ASURE SOFTWARE INC - Quarter Report: 2020 June (Form 10-Q)

UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2020

OR

For the transition period from                  to 

Commission file number: 1-34522

ASURE SOFTWARE, INC.

(Exact Name of Registrant as Specified in its Charter)

(512) 437-2700

(Registrant’s Telephone Number, including Area Code)

 Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ☒     No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes ☒     No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒

As of August 7, 2020, 15,850,601 shares of the registrant’s Common Stock were outstanding.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

ASURE SOFTWARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.

ASURE SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Amounts in thousands, except share and per share data)

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

ASURE SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Amounts in thousands)

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements. 

ASURE SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

ASURE SOFTWARE, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data unless otherwise noted)

NOTE 1 – THE COMPANY AND BASIS OF PRESENTATION

Asure Software, Inc., (“Asure”, the “Company”, “we” and “our”), a Delaware Corporation, is a leading provider of Human Capital Management (“HCM”). 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 laws, and (iii) allocate more resources to support growth rather than back-office overhead that suffocates growth. Asure’s HCM suite, named AsureHCM, includes cloud-based Payroll & Tax, Human Resources ("HR"), and Time & Attendance software as well as HR Services ranging from HR projects to completely outsourcing payroll and HR staff. We develop, market, sell and support our offerings across North America through our principal office in Austin, Texas and from our processing hubs in California, Tennessee, Nebraska, New York, Florida, Vermont, and Washington. 

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. We used the proceeds to pay down debt. In July 2020 we finalized our working capital adjustment and received escrow funds of $1,687. For further information regarding the transaction, see Note 10 to the accompanying consolidated financial statements.

We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with the rules and regulations of the Securities and Exchange Commission and accordingly, they do not include all information and footnotes required under U.S. generally accepted accounting principles ("U.S. GAAP") for complete financial statements. Certain reclassifications were made to conform to the current period presentation in the condensed consolidated statements of comprehensive loss. These reclassifications include a change in the presentation of revenues.

In the opinion of management, these interim financial statements contain all adjustments, consisting of normal, recurring adjustments, necessary for a fair presentation of our financial position as of June 30, 2020 and the results of operations, statements of changes in stockholders' equity for the three and six months ended June 30, 2020 and June 30, 2019, and our statements of cash flows for the six months ended June 30, 2020 and June 30, 2019.

These condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto filed with the Securities and Exchange Commission in our annual report on Form 10-K for the fiscal year ended December 31, 2019. The results for the interim periods are not necessarily indicative of results for a full fiscal year.

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

Preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are subjective in nature and involve judgments. The more significant estimates made by management include the valuation allowance for the gross deferred tax assets, useful lives of fixed assets, the determination of the fair value of its long-lived assets, and the fair value of assets acquired and liabilities assumed during acquisitions. We base our estimates on historical experience and on various other assumptions management believes reasonable under the given circumstances.  These estimates could be materially different under different conditions and assumptions.  Additionally, the actual amounts could differ from the estimates made. Management periodically evaluates estimates used in the preparation of the consolidated financial statements for continued reasonableness. We make appropriate adjustments, if any, to the estimates used prospectively based upon such periodic evaluation.

ASURE SOFTWARE, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data unless otherwise noted)

SIGNIFICANT RISKS AND UNCERTAINTIES

The COVID-19 pandemic has resulted in a global economic slowdown and disruptions that have and could continue to negatively impact our business. The pandemic and numerous measures implemented to contain the virus such as business shutdowns, shelter-in-place orders and travel bans and restrictions have caused businesses, especially small and medium sized businesses some of whom are our customers, to reduce headcount or cease operations as customer demand decreased. Given the economic slowdown and other risks and uncertainties associated with the pandemic, we expect that our business, financial condition, results of operations and growth prospects will be adversely affected in the future. Our business is impacted by employment levels as we have contracts that charge clients on a per-employee basis. In addition, the conditions caused by the COVID-19 pandemic could adversely affect our customers’ ability or willingness to purchase our offerings, delay prospective customers’ purchasing decisions, delay the provisioning of our offerings, lengthen payment terms, reduce the value or duration of customer subscription contracts, or affect attrition rates, all of which could adversely affect our future sales, operating results and overall financial performance.

The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions and the impact of these and other factors on our employees, customers, partners and vendors. If we are not able to respond to and manage the impact of such events effectively, our business will be harmed.

RECENT ACCOUNTING PRONOUNCEMENTS

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurement (Topic 820). The new guidance modifies disclosure requirements related to fair value measurement.  We adopted the standard on January 1, 2020. The adoption of this standard did not have an impact on our financial statements and disclosures.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40). The new guidance reduces complexity for the accounting for costs of implementing a cloud computing service arrangement and aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). We adopted the standard on January 1, 2020 prospectively to all implementation costs incurred after the date of adoption. The effects of this standard on our financial position, results of operations and cash flows were not material.

Standards Yet to Be Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses. ASU 2016-13 requires organizations to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. As we are a smaller reporting company, ASU 2016-13 is effective for us beginning January 1, 2023. We are currently evaluating the impact, if any, the adoption will have on our financial position and results of operations.

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. ASU 2019-12 eliminates certain exceptions related to the approach for intra-period 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 aspects of the accounting for income taxes. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. We are currently evaluating the impact, if any, the adoption will have on our financial position and results of operations.

ASURE SOFTWARE, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data unless otherwise noted)

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 June 30, 2020, we were not a party to any pending legal proceedings that are material to our business.

NOTE 3 – INVESTMENTS AND FAIR VALUE MEASUREMENTS

As of June 30, 2020 and December 31, 2019, funds held for clients invested in available-for-sale securities consisting of government and commercial bonds, including mortgage-backed securities, amounted to $27,591 and $24,136, respectively. As of June 30, 2020 and December 31, 2019, funds held for clients invested in money market funds and other cash equivalents amounted to $47,694 and $48,500, respectively. Additionally, as of June 30, 2020, we had $16,505 in money market funds, classified as cash equivalents. Cash equivalents as of December 31, 2019 were not material.

Investments classified as available-for-sale consisted of the following:

ASURE SOFTWARE, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data unless otherwise noted)

Expected maturities of available-for-sale securities as of June 30, 2020 are as follows:

Accounting Standards Codification (“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:

ASURE SOFTWARE, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data unless otherwise noted)

The following table presents the fair value hierarchy for our financial assets measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019, respectively:

NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETS

As of June 30, 2020 and December 31, 2019, goodwill was $68,697, which is net of the $35,060 impairment loss recognized in the fourth quarter of 2019. The Company evaluates the recoverability of goodwill annually and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. As of June 30, 2020, there has been no impairment of goodwill based on the quantitative assessments performed by the Company.

ASURE SOFTWARE, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data unless otherwise noted)

The gross carrying amount and accumulated amortization of our intangible assets as of June 30, 2020 and December 31,  2019 are as follows:

We record amortization expenses using the straight-line method over the estimated useful lives of the intangible assets, as noted above.  Amortization expenses recorded in Operating Expenses were $2,349 and $2,403, for the three months ended June  30,  2020 and 2019, respectively. Amortization expenses recorded in Cost of Sales were $397 and $360 for the three months ended June 30, 2020 and 2019, respectively.

Amortization expenses recorded in Operating Expenses were $4,698 and $4,821, for the six months ended June 30, 2020 and 2019, respectively. Amortization expenses recorded in Cost of Sales were $828 and $720 for the six months ended June 30, 2020 and 2019, respectively. There is no impairment of intangibles during the six months ended June 30, 2020 based on the qualitative assessment performed by the Company.

ASURE SOFTWARE, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data unless otherwise noted)

The following table summarizes the future estimated amortization expense relating to our intangible assets as of June  30,  2020:

NOTE 5 – NOTES PAYABLE

The following table summarizes our outstanding debt as of the dates indicated:

The following table summarizes the debt issuance costs as of the dates indicated based:

ASURE SOFTWARE, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data unless otherwise noted)

The following table summarizes the future principal payments related to our outstanding debt as of June 30, 2020:

Term Loan - Wells Fargo

In March 2014, we entered into a credit agreement (the “Credit Agreement”) with Wells Fargo, as administrative agent, and the lenders that are party thereto. The Credit Agreement contains customary events of default, including, among others, payment defaults, covenant defaults, judgment defaults, bankruptcy and insolvency events, cross defaults to certain indebtedness, incorrect representations or warranties, and change of control. In some cases, the defaults are subject to customary notice and grace period provisions. In March 2014 and in connection with the Credit Agreement, we and our wholly owned active subsidiaries entered into a Guaranty and Security Agreement with Wells Fargo Bank. Under the Guaranty and Security Agreement, we and each of our wholly owned active subsidiaries have guaranteed all obligations under the Credit Agreement and granted a security interest in substantially all of our and our subsidiaries’ assets.

In December 2019, we entered into a third amended and restated credit agreement (the “Third Restated Credit Agreement”) with Wells Fargo Bank, as agent and lender, amending and restating the terms of the Second Amended and Restated Credit Agreement dated as of March 2018. The Third Restated Credit Agreement provided for $20,000 in term loans and a $10,000 revolver. It also amended the applicable margin rates for determining the interest payable on loans and amended certain of our financial covenants, including adding a covenant based on achieving 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 was in lieu of a leverage covenant calculated at March 31, 2020, June 30, 2020 and September 30, 2020 See Note 12 - Subsequent Events for information regarding amendments that Wells Fargo Bank and we have made to the Third Restated Credit Agreement after June 30, 2020.

PPP Loan

In April 2020, Asure entered into a Promissory Note (the “PPP Note”) with Pinnacle Bank as the lender (the “Lender”), pursuant to which the Lender agreed to give us a loan under the Paycheck Protection Program (the "PPP Loan") offered by the U.S. Small Business Administration (the “SBA”) in a principal amount of $8,856 pursuant to Title 1 of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”).

The PPP Loan proceeds are available to be used to pay for payroll costs, including salaries, commissions, and similar compensation, group health care benefits, and paid leaves. Under the Cares Act, the PPP loan may be forgiven if certain criteria are satisfied. The amount that will be forgiven will be calculated in part with reference to the Company’s full time headcount during the twenty-four week period following the funding of the PPP Loan. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loans granted under the Cares Act. The PPP Loan is subject to forgiveness to the extent proceeds are used for payroll costs, including payments required to continue group health benefits, and certain rent, utility, and mortgage interest expenses (collectively, “Qualifying Expenses”), pursuant to the terms and limitations of the Cares Act. The Company intends to use a significant majority of the PPP Loan amount for Qualifying Expenses. However, no assurances is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part.

The interest rate on the PPP Note is a fixed rate of 1% per annum. To the extent that the amounts owed under the PPP Loan, or a portion of them, are not forgiven, the Company will be required to make principal and interest payments in monthly installments beginning seven months from April 2020. The PPP Note matures in two years.

ASURE SOFTWARE, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data unless otherwise noted)

The PPP Note includes events of default. Upon the occurrence of an event of default, the Lender will have the right to exercise remedies against the Company, including the right to require immediate payment of all amounts due under the PPP Note.  

Revolving Credit Facility

As of June 30, 2020 and December 31, 2019, no amount was outstanding and $9,500 and $10,000, respectively, was available for borrowing under the revolver.

   Due to the effects of Covid-19 on our business, we were not in compliance with our minimum EBITDA financial covenant as of March 31, 2020 and June 30, 2020 and do not expect to be in compliance with the minimum EBITDA financial covenants as set forth in the Third Restated Credit Agreement in future quarters. These covenants were set  in December 31, 2019, before the Covid-19 pandemic and its possible effects on our business were known to our senior lender or us. See Note 12 – Subsequent Events for information about the amendment we entered with our senior lender resetting these financial covenants and expectations regarding cash available for future business needs and our ability to comply with our financial covenants in future quarters.

NOTE 6 – STOCKHOLDERS’ EQUITY

Authorized Shares

On May 28, 2020, the Company amended its Restated Certificate of Incorporation to increase the total number of authorized shares of capital stock from 23,500,000 to 45,500,000 and the number of authorized shares of common stock from 22,000,000 to 44,000,000.

Share Repurchase Program

On March 10, 2020, our Board of Directors authorized a new stock repurchase program, under which we may repurchase up to $5,000 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.

While the program remains in place, there have been no repurchases in 2020 and 2019.

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 during pre-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 originally reserved for issuance. On May 27, 2020, our shareholders increased the number of shares reserved for issuance under the Purchase Plan by an additional 250,000 shares.

Accumulated Other Comprehensive Income (Loss)

As of June 30, 2020 and December 31, 2019, accumulated other comprehensive income (loss) consisted of net unrealized gains and losses on available-for-sale securities.

ASURE SOFTWARE, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data unless otherwise noted)

NOTE 7 – CONTRACTS WITH CUSTOMERS AND REVENUE CONCENTRATION

Receivables

Receivables from contracts with customers, net of allowance for doubtful accounts of $885 were $5,541 at June 30, 2020.  Receivables from contracts with customers, net of allowance for doubtful accounts of $904 were $4,808 at December 31, 2019. As of June 30, 2020, one customer represented 13% of our net accounts receivable balance. No customers represented more than 10% of our net accounts receivable balance as of December 31, 2019.

Deferred Commissions

Deferred commission costs from contracts with customers were $3,148 and $2,697 at June 30, 2020 and December 31, 2019, respectively. The amount of amortization recognized for the three and six months ended June 30, 2020 was $190 and $440, respectively and for the three and six months ended June 30, 2019 was $471 and $591, respectively.

Deferred Revenue

During the three and six months ended June 30, 2020, revenue of $689 and $3,393, respectively, and the three and six months ended June 30, 2019, revenue of $631 and $2,214, respectively, was recognized from the deferred revenue balance at the beginning of each period.

Transaction Price Allocated to the Remaining Performance Obligations

As of June 30, 2020, approximately $27,272 of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 65% of these remaining performance obligations over the next 12 months, with the balance recognized thereafter.

Revenue Concentration

During the three and six months ended June 30, 2020 and 2019, there were no customers that individually represented 10% or more of consolidated revenue.

 NOTE 8 – LEASES

We have entered into office space lease agreements, which qualify as operating leases under Topic 842. Under such leases, the lessors receive annual minimum (base) rent. The leases have original terms (excluding extension options) ranging from one to ten years. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

We record base rent expense under the straight-line method over the term of the lease. In the accompanying condensed consolidated statements of comprehensive loss, rent expense is included in operating expenses under selling, general and administrative expenses. The components of the rent expense for the three and six months ended June 30, 2020 and 2019 were as follows:

ASURE SOFTWARE, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data unless otherwise noted)

For purposes of calculating the operating lease assets and lease liabilities, extension options are not included in the lease term unless it is reasonably certain we will exercise the option, or the lessor has the sole ability to exercise the option. The weighted average discount rate of our operating leases is 10% and 9% as of June 30, 2020 and December 31, 2019, respectively. The weighted average remaining lease term is five and six years as of June 30, 2020 and December 31, 2019, respectively.

Supplemental cash flow information related to operating leases for the six months ended June 30, 2020 and 2019 follow:

Future minimum commitments over the life of all operating leases, which exclude variable rent payments, are as follows:

NOTE 9 – SHARE-BASED COMPENSATION

We have one active equity plan, the 2018 Incentive Award Plan (the “2018 Plan”). The 2018 Plan, approved by our shareholders, replaced our 2009 Equity Incentive Plan, as amended (the “2009 Plan”), however, the terms and conditions of the 2009 Plan continues to govern any outstanding awards previously granted under the 2009 Plan.

The number of shares available for issuance under the 2018 Plan is equal to the sum of (i) 2,350,000 shares, and (ii) any shares subject to issued and outstanding awards under the 2009 Plan as of the effective date of the 2018 Plan that expire, are canceled or otherwise terminate following the effective date of the 2018 Plan. We have outstanding options to purchase 1,366,692 shares at a weighted average exercise price of $7.77. During the three and six months ending June 30, 2020 we issued 481,500 and 544,500 of employee stock options, respectively. The weighted average exercise price of these awards was $6.42 and $6.36 for the three and six months ended June 30, 2020, respectively, these awards will vest over a three-year period. We also had 585,050 outstanding restricted stock units as of June 30, 2020.

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.

ASURE SOFTWARE, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data unless otherwise noted)

As of June 30, 2020, we had 1,096,104 shares available for grant pursuant to the 2018 Plan.

Share based compensation for our stock option plans for the three months ended June 30, 2020 and June 30, 2019 was $588 and $392, respectively and for the six months ended June 30, 2020 and June 30, 2019 was $1,026 and $1,003, respectively. We issued 58,479 and 85,000 shares of common stock related to exercises of stock options for the three months ended June 30, 2020 and 2019, respectively. We issued 7,213 and 8,000 shares of common stock related to the issuance of vested restricted stock units for the three months ended June 30, 2020 and 2019, respectively.

NOTE 10 – DISCONTINUED OPERATIONS

In December 2019, we sold our Workspace Management business to FM:Systems for approximately $121,500 in cash, of which $1,685 is held in escrow and is included in prepaid expenses and other current assets in the condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019. The purchase price is subject to a working capital adjustment. This transaction enables us to focus on and continue to deliver our HCM solutions to small and mid-size businesses.

The table below reflects the operating results of the Workspace Management business reported as discontinued operations during the three and six months ended June 30, 2019.

The table below reflects the depreciation, amortization, capital expenditures, and significant operating and investing non-cash items of the Workspace Management business reported as discontinued operations during the three and six months ended June 30, 2019:

NOTE 11 – NET LOSS PER SHARE

We compute net loss per share based on the weighted average number of common shares outstanding for the period.  Diluted net loss per share reflects the maximum dilution that would have resulted from incremental common shares issuable upon the exercise of stock options.  We compute the number of common share equivalents, which includes stock options, using the treasury stock method. We have excluded stock options and restricted stock units of approximately 1,951,000 and 1,502,000 shares for the three and six months ended June 30, 2020 and 2019, respectively, from the computation of the diluted shares because the effect of including the stock options and restricted stock units would have been anti-dilutive.

ASURE SOFTWARE, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data unless otherwise noted)

The following table sets forth the computation of basic and diluted net loss per common share for the three and six months ended June 30, 2020 and June 30, 2019:

NOTE 12 – SUBSEQUENT EVENTS

The Company evaluated subsequent events through the date of the filing of this Quarterly Report on Form 10-Q with the SEC, to ensure that this filing includes appropriate disclosure of events both recognized in the condensed consolidated financial statements as of June 30, 2020, and events which occurred subsequent to June 30, 2020 but were not recognized in the condensed consolidated financial statements.

On July 7, 2020, our senior lender identified certain events of default under our Third Restated Credit Agreement and reserved their rights to pursue their remedies under the Credit Agreement as a result of the events of default. Then, on July 10, 2020, our senior lender issued a reservation of rights letter related to these events of default. The primary event of default that triggered the reservation of rights letter was our failure to achieve Minimum EBITDA of $3,750 for the first quarter ending March 31, 2020, as required under Section 7 of the Credit Agreement, which failure was a result of impacts to our business driven primarily by COVID-19. The other events of default were technical defaults resulting from the fact that we were either unaware that our senior lender was considering the failure to achieve Minimum EBITDA an event of default as of May 11, 2020 or because we were unaware that the senior lender was still requiring that we provide certain requested documents in connection with our banking relationship. Under the reservation of rights letter, the senior lender began accruing default interest from May 11, 2020, which we would have been required to pay on July 31, 2020. Our senior lender extended the date by which we would be required to pay the accrued default interest to August 10, 2020 as we were negotiating an amendment to the Third Restated Credit Agreement.

On August 10, 2020, we entered into a waiver and amendment to our Third Restated Credit Agreement and our Amended and Restated Guaranty and Security Agreement (the “Fourth Amendment”).

ASURE SOFTWARE, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data unless otherwise noted)

As amended by the Fourth Amendment, the Third Restated Credit Agreement now provides for $10,000 in term loans and a $5,000 revolver, requiring that we make a principal payment of $9,750 on our outstanding term loans and reducing future availability on our revolver by $5,000. The Fourth Amendment also re-amortized the outstanding principal amount of the term loan, which is now payable as follows:

In addition, the Fourth Amendment requires a LIBOR floor of 1.00% and sets the Applicable Margin at the highest level through September 30, 2021. The Applicable Margin is currently at 4.25%.

The outstanding principal balance and all accrued and unpaid interest on the term loans is due on December 31, 2024. The Fourth Amendment provides for an accordion feature to our term loan that would allow us to borrow up to an additional $15,000 in term loans subject to certain conditions following the Covenant Conversion Date, which is described below.

The Fourth Amendment also reset our financial covenants as follows:

The Fourth Amendment does not require that we meet our fixed charge ratio or leverage ratio covenant until the Covenant Conversion Date. For this purpose, the Coverage Conversion Date is the earlier of August 10, 2022 or the date in which we have satisfied the fixed charge coverage ratio and leverage ratio for two consecutive reporting periods. Until such time, we are only obligated to comply with our minimum EBITDA and minimum recurring revenue covenants. 

In addition to the requirement that we pay $9,750 on our outstanding term loans, we were also required to pay our senior lender an amendment fee of $225. Our senior lender waived the payment of default interest that had accrued since May 11, 2020 and stopped assessing default interest as of August 10, 2020. Our senior lender further waived any prepayment penalty that would have otherwise been due on the $9,750 payment toward our term loan and agreed that we would not owe a prepayment penalty if we were to refinance our facility before December 31, 2021. Finally, as a condition to the amendment, our senior lender required that we agree to obtain lender consent for any acquisitions until the later of August 10, 2021 or the Covenant Conversion Date. Previously certain types of acquisitions were deemed permitted acquisitions, which did not require our lender’s consent. We do not anticipate an issue with obtaining consent from our lender for accretive acquisitions.

We had sufficient cash on hand to make the required payment of $9,750 in connection with the Fourth Amendment and expect to have enough cash on hand to meet our future business needs. Further, we expect to comply with our financial covenants in future quarters under the Third Restated Credit Agreement, as amended by the Fourth Amendment.

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 “believe,” “estimate,” “continue," "seek," plan,” “expect,” "intend," “anticipate,” “may,” "will," “could” and other similar expressions. Although these forward-looking statements reflect management’s current plans and expectations, which we believe are reasonable as of the filing date of this report, they inherently are subject to certain risks and uncertainties. These risks and uncertainties include — but are not limited to — our ability to achieve or sustain profitability; the impact of COVID-19 on the US and global economy, including business disruptions, reductions in employment and a decrease in business failures, specifically among our clients; adverse changes in the economy, financial markets, and credit markets, including a continuing high unemployment rate and the impact of low interest rates on the interest we receive on our cash, cash equivalents and investments; delays or reductions in information technology spending;  the development of the market for cloud-based workplace applications; product development; market acceptance of new products and product improvements; changes in the forgiveness provisions for loans under the Paycheck Protection Program; our ability to retain or increase our customer base;  security breaches; errors, disruptions or delays in our services; privacy concerns and laws; changes in our sales cycle; competition, including pricing pressures, entry of new competitors, and new technologies; intellectual property enforcement and litigation; our ability to obtain additional capital; our ability to hire, retain and motivate employees; our ability to manage our growth; our ability to realize benefits from acquisitions; limited or single sources of supply of key components; the level of our indebtedness; changes in sales may not be immediately reflected in our operating results due to our subscription model; changes in U.S and foreign laws and regulations; changes in the Internet infrastructure; disruptions in computing and communication infrastructure; and changes in accounting standards. Please refer to Part II, Item IA, “Risk Factors” of this Form 10-Q and Part I, Item IA, “Risk Factors” of our most recently filed Annual Report on Form 10-K for a further description of these and other factors. 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.

OVERVIEW

The following review of Asure’s financial position as of June 30, 2020 and December 31, 2019, and results of operations for the three and six months ended June 30, 2020 and 2019 should be read in conjunction with our 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Asure’s internet website address is http://www.asuresoftware.com. Our 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 our internet website free of charge as soon as reasonably practicable after they are electronically filed, or furnished to, the Securities and Exchange Commission. Asure’s internet website and the information contained in our website or connected to our website is not incorporated into this Quarterly Report on Form 10-Q.

Asure is a leading provider of cloud-based Human Capital Management (“HCM”) software and services and, until its divestiture in December 2019, Workspace Management software solutions. Asure helps small and mid-sized companies grow by helping them build better teams with skills that get them to the next level, stay compliant with ever changing federal, state, and local tax jurisdictions and labor laws, and better allocation of cash so they can spend their financial capital on growing their business rather than back-office overhead that suffocates growth. Asure’s Human Capital Management suite, named AsureHCM, includes cloud-based Payroll & Tax, HR, and Time & Attendance software as well as HR Services ranging from HR projects to completely outsourcing payroll and HR staff. We also offer these products and services through our network of reseller partners.

Asure’s platform vision is to help clients grow their business and become the most trusted HCM 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 AsureHRServices.

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).

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 directly to SMBs and their trusted advisors which include CPAs, banks, and benefits brokers who frequently refer their clients to HCM vendors. Our indirect model licenses our HCM software to resellers that provide value-add HCM services to their clients. These resellers include pure-play payroll providers focused on a geographic or industry niche as well as CPAs, banks, and benefits brokers that want to expand relationships with their clients directly without referring those clients outside their business.

Recent Developments

The COVID-19 outbreak has disrupted businesses on a global scale. The rapid spread has resulted in authorities around the world implementing numerous measures to contain the virus, such as business shutdowns, quarantines, shelter-in-place orders and travel bans and restrictions. The pandemic and these containment measures have had, and are expected to continue to have, a substantial negative impact on businesses, especially SMBs. We expect a COVID-19 related decrease in customer demand across all our markets to negatively and materially impact our revenues for the remainder of 2020, with the most significant impact currently expected in the second and third quarters. We implemented cost-saving initiatives in the first quarter of 2020. In April 2020, we entered into a loan under the Paycheck Protection Program (“PPP”) offered by the U.S. Small Business Administration in a principal amount of $8,856. We did not record any asset impairments or bad debt reserves related to COVID-19 during the first two quarters of 2020, but future events may require such charges. We will continue to evaluate the nature and extent of the COVID-19 outbreak’s impact on our financial condition, results of operations and cash flows.

RESULTS OF OPERATIONS

($ in thousands)

Three and Six Months Ended June 30, 2020 Compared to Three and Six Ended June 30, 2019

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

Revenue

Our revenue was derived from the following sources:

Total revenue represents our consolidated revenues, including sales of our payroll and tax services, time and attendance and human resource software, as well as complementary hardware devices to enhance our software products. Recurring revenue consists of cloud revenue, hardware as a service, maintenance and support revenue and interest earned on client funds. Professional services, hardware and other revenue consists of hardware revenue, on-premise software license revenue as well as installation services and other professional services revenue.  Revenue mix varies by product.

Revenue for the three months ended June 30, 2020 was $14,115, a decrease of $3,159, or 18.3%, from $17,274 for the three months ended June 30, 2019, which excludes revenue from discontinued operations. Recurring revenue decreased primarily due to the impact of COVID, the loss of one major client and lower interest rates.

Revenue for the six months ended June 30, 2020 was $33,061, a decrease of $4,623, or 12.3%, from $37,684 for the six months ended June 30, 2019, which excludes revenue from discontinued operations. Recurring revenue decreased primarily due to the impact of COVID, the loss of one major client, and lower interest rates.

Although our total customer base is widely spread across industries, our HCM sales are concentrated in small to mid-size businesses.  We continue to target small and medium-sized businesses across industries as prospective customers.  Geographically, we sell our HCM 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 three months ended June 30, 2020 was $8,107, a decrease of $2,108 or 20.6%, from $10,215 for the three months ended June 30, 2019. Gross margin as a percentage of revenue was 57.4% for the three months ended June 30, 2020 as compared to 59.1% for the three months ended June 30, 2019. Our decline in gross margin is primarily attributable to lower sales volumes, a growing investment in HCM service resources and personnel, a migration to secure cloud hosting services and an increase in the amortization of capitalized software costs.

Consolidated gross profit for the six months ended June 30, 2020 was $19,213, a decrease of $5,158 or 21.2%, from $24,371 for the six months ended June 30, 2019. Gross margin as a percentage of revenue was 58.1% for the six months ended June 30, 2020 as compared to 64.7% for the six months ended June 30, 2019. Our decline in gross margin is attributable to lower sales volumes, a growing investment in HCM service resources and personnel, increased amortization of capitalized software costs as well as migration to secure cloud hosting services.

Sales and Marketing Expenses

Sales and marketing expenses primarily consist of salaries and related expenses, including stock-based expenses, for sales and marketing staff, including commissions, as well as marketing programs, which include events, corporate communications and product marketing activities.

Selling and marketing expenses for the three months ended June 30, 2020 were $2,769, a decrease of $289 from $3,058 for the three months ended June 30, 2019. The decline in sales and marketing is primarily attributable to reduced travel expenses as a result of travel restrictions due to the COVID-19 virus.  Sales and marketing expenses as a percentage of revenue increased to 19.6% for the three months ended June 30, 2020 from 17.7% for the same period in 2019 primarily due to lower sales volumes.

Selling and marketing expenses for the six months ended June 30, 2020 were $6,344, an increase of $581 from $5,763 for the six months ended June 30, 2019, primarily due to increased personnel costs as we focus on hiring direct sales personnel, We continue to expand and increase selling costs as we focus on hiring direct sales personnel, expanding recognition of our brand, and lead generation.  Selling and marketing expenses as a percentage of revenue increased to 19.2% for the six months ended June 30, 2020 from 15.3% for the same period in 2019.

We 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 three months ended June 30, 2020 were $5,193, a decrease of $1,425 from $6,618 for the three months ended June 30, 2019, primarily attributable to reduced personnel costs and reduced rent expenses associated with closures of certain facilities we had acquired due to acquisition.   General and administrative expenses as a percentage of revenue decreased to 36.8% for the three months ended June 30, 2020 from 38.3% for the same period in 2019.

General and administrative expenses for the six months ended June 30, 2020 were $11,646, a decrease of $3,161 from $14,807 for the six months ended June 30, 2019. The decline in general and administrative expenses is primarily attributable to a reduction in professional fees that were incurred in the six months ended June 30, 2019, as well as reduced rent expenses associated with closures of certain facilities, we had acquired due to acquisition.  General and administrative expenses as a percentage of revenue decreased to 35.2% for the six months ended June 30, 2020 from 39.3% for the same period in 2019.

We continue to drive efficiencies within our payroll operations and execute vendor rationalization with the sale of the Workspace Management business in the fourth quarter of 2019.

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 three months ended June 30, 2020 were $1,377, an increase of $408, or 42.1%, from $969 for the three months ended June 30, 2019. The increase in R&D expense is primarily attributable to increased personnel costs as well as COVID-19 related initiatives in order to comply with the CARES Act legislation. R&D expenses as a percentage of revenues increased to 9.8% for the three months ended June 30, 2020 from 5.6% for the same period in 2019.

R&D expenses for the six months ended June 30, 2020 were $2,551, an increase of $261, or 11.4%, from $2,290 for the six months ended June 30, 2019. The increase in R&D expense is primarily attributable to COVID-19 related initiatives in order to comply with the CARES Act. R&D expenses as a percentage of revenues increased to 7.7% for the six months ended June 30, 2020 from 6.1% for the same period in 2019.

We will continue to enhance our products and technologies through expansion of our technological resources by increasing headcount and development partnership, as well as through organic improvements and acquired intellectual property. We will continue to expand the breadth of integration between our solutions, allowing direct clients and resellers the ability to easily add and implement components across our entire solution set. We believe that our expanded investment in product, engineering, SaaS hosting, mobile and hardware technologies lays the groundwork for broader market opportunities and represents a key aspect of our competitive differentiation. Native mobile applications, QR Code integration, expanded web service integration and other technologies are all part of our initiatives.

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 dollars into compliance and certifications, including SOC I Type 2 and SOC II Type 2 certifications, GDPR, CCPA, and other initiatives.

In the second quarter of 2020, we launched the new Simple Payroll Entry cloud solution for providing clients self-service payroll entry capabilities, with a modern user experience appropriate for small companies. For Asure HR, we developed a new product tier for Advanced HR called Essential HR. Asure Time & Attendance launched our next major release 12.4. Mid-Market HCM released the Asure Mobile app in the Google and Apple stores. The app provides employees quick access to key payroll and benefit information.

Amortization of Intangible Assets

Amortization expense for the three months ended June 30, 2020 of $2,349 was consistent with amortization expense of $2,403 for the three months ended June 30, 2019. Amortization expense as a percentage of revenue was 16.6% and 13.9% for the three months ended June 30, 2020 and 2019, respectively.

Amortization expense for the six months ended June 30, 2020 of $4,698 was consistent with amortization expense of $4,821 for the six months ended June 30, 2019. Amortization expense as a percentage of revenue was 14.2% and 12.8% for the six months ended June 30, 2020 and 2019, respectively.

Interest Expense and Other, net

Interest expense and other, net for the three months ended June 30, 2020 was a gain of $14 compared to a loss of $3,069 for the three months ended June 30, 2019. Interest expense and other as a percentage of revenue was at 0.1% and (17.8%) for the three months ended June 30, 2020 and June 30, 2019, respectively.  Interest expense and other for the three months ended June 30, 2020 is composed of income from the transition services agreement with FM:Systems in relation to the sale of the Workspace business in 2019, offset by interest expense on notes payable. Interest expense and other for the three months ended June 30, 2019 is composed primarily of interest expense on notes payable.

Interest expense and other, net for the six months ended June 30, 2020 was a gain of $710 compared to a loss of $5,783 for the six months ended June 30, 2019. Interest expense and other as a percentage of revenue was at 2.1% and (15.3%) for the six months ended June 30, 2020 and June 30, 2019, respectively.  Interest expense and other for the six months ended June 30, 2020 is composed of income from the transition services agreement with FM:Systems in relation to the sale of the Workspace business in 2019, offset by interest expense on notes payable. Interest expense and other for the six months ended June 30, 2019 is composed primarily of interest expense on notes payable.

Income Taxes

For the three months ended June 30, 2020 and 2019, we recorded an income tax expense attributable to continuing operations of $377 and $396, respectively, a decrease of $19, or 4.8%. For the six months ended June 30, 2020 and 2019, we recorded an income tax expense attributable to continuing operations of $395 and $642, respectively, a decrease of $247, or 38.4%, primarily attributable to a reduction in our deferred tax liabilities.

Loss From Continuing Operations

We incurred a loss from continuing operations of $3,944, or $0.25 per share, during the three months ended June 30, 2020, compared to a loss from continuing operations of $6,298, or $0.41 per share, during the three months ended June 30, 2019. Loss from continuing operations as a percentage of total revenues was 27.9% and 36.5% for the three months ended June 30, 2020 and 2019, respectively.

We incurred a loss from continuing operations of $5,711, or $0.36 per share, during the six months ended June 30, 2020, compared to a loss from continuing operations of $9,735, or $0.63 per share, during the six months ended June 30, 2019. Loss from continuing operations as a percentage of total revenues was 17.3% and 25.8% for the six months ended June 30, 2020 and 2019, respectively.

We intend to continue to implement our corporate strategy for growing our 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, including the effects of COVID-19, and there can be no assurance that we can successfully grow our revenues or achieve profitability during the remainder of fiscal year 2020.

LIQUIDITY AND CAPITAL RESOURCES (Amounts in thousands)

Working Capital.  We had working capital of $10,513 at June 30, 2020, a decrease of $7,341 from working capital of $17,854 at December 31, 2019. Working capital as of June 30, 2020 and December 31, 2019 includes $3,766 and $5,500 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. The decrease in working capital is primarily due to a $9,750 reclassification of outstanding principal on our credit facility from current to short term.

Operating Activities.  Net cash used in operating activities of $4,131 for the six months ended June 30, 2020 was primarily driven by a net loss of $5,711. Non-cash adjustments to our net loss by approximately $881 due to a reduction in the amortization of our deferred financing costs and adjustments made to our allowance for doubtful accounts. Changes in operating assets and liabilities resulted in an increased use of cash of $8,242.

Investing Activities.  Net cash provided by investing activities of $29,891 for the six months ended June 30, 2020 is primarily due to the net change in funds held for clients. Net cash provided by investing activities of $21,396 for the six months ended June 30, 2019 is primarily due to the net change in funds held for clients offset by the acquisition of Payroll Maxx in the first quarter of 2019.

Financing Activities.  Net cash used in financing activities was $25,327 for the six months ended June 30, 2020, which primarily consisted of a net decrease in client fund obligations of $32,370 and payments of notes payable of $2,359 offset by proceeds of notes payable of $8,856. Net cash used in financing activities was $25,042 for the six months ended June 30, 2019. We incurred $8,000 of indebtedness, resulting in a source of cash. This was offset by debt financing fees of $1,102 and the net change in client fund obligations of $32,238.

Sources of Liquidity. As of June 30, 2020, Asure’s principal sources of liquidity consisted of approximately $29,259 of cash and cash equivalents, cash generated from operations of our business over the next twelve months, and $9,500 available for borrowing under our Wells Fargo revolver. Our cash and cash equivalents is offset by $33,882 in notes payable. Accordingly, after reviewing the terms of the Third Restated Credit Agreement and in light of the impact of COVID-19 on our business and the related need to support our operations, we entered into a loan with Pinnacle Bank under the Paycheck Protection Program (the “PPP Loan”) offered by the U.S. Small Business Administration amounting to $8,856 pursuant to Title 1 of the Coronavirus Aid, Relief and Economic Security Act (the “Cares Act”). The PPP Loan proceeds are available to be used to pay for payroll costs, including salaries, commissions, and similar compensation, group health care benefits, and paid leaves. . Under the Cares Act, the PPP loan may be forgiven if certain criteria are satisfied. The amount that will be forgiven will be calculated in part with reference to the Company’s full time headcount during the twenty-four week period following the funding of the PPP Loan. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loans granted under the Cares Act. The PPP Loan is subject to forgiveness to the extent proceeds are used for payroll costs, including payments required to continue group health benefits, and certain rent, utility, and mortgage interest expenses (collectively, “Qualifying Expenses”), pursuant to the terms and limitations of the Cares Act. The Company intends to use a significant majority of the PPP Loan amount for Qualifying Expenses. However, we make no assurances that  we will obtain forgiveness of the PPP Loan in whole or in part.

Due to the effects of Covid-19 on our business, we were not in compliance with our minimum EBITDA financial covenant as of March 31, 2020 and June 30, 2020 and do not expect to be in compliance with the minimum EBITDA financial covenants as set forth in the Third Restated Credit Agreement in future quarters. These covenants were set  in December 31, 2019, before the Covid-19 pandemic and its possible effects on our business were known to our senior lender or us.

On August 10, 2020, we entered into a waiver and amendment to our Third Restated Credit Agreement and our Amended and Restated Guaranty and Security Agreement (the “Fourth Amendment”).

As amended by the Fourth Amendment, the Third Restated Credit Agreement reduced our facility from $30,000 to $15,000, consisting of $10,000 in term loans and a $5,000 revolver. As a result, we were required to make a principal payment of $9,750 on our outstanding term loans. The Fourth Amendment provides for an accordion feature to our term loan that would allow us to borrow up to an additional $15,000 in term loans subject to certain conditions following the Covenant Conversion Date, which is described below.

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

The Fourth Amendment does not require that we meet our fixed charge ratio or leverage ratio covenant until the Covenant Conversion Date. For this purpose, the Coverage Conversion Date is the earlier of August 10, 2022 or the date in which we have satisfied the fixed charge coverage ratio and leverage ratio for two consecutive reporting periods. Until such time, we are only obligated to comply with our minimum EBITDA and minimum recurring revenue covenants. 

In addition to the requirement that we pay $9,750 on our outstanding term loans, we were also required to pay our senior lender an amendment fee of $225. Our senior lender waived the payment of default interest that had accrued since May 11, 2020 and stopped assessing default interest as of August 10, 2020. Our senior lender further waived any prepayment penalty that would have otherwise been due on the $9,750 payment toward our term loan and agreed that we would not owe a prepayment penalty if we were to refinance our facility before December 31, 2021. Finally, as a condition to the amendment, our senior lender required that we agree to obtain lender consent for any acquisitions until the later of August 10, 2021 or the Covenant Conversion Date. Previously certain types of acquisitions were deemed permitted acquisitions, which did not require our lender’s consent. We do not anticipate an issue with obtaining consent from our lender for accretive acquisitions.

We had sufficient cash on hand to make the required payment of $9,750 in connection with the Fourth Amendment and expect to have enough cash on hand to meet our future business needs. Further, we expect to comply with our financial covenants in future quarters under the Third Restated Credit Agreement, as amended by the Fourth Amendment.

OFF-BALANCE SHEET ARRANGEMENTS

As of June 30, 2020, we did not have any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission.

COMMITMENTS AND CONTINGENCIES

None.

CRITICAL ACCOUNTING POLICIES

Information regarding recent accounting pronouncements is provided in Note 2, Significant Accounting Policies, to the Condensed Consolidated Financial Statements. Such information is incorporated by reference herein.

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to our exposure from market risks from those disclosed in our 2019 Annual Report on Form 10-K.

ITEM 4.     CONTROLS AND PROCEDURES

Evaluation of Disclosure Control and Procedures

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for us.  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 June 30, 2020 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. During the fourth quarter of 2019, management reported a material weakness in the Company’s internal control over financial reporting.

Change in Internal Controls over Financial Reporting

Except for the remediation efforts on the material weakness noted above, during the period ended June 30, 2020, there were no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

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 June 30, 2020, we were not party to any pending legal proceedings that are material to our business.

ITEM 1A.    RISK FACTORS

Except as set forth below, there have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K, filed with the Securities Exchange Commission on March 16, 2020 (the “Form 10-K”), and investors are encouraged to review such risk factors prior to making an investment in the Company.

The effects of the COVID-19 pandemic have materially affected how we and our customers are operating our businesses, and the duration and extent to which this will impact our future results of operations and overall financial performance remains uncertain.

In December 2019, a novel coronavirus disease (“COVID-19”) was reported and in January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic. A significant outbreak of epidemic, pandemic, or contagious diseases in the human population could result in a widespread health crisis that could adversely affect the broader economies, financial markets and overall demand environment for our products.

As a result of the COVID-19 pandemic, we have temporarily closed our offices and several other impacted locations and implemented certain travel restrictions, both of which have begun to disrupt how we operate our business. We have shifted certain of our customer events to virtual-only experiences and we may deem it advisable to similarly alter, postpone or cancel entirely additional customer, employee or industry events in the future. Moreover, the conditions caused by the COVID-19 pandemic can affect the rate of IT spending and could adversely affect our customers’ ability or willingness to attend our events or to purchase our offerings, delay prospective customers’ purchasing decisions, adversely impact our ability to provide on-site consulting services to our customers, delay the provisioning of our offerings, lengthen payment terms, reduce the value or duration of their subscription contracts, or affect attrition rates, all of which could adversely affect our future sales, operating results and overall financial performance.

Our operations have also begun to be negatively affected by a range of external factors related to the COVID-19 pandemic that are not within our control. For example, many cities, counties, states, and even countries have imposed or may impose a wide range of restrictions on our employees, partners and customers physical movement to limit the spread of COVID-19. If the COVID-19 pandemic has a substantial impact on our employees, partners or customers attendance or productivity, our results of operations and overall financial performance may be harmed.

The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions and the impact of these and other factors on our employees, customers, partners and vendors. If we are not able to respond to and manage the impact of such events effectively, our business will be harmed and the effects of the COVID-19 pandemic could cause or contribute to the risks and uncertainties set forth in the Form 10-K.

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

On July 7, 2020, our senior lender identified certain events of default under our Third Amended and Restated Credit Agreement by and among Wells Fargo Bank, National Association as Administrative Agent, the lenders that are party thereto and us, dated December 31, 2019 (the “Credit Agreement”) and reserved their rights to pursue their remedies under the Credit Agreement as a result of the events of default. Then, on July 10, 2020, our senior lender issued a reservation of rights letter related to these events of default. The primary event of default that triggered the reservation of rights letter is our failure to achieve Minimum EBITDA of $3,750,000 for the first quarter ending March 31, 2020, as required under Section 7 of the Credit Agreement, which failure was a result of impacts to our business driven primarily by COVID-19. The other events of default were technical defaults resulting from the fact that we were either unaware that our senior lender was considering the failure to achieve Minimum EBITDA an event of default as of May 11, 2020 or because we were unaware that the senior lender was still requiring that we provide certain requested documents in connection with our banking relationship. Under the reservation of rights letter, the senior lender is accruing default interest from May 11, 2020, which we would have been required to pay on August 10, 2020. On August 10, 2020 we executed a waiver and amendment to the Credit Agreement, which is described in more detail under “Sources of Liquidity.” The amendment reset our financial covenants and waived the default in exchange for the payment of $9,750 in principal owed on our term loan and the payment of an amendment fee of $225 to our senior lender. Our senior lender also waived payment of a prepayment penalty.

ITEM 5.    OTHER INFORMATION

Kelyn Brannon resigned her position as chief financial officer and secretary, with her last day being August 10, 2020. Effective August 11, 2020, James (Jay) A. Powers was appointed as the Company’s chief financial officer and secretary. Ms. Brannon will be available through December 31, 2020 to assist Mr. Powers with the transition of her duties and responsibilities.

Mr. Powers, age 58, has over 25 years of increasing levels of financial and accounting leadership experience, with over seven years as chief financial officer. Since June 2019, Mr. Powers has been employed as the chief financial officer of Roadwire, Inc. Prior to that, he owned his own business, Powering Financial Performance LLC, serving in interim chief financial officer roles for a number of businesses. He has also served as chief financial officer for Active Power, Inc, now known as P10 Holdings, Inc from May 2013 to December 2018. During the last two years, there have been no transactions or proposed transactions by the Company in which Mr. Powers has had or is to have a direct or indirect material interest, and there are no family relationships between Mr. Powers and any of the Company’s other executive officers or directors.

We have agreed to pay Mr. Powers an initial annual base salary of $260,000 for his services, which will be increased to $315,000 when the Company determines to reinstate its executive officers’ full salaries, which were reduced as a cost savings measure in connection with the Covid-19 pandemic.  In addition, in 2020, Mr. Powers will be eligible for a cash bonus based on the Company’s profitability and other determining factors. The target amount of his cash bonus is 50% of his annual base salary, which will be pro-rated from his start date of August 10, 2020. We also granted Mr. Powers 10,000 restricted stock units (RSUs) and options to purchase 75,000 shares of our common stock at an exercise price equal to the closing price of our common stock on August 10, 2020, the date of the grant. Such RSUs will vest as follows: 1/3 on the first anniversary date of the grant date and the remaining 2/3rds will vest over the following 2 year period in substantially equal quarterly installments. Such options will vest as follows: 1/3 on the first anniversary of the grant date and the remaining 2/3rds will vest over the following 2 year period in substantially equal monthly installments. The RSUs and options will be granted under, and be subject to the terms of, our 2018 Incentive Award Plan. In addition, we have agreed that if we terminate Mr. Powers for any reason other than gross misconduct, he will receive severance pay equal to three (3) months’ of his then current base salary, plus the employer’s portion of the health care premium for continuation coverage under COBRA, also for a period of three months, provided that he has executed a general release of claims.

Mr. Powers is expected to enter into our standard form of indemnification agreement and to be a participant in our Executive Change in Control Severance Plan. The form of indemnification agreement and our Executive Change in Control Severance Plan have been filed as Exhibits 10.1 and 10.2 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on December 21, 2017, and are incorporated herein in their entirety by reference.

In connection with her resignation and the transition of her duties and responsibilities to Mr. Powers, the Company has offered Ms. Brannon severance to include: (a) $131,968.36 of severance pay, and (b) the acceleration of the vesting of 30,011 stock options and 22,499 restricted stock units granted to Ms. Brannon during her employment with the Company. The Company’s offer of severance is subject to customary conditions, including the execution of a general release of claims. Pursuant to applicable law, Ms. Brannon has a period of twenty-one days to review our offer of severance.

Dollars reflected in this Item 5 are actual dollars, not thousands.

ITEM 6.     EXHIBITS

* Filed herewith

** Compensatory plan or arrangement

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.