ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following review of Asure’s financial position as of DecemberMarch 31, 20092010 and JulyDecember 31, 2009 and for the two and fivethree months ended DecemberMarch 31, 20092010 and 20082009 should be read in conjunction with the Company’s 2009 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Asure’s internet website address is http://www.asuresoftware.com. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through the investor relations page of the Company’s internet website free of charge as soon as reasonably practicable after they are electronically filed, or furnishedf urnished to, the Securities and Exchange Commission. Asure’s internet website and the information contained therein or connected thereto are not intended to be incorporated into this Quarterly Report on Form 10-Q.
In September 2007, the Company (formerly known as Forgent Networks, Inc.) announced its name change to “Asure Software” to reflect the Company’s focus on its software business for its future growth. The Company’s stockholders approved the name change at the December 17, 2009 Annual Meeting. As a software and services provider, in October 2007, Asure purchased iSarla Inc., a Delaware corporation and application service provider that offers on-demand software solutions. As a result of the iEmployee acquisition, the Company currently offers two main product lines in its software and services business: NetSimplicity and iEmployee. Asure’s NetSimplicity product line provides simple and affordable solutions to common office administration problems. NetSimplicity’sNetSimplicity& #8217;s flagship product, Meeting Room Manager (“MRM”), automates the entire facility scheduling process: reserving rooms, requesting equipment, ordering food, sending invitations, reporting on the meeting environment and more. Asure’s iEmployee product line helps simplify the HR process and improves employee productivity by managing and communicating human resources, employee benefits and payroll information. iEmployee's web-based solutions include Time & Attendance, Timesheets, Human Resource Benefits, Expenses and others. Additional business information is contained elsewhere in this Report, including under Item 7 of Part II (Management’s Discussion and Analysis of Financial Condition and Results of Operations ).
Effective September 19, 2008, the Company transferred the listing of its common stock from the Nasdaq Global Market Exchange to the Nasdaq Capital Market Exchange. The Company’s trading symbol continued to be “ASUR” and the trading of the Company’s stock was unaffected by this change. As a result of this transfer, Asure was provided an additional 180 calendar days, or until February 2, 2009, to regain compliance with the minimum $1.00 share bid price requirement pursuant to Nasdaq Marketplace Rule 4450(a)(5).
Due to the continued unprecedented market conditions, Nasdaq, on several occasions, further suspended the enforcement of its rules requiring a minimum $1.00 share bid price for all Nasdaq-listed companies. Consequently, Asure’s compliance deadline was extended until November 17, 2009. On November 18, 2009, the Company was notified by Nasdaq that due to its failure to satisfying the minimum $1.00 bid price per share requirement, its stock would be delisted from Nasdaq’s Capital Markets on November 30, 2009 unless an appeal was requested. On November 18, 2009 Asure requested and was granted a hearing request to appeal the Nasdaq staff’s decision. On December 10, 2009, Nasdaq held a telephonic panel hearing regarding the Company’s notice of delisting due to its deficiency in its minimum bid price requirement. On December 17, 2009, the Company’s stockholders approved a proposal to effect a 10-for-1 reverse stock split. The reverse stock split was effective December 28, 2009 and as a result the Company’s stock began and has continued to trade above $1.00. On January 20, 2010, the Company received a letter from Nasdaq stating that it had regained compliance with the minimum $1.00 bid price requirement.
On January 29, 2009, Asure’s Board announced its plan to take the Company private. Due to concerns including the loss of liquidity and reduced requirements for regular financial reporting and disclosure, a group of shareholders led by Red Oak Fund, LP (“Red Oak”) opposed the Go-Private effort. As shareholder vote counts indicated a majority of shareholders also opposed the Go-Private effort, the Board canceled the special meeting and withdrew its proposal to go private. Subsequently, Red Oak nominated a slate of board directors, who were elected to replace Asure’s prior Board during the Company’s annual shareholders meeting on August 28, 2009. In addition to a new board of directors, the Company is currently managed by a new Chief Executive Officer, Pat Goepel and a new Chief Financial Officer, David Scoglio. The new board of directors believes the new CEO and CFO will be able to implement its strategy for growing the software business and achieving profitability and positive cash flows. However, uncertainties and challenges remain and there can be no assurances that Asure's current strategy will be successful.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Report represent forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results of operations, levels of activity, economic performance, financial condition or achievements to be materially different from future results of operations, levels of activity, economic performance, financial condition or achievements as expressed or implied by such forward-looking statements.
Asure has attempted to identify these forward-looking statements with the words “believes,” “estimates,” “plans,” “expects,” “anticipates,” “may,” “could” and other similar expressions. Although these forward-looking statements reflect management’s current plans and expectations, which are believed to be 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 Form 10-Q to conform such statements to actual results.
RESULTS OF OPERATIONS
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 Operations:
| | FOR THE THREE MONTHS ENDED MARCH 31, | |
| | 2010 | | | 2009 | |
Revenues | | | 100 | % | | | 100 | % |
Gross margin | | | 74.1 | | | | 80.4 | |
Selling, general and administrative | | | 58.6 | | | | 109.9 | |
Research and development | | | 13.9 | | | | 20.8 | |
Amortization of intangible assets | | | 6.1 | | | | 5.9 | |
Total operating expenses | | | 78.5 | | | | 136.7 | |
Other income (expense), net | | | (2.6 | ) | | | 2.2 | |
Net loss | | | (7.6 | ) | | | (54.9 | ) |
| FOR THE TWO MONTHS ENDED DECEMBER 31, | FOR THE FIVE MONTHS ENDED DECEMBER 31, |
| 2009 | 2008 | 2009 | 2008 |
| | | | |
Revenues | 100% | 100% | 100% | 100% |
Gross margin | 74.1 | 80.0 | 77.2 | 79.9 |
Selling, general and administrative | 47.5 | 125.4 | 88.4 | 118.2 |
Research and development | 15.7 | 23.4 | 16.9 | 21.2 |
Amortization of intangible assets | 6.0 | 6.7 | 6.2 | 5.8 |
Total operating expenses | 69.1 | 155.5 | 111.6 | 145.3 |
Other income (expense), net | (1.3) | 16.4 | (1.4) | 9.5 |
Net income (loss) | 2.9 | 59.2 | (36.5) | (56.5) |
TWOTHREE MONTHS ENDED DECEMBERMARCH 31, 20092010 AND 20082009
Revenues
Revenues for the twothree months ended DecemberMarch 31, 20092010 were $1.7$2.46 million, an increasea decrease of $0.2$0.05 million, or 14.5%2.0%, from the $1.5$2.51 million reported for the twothree months ended DecemberMarch 31, 2008. Revenues for the five months ended December 31, 2009 were $4.0 million, a decrease of $0.3 million, or 6.1%, from the $4.3 million reported for the five months ended December 31, 2008.2009. Consolidated revenues represent the combined revenues of the Company and its subsidiaries, including sales of the Company’s scheduling software, asset management software, human resource and time and attendance software, complementary hardware devices to enhance its software products, software maintenance and support services, installation and training services and other professional services.
During the two monthsThe Consolidated revenue for three month ended DecemberMarch 31, 2009 anincluded Visual Asset Manager (“VAM”) software which accounted for 4.3% or $106 thousand of the total revenue for the period. This product line was sold in February 2009 to E-Innovative Services Group (“EISG”), LLC. After adjusting for the ‘VAM’ sale, which was not in the three month period ending March 2010, the comparable revenues increased by 2% or $56 thousand, primarily due to increase in hardware, SaaS and Maintenance and Support revenue for the scheduling software and time and attendance software accounted for approximately 80% of the $0.2 millionby $205 thousand. This increase was offset by decrease in revenue. Software license and deploymentDeployment revenues decreased by $0.5 million during the five months ended December 31, 2009. This decrease was offset by increases in hardware revenue and subscription revenues, the combination of which accounted for approximately 103% of the $0.3 million decrease in revenues during the five months ended December 31, 2009.$150 thousand.
Asure will continue to target small and medium businesses and divisions of enterprises. In addition to continuing to develop its workforce management solutions and release new software updates and enhancements, the Company is actively exploring other opportunities to acquire additional products or technologies to complement its current software and services. Asure also is implementing marketing initiatives, including tailoring its solutions to provide increased value and a simplified purchasing model to targeted customers. As the overall workforce management solutions market continues to experience significant growth related to software as a service (“SaaS”) products, Asure will continue to focus on sales of its MRM On Demand and iEmployee SaaS products. Management believes that as the economy starts to recover, Asurean economic recovery will grow its revenues in calendar year 2010.
facilitate additional revenue growth.
Gross Margin
Gross margins for the twothree months ended March 31, 2010 were $1.8 million, a decrease of $0.2 million, or 9.7%, from the $2.0 million reported for the three months ended December 31, 2009 were $1.24 million, an increase of $71 thousand, or 6.1%, from the $1.17 million reported for the two months ended December 31, 2008. The 6.1% increase in gross margin dollars was mainly attributable to the increase in hardware revenues over the same period. Gross margins for the five months ended December 31, 2009 were $3.0 million, a decrease of $0.3 million, or 9.3%, from the $3.4 million reported for the five months ended December 31, 2008. The $0.3 million decrease in gross margins during the five months ended December 31, 2009 is primarily due to the decrease in software revenues.2009. . Gross margins as a percentage of revenues were 74.1% and 80.0%80.4% for the twothree months ended DecemberMarch 31, 20092010 and 2008,2009, respectively. This decrease in gross margin percentage was primarily due to the increase in hardware revenue which generates lower gross margins than software. Gross margin as a percentage of total revenues were 77.2% and 79.9% for the five months ended December 31, 2009 and 2008, respectively. This decrease was mainly due to the decrease in revenues for the same period.
Asure’s cost of sales relates primarily to compensation expenses, hardware expenses and the amortization of the Company’s purchased software costs. These expenses represented approximately 77.9%63.0% (excluding VAM COGS) and 66.0%64.4% of the total cost of sales for the twothree months ended DecemberMarch 31, 20092010 and 2008, respectively and 78.1% and 65.3% of the total cost of sales for the five months ended December 31, 2009, and 2008, respectively. The short term variability in cost of goods sold as a percentage of revenue is primarily attributable to product mix.
Selling, General and Administrative
Selling, general and administrative (“SG&A”) expenses for the twothree months ended DecemberMarch 31, 20092010 were $.8$1.4 million, a decrease of $1.1$1.3 million or 56.7%47.8%, from the $1.9$2.8 million reported for the twothree months ended DecemberMarch 31, 2008.2009. SG&A expenses as a percentage of revenues were 47.5%58.6% and 125.4%109.9% for the twothree months ended DecemberMarch 31, 20092010 and 2008,2009, respectively.
SG&A expenses forDuring the fivethree months ended DecemberMarch 31, 2009 were $3.5 million, a decrease of $1.5 million, or 29.8%, from the $5.0 million reported for the five months ended December 31, 2008. SG&A expenses as a percentage of revenues were 88.4% and 118.2% for the five months ended December 31, 2009 and 2008, respectively.
During the two months ended December 31, 2009,2010, SG&A expenses decreased $1.1$1.3 million, primarily due to across the board decreases in compensation, marketing expensesall categories, as part of headcount, benefits and renegotiation of some expenses deemed excessive by management.general cost reductions. Effective March 1, 2009, Asure implemented a mandatory 10% pay reduction for its personnel and also terminated headcount at the beginning of the fiscal quarter ended October 31,in August 2009, which led to decreased compensation expenses by approximately $0.3$0.4 million during the current fiscal quarter as well. Additionally, in efforts to further trim overhead costs, Asure’s reduced its marketing budget, decreasing marketing expenses by $0.1$0.2 million and legal, lease, insurance and audit costs by $0.4 million during the twothree months ended DecemberMarch 31, 2009. Finally, across the board cost reduction efforts and renegotiation of some payables resulted in a total reduction of expenses of $0.5 million in the two month period ended December 31, 2009.2010.
During the five months ended December 31, 2009, SG&A expenses decreased $1.5 million, approximately 69% of which is due to decreases in compensation and marketing expenses. The mandatory 10% pay reduction for its personnel and also terminated headcount at the beginning of the fiscal year, decreased compensation costs by approximately $0.6 million and reduction in marketing budget, decreased marketing expenses by $0.5 million for the five month period ending December 31, 2009. Finally, across the board cost reduction efforts resulted in a total reduction of expenses of $0.5 million in the five month period ended December 31, 2009
Throughout its operations, Asure continues to evaluate any unnecessary SG&A expenses and plans to further reduce expenses as appropriate.
Research and Development
Research and development (“R&D”) expenses for the twothree months ended DecemberMarch 31, 20092010 were $0.26$0.3 million, a decrease of $79 thousand,$0.2 million, or 23.0%34.6%, from the $0.34$0.5 million reported for the twothree months ended DecemberMarch 31, 2008.2009. Research and development (“R&D”) expenses as a percentage of revenues were 15.7%13.9% and 23.4%20.8% for the twothree months ended DecemberMarch 31, 2010 and 2009, and 2008, respectively. R&D expenses for the five months ended December 31, 2009 were $0.7 million, a decrease of $0.2 million, or 25.2%, from the $0.9 million reported for the five months ended December 31, 2008. R&D expenses as a percentage of revenues were 16.9% and 21.2% for the five months ended December 31, 2009 and 2008, respectively.
During the twothree months ended DecemberMarch 31, 2009,2010, R&D expenses decreased $79 thousand$0.2 million primarily due to decreases in compensation. Approximately 99% ofcompensation by $148 thousand, related to the decrease in R&D expenses for the five months ending December 31, 2009 is also due to a decrease in compensation.aforementioned pay and headcount reductions.
Asure continues to improve and enhance its workforce management solutions – particularly its Time & Attendance software from the iEmployee product line and its Meeting Room Manager (“MRM”) software from its NetSimplicity product line. Time & Attendance enhancements included an additional application programming interface for time collection, which expands the software’s interoperability with various time clocks in addition to Asure’s Easy Touch Time Clock. Additionally, the Company implemented a new line of clocks that contains several forms of data collection including magnetic stripe, barcode, proximity and biometric readers. The expanded interoperability and new line of clocks expanded Time & Attendance’s capabilities to meet various customers’ requirementsrequir ements by increasing the customers’ choices when selecting hardware devices. Asure also added functionality to its Time & Attendance software by developing an automated calculation of the time off accruals and a new flexible pay schedule that allows customers to specify start and end dates and times for multiple different pay periods.
Asure has continued to develop MRM and enhanced the Microsoft Outlook Plug-in, Web and Interactive LCD interfaces, allowed assigned delegates the ability to schedule meetings on behalf of others, and provided more sophisticated conflict resolution options for scheduling recurring meetings via Microsoft Outlook®. Asure’s R&D efforts related to its NetSimplicity product line culminated in August 2009 when the Company released MRM, Version 8.0. Under this next generation of the Company’s room and resource scheduling solution, customers have the benefit of a bi-directional Outlook Plug-in. Meetings and resources scheduled through Microsoft Outlook are synchronized to the Web client, thus allowing users to create, manage and update information from the Web client, given the appropriate privileges.privil eges. Customers can now delegate scheduling responsibilities to individuals without requiring access to Microsoft Outlook.
Asure’s development efforts for future releases and enhancements are driven by feedback received from its existing and potential customers and by gauging marketing trends. Management believes it has the appropriate development team to design and further improve its workforce management solutions.
Amortization of intangible assets
Amortization expenses for the twothree months ended DecemberMarch 31, 20092010 were $0.1 million,$149 thousand, which is the same amount reported for the twothree months ended DecemberMarch 31, 2008.2009. Amortization expenses as a percentage of revenues were 6.0%6.1% and 6.7%5.9% for the twothree months ended DecemberMarch 31, 20092010 and 2008, respectively. Amortization expenses for the five months ended December 31, 2009, were $0.3 million, which is the same amount reported for the five months ended December 31,2008. Amortization expenses as a percentage of revenues were 6.2% and 5.8% for the five months ended December 31, 2009 and 2008, respectively. Upon acquiring the iEmployee business in October 2007, Asure recorded several intangible assets, which are being amortized over their estimated useful lives. The amortization expenses during the two months and fivethree months ended DecemberMarch 31, 20092010 and 20082009 relate entirely to these acquired intangible assets.
Net Income (Loss)Loss
Asure generated a net profitloss of $0.1$0.2 million, or $0.02$0.06 per share, during the twothree months ended DecemberMarch 31, 2009,2010, compared to $0.9a net loss of $1.4 million of lossor $0.44 per share reported for the twothree months ended DecemberMarch 31, 2008.2009. Net profitsloss as a percentage of total revenues were 2.9%7.6% and 54.9% for the twothree months ended DecemberMarch 31, 2010 and 2009, and net loss was 60.5% for the two months ended December 31, 2008. Asure incurred a net loss of $1.5 million, or $0.46 per share, during the five months ended December 31, 2009 compared to a net loss of $2.4 million, or $0.77 per share, during the five months ended December 31, 2008. Net loss as a percentage of revenues were 36.5% and 56.5% for the five months ended December 31, 2009 and 2008, respectively.
The $0.9 million decrease in net loss during the five months ended December 31, 2009 is due primarily to the $1.7 million decrease in operating expenses, offset by a $0.3 million decrease in revenues and $0.3 million decrease in other income & expenses due to a one-time gain recorded during the five month period ending December 31, 2008 related to the release of Tandberg escrow funds.
Asure will continue to implement its corporate strategy for growing its software and services business by modestly investing in areas that directly generate revenue and positive cash flows for the Company. However, uncertainties and challenges remain, especially during this macroeconomic environment downturn, and there can be no assurance that the Company can successfully grow its revenues or achieve profitability during the remainder of fiscal year 2010.
LIQUIDITY AND CAPITAL RESOURCES
| | FOR THE FIVE MONTHS ENDED DECEMBER 31, | |
| | 2009 | | | 2008 | |
| | (in thousands) | |
| | | | | | |
Working capital | | $ | 216 | | | $ | 7,843 | |
Cash, cash equivalents and short-term investments | | | 2,263 | | | | 12,016 | |
Cash provided by (used in) operating activities | | | (7,502 | ) | | | (2,451 | ) |
Cash provided by (used in) investing activities | | | 5,304 | | | | (258 | ) |
Cash provided by (used in) financing activities | | | 55 | | | | (10 | ) |
| | FOR THE THREE MONTHS ENDED | |
| | MARCH 31, | |
| | 2010 | | | 2009 | |
| | (in thousands) | |
| | | | | | |
Working capital | | $ | 106 | | | $ | 6,654 | |
Cash, cash equivalents and short-term investments | | | 1,991 | | | | 10,885 | |
Cash used in operating activities | | | (111 | ) | | | (1,023 | ) |
Cash used in investing activities | | | (77 | ) | | | 0 | |
Cash used in financing activities | | | (123 | ) | | | 0 | |
Cash used in operating activities was $7.5$.1 million for the fivethree months ended DecemberMarch 31, 20092010 due primarily to $1.5$.2 million in net loss and a $5.2$0.3 million reduction in accounts payable primarily due to the one time payment of the Jenkens litigation settlement of $4.3 during the first fiscal quarter ended October 31, 2009.offset by $0.4 million decrease in accounts receivable. Cash used in operating activities was $2.5$1.0 million for the fivethree months ended December 31, 2008 due primarily to the $2.4 million in net loss.
Cash provided by investing activities was $5.3 million for the five months ended DecemberMarch 31, 2009 due primarily to liquidation of short-term investments to pay out Jenken’s litigation of $4.3 million. $1.4 million in net loss, which was offset by $0.3 million in total non-cash depreciation and amortization expenses.
Cash used inby investing activities was $0.3$0.1 million for the fivethree months ended DecemberMarch 31, 20082010 due primarily to net purchases of property and equipment. No net Cash was provided or used by the investing activities as $65 thousand net sale of short-term investments.investments was offset by $65 thousand of purchases of property and equipment for the three months ending March 31, 2009. Asure’s current operations are not capital intensive and management does not anticipate any significant capital expenditures during the remainder of fiscal year 2010.
The Company leases office space and equipment under non-cancelable operating leases that expire at various dates through 2013. Certain leases obligate Asure to pay property taxes, maintenance and insurance and include escalation clauses. The total amount of base rentals over the term of the Company’s leases is charged to expense on a straight-line basis, with the amount of the rental expense in excess of the lease payments recorded as a deferred rent liability. Approximately $11.4$10.6 million or 95.9%95.8% of the Company’s total operating lease obligations relate to its corporate office facility at Wild Basin in Austin, Texas. As of DecemberMarch 31, 2009,2010, Asure had $3.7$3.2 million in future minimum lease payments receivable under non-cancelable sublease arrangements.
Subsequent to the amendment of its corporate office facility lease as described in Note 9, the $10.6 million future lease obligation will be reduced to $720 thousand and the $3.2 million in future minimum lease payments receivable under sublease arrangements will be reduced to $0.
Management continues to evaluate and reduce any unnecessary expenditure, while continuing to closely monitor all of its cash sources and uses as it manages its operations through the current recession.
Cash provided byused in financing activities was $0.1 million for the fivethree months ended DecemberMarch 31, 20092010 related primarily to the Stock Purchase Agreement between Asure and its CEO for $0.2 million, which was offset by repurchase of treasury stock for $0.1 million. No Cash was provided or used in financing activities was $10 thousand for the fivethree months ended DecemberMarch 31, 2008.2009. Management believes it currently has sufficient cash and short-term investments on hand to fund its operations during the next twelve months and beyond without needing to obtain long-term financing. Therefore, the Company does not anticipate that it will be affected by any credit shortage in the current economic business environment.
Pursuant to Asure’s stock repurchase plan, the Company is allowed up to repurchase up to 300,000 shares (adjusted for the 10 to 1 reverse stock split) of the Company’s common stock. During the two and fivethree months ended DecemberMarch 31, 20092010 Asure repurchased 33,70343,364 shares of common stock for $92$110 thousand. In total, Asure has repurchased 212,743256,107 shares for approximately $4.9$5.0 million over the life of the plan. Management will periodically assess repurchasing additional shares, depending on the Company’s cash position, market conditions and other factors.
As of DecemberMarch 31, 2009,2010, Asure’s principal sourcessource of liquidity consisted of $2.3$2.0 million of current cash and cash equivalents.equivalents as well as future cash generated from operations. Management is focused on growing its existing software operations and continuing to reduce expenses and thus plans to utilize its cash balances to expand its operations by making additional prudent investments as necessary. Although AsureThe Company believes that it has sufficient cash for its short and long term needs, including the $1.5 million payment it is currently not actively exploring prospectsrequired to make in acquiring a public or privately held technology business or product line,the second fiscal quarter as part of its lease amendment as described in Note 9. The lease amendment will save the Company may consider a potential opportunity if the right opportunity presents itself.approximately $120 thousand in monthly cash payments beginning in April 2010.
There is no assurance that the Company will be able to limit its cash consumption and preserve its cash balances, and it is possible that the Company’s future business demands may lead to cash utilization at levels greater than recently experienced. Management believes that the Company has sufficient capital and liquidity to fund and cultivate the growth of its current and future operations for the next 12 months and thereafter. However, due to uncertainties related to the timing and costs of these efforts, Asure may need to raise additional capital in the future. Yet, there is no assurance that the Company will be able to raise additional capital if and when it is needed.
CRITICAL ACCOUNTING POLICIES
The Company’s consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and include the accounts of Asure's wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated 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 and 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 disclosuredisclosur e of contingent assets and liabilities at fiscal year 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 the gross deferred tax asset, contingency legal reserves, lease impairment, 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 the iEmployee acquisition. The Company bases its estimates on historical experience and on various other assumptions that are believed to be 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 financial statements for continued reasonableness. Appropriate adjustments, if any, to the estimates used are made prospectivelyp rospectively based upon such periodic evaluation.
Management believes the following represent Asure’s critical accounting policies:
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is probable. The Company recognizes software revenue in accordance with FASB ASC 985-605, Revenue Recognition – Multiple Element Arrangements (FASB ASC 985-605). The Company’s revenues consists of software license, software subscription and service fees. Revenue from the software element is earned through the licensing or right to use the Company’s software and from the sale of specific software products. Service fee income is earned through the sale of maintenance and technical support, training and installation. Revenue from the sale of hardware devices is recognized upon shipment of the hardware. 0;Asure also sells multiple elements within a single sale.
When the Company sells software licenses in a multiple element arrangement and vendor-specific objective evidence (“VSOE”) of fair value is available for the undelivered element, sales revenue is generally recognized on the date the product is shipped, using the residual method, with a portion of revenue recorded as deferred (unearned) due to the applicable undelivered elements. VSOE of fair value for the maintenance, training and installation services are based on the prices charged for the maintenance and services when sold separately. Undelivered elements for our multiple element arrangements with a customer are generally restricted to post contract support, training and install. The amount of revenue allocated to these undelivered elements is based on the VSOE of fair value for those undelivered elements. Deferred revenue due to undelivered elements is recognized ratably on a straight-line basis over the service period (typically one year) or when the service is completed. When VSOE of fair value is not available for the undelivered element of a multiple element arrangement, sales revenue is generally recognized ratably, on a straight-line basis over the service period of the undelivered element. The Company’s training and installation services are not essential to the functionality of the Company’s products as such services can be provided by a third party or the customers themselves.
For
The Company also sells software subscriptions and may at times sell related setup, implementation and professional services in the same arrangement. Setup and implementation services typically occur at start of the software subscription arrangements,period, while certain professional services may not occur several months later depending on the nature of the services and the customer requirements. Prior to January 1, 2010, the Company recognizesrecognized the total contract value of software subscriptions and related services ratably as a single unit of accounting over the contract term, beginning when the customer iswas able to utilize the software. Subsequent to the adoption of the updated FASB ASC 605, the Company accounts each of these elements as separate accounting units. We allocate the va lue of the arrangement to each unit of accounting based on vendor specific objective evidence of selling price, when it exists, third-party evidence of selling prices for like services or estimated selling price. Software subscription service revenues are recognized pro-rata over the life of the software subscription contract, while the related setup, implementation or professional services revenues are recognized upon completion. The result of the adoption is an immaterial acceleration of setup, implementation and professional service revenues related to software subscription transactions.
The Company does not recognize revenue for agreements with rights of return, refundable fees, cancellation rights or acceptance clauses until such rights of return, refund or cancellation have expired or acceptance has occurred. The Company's arrangements with resellers do not allow for any rights of return.
Deferred revenue includes amounts received from customers in excess of revenue recognized, and is comprised of deferred maintenance, service and other revenue. Deferred revenues are recognized in the Consolidated Statements of Operations when the service is completed and over the terms of the arrangements, primarily ranging from one to three years.
Impairment of Goodwill, Intangible Assets and Long-Lived Assets
Goodwill and other intangible assets with indefinite lives are not required to be amortized under FASB ASC 350, Intangibles-Goodwill and Other(FASB (FASB ASC 350) and accordingly, the Company reviews its goodwill for possible impairment on an annual basis, or whenever specific events warrant. Events that may create an impairment review include, but are not limited to: significant and sustained decline in the Company's stock price or market capitalization, significant underperformance of operating units and significant changes in market conditions and trends. Asure uses a two-step process and a discounted cash flow model to evaluate its assets for impairment. If the carrying amount of the goodwill or asset exceeds its implied fair value, an impairment loss is recognized in an amountamo unt equal to the excess during that fiscal period. Intangible assets that are not deemed to have indefinite lives are amortized over their useful lives and are tested for impairment in accordance with FASB ASC 350.
In accordance with FASB ASC 350, Asure reviews and evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, including those noted above, the Company compares 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, the fair values of those assets are estimated by discounting the projected cash flows. Any excess of the carrying amounts over the fair values are recorded as impairments in that fiscal period.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is a smaller reporting company as defined by Rule 12b-2 under the Exchange Act and is not required to provide the information required under this item.
ITEM 4. CONTROLS AND PROCEDURES
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports it files under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Such controls include those designed to ensure that information for disclosure is communicated to management, including the Chairman of the Board and the Chief Executive Officer (“CEO”), as appropriate to allow timely decisions regarding required disclosure.
The CEO and CFO, with the participation of management, have evaluated the effectiveness of the Company’s disclosure controls and procedures as of DecemberMarch 31, 2009.2010. Based on their evaluation, they have concluded, to the best of their knowledge and belief, that the disclosure controls and procedures are effective. No changes were made in the Company’s internal controls over financial reporting during the twothree months ended DecemberMarch 31, 2009,2010, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. In making this assessment, management used the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring OrganizationsOrgani zations of the Treadway Commission.
ITEM 1. LEGAL PROCEEDINGS
Asure was the defendant or plaintiff in various actions that arose in the normal course of business. With the exception of the proceedings described below, none of the pending legal proceedings to which the Company is a party are material to the Company.
Litigation with Jenkens & Gilchrist, P.C.
On July 16, 2007, Jenkens & Gilchrist, P.C. (“Jenkens”), Asure’s former legal counsel, filed a complaint against Asure and Compressions Labs, Inc., in the District Court of Dallas County, Texas. In its complaint, Jenkens alleged a breach of contract and sought a declaratory judgment. Asure disputed Jenkens’ claims and also sought relief through the court system.
After Asure terminated Jenkens, the Company entered into a Resolution Agreement with Jenkens in December 2004. Under the Resolution Agreement, the Company believed Jenkens was entitled to $1,400 for all fees and expenses related to certain settlements received from licensing the Company's intellectual property. Jenkens interpreted the Resolution Agreement on broader terms and initially believed it was entitled to $2,800. As of July 31, 2007, Asure accrued $2,100 for Jenkens’ contingency fees related to these settlements. The Company recorded the contingency fees as part of cost of sales on its Consolidated Statement of Operations for the year ended July 31, 2007 in order to properly match the expenses to the related licensing revenues. The $2,100 accrual remained as part of Asure’sAsure& #8217;s current liabilities through fiscal year 2009.
On July 20, 2009, the trial with Jenkens commenced. As the result of the jury verdict in July 2009 to award Jenkens approximately $4,600 in damages, attorney’s fees and interest, Asure entered into a settlement agreement with Jenkens, effective August 20, 2009. Under the settlement agreement, Asure agreed to pay Jenkens $4,300 and the parties agreed to release all claims against each other. Based on the settlement amount, the Company accrued an additional $2,200 as of July 31, 2009. Since the Company was no longer licensing its intellectual property and had no related licensing revenues in fiscal year 2009, this additional $2,200 expense was recorded as part of operating expenses on the Consolidated Statement of Operations for the year ended July 31, 2009. Asure paid Jenkens $4,300$4,30 0 on August 25, 2009 and the Company considers this litigation to be concluded.
Litigation with Wild Basin
On September 6, 2007, Asure filed a petition against Wild Basin One & Two, Ltd. (“Wild Basin”) in the District Court of Travis County, Texas. The petition claimed Wild Basin was in breach of contract relating to Asure’s lease agreement by unreasonably withholding and delaying its consent to Asure’s lease assignment to a third party. On October 19, 2007, Asure amended its petition to include claims of fraud and breach of fiduciary duty against Wild Basin. On June 5, 2008, Asure amended its petition to request the Court make declaratory judgments on several issues in the case and to include as a breach of contract claim its claim for withholding amounts that should have been distributed by Wild Basin in the past pursuant to the lease. Asure sought to recover all damages as a result of the delay in closing its pending assignment and amounts not distributed in the past, among other damages.
The trial for this litigation commenced on September 22, 2008. Prior to the conclusion of the trial, Asure and Wild Basin reached a settlement agreement, effective September 25, 2008. This settlement agreement requires, among other terms, that Wild Basin consents to Asure’s lease assignment. In return, Asure paid Wild Basin $75 in November 2008. Both parties agreed to mutually release claims against each other.
While Asure was significantly delayed in obtaining Wild Basin’s consent to its lease assignment, the identified third party encountered difficulties obtaining the required financing due to the tightened capital markets. Additionally, Asure continues to work with Wild Basin regarding its breach of contract claim that Wild Basin withheld amounts that should have been distributed to Asure. Asure will renew its litigation against Wild Basin regarding this matter, only if necessary.
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
Exhibits:EXHIBIT NUMBER | | |
| | |
2.2 | | Agreement and Plan of Merger, dated as of September 11, 2007 by and among Asure Software, Inc., Cheetah Acquisition Company, Inc. and iSarla Inc. (incorporated by reference to Exhibit 2.2 to the Company’s quarterly report on Form 10-Q for the three months ended October 31, 2007). |
| | |
3.1 | | Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s quarterly report on Form 10-Q for the three months ended October 31, 2004). |
| | |
3.2 | | Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s quarterly report on Form 10-Q for the three months ended October 31, 2004). |
| | |
4.1 | | Specimen Certificate for the Common Stock (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1, File No. 33-45876, as amended). |
| | |
4.2 | | Rights Agreement, dated as of December 19, 2005 between Asure Software, Inc. and American Stock Transfer & Trust Company, which includes the form of Series A Preferred Stock, $.01 par value, the form of Rights Certificate, and the Summary of Rights (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated December 19, 2005). |
| | DESCRIPTION |
31.1* | | |
| | |
31.2* | | |
| | |
32.1* | | |
| | |
32.2* | | |
| | |
33.1* | | Fourth Amendment to Lease Agreement with WB One & Two, LTD. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ASURE SOFTWARE, INC. | |
| | | |
| | | |
| By: | /s/ PATRICK GOEPEL | |
| | Patrick Goepel | |
| | Chief Executive Officer | |
| | | |
INDEX TO EXHIBITS
| | |
NUMBER | | DESCRIPTION |
| | |
2.2 | | Agreement and Plan of Merger, dated as of September 11, 2007 by and among Asure Software, Inc., Cheetah Acquisition Company, Inc. and iSarla Inc. (incorporated by reference to Exhibit 2.2 to the Company’s quarterly report on Form 10-Q for the three months ended October 31, 2007). |
| | |
3.1 | | Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s quarterly report on Form 10-Q for the three months ended October 31, 2004). |
| | |
3.2 | | Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s quarterly report on Form 10-Q for the three months ended October 31, 2004). |
| | |
4.1 | | Specimen Certificate for the Common Stock (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1, File No. 33-45876, as amended). |
| | |
4.2 | | Rights Agreement, dated as of December 19, 2005 between Asure Software, Inc. and American Stock Transfer & Trust Company, which includes the form of Series A Preferred Stock, $.01 par value, the form of Rights Certificate, and the Summary of Rights (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated December 19, 2005). |
| | |
31.1 | | |
| | |
31.2 | | |
| | |
32.1 | | |
| | |
32.2 | | |
| | |
33.1 | | |