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ASURE SOFTWARE INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 13, 2014

The following review of Asure's financial position as of and for the three months and six months ended June 30, 2014 and 2013 should be read in conjunction with our 2013 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 therein or connected thereto is not incorporated into this Quarterly Report on Form 10-Q.

Asure is a leading global provider of cloud-based software-as-a-service ("SaaS") time & labor management and workspace management solutions that enable companies of all sizes and complexities to operate more efficiently and proactively manage costs associated with their most expensive assets: real estate, labor and technology.

We currently offer two main product lines, AsureSpace™ and AsureForce®. Our AsureSpace™ workplace management solutions enable organizations to manage their office environments and optimize real estate utilization. Our AsureForce® time and labor management solutions help organizations optimize labor and labor administration costs and activities. For both product lines, support and professional services are other key elements of our software and services business. As an extension of our perpetual software product offerings, Asure offers our customers maintenance and support contracts that provide ready access to qualified support staff, software patches and upgrades to our software products. We also provide installation of and training on our products, add-on software customization and other professional services.

We target our sales and marketing efforts to a wide range of audiences, from small and medium-sized businesses to Fortune 500 companies and divisions of enterprise organizations throughout the United States, Europe and Asia/Pacific. We generate sales of our solutions through our direct sales teams and indirectly through our channel partners. We are expanding our investment in our direct sales teams to continue to address our market opportunity.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Report represent forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results of operations, levels of activity, economic performance, financial condition or achievements to be materially different from future results of operations, levels of activity, economic performance, financial condition or achievements as expressed or implied by such forward-looking statements. Asure has attempted to identify these forward-looking statements with the words "believes," "estimates," "plans," "expects," "anticipates," "may," "could" and other similar expressions. Although these forward-looking statements reflect management's current plans and expectations, which 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 - adverse changes in the economy, financial markets, and credit markets; 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; our ability to retain or increase our customer base; security breaches; errors, disruptions or delays in our services; privacy concerns; changes in the our sales cycle; competition, including pricing pressures, entry of new competitors, and new technologies; intellectual property enforcement and litigation; our ability to hire, retain and motivate employees; our ability to manage our growth; our ability to realize benefits from acquisitions; changes in sales may not be immediately reflected in our operating results due to our subscription model; changes in laws and regulations; and changes in accounting standards. 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.

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RESULTS OF OPERATIONS

The following table sets forth the percentage of total revenues represented by certain items in Asure's Consolidated Statements of Comprehensive Loss for the fiscal periods indicated: FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30, 2014 2013 2014 2013 Revenues 100 % 100 % 100 % 100 % Gross margin 79.0 76.5 77.6 73.4



Selling, general and administrative 53.4 54.8 52.4 54.8 Research and development

13.1 10.5 12.1 11.1 Amortization of intangible assets 7.6 9.2 7.6 9.5 Total operating expenses 74.0 74.6 72.1 75.4 Other income (loss), net (4.2 ) (10.3 ) (8.8 ) (11.0 ) Net income (loss) 0.2 (9.0 ) (3.9 ) (13.6 )



THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2013 (Amounts in thousands)

Revenue

Our revenue was derived from the following sources:

FOR THE THREE MONTHS ENDED June 30, Increase Revenue 2014 2013 (Decrease) % Cloud revenue $ 3,467$ 3,142 $ 325 10.3 Hardware revenue 373 435 (62 ) (14.3 ) Maintenance and support revenue 1,608 1,744 (136 ) (7.8 ) On premise software license revenue 249 324 (75 ) (23.1 ) Professional services revenue 851 651 200 30.7 Total revenue $ 6,548$ 6,296 $ 252 4.0 FOR THE SIX MONTHS ENDED June 30, Increase Revenue 2014 2013 (Decrease) % Cloud revenue $ 6,772$ 6,211 $ 561 9.0 Hardware revenue 1,000 904 96 10.6 Maintenance and support revenue 3,238 3,418 (180 ) (5.3 ) On premise software license revenue 463 583 (120 ) (20.6 ) Professional services revenue 1,602 1,155 447 38.7 Total revenue $ 13,075$ 12,271 $ 804 6.6



Revenue represents our consolidated revenues, including sales of our scheduling software, time and attendance and human resource software, complementary hardware devices to enhance our software products, software maintenance and support services, installation and training services and other professional services.

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Our product offerings are categorized into AsureSpace™ and AsureForce®. AsureSpace™ offers workplace management solutions that enable organizations to manage their office environments and optimize real estate utilization, and AsureForce® offers time and labor management solutions which help organizations optimize labor and labor administration costs and activities. Both product groupings include cloud revenue, hardware revenue, maintenance and support revenue, on premise software license revenue and professional services revenue. AsureSpace™ revenues include PeopleCube and Meeting Room Manager revenues. AsureForce® revenues include ADI, Legiant and iEmployee revenues.

Revenue for the three months ended June 30, 2014 was $6,548, an increase of $252 or 4.0%, from the $6,296 reported for the three months ended June 30, 2013. Cloud revenue and professional services revenue all increased from the first quarter of 2013 due to our continued emphasis on selling integrated cloud based solutions. AsureSpace™ revenue for the three months ended June 30, 2014 was $3,752, an increase of $395 or 11.8%, from the $3,357 recorded for the three months ended June 30, 2013. This increase was primarily due to an increase in PeopleCube cloud revenue and professional services revenue. AsureForce® revenue for the three months ended June 30, 2014 was $2,796, a decrease of $143 or 4.9%, from the $2,939 recorded for the three months ended June 30, 2013. This decrease was primarily due to a decrease in all Legiant revenues (primarily hardware revenue, maintenance and support revenue and cloud revenue), as well as a decrease in ADI on premise software license revenue. These decreases were offset by increases in ADI cloud and professional services revenue.

Revenues for the six months ended June 30, 2014 were $13,075, an increase of $804 or 6.6%, from the $12,271 reported for the six months ended June 30, 2013. This increase was primarily due to an increase in cloud revenue and professional services revenue, offset by smaller decreases in maintenance and support revenue and on premise software license revenue. AsureSpace™ revenue for the six months ended June 30, 2014 was $7,633, an increase of $1,057 or 16.1%, from the $6,576 recorded for the six months ended June 30, 2013. This increase was primarily due to an increase in PeopleCube cloud revenue, hardware revenue and professional services revenue. AsureForce® revenue for the six months ended June 30, 2014 was $5,442, a decrease of $253 or 4.4%, from the $5,695 recorded for the six months ended June 30, 2013. This decrease was primarily due to decreases in all Legiant revenues and iEmployee cloud revenue, offset by increases in ADI cloud revenue and professional services revenue.

Although our sales are concentrated in certain industry sectors, including corporate, education, healthcare, government, legal and non-profit, our total customer base is widely spread across industries. Geographically, we sell our products worldwide, but sales are largely concentrated in the United States, Canada and Europe. Additionally, we have a distribution partner in Australia. We continue to target small and medium size businesses and divisions of enterprises in these same industries as prospective customers. As the overall workforce management solutions market continues to experience significant growth related to SaaS products, we will continue to focus on sales of Meeting Room Manager On Demand, PeopleCube and ADI SaaS products.

In addition to continuing to develop our workforce and workspace management solutions and release new software updates and enhancements, we continue to actively explore other opportunities to acquire additional products or technologies to complement our current software and services. Through acquisitions in 2011 of ADI and Legiant, we expanded our cloud computing time and attendance software and management services business. The 2012 acquisition of PeopleCube gave us a product line that includes software to assist customers in driving integrated facility management of offices, conference rooms, video conferencing, events and training, alternative workspaces and lobby use.

Gross Margin

Consolidated gross margin for the three months ended June 30, 2014 was $5,175, an increase of $360, or 7.5%, from the $4,815 reported for the three months ended June 30, 2013. Gross margin as a percentage of revenues was 79.0% and 76.5% for the three months ended June 30, 2014 and 2013, respectively. Consolidated gross margin for the six months ended June 30, 2014 was $10,144, an increase of $1,131, or 12.5%, from the $9,013 reported for the six months ended June 30, 2013. Gross margins as a percentage of revenues were 77.6% and 73.4% for the six months ended June 30, 2014 and 2013, respectively. We attribute the increase in gross margins to gained efficiencies from the consolidation of hosting and support costs after the PeopleCube acquisition which occurred in the third quarter of 2012 as well as a shift in revenue mix toward higher margin items such as cloud revenue.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses for the three months ended June 30, 2014 were $3,495, an increase of $47 or 1.4%, from the $3,448 reported for the three months ended June 30, 2013. SG&A expenses as a percentage of revenues were 53.4% and 54.8% for the three months ended June 30, 2014 and 2013, respectively.

Selling, general and administrative ("SG&A") expenses for the six months ended June 30, 2014 were $6,857, an increase of $133 or 2.0%, from the $6,724 reported for the six months ended June 30, 2013. SG&A expenses as a percentage of revenues were 52.4% and 54.8% for the six months ended June 30, 2014 and 2013, respectively.

We continue to evaluate any unnecessary SG&A expenses and plans to further reduce expenses as appropriate.

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Research and Development Expenses

Research and development ("R&D") expenses for the three months ended June 30, 2014 were $855, an increase of $191, or 28.8%, from the $664 reported for the three months ended June 30, 2013. R&D expenses as a percentage of revenues were 13.1% and 10.5% for the three months ended June 30, 2014 and 2013, respectively.

Research and development ("R&D") expenses for the six months ended June 30, 2014 were $1,576, an increase of $212, or 15.5%, from the $1,364 reported for the six months ended June 30, 2013. R&D expenses as a percentage of revenues were 12.1% and 11.1% for the six months ended June 30, 2014 and 2013, respectively.

The increase in both quarter and year to date R&D expenses is due to an increase in headcount and the related placement fees, as well as severance expense for another employee recorded in the second quarter of 2014. These increases reflect our commitment to expand and enhance our industry leading tools and technology.

We continue to improve our products and technologies through organic improvements as well as through acquired intellectual property. Our expanded investment in SaaS hosting, mobile and hardware technologies lay the ground work 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 further improve our workforce management solutions.

Amortization of Intangible Assets

Amortization expenses for the three months ended June 30, 2014 were $497, a decrease of $85, or 14.6%, from the $582 reported for the three months ended June 30, 2013. Amortization expenses as a percentage of revenues were 7.6% and 9.2% for the three months ended June 30, 2014 and 2013, respectively. Amortization expenses for the six months ended June 30, 2014 were $994, a decrease of $170 or 14.6% compared to $1,164, reported for the six months ended June 30, 2013. Amortization expenses as a percentage of revenues were 7.6% and 9.5% for the six months ended June 30, 2014 and 2013, respectively. This decrease is the result of some of PeopleCube's intangible assets being sold in the third quarter of 2013 and others becoming fully amortized.

Other Income and Loss

Other loss for the three months ended June 30, 2014 was $278, a decrease of $370, or 57.1%, from the $648 reported for the three months ended June 30, 2013. Other loss as a percentage of revenues was 4.2% and 10.3% for the three months ended June 30, 2014 and 2013, respectively. Other loss for the three months ended June 30, 2014 is composed primarily of interest expense on notes payable of $264. Other loss for the three months ended June 30, 2013 is composed primarily of interest expense on notes payable of $520 and amortization of OID of $125.

Other loss for the six months ended June 30, 2014 was $1,155, a decrease of $194, or 14.4%, from the $1,349 reported for the six months ended June 30, 2013. Other expense as a percentage of revenues was 8.8% and 11.0% for the six months ended June 30, 2014 and 2013, respectively. Other loss for the six months ended June 30, 2014 is composed primarily of a loss on debt refinancing of $1,402, offset by a gain on the settlement of the PeopleCube litigation of $1,034. Interest expense on notes payable was $721 and amortization of OID on notes payable was $54 for the six months ended June 30, 2014 as compared to interest expense on notes payable of $1,050 and amortization of OID of $275 for the six months ended June 30, 2013.

Income Taxes

Income tax expense for the three months ended June 30, 2014 was $35, a decrease of $7, or 16.7%, from the $42 reported for the three months ended June 30, 2013.

Income tax expense for the six months ended June 30, 2014 was $77, a decrease of $4, or 4.9%, from the $81 reported for the six months ended June 30, 2013, respectively.

Net Loss

We generated net income of $15, or $0.00 per share, during the three months ended June 30, 2014, compared to a net loss of $569 or $(0.10) per share reported for the three months ended June 30, 2013. Net income as a percentage of total revenues was 0.2% for the three months ended June 30, 2014 compared to net loss of 9.0% of total revenues for the three months ended June 30, 2013.

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We generated a net loss of $515, or $(0.09) per share, during the six months ended June 30, 2014, compared to a net loss of $1,669 or $(0.31) per share reported for the six months ended June 30, 2013. Net loss as a percentage of total revenues was 3.9% for the six months ended June 30, 2014 compared to net loss of 13.6% of total revenues for the six months ended June 30, 2013.

We intend to continue to implement our corporate strategy for growing the 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 and there can be no assurance that we can successfully grow our revenues or achieve profitability during the remainder of fiscal year 2014.

LIQUIDITY AND CAPITAL RESOURCES (Amounts in thousands)

June 30, December 31, 2014 2013 Working capital deficit $ (5,983 )$ (7,837 ) Cash, cash equivalents and short-term investments 2,005 3,938 For the Six Months Ended June 30, 2014 2013 Cash provided by operating activities $ 747 $ 786 Cash used in investing activities (281 ) (235 ) Cash provided by (used in) financing activities (2,378 ) 517



Working Capital. We had a working capital deficit of $5,983 at June 30, 2014, a decrease of $1,854 from the $7,837 deficit at December 31, 2013. The working capital deficit at June 30, 2014 and December 31, 2013 includes $9,365 and $10,059 of 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. We attribute the decrease in our working capital deficit to a decrease in current notes payable of $3,312, together with a decrease in deferred revenue of $694.. 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. This is offset by a decrease in cash and cash equivalents of $1,933. Cash and current notes payable decreased primarily due to the payoff of the Deerpath note and the payoff of the PeopleCube note (through the settlement of the litigation), offset by the new term note with Wells Fargo in the first quarter of 2014.

Operating Activities. Cash provided by operating activities was $747 for the six months ended June 30, 2014. The $747 of cash provided by operating activities during the first six months of 2014 was primarily driven by the net income (after adjustment for non-cash items) of $1,355, a decrease in accounts receivable of $474 and the release of restricted cash of $250, offset by a decrease in deferred revenue of $860, a decrease in accounts payable of $264, and an increase in inventory of $183. The $786 of cash provided by operating activities during the first six months of 2013 was primarily driven by the net income (after adjustment of non-cash items) of $208 and an increase in accrued expenses and deferred revenue of $1,093, offset by a decrease in accounts payable of $605.

Investing Activities. Cash used in investing activities was $281 and $235 for the six months ended June 30, 2014 and June 30, 2013, respectively, due primarily to net purchases of property and equipment.

Financing Activities. Cash used in financing activities was $2,378 for the six months ended June 30, 2014. We incurred $15,000 of debt, as well as received cash of $373 from insurance proceeds for settlement of notes payable, net of expenses. This is offset by note payments of $16,436 and debt financing fees of $565. Cash provided by financing of $517 for the six months ended June 30, 2013 consisted of the sale of common stock of $3,461 offset by payments on notes payable of $2,726 and payments on the amendment of senior notes payable of $188.

Sources of Liquidity. As of June 30, 2014, Asure's principal sources of liquidity consisted of approximately $2,000 of current cash and cash equivalents, future cash generated from operations and amounts available for borrowing under our Wells Fargo revolver discussed in Note 6 - Notes Payable.

We believe that we have and/or will generate sufficient cash for our short- and long-term needs. Based on current internal projections, we believe that we currently have and/or will generate sufficient cash for our operational needs, including any required debt payments, for at least the next twelve months. We currently project that we can generate positive cash flows from our operating activities for at least the next twelve months.

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Our management team is focused on growing our existing software operations and is also seeking additional strategic acquisitions for the near future. At present, we plan to fund any future acquisition with equity, existing cash, cash generated from future operations and/or cash or debt raised from outside sources. As discussed in Note 10 - Subsequent Events of the accompanying financial statements, we acquired all of the outstanding common stock of FotoPunch, Inc. in July 2014 and substantially all the assets of Roomtag, LLC in August 2014.

We cannot assure that we can grow our cash balances or limit our cash consumption and thus maintain sufficient cash balances for our planned operations or future acquisitions. Future business demands may lead to cash utilization at levels greater than recently experienced. We may need to raise additional capital in the future. However, we cannot assure that we will be able to raise additional capital on acceptable terms, or at all. Subject to the foregoing, management believes that we have sufficient capital and liquidity to fund and cultivate the growth of our current and future operations for at least the next twelve months and to maintain compliance with the terms of our debt agreements and related covenants or to obtain compliance through debt repayments made with the available cash on hand or anticipated for receipt in the ordinary course of operations.

CRITICAL ACCOUNTING POLICIES

There were no material changes to our critical accounting policies and estimates since December 31, 2013. For additional information on critical accounting policies, refer to "Management's Discussion and Analysis" in our 2013 Annual Report on Form 10-K.


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