NOTE 4 – ACQUISITIONS

2018 Acquisitions

In January 2018, we acquired all of the outstanding shares of common stock of Pay Systems of America, Inc. (“Pay Systems”), a provider of HR, payroll and employee benefits services. The aggregate consideration for the shares consisted of (i) $14,152 in cash and (ii) a subordinated promissory note (the “Pay Systems Note”) in the principal amount of $1,572 subject to adjustment, We funded the cash payment with cash on hand. The Pay Systems Note bears interest at an annual rate of 2.0% and is payable in two installments – one-half, plus accrued interest, on July 1, 2018 and the remaining principal balance and accrued interest on January 1, 2019.

In January 2018, we also completed the acquisitions of two other companies that are current resellers of our leading Human Resource Information System platform (“Evolution HCM”). We funded these two acquisitions with cash on hand, subordinated promissory notes and shares of Asure common stock.

In April 2018, we acquired all of the assets of a provider of outsourced HR, consulting, and professional services around payroll and employee benefits; and we acquired all of the share capital of a provider of a sensor-based solution that allows organizations across the world to streamline operations, create efficiencies, enhance productivity, and analyze employee engagement. We funded these acquisitions with cash (using borrowed funds under our Second Restated Credit Agreement) and subordinated promissory notes.

In April 2018, we also purchased a portfolio of customer accounts and the related contracts for payroll processing services (known as Evolution Payroll) from Wells Fargo Bank, N.A. for an aggregate purchase price of $10,450. The aggregate purchase price consisted of (i) $10,000 in cash and (ii) a subordinated promissory note (the “Evolution Payroll Note”) in the principal amount of $450. The Evolution Payroll Note bears interest at an annual rate of 2.0%, and the unpaid principal and all accrued interest under the Evolution Payroll Note is payable on April 9, 2020. To finance this transaction, we borrowed approximately $10,000 under our Second Restated Credit Agreement.

Except for the purchase of Pay Systems of America, Inc. and the Evolution Payroll portfolio, the 2018 acquisitions, individually, were not material to our results of operations, financial position, or cash flows. We have treated the purchase of the Evolution Payroll portfolio as an acquisition of assets, rather than as an acquisition of a business.

Purchase Price Allocation

Following is the purchase price allocation for the 2018 business acquisitions. We based the preliminary fair value estimate for the assets acquired and liabilities assumed for these acquisitions upon preliminary calculations and valuations. Our estimates and assumptions for these acquisitions are subject to change as we obtain additional information for our estimates during the respective measurement periods (up to one year from the acquisition date). The primary areas of those preliminary estimates that we have not yet finalized relate to certain tangible assets and liabilities acquired, and income and non-income based taxes.

We recorded the transactions, with the exception of the Evolution Payroll portfolio purchase, using the acquisition method of accounting and recognized assets and liabilities assumed at their fair value as of the dates of acquisitions. The $22,680 of intangible assets subject to amortization consist of $18,700 allocated to Customer Relationships, $2,100 for Developed Technology, $1,550 for Trade Names, and $330 for Noncompete Agreements. To value the Trade Names, we employed the relief from royalty method under the market approach. For the Noncompete Agreements, we employed a form of the income approach which analyzes the Company’s profitability with these assets in place, in contrast to the Company’s profitability without them. For the Customer Relationships and Developed Technology, we employed a form of the excess earnings method, which is a form of the income approach. The discount rate used in valuing these assets ranged from 13.0% to 33.0%, which reflects the risk associated with the intangible assets related to the other assets and the overall business operations to us. We estimated the fair values of the Trade Names using the relief from royalty method based upon a 1.0% royalty rate.

We believe significant synergies are expected to arise from these strategic acquisitions. This factor contributed to a purchase price that was in excess of the fair value of the net assets acquired and, as a result, we recorded goodwill for each acquisition. A portion of acquired goodwill will be deductible for tax purposes.

Assets Acquired	Pay Systems		Others		Total
Cash & cash equivalents	$	767	$	600	$	1,367
Accounts receivable		54		2,609		2,663
Fixed assets		121		39		160
Inventory		-		657		657
Other assets		49		1,014		1,063
Funds held for clients		10,976		14,050		25,026
Goodwill		8,871		10,373		19,244
Intangibles		7,240		15,440		22,680
Total assets acquired	$	28,078	$	44,782	$	72,860

Liabilities assumed
Accounts payable		113		1,170		1,282
Accrued other liabilities		951		2,983		3,935
Deferred revenue		-		355		355
Client fund obligations		11,820		14,050		25,870
Total liabilities assumed		12,884		18,558		31,442

Net assets acquired	$	15,194	$	26,224	$	41,418

The following is a reconciliation of the purchase price to the fair value of net assets acquired at the date of acquisition:

	Pay Systems			Others			Total
Purchase price	$	15,724		$	27,950		$	43,674
Working capital adjustment		(469	)		210			(259	)
Adjustment to fair value of contingent liability		-			(1,761	)		(1,761	)
Adjustment to fair value of Asure’s stock		-			(104	)		(104	)
Debt discount		(61	)		(71	)		(132	)
Fair value of net assets acquired	$	15,194		$	26,224		$	41,418

The purchase of the Evolution Payroll portfolio has been accounted for as an asset acquisition under the acquisition method of accounting. The amendments in ASU 2017-01 provide a screen to determine when a set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set of assets and activities is not a business. Since the acquisition was determined to be an asset acquisition, the total value of the purchase consideration is allocated to the asset acquired. Management assessed the fair value of the promissory note and cash consideration as of April 1, 2018, which was as follows:

	Fair Value
Cash	$	10,000
Promissory note		450
Debt discount		(46	)
Total	$	10,404

Fair value of asset acquired, Customer Relationships	$	10,404

As an asset acquisition, we also capitalized approximately $40 of total costs incurred to complete the acquisition consisting of legal fees of approximately $30 and accounting fees of approximately $10. The total intangible asset of $10,444 is recorded in our consolidated balance sheet within Intangible Assets- Customer Relationships, and is being amortized over its estimated useful life of eight years.

Transaction costs incurred for the 2018 business acquisitions were $1,308 and $2,301 in the three and six months ended June 30, 2018, respectively, and were expensed as incurred and included in selling, general and administrative expenses.

Unaudited Pro Forma Financial Information

The following unaudited summary of pro forma combined results of operations for the three and six months ended June 30, 2018 and June 30, 2017 gives effect to our 2017 and 2018 acquisitions as if we had completed them on January 1, 2017. This pro forma summary does not reflect any operating efficiencies, cost savings or revenue enhancements that we may achieve by combining operations. In addition, we have not reflected certain non-recurring expenses, such as legal expenses and other transactions expenses for the first 12 months after the acquisition, in the pro forma summary. We present this pro forma summary for informational purposes only and it is not necessarily indicative of what our actual results of operations would have been had the acquisitions taken place as of January 1, 2017, nor is it indicative of future consolidated results of operations.

	FOR THE THREE MONTHS ENDED JUNE 30, 2018			FOR THE THREE MONTHS ENDED JUNE 30, 2017
Revenue	$	21,868		$	22,111
Net income (loss)	$	(2,457	)	$	(2,053	)
Net income (loss) per common share:
Basic and diluted	$	(0.19	)	$	(0.19	)

Weighted average shares outstanding:
Basic and diluted		12,939			11,021

	FOR THE SIX MONTHS ENDED JUNE 30,			FOR THE SIX MONTHS ENDED JUNE 30,
	2018			2017
Revenue	$	43,425		$	43,983
Net income (loss)	$	(3,710	)	$	(2,787	)
Net income (loss) per common share:
Basic and diluted	$	(0.29	)	$	(0.26	)

Weighted average shares outstanding:
Basic and diluted	$	12,762		$	10,658