate and manage highly qualified and experienced technical, sales, marketing, managerial and executive personnel. Our future development and growth depend on the efforts of key management personnel and technical employees. We cannot guarantee that we will continue to attract and retain personnel with the requisite capabilities and experience. The loss of one or more of our key management or technical personnel could have a material and adverse effect on our business, operating results and financial condition.
Our operating results may vary based on changes in our industry or the impact of changes in the global economy on us or our clients. The revenue growth and potential profitability of our business depends on demand for enterprise application software and services generally and for workspace and workforce management solutions in particular. We sell our software products and services primarily to large, mid-sized and small business organizations whose businesses fluctuate based on general economic and business conditions. In addition, a portion of our revenue is attributable to the number of users of our products at each of our clients, which in turn is influenced by the employment and hiring patterns of our clients and potential clients. To the extent that economic uncertainty or weak economic conditions cause our clients and potential clients to freeze or reduce their headcount, demand for our products may be negatively affected. Historically, economic downturns have resulted in overall reductions in spending on information technology and workforce management software as well as pressure from clients and potential clients for extended billing terms. If economic conditions deteriorate, our clients and potential clients may elect to decrease their information technology and workforce management budgets by deferring or reconsidering product purchases, which would adversely affect our business, operating results and financial condition.
The market for workforce management in which we participate is intensely competitive, and if we do not compete effectively, our business, operating results and financial condition could be adversely affected.
The market for workforce management software is highly competitive, rapidly evolving and fragmented. Many of our competitors and potential competitors are larger and have greater brand name recognition, longer operating histories, larger marketing budgets and significantly greater resources than we do. These competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, and they may be able to compete more effectively on price and other terms. In addition, with the introduction of new technologies and market entrants, we expect competition to intensify in the future. If we fail to compete effectively, our business will be harmed. Some of our principal competitors offer their products or services at a lower price, which has resulted in pricing pressures on our products. Similarly, some competitors offer different billing terms, which has resulted in pressures on our billing terms. If we are unable to maintain our pricing levels and billing terms, our operating results could be negatively impacted. In addition, pricing pressures and increased competition generally could result in reduced sales, reduced margins, losses or the failure of our products to achieve or maintain more widespread market acceptance, any of which could adversely affect our business, operating results and financial condition.
We face competition from paper-based processes and desktop software tools. We also face competition from custom-built software that is designed to support the needs of a single organization, as well as from third-party talent and human resource application providers. These vendors include, without limitation, Dean Evans & Associates, Inc., Emergingsoft Corporation, AgilQuest Corporation and Condeco Ltd. (UK) as competitors to the AsureSpace™ line and Kronos, Replicon and Time Simplicity as competitors to the AsureForce® line. In addition, some of the parties with which we maintain business alliances offer or may offer products or services that compete with our products or services.
Many of our competitors are able to devote greater resources to the development, promotion and sale of their products and services. In addition, many of our competitors have established marketing relationships, access to large client bases and major distribution agreements with consultants, system integrators and distributors. Moreover, many software vendors can bundle human resource products or offer such products at a lower price as part of a larger product sale. In addition, some competitors may offer software that addresses one or a limited number of workforce management functions at a lower price point or with greater depth than our products. For all of these reasons, we may not be able to compete successfully against our current and future competitors.
Existing or future laws and regulations could increase the cost of our products and negatively affect our operating results, as well as subject us to litigation, regulatory investigations and other potential liabilities.
Our business is subject to a wide range of complex U.S. and foreign laws and regulations. As a provider of human resources outsourcing solutions, we process personal and sensitive data related to clients, employees of our clients, and our employees, and are subject to compliance obligations under federal, state and foreign privacy and data security-related laws. For instance, in the United States, the Health Insurance Portability and Accountability Act of 1996 applies to our COBRA, flexible spending account and health savings account benefits administration services businesses. We are also subject to federal, state and foreign security breach notification laws with respect to both our own employee data and client employee data.
Some of our solutions assist our clients in complying with certain U.S. and foreign laws and regulations that apply to them. For example, our HCM solutions help clients manage their compliance with certain requirements of the Patient Protection and Affordable Care Act in the United States. Our COBRA administration services and flexible spending account services in the United States are designed to help our clients comply with relevant federal guidelines relating to, respectively, employers’ benefits continuation obligations and certain requirements of the Internal Revenue Code. Changes in such laws or regulations may negatively affect our operating results, and render these compliance management aspects of our products and services obsolete.
Evolving regulation of the Internet, changes in the infrastructure underlying the Internet or interruptions in Internet access may adversely affect our business, operating results and financial condition by increasing our expenditures and causing client dissatisfaction.
Our services depend on the ability of our registered users to access the Internet. Currently, this access is provided by companies that have significant market power in the broadband and Internet access marketplace, including incumbent telephone companies, cable companies, mobile communications companies and government-owned service providers. Laws or regulations that adversely affect the growth, popularity or use of the Internet, including changes to laws or regulations impacting Internet neutrality, could decrease the demand for our products, increase our operating costs, require us to alter the manner in which we conduct our business and/or otherwise adversely affect our business. For example, the Federal Communications Commission (the “FCC”) recently adopted an order repealing rules that prohibit Internet service providers (“ISPs”) from blocking or throttling Internet traffic, and from engaging in practices that prioritize particular Internet content in exchange for payment (also known as “paid prioritization”). The order is not yet effective and has been challenged in court, which could result in further changes to the governing law. There is also uncertainty regarding how the FCC’s new framework, if upheld, and new oversight by the Federal Trade Commission (“FTC”) will be applied. Depending on ongoing appellate proceedings and future action by the FCC and FTC, we could experience discriminatory or anti-competitive practices that could cause us to incur additional expense or otherwise adversely affect our business, operating results and financial condition. In particular, the repeal of restrictions on paid prioritization could enable ISPs to impose higher fees and otherwise adversely affect our business.
In addition, the rapid and continual growth of traffic on the Internet has resulted at times in slow connection and download speeds of Internet users. Our business may be harmed if the Internet infrastructure cannot handle our clients’ demands or if hosting capacity becomes insufficient. If our clients become frustrated with the speed at which they can utilize our products over the Internet, our clients may discontinue the use of our software and choose not to renew their contracts with us. Further, the performance of the Internet has also been adversely affected by viruses, worms, hacking, phishing attacks, denial of service attacks and other similar malicious programs, as well as other forms of damage to portions of its infrastructure, which have resulted in a variety of Internet outages, interruptions and other delays. These service interruptions could diminish the overall attractiveness of our products to existing and potential users and could cause demand for our products to suffer.
Our business and operations are experiencing growth and organizational change. If we fail to effectively manage such growth and change, our business, operating results and financial condition could be adversely affected.
We have experienced, and may continue to experience, growth and organizational change, which has placed, and may continue to place, significant demands on our management, operational and financial resources. For example, our headcount has grown from 179 employees (175 full-time) on December 31, 2016 to 324 employees (315 full-time) on December 31, 2017. We may continue to expand our operations in the future, either organically or through additional acquisitions. We have also experienced significant growth in the number of users, transactions and data that our SaaS hosting infrastructure supports. We will require significant capital expenditures and the allocation of valuable management resources to manage this growth. If we fail to manage our anticipated growth and change in an effective manner, our ability to retain and attract clients may suffer and our business, operating results and financial condition may be adversely affected.
Our clients could have insufficient funds to cover payments we have made on their behalf, resulting in financial loss to us.
As part of the payroll processing service, we are authorized by our clients to transfer money from their accounts to fund amounts owed to their employees and various taxing authorities. It is possible that we could be held liable for such amounts in the event the client has insufficient funds to cover them. We have in the past, and may in the future, make payments on our clients’ behalf for which we may not be reimbursed, resulting in loss to us.
Our interest earned on funds held for clients may be impacted by changes in government regulations mandating the amount of tax withheld or timing of remittance.
We receive interest income from investing client funds collected but not yet remitted to applicable tax or regulatory agencies or to client employees. A change in regulations either decreasing the amount of taxes to be withheld or allowing less time to remit taxes to applicable tax or regulatory agencies could adversely impact interest income.
The markets in which we participate are highly competitive, and if we do not compete effectively, our operating results could be adversely affected.
The market for payroll and HCM solutions is fragmented, highly competitive and rapidly changing. Our competitors vary for each of our solutions, and include (i) enterprise-focused software providers, such as Ultimate Software Group, Inc., Workday, Inc., SAP AG, Oracle Corporation and Ceridian Corporation, (ii) payroll service providers, such as Automatic Data Processing, Inc., Paychex, Inc., Paycom Software, Inc., Paycor, Inc. and (iii) other regional providers, and HCM point solutions, such as Cornerstone OnDemand, Inc.
Several of our competitors are larger, have greater name recognition, longer operating histories and significantly greater resources than we do. Many of these competitors are able to devote greater resources to the development, promotion and sale of their products and services. Furthermore, our current or potential competitors may be acquired by third parties with greater available resources and the ability to initiate or withstand substantial price competition. As a result, our competitors may be able to develop products and services better received by our markets or may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, regulations or client requirements.
In addition, current and potential competitors have established, and might in the future establish, partner or form other cooperative relationships with vendors of complementary products, technologies or services to enable them to offer new products and services, to compete more effectively or to increase the availability of their products in the marketplace. New competitors or relationships might emerge that have greater market share, a larger client base, more widely adopted proprietary technologies, greater marketing expertise, greater financial resources, and larger sales forces than we have, which could put us at a competitive disadvantage. In light of these advantages, current or potential clients might accept competitive offerings in lieu of purchasing our offerings. We expect intense competition to continue for these reasons, and such competition could negatively impact our sales, profitability or market share.
If we lose key personnel, including key management personnel, or are unable to attract and retain additional personnel as needed in the future, it could disrupt the operation of our business, delay our product development and harm our growth efforts.
Our future performance depends largely on our ability to continually and effectively attract, train, retain, motivate and manage highly qualified and experienced technical, sales, marketing, managerial and executive personnel. Our future development and growth depend on the efforts of key management personnel and technical employees. We cannot guarantee that we will continue to attract and retain personnel with the requisite capabilities and experience. The loss of one or more of our key management or technical personnel could have a material and adverse effect on our business, operating results and financial condition.
Any significant disruption in our SaaS hosting network infrastructure could harm our reputation, require us to provide credits or refunds, result in early terminations of client agreements or a loss of clients, and adversely affect our business, operating results and financial condition.
Our SaaS hosting network infrastructure is a critical part of our business operations. Our clients access our workforce management software through a standard web browser and depend on us for fast and reliable access to our products. Our software is proprietary, and we rely on third-party data center hosting facilities and the expertise of members of our engineering and software development teams for the continued performance of our software. We have experienced, and may in the future experience, disruptions in our computing and communications infrastructure. Factors that may cause such disruptions include:
· | telecommunications outages from third-party providers; |
· | acts of terrorism, sabotage or other intentional acts of vandalism, including cyber attacks; |
· | unforeseen interruption or damages experienced in moving hardware to a new location; |
· | fire, earthquake, flood and other natural disasters; and |
Although we generally back up our client databases hourly, store our data in more than one geographically distinct location at least weekly and perform real-time mirroring of data to disaster recovery locations, we do not currently offer immediate access to disaster recovery locations in the event of a disaster or major outage. Thus, in the event of any of the factors described above, or other failures of our computing infrastructure, clients may not be able to access their data for lengthy periods of time and it is possible that client data from recent transactions may be permanently lost or otherwise compromised. In addition, we may not have adequate insurance coverage to compensate for losses from a major interruption. Moreover, some of our agreements include performance guarantees and service level standards that obligate us to provide credits, refunds or termination rights in the event of a significant disruption in our SaaS hosting network infrastructure or other technical problems that relate to the functionality or design of our software.
Even if demand for workforce management products and services increases generally, there is no guarantee that demand for SaaS products generally or our products in particular will increase to a corresponding degree, or at all.
The widespread adoption of our products depends not only on strong demand for workforce management products and services generally, but also for products and services delivered via a SaaS business model in particular. A significant number of organizations do not use workforce management products, and it is unclear whether such organizations will ever use these products and, if they do, whether they will choose to use a SaaS workforce management software service or our products in particular. As a result, we cannot assure you that our SaaS workforce management software products will achieve and sustain the high level of market acceptance that is critical for the success of our business.
Because of how we recognize revenue with respect to our workforce management products, a significant downturn in our business may not be immediately reflected in our operating results.
Our revenues consist of SaaS offerings, time-based software subscriptions, and perpetual software license sale arrangements. We recognize revenue from our SaaS arrangements and time-based software subscription agreements monthly over the terms of these arrangements, which typically range from one to three years. As a result, a significant portion of the revenue we report in each quarter is generated from arrangements entered into during previous periods. Consequently, a decline in new subscriptions or SaaS arrangements in any one quarter may not have a significant impact on our revenue and financial performance in that quarter, but will negatively affect our revenue, or rate of revenue growth, and financial performance in future quarters.
In addition, if subscription or SaaS arrangements expire and are not renewed in the same quarter, our revenue and financial performance in that quarter and subsequent quarters will be negatively affected. However, the revenue impact may not be immediately reflected in our operating results to the extent there is an offsetting increase in revenue from perpetual license sales in that same quarter.
Finally, we may be unable to adjust our fixed costs in response to reduced revenue. Accordingly, the effect of significant declines in sales and market acceptance of our products may not be reflected in our short-term operating results.
Because we generally recognize subscription revenue from our clients over the terms of their agreements but incur most costs associated with generating such agreements up front, rapid growth in our client base may put downward pressure on our operating income in the short term.
The expenses associated with generating client agreements are generally incurred up front, while the resulting subscription revenue is generally recognized over the life of the agreements. Accordingly, increased growth in the number of our clients will result in our recognition of more costs than revenue during the early periods covered by such agreements, even in cases where the agreements are expected to be profitable for us over their full terms.
If we fail to adequately protect our proprietary rights, our competitive advantage and brand could be impaired and we may lose valuable assets, generate reduced revenue and incur costly litigation to protect our rights.
Our success is dependent, in part, upon protecting our proprietary technology. We rely on a combination of trademarks, service marks, trade secret laws and contractual restrictions to establish and protect our proprietary rights in our products and services. However, the steps we take to protect our intellectual property may be inadequate. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Despite our precautions, it may be possible for unauthorized third parties to copy our products and use information that we regard as proprietary to create products and services that compete with ours. Some license provisions protecting against unauthorized use, copying, transfer and disclosure of our licensed products may be unenforceable under the laws of certain jurisdictions and foreign countries. Further, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States. To the extent we expand our international activities, our exposure to unauthorized copying and use of our products and proprietary information may increase. While our general practice is to enter into confidentiality and invention assignment agreements with our employees and consultants and confidentiality agreements with the parties with whom we have strategic relationships and business
alliances, these agreements may not be effective in controlling access to and distribution of our products and proprietary information. Further, these agreements do not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our products. Litigation brought to protect and enforce our intellectual property rights could be costly, time consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. If we fail to secure, protect and enforce our intellectual property rights, we may lose valuable assets, generate reduced revenue and incur costly litigation to protect our rights, which could adversely affect our business, operating results and financial condition.
We may be sued by third parties for infringement of their proprietary rights.
Our level of indebtedness and the terms of our indebtedness, including the indebtedness under our Restated Credit Agreement and subordinated promissory notes, could adversely affect our operations and limit our ability to plan for or respond to changesThere is considerable intellectual property development activity in our businessindustry. Our success depends upon our not infringing upon the intellectual property rights of others. Third parties, including our competitors, may own or acquire additional businesses. Ifclaim to own intellectual property relating to our products or services and may claim that we are unableinfringing their intellectual property rights. We may be found to be infringing upon such rights, even if we are unaware of their intellectual property rights. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, obtain licenses, modify applications, prevent us from offering our services, or require that we comply with restrictions in,other unfavorable terms. We may also be obligated to indemnify our customers, vendors or cannot repay or refinance our indebtedness, the repayment of our indebtedness could be accelerated.
In order to consummate our acquisitions in 2017 and January of 2018, we incurred approximately $13.7 million of subordinated indebtednesspartners in connection with any such claim or litigation. Even if we were to prevail in such a dispute, any litigation regarding our intellectual property could be costly and time-consuming and divert the notes issued to the sellers. In addition, asattention of December 31, 2017, we have approximately $68.3 million in senior, secured debt outstanding under our Restated Credit Agreement. Our high level of indebtedness could adversely affectmanagement and key personnel form our business in the following ways, among others:
· | make it more difficult for us to satisfy our financial obligations under our current debt obligations, or other indebtedness, as well as our contractual and commercial commitments, and could increase the risk that we may default on our debt obligations; |
· | require us to use a substantial portion of our cash flow from operations to pay interest and principal on our current debt obligations or other indebtedness, which would reduce the funds available for working capital, capital expenditures and other general corporate purposes; |
· | limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other investments or general corporate purposes, which may limit the ability to execute our business strategy; |
· | heighten our vulnerability to downturns in our business, our industry or in the general economy, and restrict us from exploiting business opportunities or making acquisitions; |
· | place us at a competitive disadvantage compared to those of our competitors that may have proportionately less debt; |
· | limit management’s discretion in operating our business; |
· | limit our flexibility in planning for, or reacting to, changes in our business, the industry in which we operate or the general economy; and |
· | result in higher interest expense if interest rates increase. |
Our ability to make scheduled payments on or to refinance our indebtedness depends on our future performance, which is subject to economic, financial, competitive and other factors that may be beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and support our growth strategies. If we are unable to generate sufficient cash flow, we may be required to pursue one or more alternatives,operations. Any such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or on desirable terms, which could result in a default on our debt obligations, including under our current debt obligations. In addition, if for any reason we are unable to meet our debt service and repayment obligations, we would be in default under the terms of our Restated Credit Agreement, which would allow our creditors at that time to declare all outstanding indebtedness to be due and payable. Under these circumstances, our lenders could compel us to apply all of our available cash to repay our indebtedness.
Our ability to incur debt and the use of our funds could be limited by the restrictive covenants in our loan agreement for our term loan and revolving credit facility.
Our Restated Credit Agreement with Wells Fargo Bank, N.A. provides for a term loan and revolving credit facility that contains restrictive covenants, including restrictions on our ability to pay dividends to stockholders, as well as requirements to comply with certain leverage ratios and other financial maintenance tests. These restrictive covenants and requirements limit the amount of borrowings that are available to us. The Restated Credit Agreement covenants may also affect our ability to obtain future financing and to pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions. These covenants could place us at a disadvantage compared to some of our competitors, who may have fewer restrictive covenants and may not be required to operate under these restrictions.
Sales, or the potential for sales, of a substantial number of shares of our common stock in the public market by us or our existing stockholders could cause our stock price to fall.
The sale of substantial amounts of shares of our common stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of shares of our common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to raise capital through the sale of equity securities in the future at a time and at a price that we deem appropriate. As of March 12, 2018, we had a total of 12,584,036 shares of common stock outstanding.
The entities and persons affiliated with iSystems Holdings, LLC beneficially own 1,526,332 shares of our common stock, or approximately 12% of our outstanding common stock based on shares outstanding as of March 12, 2018. Pursuant to an investors rights agreement entered into between the parties in connection with our acquisition of iSystems (the “Investors Rights Agreement”), Holdings has requested that we file a registration statement to register its shares of our common stock for resale to the public. Under the Investor Rights Agreement, public resales of shares registered under this registration statement, once declared effective, may not occur until after May 25, 2018. Any sales of these shares in the public market, or the perception that such sales may occur,events could have a material adverse effect on the market price of our common stock.
Our stock price has been, and likely will continue to be, volatile.
The market price of our common stock has in the past been, and is likely to continue in the future to be, volatile. During the fiscal year ended December 31, 2016, the Nasdaq closing price of one share of our common stock reached a high of $9.55 and a low of $4.36. During the fiscal year ended December 31, 2017, it reached a high of $16.44 and a low of $9.00. That volatility depends upon many factors, some of which are beyond our control, including:
| · | announcements regarding the results of expansion or development efforts by us or our competitors; |
| · | announcements regarding the acquisition of businesses or companies by us or our competitors; |
| · | technological innovations or new products and services developed by us or our competitors; |
| · | changes in foreign or domestic regulations; |
| · | issuance of new or changed securities analysts’ reports and/or recommendations applicable to us or our competitors; |
| · | additions or departure of our key personnel; |
| · | actual or anticipated fluctuations in our quarterly financial and operating results and degree of trading liquidity in our common stock; and |
| · | political or economic uncertainties. |
One or more of these factors could cause a decline in the price of our common stock. In addition, stock markets generally have experienced significant price and volume volatility. This volatility has had a substantial effect on the market prices of securities of many public companies for reasons frequently unrelated or disproportionate to the operating performance of the specific companies.
We are exposed to the credit risks of our customers; if we have inadequately assessed their creditworthiness, we may have more exposure to accounts receivable risk than we anticipate. Failure to collect our accounts receivable in amounts that we anticipate could adversely affect our operating results andbusiness, financial condition.
We grant credit to customers in the ordinary course of business, exposing us to the credit risk of our customers. In the course of our sales to customers, we may encounter difficulty collecting accounts receivable, which could adversely impact our operating results and financial condition. We maintain reserves for potential credit losses. However, these reserves are based on our judgment and a variety of factors and assumptions.
We perform credit evaluations of our customers’ financial condition. However, our evaluation of the creditworthiness of customers may not be accurate if they do not provide us with timely and accurate financial information or if their situations change after we evaluate their credit. While we attempt to monitor these situations carefully, adjust our allowances for doubtful accounts as appropriate and take measures to collect accounts receivable balances, we have written down accounts receivable and written off doubtful accounts in prior periods and may be unable to avoid additional write-downs or write-offs of doubtful accounts in the future. Such write-downs or write-offs could negatively affect our operating results for the period in which they occur, and could harm our financial condition.
Our effective tax rate may fluctuate as a result of new tax laws and our interpretations of those new tax laws, which are subject to significant judgments and estimates. The ongoing effects of the new tax laws and the refinement of provisional estimates could make our results difficult to predict.
Our effective tax rate may fluctuate as a result of new tax laws and our interpretations of those new tax laws, which are subject to significant judgments and estimates. The ongoing effects of the new tax laws and the refinement of provisional estimates could make our results difficult to predict.
Our effective tax rate may fluctuate in the future as a result of the U.S. Tax Cuts and Jobs Act (the Act), which was enacted on December 22, 2017. The Act introduces significant changes to U.S. income tax law that will have a meaningful impact on our provision for income taxes once we release our valuation allowance. Accounting for the income tax effects of the Act requires significant judgments and estimates in the interpretation and calculations of the provisions of the Act.
Due to the timing of the enactment and the complexity involved in applying the provisions of the Act, we made reasonable estimates of the effects and recorded provisional amounts in our consolidated financial statements for the year ended December 31, 2017. The U.S. Treasury Department, the Internal Revenue Service (IRS), and other standard-setting bodies may issue guidance on how provisions of the Act will be applied or otherwise administered that is different from our interpretation. As we collect and prepare necessary data, and interpret the Act and any additional guidance issued by the IRS or other standard-setting bodies, we may make adjustments to the provisional amounts that could materially affect our financial position and results of operations as well as our effective tax rate in the period in which the adjustments are made. Further, foreign governments may enact local tax laws in response to the Act which may result in additional changes that could materially affect our financial positioncondition and results of operations.
Some of our key components are procured from a single or limited number of suppliers. Thus, we are at risk of shortage, price increases, tariffs, changes, delay, or discontinuation of key components, which could disrupt and materially and adversely affect our business.
We face risks associated with expanding our sales outsideSome of the United States.
key components used to manufacture our products, such as the AsureForce time clocks and air clocks, come from limited or single sources of supply. We believe thatdo not have contractual commitments or guaranteed supply arrangements with our future growth depends in part upon our ability to increase sales in international markets. These sales are subject tosuppliers. As a variety of risks, including fluctuations in currency exchange rates, tariffs, import restrictions and other trade barriers, unexpected changes in regulatory requirements, longer accounts receivable payment cycles, potentially adverse tax consequences and export license requirements. In addition,result, we are subject to the risks inherentrisk of shortages and long lead times in conducting business internationally, including political and economic instability and unexpected changes in diplomatic and trade relationships. Currency fluctuations may also increase the relative pricesupply of our productscomponents or products. Further, our suppliers may experience financial or other difficulties as a result of uncertain and weak worldwide economic conditions. Other factors which may affect our suppliers' ability or willingness to supply components to us include internal management or reorganizational issues, such as roll-out of new equipment which may delay or disrupt supply of previously forecasted components, or industry consolidation and divestitures, which may result in international marketschanged business and therebyproduct priorities among certain suppliers. It could also cause our productsbe difficult, costly and time consuming to become less affordableobtain alternative sources for these components, or less price competitive than thoseto change product designs to make use of international competitors. These risks associated with international operations mayalternative components. In addition, difficulties in transitioning from an existing supplier to a new supplier could create delays in component availability that would have a material adverse effectsignificant impact on our revenue from or costs associated with international sales.
ability to fulfill orders for our products.
Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported operating results.
A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.
As a public company, we are obligated to maintain effective internal control over financial reporting. If our internal control over financial reporting is ineffective, our financial reportingOur directors, officers and principal stockholders have significant voting power and may take actions that may not be accurate, complete and timely, and our auditors may be unable to attest to its effectiveness when required, thus adversely affecting investor confidence in our company.
We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on the effectivenessbest interests of our internal control over financial reporting. Our auditors also need to auditother stockholders.
As of March 6, 2020, our officers, directors and provide an attestation report on the effectivenessprincipal stockholders each holding more than 5% of our internalcommon stock, collectively, control over financial reporting.
We have incurred and continueapproximately 14% of our outstanding common stock. As a result, these stockholders, if they were to incur significant costs assessing our system of internal control over financial reporting and processing documentation necessary to perform the evaluation needed to comply with Section 404.We may discover, and may notact together, would be able to remediate, futureexert significant deficiencies or material weaknesses, or we may be unable to complete our evaluation, testing or any required remediation in a timely fashion. Failureinfluence over the management and affairs of our internalcompany and most matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This significant concentration of ownership may have the effect of delaying or preventing a change of control, over financial reportingincluding those that you may believe are in your best interests as one of our stockholders. If potential acquirers are deterred, you may lose an opportunity to be effective could cause our financial reporting to be inaccurate, incomplete or delayed. Moreover, even if there is no inaccuracy, incompletion or delay of reporting results, if we identify one or more material weaknessesprofit from a possible acquisition premium in our internal control over financial reporting, we will be unable to assert, and our auditors will be unable to affirm, that our internal control is effective, in which case investorsstock price. This significant concentration of stock ownership may lose confidence inalso adversely affect the accuracy and completeness of our financial reports, which could have a material adverse effect on thetrading price of our common stock.
The results of the United Kingdom’s referendum on withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business.
In June 2016, a majority of voters in the United Kingdom electedstock due to withdraw from the European Union in a national referendum. In March 2017, the United Kingdom formally notified the European Union of its intention to withdraw pursuant to Article 50 of the Lisbon Treaty. The referendum was advisory, and the terms of withdrawal are subject to a negotiation period that could last until March 2019. The referendum and the ensuing process of the United Kingdom’s withdrawal from the European Union has created significant uncertainty about the future relationship between the United Kingdom and the European Union, including with respect to the laws and regulations that will apply as the United Kingdom determines which European Union laws to replace or replicate in the event of a withdrawal. The referendum has also given rise to calls for the governments of other European Union member states to consider withdrawal. These developments, or theinvestors’ perception that anyconflicts of them could occur, have had andinterest may continue to have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Any of these factors could depress economic activity and restrict our access to capital, which could have a material adverse effect on our business, operating results and financial condition.
To the extent that our pre-tax incomeexist or loss becomes relatively modest, our ability to conclude that a control deficiency is not a material weakness or that an accounting error does not require a restatement could be adversely affected.
Under the Sarbanes-Oxley Act of 2002, our management is required to assess the impact of control deficiencies based upon both quantitative and qualitative factors, and depending upon that analysis, we classify such identified deficiencies as either a control deficiency, significant deficiency or a material weakness. One element of our analysis of the significance of any control deficiency is its actual or potential financial impact. This assessment will vary depending on our level of pre-tax income or loss. For example, a smaller pre-tax income or loss will increase the likelihood of a quantitative assessment of a control deficiency as a significant deficiency or material weakness.
To the extent that our pre-tax income or loss is relatively small, if management or our independent registered public accountants identify an error in our interim or annual financial statements, it is more likely that such an error may be determined to be a material weakness or be considered a material error that could, depending upon the complete quantitative and qualitative analysis, result in our having to restate previously issued financial statements.
Our balance sheet includes significant amounts of goodwill and intangible assets. The impairment of a significant portion of these assets would adversely affect our business, operating results and financial condition.
As a result of our acquisitions, a significant portion of our total assets consist of intangible assets, including goodwill. Goodwill and identifiable intangible assets together accounted for approximately 56% of the total assets on our balance sheet as of December 31, 2017. We may not realize the full fair value of our intangible assets and goodwill. We expect to engage in additional acquisitions, which may result in our recognition of additional identifiable intangible assets and goodwill. We will evaluate on a regular basis whether all or a portion of our goodwill and identifiable intangible assets may be impaired. Under current accounting rules, any determination that impairment has occurred would require us to write off the impaired portion of goodwill and such intangible assets, resulting in a charge to our earnings. An impairment of a significant portion of goodwill or intangible assets could have a material adverse effect on our business, operating results and financial condition.
We do not intend to pay dividends for the foreseeable future, and you must rely on increases in the market price of our common stock for returns on equity investment.
For the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not anticipate paying any cash dividends on our common stock. In addition, our Third Restated Credit Agreement contains limitations on our ability to pay dividends and make other distributions. Accordingly, investors must be prepared to rely on sales of their common stock after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not purchase our common stock. Any determination to pay dividends in the future will be made at the discretion of our board of directors and will depend on our results of operations, financial condition, capital requirements, contractual restrictions, restrictions imposed by applicable law and other factors our board deems relevant.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2017,2019, we had federal net operating loss carryforwards of approximately $130.1$34 million and research and development credit carryforwards of approximately $5.6$4 million, which begin expiring in 2018.2020. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre- change tax attributes, such as research tax credits, to offset its post-change income and taxes may be limited. In general, an “ownership change” occurs if there is a cumulative change in our ownership by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules apply under state tax laws. In the event that it is determined that we have in the past experienced ownership changes, or if we experience one or more ownership changes as a result of future transactions in our stock, then we may be limited in our ability to use our net operating loss carryforwards and other tax assets to reduce taxes owed on the net taxable income that we earn. Any such limitations on the ability to use our net operating loss carryforwards and other tax assets could adversely impact our business, operating results, and financial condition.
Our stockholder rights plan, or “poison pill,” includes terms and conditions which could discourage a takeover or other transaction that stockholders may consider favorable.
On October 28, 2009, stockholders of record at the close of business on that date received a dividend of one right (a “Right”) for each outstanding share of common stock. Each Right entitles the registered holder to purchase one one-thousandth of a share of Series A junior participating preferred stock of the Company (the “Preferred Stock”), at a price of $11.63 per one thousandth of a share of Preferred Stock, subject to adjustment (the “Exercise Price”). The Rights are not exercisable until the Distribution Date referred to below. The description and terms of the Rights are set forth in the Second Amended and Restated Rights Agreement between the Company and American Stock Transfer & Trust Company LLC, dated as of October 28, 2009.
April 17, 2019.
The Second Amended and Restated Rights Agreement imposes a significant penalty upon any person or group that acquires 4.9% or more (but less than 50%) of our then-outstanding common stock without the prior approval of the board of directors. Stockholders who own 4.9% or more of our then-outstanding common stock as of the close of business on the Record Date will not trigger the Second Amended and Restated Rights Agreement so long as they do not increase their ownership of the common stock after the Record Date by more than one-half of 1% of the then-outstanding common stock. A person or group that acquires shares of our common stock in excess of the above-mentioned applicable threshold, subject to certain limited exceptions, is called an “Acquiring Person.” Any rights held by an Acquiring Person are void and may not be exercised. The Rights will not be exercisable until 10 days after a public announcement by us that a person or group has become an Acquiring Person. On the date (if any) that the Rights become exercisable (the “Distribution Date”), each Right would allow its holder to purchase one one-thousandth of a share of Preferred Stock for a purchase price of $11.63. In addition, if a person or group becomes an Acquiring Person after the Distribution Date or already is an Acquiring Person and acquires more shares after the Distribution Date, all holders of Rights, except the Acquiring Person, may exercise their rights to purchase a number of shares of the common stock (in lieu of Preferred Stock) with a market value of twice the Exercise Price, upon payment of the purchase price.
The Rights will expire on the earliest of (a) October 28, 2019,2022, (b) the exchange or redemption of the Rights, (c) consummation of a merger or consolidation or sale of assets resulting in expiration of the Rights, (d) the consummation of a reorganization transaction entered that the board of directors determines will help prevent an “Ownership Change,” as defined in Section 382 of the Code and protect our net operating losses, (e) the repeal of Section 382 of the Internal Revenue Code or any successor statute, or any other change, if the board of directors determines the Second Amended and Restated Rights Agreement is no longer necessary for the preservation of tax benefits, or (f) the beginning of a taxable year to which the board of directors determines that no tax benefits may be carried forward.
We may, at our option and with the approval of the board of directors, at any time prior to the close of business on the earlier of (i) the tenth day following the first date of public announcement by us or an Acquiring Person that an Acquiring Person has become such or such later date as may be determined by action of a majority of the members of the board of directors then in
office and publicly announced by us or (ii) October 28, 2019,2022, redeem all but not less than all the then outstanding Rights at a redemption price of $0.067 per Right (such redemption price being herein referred to as the “Redemption Price”). We may, at our option, pay the Redemption Price either in common stock (based on the current per share market price thereof) or cash; provided, that if the board of directors authorizes redemption of the Rights on or after the time a person becomes an Acquiring Person, then such authorization shall require the concurrence of a majority of the members of the board of directors then in office. In addition, after a person becomes an Acquiring Person the board of directors may exchange the Rights (other than Rights owned by the Acquiring Person or its affiliates), in whole or in part, at an exchange ratio of one common share per Right (subject to adjustment).
The Rights have certain anti-takeover effects, including potentially discouraging a takeover that stockholders may consider favorable. The Rights will cause substantial dilution to a person or group that attempts to acquire us on terms not approved by the board of directors. On the other hand, the Rights should not interfere with any merger or other business combination approved by the board of directors since the Rights may be redeemed by us at the Redemption Price prior to the date ten days after the public announcement that a person or group has become the beneficial owner of 4.9% or more of the common stock, and any securities which a person or any of such person’s affiliates may be deemed to have the right to acquire pursuant to any merger or other acquisition agreement between us and such person may be excluded from the calculation of their beneficial ownership if such agreement has been approved by the board of directors prior to them becoming an Acquiring Person.
Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable and may lead to entrenchment of our management and board of directors.
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could have the effect of delaying or preventing changes in control or changes in our management or our board of directors. These provisions include:
no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
· | no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates; |
in addition to our current stockholder rights plan, the ability of our board of directors to further issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;
the requirement that a special meeting of stockholders may be called only by the Chairman of the board of directors, the Chief Executive Officer or the Secretary at the request of the board of directors or upon the written request, stating the purpose of the meeting, of stockholders who together own of record 10% of the outstanding shares of each class of stock entitled to vote at such meeting, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and
· | in addition to our current stockholders rights plan, the ability of our board of directors to further issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer; |
· | the requirement that a special meeting of stockholders may be called only by the Chairman of the board of directors, the Chief Executive Officer or the Secretary at the request of the board of directors or upon the written request, stating the purpose of the meeting, of stockholders who together own of record 10% of the outstanding shares of each class of stock entitled to vote at such meeting, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and |
· | advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us. |
We are also subject to certain anti-takeover provisions under Delaware law. Under Delaware law, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. We have not opted out of this provision of Delaware law.
Our business could be negatively affected as a result of actions of activist stockholders, and such activism could impact the trading value of our securities.
Stockholders may, from time to time, engage in proxy solicitations or advance stockholder proposals, or otherwise attempt to effect changes and assert influence on our board of directors and management. Activist campaigns that contest or conflict with our strategic direction or seek changes in the composition of our board of directors could have an adverse effect on our operating results and financial condition. A proxy contest would require us to incur significant legal and advisory fees, proxy solicitation expenses and administrative and associated costs and require significant time and attention by our board of directors and management, diverting their attention from the pursuit of our business strategy. Any perceived uncertainties as to our future direction and control, our ability to execute on our strategy, or changes to the composition of our board of directors or senior management team arising from a proxy contest could lead to the perception of a change in the direction of our business or instability which may result in the loss of potential business opportunities, make it more difficult to pursue our strategic initiatives, or limit our ability to attract and retain qualified personnel and business partners, any of which could adversely affect our business and
operating results. If individuals are ultimately elected to our board of directors with a specific agenda, it may adversely affect our ability to effectively implement our business strategy and create additional value for our stockholders. We may choose to initiate, or may become subject to, litigation as a result of the proxy contest or matters arising from the proxy contest, which would serve as a further distraction to our board of directors and management and would require us to incur significant additional costs. In addition, actions such as those described above could cause significant fluctuations in our stock price based upon temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal offices are located in Austin, Texas where we occupy approximately 15,000 square feet of office space under one operating lease that expires in July 2022. We entered into a lease agreement for new corporate office facilities to accommodate our growth in July 2017. We also lease office suites in Alabama, Florida, Massachusetts, Michigan, Nevada and the United Kingdom, and as a result of our 2017 acquisitions, office suites in Alabama, Oregon, Ohio, Vermont, and Washington. As a result of our Januarythe 2018 acquisitions, we also lease office spacehave offices in California, Iowa, Tennessee, and North Carolina,
Georgia and New York.
Management believes that the leased properties described above are adequate to meet Asure’s current operational requirements and can accommodate further physical expansion of office space as needed.
ITEM 3. LEGAL PROCEEDINGS
Although Asure has been, and in the future may be,is periodically the defendant or plaintiff in various actions arising in the normal course of business, as of December 31 2017, we were not party to anybusiness. No pending legal proceedings.proceedings to which we are a party are material to us.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES MARKET INFORMATION
Our common stock trades on the Nasdaq Capital Market under the symbol “ASUR.” The following table shows the high and low closing sale prices of our common stock for each full quarter as reported by Nasdaq for the periods indicated:
| | | 2017 | | | 2016 | |
| | | HIGH | | | LOW | | | HIGH | | | LOW | |
| 1st Quarter | | $ | 12.56 | | | $ | 9.00 | | | $ | 5.67 | | | $ | 4.36 | |
| 2nd Quarter | | $ | 16.44 | | | $ | 9.70 | | | $ | 5.45 | | | $ | 4.53 | |
| 3rd Quarter | | $ | 15.16 | | | $ | 10.18 | | | $ | 6.57 | | | $ | 4.64 | |
| 4th Quarter | | $ | 15.78 | | | $ | 10.21 | | | $ | 9.55 | | | $ | 6.52 | |
DIVIDENDS
We did not pay cash dividends on our common stock during fiscal years 20172019 and 2016.2018. We presently intend to continue a policy of retaining earnings for reinvestment in our business, rather than paying cash dividends.
HOLDERS
HOLDERS
As of March 12, 2018,6, 2020, we had approximately 320257 stockholders of record of our common stock.
UNREGISTERED SALE OF EQUITY SECURITIES
Other than sales disclosed in previous quarterly reports on Form 10-Q or current reports on Form 8-K, there were no unregistered sales of equity securities by us during the year ended December 31, 2017.2019.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information as of December 31, 20172019 with respect to shares of our common stock that we may issue under our existing equity compensation plans (share amounts in thousands).
| | | A | | | B | | | C | |
| Plan Category | | Number of Securities to be Issued Upon Exercise of Outstanding Options | | | Weighted Average Exercise Price of Outstanding Options | | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column A) | |
| Equity Compensation Plan Approved by Stockholders (1) | | | 1,014 | | | $ | 9.22 | | | | 20 | |
| Equity Compensation Plans Not Approved by Stockholders (2) | | | -0- | | | $ | -0- | | | | -0- | |
| Total | | | 1,014 | | | $ | 9.22 | | | | 20 | |
|
| | | | | | | | | | |
| | | A | | B | | C |
| Plan Category | | Number of Securities to be Issued Upon Exercise of Outstanding Options and Release of Nonvested RSUs | | Weighted Average Exercise Price of Outstanding Options | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column A)(3) |
| Equity Compensation Plan Approved by Stockholders (1) | | 1,756 |
| | $ | 9.71 |
| | 387 |
|
| Equity Compensation Plans Not Approved by Stockholders (2) | | — |
| | — |
| | — |
|
| Total | | 1,756 |
| | $ | 9.71 |
| | 387 |
|
| |
| (1) | Consists of the 2009 Equity2018 Incentive Award Plan. |
| |
| (2) | Our stockholders have previously approved our existing equity compensation plan. |
| |
| (3) | In December 2019, we offered to exchange certain outstanding options to purchase shares of our common stock previously granted under our prior and current equity incentive plans that have an exercise price per share higher than the greater of $8.50 or the closing trading price of our common stock on the offer expiration date for new restricted stock units. Subsequent to December 31, 2019, 280,500 additional shares became available for issuance as a result of the exchange. |
ITEM 6. SELECTED FINANCIAL DATA
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this Item.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Report represent forward-looking statements. Forward-looking statements include but are not limited to statements regarding our strategy, future operations, financial condition, results of operations, projected costs, and plans and objectives of management. 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,” “could”“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.
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:
| | | 2017 | | | 2016 | |
| Revenues | | | 100.0 | % | | | 100.0 | % |
| Gross margin | | | 76.8 | | | | 77.2 | |
| Selling, general and administrative | | | 62.2 | | | | 59.2 | |
| Research and development | | | 8.2 | | | | 8.2 | |
| Amortization of intangible assets | | | 8.2 | | | | 6.3 | |
| Total operating expenses | | | 78.7 | | | | 73.7 | |
| Total other loss, net | | | (8.5 | ) | | | (6.2 | ) |
| Net loss | | | (10.5 | ) | | | (2.7 | ) |
Overview
Asure is a leading global provider of cloud-based software-as-a-serviceHuman Capital Management (“SaaS”HCM”) timesoftware 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 managementlaws, and Agile Workplace managementbetter 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 enable companies of all sizesprovide 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 complexitiesbenefits brokers that want to operate more efficiently and proactively manage costs associatedexpand relationships with their most expensive assets: real estate, labor and technology.clients directly without referring those clients outside their business.
We currently offer two main product lines, AsureSpace™ and AsureForce®. Our AsureSpace™ Agile Workplace management solutions enable organizations to manage their office environments and optimize real estate utilization. Our AsureForce® time and labor management solutions help organizations optimize labor and labor administration costs and activities. With our acquisitionsIn December 2019, we completed the sale of Mangrove Employer Services, Inc. and the assets of Mangrove COBRAsource Inc. in March 2016, we have entered into the human resource management, payroll processing and benefits administration services businesses, which we are integrating into our existing AsureForce® product line.
In January 2017, we closed on the purchase of three strategic acquisitions: PersonnelWorkspace Management Systems, Inc. (“PMSI”), a leading provider of outsourced HR solutions; Corporate Payroll, Inc. -Payroll Division (“CPI”), a leading provider of payroll services; and Payroll Specialties NW, Inc. (“PSNW”), a leading provider of payroll services.business. We acquired all of the outstanding shares of common stock of PMSI, a Washington corporation. The aggregate consideration for the stock consisted of (i) $3.875 million in cash and (ii) a subordinated promissory note in the principal amount of $1.125 million, subject to adjustment. We also acquired substantially all the assets of CPI, an Ohio corporation, relating to its payroll service bureau business. The aggregate consideration for the assets consisted of (i) $1.5 million in cash, (ii) a subordinated promissory note in the principal amount of $500,000 and (iii) 112,166 shares of our common stock valued at $1.0 million, subject to adjustment. Finally, we acquired substantially all the assets of PSNW, an Oregon corporation. The aggregate consideration for the assets consisted of (i) $3.010 million in cash and (ii) a subordinated promissory note in the principal amount of $600,000, subject to adjustment.
In May 2017, we entered into an equity purchase agreementAsset and Equity Purchase Agreement (the “Equity Purchase“Purchase Agreement”) with iSystems Holdings,FM: Systems Group, LLC a Delaware limited liability company, and iSystems Intermediate Holdco, Inc., a Delaware corporation (“iSystems”FMS Bidco UK Limited (collectively, “Buyer”), pursuant to which, we acquired 100%among other things, Buyer agreed to acquire all of the outstanding equity interestsissued share capital of iSystemsAsure 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 $55.0 million.$120 million in cash. The aggregate purchase price consists of (i) $32.0 million in cash,is subject to adjustment, (ii) a secured subordinated promissory note (“iSystems Note”) inworking capital adjustment. For further information regarding the principal amount of $5.0 million, subject to adjustment, and (iii) 1,526,332 shares of unregistered common stock valued at $18.0 million based on a volume-weighted average of the closing prices of our common stock during a 90-day period. Based in Vermont, iSystems is a leading national provider of HCM solutions to more than 100 payroll and HR service bureaus, providing Asure with additional cross-sell revenue opportunities and cost synergies.
In May 2017, we also entered into a stock purchase agreement with Compass HRM, Inc. (“Compass”)Purchase Agreement and the sellers and seller representative named therein, pursuant to which the sellers sold 100% of the outstanding shares of capital stock of Compass to us for an aggregate purchase price of $6.0 million, subject to adjustment. The aggregate purchase price consists of $4.5 million in cash and a subordinated promissory note in the principal amount of $1.5 million, subject to adjustment. Compass is headquartered in Tampa, Florida, and provides cloud-based human resource management software, including payroll, benefits, time and attendance, and performance management.
We completed an underwritten public offering in June 2017. In connection with the public offering, we issued 2,185,000 shares of common stock, including 285,000 shares of common stock pursuanttransactions contemplated thereby, see Note 12 to the exercise of the underwriters’ over-allotment option, at the public offering price of $13.50 per share. We recognized net proceeds of $27.8 million, after deducting the underwriting discounts and commissions and other estimated offering expenses.
In October 2017, we entered into a stock purchase agreement with Associated Data Services, Inc. (“ADS”) and the sellers and seller representative named therein, pursuant to which the sellers sold 100% of the outstanding shares of capital stock of ADS to us for an aggregate purchase price of $3.4 million, subject to adjustment. The aggregate purchase price consists of $1.8 million in cash; 44,624 shares of Asure Software, Inc. common stock valued at $528,200; and a subordinated promissory note in the principal amount of $1.2 million, subject to adjustment. ADS is a leading regional human resources and payroll services bureau in the Southeast and a current reseller of our HCM solution, Evolution based in Birmingham, Alabama.
See Note 4- Acquisitions in the accompanying consolidated financial statements for more information about the acquisitions completed in 2017.
To finance the cash portion of the purchase price for the iSystems and Compass acquisitions in May 2017, we entered into an amended and restated credit agreement (the “Restated Credit Agreement). The Restated Credit Agreement provides for an increase in the aggregate principal amount of total commitments from approximately $32.7 million to $75.0 million. This increase includes an additional term loan commitment of approximately $40.3 million and an additional revolver commitment of $2.0 million. The term loan consists of a $35.0 million “First Out Loan Obligation” funded by Wells Fargo as administrative agent, and a $35.0 million “Last Out Loan Obligation” funded by Wells Fargo’s syndicate partner, Goldman Sachs. We borrowed $36.5 million to complete the two acquisitions. The Restated Credit Agreement also changes the applicable margin rates for determining the interest rate payable on the loan and our leverage ratio, fixed charge coverage ratio and Trailing Twelve Months recurring revenue requirements. See Note 6- Notes Payable in the accompanying consolidated financial statements for more information about the Restated Credit Agreement.
In January 2018, we completed the following three acquisitions: TelePayroll, Inc., Pay Systems of America, Inc. and Savers Administrative Services Inc. Each of the acquired companies are leading providers of human resources, payroll and employee benefits services and are licensees of our HCM software platform, Evolution. TelePayroll operates in southern California; Pay Systems of America operates in Tennessee and Iowa; and Savers Administrative Services operates in North Carolina. The total consideration for the three acquisitions was $30.6 million, of which $25.3 million was paid in cash with cash on hand and the remaining portion was paid with a combination of promissory notes and Asure common stock.
See Note 14- Subsequent Events in the accompanying consolidated financial statements for more information about the acquisitions completed in January 2018.
We target our sales and marketing efforts to a wide range of audiences, from small to medium-sized businesses and divisions of enterprise organizations throughout the United States, Europe and Asia/Pacific. We generate sales of our solutions through our direct sales teams and indirectly through our channel partners. We are expanding our investment in our direct sales teams to continue to address our market opportunity.
Consolidated Financial Statements.
Under the continued guidance and direction of our directors and Chief Executive Officer,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 2018.
Operating Segment
We operate as one operating segment. Operating segments are defined as components of an enterprise for which the chief operating decision maker, who in our case is the chief executive officer, in deciding how to allocate resources and assess performance, evaluates separate financial information regularly. During 2017,2019, and over the last few years, we have completed a number of acquisitions. These acquisitions have allowed us to expand our offerings, presence and reach in various market segments of the human capital management market. Our business operates in one operating segment because our chief operating decision maker evaluates our financial information and resources and assesses the performance of these resources on a consolidated basis. Since we operate as one operating segment, all required financial segment information can be found in the consolidated financial statements.
RESULTS OF OPERATIONS
The following discussions of our results of continuing operations exclude the results related to the Workspace Management business. 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:
|
| | | | | |
| | 2019 | | 2018 |
| Revenues | 100.0 | % | | 100.0 | % |
| Gross margin | 59.2 |
| | 62.1 |
|
| Selling, general and administrative | 57.5 |
| | 57.8 |
|
| Research and development | 7.3 |
| | 9.4 |
|
| Amortization of intangible assets | 16.1 |
| | 11.8 |
|
| Total operating expenses | 128.9 |
| | 79.0 |
|
| Loss from continuing operations before income taxes | (90.8 | ) | | (30.4 | ) |
| Net income (loss) | 41.0 |
| | (11.9 | ) |
Comparison of Fiscal 2019 to 2018
Revenue
Our revenue was derived from the following sources (in(Amounts in thousands):
| Revenue | | 2017 | | | 2016 | | | Increase (Decrease) | | | % | |
| Cloud revenue | | $ | 39,267 | | | $ | 20,606 | | | $ | 18,661 | | | | 90.6 | |
| Hardware revenue | | | 4,703 | | | | 3,795 | | | | 908 | | | | 23.9 | |
| Maintenance and support revenue | | | 4,453 | | | | 4,566 | | | | (113 | ) | | | (2.5 | ) |
| On premise software license revenue | | | 1,392 | | | | 2,218 | | | | (826 | ) | | | (37.2 | ) |
| Professional services revenue | | | 4,627 | | | | 4,357 | | | | 270 | | | | 6.2 | |
| Total revenue | | $ | 54,442 | | | $ | 35,542 | | | $ | 18,900 | | | | 53.2 | |
|
| | | | | | | | | | | | | | |
| Revenue | 2019 | | 2018 | | Increase (Decrease) | | % |
| Recurring revenue | 70,066 |
| | $ | 58,890 |
| | $ | 11,176 |
| | 19.0 |
|
| Professional services, hardware and other revenue | 3,084 |
| | 4,736 |
| | (1,652 | ) | | (34.9 | ) |
| Total revenue | $ | 73,150 |
| | $ | 63,626 |
| | $ | 9,524 |
| | 15.0 |
|
Total revenue represents our consolidated revenues, including sales of our scheduling software, time and attendance and human resource software, as well as complementary hardware devices to enhance our software products. Most product groupings include cloud revenue, hardware revenue, maintenance and support revenue, on premise software license revenue as well as installation and services and other professional services revenue. Revenue mix varies by product.
OurExcluding revenue from discontinued operations our total revenue in 20172019 was $54,442$73,150 as compared to $35,542$63,626 in 2016.2018. Total revenue increased by $18,900,$9,524, or 53.2%15.0%, in 20172019 as compared to 2016. Cloud2018. Recurring revenue comprised the majority of the increase with an increase of $18,661,$11,176, or 90.6%19.0%. Hardware revenue and professional services revenue also increased,trended slightly downward, offset by a decreasean increase in on premise software license revenue and a small decrease in maintenance and support revenue.
Cloud revenue increased $18,661, or 90.6%, over 2016. Cloud revenue was $39.3 million in 2017 as compared to $20.6 million in 2016. Overall, we attribute the majority of the increase in cloud revenue to the acquisitions in 2017, which contributed $17.1 million in cloud revenue in 2017, and an increase in Mangrove and organic Asure Software cloud revenue, which increased $635,000 and $1.2 million, respectively over 2016 cloud revenue. iSystems and PMSI contributed $7.4 million and $4.4 million, respectively, of the $17.1 million in cloud revenue from acquisitions, or 69.3%.
Hardware revenue increased by $908, or 23.9%, over 2016. This was primarily due to a large sale of hardware as part of a major customer contract we successfully gained in 2017.
Maintenance and support revenue slightly decreased by $113, or 2.5%, over 2016. Maintenance and support revenue was $4.5 million in 2017 as compared to $4.6 million in 2016. This decrease is primarily a result of movements of clients from on premise to on demand, cloud-based solutions and timing of work performed on contracts.
On premise software license revenues decreased $826, or 37.2%, as compared to 2016. On premise software license revenue was $1.4 million in 2017 as compared to $2.2 million in 2016. This decrease is primarily a result of movements of clients from on premise to on demand, cloud-based solutions.
Professional services revenue increased $270, or 6.2%, over 2016. Professional services revenue was $4.6 million in 2017 as compared to $4.4 million in 2016. Professional services revenue increased primarily as a result of the acquisitions of iSystems and PMSI in 2017.
Although our total customer base is widely spread across industries, our HCM sales are concentrated in certain industry sectors, including corporate education, healthcare, government, legal and non-profit.small to mid-size businesses. We continue to target small and medium sizedmedium-sized businesses and divisions of larger enterprises in these sameacross industries as prospective customers. Geographically, we sell our HCM products worldwide, but sales are largely concentrated in the United States, Canada and Europe. Additionally, we have reseller partners in North America, UK, South Africa and Asia Pacific.
States.
In addition to continuing to develop our workforce and Agile Workplace management solutions and release of new software updates and enhancements, we continue to actively explore other opportunities to acquire additional products or technologies to complement our current software and services. Through acquisitions in 2011 of ADI and Legiant, we expanded our cloud computing time and attendance software and management services business. The 2012 acquisition of PeopleCube gave us a product line that includes software to assist customers in driving integrated facility management of offices, conference rooms, video conferencing, events and training, alternative workspaces and lobby use. The 2014 acquisitions of FotoPunch and Roomtag support our vision to deliver innovative cloud-based Agile Workplace technologies. Our March 2016 acquisitions from Mangrove enable us to enter into the human resource management, payroll processing and benefits administration services businesses, which we are integrating into our existing AsureForce® product line. With respect to the three acquisitions closed in January 2017, PSNW and CPI are top regional service bureaus that resell our HCM products (formerly Mangrove) and integrate seamlessly into our business, while PMSI is a leading HCM service company that expands our solution, service, and implementation capabilities. Our May 2017 acquisition of iSystems, a leading national provider of HCM solutions, provides us with additional cross-sell revenue opportunities and cost synergies and our May 2017 acquisition of Compass HRM, an existing reseller of our HCM offerings, provides us with a regional HR and payroll service bureau in the Southeast. Our October 2017 acquisition of ADS, a leading regional human resources and payroll services bureau in the Southeast and a current reseller of our HCM solution, Evolution, was consistent with our vision to deliver a unified SaaS-based HCM platform and workplace solutions to support an evolving mobile workforce.
GrossProfit and GrossMargin
Consolidated gross marginprofit was $41.8 million$43,314 in 20172019 and $27.4 million$39,504 in 2016, an increase2018, a decrease of $14.4 million,$3,810, or 52.5%9.6%. Gross margin as a percentage of revenues was 76.8%59.2% for 20172019 and 77.2%62.1% for 2016.2018. Gross margin increaseddecreased due to our growing investment in line with the increase in total revenue.
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. These expenses represented approximately 95% of the total cost of sales for 2017 and 93% for 2016. These expenses increased by approximately $4.5 million, or 59.4%, over 2016. This increase is comprised primarily of increases in salary and benefits expense of $2.9 million, or 74.0%, and an increase in product costs of $1.2 million, or 45.5%, over 2016. 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 $33.9 million$42,093 in 20172019 and $21.0 million$36,765 in 2016,2018, an increase of $12.8 million,$5,328, or 61.0%14.5%. SG&A expenses as a percentage of revenues were 62.2%57.5% and 59.2%57.8% for 20172019 and 2016,2018, respectively.
SG&A increased due to a full year of Mangrove expenses and2018 acquisition and integration related expenses and 2019 acquisition related to the acquisitions of ADS, CPI, PMSI, PSNW, iSystems and Compass in 2017,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.
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 $4.5 million$5,351 in 20172019 and $2.9 million$5,998 in 2016, an increase2018, a decrease of $1.6 million$647, or 53.9%10.8%. R&D expenses as a percentage of revenues were 8.2%7.3%% and 8.2%9.4% for 20172019 and 2016,2018, respectively.
The $1.6 million increase is primarily due to an increase in technical resources, including increased headcount, from our acquisition of iSystems in 2017.
Asure successfully executed its 2017 stated R&D goals of platform, co-innovation and mobility development within our product suites via a mix of capital projects and expansion of the core product and engineering resources. Asure was able to deliver the port to a unified and integrated platform between its AsureHCM and AsureForce products, as well develop enhanced mobile solutions in both its AsureSpace and AsureForce products. With the acquisition of iSystems and its Evolution product in May 2017, R&D efforts saw the fulfillment of moving the former Payroll centric solution to a fully integrated HCM suite for the SMB market.
Key 2019 product highlights include:
· | AsureHCM: Port to integrated Amazon AWS infrastructure; development of Job Board and Application Tracking (ATS) integration; Port of COBRA product set to integrate with AsureHCM platform |
· | AsureForce: Phase one move to Amazon AWS infrastructure and expanded HCM integration; New mobile employee self-service product; DIY payroll integration tool |
· | AsureSpace: Expanded integration options with Crestron Fusion, Cisco WebEx and Microsoft Exchange; Expanded partnership footprint with additional Digital Workplace hardware vendors utilizing our open API based platform. |
· | EvolutionHCM: Previously noted transformation from Payroll to Integration HCM platform |
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 continue the integrationincrease operational efficiencies for both Asure and platform development theme in 2018, againour resellers, and will also drive new business growth with a mixmarket-leading solution for payroll client self-service. Development will be complete on Simple Payroll Entry in early second quarter of capital2020, followed by a Beta period and core engineering efforts. Where 2017 focused ongeneral release. In our continuing commitment to keep our clients compliant, we also released a product update to reflect the mid-market integration, 2018 will seerevamped 2020 W-4 income tax withholding announced by the same elementsIRS 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 Channel product, Evolution,outage windows, a redesigned bulk hour time card, and expanded reporting capabilities with our Advanced reports powered by Izenda.
AsureHR: 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 single vendor solutionbeta 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 channel partnersnetwork of bureaus and direct sales alike. During 2018partners. 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 will continuealso invested heavily on DevOps and infrastructure automation to make investmentsincrease 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 mid-marketHCM and globalpayroll 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. We believe we have the appropriate development team to design and enhance our solution sets, including a unified reporting solution that provides substantive value to the vision of a single vendor, single platform solution for datasuite and analytics. Asure sees a continued expansion of the use of this integrated data into future artificial intelligence and business intelligence areas, fulfilling the vision of our People Success Platform to drive the Workplace of the future.
platform.
Amortization of Intangible Assets
Amortization expenses in 20172019 were $4.5 million,$11,765, an increase of $2.2 million,$4,284, or 98.7%57.3%, as compared to $2.3 million$7,481 in 2016.2018. Amortization expenses as a percentage of revenues were 8.2%16.1% and 6.3%11.8%% for 20172019 and 2016,2018, respectively. This increase is due toIn 2019, we accelerated the amortization relatedafter a reassessment of the useful lives of certain trade names in relation to our acquisitionsrebranding efforts, resulting in 2017.an increase in amortization expense.
Impairment of Goodwill
During fiscal 2019, we determined that the estimated fair value of our HCM reporting unit was less than its carrying value. Therefore, we compared the carrying value of the reporting unit to its fair value in order to determine if an impairment exists. In addition to performing the income based approach discussed above we compared the market value of our common stock to our HCM reporting unit’s carrying value noting its carrying value exceeded market value. 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, Incomenet
Interest expense and Loss
Other Lossother, net was $4.6 million$15,447 for the year ended 20172019 as compared to $2.0 million$8,615 in the year ended 2016. Other Loss in 20172018. Interest expense and 2016 was primarily comprised of interest expense. The increaseother, net is primarily comprised of an increase inloss from our extinguishment of debt and interest expense which increased in 2019 due the to the higher debt balances resultingdue from our Restated Credit Agreement and debt incurred in connection with our acquisitions.
Income Taxes
At December 31, 2017,2019, we had federal net operating loss carryforwards of approximately $130.1 million,$33,700, Federal R&D credit carryforwards of approximately $5.6 million$3,739 and alternative minimum tax credit carryforwards of approximately $123,000.$31. The net operating
loss and Federal R&D credit carryforwards will expire in varying amounts from 20182020 through 2037,2038, if not utilized. Minimum tax credit carryforwards carryFederal net operating losses generated in 2018 and after are carried forward indefinitely.
Income tax expense decreasedbenefit attributable to continuing operations increased from $189,000$7,982 in 20162018 to $96,000$24,111 in 2017,2019, a $93,000,$16,129, or 49.0%202.1%, decrease.increase. These figures represent an effective tax rate of 1.7%36.3% and 24.1%41.2% in 20172019 and 2016,2018, respectively. IncomeIn 2019, we recorded income tax expense isbenefits 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 taxes ontax 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 amortizationtiming and amount of goodwill for tax purposes and the results of foreign operations.
which are uncertain.
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 goodwill.jurisdictions in which we have net deferred tax liabilities. During 2017,2019, we decreased the valuation allowance attributable to continuing operations by approximately $14.7 million$14,849 due primarily to operations acquisitions and the impact of changes in tax law.acquisitions.
We consider the undistributed earnings of our foreign subsidiaries permanently reinvested and, accordingly, we have not provided for U.S. federal or state income taxes thereon.
Net Income (Loss)
Net loss was $5.7 million in 2017. Net loss was $972,000 in 2016. The increase in net loss was $4.8 million, or 488.7%. Net loss as a percentage of total revenues was 10.5% and 2.7% in 2017 and 2016, respectively.
LIQUIDITY AND CAPITAL RESOURCES (Amounts in thousands)
| | | At and for the year ended December 31, | |
| | | 2017 | | | 2016 | |
| | | (in thousands) | |
| | | | | | | |
| Working capital | | $ | 17,026 | | | $ | 4,207 | |
| Cash, cash equivalents and short-term investments | | | 27,792 | | | | 12,767 | |
| Cash used in operating activities | | | (36 | ) | | | (2,012 | ) |
| Cash used in investing activities | | | (58,492 | ) | | | (18,775 | ) |
| Cash provided by (used in) financing activities | | | 73,541 | | | | 32,299 | |
|
| | | | | | | |
| | 2019 | | 2018 |
| Working capital | $ | 17,854 |
| | $ | 11,443 |
|
| Cash, cash equivalents and short-term investments | 28,826 |
| | 15,444 |
|
| Net cash used in operating activities | (450 | ) | | (7,129 | ) |
| Net cash provided by (used in) investing activities | 96,942 |
| | (107,228 | ) |
| Net cash provided by (used in) financing activities | (82,995 | ) | | 101,788 |
|
Working Capital. We had working capital of $17.0 million$17,854 at December 31, 2017,2019, an increase of $12.8 million$6,411 from $4.2 million$11,443 at December 31, 2016.2018. We attribute the increase in our working capital primarily to an increase in cash and cash equivalents of $15.7 million as a resultdue to the divestiture of our June 2017 public stock offering and our May 2017 refinancing of our amended credit agreement, offset by our 2017 acquisitions and net cash used by operations. Accounts receivable also increased $4.1 million due to an increase in revenue, offset by an increase in short term notes payable of $3.4 million.Workspace Management business. Working capital at December 31, 20172019 includes $13.1 million$5,500 of short term deferred revenue, an increase fromin short term deferred revenue of $9.3 million at$2,613 compared to December 31, 2016. Our 2017 acquisitions contributed $1.3 million of current deferred revenue at December 31, 2017.2018. Deferred revenue is an obligation to perform future services. We expect that deferred revenue will convert to future revenue as we perform our services, but this does not represent future payments. Deferred revenue can vary based on seasonality, expiration of initial multi-year contracts and deals that are billed after implementation rather than in advance of service delivery.
Operating Activities. CashNet cash used in operating activities was $36,000$450 in 2017 as compared to cash used in operating activities of $2.0 million in 2016.2019. The $36,000$450 of cash used in operating activities during 20172019, including discontinued operations, was primarily driven by our net income (after adjustment for non-cash items) of $1.4 million$30,001 and an increaseincreases in deferred revenue of $5,662, and accrued expenses and other liabilitieslong-term obligations of $2.6 million and $1.6 million, respectively,$5,649. This was offset by an increasenon-cash adjustments of $(35,215), increases in accounts receivable of $1,446 and other assetsinventory of $4.1 million and $1.3 million, respectively,$1,581, and a decrease in accounts payable of $254,000.$3,174.
Net cash used in operating activities was $7,129 in 2018. The $2.0 million$7,129 of cash used in operating activities during 20162018 was primarily driven by our net income (after adjustment for non-cash items)loss of $3.2 million$7,548, increases in inventory and an increase in other liabilities of $466,000, offset by an increase in accounts receivable of $3.4 million,$2,948 and decreases$1,719, respectively, and a decrease in deferred revenue and accounts payableaccrued expenses of $1.7 million and $1.1 million, respectively.
$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 20172018 was $58.5 million.$107,228. The cash used in investing activities in 2017 was2018 is primarily comprised of the acquisitions of $45.4 million and the net change in funds held for clients of $10.2 million. Cash used in investing activities during 2016 was $18.8 million. The2018 acquisitions.
Financing Activities. Net cash used in investingfinancing activities of $82,995 in 20162019 was primarily compriseddue to the payments of the acquisition of Mangrove in the first quarter of 2016 of $12.0 millionour notes payable and the net change in funds held for clients of $6.6 million.debt financing costs.
Financing Activities. CashNet cash provided by financing activities during 2017of $101,788 in 2018 was $73.5 million. We recognizedprimarily due to an increase of $36,750 in our indebtedness and net proceeds of approximately $39,449 from the issuance of our common stock of $27.8 million in an underwritten public offering we completed in June 2017, as well as incurred $45.8 million of indebtedness in connection with the 2017 acquisitions. This was2018, partially offset by payments on notes payabledebt of $9.0 million$11,645 and debt financing fees of $1.4 million. In connection with the public offering, we issued 2,185,000 shares of common stock, including 285,000 shares of common stock pursuant to the exercise of the underwriters’ over-allotment option, at the public offering price of $13.50 per share. Cash provided by financing activities during 2016 was $32.3 million. We borrowed $18.4 million, offset by note payable payments of $7.2 million. Our stock issuances through our public stock offering and other stock issuances yielded $15.2 million in proceeds.$1,693.
Sources of Liquidity. As of December 31, 2017,2019, Asure’s principal sources of liquidity consisted of approximately $27.8 million$28,826 of cash and cash equivalents, future cash generated from operations of our business over the next twelve months, and $5.0 million$10,000 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. However, wemonths 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 needbe sufficient to fund such growth activities but may raise additional capital or incur additional indebtedness to growsupplement those sources as we execute on our existing software operations and to seek additional strategic acquisitions in the near future.
Subsequent to December 31, 2017, we used $25.3 million of cash on hand to fund the three acquisitions completed in January 2018. In addition, we have subordinated note payables in the aggregate principal amounts of $2.2 million that become due on April 30, 2018 and $2.8 million due May 25, 2018. There can be no assurance that we will be able to obtain additional equity or debt financing on terms acceptable to us, if at all.
Our management team is focused on growing our existing software operations and is also seeking additional strategic acquisitions for the near future. At present, we plan to fund any future acquisition with existing cash and cash equivalents, cash generated from future operations, funds under credit facilities, and cash generated from the issuance of equity or debt securities.
Shelf Registration
In June 2016,April 2018, we filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”) to sellprovide access to additional capital, if needed. Pursuant to the shelf registration statement, we may from time to time upoffer to $30.0 millionsell in one or more offerings shares of our common stock preferred stock, warrants, debtor other securities subscription rights and units. In July 2016, thehaving 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 was declaredrelating to these securities became effective by the SEC. Under this shelf registration statement, in December 2016on April 16, 2018. In June 2018, we completed an underwritten public offering in which we sold an aggregate of 1,949,2502,375,000 shares of our common stock at thea public offering price of $8.00$17.50 per share, which includes 254,250 shares sold pursuant to the underwriters’ full exercise of their over-allotment option.share. We receivedrealized net proceeds of approximately $14.4 million,$38,900 after deducting the underwriting discounts and commissions and other estimated offering expenses.
In February 2017, we filed a shelf registration statement on Form S-3 with the SEC to sell, from time to time, in one or more offerings, up to $75.0 million As of our common stock, preferred stock, warrants, debt securities, subscription rights, and units. In April 2017,December 31, 2018, there is approximately $133,400 remaining available under the shelf registration statement was declared effective by the SEC. Under this shelf registration statement, in June 2017 we completed an underwritten public offering of 2,185,000 shares of common stock at the public offering price of $13.50 per share, which includes 285,000 shares sold pursuant to the exercise of the underwriters’ over-allotment option. We recognized net proceeds of $27.8 million, after deducting the underwriting discounts and commissions and other estimated offering expenses.statement.
These registration statements are intended to provide us with flexibility to access the public capital markets in order to pursue our growth strategies.
Credit Agreement
In March 2014, we entered into a credit agreement (the “Credit Agreement”) with Wells Fargo, Bank, N.A., 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 provided for a term loan in the amount of $15.0 million maturing in MarchIn December 2019, and a revolving loan commitment in the aggregate amount of up to $3.0 million. The outstanding principal amount of the revolving loan is due and payable in March 2019. Additionally, the Credit Agreement provided for a $10.0 million uncommitted incremental term loan facility to support permitted acquisitions.
In March 2017, we amended our Credit Agreement to, among other things, obtain an additional term loan in the amount of $5.0 million. In the first quarter of 2017, we used the proceeds of the additional term loan to repay a portion of all amounts outstanding under the secured subordinated note we issued in connection with the Mangrove acquisition.
In May 2017, we entered into ana third amended and restated credit agreement (the “Restated“Third Restated Credit Agreement”) with Wells Fargo Bank, N. A., as administrative agent and the lenders that are parties thereto,lender, amending and restating the terms of the Second Amended and Restated Credit Agreement dated as of March 2014, as amended.
2018.
The Third Restated Credit Agreement provides for an increase$20,000,000 in the aggregate principal amount of total commitments from approximately $32.7 million to $75.0 million. This increase includes an additional term loan commitment of approximately $40.3 million and an additional revolver commitment of $2.0 million. The term loan consists of a $35.0 million “First Out Loan Obligation” funded by Wells Fargo as administrative agent,loans and a $35.0 million “Last Out Loan Obligation” funded by Wells Fargo’s syndicate partner, Goldman Sachs. As of December 31, 2017 and 2016, $0 was outstanding and $5.0 million and $3.0 million, respectively, were available for borrowing under the$10,000,000 revolver. As of December 31, 2017 and 2016, $68.25 million and $24.7 million, respectively, were outstanding under the term loan.
The Third Restated Credit Agreement amends the applicable margin rates for determining the interest rate payable on outstanding First Out and Last Out loan obligationsthe loans as follows:
|
| | |
| Leverage Ratio | Applicable Margin Relative to Base Rate Loans | First Out Base
Applicable Margin Relative to
LIBOR Rate Margin | | First Out LIBOR
Rate Margin
| | Last Out Base
Rate Margin
| | Last Out LIBOR
Rate MarginLoans
|
< 3.25:12.00:1.00 | 2.25% percentage points | 2.00 Percentage Points | | 3.00 Percentage Points | | 7.00 Percentage Points | | 8.00 Percentage Points3.25% percentage points |
> 3.25:1≤ 3.00:1.00, and ≥ 2.00:1.00 | 2.75% percentage points | 2.50 Percentage Points3.75% percentage points |
| ≥ 3.00:1.00 | 3.25% percentage points | 3.50 Percentage Points | | 7.50 Percentage Points | | 8.50 Percentage Points4.25% percentage points |
The outstanding principal amount of the term loan is payable in equal installments of $875,000as follows:
$125,000 beginning on September 30, 2017March 31, 2020 and the last day of each fiscal quarter thereafter through and including December 31, 2021; and
$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 loanloans is due on May 25, 2022.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 increasedecrease the maximum ratio to 5.75:13.50:1.00 at December 31, 2020, 3.25:1.00 at March 31, 2021 and June 30, 2017, stepping down to 3.25:12021 and 2.50:1.00 at JuneSeptember 30, 20202021 and each quarter-end thereafter; and
·amends our fixed charge coverage ratio to be notno less than 1.35:11.00:1.00 at June 30, 2017March 31, 2020, and September 30, 2017, not less than 1.45:1 ateach quarter end thereafter through and including December 31, 2017, and not less than2021, 1.50:1 beginning with the quarter ending1.00 at March 31, 2018 and each quarter-end thereafter; and
· adds a Trailing Twelve Months (“TTM”) recurring revenue covenant, requiring software-as-a-service, hardware-as-a-service and cloud subscription and maintenance support revenues to be at least $41.0 million at June 30, 2017 and stepping up to $60.5 million2022, 1.60:1.00 at June 30, 2022, and 2.00:1:00 at September 30, 2022 and each quarter-endquarter end thereafter.
The Restated Credit Agreement contains customary affirmative and negative covenants, including, among others, limitations with respect to debt, liens, fundamental changes, sale of assets, prepayment of debt, investments, dividends and transactions with affiliates.
As of December 31, 2017, we were in2019 and December 31, 2018, no amount was outstanding and $10,000 and $5,000, respectively, was available for borrowing under the revolver.
As of December 31, 2019, compliance with allcertain financial covenants was not yet required under the Third Restated Credit Agreement and all payments remain current under the Restated Credit Agreement.current. We expect to be in compliance or be able to obtain compliance through debt repayments with available cash on hand or ascash 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.
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. Future business demands may lead to cash utilization at levels greater than recently experienced. We willmay need to raise additional capital in the future in order to grow our existing software operations and to seek additional strategic acquisitions in the near future. 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. We have eliminated all significant intercompany transactions and balances in the consolidation. Preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are subjective in nature and involve judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at fiscal year endyear-end and the reported amounts of revenues and expenses during the fiscal year. The more significant estimates made by management include the valuation allowance for our gross deferred tax asset, lease impairment, useful lives of fixed assets, the determination of the fair value of our 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 that management believes are reasonable under the given circumstances. These estimates could be materially different under different conditions and assumptions. Additionally, the actual amounts could differ from the estimates made. Management periodically evaluates estimates used in the preparation of our financial statements for continued reasonableness. We prospectively apply appropriate adjustments, if any, to our estimates based upon our periodic evaluation.
We believe the following are our critical accounting policies:
Revenue Recognition
Our revenues consistrevenue consists of software-as-a-service (“SaaS”) offerings and time-based software subscriptions, and perpetual softwaresubscription license sale arrangements that also, typically include hardware, maintenance/support, and professional services elements. We recognize revenue on an output basis when persuasive evidencecontrol of the promised goods or services is transferred to our customers, in an arrangement exists, delivery has occurred,amount that reflects the feeconsideration we expect to be entitled to in exchange for those goods or services. Our contracts with customers may include multiple performance obligations. 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 fixedwilling 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 determinable and collectability is probable. Software and software-related elements are recognized in accordance withmore, but not all, of the promised goods or services.
Effective January 1, 2018, we adopted the Financial Accounting Standards CodificationBoard (“ASC”FASB”) 985-605 Software Revenue Recognition. In May 2014, the FASB issued ASUAccounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“, and ASU 2014-09”).2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date, which deferred the effective date of ASU 2014-09 by one year. ASU 2014-09 (“Topic 606”) “Revenue from Contracts with Customers) supersedes a majority of existingthe revenue recognition guidance under US GAAP,requirements in Accounting Standards Codification ("ASC") 605, Revenue Recognition, and requires companiesis based on the principle that revenue is recognized to recognize revenue when it transfersdepict the transfer of goods or services to a customercustomers in an amount that reflects the consideration to which a companythe entity expects to be entitled in exchange for those goods or services. It also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue, cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The adoption of ASU 2014-09, using the modified retrospective approach, had no significant impact on our results of operations, cash flows, or financial position. The initial application was applied to all contracts at the date of initial application. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings.
We recorded a $1,500 cumulative effect adjustment to opening retained earnings as of January 1, 2018 related to an increase in deferred commissions. There was no impact to revenue as a result of applying Topic 606.
The primary impact of adopting Topic 606 is effective date for fiscal years beginning after December 15, 2017. See Note 2 – Significant Account Policies into sales commissions related to onboarding new clients that were previously expensed. Under the accompanying consolidated financial statements for more detail onnew standard, these costs are now capitalized as deferred commissions and amortized over the estimated impactcustomer life of this accounting pronouncement. Non-software revenue elements are recognized in accordance with ASC 605-25 Revenue Recognition Multiple-Element Arrangements. Since we currently offer our software solutions under either a perpetual license, time-based subscription or SaaS model, revenue recognition timing varies based on which form of software rights the customer purchases.
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. A typical SaaSSaaS/software subscription arrangement will also include hardware, setup and implementation services. We allocate the value of the SaaS arrangement to each separate unit of accounting based on vendor-specific objective evidence (“VSOE”) of selling price, when it exists, third-party evidence of selling price for like services or best estimated selling price. Revenue allocated to the SaaS/software subscription elementperformance obligations are recognized on an output basis ratably as the service is recognized ratablyprovided over the non-cancellable term of the SaaS/subscription service.service and are reported as Recurring revenue on the Consolidated Statement of Comprehensive Loss. Revenue allocated to other units of accountingperformance obligations included in the arrangement is recognized as outlined in the paragraphs below.
We typically sell perpetual software licenses in multiple-element arrangements that include hardware, maintenance/support and professional services. Software license revenues, determined under the residual method, are generally recognized on the date we deliver the product to the customer if VSOE of fair value exists for all undelivered elements of the software arrangement. If VSOE of fair value does not exist for an undelivered element, we defer the entire software arrangement and recognize it ratably, over the remaining non-cancellable maintenance term, after we have delivered all other undelivered elements. We base VSOE of fair value for our maintenance, training and installation services on the prices charged for these services when sold separately. We recognize revenue allocated to hardware, maintenance and services elements included in the arrangement as outlined below.
Hardware devices sold to customers (typically time clock, LCD panel and other peripheral devices) are not essentialsold as either a standard product sell arrangement where title to the functionality ofhardware passes to the software andcustomer or under a hardware-as-a-service (“HaaS”) arrangement where the title to the hardware remains with Asure. Revenue allocated to hardware sold as sucha standard product are treated as non-software elements for revenue recognition purposes. We recognize hardware revenuerecognized on an output basis when title passes to the customer, typically the date we ship the hardware. If we sellRevenue allocated to hardware under a hardware-as-a-service (“HaaS”) arrangement title toare recognized on an output basis, recorded ratably as the hardware remains with Asure and we recognize hardware usage revenue ratablyservice is provided over the non-cancellable term of the hardware service delivery,HaaS arrangement, typically one year.
Revenue recognized from hardware devices sold to customers via either of the two above types of arrangements are reported as Hardware revenue on the Consolidated Statement of Comprehensive Loss.
Our professional services offerings which typically include data migration, set up, training, and implementation services are also not essential to the functionality of our products, as third parties or customers themselves can perform these services. Set up and implementation services typically occur at the start of the software arrangement while certain other professional services, depending on the nature of the services and customer requirements, may occur several months later. We can reasonably estimate professional services performed for a fixed fee and we recognize themallocated revenue on an output basis on a proportional performance basis.basis as the service is provided. We recognize allocated revenue on an output basis for professional services engagements billed on a time and materials basis as we deliver the services.service is provided. We recognize revenuesallocated revenue on an output basis on all other professional services engagements upon the earlier of the completion of the servicesservice’s deliverable or the expiration of the customer’s right to receive the service.
Revenue recognized from professional services offerings are reported as Professional service revenue on the Consolidated Statement of Comprehensive Loss.
We recognize allocated revenue for maintenance/support revenueson an output basis ratably over the non-cancellable term of the support agreement. 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.
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. Our arrangements with resellers do not allow for any rights of return.
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 transaction prices of our contracts do not include consideration amounts that are variable and do not include noncash consideration.
Deferred revenue includes amounts received frominvoiced to customers in excess of revenue we recognize, and is comprised of deferred maintenance, serviceSaaS/software, HaaS, Maintenance and othersupport, and Professional services revenue. We recognize deferred revenuesrevenue when we complete the service and over the terms of the arrangements, primarily ranging from one to three years.
Intangible Assets and Goodwill
We record the assets acquired and liabilities assumed in business combinations at their respective fair values at the date of acquisition, with any excess purchase price recorded as goodwill. Valuation of intangible assets and in-process research and development entails significant estimates and assumptions including, but not limited to, estimating future cash flows from product sales, developing appropriate discount rates, estimating probability rates for the continuation of customer relationships and renewal of customer contracts and approximating the useful lives of the intangible assets acquired. U.S. generally accepted accounting principles (“GAAP”) require that we not amortize intangible assets other than goodwill with an indefinite life until we determine their life as finite. We must amortize all other intangible assets over their useful lives. We currently amortize our acquired intangible assets with definite lives over periods ranging from one to nine years.
We have assessed the fair value of our customer relationship intangible assets as of December 31, 2019, we do not believe these to be impaired, as the carrying value of the customer relationship intangible assets are recoverable through the associated project cash flows.
Impairment of Intangible Assets and Long-Lived Assets
In accordance with Financial Accounting Standards Board (“FASB”)FASB ASC 350, we review and evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate that we may not recover their net book value. When such factors and circumstances exist, including those noted above, we compare the assets’ carrying amounts against the estimated undiscounted cash flows we expect to generate with those assets over their estimated useful lives. If the carrying amounts are greater than the undiscounted cash flows, we estimate the fair values of those assets by discounting the projected cash flows. We record any excess of the carrying amounts over the fair values as impairments in that fiscal period. In 2019, we accelerated the amortization after a reassessment of the useful lives of certain trade names in relation to our rebranding efforts. There has been no other impairment of intangible assets and long-lived assets for the periods presented.
Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired in a business combination. 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 for the periods presented.in 2018. See Notes 4 and 5 in the accompanying consolidated financial statements for additional information regarding goodwill.
Income Taxes
We account for income taxes using the liability method under ASC 740, Accounting for Income Taxes, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events included in the financial statements. Under the liability method, we determine deferred tax assets and liabilities based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which we expect the differences to reverse. We reduce deferred tax assets by a valuation allowance when it is more likely than not that we will not realize some component or all of the deferred tax assets.
See Note 2 – Significant Account Policies in the accompanying consolidated financial statements for more information about Recent Accounting Pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have operations in the United States and internationally, and we are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate, foreign exchange, inflation and counterparty risks, as well as risks relating to changes in the general economic conditions in the countries where we conduct business. To reduce certain of these risks, we monitor the financial condition of our large clients and limit credit exposure by principally collecting in advance and setting credit limits as we deem appropriate. In addition, our investment strategy has been to invest in financial instruments, including U.S. treasury securities and money market funds backed by United States Treasury Bills within the guidelines established under our investment policy. We also make strategic investments in privately-held companies in the development stage. To date, we have not used derivative instruments to mitigate the impact of our market risk exposures. We have also not used, nor do we intend to use, derivatives for trading or speculative purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item 8 are listed in Items 15(a)(1) and (2) of Part IV of this Report (Exhibits, Financial Statement Schedules).
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the ShareholdersStockholders and Board of Directors of
Asure Software, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Asure Software, Inc.’s's (the “Company”) internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weakness described in the following paragraph on the achievement of the objectives of the control criteria, the Company has not maintained in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control –- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
A material weakness is a control deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in “Management's Annual Report on Internal Control Over Financial Reporting”:
The Company did not maintain appropriate access to certain systems and did not maintain appropriate segregation of duties related to processes associated with those systems that creates the reasonable possibility of a material misstatement in the financial statements.
This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the December 31, 2019 consolidated financial statements, and this report does not affect our report dated March 16, 2020 on those consolidated financial statements.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets as of December 31, 20172019 and 20162018 and the related consolidated statements of comprehensive income shareholders’(loss), changes in stockholders’ equity, and cash flows and the related notes for each of the two years thenin the period ended December 31, 2019 of the Company, and our report dated March 16, 20182020 expressed an unqualified opinion on those financial statements.
Explanatory Paragraph – Excluded Subsidiaries
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded its wholly owned direct and indirect subsidiaries, iSystems Intermediate HoldCo, Inc., iSystems LLC, evoPro Solutions, Inc., Compass HRM, Inc. and Associated Data Services, Inc., from its assessment of internal control over financial reporting as of December 31, 2017 because these entities were acquired by the Company in purchase business combinations during 2017. We have also excluded iSystems Intermediate HoldCo, Inc., iSystems LLC, evoPro Solutions, Inc., Compass HRM, Inc. and Associated Data Services, Inc. from our audit of internal control over financial reporting. These subsidiaries’ combined total assets and total revenues represent approximately 39.5% and 18.3%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2017.statements.
Basis for Opinion
The Company’sCompany's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management Annual Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company’sCompany's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.accounting principles. A company’scompany's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America,accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that degree of compliance with the policies or procedures may deteriorate.
/s/ Marcum LLP
Marcum LLP
Costa Mesa, California
Irvine, California
March 16, 20182020
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Control and Procedures
Based on an evaluation under the supervision and with the participation of our management, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were not effective as of December 31, 20172019 to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
disclosure due to the material weakness identified below.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (“COSO”). Based on our assessment, management has concluded that our internal control over financial reporting was not effective as of December 31, 20172019 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles.principles due to the material weakness identified below. Our independent registered public accounting firm, Marcum LLP, has issued an audit report with respect to our internal control over financial reporting, which appears in Part II, Item 8 of this Annual Report on Form 10-K, and is incorporated herein by reference.
Management has excluded its wholly owned direct and indirect subsidiaries, iSystems Intermediate HoldCo, Inc., iSystems LLC, evoPro Solutions, Inc., Compass HRM, Inc. and Associated Data Services, Inc., from its assessment of internal control over financial reporting as of December 31, 2017 because these entities were acquired by us in purchase business combinations during 2017. These subsidiaries’ combined total assets and total revenues represent approximately 39.5% and 18.3%, respectively,identified a deficiency related to the design effectiveness of the Company’s controls surrounding the safeguarding of assets. Specifically, the Company did not maintain appropriate access to certain systems and did not maintain appropriate segregation of duties related to processes associated with those systems. Although there were no material misstatements to the consolidated financial statement amountsstatements as of and for the year ended December 31, 2017. Asure Software, Inc.’s2019, such deficiency creates a reasonable possibility that a material misstatement to the consolidated financial statements will not be prevented or detected on a timely basis and presents a material weakness in the Company’s internal control over financial reporting. As a result, management concluded that our internal control over financial reporting as ofwas not effective at December 31, 2017 has been audited by Marcum LLP, an independent registered public accounting firm, as stated in their report on internal control over financial reporting included in this report, which is incorporated herein by reference.2019.
There were no changes in our internal control over financial reporting during the year ended December 31, 20172019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Remediation of Material Weakness in Internal Control Over Financial Reporting
Management has implemented measures designed to remediate the material weakness. The remediation actions include: (i) review and changes to system access, (ii) organization re-alignment to improve and ensure segregation of duties and (iii) implementation of additional manual and IT controls.
We believe that the above actions will remediate the material weakness. The weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect the remediation of this material weakness will be completed by June 30, 2020.
38
Changes in Internal Control Over Financial Reporting
Except for the material weakness identified during the fourth quarter, as of December 31, 2019, there have been no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that
occurred during the fourth quarter of 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
On March 10, 2020, our Board of Directors authorized a new stock repurchase program, under which we may repurchase up to $5 million of our outstanding common stock. This new stock repurchase program is in addition to the approximately 66,000 shares available under our existing stock repurchase plan.
Under this new stock repurchase program, we may repurchase shares in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The extent to which we repurchase our shares, and the timing of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations, as determined by our management. The repurchase program may be extended, suspended or discontinued at any time. We expect to finance the program from existing cash resources.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this Item is incorporated by reference fromto the information set forth in our definitive proxy statement to be filed relating tofor our 20182020 annual meeting of shareholders.shareholders under the headings “Item 1 – Election of Directors and “Other Matters.”
TheIn addition, the following table sets forth information regarding our current executive officers as of March 16, 2018:2020:
|
| | | | |
| Name | | Age | | Position |
| Patrick Goepel | | 5557 | | Chief Executive Officer |
Joe KarbowskiKelyn Brannon | | 5061 | | Chief Operating Officer/Chief TechnicalFinancial Officer |
| Eyal Goldstein | | 4244 | | Chief Revenue Officer |
Kelyn BrannonRhonda Parouty | | 5945 | | Chief FinancialOperating Officer |
Patrick Goepelwas elected to our Board of Directors in August 2009. He was subsequently appointed as Interim Chief Executive Officer on September 15, 2009 and became Chief Executive Officer as of January 1, 2010. Prior to joining Asure, he served as Chief Operating Officer of Patersons Global Payroll. Previously, he was the President and Chief Executive Officer of Fidelity Investment’s Human Resource Services Division from 2006 to 2008; President and Chief Executive Officer of Advantec from 2005 to 2006; and Executive Vice President of Business Development and US Operations at Ceridian from 1994 to 2005. A former board member of iEmployee, Mr. Goepel currently serves on the board of directors of APPD Investments and SafeGuard World International.
Joe Karbowski was promoted to Chief Operating Officer and Chief Technical Officer in September 2016. He joined Asure in 2012 when we acquired PeopleCube, where he also served as Chief Technical Officer, evolving it from a startup he co-founded in 1999 to be a leader in the Agile Workplace market. With more than 25 years of experience in building commercial software companies, he is a featured speaker and has published numerous articles on software development techniques and methodologies. Joe earned a Bachelor of Science degree in Computer Science from Michigan Technological University, Houghton.
Eyal Goldstein joined Asure as Chief Revenue Officer in December 2016. Prior to joining Asure, Mr. Goldstein served as Chief Revenue Officer of Insight Venture Partner’s FilmTrack, a global rights management platform, from 2013-2016. He previously served as Executive Vice President of DAZ Systems, prior to DAZ he was Regional Vice President at Oracle Corp. and also served as Vice President at Ceridian Corporation. Mr. Goldstein earned a Bachelor’s degree in English from University of Nevada, Las Vegas.
Kelyn Brannon joined Asure as Chief Financial Officer in October 2017. Prior to joining Asure, Ms. Brannon held positions as a CFO as well as a CEO at several leading enterprises, including Amazon, Calypso Technology, Calix, and most recently, Arista Networks, where she served as CFO from 2013-2015. Brannon also held senior finance positions at Sun Microsystems, Lexmark International, and Ernst & Young, and is a member of the American Institute of Certified Public Accountants. Ms. Brannon earned a Bachelor’s degree in Political Science from Murray State University.
Eyal Goldstein joined Asure as Chief Revenue Officer in December 2016. Prior to joining Asure, Mr. Goldstein served as Chief Revenue Officer of Insight Venture Partner’s FilmTrack, a global rights management platform, from 2013-2016. He previously served as Executive Vice President of DAZ Systems, prior to DAZ he was Regional Vice President at Oracle Corp. and served as Vice President at Ceridian Corporation. Mr. Goldstein earned a Bachelor’s degree in English from the University of Nevada, Las Vegas. Rhonda Parouty joined Asure as Chief Operating Officer in January 2019. Prior to joining Asure, Ms. Parouty was an advisor to various start-ups, including Trivie, Inc. and ZenYala. From 2016 to 2017, Ms. Parouty served as Executive Vice President, Channel Management & Consumer Brands at BrandMuscle, a global leader in precision local marketing solutions. From 2007 until 2016, Ms. Parouty held various positions with HP Software, including as Head of Revenue, Global Business Development & Strategy Director (2014-2016); Global Business Strategy & Operations Director (2012-2014); and Global Application Owner & Consulting Services Leader (2007-2012).
ITEM 11. EXECUTIVE COMPENSATION
The information required under this Item is incorporated by reference fromto the information set forth in our definitive proxy statement to be filed relating tofor our 20182020 annual meeting of shareholders.shareholders under the headings “Executive Compensation,” “Equity Compensation Plan Information” and “Non-Employee Director Compensation Table.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required under this Item is incorporated by reference fromto the information set forth in our definitive proxy statement to be filed relating tofor our 20182020 annual meeting of shareholders.shareholders under the heading “Security Ownership of Certain Beneficial Owners and Management.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required under this Item is incorporated by reference fromto the information set forth in our definitive proxy statement to be filed relating tofor our 20182020 annual meeting of shareholders.shareholders under the heading “Approval of Transactions with Related Parties.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required under this Item is incorporated by reference fromto the information set forth in our definitive proxy statement to be filed relating tofoe our 20182020 annual meeting of shareholders.
39
Independent Registered Public Accounting Firm.”
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| (a) | Financial Statements and Financial Statements and Financial Statement Schedules |
(1) Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 20172019 and 2016
2018
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 20172019 and 2016
2018
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 20172019 and 2016
2018
Consolidated Statements of Cash Flows for the Years Ended December 31, 20172019 and 2016
2018
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
All schedules for which provision is made in the applicable account regulation of the Securities and Exchange Commission are either not required under the related instructions, are inapplicable or the required information is included elsewhere in the Consolidated Financial Statements and incorporated herein by reference.
(b) Exhibits
| EXHIBIT NUMBER | DOCUMENT DESCRIPTION |
| 2.1 | |
| |
2.2 | |
| |
2.3 | |
| |
2.4 | |
| |
2.5 | |
| |
| 3.1 | |
| |
| 3.2 | |
| |
3.3 | |
| |
3.4 | |
| |
3.5 | |
| |
3.6 | |
| |
4.6 | |
| |
4.7 | |
| |
4.8 | |
| |
4.94.4† | |
| |
4.10 | |
| |
4.114.5 | |
| 4.6 | |
| 10.1† | |
| 10.2† | |
| |
| 10.3† | |
| |
| 10.4† | |
| |
| 10.5† | |
| 10.6 | |
10.6† | |
| Intentionally omitted |
| 10.7 | |
| Intentionally omitted |
| 10.8 | |
| Intentionally omitted |
| 10.9 | Intentionally omitted |
| 10.1 | Intentionally omitted |
|
10.10 | |
| 10.11 | |
| |
10.11 | Credit AgreementDecember 31, 2019, by and amongthe lenders identified by the Signature Pages thereto, Wells Fargo Bank, National Association, as Administrative Agent, the Lenders that are parties thereto as the Lenders, and Asure Software, Inc., as Borrower, Dated as of March 20, 2014 (19) |
| |
10.12 | |
| |
10.13 | |
| |
10.14 | |
| 10.12 | |
10.15 | Intentionally omitted |
| 10.13 | Intentionally omitted |
10.1610.14 | Intentionally omitted |
| 10.15† | |
| 10.16 | Intentionally omitted |
| 10.17 | |
| Intentionally omitted |
| 10.18 | |
| Intentionally omitted |
| 10.19 | Intentionally omitted |
| 10.2 | Intentionally omitted |
10.20 | |
| |
10.21 | |
| |
10.2210.21† | |
| |
10.23 | |
| |
10.24†10.23† | |
| |
10.25†10.24† | |
| 10.25 | |
| 10.26 | Intentionally omitted |
| 10.27 | |
| 10.28 | |
| 10.29 | |
| 10.3 | |
| 14 | |
| |
| 21 | |
| |
| 23.1 | |
| |
| 31.1 | |
| |
| 31.2 | |
| |
| 32.1 | |
| |
| 32.2 | |
| |
101 | The following materials from Asure Software, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2017,2019, formatted in XBRL (Extensible Business Reporting Language): (1) the Consolidated Balance Sheets, (2) the Consolidated Statements of Comprehensive Loss,Income (Loss), (3) the Consolidated Statements of Cash Flows, and (4) Notes to Consolidated Financial Statements. |
|
| |
| |
| † | Management contract or compensatory plan or arrangement required to be filed as an Exhibit to the Annual Report on Form 10-K |
| |
| * | Filed herewith |
(1) ** | Incorporated by referenceSchedules and similar attachments to the Company’s Quarterly Report on Form 10-Q for the three months ended September 30, 2011 filed with the SEC on November 14, 2011. |
agreement has been omitted pursuant to Item 601(b)(2) of Regulation S-K.
(2) | Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on March 30, 2012. |
(3) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on July 6, 2012. |
(4) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on October 15, 2012. |
(5) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the three months ended October 31, 2004 filed with the SEC on December 15, 2004. |
(6) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on December 29, 2009. |
(7) | Incorporated by reference to Appendix C to the Company’s Proxy Statement filed with the SEC on May 23, 2012. |
(8) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on May 1, 2017. |
(9) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2017 filed with the SEC on May 11, 2017. |
(10) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on September 27, 2012. |
(11) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on March 20, 2017.
|
(1) Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on March 30, 2012.
(12) | Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-3 filed with the SEC on December 13,(2) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2017 filed with the SEC on May 11, 2017.(3) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on September 27, 2012. |
(13) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on October 28, 2009. |
(4) Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-3 filed with the SEC on December 13, 2012.(5) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on April 19, 2019.
(6) Incorporated by reference to the Company’s 2013 Proxy Statement filed with the SEC on April 30, 2013.
(7) Incorporated by reference to the Company’s Current Report on Form 8-K/A filed with the SEC on September 28, 2009.
(8) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on January 3, 2020.
(9) Incorporated by reference to the Company’s Registration Statement on Form S-8 (No. 333-215097) filed with the SEC on December 14, 2016.
(10) Incorporated by reference to the Company’s Proxy Statement filed with the SEC on April 21, 2017.
(11) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on December 21, 2017.
(12) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the three months ended September 30, 2018 filed with the SEC on November 9, 2018.
(13) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on April 2, 2018.
(14) Incorporated by reference to the Company’s Registration Statement on Form S-8 (No. 333-230967) filed with the SEC on April 19, 2019.
(15) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on October 8, 2019.
(16) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on December 6, 2019.
(14) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on March 12, 2012. |
(15) | Incorporated by reference to the Company’s 2013 Proxy Statement filed with the SEC on April 30, 2013. |
(16) | Incorporated by reference to the Company’s Current Report on Form 8-K/A filed with the SEC on September 28, 2009. |
(17) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2010 filed with the SEC on May 17, 2010. |
(18) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on June 5, 2013. |
(19) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on March 25, 2014. |
(20) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on March 22, 2016. |
(21) | Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on March 30, 2016. |
(22) | Incorporated by reference to the Company’s Registration Statement on Form S-8 (No. 333-215097) filed with the SEC on December 14, 2016. |
(23) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on March 16, 2017. |
(24) | Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 20, 2017. |
(25) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on May 26, 2017. |
(26) | Incorporated by reference to the Company’s Proxy Statement filed with the SEC on April 21, 2017. |
(27) | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on December 21, 2017. |
Index Toto Financial Statements and Financial Statement Schedules (Item 15(a)(1) of Part IV)
|
| |
| | PAGE |
| | |
| F - 1 |
| Financial Statements: | |
| F - 2 |
| F - 3 |
| F - 4 |
| F - 5 |
| F - 6 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the ShareholdersStockholders and
Board of Directors of
of Asure Software, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Asure Software, Inc. (the “Company”) as of December 31, 20172019 and 2016,2018, the related consolidated statements of comprehensive loss,income (loss), changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2017,2019, and the related notes (collectively referred to as the “consolidated financial“financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 20172019 and 2016,2018, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2017,2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”("PCAOB"), the Company’sCompany's internal control over financial reporting as of December 31, 2017,2019, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013 and our report dated March 16, 2018, 2020expressed an unqualifiedadverse opinion on the effectiveness of the Company’s internal control over financial reporting.reporting because of the existence of a material weakness.
Explanatory Paragraph - Change in Accounting Principle
As discussed in Note 2 to the financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of ASU No. 2016-02, Leases (Topic 842), as amended, effective January 1, 2019, using the modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’sCompany's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Marcum LLP
Marcum LLP
We have served as the Company’s auditor since 2016.2016
Irvine,Costa Mesa, California
March 16, 2018
2020
ASURE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
| | | December 31, 2017 | | | December 31, 2016 | |
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | $ | 27,792 | | | $ | 12,767 | |
| Accounts and note receivable, net of allowance for doubtful accounts of $425 and $338 at December 31, 2017 and December 31, 2016, respectively | | | 13,361 | | | | 8,108 | |
| Inventory | | | 509 | | | | 487 | |
| Prepaid expenses and other current assets | | | 2,588 | | | | 1,256 | |
| Total current assets before funds held for clients | | | 44,250 | | | | 22,618 | |
| Funds held for clients | | | 42,328 | | | | 22,981 | |
| Total current assets | | | 86,578 | | | | 45,599 | |
| Property and equipment, net | | | 5,217 | | | | 1,878 | |
| Goodwill | | | 77,348 | | | | 26,259 | |
| Intangible assets, net | | | 33,554 | | | | 12,048 | |
| Other assets | | | 614 | | | | 39 | |
| Total assets | | $ | 203,311 | | | $ | 85,823 | |
| Liabilities and stockholders’ equity | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Current portion of notes payable | | $ | 8,895 | | | $ | 5,455 | |
| Accounts payable | | | 1,912 | | | | 1,576 | |
| Accrued compensation and benefits | | | 2,477 | | | | 1,192 | |
| Other accrued liabilities | | | 862 | | | | 936 | |
| Deferred revenue | | | 13,078 | | | | 9,252 | |
| Total current liabilities before client fund obligations | | | 27,224 | | | | 18,411 | |
| Client fund obligations | | | 42,328 | | | | 22,981 | |
| Total current liabilities | | | 69,552 | | | | 41,392 | |
| Long-term liabilities: | | | | | | | | |
| Deferred revenue | | | 1,125 | | | | 769 | |
| Notes payable, net of current portion and debt issuance cost | | | 66,973 | | | | 24,581 | |
| Other liabilities | | | 1,887 | | | | 835 | |
| Total long-term liabilities | | | 69,985 | | | | 26,185 | |
| Total liabilities | | | 139,537 | | | | 67,577 | |
| Commitments (Note 13) | | | | | | | | |
| Stockholders’ equity: | | | | | | | | |
| Preferred stock, $.01 par value; 1,500 shares authorized; none issued or outstanding | | | - | | | | - | |
| Common stock, $.01 par value; 22,000 and 11,000 shares authorized; 12,876 and 8,901 shares issued, 12,492 and 8,517 shares outstanding at December 31, 2017 and December 31, 2016, respectively | | | 129 | | | | 89 | |
| Treasury stock at cost, 384 shares at December 31, 2017 and December 31, 2016 | | | (5,017 | ) | | | (5,017 | ) |
| Additional paid-in capital | | | 346,322 | | | | 295,044 | |
| Accumulated deficit | | | (277,597 | ) | | | (271,875 | ) |
| Accumulated other comprehensive income (loss) | | | (63 | ) | | | 5 | |
| Total stockholders’ equity | | | 63,774 | | | | 18,246 | |
| Total liabilities and stockholders’ equity | | $ | 203,311 | | | $ | 85,823 | |
|
| | | | | | | |
| | December 31,
2019 | | December 31,
2018 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 28,826 |
| | $ | 15,444 |
|
| Accounts and note receivable, net of allowance for doubtful accounts of $904 and $511 at December 31, 2019 and December 31, 2018, respectively | 4,808 |
| | 5,102 |
|
| Inventory | 656 |
| | 1,169 |
|
| Prepaid expenses and other current assets | 12,218 |
| | 2,261 |
|
| Current assets of discontinued operations | — |
| | 13,733 |
|
| Total current assets before funds held for clients | 46,508 |
| | 37,709 |
|
| Funds held for clients | 137,935 |
| | 122,206 |
|
| Total current assets | 184,443 |
| | 159,915 |
|
| Property and equipment, net | 7,867 |
| | 6,434 |
|
| Goodwill | 68,697 |
| | 99,108 |
|
| Intangible assets, net | 63,850 |
| | 72,248 |
|
| Operating lease assets, net | 6,963 |
| | — |
|
| Other assets | 3,224 |
| | 2,338 |
|
| Long-term assets of discontinued operations | — |
| | 21,057 |
|
| Total assets | $ | 335,044 |
| | $ | 361,100 |
|
| Liabilities and stockholders’ equity | | | |
| Current liabilities: | | | |
| Current portion of notes payable | $ | 2,571 |
| | $ | 4,733 |
|
| Accounts payable | 1,736 |
| | 2,945 |
|
| Accrued compensation and benefits | 3,424 |
| | 2,281 |
|
| Operating lease liabilities, current | 1,575 |
| | — |
|
| Other accrued liabilities | 6,556 |
| | 1,105 |
|
| Deferred revenue | 5,500 |
| | 2,887 |
|
| Current liabilities of discontinued operations | — |
| | 11,351 |
|
| Total current liabilities before client fund obligations | 21,362 |
| | 25,302 |
|
| Client fund obligations | 145,227 |
| | 123,170 |
|
| Total current liabilities | 166,589 |
| | 148,472 |
|
| Long-term liabilities: | | | |
| Deferred revenue | 322 |
| | 834 |
|
| Deferred tax liability | 336 |
| | 869 |
|
| Notes payable, net of current portion and debt issuance cost | 24,142 |
| | 106,634 |
|
| Operating lease liabilities, noncurrent | 5,937 |
| | — |
|
| Other liabilities | 139 |
| | 439 |
|
| Long-term liabilities of discontinued operations | — |
| | 1,334 |
|
| Total long-term liabilities | 30,876 |
| | 110,110 |
|
| Total liabilities | 197,465 |
| | 258,582 |
|
| Commitments and Contingencies (Notes 2 and 15) |
| |
|
| Stockholders’ equity: | | | |
| Preferred stock, $.01 par value; 1,500 shares authorized; none issued or outstanding | — |
| | — |
|
| Common stock, $.01 par value; 22,000 and 22,000 shares authorized; 16,098 and 15,666 shares issued, 15,714 and 15,282 shares outstanding at December 31, 2019 and December 31, 2018, respectively | 161 |
| | 157 |
|
| Treasury stock at cost, 384 shares at December 31, 2019 and December 31, 2018 | (5,017 | ) | | (5,017 | ) |
| Additional paid-in capital | 396,102 |
| | 391,927 |
|
| Accumulated deficit | (253,642 | ) | | (283,643 | ) |
| Accumulated other comprehensive loss | (25 | ) | | (906 | ) |
| Total stockholders’ equity | 137,579 |
| | 102,518 |
|
| Total liabilities and stockholders’ equity | $ | 335,044 |
| | $ | 361,100 |
|
The accompanying notes are an integral part of these consolidated financial statements.
ASURE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
LOSSINCOME (LOSS)(Amounts in thousands, except share and per share data)
| | | FOR THE TWELVE MONTHS ENDED DECEMBER 31, | |
| | | 2017 | | | 2016 | |
| Revenues: | | | | | | |
| Cloud revenue | | $ | 39,267 | | | $ | 20,606 | |
| Hardware revenue | | | 4,703 | | | | 3,795 | |
| Maintenance and support revenue | | | 4,453 | | | | 4,566 | |
| On premise software license revenue | | | 1,392 | | | | 2,218 | |
| Professional services revenue | | | 4,627 | | | | 4,357 | |
| Total revenues | | | 54,442 | | | | 35,542 | |
| Cost of Sales | | | 12,619 | | | | 8,117 | |
| Gross margin | | | 41,823 | | | | 27,425 | |
| | | | | | | | | |
| Operating expenses | | | | | | | | |
| Selling, general and administrative | | | 33,887 | | | | 21,048 | |
| Research and development | | | 4,459 | | | | 2,897 | |
| Amortization of intangible assets | | | 4,477 | | | | 2,253 | |
| Total operating expenses | | | 42,823 | | | | 26,198 | |
| | | | | | | | | |
| Income (loss) from operations | | | (1,000 | ) | | | 1,227 | |
| | | | | | | | | |
| Other income (loss) | | | | | | | | |
| Interest expense and other | | | (4,626 | ) | | | (2,010 | ) |
| Total other loss, net | | | (4,626 | ) | | | (2,010 | ) |
| | | | | | | | | |
| Loss from operations before income taxes | | | (5,626 | ) | | | (783 | ) |
| Income tax provision | | | (96 | ) | | | (189 | ) |
| Net loss | | $ | (5,722 | ) | | $ | (972 | ) |
| Other comprehensive income (loss): | | | | | | | | |
| Foreign currency translation (loss) gain | | | (68 | ) | | | 83 | |
| Other comprehensive loss | | $ | (5,790 | ) | | $ | (889 | ) |
| | | | | | | | | |
| Basic and diluted net loss per share | | | | | | | | |
| Basic | | $ | (0.53 | ) | | $ | (0.15 | ) |
| Diluted | | $ | (0.53 | ) | | $ | (0.15 | ) |
| Weighted average basic and diluted shares | | | | | | | | |
| Basic | | | 10,891,000 | | | | 6,533,000 | |
| Diluted | | | 10,891,000 | | | | 6,533,000 | |
|
| | | | | | | |
| | Years Ended December 31 |
| | 2019 | | 2018 |
| Revenue: | | | |
| Recurring | $ | 70,066 |
| | $ | 58,890 |
|
| Professional services, hardware and other | 3,084 |
| | 4,736 |
|
| Total revenue | 73,150 |
| | 63,626 |
|
| Cost of sales | 29,836 |
| | 24,122 |
|
| Gross profit | 43,314 |
| | 39,504 |
|
| Operating expenses | | | |
| Selling, general and administrative | 42,093 |
| | 36,765 |
|
| Research and development | 5,351 |
| | 5,998 |
|
| Amortization of intangible assets | 11,765 |
| | 7,481 |
|
| Impairment of goodwill | 35,060 |
| | — |
|
| Total operating expenses | 94,269 |
| | 50,244 |
|
| Loss from operations | (50,955 | ) | | (10,740 | ) |
| Interest expense and other, net | (15,447 | ) | | (8,615 | ) |
| Loss from continuing operations before income taxes | (66,402 | ) | | (19,355 | ) |
| Income tax benefit | (24,111 | ) | | (7,982 | ) |
| Loss from continuing operations | (42,291 | ) | | (11,373 | ) |
| Discontinued operations (Note 12) | | | |
| Gain on disposal of discontinued operations | 94,293 |
| | — |
|
| Income from operations of discontinued operations | 3,498 |
| | 4,578 |
|
| Income tax expense | (25,499 | ) | | (753 | ) |
| Gain on discontinued operations, net of taxes | 72,292 |
| | 3,825 |
|
| Net income (loss) | 30,001 |
| | (7,548 | ) |
| Other comprehensive income (loss): | | | |
| Change in unrealized gain (loss) on available for sale securities | 6 |
| | (101 | ) |
| Foreign currency translation loss | (597 | ) | | (742 | ) |
| Comprehensive income (loss) | $ | 29,410 |
| | $ | (8,391 | ) |
| | | | |
| Basic and diluted loss per share from continuing operations | | | |
| Basic | $ | (2.73 | ) | | $ | (0.81 | ) |
| Diluted | $ | (2.73 | ) | | $ | (0.81 | ) |
| Basic and diluted net income (loss) per share | | | |
| Basic | $ | 1.93 |
| | $ | (0.54 | ) |
| Diluted | $ | 1.93 |
| | $ | (0.54 | ) |
| Weighted average basic and diluted shares | | | |
| Basic | 15,511,000 |
| | 14,010,000 |
|
| Diluted | 15,511,000 |
| | 14,010,000 |
|
The accompanying notes are an integral part of these consolidated financial statements.
ASURE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Amounts in thousands)
| | | Common | | | Common | | | | | | Additional | | | | | | Other | | | Total | |
| | | Stock | | | Stock | | | Treasury | | | Paid-in | | | Accumulated | | | Comprehensive | | | Stockholders’ | |
| | | Outstanding | | | Amount | | | Stock | | | Capital | | | Deficit | | | Income (Loss) | | | Equity | |
| BALANCE AT DECEMBER 31, 2015 | | | 6,290 | | | $ | 67 | | | $ | (5,017 | ) | | $ | 279,649 | | | $ | (270,903 | ) | | $ | (78 | ) | | $ | 3,718 | |
| Share based compensation | | | | | | | | | | | | | | | 226 | | | | | | | | | | | | 226 | |
| Stock issued upon option exercise | | | 278 | | | | 3 | | | | | | | | 741 | | | | | | | | | | | | 744 | |
| Stock issued, net of issuance cost | | | 1,949 | | | | 19 | | | | | | | | 14,428 | | | | | | | | | | | | 14,447 | |
| Net loss | | | | | | | | | | | | | | | | | | | (972 | ) | | | | | | | (972 | ) |
| Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | 83 | | | | 83 | |
| BALANCE AT DECEMBER 31, 2016 | | | 8,517 | | | $ | 89 | | | | (5,017 | ) | | | 295,044 | | | | (271,875 | ) | | | 5 | | | | 18,246 | |
| Share based compensation | | | | | | | | | | | | | | | 593 | | | | | | | | | | | | 593 | |
| Stock issued upon option exercise | | | 80 | | | | - | | | | | | | | 445 | | | | | | | | | | | | 445 | |
| Stock issued, net of issuance cost | | | 3,895 | | | | 40 | | | | | | | | 50,240 | | | | | | | | | | | | 50,280 | |
| Net loss | | | | | | | | | | | | | | | | | | | (5,722 | ) | | | | | | | (5,722 | ) |
| Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | (68 | ) | | | (68 | ) |
| BALANCE AT DECEMBER 31, 2017 | | | 12,492 | | | $ | 129 | | | $ | (5,017 | ) | | $ | 346,322 | | | $ | (277,597 | ) | | $ | (63 | ) | | $ | 63,774 | |
The accompanying notes are an integral part of these consolidated financial statements.
ASURE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS(Amounts in thousands)
| | | FOR THE TWELVE MONTHS ENDED DECEMBER 31, | |
| | | 2017 | | | 2016 | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
| Net loss | | $ | (5,722 | ) | | $ | (972 | ) |
| Adjustments to reconcile net loss to net cash used in operations: | | | | | | | | |
| Depreciation and amortization | | | 6,058 | | | | 3,613 | |
| Provision for doubtful accounts | | | 495 | | | | 265 | |
| Share-based compensation | | | 593 | | | | 226 | |
| Other | | | - | | | | 94 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (4,096 | ) | | | (3,401 | ) |
| Inventory | | | (17 | ) | | | 297 | |
| Prepaid expenses and other assets | | | (1,325 | ) | | | 233 | |
| Accounts payable | | | (254 | ) | | | (1,104 | ) |
| Accrued expenses and other long-term obligations | | | 1,589 | | | | 466 | |
| Deferred revenue | | | 2,643 | | | | (1,729 | ) |
| Net cash used in operating activities | | | (36 | ) | | | (2,012 | ) |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
| Acquisitions net of cash acquired | | | (45,390 | ) | | | (12,000 | ) |
| Purchases of property and equipment | | | (1,400 | ) | | | (436 | ) |
| Software capitalization costs | | | (1,658 | ) | | | - | |
| Collection of note receivable | | | - | | | | 223 | |
| Restricted cash | | | 200 | | | | - | |
| Net change in funds held for clients | | | (10,244 | ) | | | (6,562 | ) |
| Net cash used in investing activities | | | (58,492 | ) | | | (18,775 | ) |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
| Proceeds from notes payable | | | 45,777 | | | | 18,413 | |
| Payments on notes payable | | | (8,973 | ) | | | (7,233 | ) |
| Debt financing fees | | | (1,433 | ) | | | (438 | ) |
| Payments on capital leases | | | (131 | ) | | | (197 | ) |
| Net proceeds from issuance of common stock | | | 28,002 | | | | 15,192 | |
| Net change in client fund obligations | | | 10,299 | | | | 6,562 | |
| Net cash provided by financing activities | | | 73,541 | | | | 32,299 | |
| | | | | | | | | |
| Effect of foreign exchange rates | | | 12 | | | | 97 | |
| | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | 15,025 | | | | 11,609 | |
| Cash and cash equivalents at beginning of period | | | 12,767 | | | | 1,158 | |
| Cash and cash equivalents at end of period | | $ | 27,792 | | | $ | 12,767 | |
| | | | | | | | | |
| SUPPLEMENTAL INFORMATION: | | | | | | | | |
| Cash paid for: | | | | | | | | |
| Interest | | $ | 3,466 | | | $ | 1,415 | |
| Income taxes | | | 23 | | | | - | |
| Non-cash Investing and Financing Activities: | | | | | | | | |
| Subordinated notes payable –acquisitions | | | 9,193 | | | | 6,000 | |
| Equity issued in connection with acquisitions | | | 22,353 | | | | - | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock Outstanding | | Common Stock Amount | | Treasury Stock | | Additional Paid- in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Stockholders’ Equity |
| BALANCE AT DECEMBER 31, 2017 | 12,492 |
| | $ | 129 |
| | $ | (5,017 | ) | | $ | 346,322 |
| | $ | (277,597 | ) | | $ | (63 | ) | | $ | 63,774 |
|
| Retrospective adoption of Topic 606 | — |
| | — |
| | — |
| | — |
| | 1,502 |
| | — |
| | 1,502 |
|
| Share based compensation | — |
| | — |
| | — |
| | 1,687 |
| | — |
| | — |
| | 1,687 |
|
| Stock issued upon option exercise | 28 |
| | — |
| | — |
| | 156 |
| | — |
| | — |
| | 156 |
|
| Stock issued, net of issuance cost | 2,762 |
| | 28 |
| | — |
| | 43,762 |
| | — |
| | — |
| | 43,790 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | (7,548 | ) | | — |
| | (7,548 | ) |
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | (843 | ) | | (843 | ) |
| BALANCE AT DECEMBER 31, 2018 | 15,282 |
| | 157 |
| | (5,017 | ) | | 391,927 |
| | (283,643 | ) | | (906 | ) | | 102,518 |
|
| Stock issued upon option exercise and vesting of restricted stock units | 204 |
| | 2 |
| | — |
| | 846 |
| | — |
| | | | 848 |
|
| Stock issued under the employee stock purchase plan | 105 |
| | 1 |
| | — |
| | 507 |
| | — |
| | — |
| | 508 |
|
| Stock issued upon acquisition | 123 |
| | 1 |
| | — |
| | 554 |
| | — |
| | — |
| | 555 |
|
| Share based compensation | — |
| | — |
| | — |
| | 2,268 |
| | — |
| | | | 2,268 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 30,001 |
| | — |
| | 30,001 |
|
| Disposal of discontinued operations | — |
| | — |
| | — |
| | — |
| | — |
| | 1,472 |
| | 1,472 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | (591 | ) | | (591 | ) |
| BALANCE AT DECEMBER 31, 2019 | 15,714 |
| | $ | 161 |
| | $ | (5,017 | ) | | $ | 396,102 |
| | $ | (253,642 | ) | | $ | (25 | ) | | $ | 137,579 |
|
The accompanying notes are an integral part of these consolidated financial statements.
ASURE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
|
| | | | | | | |
| | Years Ended December 31 |
| | 2019 | | 2018 |
| Cash flows from operating activities: | | | |
| Net income (loss) | $ | 30,001 |
| | $ | (7,548 | ) |
| Adjustments to reconcile net income (loss) to net cash used in operations: | | | |
| Depreciation and amortization | 18,165 |
| | 12,927 |
|
| Impairment of goodwill | 35,060 |
| | — |
|
| Amortization of debt financing costs and discount | 1,462 |
| | 1,451 |
|
| Release of contingent consideration | — |
| | (489 | ) |
| Provision for doubtful accounts | 446 |
| | 504 |
|
| Benefit from deferred income taxes | (1,193 | ) | | (7,083 | ) |
| Loss (gain) on extinguishment of debt | 2,808 |
| | (479 | ) |
| Gain on sale of discontinued operations | (94,293 | ) | | — |
|
| Share-based compensation | 2,268 |
| | 1,687 |
|
| Loss on disposals of fixed assets | 62 |
| | 53 |
|
| Changes in operating assets and liabilities: | | | |
| Accounts receivable | (1,446 | ) | | (1,719 | ) |
| Inventory | (1,581 | ) | | (2,948 | ) |
| Prepaid expenses and other assets | 554 |
| | (1,437 | ) |
| Accounts payable | (3,174 | ) | | 1,595 |
|
| Accrued expenses and other long-term obligations | 5,649 |
| | (2,410 | ) |
| Operating lease liabilities | (900 | ) | | — |
|
| Deferred revenue | 5,662 |
| | (1,233 | ) |
| Net cash used in operating activities | (450 | ) | | (7,129 | ) |
| Cash flows from investing activities: | | | |
| Proceeds from sale of discontinued operations | 118,206 |
| | — |
|
| Acquisitions, net of cash acquired | (7,443 | ) | | (66,984 | ) |
| Purchases of property and equipment | (1,017 | ) | | (1,898 | ) |
| Software capitalization costs | (3,824 | ) | | (3,896 | ) |
| Net change in funds held for clients | (8,980 | ) | | (34,450 | ) |
| Net cash provided by (used in) investing activities | 96,942 |
| | (107,228 | ) |
| Cash flows from financing activities: | | | |
| Proceeds from notes payable | 28,636 |
| | 36,750 |
|
| Payments of notes payable | (118,421 | ) | | (7,105 | ) |
| Proceeds from revolving line of credit | 10,231 |
| | 4,540 |
|
| Payments of revolving line of credit | (10,312 | ) | | (4,540 | ) |
| Debt financing fees | (1,539 | ) | | (1,693 | ) |
| Payments of finance leases | (102 | ) | | (135 | ) |
| Net proceeds from issuance of common stock | 820 |
| | 39,449 |
|
| Net change in client fund obligations | 7,692 |
| | 34,522 |
|
| Net cash provided by (used in) financing activities | (82,995 | ) | | 101,788 |
|
| Effect of foreign exchange rates | (115 | ) | | 221 |
|
| Net increase (decrease) in cash and cash equivalents | 13,382 |
| | (12,348 | ) |
| Cash and cash equivalents at beginning of period | 15,444 |
| | 27,792 |
|
| Cash and cash equivalents at end of period | $ | 28,826 |
| | $ | 15,444 |
|
| Supplemental information: | | | |
| Cash paid for: | | | |
| Interest | $ | 8,897 |
| | $ | 7,819 |
|
| Income taxes | 126 |
| | 91 |
|
| Non-cash Investing and Financing Activities: | | | |
| Subordinated notes payable –acquisitions | — |
| | 7,592 |
|
| Equity issued in connection with acquisitions | 555 |
| | 4,493 |
|
The accompanying notes are an integral part of these consolidated financial statements.
ASURE SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
NOTE 1 - THE COMPANY
Asure Software, Inc., (“Asure”, the “Company”, “we” and “our”), a Delaware corporation,Corporation, is a leading provider of cloud-based software-as-a-serviceHuman Capital Management (“SaaS”HCM”) timeand, until its divestiture in December 2019, Workspace Management software solutions. Asure facilitates the growth of small and mid-sized companies by helping them (i) build better teams with skills that get them to the next level, (ii) stay compliant with ever changing federal, state, and local tax jurisdictions and labor managementlaws, and Agile Workplace management solutions(iii) allocate more resources to support growth rather than back-office overhead that enable organizations to manage their office environmentssuffocates growth. Asure’s HCM suite, named AsureHCM, includes cloud-based Payroll & Tax, Human Resources ("HR"), and Time & Attendance software as well as their human resourceHR Services ranging from HR projects to completely outsourcing payroll and payroll processes effectively and efficiently.HR staff. We develop, markets, sellsmarket, sell and supports itssupport our offerings worldwide through itsour principal office in Austin, Texas and through additional offices in Tampa,Alabama, California, Florida, Traverse City,Massachusetts, Michigan, Burlington,Nebraska, New York, North Carolina, Tennessee, Vermont, Washington, and London,the United Kingdom.
In December 2019, we completed the sale of the assets of our Workspace Management business for an aggregate purchase price of approximately $121,500 in cash. The purchase price is subject to a working capital adjustment. For further information regarding the transaction, see Note 12 to the accompanying consolidated financial statements.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
We have prepared our consolidated financial statements in accordance with U.S. generally accepted accounting principles and hashave included the accounts of itsour wholly owned subsidiaries. We have eliminated all significant intercompany transactions and balances in consolidation. We have made certain reclassifications to the prior year’s consolidated financial statements to conform to the current year presentation.
SEGMENTS
The chief operating decision maker is Asure’s Chief Executive Officer who reviews financial information presented on a company-wide basis. Accordingly, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280, we determined that itthe Company has a single reporting segment and operating unit structure.
USE OF ESTIMATES
Preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are subjective in nature and involve judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at fiscal year endyear-end and the reported amounts of revenues and expenses during the fiscal year.reporting period. 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 itsthe Company's 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.
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 December 31, 2017,2019, we were not party to any pending legal proceedings.
LIQUIDITY AND GOING CONCERN
As of December 31, 2017, our principal sources of liquidity consisted of approximately $27,792 of cash and cash equivalents, future cash generated from operations and $5,000 available for borrowing under our Wells Fargo revolver discussed in Note 6 – Notes Payable. We believe that we have and/or will generate sufficient cash for our short- and long-term needs, including meeting the requirements of our term loan, and the related debt covenant requirements. We continue to seek reductions in our expenses as a percentage of revenue on an annual basis and thus may utilize our cash balances in the short-term to reduce long-term costs. 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 the issuance of the consolidated financial statements.
ASURE SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
In February 2017, we filed a shelf registration statement on Form S-3 with the SEC to sell, from time to time, in one or more offerings, up to $75,000 of our common stock, preferred stock, warrants, debt securities, subscription rights, and units. In April 2017, the shelf registration statement was declared effective by the SEC. Under this shelf registration statement, in June 2017 we completed an underwritten public offering of 2,185,000 shares of common stock at the public offering price of $13.50 per share, which includes 285,000 shares sold pursuant to the exercise of the underwriters’ over-allotment option. We recognized net proceeds of $27,800, after deducting the underwriting discounts and commissions and other estimated offering expenses.
In May 2017, we entered into an amended and restated credit agreement (the “Restated Credit Agreement”) with Wells Fargo Bank, N. A., as administrative agent, and the lenders that are parties thereto, amending and restating the terms of the Credit Agreement dated as of March 2014, as amended.
The Restated Credit Agreement provides for an increase in the aggregate principal amount of total commitments from approximately $32,714 to $75,000. This increase includes an additional term loan commitment of approximately $40,286 and an additional revolver commitment of $2,000. The term loan consists of a $35,000 “First Out Loan Obligation” funded by Wells Fargo as administrative agent, and a $35,000 “Last Out Loan Obligation” funded by Wells Fargo’s syndicate partner, Goldman Sachs.
The Restated Credit Agreement amends the applicable margin rates for determining the interest rate payable on outstanding First Out and Last Out loan obligations as follows:
Leverage Ratio | | First Out Base
Rate Margin
| | First Out LIBOR
Rate Margin
| | Last Out Base
Rate Margin
| | Last Out LIBOR
Rate Margin
|
< 3.25:1 | | 2.00 Percentage Points | | 3.00 Percentage Points | | 7.00 Percentage Points | | 8.00 Percentage Points |
> 3.25:1 | | 2.50 Percentage Points | | 3.50 Percentage Points | | 7.50 Percentage Points | | 8.50 Percentage Points |
The outstanding principal amount of the term loan is payable in equal installments of $875 beginning on September 30, 2017 and the last day of each fiscal quarter thereafter. The outstanding principal balance and all accrued and unpaid interest on the term loan is due on May 25, 2022.
The Restated Credit Agreement also:
· amends our leverage ratio covenant to increase the maximum ratio to 5.75:1 at June 30, 2017, stepping down to 3.25:1 at June 30, 2020 and each quarter-end thereafter;
· amends our fixed charge coverage ratio to be not less than 1.35:1 at June 30, 2017 and September 30, 2017, not less than 1.45:1 at December 31, 2017, and not less than 1.50:1 beginning with the quarter ending March 31, 2018 and each quarter-end thereafter; and
· adds a Trailing Twelve Months (“TTM”) recurring revenue covenant, requiring software-as-a-service, hardware-as-a-service and cloud subscription and maintenance support revenues to be at least $41,000 at June 30, 2017 and stepping up to $60,500 at June 30, 2022 and each quarter-end thereafter.
As of December 31, 2017, we were in compliance with all covenants 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.
Management is focused on growing our existing product offering, as well as our customer base, to increase our recurring revenues. We have made and will continue to explore additional strategic acquisitions. We expect to fund any future acquisitions with equity, available cash, future cash from operations, or debt from outside sources.
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. Future business demands may lead to cash utilization at levels greater than recently experienced. We will need to raise additional capital in the future. However, we cannot assure that we will be able to raise additional capital on acceptable terms, or at all. In our evaluation of the Company’s ability to continue as a going concern in accordance with ASU 2014-15, we have considered factors such as the Company’s historical and forecasted results of operations and cash flows from operations, and we believe that substantial doubt regarding the Company’s ability to continue as a going concern is not probable. 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 from the issuance of these consolidated financial statements and to maintain compliance with the terms of our debt agreements and related covenants or to obtain compliance through debt repayments made with the available cash on hand or anticipated for receipt in the ordinary course of operations.
ASURE SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash deposits and highly liquid investments with an original maturity of three months or less when purchased.
ASURE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
INVESTMENTS
Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in accumulated other comprehensive income (loss). The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. The amortization of premiums and accretion of discounts is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are included in other income (expense). The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income.
FUNDS HELD FOR CLIENTS
Funds held for clients represent assets that, based upon the Company’s intent, are restricted for use solely for the purposes of satisfying the obligations to remit funds relating to the Company’s payroll and payroll tax filing services, which are classified as client fund obligations on our consolidated balance sheets. Funds held for clients are held in demand deposit accounts at major financial institutions and are classified as a current asset on our consolidated balance sheets since these funds are held solely for the purposes of satisfying the client fund obligations.
Client fund obligations represent the Company’s contractual obligations to remit funds to satisfy clients’ payroll and tax payment obligations and are recorded on the consolidated balance sheets at the time that the Company impounds funds from clients. The client fund obligations represent liabilities that will be repaid within one year of the balance sheet date. The Company has reported client fund obligations as a current liability on the consolidated balance sheets totaling $42,328$145,227 and $22,981$123,170 as of December 31, 20172019 and December 31, 2016,2018, respectively. The Company has classified funds held for clients as a current asset totaling $137,935 and $122,206 as of December 31, 2019 and 2018, respectively, since these funds are held solely for the purposes of satisfying client funds obligations. The Company has reported cash flows related to purchases, sales and maturities of corporate and client funds marketable securities on a gross basis in the investing section of the statements of consolidated cash flows. The Company has reported cash flows related to client fund investments with original maturities of ninety days or less on a net basis within the net increase in restricted cash and cash equivalents and other restricted assets held to satisfy client fund obligations in the investing section of the statements of consolidated cash flows. The Company has reported cash flows related to cash received from and paid on behalf of clients on a net basis within the net increase in client fund obligations in the financing activities section of the statements of consolidated cash flows.
FAIR VALUE OF FINANCIAL INSTRUMENTS
We apply the authoritative guidance on fair value measurements for financial assets and liabilities that are measured at fair value on a recurring basis, and non-financial assets and liabilities such as goodwill, intangible assets and property and equipment that are measured at fair value on a non-recurring basis.
CONCENTRATION OF CREDIT RISK
We grant credit to customers in the ordinary course of business. We limit concentrations of credit risk related to our trade accounts receivable due to our large number of customers, including third-party resellers, and their dispersion across several industries and geographic areas. We perform ongoing credit evaluations of our customers and maintain reserves for potential credit losses. We require advanced payments or secured transactions when deemed necessary.
We review potential customers’ credit ratings to evaluate customers’ ability to pay an obligation within the payment term, which is usually net thirty days. If we receive reasonable assurance of payment and know of no barriers to legally enforce the payment obligation, we may extend credit to customers. We place accounts on “Credit Hold” if a placed order exceeds the credit limit or sooner if circumstances warrant. We follow our credit policy consistently and routinely monitor our delinquent accounts for indications of uncollectability.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain an allowance for doubtful accounts at an amount we estimate to be sufficient to provide adequate protection against losses resulting from extending credit to our customers. We base this allowance, in the aggregate, on historical collection experience, age of receivables and general economic conditions. The allowance for doubtful accounts also considers the need for specific customer reserves based on the customer’s payment experience, credit-worthiness and age of receivable balances. Our bad debts have not been material and have been within management expectations.
ASURE SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
The following table summarizes the annual changes in our allowance for doubtful accounts:
| Balance at December 31, 2015 | | $ | 145 | |
| Provision for doubtful accounts receivable | | | 265 | |
| Write-off of uncollectible accounts receivable | | | (72 | ) |
| Balance at December 31, 2016 | | $ | 338 | |
| Provision for doubtful accounts receivable | | | 495 | |
| Write-off of uncollectible accounts receivable | | | (408 | ) |
| Balance at December 31, 2017 | | $ | 425 | |
INVENTORY
Inventory consists of finished goods and is stated at the lower of cost or net realizable value, cost being determined using the first-in, first-out method. Inventory includes purchased LCD panels and a full range of biometric and card recognition clocks that we sell as part of our workforce and workspace managementAsureTime&Attendance solutions. We routinely assess our on-hand inventory for timely identification and measurement of obsolete, slow-moving or otherwise impaired inventory.
ASURE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
PROPERTY AND EQUIPMENT
We record property and equipment, including software, furniture and equipment, at cost less accumulated depreciation. We record depreciation using the straight-line method over the estimated economic useful lives of the assets, which range from two to five years.years. Property and equipment also includes leasehold improvements and capital leases which we record at cost less accumulated amortization. We record amortization of leasehold improvements and capital leases using the straight-line method over the shorter of the lease term or over the life of the respective assets, as applicable. We recognize gains or losses related to retirements or disposition of fixed assets in the period incurred. We expense repair and maintenance costs as incurred. We periodically review the estimated economic useful lives of our property and equipment and make adjustments, if necessary, according to the latest information available.
BUSINESS COMBINATIONS
We have accounted for our acquisitions using the acquisition method of accounting based on ASC 805—BusinessCombinations, which requires recognition and measurement of all identifiable assets acquired and liabilities assumed at their full fair value as of the date we obtain control. We have determined the fair value of assets acquired and liabilities assumed based upon our estimates of the fair values of assets acquired and liabilities assumed in the acquisitions. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired. While we have used our best estimates and assumptions to measure the fair value of the identifiable assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, not to exceed one year from the date of acquisition, any changes in the estimated fair values of the net assets recorded for the acquisitions will result in an adjustment to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, we record any subsequent adjustments to our consolidated statements of comprehensive loss.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired in a business combination. 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, by first assessing qualitative factors to determine whether it is necessary to perform the two-stepquantitative goodwill impairment test. If determined to be necessary,On January 1, 2019, we early adopted Accounting Standards Update ("ASU") No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the two-stepTest for Goodwill Impairment ("ASU 2017-04"). Under ASU 2017-04, an impairment test should be used to identify any potential impairment and measurecharge is based on the excess of a reporting unit's carrying amount over its fair value. In 2019, we recognized an impairment loss if any. Step one of the impairment test consists of comparing the fair value of the reporting unit with the aggregate carrying value, includingon goodwill. If the carrying value of a reporting unit exceeds the reporting unit’s fair value, step two must be performed to determine the amount, if any, of the goodwill impairment. We tested goodwill using the qualitative factors during 2017 and 2016. There has beenIn 2018, there was no impairment of goodwill for the periods presented.goodwill. See Notes 4 and 5 for additional information regarding goodwill.
We amortize intangible assets not considered to have an indefinite useful life using the straight-line method over their useful lives. We currently amortize our acquired intangible assets with definite lives over periods ranging from one to nine years. Each reporting period, we evaluate the estimated remaining useful life of intangible assets and assess whether events or changes in circumstances warrant a revision to the remaining period of amortization or indicate that impairment exists. In 2019, we accelerated the amortization after a reassessment of the useful lives of certain trade names in relation to our rebranding efforts. We have not identified any other impairments of finite-lived intangible assets during any of the periods presented. See Note 5 – Goodwill and Other Intangible Assets for additional information regarding intangible assets.
ASURE SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with ASC 350, we review and evaluates our long-lived assets for impairment whenever events or changes in circumstances indicate that we may not recover their net book value. When such factors and circumstances exist, we compare the assets’ carrying amounts against the estimated undiscounted cash flows to be generated by those assets over their estimated useful lives. If the carrying amounts are greater than the undiscounted cash flows, we estimate the fair values of those assets by discounting the projected cash flows. We record any excess of the carrying amounts over the fair values as impairments in that fiscal period. We have identified no impairment of long-lived assets during any of the periods presented.
ORIGINAL ISSUE DISCOUNTS
We recognize original issue discounts, when incurred on the issuance of debt, as a reduction of the current loan obligations that we amortize to interest expense over the life of the related indebtedness using the effective interest rate method. We record the amortization as interest expense – amortization of OID in the Consolidated Statements of Comprehensive Loss. At the time of any repurchases or retirements of related debt, we will write off the remaining amount of net original issue discounts and include them in the calculation of gain/(loss)gain or loss on retirementextinguishment in the consolidated statements of comprehensive loss.
REVENUE RECOGNITION
On January 1, 2018, we adopted ASC Topic 606 (“Topic 606”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. There was no impact to revenue as a result of applying Topic 606 for the year ended December 31, 2018.
ASURE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
Our revenues consistrevenue consists of software-as-a-service (“SaaS”) offerings and time-based software subscriptions, and perpetual softwaresubscription license sale arrangements that also, typically include hardware, maintenance/support, and professional services elements. We recognize revenue on an output basis when persuasive evidencecontrol of the promised goods or services is transferred to our customers, in an arrangement exists, delivery has occurred,amount that reflects the fee is fixedconsideration we expect to be entitled to in exchange for those goods or determinable and collectability is probable. Software and software-related elements are recognized in accordanceservices. Our contracts with ASC 985-605 Software Revenue Recognition. We recognized non-softwarecustomers may include multiple performance obligations. For such arrangements, we allocate revenue elements in accordance with ASC 605-25 Revenue Recognition Multiple-Element Arrangements. Since we currently offer our software solutions under either a perpetual license, time-based subscription or SaaS model, revenue recognition timing variesto each performance obligation based on which formits 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 software rightssales data as well as through use of the customer purchases.
residual approach when we can estimate the standalone selling price for one or more, but not all, of the promised goods or services.
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. A typical SaaSSaaS/software subscription arrangement will also include hardware, setup and implementation services. We allocate the value of the SaaS arrangement to each separate unit of accounting based on vendor-specific objective evidence (“VSOE”) of selling price, when it exists, third-party evidence of selling price for like services or best estimated selling price. Revenue allocated to the SaaS/software subscription elementperformance obligations are recognized on an output basis ratably as the service is recognized ratablyprovided over the non-cancellable term of the SaaS/subscription service. We recognizeservice and are reported as Recurring revenue on the Consolidated Statement of Comprehensive Loss. Revenue allocated to other units of accountingperformance obligations included in the arrangement is recognized as outlined in the paragraphs below.
We typically sell perpetual software licenses in multiple-element arrangements that include hardware, maintenance/support and professional services. We generally recognize software license revenues, determined under the residual method, on the date we deliver the product to the customer if VSOE of fair value exists for all undelivered elements of the software arrangement. If VSOE of fair value does not exist for an undelivered element, we defer the entire software arrangement and recognize it ratably over the remaining non-cancellable maintenance term after we have delivered all other undelivered elements. We base VSOE of fair value for our maintenance, training and installation services on the prices charged for these services when sold separately. We recognize revenue allocated to hardware, maintenance and services elements included in the arrangement as outlined below.
Hardware devices sold to customers (typically time clock, LCD panel and other peripheral devices) are not essentialsold as either a standard product sell arrangement where title to the functionality ofhardware passes to the software andcustomer or under a hardware-as-a-service (“HaaS”) arrangement where the title to the hardware remains with Asure. Revenue allocated to hardware sold as such we treat them as non-software elements for revenue recognition purposes. We recognize hardware revenuea standard product are recognized on an output basis when title passes to the customer, typically the date we ship the hardware. If we sellRevenue allocated to hardware under a hardware-as-a-service (“HaaS”) arrangement title toare recognized on an output basis, recorded ratably as the hardware remains with Asure and we recognize hardware usage revenue ratablyservice is provided over the non-cancellable term of the hardware service delivery,HaaS arrangement, typically one year.
Revenue recognized from hardware devices sold to customers via either of the two above types of arrangements are reported as Hardware revenue on the Consolidated Statement of Comprehensive Loss.
Our professional services offerings which typically include data migration, set up, training, and implementation services are also not essential to the functionality of our products, as third parties or customers themselves can perform these services. Set up and implementation services typically occur at the start of the software arrangement while certain other professional services, depending on the nature of the services and customer requirements, may occur several months later. We can reasonably estimate professional services performed for a fixed fee and we recognize thisallocated revenue on an output basis on a proportional performance basis.basis as the service is provided. We recognize allocated revenue on an output basis for professional services engagements billed on a time and materials basis as we deliver the services.service is provided. We recognize revenuesallocated revenue on an output basis on all other professional services engagements upon the earlier of the completion of the servicesservice’s deliverable or the expiration of the customer’s right to receive the service.
ASURE SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
Comprehensive Loss.
We recognize allocated revenue for maintenance/support revenueson an output basis ratably over the non-cancellable term of the support agreement. 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 Recurring on the Consolidated Statement of Comprehensive 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. Our arrangements with resellers do not allow for any rights of return.
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 transaction prices of our contracts do not include consideration amounts that are variable and do not include noncash consideration.
Deferred revenue includes amounts received frominvoiced to customers in excess of revenue recognized,we recognize, and is comprised of deferred maintenance, serviceSaaS/software, HaaS, Maintenance and othersupport, and Professional services revenue. We recognize deferred revenuesrevenue when we complete the service and over the terms of the arrangements, primarily ranging from one to three years.years.
ADVERTISING COSTS
We expense advertising costs as we incur them. Advertising expenses were $65$64 and $109$55 for 20172019 and 2016,2018, respectively. We recorded these expenses as part of sales and marketing expenses on our Consolidated Statements of Comprehensive Loss.
ASURE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
LEASE OBLIGATIONS
WeAt the commencement date of a lease, we recognize itsa liability to make lease obligations with scheduled rent increasespayments and an asset representing the right-of-use underlying asset during the lease term. The lease liability is measured at the present value of lease payments over the lease term. As our leases typically do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date taking into consideration necessary adjustments for collateral, depending on the facts and circumstances of the lessee and the leased asset, and term to match the lease term. The operating lease asset is measured at cost, which includes the initial measurement of the lease liability and initial direct costs incurred by the Company and excludes lease incentives. Operating lease assets and liabilities as shown separately in our consolidated balance sheets.
Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease costs are recognized on a straight-line basis. Accordingly, we charge the total amount of base rentalsbasis over the term of our leases to expense on a straight-line method, recording the amount of rental expense in excess of lease payments as a deferred rent liability. As of December 31, 2017term. Lease agreements that contain both lease and 2016, we had $125 and $0 deferred rent liabilities. We also recognize capital lease obligations and record the underlying assets and liabilities on our Consolidated Balance Sheets. As of December 31, 2017 and 2016, we had $24 and $163 in capital lease obligations, respectively. non-lease components are generally accounted for separately.
FOREIGN CURRENCY TRANSLATION
We measure the financial statements of our foreign subsidiaries using the local currency as the functional currency. Accordingly, we translate the assets and liabilities of these foreign subsidiaries at current exchange rates at each balance sheet date. We record translation adjustments arising from the translation of net assets located outside of the United States into United States dollars in accumulated other comprehensive loss as a separate component of stockholders’ equity. We translate income and expenses from the foreign subsidiaries using monthly average exchange rates. We include net gains and losses resulting from foreign exchange transactions in other income and expenses, which were not significant in 2017and 2016. 2019 and 2018.
INCOME TAXES
We account for income taxes using the liability method under ASC 740, Accounting for Income Taxes, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events included in the financial statements. Under the liability method, we determine deferred tax assets and liabilities based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which we expect the differences to reverse. We reduce deferred tax assets by a valuation allowance when it is more likely than not that we will not realize some component or all of the deferred tax assets.
SHARE BASED COMPENSATION
We adopted Statement ASC 718 effective August 1, 2005, using the modified prospective application transition method. The modified prospective application method requires that companies recognize compensation expense on stock-based payment awards that are modified, repurchased or cancelled after the effective date. We estimate the fair value of each award granted from our stock option plan at the date of grant using the Black-Scholes option pricing model. During 2017 and 2016, we granted 575,000 and 454,000 stock options, respectively.
As of December 31, 2017, we expect to recognize $1,362 of unrecognized compensation costs related to non-vested option grantsThe fair value is recognized as expense over the courseservice period, net of estimated forfeitures, using the following three years.straight-line method. The estimation of share-based awards that will ultimately vest requires judgment, and, to the extent actual results or updated estimates differ from current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We primarily consider historical experience when estimating expected forfeitures.
We issued 80,000 shares of common stock related to exercises of stock options granted from our stock option plan for 2017 and 278,000 shares in 2016.
ASURE SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Standards
In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-11, “Simplifying the Measurement of Inventory”. Inventory within the scope of this update is required to be measured at the lower of its cost or net realizable value, with net realizable value being the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU is effective prospectively for fiscal years and interim periods beginning after December 15, 2016, with early adoption permitted. We adopted the provisions of ASU 2015-11 on January 1, 2017. This adoption did not have any impact on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.”. The purpose of ASU 2016-09 is to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification of such activity on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within that year. Prospective, retrospective, or modified retrospective application may be used dependent on the specific requirements of the amendments within ASU 2016-09. Effective January 1, 2017, the Company adopted ASU 2016-09 on a prospective basis. As such, prior periods have not been adjusted.
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment (Topic 350)”, which eliminates Step 2 from the goodwill impairment test. ASU 2017-04 is effective for annual and interim periods in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017 and should be applied prospectively. We adopted the provisions of ASU 2017-04 on January 1, 2017. The adoption did not have any impact on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 806): Clarifying the Definition of a Business”, which provides guidance in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting, including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for public companies for fiscal years beginning after December 15, 2017. We adopted this standard early as of January 1, 2017 as permitted under the standard. The adoption did not have any impact on our consolidated financial statements.
Standards Yet To Be Adopted
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 supersedes a majority of existing revenue recognition guidance under US GAAP, and requires companies to recognize revenue when it transfers goods or services to a customer in an amount that reflects the consideration to which a company expects to be entitled. Companies may need to apply more judgment and estimation techniques or methods while recognizing revenue, which could result in additional disclosures to the financial statements. In addition, in March 2016, April 2016, May 2016 and December 2016 the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”), ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”), ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”) and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (“ASU 2016-20”), respectively, to amend certain guidance in ASU 2014-09. Topic 606 allows for either a retrospective or cumulative effect transition method. ASU 2014-09 was originally effective for fiscal years beginning after December 15, 2016. In July 2015, the FASB approved a one-year deferral of ASU 2014-09 and all amendments to it, with a new effective date for fiscal years beginning after December 15, 2017 with early adoption permitted as of the original effective date.
We plan to adopt ASU 2014-09, as well as other clarifications and technical guidance issued by the FASB related to this new revenue standard, on January 1, 2018. We have developed our plan for implementing the new standard, which includes, but is not limited to, identifying contract populations and “in scope” customer contracts, identifying performance obligations in those customer contracts, and evaluating any impact of variable consideration. The Company has evaluated the transition methods and will likely apply the modified retrospective transition method, which would result in an adjustment to retained earnings for the cumulative effect, if any, of applying the standard to contracts that are not completed at the date of initial application. Under this method, we would not restate the prior financial statements presented, therefore the new standard requires us to provide additional disclosures of the amount by which each financial statement line item is affected in the current reporting period during 2018, as compared to the guidance that was in effect before the change, and an explanation of the reasons for significant changes, if any.
ASURE SOFTWARE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data unless otherwise noted)
The impact that the new revenue recognition standard will have on our consolidated financial statements and disclosures has not yet been fully assessed. However, we do not expect the provisions of the new standard to have a material effect on the timing or amount of revenue we recognize. Our assessment also includes determining the impact the new standard may have on the revenue reporting processes, including disclosures, ensuring internal controls will operate effectively with the new standard and performing gap analyses on collected data and determining the relative accounting positions where applicable. Included in our assessment of the new standard, is the potential impact on sales commissions and the term over which they will amortize.
In February 2016, the FASB issued ASU No. 2016-02, “LeasesLeases (Topic 842)”. The core principle of the standard is that a lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in its statement of financial position a liability to make lease payments (the lease liability) and a right-of-usean operating lease asset representing its right to use the underlying asset for the lease term. Additional qualitative and quantitative disclosures are also required. We will be requiredadopted the standard on January 1, 2019, utilizing the cumulative-effect adjustment transition method, which applies the provisions of the standard at the effective date without adjusting the comparative periods presented. Upon adoption, we did not record an adjustment to adoptour beginning accumulated deficit.
In addition, we adopted the newfollowing additional practical expedients available for implementation:
•An entity need not reassess whether any existing or expired contracts are or contain leases;
•An entity need not reassess lease classification for any existing or expired leases; and
•An entity need not reassess initial direct costs for any existing leases.
ASURE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
We recognized operating lease liabilities of approximately $8,900 on January 1, 2019. A right-of-use asset of approximately $8,200 was recognized based on the lease liability, adjusted for the reclassification of deferred rent and lease incentive of approximately $700. The standard did not materially impact our operating results or liquidity upon adoption. The standard has no impact on the timing or classification of our cash flows as reported in the first quarterCondensed Consolidated Statement of 2019. WeCash Flows. Our accounting for finance leases remained substantially unchanged. Disclosures related to this standard are currently evaluating the impact ASU 2016-02 will have on our consolidated financial statements.
included in Note 15.
In August 2016,January 2017, the FASB issued ASU 2016-15, “Statement2017-04, which simplifies the accounting for goodwill impairment by requiring a goodwill impairment to be measured using a single step impairment model, whereby the impairment equals the difference between the carrying amount and the fair value of Cash Flowsthe specified reporting units in their entirety. This eliminates the second step of the current impairment model that requires companies to first estimate the fair value of all assets in a reporting unit and measure impairments based on those fair values and a residual measurement approach. It also specifies that any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. We recognized a goodwill impairment loss in 2019. Refer to Note 5.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 230) Classification220): Reclassification of Certain Cash ReceiptsTax Effects from Accumulated Other Comprehensive Income, which provides entities the option to reclassify tax effects stranded in accumulated other comprehensive income as a result of the 2017 Tax Cuts and Cash Payments” which eliminates Jobs Act (“the diversity in practice relatedTax Act”) to eight cash flow classification issues. This ASU isretained earnings. We adopted the standard effective for fiscal years beginning after December 15, 2017, with early adoption permitted.January 1, 2019. The adoption of this accounting standard did not have a material impact on our financial position, results of operations, cash flows, or presentation thereof.
Standards Yet to Be Adopted
In November 2016, theThe FASB issued ASU 2016-18, “StatementNo. 2018-13, Fair Value Measurement (Topic 820). The new guidance modifies disclosure requirements related to fair value measurement. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Implementation on a prospective or retrospective basis varies by specific disclosure requirements. Early adoption is permitted. The standard also allows for the early adoption of Cash Flows (Topic 230): Restricted Cash,” which requiresany removed or modified disclosures upon issuance of this ASU while delaying the changeadoption of the additional disclosures until their effective date. We plan to adopt this standard at the effective date and do not expect any material impact from adoption.
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 restricted casha 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). For public companies, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. Implementation should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The effects of this standard on our financial position, results of operations or cash equivalentsflows are not expected to be included withmaterial.
The FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, in December 2019. ASU 2019-12 eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other changes in cash and cash equivalents inaspects of the statement of cash flows. Theaccounting for income taxes. ASU 2019-12 is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The adoption of this accounting standard did not have a material impact on our financial position, results of operations, cash flows, or presentation thereof.
In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718) Scope of Modification Accounting,” which clarifies when to account for a change in the terms or conditions of a share-based payment award as a modification. ASU 2017-09 requires modification accounting only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017,2020, and interim periods within those fiscal years. TheWe are currently evaluating the impact, if any, the adoption of this accounting standard did notwill have a material impact on our financial position and results of operations, cash flows, or presentation thereof.operations.
NOTE 3 - INVESTMENTS ANDFAIR VALUE MEASUREMENTS
At December 31, 2019 and 2018, $24,136 and $4,256, respectively, of funds held for clients were invested in available-for-sale securities consisting of government and commercial bonds, including mortgage backed securities. As of December 31, 2019 and 2018, we also had $48,500 and $0, respectively, of funds held for clients invested in money market funds and other cash equivalents. Additionally, as of December 31, 2018, we had $8,111 in money market funds classified as cash equivalents. Cash equivalents as of December 31, 2019 was not material.
Accounting Standards Codification (“ASC”)ASURE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
Investments classified as available-for-sale consisted of the following:
|
| | | | | | | | | | | | | | | |
| | Amortized Cost | | Gross Unrealized Gains (1) | | Gross Unrealized Losses (1) | | Aggregate Estimated Fair Value |
| December 31, 2019: | | | | | | | |
Funds Held for Clients (2) | | | | | | | |
| Certificates of deposit | $ | 8,828 |
| | $ | 11 |
| | $ | — |
| | $ | 8,839 |
|
| Corporate debt securities | 6,883 |
| | 6 |
| | (9 | ) | | 6,880 |
|
| Municipal bonds | 6,383 |
| | 6 |
| | (7 | ) | | 6,382 |
|
| US Government agency securities | 1,000 |
| | — |
| | — |
| | 1,000 |
|
| Asset-backed securities | 1,067 |
| | — |
| | (32 | ) | | 1,035 |
|
| Total | $ | 24,161 |
| | $ | 23 |
| | $ | (48 | ) | | $ | 24,136 |
|
| | | | | | | | |
| December 31, 2018: | | | | | | | |
Funds Held for Clients (2) | | | | | | | |
| Corporate debt securities | $ | 4,334 |
| | $ | 21 |
| | $ | (99 | ) | | $ | 4,256 |
|
| |
| (1) | Unrealized gains and losses on available-for-sale securities are included as a component of comprehensive loss. At December 31, 2019, there were 53 securities in an unrealized gain position and there were 18 securities in an unrealized loss position. These unrealized losses were less than $35 individually and $50 in the aggregate. These securities have not been in a continuous unrealized gain or loss position for more than 12 months. The Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell these investments before recovery of their amortized cost basis, which may be at maturity. The Company reviews its investments to identify and evaluate investments that have an indication of 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 the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. |
| |
| (2) | At December 31, 2019 and 2018, none of these securities were classified as cash and cash equivalents on the Company’s balance sheet. |
Expected maturities of available-for-sale securities as of December 31, 2019 are as follows:
|
| | | |
| One year or less | $ | 6,414 |
|
| After one year through five years | 17,681 |
|
| After five years through 10 years | — |
|
| After 10 years | 41 |
|
| | $ | 24,136 |
|
ASC 820, Fair Value Measurements and Disclosures defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles 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. |
ASURE SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
The following table presents the fair value hierarchy for our financial assets measured at fair value on a recurring basis as of December 31, 20172019 and December 31, 2016,2018, respectively:
| | | | | | Fair Value Measure at December 31, 2017 | |
| | | Total | | | Quoted | | | Significant | | | | |
| | | Carrying | | | Prices | | | Other | | | Significant | |
| | | Value at | | | in Active | | | Observable | | | Unobservable | |
| | | December 31, | | | Market | | | Inputs | | | Inputs | |
| Description | | 2017 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| Assets: | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 27,792 | | | $ | 27,792 | | | $ | - | | | $ | - | |
| Total | | $ | 27,792 | | | $ | 27,792 | | | $ | - | | | $ | - | |
| | | | | | Fair Value Measure at December 31, 2016 | |
| | | Total | | | Quoted | | | Significant | | | | |
| | | Carrying | | | Prices | | | Other | | | Significant | |
| | | Value at | | | in Active | | | Observable | | | Unobservable | |
| | | December 31, | | | Market | | | Inputs | | | Inputs | |
| Description | | 2016 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| Assets: | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 12,767 | | | $ | 12,767 | | | $ | - | | | $ | - | |
| Total | | $ | 12,767 | | | $ | 12,767 | | | $ | - | | | $ | - | |
The following summarizes quantitative information about Level 3 fair value measurements.
Contingent consideration
In connection with the acquisition of FotoPunch, Inc. (“FotoPunch”) in July 2014, we recorded contingent consideration based upon the expected achievement of certain milestone goals. We will record any changes to the fair value of contingent consideration due to changes in assumptions used in preparing the valuation model in selling, general and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss).
Contingent consideration is valued using a multi-scenario discounted cash flow method. The assumptions used in preparing the discounted cash flow method include estimates for outcomes if milestone goals are achieved and the probability of achieving each outcome. Management estimates probabilities and then applies them to management’s conservative case forecast, most likely case forecast and optimistic case forecast with the various scenarios. The Company retained a third party expert to assist in determining the value of the contingent consideration as of December 31, 2016.
As of December 31, 2016, the third party expert determined the value of the contingent consideration for the FotoPunch acquisition was zero. The valuation of the contingent consideration was based on a Monte Carlo simulation model for fiscal 2017 to 2018. Management provided revenue projections (an unobservable input) of $228 and $251 for fiscal 2017 and fiscal 2018, respectively.
The following table summarizes the annual changes in our contingent consideration:
| Balance at December 31, 2015 | | $ | 173 | |
| Change in fair value of earnout | | | (173 | ) |
| Balance at December 31, 2016 | | $ | - | |
Changes to the estimated fair value of contingent consideration were primarily due to revisions to the Company’s expectations of earn-out achievement.
F-14
|
| | | | | | | | | | | | | | | |
| | | | Fair Value Measure at December 31, 2019 |
| | Total
Carrying
Value at
December 31,
2019 | | Quoted Prices in Active Market (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Assets: | | | | | | | |
| Funds held for clients | | | | | | | |
| Money market funds | 48,500 |
| | 48,500 |
| | — |
| | — |
|
| Available-for-sale securities | 24,136 |
| | — |
| | 24,136 |
| | — |
|
| Total | $ | 72,636 |
| | $ | 48,500 |
| | $ | 24,136 |
| | $ | — |
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
|
| | | | | | | | | | | | | | | |
| | | | Fair Value Measure at December 31, 2018 |
| | Total
Carrying
Value at
December 31,
2018 | | Quoted Prices in Active Market (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Assets: | | | | | | | |
| Cash equivalents |
|
| |
|
| |
|
| |
|
|
| Money market funds | $ | 8,111 |
| | $ | 8,111 |
| | $ | — |
| | $ | — |
|
| Funds held for clients |
|
| |
|
| |
|
| |
|
|
| Available-for-sale securities | 4,256 |
| | — |
| | 4,256 |
| | — |
|
| Total | $ | 12,367 |
| | $ | 8,111 |
| | $ | 4,256 |
| | $ | — |
|
Other Financial Assets and Liabilities
Financial assets and liabilities with carrying amounts approximating fair value include cash and cash equivalents, trade accounts receivable, accounts payable, accrued expenses and other current liabilities. The carrying amount of these financial assets and liabilities approximates fair value because of their short maturities.
Our line of credit and notes payable, including current portion, as of December 31, 2017,2019, had a carrying value of $78,097.$26,713. This carrying value approximates fair value. The fair value is based on interest rates that are currently available to us for issuance of debt with similar terms and remaining maturities.
NOTE 4 - ACQUISITIONS
20172018 Acquisitions
In January 2017,2018, we closed three strategic acquisitions: Personnel Management Systems, Inc., a provider of outsourced HR solutions; Corporate Payroll, Inc. (Payroll Division), a provider of payroll services; and Payroll Specialties NW, Inc., a provider of payroll services.
In May 2017, we closed two strategic acquisitions: iSystems Internediate HoldCo, Inc. (“iSystems”), and Compass HRM. iSystems, through its flagship product, Evolution HCM, offers payroll, tax management and HR software combined with comprehensive back-end service bureau tools to service providers across the United States. Tampa-based Compass HRM is a current reseller of our HCM offering (formerly Mangrove), which provides human resources solutions that enhance organizations, people, and profits through payroll and HR solutions. The acquisition of Compass HRM expands our reach in the Southeast, particularly Florida.
In October 2017, we acquired Associated Data Services (“ADS”). ADS, based in Birmingham, Alabama, is a leading regional human resources and payroll services bureau in the Southeast and a current reseller of our HCM solution, Evolution.
Stock Purchase Agreement
In January 2017, we closed on the acquisition of all of the outstanding shares of common stock (the “Shares”) of Personnel ManagementPay Systems of America, Inc. (“Pay Systems”), a Washington corporation (“PMSI”), pursuant to a Stock Purchase Agreement (the “Stock Purchase Agreement”), among us, PMSI, the sellers identified therein,provider of HR, payroll and the stockholders’ representative named therein.employee benefits services. The aggregate consideration for the Sharesshares consisted of (i) $3,875$13,935 in cash and (ii) a subordinated promissory note (the “PMSI“Pay Systems Note”) in the principal amount of $1,125$1,572, subject to adjustment as provided in the Stock Purchase Agreement.adjustment. We funded the cash payment with proceeds from our recent underwritten public offering in June 2017.cash on hand. The PMSIPay Systems Note bears interest at an annual rate of 2.0% and matures on April 30, 2018. The entire unpaid principal and allis payable in two installments – one-half, plus accrued interest, underon July 1, 2018 and the PMSI Note is payable at maturity. The Stock Purchase Agreement contains certain customary representations, warranties, indemnitiesremaining principal balance and covenants.
Asset Purchase Agreement
accrued interest on January 1, 2019. This note was paid in full in January 2019.
In January 2017,2018, we closedalso completed the acquisitions of two other companies that are current resellers of our leading Human Resource Information System platform. We funded these two acquisitions with cash on the acquisition of substantially all the assets of Corporate Payroll, Inc., an Ohio corporation (“CPI”), relating to its payroll service bureau business, pursuant to an Asset Purchase Agreement (the “CPI Asset Purchase Agreement”). The aggregate consideration for the assets consisted of (i) $1,500 in cash, (ii) ahand, subordinated promissory note (the “CPI Note”) in the principal amount of $500notes and (iii) 112,166 shares of ourAsure common stock valued at $1,000, subject to adjustment as provided in the CPI Asset Purchase Agreement. We funded the cash payment with proceeds from our recent underwritten public offering in June 2017. The CPI Note bears no interest and matures on April 30, 2018. The entire unpaid principal under the CPI Note is payable at maturity. The recipient of the shares of our common stock entered into a six month lock-up agreement with us. The CPI Asset Purchase Agreement contains certain customary representations, warranties, indemnities and covenants.
ASURE SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
Asset Purchase Agreement
In January 2017,April 2018, we closed on the acquisitionacquired all of substantially all the assets of Payroll Specialties NW, Inc.,a provider of outsourced HR, consulting, and professional services around payroll and employee benefits; and we acquired all of the share capital of a provider of a sensor-based solution that allows organizations across the world to streamline operations, create efficiencies, enhance productivity, and analyze employee engagement. We funded these acquisitions with cash (using borrowed funds under our Second Restated Credit Agreement) and subordinated promissory notes.
In April 2018, we also purchased a portfolio of customer accounts and the related contracts for payroll processing services (known as Evolution Payroll) from Wells Fargo for an Oregon corporation (“PSNW”), pursuant to an Asset Purchase Agreement (the “PSNW Asset Purchase Agreement”).aggregate purchase price of $10,450. The aggregate consideration for the assetspurchase price consisted of (i) $3,010$10,000 in cash and (ii) a subordinated promissory note (the “PSNW“Evolution Payroll Note”) in the principal amount of $600, subject to adjustment as provided in the PSNW Asset Purchase Agreement. We funded the cash payment with proceeds from our recent underwritten public offering in June 2017.$450. The PSNWEvolution Payroll Note bears interest at an annual rate of 2.0%, and matures on April 30, 2018. The entirethe unpaid principal and all accrued interest under the PSNWEvolution Payroll Note is payable at maturity. The PSNW Asset Purchase Agreement contains certain customary representations, warranties, indemnities and covenants.
Equity Purchase Agreement
on April 9, 2020. To finance this transaction, we borrowed approximately $10,000 under our Second Restated Credit Agreement.In May 2017,July 2018, we entered into an equity purchase agreement (the “Equity Purchase Agreement”) with iSystems Holdings, LLC, a Delaware limited liability company (“Seller”),acquired all of the capital stock of USA Payroll, Inc. and iSystems Intermediate Holdco, Inc.assets of its affiliates (“USA Payroll”), a Delaware corporation (“iSystems”), pursuant to which we acquired 100%payroll processing company based in Rochester, New York and a licensee of the outstanding equity interests of iSystems for an aggregate purchase price of $55,000, subject to adjustment as provided in the Equity Purchase Agreement.our Evolution software. The aggregate purchase price consistsconsisted of (i) $32,000$18,561 in cash, subject to adjustment,cash; (ii) a secured subordinated promissory note (“iSystems Note”(the “USA Payroll Notes”) in the principal amount of $5,000, subject to adjustment,$3,263; and (iii) 1,526,332225,089 unregistered shares of unregisteredour common stock valued at $18,000$3,600 based on a volume-weighted average of the closing prices of our common stock during a 90-day period. We funded the cash payment with cash on hand. The iSystems Note bearsUSA Payroll Notes bear interest at an annual rate of 3.5%3.0%. Interest payments are due on July 1, 2019, July 1, 2020 and matures on May 25, 2019. The unpaid principal and all accrued interest underand principal is due on July 1, 2021.
Except for the promissory note is payable in two installmentspurchase of $2.5 million on May 25,Pay Systems, Evolution Payroll portfolio and USA Payroll, the 2018 and May 25, 2019, subjectacquisitions, individually, were not material to adjustment. The Equity Purchase Agreement contains certain customary representations, warranties, indemnities and covenants.
To financeour results of operations, financial position, or cash flows. We have treated the iSystems acquisition, we amended and restated our existing credit agreement with Wells Fargo Bank, National Association, as administrative agent (the “Restated Credit Agreement”) to add an additional term loan in the amount of approximately $40,000, of which we borrowed approximately $32,000 to complete the iSystems acquisition. See Note 6- Notes Payable for further detail.
In connection with the iSystems acquisition, we also entered into an investor rights agreement (the “Investor Rights Agreement”) with the Seller. Pursuant to the termspurchase of the Investor Rights Agreement, until May 2018, the holdersEvolution Payroll portfolio as an acquisition of the registrable securities received in connection with theassets, rather than as an acquisition have agreed not to directly or indirectly transfer, sell, make any short sale or otherwise dispose of any of our equity securities and not to vote any of our equity securities or solicit proxies other than in favor of each director that our board recommends for election, against any director that our board has not nominated for election, and in accordance with the recommendation of our board on any other matters, subject to certain exceptions. In addition, under the Investor Rights Agreement, holders of the registrable securities have demand registration rights which allow a registration statement to be filed on or about March 31, 2018 and piggyback registration rights which become effective in May 2018. In addition, under the terms of the Investor Rights Agreement, such holders have the right to nominate one director to our board of directors until the first date that the holders of the registrable securities no longer hold more than the lesser of (x) 5% of our outstanding common stock (as equitably adjusted for any stock splits, stock combinations, reorganizations, exchanges, merger, recapitalizations or similar transaction after the date hereof) and (y) 90% of the shares of our common stock held by such holders as of May 25, 2017. The director nominee appointed by the holders is Daniel Gill. Our board appointed him to serve as a director on June 6, 2017. Mr. Gill is a founder and a co-managing partner of Silver Oak Services Partners, a private equity firm. In 2014 Silver Oak acquired iSystems, LLC (currently, a wholly owned subsidiary of iSystems) and Mr. Gill served on the board of directors of iSystems, LLC.
Stock Purchase Agreement
In May 2017, we entered into a stock purchase agreement (the “Stock Purchase Agreement”) with Compass HRM, Inc. (“Compass”) and the sellers and seller representative named therein, pursuant to which the sellers sold 100% of the outstanding shares of capital stock of Compass to us for an aggregate purchase price of $6,000, subject to adjustment as provided in the Stock Purchase Agreement. The aggregate purchase price consists of $4,500 in cash and a subordinated promissory note (“Compass Note”) in the principal amount of $1,500, subject to adjustment. The Compass Note bears interest at an annual rate of 2.0% and matures on May 25, 2022. The Compass Note is payable in five annual installments of $300 on the anniversary of the closing date, subject to adjustment. Compass is headquartered in Tampa, Florida, and provides cloud-based human resource management software, including payroll, benefits, time and attendance, and performance management.
ASURE SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
To finance the Compass acquisition, we incurred approximately $4,500 of additional indebtedness pursuant to an additional term loan under our Restated Credit Agreement. See Note 6 –Notes Payable for further details.
Stock Purchase Agreement
In October 2017, we entered into a stock purchase agreement (the “ADS Stock Purchase Agreement”) with Associated Data Services (“ADS”) and the sellers and seller representative named therein, pursuant to which the sellers sold 100% of the outstanding shares of capital stock of ADS to us for an aggregate purchase price of $3,400, subject to adjustment as provided in the ADS Stock Purchase Agreement. The aggregate purchase price consists of $1,778 in cash; 44,624 shares of common stock in Asure Software, Inc. estimated to have a fair value of $528,200; and a subordinated promissory note (“ADS Note”) in the principal amount of $1,122, subject to adjustment. The ADS Note bears interest at an annual rate of 2.0% and matures on October 1, 2019. The ADS Note is payable in two annual installments of $370 and $752 on the anniversary of the closing date, subject to adjustment. ADS is a leading regional human resources and payroll services bureau in the Southeast and a current reseller of our HCM solution, Evolution, based in Birmingham, Alabama.
business.
Purchase Price Allocation
Following is the purchase price allocation for the 20172018 business acquisitions. We based the preliminary fair value estimate for the assets acquired and liabilities assumed for these acquisitions upon preliminary calculations and valuations. Our estimates and assumptions for these acquisitionacquisitions are subject to change as we obtain additional information for our estimates during the respective measurement periods (up to one year from the acquisition date). The primary areas of those preliminary estimates that we have not yet finalized relate to certain tangible assets and liabilities acquired, and income and non-income based taxes.
We recorded the transactions, with the exception of the Evolution Payroll portfolio purchase, using the acquisition method of accounting and recognized assets and liabilities assumed at their fair value as of the dates of acquisitions. The $26,408$40,323 of intangible assets subject to amortization consist of $23,085$33,554 allocated to Customer Relationships, $1,621$2,100 for Developed Technology, $2,330 for Trade Names, $1,010 for Developed Technology, and $692$330 for Noncompete Agreements. To value the Trade Names, we employed the relief from royalty method under the market approach. For the Noncompete Agreements, we employed a form of the income approach which analyzes the Company’s profitability with these assets in place, in contrast to the Company’s profitability without them. For the Customer Relationships and Developed Technology, we employed a form of the excess earnings method, which is a form of the income approach. The discount rate used in valuing these assets ranged from 14.0%13.0% to 17.0%33.0%, which reflects the risk associated with the intangible assets related to the other assets and the overall business operations to us. We estimated the fair values of the Trade Names using the relief from royalty method based upon a 1.0% to 1.7% royalty rate.
We believe significant synergies are expected to arisefrom these strategic acquisitions. This factor contributed to a purchase price that was in excess of the fair value of the net assets acquired and, as a result, we recorded goodwill for each acquisition. A portion of acquired goodwill will be deductible for tax purposes.
ASURE SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
We based the allocations on fair values at the date of acquisition:
| Assets Acquired | | CPI | | | PMSI | | | PSNW | | | iSystems | | | Compass | | | ADS | | | Total | | |
| | | | | Pay Systems | | USA Payroll | | Others | | Total |
| Cash & cash equivalents | | $ | 126 | | | | 131 | | | | 53 | | | | 211 | | | | 207 | | | | 124 | | | $ | 852 | | $ | 764 |
| | $ | 470 |
| | $ | 643 |
| | $ | 1,877 |
|
| Accounts receivable | | | 22 | | | | 347 | | | | 111 | | | | 951 | | | | 241 | | | | - | | | | 1,672 | | 56 |
| | 104 |
| | 2,395 |
| | 2,555 |
|
| Restricted cash | | | - | | | | - | | | | - | | | | 200 | | | | - | | | | - | | | | 200 | | |
| Fixed assets | | | - | | | | 130 | | | | 7 | | | | 681 | | | | 38 | | | | 4 | | | | 860 | | 121 |
| | 98 |
| | 428 |
| | 647 |
|
| Inventory | | — |
| | — |
| | 121 |
| | 121 |
|
| Other assets | | | - | | | | 17 | | | | 17 | | | | 699 | | | | 33 | | | | 1 | | | | 767 | | 100 |
| | 5 |
| | 995 |
| | 1,100 |
|
| Funds held for clients | | | 2,809 | | | | - | | | | 6,294 | | | | - | | | | - | | | | 5,091 | | | | 9,103 | | 10,976 |
| | 20,439 |
| | 14,013 |
| | 45,428 |
|
| Goodwill | | | 1,190 | | | | 2,289 | | | | 1,579 | | | | 42,253 | | | | 2,049 | | | | 1,450 | | | | 50,810 | | 9,606 |
| | 12,644 |
| | 11,966 |
| | 34,216 |
|
| Intangibles | | | 1,563 | | | | 2,646 | | | | 1,879 | | | | 15,070 | | | | 3,470 | | | | 1,780 | | | | 26,408 | | 7,240 |
| | 17,643 |
| | 15,440 |
| | 40,323 |
|
| Total assets acquired | | $ | 5,710 | | | | 5,560 | | | | 9,940 | | | | 60,065 | | | | 6,038 | | | | 8,450 | | | $ | 90,672 | | $ | 28,863 |
| | $ | 51,403 |
| | $ | 46,001 |
| | $ | 126,267 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities assumed | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Accounts payable | | | 51 | | | | 19 | | | | 28 | | | | 392 | | | | 65 | | | | 18 | | | | 573 | | 85 |
| | 39 |
| | 880 |
| | 1,004 |
|
| Deferred tax liability | | 1,364 |
| | 3,622 |
| | 2,036 |
| | 7,022 |
|
| Accrued other liabilities | | | - | | | | 191 | | | | 40 | | | | 791 | | | | 45 | | | | 6 | | | | 1,073 | | 946 |
| | 376 |
| | 2,335 |
| | 3,657 |
|
| Deferred revenue | | | - | | | | 370 | | | | - | | | | 1,073 | | | | - | | | | - | | | | 1,443 | | — |
| | — |
| | 1,289 |
| | 1,289 |
|
| Client fund obligations | | | 2,754 | | | | - | | | | 6,294 | | | | - | | | | - | | | | 5,091 | | | | 9,048 | | 11,962 |
| | 20,439 |
| | 14,000 |
| | 46,401 |
|
| Total liabilities assumed | | | 2,805 | | | | 580 | | | | 6,362 | | | | 2,256 | | | | 110 | | | | 5,115 | | | | 12,137 | | 14,357 |
| | 24,476 |
| | 20,540 |
| | 59,373 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net assets acquired | | $ | 2,905 | | | | 4,980 | | | | 3,578 | | | | 57,809 | | | | 5,928 | | | | 3,335 | | | $ | 78,535 | | $ | 14,506 |
| | $ | 26,927 |
| | $ | 25,461 |
| | $ | 66,894 |
|
The following is a reconciliation of the purchase price to the fair value of net assets acquired at the date of acquisition:
| | | CPI | | | PMSI | | | PSNW | | | iSystems | | | Compass | | | ADS | | | Total | |
| Purchase price | | $ | 3,000 | | | | 5,000 | | | | 3,610 | | | | 55,000 | | | | 6,000 | | | | 3,400 | | | $ | 76,010 | |
| Working capital adjustment | | | - | | | | 42 | | | | - | | | | 202 | | | | 81 | | | | - | | | | 325 | |
| Adjustment to fair value of Asure’s stock issued | | | (54 | ) | | | - | | | | - | | | | 2,880 | | | | - | | | | 28 | | | | 2,854 | |
| Debt discount | | | (41 | ) | | | (62 | ) | | | (32 | ) | | | (273 | ) | | | (153 | ) | | | (93 | ) | | | (654 | ) |
| Fair value of net assets acquired | | $ | 2,905 | | | | 4,980 | | | | 3,578 | | | | 57,809 | | | | 5,928 | | | | 3,335 | | | $ | 78,535 | |
Transaction costs |
| | | | | | | | | | | | | | | |
| | Pay Systems | | USA Payroll | | Others | | Total |
| Purchase price | $ | 15,507 |
| | $ | 27,504 |
| | $ | 28,142 |
| | $ | 71,153 |
|
| Working capital adjustment | (940 | ) | | — |
| | (557 | ) | | (1,497 | ) |
| Adjustment to fair value of contingent liability | — |
| | — |
| | (1,761 | ) | | (1,761 | ) |
| Adjustment to fair value of Asure’s stock | — |
| | (287 | ) | | (7 | ) | | (294 | ) |
| Debt discount | (61 | ) | | (290 | ) | | (356 | ) | | (707 | ) |
| Fair value of net assets acquired | $ | 14,506 |
| | $ | 26,927 |
| | $ | 25,461 |
| | $ | 66,894 |
|
The purchase of the Evolution Payroll portfolio has been accounted for as an asset acquisition under the 2017 acquisitions were $3,112acquisition method of accounting. The amendments in ASU 2017-1 provide a screen to determine when a set of assets and were expensedactivities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set of assets and activities is not a business. Since the acquisition was determined to be an asset acquisition, the total value of the purchase consideration is allocated to the asset acquired. Management assessed the fair value of the promissory note and cash consideration as incurred and included in selling, general and administrative expenses.
of April 1, 2018, which was as follows:
F-18
|
| | | |
| | Fair Value |
| Cash | $ | 10,000 |
|
| Promissory note | 450 |
|
| Debt discount | (46 | ) |
| Total | $ | 10,404 |
|
| | |
| Fair value of asset acquired, Customer Relationships | $ | 10,404 |
|
As an asset acquisition, we also capitalized approximately $40 of total costs incurred to complete the acquisition consisting of legal fees of approximately $30 and accounting fees of approximately $10. The total intangible asset of $10,444 is recorded in our consolidated balance sheet within Intangible Assets- Customer Relationships, and is being amortized over its estimated useful life of eight years.
ASURE SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
2016 Acquisitions
ThroughTransaction costs incurred for the stock and asset purchases described below, we have entered into the human resource management, payroll processing and benefits administration services businesses, which we intend to integrate into our existing AsureForce® product line.
Stock Purchase Agreement
In March 2016, we acquired all of the issued and outstanding shares of common stock (the “Shares”) of Mangrove Employer Services, Inc. of Tampa, Florida (“Mangrove”). Pursuant to this stock purchase, we acquired the payroll division of Mangrove, which is engagedbusiness acquisitions were $1,347 in the human resource managementyear ended December 31, 2018, and payroll processing businesses. The aggregate consideration for the Shares consisted of (i) $11,348 in cash, a portion of which was used to pay certain obligations of Mangrove and (ii) a secured subordinated promissory note (the “Note”) in the principal amount of $6,000, subject to adjustment as provided in the Stock Purchase Agreement. We funded the cash payment with proceeds from our credit agreement with Wells Fargo. The Note was paid in full in the first quarter of 2017. The Stock Purchase Agreement contains certain customary representations, warranties, indemnities and covenants. Details regarding the financing of the acquisition are described under Note 6- Notes Payable. Transaction costs for this acquisition were $706 and we expensed them as incurred and included in selling, general and administrative expenses.
Asset Purchase Agreement
Contingent consideration
In March 2016, we also acquired substantiallyconnection with the acquisition of all of the assets of Mangrove COBRAsource Inc., a benefits administrationprovider of outsourced human resources, consulting, and professional services business which then was a wholly owned subsidiaryin April 2018, we recorded contingent consideration based upon the expected achievement of Mangrove. The aggregate consideration for the assets was $1,036, which Mangrove COBRAsource appliedcertain milestone goals. We will record any changes to pay off certain loan balances. The Asset Purchase Agreement contains certain customary representations, warranties, indemnities and covenants.
Purchase Price Allocation
Following is the purchase price allocation for the acquisition of Mangrove.
We recorded the transaction using the acquisition method of accounting and recognized assets and liabilities assumed at their fair value as of the date of acquisition. The $8,700 of intangible assets subject to amortization consist of $1,200 allocated to Customer Relationships, $6,900 in Developed Technology and $600 for Trade Names. We estimated the fair value of contingent consideration due to changes in assumptions used in preparing the Customer Relationshipsvaluation model in selling, general and Developed Technologyadministrative expenses in the Consolidated Statements of Comprehensive Income (Loss).
Contingent consideration is valued using the excess earnings method, a form of the income approach. Wemulti-scenario discounted cash flow projections using a ratemethod. The assumptions used in preparing the discounted cash flow method include estimates for outcomes if milestone goals are achieved and the probability of 18.1%, which reflects the risk associatedachieving each outcome. Management estimates probabilities and then applies them to management’s conservative case forecast, most likely case forecast and optimistic case forecast with the intangible asset relatedvarious scenarios. The Company retained a third party expert to assist in determining the other assets and the overall business operations to us. We estimated the fair value of the Trade Names usingcontingent consideration as of April 1, 2018.
As of April 1, 2018, the relief from royalty method based upon a 1.2% royalty rate forthird party expert determined the payroll division and 0.5% for the benefits administration services business.
We believe significant synergies are expected to arisefrom this strategic acquisition. This factor contributed to a purchase price that was in excess of the fair value of the net assets acquiredcontingent consideration for the acquisition was $489 based on a Monte Carlo simulation model for fiscal 2017 to 2019. We released the liability for the contingent consideration in 2018, and asrecorded a result, we recorded goodwill. A portiongain of acquired goodwill will be deductible for tax purposes.
We based$489 to Other Income in the allocations on fair values at the dateaccompanying consolidated statement of acquisition:
| | | Amount | |
| Assets acquired | | | |
| Accounts receivable | | $ | 523 | |
| Funds held for clients | | | 16,419 | |
| Fixed assets | | | 258 | |
| Other assets | | | 28 | |
| Goodwill | | | 9,016 | |
| Intangibles | | | 8,700 | |
| Total assets acquired | | $ | 34,944 | |
| | | | | |
| Liabilities assumed | | | | |
| Accounts payable | | | 64 | |
| Accrued other liabilities | | | 461 | |
| Client fund obligations | | | 16,419 | |
| Total liabilities assumed | | $ | 16,944 | |
| Net assets acquired | | $ | 18,000 | |
ASURE SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
operations.
Unaudited Pro Forma Financial Information
The following unaudited summary of pro forma combined results of operations for the twelve monthsyear ended December 31, 2017 and 20162018 gives effect to theour 2018 business and asset acquisitions of Mangrove, PMSI, iSystems, Compass, and ADS and the acquisition of the assets of COBRAsource, PSNW and CPI as if we had completed them on January 1, 2016.2017. This pro forma summary does not reflect any operating efficiencies, cost savings or revenue enhancements that we may achieve by combining operations. In addition, we have not reflected certain non-recurring expenses, such as legal expenses and other transactions expenses for the first 12 months after the acquisition, in the pro forma summary. We present this pro forma summary for informational purposes only and it is not necessarily indicative of what our actual results of operations would have been had the acquisitions taken place as of January 1, 2016,2017, nor is it indicative of future consolidated results of operations.
| | | FOR THE YEAR | | | FOR THE YEAR | |
| | | ENDED DECEMBER 31, | | | ENDED DECEMBER 31, | |
| | | 2017 | | | 2016 | |
| Revenues | | $ | 62,393 | | | $ | 61,412 | |
| Net income (loss) | | $ | (4,693 | ) | | $ | (5,612 | ) |
| Net income (loss) per common share: | | | | | | | | |
| Basic and diluted | | $ | (0.40 | ) | | $ | (0.68 | ) |
| | | | | | | | | |
| Weighted average shares outstanding: | | | | | | | | |
| Basic | | | 11,639 | | | | 8,216 | |
| Diluted | | | 11,639 | | | | 8,216 | |
|
| | | |
| | Year Ended December 31, 2018 |
| Revenues | $ | 74,062 |
|
| Net income (loss) | $ | (9,937 | ) |
| Net income (loss) per common share: | |
| Basic and diluted | $ | (0.70 | ) |
| | |
| Weighted average shares outstanding | 14,121 |
|
We did not have material acquisitions in 2019.
NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS
We accounted for itsour historical acquisitions in accordance with ASC 805, Business Combinations. We recorded the amount exceeding the fair value of net assets acquired at the date of acquisition as goodwill. We recorded intangible assets apart from goodwill if the assets had contractual or other legal rights or if the assets could be separated and sold, transferred, licensed, rented or exchanged. Our goodwill relates to the following acquisitions: ADI and Legiant inacquisitions from 2011 PeopleCube in 2012, FotoPunch and Roomtag in 2014, Mangrove in 2016, PMSI, CPI and PSNW in January 2017, iSystems and Compass in May 2017, and ADS in October 2017. through 2019.
In accordance with ASC 350, Intangibles-Goodwill and Other, we review and evaluate our long-lived assets, including intangible assets with finite lives, for impairment whenever events or changes in circumstances indicate that we may not recover their net book value. 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.
ASURE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
We typically use an income method to estimate the fair value of these assets, which is based on forecasts of the expected future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflect a consideration of other marketplace participants, and include the amount and timing of future cash flows (including expected growth rates and profitability). Estimates utilized in the projected cash flows include consideration of macroeconomic conditions, overall category growth rates, competitive activities, cost containment and margin expansion, Company business plans, the underlying product or technology life cycles, economic barriers to entry, a brand's relative market position and the discount rate applied to the cash flows. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions.
During fiscal 2019, we determined that the estimated fair value of our HCM reporting unit was less than its carrying value. Therefore, we compared the carrying value of the reporting unit to its fair value in order to determine if an impairment exists. In addition to performing the income based approach discussed above we compared the market value of our common stock to our HCM reporting unit’s carrying value noting its carrying value exceeded market value. 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 has beenwere no impairment indicators or triggering events during the previously reported quarters of 2019, the sale of our Workspace Management business in the fourth quarter led to an increase in the carrying value of the remaining business above its market value as of December 31, 2019.
We believe the estimates and assumptions utilized in our impairment testing are reasonable and are comparable to those that would be used by other marketplace participants. However, actual events and results could differ substantially from those used in our valuations. To the extent such factors result in a failure to achieve the level of projected cash flows initially used to estimate fair value for purposes of establishing or subsequently impairing the carrying amount of goodwill forand related intangible assets, we may need to record additional non-cash impairment charges in the periods presented. future.
We amortize intangible assets not considered to have an indefinite useful life using the straight-line method over their estimated period of benefit, which generally ranges from one to nine years. Each reporting period, we evaluate the estimated remaining useful life of intangible assets and assess whether events or changes in circumstances warrant a revision to the remaining period of amortization or indicate that impairment exists. We have not identified any impairmentsIn 2019, we disposed of finite-livedcertain trade names in relation to our rebranding efforts.
The following table summarizes the changes in our goodwill:
|
| | | |
| Balance at Balance at December 31, 2017 | $ | 67,301 |
|
| Goodwill recognized upon acquisition | 31,726 |
|
| Adjustments to goodwill associated with acquisitions | 81 |
|
| Balance at December 31, 2018 | 99,108 |
|
| Goodwill recognized upon acquisition | 4,826 |
|
| Adjustments to goodwill associated with acquisitions | (177 | ) |
| Impairment loss | (35,060 | ) |
| Balance at December 31, 2019 | $ | 68,697 |
|
The gross carrying amount and accumulated amortization of our intangible assets during anyas of the periods presented.
| Balance at December 31, 2016 | | $ | 26,259 | |
| Goodwill recognized upon acquisitions of PMSI, CPI, PSNW, iSystems, Compass, and ADS | | | 50,810 | |
| Adjustment to Goodwill associated with acquisition of Mangrove | | | 272 | |
| Foreign exchange adjustment to goodwill | | | 7 | |
| Balance at December 31, 2017 | | $ | 77,348 | |
December 31, 2019 and 2018 are as follows:
F-20
|
| | | | | | | | | | | | | | |
| Intangible Assets | | Weighted Average Amortization Period (in Years) | | 2019 |
| | | Gross | | Accumulated Amortization | | Net |
| Developed Technology | | 6.0 | | $ | 10,001 |
| | $ | (6,004 | ) | | $ | 3,997 |
|
| Customer Relationships | | 8.9 | | 78,558 |
| | (19,757 | ) | | 58,801 |
|
| Reseller Relationships | | 7.0 | | 853 |
| | (853 | ) | | — |
|
| Trade Names | | 3.0 | | 780 |
| | (78 | ) | | 702 |
|
| Noncompete Agreements | | 5.2 | | 1,032 |
| | (682 | ) | | 350 |
|
| | | 8.5 | | $ | 91,224 |
| | $ | (27,374 | ) | | $ | 63,850 |
|
ASURE SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
The gross carrying amount and accumulated amortization of our intangible assets as of December 31, 2017 and 2016 are as follows:
| | | | | | December 31, 2017 | |
| Intangible Assets | | Weighted Average Amortization Period (in Years) | | | Gross | | | Accumulated Amortization | | | Net | |
| | | | | | | | | | | | | |
| Developed Technology | | | 6.7 | | | $ | 11,925 | | | $ | (5,010 | ) | | $ | 6,915 | |
| Customer Relationships | | | 9.5 | | | | 37,096 | | | | (13,142 | ) | | | 23,954 | |
| Reseller Relationships | | | 7.0 | | | | 853 | | | | (761 | ) | | | 92 | |
| Trade Names | | | 10.4 | | | | 2,915 | | | | (884 | ) | | | 2,031 | |
| Noncompete Agreements | | | 6.1 | | | | 692 | | | | (130 | ) | | | 562 | |
| | | | 8.8 | | | $ | 53,481 | | | $ | (19,927 | ) | | $ | 33,554 | |
| | | | | | December 31, 2016 | |
| Intangible Assets | | Weighted Average Amortization Period (in Years) | | | Gross | | | Accumulated Amortization | | | Net | |
| | | | | | | | | | | | | |
| Developed Technology | | | 12.7 | | | $ | 10,915 | | | $ | (3,408 | ) | | $ | 7,507 | |
| Customer Relationships | | | 7.3 | | | | 14,011 | | | | (10,270 | ) | | | 3,741 | |
| Reseller Relationships | | | 7 | | | | 853 | | | | (640 | ) | | | 213 | |
| Trade Names | | | 14.5 | | | | 1,294 | | | | (707 | ) | | | 587 | |
| | | | 9.8 | | | $ | 27,073 | | | $ | (15,025 | ) | | $ | 12,048 | |
|
| | | | | | | | | | | | | | |
| Intangible Assets | | Weighted Average Amortization Period (in Years) | | 2018 |
| | | Gross | | Accumulated Amortization | | Net |
| Developed Technology | | 6.0 | | $ | 10,001 |
| | $ | (4,234 | ) | | $ | 5,767 |
|
| Customer Relationships | | 9.0 | | 73,358 |
| | (10,922 | ) | | 62,436 |
|
| Reseller Relationships | | 7.0 | | 853 |
| | (853 | ) | | — |
|
| Trade Names | | 13.3 | | 3,988 |
| | (524 | ) | | 3,464 |
|
| Noncompete Agreements | | 5.2 | | 1,032 |
| | (451 | ) | | 581 |
|
| | | 8.3 | | $ | 89,232 |
| | $ | (16,984 | ) | | $ | 72,248 |
|
We record amortization expense using the straight-line method over the estimated useful lives of the intangible assets, as noted above. Amortization expenses were $4,477$11,765 and $2,253$7,481 for 20172019 and 2016,2018, respectively, included in Operating Expenses. Amortization expenses recorded in Cost of Sales were $453$1,994 and $425$1,607 for 20172019 and 2016,2018, respectively.
The following table summarizes the future estimated amortization expense relating to our intangible assets as of December 31, 2017:2019
| Calendar Years | | | |
| 2018 | | $ | 5,474 | |
| 2019 | | | 4,760 | |
| 2020 | | | 3,925 | |
| 2021 | | | 3,593 | |
| 2022 | | | 3,501 | |
| Thereafter | | | 12,301 | |
| Subtotal | | $ | 33,554 | |
|
| | | |
| Year Ending | |
| 2020 | $ | 10,449 |
|
| 2021 | 10,097 |
|
| 2022 | 9,563 |
|
| 2023 | 8,672 |
|
| 2024 | 8,445 |
|
| Thereafter | 16,624 |
|
| Total | $ | 63,850 |
|
NOTE 6 - NOTES PAYABLE
The following table summarizes our outstanding debt as of December 31, 2019 and 2018:
F-21
|
| | | | | | | | | | | |
| | Maturity | | Stated Interest Rate | | 2019 | | 2018 |
| Subordinated Notes Payable- acquisitions | 10/1/2019 - 7/1/2021 | | 2.00% - 3.50% | | $ | 7,185 |
| | $ | 10,327 |
|
| Term Loan - Wells Fargo term loan | 12/31/2024 | | 8.00% | | 20,000 |
| | — |
|
| Term Loan - Wells Fargo Syndicate Partner | 5/25/2022 | | 10.55% | | — |
| | 52,106 |
|
| Term Loan - Wells Fargo | 5/25/2022 | | 5.55% | | — |
| | 52,106 |
|
| Total Notes Payable | | | | $ | 27,185 |
| | $ | 114,539 |
|
| Short-term notes payable | | | | $ | 2,696 |
| | $ | 5,864 |
|
| Long-term notes payable | | | | $ | 24,489 |
| | $ | 108,675 |
|
The following table summarizes the debt issuance costs as of December 31, 2019 and 2018:
|
| | | | | | | | | | | |
| | December 31, 2019 |
| | Gross Notes Payable | | Debt Issuance Costs | | Net Notes Payable |
| Notes payable, current portion | $ | 2,696 |
| | $ | (125 | ) | | $ | 2,571 |
|
| Notes payable, net of current portion | 24,489 |
| | (347 | ) | | 24,142 |
|
| Total Notes Payable | $ | 27,185 |
| | $ | (472 | ) | | $ | 26,713 |
|
ASURE SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
NOTE 6 - NOTES PAYABLE
The following table summarizes our outstanding debt as
|
| | | | | | | | | | | |
| | December 31, 2018 |
| | Gross Notes Payable | | Debt Issuance Costs | | Net Notes Payable |
| Notes payable, current portion | $ | 5,864 |
| | $ | (1,131 | ) | | $ | 4,733 |
|
| Notes payable, net of current portion | 108,675 |
| | (2,041 | ) | | 106,634 |
|
| Total Notes Payable | $ | 114,539 |
| | $ | (3,172 | ) | | $ | 111,367 |
|
We used a portion of the dates indicated:
| Notes Payable | | Maturity | | Stated Interest Rate | | | Balance as of December 31, 2017 | | | Balance as of December 31, 2016 | |
| Subordinated Notes Payable- Mangrove acquisition | | 3/18/2018 | | | 3.50 | % | | $ | - | | | $ | 6,000 | |
| Subordinated Notes Payable- PMSI acquisition | | 4/30/2018 | | | 2.00 | % | | | 1,125 | | | | - | |
| Subordinated Notes Payable- CPI acquisition | | 4/30/2018 | | | - | % | | | 500 | | | | - | |
| Subordinated Notes Payable- PSNW acquisition | | 4/30/2018 | | | 2.00 | % | | | 600 | | | | - | |
| Subordinated Notes Payable- iSystems acquisition | | 5/25/2019 | | | 3.50 | % | | | 5,000 | | | | - | |
| Subordinated Notes Payable- Compass acquisition | | 5/25/2022 | | | 2.00 | % | | | 1,500 | | | | - | |
| Subordinated Notes Payable- ADS acquisition | | 10/1/2019 | | | 2.00 | % | | | 1,122 | | | | - | |
| Term Loan – Wells Fargo Syndicate Partner | | 5/25/2022 | | | 9.53 | % | | | 34,125 | | | | - | |
| Term Loan - Wells Fargo | | 5/25/2022 | | | 4.53 | % | | | 34,125 | | | | 24,715 | |
| Total Notes Payable | | | | | | | | $ | 78,097 | | | $ | 30,715 | |
| Short-term notes payable | | | | | | | | $ | 8,895 | | | $ | 5,455 | |
| Long-term notes payable | | | | | | | | $ | 69,202 | | | $ | 25,260 | |
On January 1, 2016, we adopted ASU 2015-03 for debt issuance costs onproceeds from the sale of the Workspace Management business to repay our term loan, on a retrospective basis. The impact of adopting ASU 2015-03 was the classification of all deferred financing costs as a deduction to corresponding debt in addition to the reclassification of deferred financing costs in other current and long-term assets to short and long-term notes payable. The following table summarizesIn connection with the payment of our debt, issuance costs aswe recorded a loss on extinguishment of debt of $2,808, which is included in interest expense and other, net in the dates indicated:
| Notes Payable | | Gross Notes Payable at December 31, 2017 | | | Debt Issuance Costs | | | Net Notes Payable at December 31, 2017 | |
| Notes payable, current portion | | $ | 8,895 | | | $ | - | | | $ | 8,895 | |
| Notes payable, net of current portion | | | 69,202 | | | | (2,229 | ) | | | 66,973 | |
| Total Notes Payable | | $ | 78,097 | | | $ | (2,229 | ) | | $ | 75,868 | |
| Notes Payable | | Gross Notes Payable at December 31, 2016 | | | Debt Issuance Costs | | | Net Notes Payable at December 31, 2016 | |
| Notes payable, current portion | | $ | 5,455 | | | $ | - | | | $ | 5,455 | |
| Notes payable, net of current portion | | | 25,260 | | | | (679 | ) | | | 24,581 | |
| Total Notes Payable | | $ | 30,715 | | | $ | (679 | ) | | $ | 30,036 | |
consolidated statement of comprehensive income (loss) for the year ended December 31, 2019.
The following table summarizes the future gross principal payments related to our outstanding debt:
| Year Ended | | Gross Amount | |
| December 31, 2018 | | $ | 8,895 | |
| December 31, 2019 | | | 7,052 | |
| December 31, 2020 | | | 3,800 | |
| December 31, 2021 | | | 3,800 | |
| December 31, 2022 | | | 54,550 | |
| Gross Notes Payable | | $ | 78,097 | |
ASURE SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
Subordinated Notes Payable- Mangrove Acquisition
In March 2016, we acquired all of the issued and outstanding shares of common stock (the “Shares”) of Mangrove. The aggregate consideration for the Shares consisted of (i) $11,348 in cash, a portion of which was used to pay certain obligations of Mangrove and (ii) a secured subordinated promissory note (the “Note”) in the principal amount of $6,000, subject to adjustmentdebt as provided in the Stock Purchase Agreement. We funded the cash payment with proceeds from the Credit Agreement with Wells Fargo. This note was paid in full in the first quarter of 2017.
Subordinated Notes Payable- PMSI Acquisition
In January 2017, we acquired all of the outstanding shares of common stock (the “Shares”) of Personnel Management Systems, Inc., a Washington corporation (“PMSI”), pursuant to a Stock Purchase Agreement (the “Stock Purchase Agreement”). The aggregate consideration for the Shares consisted of (i) $3,875 in cash and (ii) a subordinated promissory note (the “PMSI Note”) in the principal amount of $1,125 subject to adjustment as provided in the Stock Purchase Agreement. We funded the cash payment with proceeds from our recent public stock offering. The PMSI Note bears interest at an annual rate of 2.0% and matures on April 30, 2018. The entire unpaid principal and all accrued interest under the PMSI Note is payable at maturity.
Subordinated Notes Payable- CPI Acquisition
In January 2017, we acquired substantially all the assets of Corporate Payroll, Inc., an Ohio corporation (“CPI”), relating to its payroll service bureau business, pursuant to an Asset Purchase Agreement (the “CPI Asset Purchase Agreement”). The aggregate consideration for the assets consisted of (i) $1,500 in cash, (ii) a subordinated promissory note (the “CPI Note”) in the principal amount of $500 and (iii) 112,166 shares of our common stock valued at $1,000, subject to adjustment as provided in the CPI Asset Purchase Agreement. We funded the cash payment with proceeds from our recent public stock offering. The CPI Note bears no interest and matures on April 30, 2018. The entire unpaid principal under the CPI Note is payable at maturity.
Subordinated Notes Payable – PSNW Acquisition
In January 2017, we acquired substantially all the assets of Payroll Specialties NW, Inc., an Oregon corporation (“PSNW”), pursuant to an Asset Purchase Agreement (the “PSNW Asset Purchase Agreement”). The aggregate consideration for the assets consisted of (i) $3,010 in cash and (ii) a subordinated promissory note (the “PSNW Note”) in the principal amount of $600, subject to adjustment as provided in the PSNW Asset Purchase Agreement. We funded the cash payment with proceeds from our recent public stock offering. The PSNW Note bears interest at an annual rate of 2.0% and matures on April 30, 2018. The entire unpaid principal and all accrued interest under the PSNW Note is payable at maturity.
In October 2017, the seller of PSNW became an employee of Asure Software, Inc. As of December 31, 2017, the principal amount of $600 is due to the seller, who is currently an employee.
Subordinated Notes Payable- iSystems Acquisition
In May 2017 we acquired 100% of the outstanding equity interests of iSystems Intermediate Holdco, Inc., a Delaware corporation (“iSystems”), pursuant to an equity purchase agreement (the “Equity Purchase Agreement”). The aggregate purchase price consisted of (i) $32,000 in cash, subject to adjustment as provided in the Equity Purchase Agreement, (ii) a secured subordinated promissory note (“iSystems Note”) in the principal amount of $5,000, subject to adjustment as provided in the Equity Purchase Agreement, and (iii) 1,526,332 shares of unregistered common stock valued at $18,000. The iSystems Note bears interest at an annual rate of 3.5% and matures on May 25, 2019. The unpaid principal and all accrued interest under the promissory note is payable in two installments of $2.5 million on May 25, 2018 and May 25, 2019, subject to adjustment.
Subordinated Notes Payable- Compass Acquisition
In May 2017, we acquired 100% of the outstanding shares of capital stock of Compass HRM, Inc. (“Compass”) pursuant to a stock purchase agreement (the “Stock Purchase Agreement”). The aggregate purchase price consisted of $4,500 in cash and a subordinated promissory note (“Compass Note”) in the principal amount of $1,500, subject to adjustment as provided in the Stock Purchase Agreement. The Compass Note bears interest at an annual rate of 2.0% and matures on May 25, 2022. The Compass Note is payable in five annual installments of $300 on the anniversary of the closing date, subject to adjustment.
In May 2017, the seller of Compass became an employee of Asure Software, Inc. As of December 31, 2017, the principal amount of $1,500 is due to the seller, who is currently an employee.
2019:
ASURE SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
Subordinated Notes Payable- ADS Acquisition
In October 2017, we acquired 100% of the outstanding shares of capital stock of Associated Data Services (“ADS”). ADS, based in Birmingham, Alabama, is a leading regional human resources and payroll services bureau in the Southeast and a current reseller of our HCM solution, Evolution. The aggregate purchase price consists of $1,778 in cash; 44,624 shares of Asure Software, Inc. common stock valued at $400; and a subordinated promissory note (“ADS Note”) in the principal amount of $1,122, subject to adjustment. The ADS Note bears interest at an annual rate of 2.0% and matures on October 1, 2019. The ADS Note is payable in two annual installments of $370 and $752 on the anniversary of the closing date, subject to adjustment.
|
| | | |
| Year Ending | |
| 2020 | $ | 2,696 |
|
| 2021 | 5,489 |
|
| 2022 | 1,000 |
|
| 2023 | 1,000 |
|
| 2024 | 17,000 |
|
| Gross Notes Payable | $ | 27,185 |
|
Term Loan - Wells Fargo
In March 2014, we entered into a credit agreement (the “Credit Agreement”) with Wells Fargo, Bank, N.A., 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 provided for a term loan in the amount of $15,000 maturing in March 2019.
The Credit Agreement also provided for a revolving loan commitment in the aggregate amount of up to $3,000. The outstanding principal amount of the revolving loan is due and payable in March 2019. Additionally, the Credit Agreement provided for a $10,000 uncommitted incremental term loan facility to support permitted acquisitions.
In March 2017, we amended our Credit Agreement with Wells Fargo Bank, N.A to, among other things, obtain an additional term loan in the amount of $5,000. In the first quarter of 2017, we used the proceeds of the additional term loan to repay a portion of all amounts outstanding under the secured subordinated note we issued in connection with the Mangrove acquisition.
Third Amended and Restated Credit Agreement
In May 2017,December 2019, we entered into ana third amended and restated credit agreement (the “Restated“Third Restated Credit Agreement”) with Wells Fargo Bank, N. A., as administrative agent and the lenders that are parties thereto,lender, amending and restating the terms of the Second Amended and Restated Credit Agreement dated as of March 2014, as amended.2018.
The Third Restated Credit Agreement provides for an increase$20,000 in the aggregate principal amount of total commitments from approximately $32,714 to $75,000. This increase includes an additional term loan commitment of approximately $40,286 and an additional revolver commitment of $2,000. As of December 31, 2017 and December 31, 2016, $0 was outstanding and $5,000 and $3,000, respectively, were available for borrowing under the revolver. The term loan consists of a $35,000 “First Out Loan Obligation” funded by Wells Fargo as administrative agent,loans and a $35,000 “Last Out Loan Obligation” funded by Wells Fargo’s syndicate partner, Goldman Sachs.
$10,000 revolver.
The Third Restated Credit Agreement amends the applicable margin rates for determining the interest rate payable on outstanding First Out and Last Out loan obligationsthe loans as follows:
|
| | |
| Leverage Ratio | Applicable Margin Relative to Base Rate Loans | First Out Base
Applicable Margin Relative to
LIBOR Rate Margin | | First Out LIBOR
Rate Margin
| | Last Out Base
Rate Margin
| | Last Out LIBOR
Rate MarginLoans
|
< 3.25:12.00:1.00 | 2.25% percentage points | 2.00 Percentage Points | | 3.00 Percentage Points | | 7.00 Percentage Points | | 8.00 Percentage Points3.25% percentage points |
> 3.25:1≤ 3.00:1.00, and ≥ 2.00:1.00 | 2.75% percentage points | 2.50 Percentage Points3.75% percentage points |
| ≥ 3.00:1.00 | 3.25% percentage points | 3.50 Percentage Points | | 7.50 Percentage Points | | 8.50 Percentage Points4.25% percentage points |
The outstanding principal amount of the term loan is payable in equal installments of $875as follows:
$125 beginning on September 30, 2017March 31, 2020 and the last day of each fiscal quarter thereafter. The outstanding principal balancethereafter through and all accruedincluding December 31, 2021; and unpaid interest on the term loan is due on May 25, 2022.
ASURE SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
$250 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 for the three months ended March 31, 2020, $4,850 for the six months ended June 30, 2020 and $5,950 for the nine months ended 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 increasedecrease the maximum ratio to 5.75:13.50:1.00 at December 31, 2020, 3.25:1.00 at March 31, 2021 and June 30, 2017, stepping down to 3.25:12021 and 2.50:1.00 at JuneSeptember 30, 20202021 and each quarter-end thereafter; and
·amends our fixed charge coverage ratio to be notno less than 1.35:11.00:1.00 at June 30, 2017March 31, 2020, and September 30, 2017, not less than 1.45:1 ateach quarter end thereafter through and including December 31, 2017, and not less than2021, 1.50:1 beginning with the quarter ending1.00 at March 31, 2018 and each quarter-end thereafter; and
· adds a Trailing Twelve Months (“TTM”) recurring revenue covenant, requiring software-as-a-service, hardware-as-a-service and cloud subscription and maintenance support revenues to be at least $41,000 at June 30, 2017 and stepping up to $60,5002022, 1.60:1.00 at June 30, 2022, and 2.00:1:00 at September 30, 2022 and each quarter-endquarter end thereafter.
As of December 31, 2017, we were in2019 and December 31, 2018, no amount was outstanding and $10,000 and $5,000, respectively, was available for borrowing under the revolver.
As of December 31, 2019, compliance with allcertain financial covenants was not yet required under the Third Restated Credit Agreement 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.
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment and related depreciable useful lives as of December 31, 20172019 and 20162018 are composed of the following:
| | | December 31, | |
| | | 2017 | | | 2016 | |
| | | | | | | |
| Software: 3-5 years | | $ | 7,436 | | | $ | 7,090 | |
| Furniture and equipment: 2-5 years | | | 7,918 | | | | 7,087 | |
| Internal support equipment: 2-4 years | | | 696 | | | | 696 | |
| Capital leases: lease term or life of the asset | | | 178 | | | | 178 | |
| Leasehold improvements: shorter of the lease term or life of the improvement | | | 3,813 | | | | 2,610 | |
| Software development costs | | | 2,062 | | | | - | |
| | | | 22,103 | | | | 17,661 | |
| Less accumulated depreciation and amortization | | | (16,886 | ) | | | (15,783 | ) |
| | | $ | 5,217 | | | $ | 1,878 | |
|
| | | | | | | |
| | 2019 | | 2018 |
| Furniture and equipment: 2-5 years | $ | 7,851 |
| | $ | 5,922 |
|
| Software development costs | 7,529 |
| | 4,773 |
|
| Software: 3-5 years | 3,970 |
| | 6,037 |
|
| Leasehold improvements: shorter of the lease term or life of the improvement | 1,221 |
| | 2,118 |
|
| Internal support equipment: 2-4 years | — |
| | 696 |
|
| Finance leases: lease term or life of the asset | — |
| | 178 |
|
| Total property and equipment | 20,571 |
| | 19,724 |
|
| Less accumulated depreciation and amortization | (12,704 | ) | | (13,290 | ) |
| Property and equipment, net | $ | 7,867 |
| | $ | 6,434 |
|
We record the amortization of our capitalfinance leases as depreciation expense on our Consolidated Statements of Comprehensive Loss. Depreciation and amortization expenses relating to property and equipment were approximately $1,128$2,370 and $935$2,181 for 20172019 and 2016,2018, respectively.
As part of the acquisitions of Mangrove and iSystems in 2016 and 2017, weWe acquired software development costs. Wecosts from prior acquisitions and we continue to invest in software development. We are developing products which we intend to offer utilizing software as-a-service (“SaaS”).We. We follow the guidance of ASC 350-40, Intangibles- Goodwill and Other- Internal Use Software, for development costs related to these new products. Costs incurred in the planning stage are expensed as incurred while costs incurred in the application and infrastructure stage are capitalized, assuming such costs are deemed to be recoverable. Costs incurred in the operating stage are generally expensed as incurred except for significant upgrades and enhancements. Capitalized software costs are amortized over the software’s estimated useful life, which management has determined to be three years. During the yearyears ended December 31, 20172019 and 2016,2018, we capitalized $2,062$2,756 and $258$2,711 of software development costs, respectively.
ASURE SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
NOTE 8 - CERTAIN BALANCE SHEET ACCOUNTS
Prepaid expenses and other current assets as of December 31, 2019 and 2018 consist of the following:
|
| | | | | | | |
| | 2019 | | 2018 |
| Non-trade receivables related to custodial funds | $ | 7,785 |
| | $ | — |
|
| Receivable from sale of Workspace Management | 1,685 |
| | — |
|
| Prepaid expenses | 1,454 |
| | 1,590 |
|
| Other current assets | 1,294 |
| | 671 |
|
| | $ | 12,218 |
| | $ | 2,261 |
|
Other accrued liabilities as of December 31, 2019 and 2018 consist of the following:
|
| | | | | | | |
| | 2019 | | 2018 |
| Income taxes payable | $ | 2,608 |
| | $ | — |
|
| Accrued expenses and other | 3,948 |
| | 1,105 |
|
| | $ | 6,556 |
| | $ | 1,105 |
|
NOTE 89 - STOCKHOLDERS’ EQUITY
SHELF REGISTRATION
In February 2017,April 2018, we filed a universal shelf registration statement on Form S-3 with the SECSecurities and Exchange Commission (“SEC”) to sell,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 up to $75,000,000shares of our common stock preferred stock, warrants, debtor other securities subscription rights, and units. Inhaving 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 201716, 2018. As of December 31, 2019, there is $133,438 remaining available under the shelf registration statement was declared effective by the SEC. Under this shelf registration statement,statement.
In June 2018, we completed an underwritten public offering in June 2017. In connection with the public offering,which we issued 2,185,000sold an aggregate of 2,375,000 shares of our common stock including 285,000 shares of common stock pursuant to the exercise of the underwriters’ over-allotment option, at thea public offering price of $13.50$17.50 per share. NetWe realized net proceeds from the issuance of common stock was $27,800.approximately $38,900 after deducting underwriting discounts and estimated offering expenses.
SHARE REPURCHASE PROGRAM
Pursuant to our stock repurchase plan, we may repurchase up to 450,000 shares of our common stock. We have repurchased a total of 384,000 shares for approximately $5,000 over the life of the plan. Management will periodically assess repurchasing additional shares, depending on our cash position, market conditions, financial covenants and other factors. While the program remains in place, we did not repurchase any shares during 20172019 or 2016.2018.
STOCK AND STOCK OPTION PLANS
We have one active equity plan, the 2018 Incentive Award Plan (the “2018 Plan”). The 2018 Plan, approved by our shareholders, is intended to replace our 2009 Equity Incentive Plan, as amended (the “2009 Plan”)., however, the terms and conditions of the 2009 Plan will continue to govern any outstanding awards granted thereunder.
Employees and consultants of the Company, its subsidiaries and affiliates, as well as members of our board, are eligible to receive awards under the 2018 Plan. The 20092018 Plan provides for the issuancegrant of non-qualified andstock options, including incentive stock options (“ISOs”) and nonqualified stock options (“NQSOs”), stock appreciation rights, restricted stock, restricted stock units ("RSUs"), performance bonus awards, performance stock unit awards, other stock or cash-based awards and dividend equivalents to our employees and consultants.eligible individuals. We generally grant stock options with exercise prices equal to the fair market value at the time of grant. The options generally vest over three to four years and are exercisable for a period of five to ten years beginning with the date of grant. Our
The number of shares available for issuance under the 2018 Plan is equal to the sum of (i) 750,000 shares, (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 cancelled
ASURE SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
or otherwise terminate following the effective date of the 2019 Plan. In May 2019, our shareholders approved an amendment to the 20092018 Plan in June 2017 to increase the number of shares reserved under the plan from 1,400,000 to 1,700,000.of common stock authorized for issuance by 600,000 shares. We have 1,014,0001,756,000 options and RSUs granted and outstanding pursuant to the 20092019 Plan as of December 31, 2017.2019.
In December 2019, we offered to exchange certain outstanding options to purchase shares of our common stock previously granted under the 2009 Plan and the 2018 Plan that have an exercise price per share higher than the greater of $8.50 or the closing trading price of our common stock on the offer expiration date (“eligible options”) for new RSUs to be granted under the 2018 Plan. The offer exchange program was approved by our board of directors and by our shareholders earlier in 2019. Under the offer exchange program, every 2.5 shares underlying an eligible option would be exchanged for one new RSU. Upon expiration of the exchange offer in January 2020, we granted 187,000 RSUs in exchange for the cancellation of options to purchase 467,500 shares that were tendered by employees who participated in the offer exchange program.
We use the Black-Scholes option valuation model to value employee stock awards. We estimate stock price volatility based upon our historical volatility. Estimated option life and forfeiture rate assumptions are derived from historical data. For stock-based compensation awards with graded vesting, we recognize compensation expense using the straight-line amortization method.
Total compensation expense recognized in the Consolidated Statements of Comprehensive Loss for stock based awards was $593$1,990 and $226$1,565 for 20172019 and 2016,2018, respectively.
The following table summarizes the weighted average assumptions used to develop their fair value for 2017the year ending December 31, 2019 and 2016:2018:
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | |
| Risk-free interest rate | | | 1.60 | % | | | .97 | % |
| Expected volatility | | | .41 | | | | 0.38 | |
| Expected life in years | | | 3.69 | | | | 3.44 | |
| Dividend yield | | | - | | | | - | |
|
| | | | | | | |
| | 2019 | | 2018 |
| Grant date fair value | $ | 2.65 |
| | $ | 6.41 |
|
| Risk-free interest rate | 1.25 | % | | 2.81 | % |
| Expected volatility | 44 | % | | 45 | % |
| Expected life in years | 3.50 |
| | 4.00 |
|
| Dividend yield | — |
| | — |
|
As of December 31, 2017,2019, we reserved shares of common stock for future issuance as follows:
Options outstanding |
| | | 1,014,000 | |
| Options and RSUs outstanding | 1,756,000 |
|
| Shares available for future grant | 387,000 | | 20,000 |
|
| Shares reserved | 2,143,000 | | 1,034,000 |
|
The following table summarizes activity related to options during the year ended December 31, 2019.
F-26
|
| | | | | | | | | | | | |
| | Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value |
| Outstanding at the beginning of the year | 1,494,000 |
| | $ | 10.99 |
| | | | |
| Granted | 721,000 |
| | 6.50 |
| | | | |
| Exercised | (143,000 | ) | | 5.65 |
| | | | |
| Canceled | (387,000 | ) | | 10.17 |
| | | | |
| Outstanding at the end of the year | 1,685,000 |
| | $ | 9.71 |
| | 3.1 | | $ | 1,336 |
|
| Vested and expected to vest | 1,424,000 |
| | $ | 9.83 |
| | 3.0 | | $ | 1,052 |
|
| Exercisable | 769,000 |
| | $ | 10.43 |
| | 2.2 | | $ | 350 |
|
The total intrinsic value of options exercised during the years ended December 31, 2019 and 2018 was $356 and $276, respectively. As of December 31, 2019, total compensation cost not yet recognized related to nonvested share options was $2,180, which is expected to be recognized over a weighted average period of 2.2 years.
ASURE SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
The following table summarizes activity under all Plansrelated to RSUs during 2017 and 2016.the year ended December 31, 2019.
| | | Year Ended December 31, 2017 | | | Year Ended December 31, 2016 | |
| | | | | | Weighted | | | | | | Weighted | |
| | | | | | Average | | | | | | Average | |
| | | | | | Exercise | | | | | | Exercise | |
| | | Shares | | | Price | | | Shares | | | Price | |
| Outstanding at the beginning of the year | | | 614,000 | | | $ | 6.47 | | | | 640,000 | | | $ | 4.40 | |
| Granted | | | 575,000 | | | | 11.30 | | | | 454,000 | | | | 6.70 | |
| Exercised | | | (80,000 | ) | | | 5.55 | | | | (278,000 | ) | | | 2.69 | |
| Canceled | | | (95,000 | ) | | | 7.16 | | | | (202,000 | ) | | | 5.61 | |
| Outstanding at the end of the year | | | 1,014,000 | | | $ | 9.22 | | | | 614,000 | | | $ | 6.47 | |
| Options exercisable at the end of the year | | | 247,000 | | | $ | 6.34 | | | | 130,000 | | | $ | 5.71 | |
| Weighted average fair value of options granted during the year | | $ | 3.63 | | | | | | | $ | 1.53 | | | | | |
|
| | | | | | |
| | Shares | | Weighted Average Grant-Date Fair Value |
| Outstanding at the beginning of the year | 145,000 |
| | $ | 13.73 |
|
| Granted | 29,000 |
| | 6.88 |
|
| Released | (61,000 | ) | | 13.01 |
|
| Forfeited | (42,000 | ) | | 13.85 |
|
| Outstanding at the end of the year | 71,000 |
| | $ | 11.52 |
|
The following table summarizestotal fair value of RSUs vested during the outstandingyears ended December 31, 2019 and exercisable options2018 was $430 and their exercise prices as$22, respectively. As of December 31, 2017:2019, total compensation cost not yet recognized related to nonvested share options was $540, which is expected to be recognized over a weighted average period of 1.8 years.
| | | | OPTIONS OUTSTANDING | | | OPTIONS EXERCISABLE | |
RANGE OF EXERCISE PRICES | | | NUMBER OUTSTANDING AT DECEMBER 31, 2017 | | | WEIGHTED- AVERAGE REMAINING CONTRACTUAL LIFE (YEARS) | | | WEIGHTED-AVERAGE EXERCISE PRICE | | | NUMBER EXERCISABLE AND VESTED AT DECEMBER 31, 2017 | | | WEIGHTED-AVERAGE EXERCISE PRICE | |
| | | | | | | | | | | | | | | | | |
| $ | 1.68 – 7.48 | | | | 293,000 | | | | 2.71 | | | $ | 5.48 | | | | 187,000 | | | $ | 5.56 | |
| | 7.49 – 11.00 | | | | 428,000 | | | | 4.13 | | | | 9.41 | | | | 60,000 | | | | 8.79 | |
| | 11.01 – 14.91 | | | | 293,000 | | | | 4.71 | | | | 12.68 | | | | – | | | | – | |
| | | | | | | | | | | | | | | | | | | | | | | |
| $ | 1.68 – 14.91 | | | | 1,014,000 | | | | 3.89 | | | $ | 9.22 | | | | 247,000 | | | $ | 6.34 | |
The aggregate intrinsic value of options outstanding and options exercisable is $1,302 and $365, respectively, at December 31, 2017.
NOTE 910 - EMPLOYEE BENEFIT PLANS
401(K) SAVINGS PLAN
We sponsor a defined contribution 401(k) plan that is available to substantially all employees. Our Board of Directors may amend or terminate the plan at any time. We provided matching contributions to the plan of $369$814 and $198$490 in 20172019 and 2016,2018, respectively.
EMPLOYEE STOCK PURCHASE PLAN
Our Employee Stock Purchase Plan (“Purchase Plan”) was approved by the shareholders in June 2017. The Purchase Plan allows all eligible employees to purchase a limited number of shares of our common stock duringpre-specified offering periods at a discount established by the Board of Directors, not to exceed 15% of the fair market value of the common stock, at the beginning or end of the offering period (whichever is lower). Under the ESPP, 225,000 shares were reserved for issuanceissuance.
NOTE 11 - CONTRACTS WITH CUSTOMERS ANDREVENUE CONCENTRATION
Receivables
Receivables from contracts with customers, net of allowance for doubtful accounts of $904 were $4,808 at December 31, 2019. Receivables from contracts with customers, net of allowance for doubtful accounts of $511, were $5,102 at December 31, 2018
Deferred Commissions
Deferred commissions costs from contracts with customers were $2,697 and 17,568 shares$1,946 at December 31, 2019 and December 31, 2018, respectively. The amount of common stock were issued at $7.65 per shareamortization recognized during the December 31, 2019 and 2018 period was $1,398 and $732, respectively.
Deferred Revenue
Revenue of $3,011 was recognized during the year ended December 31, 2017.2019 that was included in the deferred revenue balance at the beginning of the period
Transaction Price Allocated to the Remaining Performance Obligations
NOTE 10 - REVENUE CONCENTRATION
During 2017 and 2016, there were no customers who individually represented 10% or moreAs of consolidated revenue.
F-27
December 31, 2019, approximately $29,432 of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 56% of these remaining performance obligations over the next 12 months, with the balance recognized thereafter.
ASURE SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data or otherwise noted)
The following table sets forth the computation of basic and diluted net loss per common share for 2017the years ended December 31, 2019 and 2016.2018.
The components of the provision (benefit) for income taxes attributable to continuing operations for the years ended December 31, 20172019 and 20162018 are as follows:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred taxes at December 31, 20172019 and 20162018 are as follows:
As a result of various acquisitions by us in prior years, we may be subject to a substantial annual limitation in the utilization of the net operating losses and credit carryforwards 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.
The Company evaluated subsequent events through the date of the filing of this Annual Report on Form 10-K with the SEC, to ensure that this filing includes appropriate disclosure of events both recognized in the financial statements as of December 31, 2017,2019, and events which occurred subsequent to December 31, 20172019 but were not recognized in the financial statements. The Company has determined that there were no subsequent events which required recognition, adjustment to or disclosure in the financial statements, except as below and except as discusseddisclosed in Note 13 above9 and below.