ASURE SOFTWARE INC (ASUR) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
We have attempted to identify these forward-looking statements with the words “believe,” “may,” “will,” “estimate,” “projects,” “anticipate,” “intend,” “expect,” “should,” “plan,” and similar expressions. Examples of “forward-looking statements” include statements we make regarding our operating performance, future results of operations and financial position, revenue growth, earnings or other projections. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. The achievement or success of the matters covered by such forward-looking statements involves risks, uncertainties and assumptions, over many of which we have no control. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make. Additionally, we are under no obligation to update any of the forward-looking statements after the date of this Annual Report on Form 10-K or to conform such statements to actual results.
OVERVIEW
We are a provider of cloud-based Human Capital Management (“HCM”) software solutions delivered as Software-as-a-Service (“SaaS”) to businesses of all sizes. We offer human resources (“HR”) tools necessary to build a thriving workforce, provide the resources to stay compliant with dynamic federal, state, and local tax jurisdictions and their respective labor laws, freeing cash flows so these businesses can spend their financial capital on growing their businesses rather than administrative overhead that can impede growth. Our solutions also provide new ways for employers to connect with their employees in order to enhance their relationships with their talent. Asure’s HCM suite (“Asure HCM”) includes Payroll & Tax solutions, Recruiting, HR compliance and services, Time & Attendance software, Insurance and Benefits Administration, and data integrations that enable employers and their employees to enhance efficiencies and take advantage of value-added solutions, which we refer to as AsureMarketplace™. AsureMarketplace™ automates interactions between our HCM systems with third-party providers to enhance efficiency, improve accuracy and to extend the range of services offered to employers and their employees. Our approach to HR compliance services leverages technology and on-demand content to enhance scalability and efficiency while prioritizing client interactions. We offer our services directly and indirectly through our network of Reseller Partners.
We strive to be the most trusted HCM resource. We sell our solutions through both direct and partner channels. We supplement our direct sales efforts with partner programs that afford us access to opportunities in various geographic and industry niches. Asure has two types of partners: Reseller Partners that white label our products while providing value-added services to their clients (our indirect clients) and Referral Partners that provide us with client leads but do not resell our solutions.
As of December 31, 2024, Asure had more than 100,000 clients, with approximately 20% direct and the remaining clients indirect who have contracts with Reseller Partners.
We plan to continue to enhance our products and technologies by leveraging the latest technology stack, Robotic Process Automation (“RPA”), artificial intelligence (“AI”), and development partnerships. We expect that our expanded investment in product, engineering, SaaS hosting, mobile and hardware technologies will lay the groundwork for broader market opportunities and represent a key aspect of our competitive differentiation. We also plan to expand our technological resources through organic improvements and acquired intellectual property. We expect to continue to expand the breadth of integration between our solutions, allowing direct clients and our Reseller Partners the ability to easily add and implement components across our entire solution set. Our initiatives include providing our customers with more accurate and efficient automation powered by an informed knowledge base. Consistent with that effort, our engineering team utilizes an AI development Copilot to increase their productivity and efficiency. Our operations team utilizes a digital assistant to allow for a more efficient and accurate way to automate repetitive tasks, which we believe will free up our time for more strategic work and reducing the risk of errors. We are committed to providing the best-in-class solutions.
28
Table of Contents
Our development efforts for future releases and enhancements are driven by feedback received from our existing and potential customers and by gauging market trends. We believe we have the appropriate development team to design and enhance our solution suite and integrated platform. We have also made significant investments outside of core R&D into compliance and certifications, including SOC I Type 2 and SOC II Type 2 certifications, BIPA, CCPA, and other initiatives.
Asure has several forms of revenue that result from our business model:
Software-as-a-service revenue is generated when clients utilize our product suite for their recurring human resource needs—primarily payroll, tax, recruiting, HR compliance, time and attendance, insurance and benefits administration and AsureMarketplace™. This also contains revenue generated from quarterly and annual reporting requirements to local, state and federal regulatory agencies. Examples include Form W-2 and reporting mandated by the ACA.
Hardware-as-a-service revenue is generated when clients choose not to purchase our hardware, but rather rent the devices. This hardware includes a variety of clocks used to track time and attendance. Hardware revenue is generated when our clients buy our devices outright.
Maintenance and support revenue is generated from servicing our hardware on our clients’ behalf and providing training on how to operate both our hardware and software products.
Professional services revenue is generated from our clients’ needs that would normally be fulfilled by an internal payroll system or human resources department.
Our tax management solutions revenue is derived from providing clients with innovative payroll tax processing software and service solutions.
Interest from client funds is generated when we gain possession of funds intended to be disbursed based on the clients’ needs. We invest the monies in short and long-term securities that may be held to maturity before disbursement.
2024 Highlights (in thousands)
•Consolidated revenue of $119,792 for 2024, representing a 1% increase over revenue in 2023.
•Recurring revenue of $114,471 for 2024, representing a 15% increase over recurring revenue in 2023.
•Net loss of $11,773 for 2024, an increase of $2,559 from prior year loss of $9,214.
•Gross profit of $82,107 for 2024 versus $85,537 in 2023.
29
Table of Contents
RESULTS OF OPERATIONS (in thousands)
The following table sets forth, for the fiscal periods indicated, the percentage of total revenues represented by certain items in our Consolidated Statements of Comprehensive Loss:
| Year Ended December 31, | |||||
|---|---|---|---|---|---|
| 2024 | 2023 | ||||
| Revenues | 100 | % | 100 | % | |
| Gross profit | 69 | % | 72 | % | |
| Sales and marketing | 24 | % | 24 | % | |
| General and administrative | 34 | % | 33 | % | |
| Research and development | 7 | % | 6 | % | |
| Amortization of intangible assets | 14 | % | 11 | % | |
| Total operating expenses | 78 | % | 74 | % | |
| Interest Income | 1 | % | 1 | % | |
| Interest expense | (1) | % | (5) | % | |
| Loss on extinguishment of debt | — | % | (1) | % | |
| Other (expense) income, net | — | % | — | % | |
| Loss from operations before income taxes | (9) | % | (8) | % | |
| Net loss | (10) | % | (8) | % |
Revenue
Revenues are comprised of recurring revenues, professional services, hardware, and other revenues. We expect our revenues to increase as we introduce new applications, expand our client base and renew and expand relationships with existing clients. As a percentage of total revenues, we expect our mix of recurring revenues, and professional services, hardware and other revenues to remain relatively constant. While revenue mix varies by product, recurring revenue represented over 96% of total revenue in the year ended 2024, compared to 84% in 2023.
Our revenue was derived from the following sources (in thousands):
| Year Ended December 31, | Variance | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | $ | % | |||||||||||
| Recurring | $ | 114,471 | $ | 99,734 | $ | 14,737 | 15 | % | ||||||
| Professional services, hardware and other | 5,321 | 19,348 | (14,027) | (72) | % | |||||||||
| Total | $ | 119,792 | $ | 119,082 | $ | 710 | 1 | % |
Recurring Revenues
Recurring revenues include fees for our payroll and tax management, recruiting services, HR compliance, time and labor management, insurance and benefits administration, AsureMarketplace™ and other Asure solutions as well as fees charged for form filings and delivery of client payroll checks and reports. These revenues are derived from fixed amounts charged per billing period and sometimes an additional fee per employee or transaction processed. We do not require clients to enter into long-term contractual commitments for our services. Our billing period varies by client based on when each client pays its employees, which may be weekly, bi-weekly, semi-monthly or monthly. We also generate recurring revenues from our Reseller Partners that license our solutions. Because recurring revenues are based, in part, on fees for use of our applications and the delivery of checks and reports that are levied on a per-employee basis, our recurring revenues increase as our clients hire more employees. Recurring revenues are recognized in the period services are rendered.
30
Table of Contents
Recurring revenues include revenues relating to the annual processing of payroll forms, such as Form W-2 and Form 1099, and revenues from processing unscheduled payroll runs (such as bonuses) for our clients. Because payroll forms are typically processed in the first quarter of the year and many of our clients are subject to form filing requirements mandated by the ACA, first quarter revenues and margins are generally higher than in subsequent quarters. We anticipate our revenues will continue to exhibit this seasonal pattern related to ACA form filings for so long as the ACA (or replacement legislation) includes employer reporting requirements. In addition, we often experience increased revenues during the fourth quarter due to unscheduled payroll runs for our clients that occur before the end of the year. We expect the seasonality of our revenue cycle to decrease to the extent clients utilize more of our non-payroll applications.
This revenue line also includes interest earned on funds held for clients. Interest earned is generated from funds we collect from clients in advance of either the applicable due date for payroll tax submissions or the applicable disbursement date for employee payment services. These collections from clients are typically disbursed from one to 30 days after receipt, with some funds being held for up to 120 days. We typically invest funds held for clients in money market funds, demand deposit accounts, commercial paper, fixed income securities and certificates of deposit until they are paid to the applicable tax or regulatory agencies or to client employees. The amount of interest we earn from the investment of client funds is also impacted by changes in interest rates. Refer to “Risk Factors” in Part I, 1A. for more information about risks related to our ERTC business.
Recurring revenue for the year ended December 31, 2024, was $114,471, an increase of $14,737, or 15%, from $99,734 for the year ended December 31, 2023. The increase is primarily due to an increase of approximately $8,718 in acquisition related revenue and an increase of $4,323 for new multi-year licensing agreements with larger employers finalized during the year.
Professional Services, Hardware and Other Revenues
Professional Services, Hardware and Other Revenues represents implementation fees, one-time consulting projects, on-premise maintenance, hardware devices to enhance our software products as well as ERTC revenues that are transactional in nature.
Professional services, hardware and other revenue decreased by $14,027, or 72%, for the year ended December 31, 2024, from the similar period in 2023, primarily due to the discontinuation of non-recurring ERTC revenues.
ERTC revenues were originally expected to expire during 2024 and 2025; however, subsequent legislation impacted revenues and cash collections during 2024 and is expected to continue in 2025. For example, in January 2024, the United States House of Representatives passed the Tax Relief for American Families Act of 2024, which sets an expiration date of January 31, 2024, on additional claims for ERTC that can potentially apply retroactively. In September 2023, the IRS announced a moratorium through the end of the year on processing new ERTC claims due to concerns over questionable or fraudulent claims. During 2024, the IRS issued multiple releases announcing they had resumed processing of ERTC claims, additionally indicating that most claims are being approved. Refer to “Risk Factors” in Part I, 1A. for more information about risks related to our ERTC business.
Our total customer base is widely spread across industries and sizes. Geographically, we sell our products primarily in the United States.
In addition to continuing to develop our workforce solutions and release of new software updates and enhancements, we continue to actively explore other opportunities to acquire additional products or technologies to complement our current software and services.
Gross Profit and Gross Margin
Consolidated gross profit for the year ended December 31, 2024, was $82,107, a decrease of $3,430, or 4%, from $85,537 for the year ended December 31, 2023. Gross margin as a percentage of revenue was 69% for the year ended December 31, 2024, as compared to 72% for the year ended December 31, 2023. The decrease is primarily attributable to the decrease in revenue in higher margin revenue streams.
Our cost of sales relates primarily to direct product costs, compensation for operations and related consulting expenses, hardware expenses, facilities and related expenses and the amortization of our purchased software development costs. We include intangible amortization related to developed and acquired technology within cost of sales.
31
Table of Contents
Sales and Marketing Expenses
Sales and marketing expenses primarily consist of salaries and related expenses for sales and marketing staff, including stock-based expenses, commissions, as well as marketing programs, which include events, corporate communications and product marketing activities.
Sales and marketing expenses for the year ended December 31, 2024, were $28,316, a decrease of $418, or 1%, from $28,734 for the year ended December 31, 2023, primarily due to an increase in direct sales personnel offset by decreases resulting from reduced ERTC revenues. Sales and marketing expenses as a percentage of revenue remained flat at 24% for the year ended December 31, 2024 and 2023.
We expect to continue to expand and increase selling costs as we focus on hiring direct sales personnel, expanding recognition of our brand, and lead generation.
General and Administrative Expenses
General and administrative expenses primarily consist of salaries and related expenses, including stock-based expenses for finance and accounting, legal, internal audit, human resources and management information systems personnel, legal costs, professional fees, and other corporate expenses such as transaction costs for acquisitions.
General and administrative expenses for the year ended December 31, 2024, were $40,499, an increase of $1,166, or 3%, from $39,333 for the year ended December 31, 2023, primarily attributable to an increase in personnel costs from higher healthcare premiums and an increase in share-based compensation. General and administrative expenses as a percentage of revenue increased to 34% for the year ended December 31, 2024, from 33% for the same period in 2023.
Research and Development Expenses
Research and development (“R&D”) expenses consist primarily of salaries and related expenses, including stock-based expenses for employees supporting our R&D activities.
R&D expenses for the year ended December 31, 2024, were $7,807, an increase of $961, or 14%, from $6,846 for the year ended December 31, 2023. The increase in R&D expense is primarily attributable to an increase in personnel costs from higher wages and contractor usage, partially offset by an increase in capitalized software expenses driven by continued investments in development of our products. R&D expenses as a percentage of revenues increased to 7% for the year ended December 31, 2024, from 6% for the same period in 2023.
Amortization of Intangible Assets
Amortization expense in operating expenses for the year ended December 31, 2024, was $16,222, an increase of $2,599, or 19%, from $13,623 for the year ended December 31, 2023. The increase in Amortization expense is primarily attributable to increased acquisition activity compared to the prior year. Amortization expense as a percentage of revenue was 14% for the year ended December 31, 2024, from 11% for the same period in 2023.
Interest Income and Expense
Interest income for the year ended December 31, 2024, was $913 compared to interest income of $1,342 for the year ended December 31, 2023. Interest income as a percentage of revenue remained flat at 1% for the years ended December 31, 2024 and 2023. Interest expense for the year ended December 31, 2024, was $1,024 compared to interest expense of $5,639 for the year ended December 31, 2023. The decrease in interest expense, net relative to the prior year is primarily attributable to our payoff of the outstanding debt under the credit facility with Structural Capital Investments III LP (“Structural Capital”) in 2023. Interest expense as a percentage of revenue was 1% for the year ended December 31, 2024, compared to 5% for the year ended December 31, 2023. Interest expenses for the years ended December 31, 2024 and 2023, are composed primarily of interest expense on notes payable.
32
Table of Contents
Loss on Extinguishment of Debt
Loss on extinguishment of debt for the year ended December 31, 2024, was $0 compared to a loss of $1,517 for the year ended December 31, 2023. There was no loss on extinguishment of debt for the year ended December 31, 2024, compared to 1% of revenue for the year ended December 31, 2023. For the year ended December 31, 2023, the amount in loss on extinguishment of debt consisted of loss recognized as a result of the termination of our credit facility with Structural Capital.
Other (Expense) Income, Net
Other (expense) income, net for the year ended December 31, 2024, was an expense of $8 compared to income of $292 for the year ended December 31, 2023. Other (expense) income, net as a percentage of revenue was negligible for the years ended December 31, 2024 and 2023, respectively. For the year ended December 31, 2024, the amounts in other (expense) income, net primarily consisted of bank fees. For the year ended December 31, 2023, the amounts in other (expense) income, net primarily consisted of losses on disposal of assets.
Income Taxes
For the year ended December 31, 2024 and 2023, we recorded an income tax expense attributable to continuing operations of $933 and $109, respectively, an increase of $824.
Loss From Operations
We incurred a loss from operations of $11,773, or $(0.45) per share, during the year ended December 31, 2024, compared to a loss from operations of $9,214, or $(0.42) per share, during the year ended December 31, 2023. Loss from operations as a percentage of total revenues was 10% and 8% for the years ended December 31, 2024 and 2023, respectively.
LIQUIDITY AND CAPITAL RESOURCES (in thousands)
| December 31, 2024 | December 31, 2023 | |||||
|---|---|---|---|---|---|---|
| Cash and cash equivalents(1) | $ | 21,425 | $ | 30,317 |
(1)This balance excludes cash and cash equivalents in funds held for clients
Working Capital. We had working capital of $13,641 at December 31, 2024, a decrease of $12,239 from working capital of $25,880 at December 31, 2023. Working capital as of December 31, 2024 and 2023, includes $8,363 and $6,853 of short-term deferred revenue, respectively. Deferred revenue is an obligation to perform future services. We expect that deferred revenue will convert to future revenue as we perform our services, but this does not represent future payments. Deferred revenue can vary based on seasonality, expiration of initial multi-year contracts and deals that are billed after implementation rather than in advance of service delivery.
Operating Activities. Net cash provided by operating activities of $9,388 for the year ended December 31, 2024, was driven by non-cash adjustments to our net loss of approximately $28,940, primarily due to depreciation and amortization. Net cash provided by operating activities of $18,900 for the year ended December 31, 2023, was driven by non-cash adjustments to our net loss of approximately $29,530, primarily due to depreciation and amortization, offset by our net loss of $9,214. For the year ended December 31, 2023, changes in operating assets and liabilities resulted in a use of $1,416 in cash.
Investing Activities. Net cash used in investing activities of $19,256 for the year ended December 31, 2024, is primarily due to purchases of available-for-sale securities of $15,643, partially offset by proceeds from sales and maturities of available-for-sale securities of $20,522. Net cash used in investing activities of $29,525 for the year ended December 31, 2023, is primarily due to the purchase of available-for-sale securities of $27,647, partially offset by proceeds from sales and maturities of available-for-sale securities of $14,385.
Financing Activities. Net cash used in financing activities was $22,042 for the year ended December 31, 2024, which primarily consisted of a net decrease in client fund obligations of $26,342, offset by proceeds from notes payable, net of issuance costs of $4,995. Net cash provided by financing activities was $24,205 for the year ended December 31, 2023, which primarily consisted of net proceeds from the issuance of common stock of $46,800, a net increase in client fund obligations of $13,931, offset by payments of notes payable of $35,627.
33
Table of Contents
On October 31, 2024, we entered into a Sales Agreement (the “Sales Agreement”) with Roth Capital Partners, LLC (“Roth”). The Sales Agreement provides for the offer and sale of up to $25,000 of our newly issued common stock, from time to time through an “at the market offering” program. We will specify the parameters for the sale of the shares of common stock, including the number of shares to be issued, the time period during which sales are requested to be made, any limitation on the number of shares that may be sold in any one trading day and any minimum price below which sales may not be made. We may offer and sell up to $25,000 of shares of common stock pursuant to the Sales Agreement. Actual sales of common stock under the Sales Agreement will depend on a variety of factors including, among other things, market conditions, the trading price of the Common Stock and potential funding needs. As a result, the full amount of capital may not be fully realized. We intend to use the net proceeds from these at-market offerings, if any, for general corporate purposes. Our general corporate purposes include, but are not limited to, repayment or refinancing of debt, capital expenditures, funding possible acquisitions, working capital and satisfaction of other obligations. As of December 31, 2024, there are $25,000 of shares of common stock available for issuance under this acquisition shelf registration statement.
On September 12, 2023, we terminated the Loan and Security Agreement (the “Loan Agreement”) dated September 10, 2021, with Structural Capital, and Ocean II PLO LLC, as administrative and collateral agent for the Lenders (“Agent”), and repaid the secured promissory note (the “Note”) with Agent evidencing our obligations under the Loan Agreement. In connection with the termination, we paid an aggregate amount of $30,927 (the “Payoff Amount”) in full payment of the outstanding obligations under the Loan Agreement and Note. The Payoff Amount represented $30,617 of outstanding principal and interest on the unpaid principal balance, a prepayment fee in the amount of $306 and an immaterial amount of fees and other expenses due to Agent.
On August 16, 2023, we entered into an underwriting agreement (the “Underwriting Agreement”) with Stifel, Nicolaus & Company, Incorporated and Craig-Hallum Capital Group LLC, as representatives of the several underwriters named therein (collectively, the “Underwriters”), relating to a firm commitment offering of 3,333 newly issued shares of our common stock at a public offering price of $12.00 per share (the “2023 Offering”). On August 21, 2023, we completed the 2023 Offering, and realized net proceeds of $37,395, after deducting underwriting discounts and offering expenses of $2,605. Additionally, on August 30, 2023, the Underwriters exercised their option to purchase an additional 500 shares of our common stock, and we realized net proceeds of $5,507, after deducting underwriting discounts and offering expenses of $493.
We also have an outstanding promissory note with an unrelated third party intended to fund future acquisitions and for general working capital purposes from November 2024 in the amount of $5,000 as of December 31, 2024. The outstanding promissory note matures on November 1, 2025.
As of December 31, 2024, we have five promissory notes related to acquisitions that occurred during 2024 and prior years with a combined outstanding principal balance of $9,943 and maturity dates ranging from October 1, 2025 to July 1, 2029.
Sources of Liquidity. As of December 31, 2024, our principal sources of liquidity consisted of approximately $21,425 of cash, cash equivalents and restricted cash, and cash generated from operations of our business over twelve months.
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. However, we believe to have sufficient liquidity as of December 31, 2024, to support our business operations for the next 12 months. We may need to raise additional capital in the future in order to grow our existing software operations and to seem additional strategic acquisitions in the near future. However, we cannot ensure that we will be able to raise additional capital on acceptable terms, or at all.
CRITICAL ACCOUNTING ESTIMATES
We have prepared our Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles and included the accounts of our wholly owned subsidiaries. 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 reported periods. The SEC has defined a company’s critical accounting estimates as those which involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations. Based on this definition, we have identified the critical accounting estimates addressed below.
34
Table of Contents
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.
Valuation of Acquired Assets and Goodwill
Description
Identifiable intangible assets and goodwill obtained during business combination transactions are recognized based on the relative and absolute fair values of acquired assets and the excess of purchase price over that value. Intangible assets and goodwill are tested annual for impairment or more frequently when an event or circumstance indicates that they might be impaired.
Judgements and Uncertainties
During business combination transactions, we use the fair value of acquired identifiable intangible assets to allocate purchase price among acquired assets and determine the excess of purchase price to be recognized as goodwill. Valuation of acquired identifiable intangible assets 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.
Sensitivity of Estimate to Change
While we believe we have made reasonable estimates and assumptions to calculate the fair value of acquired intangible assets and goodwill, it is possible that a material difference could occur. If actual results are not consistent with the estimates and assumptions used to calculate fair value, it could result in a significant change to the assessment of fair value for intangible assets and goodwill and thus result in material impairment losses.
We completed our annual impairment assessments of long-lived assets and goodwill as of December 31, 2024, and determined that there was no impairment of either class of assets.