Table of Contents

 

 

 

**UNITEDSTATES SECURITIES AND EXCHANGE**

**COMMISSION**

**Washington, DC 20549**

 

----

 

**FORM 10-Q**

 

| **x**  | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES****EXCHANGE  ACT OF 1934**  |
|--------|------------|-------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                        |
|   |       | **For the quarterly period ended September 30, 2008.**                                                 |
|   |       |                                                                                                        |
| **o**  | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES****EXCHANGE  ACT OF 1934** |

 

**For the transition period from             to**

 

**Commission file number 001-13268**

 

**ASPYRA,INC.**

(Exact name of Registrant as specified in itscharter)

 

| **California**                  | ** ** | **95-3353465**         |
|---------------------------------|------------|------------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer       |
| incorporation or organization)  |       | Identification Number) |

 

**26115-A Mureau Road, Calabasas, California 91302**

(Address of principal executive offices)

 

**(818) 880-6700**

Registrant’s telephone number, including area code

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

Yes x    No o

 

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer, or a smaller reporting company. See definitionsof “large accelerated filer,” “accelerated filer,” and “smaller reportingcompany” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer o                     |   | Accelerated filer o         |
|-----------------------------------------------|--------|-----------------------------|
|                                          |   |                        |
| Non-accelerated filer o                       |   | Smaller reporting company x |
| (Do not check if a smaller reporting company) |   |                        |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o    No x

 

As of November 12,2008, there were 12,437,150 shares of the registrant’s common stockoutstanding.

 

 

 

----

Table of Contents

 

**ASPYRA, INC.**

 

**QUARTERLY REPORT ON FORM 10-Q**

 

**September 30, 2008**

 

**TABLE OF CONTENTS**

 
| ** **                                                                                                    | ** **                                                                                  | **Page** |
|---------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|----------|
| **PART I – FINANCIAL INFORMATION**                                                                  | ** **                                                                                  |
| Item 1.                                                                                                       | Condensed Consolidated Financial  Statements (Unaudited)                                    | 1        |
| Condensed consolidated  balance sheets at September 30, 2008 and December 31, 2007                  | 1                                                                                           |
| Condensed consolidated  statements of operations for the three months ended September 30, 2008  and 2007 | 2                                                                                           |
| Condensed consolidated  statements of operations for the nine months ended September 30, 2008  and 2007  | 3                                                                                           |
| Condensed consolidated  statements of cash flows for the nine months ended September 30, 2008  and 2007  | 4                                                                                           |
| Notes to  Condensed Consolidated Financial Statements                                                         | 5                                                                                           |
| Item 2.                                                                                                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 10       |
| Item 4T.                                                                                                      | Controls and  Procedures                                                                    | 18       |
|                                                                                                          |                                                                                        |     |
| **PART II – OTHER  INFORMATION**                                                                    | ** **                                                                                  |
| Item 1.                                                                                                       | Legal Proceedings                                                                           | 19       |
| Item 2.                                                                                                       | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 19       |
| Item 3.                                                                                                       | Defaults Upon  Senior Securities                                                            | 19       |
| Item 4.                                                                                                       | Submission of  Matters to a Vote of Security Holders                                        | 19       |
| Item 5.                                                                                                       | Other Information                                                                           | 19       |
| Item 6.                                                                                                       | Exhibits                                                                                    | 19       |
| Signatures                                                                                                    | 20                                                                                          |
| Exhibit Index                                                                                            | 21                                                                                          |

 

----

Table of Contents

 

**ASPYRA,INC.**

 

**PART I- FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                            | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                            | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ** **                                                                                            | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                            | ** ** | ** **             | ** ** | ** **            | ** ** |
| CURRENT ASSETS:                                                                                       |       |                   |       |                  |       |
| Cash                                                                                                  |       | $                      | 1,225,377  |                  | $          | 803,392 |   |
| Receivables,  net                                                                                     |       | 928,057                |       | 921,212               |       |
| Inventory                                                                                             |       | 50,099                 |       | 49,802                |       |
| Prepaid  expenses and other assets                                                                    |       | 334,586                |       | 126,139               |       |
| TOTAL  CURRENT ASSETS                                                                                 |       | 2,538,119              |       | 1,900,545             |       |
|                                                                                                  |       |                   |       |                  |       |
| PROPERTY AND  EQUIPMENT, net                                                                          |       | 568,468                |       | 839,889               |       |
| OTHER ASSETS                                                                                          |       | 245,106                |       | 86,529                |       |
| INVENTORY OF  COMPONENT PARTS                                                                         |       | 40,448                 |       | 74,896                |       |
| CAPITALIZED  SOFTWARE COSTS, net of accumulated amortization of $1,239,328 and $875,165          |       | 2,918,925              |       | 2,839,232             |       |
| INTANGIBLES,  net                                                                                     |       | 3,244,615              |       | 3,760,982             |       |
| GOODWILL                                                                                              |       | 7,268,434              |       | 7,268,434             |       |
|                                                                                                  |       | $                      | 16,824,115 |                  | $          | 16,770,507 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                         | ** ** | ** **             | ** ** | ** **            | ** ** |
| CURRENT LIABILITIES:                                                                                  |       |                   |       |                  |       |
| Notes  payable                                                                                        |       | $                      | 824,965    |                  | $          | 1,200,605 |   |
| Accounts  payable                                                                                     |       | 621,567                |       | 784,735               |       |
| Accrued liabilities:                                                                                  |       |                   |       |                  |       |
| Vacation pay                                                                                          |       | 329,052                |       | 363,239               |       |
| Accrued  compensation                                                                                 |       | 298,480                |       | 518,737               |       |
| Accrued  interest                                                                                     |       | 171,293                |       | 106,646               |       |
| Deferred  rent                                                                                        |       | 74,265                 |       | 65,143                |       |
| Customer  deposits                                                                                    |       | 376,222                |       | 218,994               |       |
| Other                                                                                                 |       | 136,731                |       | 343,725               |       |
| Deferred  service contract income                                                                     |       | 2,088,048              |       | 1,724,650             |       |
| Deferred  revenue on system sales                                                                     |       | 412,112                |       | 431,746               |       |
| Capital  lease — current portion                                                                 |       | 150,237                |       | 150,237               |       |
| TOTAL  CURRENT LIABILITIES                                                                            |       | 5,482,972              |       | 5,908,457             |       |
|                                                                                                  |       |                   |       |                  |       |
| CAPITAL  LEASE, LESS CURRENT PORTION                                                                  |       | 235,608                |       | 348,285               |       |
| NOTES  PAYABLE                                                                                        |       | 2,355,000              |       | —                |       |
|                                                                                                  |       |                   |       |                  |       |
| TOTAL  LIABILITIES                                                                                    |       | 8,073,580              |       | 6,256,742             |       |
|                                                                                                  |       |                   |       |                  |       |
| SHAREHOLDERS’ EQUITY:                                                                            |       |                   |       |                  |       |
| Common  shares, no par value; 40,000,000 shares authorized; 12,437,150 shares issued  and outstanding |       | 22,761,951             |       | 22,761,951            |       |
| Additional  paid-in-capital                                                                           |       | 2,507,111              |       | 1,178,354             |       |
| Accumulated  deficit                                                                                  |       | (16,480,757            | )          | (13,366,612           | )          |
| Accumulated  other comprehensive loss                                                                 |       | (37,770                | )          | (59,928               | )          |
| TOTAL  SHAREHOLDERS’ EQUITY                                                                      |       | 8,750,535              |       | 10,513,765            |       |
|                                                                                                  |       |                   |       |                  |       |
|                                                                                                  |       | $                      | 16,824,115 |                  | $          | 16,770,507 |   |

 

**See Notes to Condensed Consolidated FinancialStatements.**

 

1

----

Table of Contents

 

**ASPYRA,INC.**

** **

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

** **

**(unaudited)**

 
| ** **                                      | ** ** | **Three Months Ended September 30,** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                      | ** ** | **2008**                                                 | ** ** | **2007** | ** ** |
|                                            |       |                                                     |       |   |   |
| NET SYSTEM SALES AND SERVICE REVENUE:           |       |                                                     |       |   |   |
| System sales                                    |       | $                                                        | 469,961    |   | $ | 1,034,946 |   |
| Service  revenue                                |       | 1,705,792                                                |       | 1,857,979 |   |
|                                            |       | 2,175,753                                                |       | 2,892,925 |   |
|                                            |       |                                                     |       |   |   |
| COSTS OF PRODUCTS AND SERVICES SOLD:            |       |                                                     |       |   |   |
| System sales                                    |       | 465,837                                                  |       | 720,931 |   |
| Service  revenue                                |       | 593,141                                                  |       | 690,853 |   |
|                                            |       | 1,058,978                                                |       | 1,411,784 |   |
|                                            |       |                                                     |       |   |   |
| Gross profit                                    |       | 1,116,775                                                |       | 1,481,141 |   |
|                                            |       |                                                     |       |   |   |
| OPERATING  EXPENSES                             |       |                                                     |       |   |   |
| Selling,  general and administrative            |       | 1,397,834                                                |       | 1,547,318 |   |
|                                            |       |                                                     |       |   |   |
| Research and  development                       |       | 393,569                                                  |       | 580,388 |   |
|                                            |       |                                                     |       |   |   |
| Total  operating expenses                       |       | 1,791,403                                                |       | 2,127,706 |   |
|                                            |       |                                                     |       |   |   |
| Operating  loss                                 |       | (674,628                                                 | )          | (646,565 | ) |
|                                            |       |                                                     |       |   |   |
| INTEREST AND  OTHER INCOME                      |       | 179,104                                                  |       | 12,187 |   |
|                                            |       |                                                     |       |   |   |
| INTEREST  EXPENSE                               |       | (223,710                                                 | )          | (38,385 | ) |
|                                            |       |                                                     |       |   |   |
| Loss before  provision for income taxes         |       | (719,234                                                 | )          | (672,763 | ) |
|                                            |       |                                                     |       |   |   |
| PROVISION  FOR INCOME TAXES                     |       | (228                                                     | )     | — |   |
|                                            |       |                                                     |       |   |   |
| NET LOSS                                        |       | $                                                        | (719,462   | ) | $ | (672,763 | ) |
|                                            |       |                                                     |       |   |   |
| DEEMED  DIVIDEND ON EXERCISE OF WARRANTS        |       | —                                                   |       | (789,021 | ) |
|                                            |       |                                                     |       |   |   |
| NET LOSS  APPLICABLE TO COMMON SHAREHOLDERS     |       | $                                                        | (719,462   | ) | $ | (1,461,784 | ) |
|                                            |       |                                                     |       |   |   |
| LOSS PER SHARE:                                 |       |                                                     |       |   |   |
|                                            |       |                                                     |       |   |   |
| Basic                                           |       | $                                                        | (.06       | ) | $ | (.13 | ) |
| Diluted                                         |       | (.06                                                     | )          | (.13 | ) |
|                                            |       |                                                     |       |   |   |
| WEIGHTED AVERAGE NUMBER OF SHARES  OUTSTANDING: |       |                                                     |       |   |   |
| Basic                                           |       | 12,437,150                                               |       | 11,337,150 |   |
| Diluted                                         |       | 12,437,150                                               |       | 11,337,150 |   |

 

**See Notes to Condensed Consolidated FinancialStatements.**

 

2

----

Table of Contents

 

**ASPYRA,INC.**

** **

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

** **

**(unaudited)**

 
| ** **                                      | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                      | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
|                                            |       |                                                    |       |   |   |
| NET SYSTEM SALES AND SERVICE REVENUE:           |       |                                                    |       |   |   |
| System sales                                    |       | $                                                       | 1,550,744  |   | $ | 2,448,218 |   |
| Service  revenue                                |       | 5,106,381                                               |       | 5,297,332 |   |
|                                            |       | 6,657,125                                               |       | 7,745,550 |   |
|                                            |       |                                                    |       |   |   |
| COSTS OF PRODUCTS AND SERVICES SOLD:            |       |                                                    |       |   |   |
| System sales                                    |       | 1,676,073                                               |       | 1,867,902 |   |
| Service  revenue                                |       | 1,854,107                                               |       | 2,148,705 |   |
|                                            |       | 3,530,180                                               |       | 4,016,607 |   |
|                                            |       |                                                    |       |   |   |
| Gross profit                                    |       | 3,126,945                                               |       | 3,728,943 |   |
|                                            |       |                                                    |       |   |   |
| OPERATING  EXPENSES                             |       |                                                    |       |   |   |
| Selling,  general and administrative            |       | 4,551,421                                               |       | 4,832,304 |   |
|                                            |       |                                                    |       |   |   |
| Research and  development                       |       | 1,371,292                                               |       | 1,688,362 |   |
|                                            |       |                                                    |       |   |   |
| Total  operating expenses                       |       | 5,922,713                                               |       | 6,520,666 |   |
|                                            |       |                                                    |       |   |   |
| Operating  loss                                 |       | (2,795,768                                              | )          | (2,791,723 | ) |
|                                            |       |                                                    |       |   |   |
| INTEREST AND  OTHER INCOME                      |       | 199,011                                                 |       | 40,731 |   |
|                                            |       |                                                    |       |   |   |
| INTEREST  EXPENSE                               |       | (517,160                                                | )          | (131,287 | ) |
|                                            |       |                                                    |       |   |   |
| Loss before  provision for income taxes         |       | (3,113,917                                              | )          | (2,882,279 | ) |
|                                            |       |                                                    |       |   |   |
| PROVISION  FOR INCOME TAXES                     |       | (228                                                    | )     | 603 |   |
|                                            |       |                                                    |       |   |   |
| NET LOSS                                        |       | $                                                       | (3,114,145 | ) | $ |  (2,881,676 | ) |
|                                            |       |                                                    |       |   |   |
| DEEMED  DIVIDEND ON EXERCISE OF WARRANTS        |       | —                                                  |       | (789,021 | ) |
|                                            |       |                                                    |       |   |   |
| NET LOSS  APPLICABLE TO COMMON SHAREHOLDERS     |       | $                                                       | (3,114,145 | ) | $ | (3,670,697 | ) |
|                                            |       |                                                    |       |   |   |
| LOSS PER SHARE:                                 |       |                                                    |       |   |   |
|                                            |       |                                                    |       |   |   |
| Basic                                           |       | $                                                       | (.25       | ) | $ | (.33 | ) |
| Diluted                                         |       | (.25                                                    | )          | (.33 | ) |
|                                            |       |                                                    |       |   |   |
| WEIGHTED AVERAGE NUMBER OF SHARES  OUTSTANDING: |       |                                                    |       |   |   |
| Basic                                           |       | 12,437,150                                              |       | 10,969,594 |   |
| Diluted                                         |       | 12,437,150                                              |       | 10,969,594 |   |

 

**See Notes to Condensed Consolidated FinancialStatements.**

 

3

----

Table of Contents

 

**ASPYRA,INC.**

** **

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Increase (Decrease) in Cash**

** **

**(unaudited)**

 
| ** **                                                                                 | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
|                                                                                       |       |                                                    |       |   |   |
| OPERATING  ACTIVITIES                                                                      |       |                                                    |       |   |   |
| Net loss                                                                                   |       | $                                                       | (3,114,145 | ) | $ | (2,881,676 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |       |                                                    |       |   |   |
| Depreciation  and amortization                                                             |       | 541,551                                                 |       | 332,237 |   |
| Amortization  of acquired intangibles                                                      |       | 516,367                                                 |       | 516,375 |   |
| Provision  for doubtful accounts                                                           |       | 15,737                                                  |       | 47,406 |   |
| Amortization  of capitalized software costs                                                |       | 364,162                                                 |       | 316,846 |   |
| Stock based  compensation                                                                  |       | 355,757                                                 |       | 135,268 |   |
| Increase (decrease) from changes in:                                                       |       |                                                    |       |   |   |
| Receivables                                                                                |       | (22,582                                                 | )     | 193,767 |   |
| Inventories                                                                                |       | 34,152                                                  |       | 71,706 |   |
| Prepaid  expenses and other assets                                                         |       | (76,524                                                 | )          | 50,588 |   |
| Accounts  payable                                                                          |       | (163,168                                                | )     | (25,723 | ) |
| Accrued  liabilities                                                                       |       | (153,324                                                | )          | (82,739 | ) |
| Deferred  service contract income                                                          |       | 363,398                                                 |       | 606,174 |   |
| Deferred  revenue on system sales                                                          |       | (19,634                                                 | )          | (41,342 | ) |
| Net cash  used in operating activities                                                     |       | (1,358,253                                              | )          | (761,113 | ) |
|                                                                                       |       |                                                    |       |   |   |
| INVESTING  ACTIVITIES                                                                      |       |                                                    |       |   |   |
| Additions to  property and equipment                                                       |       | (19,501                                                 | )          | (66,534 | ) |
| Additions to  capitalized software costs                                                   |       | (443,854                                                | )          | (662,037 | ) |
| Net cash  used in investing activities                                                     |       | (463,355                                                | )          | (728,571 | ) |
|                                                                                       |       |                                                    |       |   |   |
| FINANCING  ACTIVITIES                                                                      |       |                                                    |       |   |   |
| Borrowings  on notes payable                                                               |       | 2,775,000                                               |       | 1,026,477 |   |
| Forgiveness  of debt                                                                       |       | (171,197                                                | )          | — |   |
| Payments on  notes payable                                                                 |       | (281,562                                                | )          | (1,070,823 | ) |
| Payments on  capital leases                                                                |       | (112,677                                                | )          | (112,678 | ) |
| Decrease in  restricted cash                                                               |       | —                                                  |       | 1,000,000 |   |
| Proceeds  from exercise of stock options                                                   |       | —                                                  |       | 1,717,880 |   |
| Net cash  provided by financing activities                                                 |       | 2,209,564                                               |       | 2,560,856 |   |
| ** **                                                                                 | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Foreign  currency translation adjustment                                                   |       | 34,029                                                  |       | (34,103 | ) |
| ** **                                                                                 | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| NET INCREASE  IN CASH                                                                      |       | 421,985                                                 |       | 1,037,069 |   |
| ** **                                                                                 | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| CASH, beginning  of period                                                            |       | 803,392                                                 |       | 1,014,632 |   |
|                                                                                       |       |                                                    |       |   |   |
| CASH, end of  period                                                                       |       | $                                                       | 1,225,377  |   | $ | 2,051,701 |   |

 

**See notes to Condensed Consolidated FinancialStatements.**

 

4

----

Table of Contents

 

**ASPYRA, INC.**

** **

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

** **

**Note 1-Presentation of Financial Statements**

 

In the opinion of management of Aspyra, Inc. (the“Company” or “ASPYRA”), the accompanying unaudited condensed consolidatedfinancial statements reflect all adjustments (which include only normalrecurring accruals) necessary to present fairly the Company’s financialposition as of September 30, 2008, the results of its operations for thethree and nine months ended September 30, 2008 and 2007, and cash flowsfor the nine months ended September 30, 2008 and 2007.  These results have been determined on thebasis of accounting principles generally accepted in the United States andpractices applied consistently with those used in preparation of the Company’sAnnual Report on Form 10-KSB for the fiscal year ended December 31,2007.

 

The results of operations for the three and nine months endedSeptember 30, 2008 are not necessarily indicative of the results expectedfor any other period or for the entire year.

 

**Note 2-Liquidity**

 

As of September 30, 2008, the Company’s working deficitof $2,944,853 compared to a working deficit of $4,007,912, as of December 31,2007. At September 30, 2008, the Company’s credit facilities with its bankconsisted of a revolving line of credit of $1,300,000, of which $744,965 wasoutstanding. On March 26, 2008, the Company executed agreements renewingits revolving line of credit in the aggregate amount of $1,300,000.  The revolving line of credit is secured bythe Company’s accounts receivable and inventory and matures on February 27,2009.  The revolving line of credit issubject to certain covenants, including revised financial covenants.  As of September 30, 2008, the Companywas in compliance with all covenants. Advances under the revolving line of credit are on a formula, based oneligible accounts receivable and inventory balances.  At September 30, 2008, the Company had $385,845outstanding on its capital leases of which $150,237 is due in the next twelvemonths.

 

The Company’s primary source of working capital has beengenerated from private placements of securities and from borrowings.  The Company has been experiencing a historyof losses due to the integration of its businesses and the significantinvestment in new products since the quarter ended March 31, 2005 andnegative cash flows from operations since the quarter ended December 31,2005.  An unanticipated decline in sales,delays in implementations where payments are tied to delivery and/orperformance of services or cancellations of contracts have had, and in thefuture could have a negative effect on cash flow from operations and could inturn create short-term liquidity problems.

 

On March 26, 2008 the Company entered into a NotePurchase Agreement with various current and new shareholders.  Pursuant to the Purchase Agreement, theinvestors purchased secured promissory notes from the Company in the principalamount of $2,775,000. The notes are convertible up to 5,427,273 shares of theCompany’s Common Stock and have a maturity date of March 26, 2010 and bearinterest at the rate of 8% per annum compounded on each July 15 and January 15.  Pursuant to the terms of the transaction, theCompany issued 3 year warrants to purchase up to 5,496,646 of shares of CommonStock.  As a result, assuming theconversion of all promissory notes and exercise of all warrants, up to10,923,919 shares of the Company’s Common Stock may be issued.  Such an issuance if it were to occur, wouldbe highly dilutive of existing shareholders and may, under certain conditionseffect a change of control of the Company.

 

We believe that our current cash and cash equivalents, andcash flow from operations, will be sufficient to meet our current anticipatedcash needs, including for working capital purposes, capital expenditures andvarious contractual obligations, for at least the next 12 months.  If the Company is unable to generate cash fromoperations or meet revenue targets or obtain new cash inflows from financing orequity offerings, the Company would need to take action and reduce costs inorder to operate for the next 12 months. This requires the Company to plan for potential courses of action toreduce costs and look for new sources of financings and capital infusion.  We may, also, require additional cashresources due to changed business conditions or other future developments,including any investments or acquisitions we may decide to pursue.  If these sources are insufficient to satisfyour cash requirements, we may seek to sell debt securities or additional equitysecurities or to obtain a credit facility with a 

 

5

----

Table of Contents

 

lender.  The sale ofconvertible debt securities or additional equity securities could result inadditional dilution to our stockholders. The incurrence of additional indebtedness would result in increased debtservice obligations and could result in additional operating and financialcovenants that would restrict our operations. In addition, there can be no assurance that any additional financingwill be available on acceptable terms, if at all.  Although there are no present understandings,commitments or agreements with respect to the acquisition of any otherbusinesses, applications or technologies, we may from time to time, evaluateacquisitions of other businesses, applications or technologies.

 

**Note 3-Inventories**

 

Inventories consist primarily of computer hardware held forresale and are stated at the lower of cost or market (net realizablevalue).  Cost is determined using thefirst-in, first-out method. Supplies are charged to expense as incurred.  The Company also maintains an inventory poolof component parts to service systems previously sold, which is classified asnon-current in the accompanying balance sheets. Such inventory is carried at the lower of cost or market and is chargedto cost of sales based on usage. Allowances are made for quantities on hand in excess of estimated futureusage.  At September 30, 2008, theinventory allowance was $201,230.

 

**Note 4-Goodwill and Intangible Assets**

 

In accordance with Statement of Financial Accounting Standards (“SFAS”)No. 142, goodwill is tested for impairment on an annual basis or betweenannual tests if an event occurs or circumstances change that would indicate thecarrying amount may be impaired.  Inaccordance with SFAS No. 144, Accounting for Impairment of Long-LivedAssets, management reviews definite life intangible assets to determine ifevents or circumstances have occurred which may cause the carrying values ofintangible assets to be impaired. The purpose of these reviews is to identifyany facts and circumstances, either internal or external, which may indicatethat the carrying values of the assets may not be recoverable.  There was no impairment when the Company didits annual impairment testing and no events have occurred since that time thatwould trigger a reevaluation.  At September 30, 2008, the net carrying value ofgoodwill and intangible assets were $7,268,434 and $3,244,615, respectively.

 

**Note5-Earnings per Share**

 

The Company accounts for its earnings per share in accordance with SFASNo.128, which requires presentation of basic and diluted earnings pershare.  Basic earnings per share iscomputed by dividing income or loss available to common shareholders by theweighted average number of common shares outstanding for the reportingperiod.  Diluted earnings per sharereflect the potential dilution that could occur if securities or othercontracts, such as stock options, to issue common stock were exercised orconverted into common stock.

 

Earnings per share have been computed as follows:

 
| ** **                                                                 | ** ** | **Three Months  Ended  September 30, 2008** | ** ** | **Three Months  Ended  September 30, 2007** | ** ** | **Nine Months  Ended  September 30, 2008** | ** ** | **Nine Months  Ended  September 30, 2007** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
|                                                                       |       |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| NET LOSS APPLICABLE TO SHAREHOLDERS                                        |       | $                                                          | (719,462   | )                                                          | $          | (1,461,784                                                | )          | $                                                         | (3,114,145 | ) | $ | (3,670,697 | ) |
| Basic weighted average number of common  shares outstanding, as reported   |       | 12,437,150                                                 |       | 11,337,150                                                 |       | 12,437,150                                                |       | 10,969,594                                                |       |
| Dilutive effect of stock options, as  reported                             |       | —                                                     |       | —                                                     |       | —                                                    |       | —                                                    |       |
| Diluted weighted average number of common  shares outstanding, as reported |       | 12,437,150                                                 |       | 11,337,150                                                 |       | 12,437,150                                                |       | 10,969,594                                                |       |
| Basic and diluted loss per share, as  reported                             |       | $                                                          | (.06       | )                                                          | $          | (.13                                                      | )          | $                                                         | (.25       | ) | $ | (.33 | ) |

 

For the three and nine months ended September 30, 2008, options topurchase 1,534,084 shares of common stock at per share prices ranging from $0.36to $2.75 were not included in the computation of diluted loss per share becauseinclusion would have been anti-dilutive. For the three and nine months ended September 30,2007, options to purchase 839,965 shares of common stock at per share pricesranging from $1.51 to $2.75 were not included in the computation of dilutedloss per share because inclusion would have been anti-dilutive.

 

6

----

Table of Contents

 

**Note 6-DebtObligations**

 

On March 26, 2008, the Company executedagreements to renew its revolving line of credit in the aggregate amount of $1,300,000.  Therevolving line of credit is secured by the Company’s accounts receivable andinventory and matures on February 27, 2009.  The revolving line of credit is subject tocertain covenants, including revised financial covenants.  As of September 30, 2008, theCompany was in compliance with all covenants. Advances under the revolving line of credit are on a formula, based oneligible accounts receivable and inventory balances.  On September 30, 2008, thetotal amount due to the bank was $744,965 which is included in notes payable.

 

In September 2008, the Company settledoutstanding obligations consisting of debt and accrued interest totaling$201,197 for $30,000.  The forgiveness ofdebt was $171,197 and was recorded in other income.

 

**Note 7-Stock-BasedCompensation**

 

Equity Incentive and Stock Option Plans: At September 30, 2008, the Company has two stock-based compensation plans.Readers should refer to both Item 6, Note 1 and Note 8 of the Company’sfinancial statements, which are included in the Company’s Annual Report on Form 10-KSBfor the year ended December 31, 2007, for additional information relatedto these stock-based compensationplans. During the nine months ended September 30, 2008, the Company’s board of directors approved an amendment to the2005 Equity Incentive Plan increasing the number of available shares.  The increase has not yet been ratified by theCompany’s shareholders, accordingly any grant made from shares included in theincrease are subject to shareholder approval. There were 135,000 and 935,000 options granted in the three and nine monthsended September 30, 2008.  There were 310,000 options granted in thethree and nine months ended September 30, 2007.  No stock optionswere exercised in the nine months ended September 30, 2008.  There were 4,000 options exercised in the ninemonths ended September 30,2007 by one option holder and the Company received $2,880.  The Company accounts for stock option grantsin accordance with FASB Statement 123(R), Share-Based Payment. Compensationcosts related to share-based payments recognized in the Condensed Statements ofIncome were $109,905 and $355,757 for the three and nine months ended September 30, 2008 and $52,202 and $135,268 forthe three and nine months ended September 30, 2007.

 

**Note8-Commitments and Contingencies**

 

In accordance withthe bylaws of the Company, officers and directors are indemnified for certainevents or occurrences arising as a result of the officer or director’s servingin such capacity.  The term of the indemnificationperiod is for the lifetime of the officer or director.  The maximum potential amount of futurepayments the Company could be required to make under the indemnificationprovisions of its bylaws is unlimited. However, the Company has a director and officer liability insurancepolicy that reduces its exposure and enables it to recover a portion of anyfuture amounts paid.  As a result of itsinsurance policy coverage, the Company believes the estimated exposure for theindemnification provisions of its bylaws is minimal and, therefore, the Companyhas not recorded any related liabilities.

 

The Company enters into indemnification provisions under agreementswith various parties in the normal course of business, typically with customersand landlords.  Under these provisions,the Company generally indemnifies and holds harmless the indemnified party forlosses suffered or incurred by the indemnified party as a result of theCompany’s activities or, in some cases, as a result of the indemnified party’sactivities under the agreement.  Theseindemnification provisions often include indemnifications relating torepresentations made by the Company with regard to intellectual propertyrights.  These indemnification provisionsgenerally survive termination of the underlying agreement.  The maximum potential amount of futurepayments the Company could be required to make under these indemnificationprovisions cannot be estimated.  TheCompany maintains general liability, errors and omissions, and professionalliability insurance in order to mitigate such risks.  The Company has not incurred material coststo defend lawsuits or settle claims related to these indemnificationagreements.  As a result, the Companybelieves the estimated exposure under these agreements is minimal.  Accordingly, the Company has not recorded anyrelated liabilities.

 

**Note 9-Income Taxes**

 

TheCompany accounts for income taxes in accordance with SFAS No. 109“Accounting for Income Taxes,” which requires recognition of deferred tax liabilitiesand assets for the expected future tax consequences of events that have beenincluded in the financial statements or tax returns.  Under this method, deferred tax liabilitiesand assets are determined based on the differences between the financial statementsand the tax basis of assets and liabilities using enacted tax rates in effectfor the year in which the differences are expected to reverse.  Valuation allowances are established whennecessary to reduce deferred tax assets to the amount expected to berealized.  Income tax expense representsthe tax payable for the period and the change during the period in deferred taxassets and liabilities.

 

7

----

Table of Contents

 

**Note 10-Private Placement**

 

OnJanuary 28, 2008, the Company entered into a Note Purchase Agreement withtwo of the Company’s current stockholders, C. Ian Sym-Smith, who is also adirector, and TITAB, LLC.  Pursuant tothe Purchase Agreement, the purchasers each purchased a secured promissory notefrom the Company in the principal amounts of $200,000 and $100,000,respectively.  The two notes each have amaturity of six months from the date of issuance and bear interest at the rateof LIBOR plus 2.5% per annum. These notes automatically converted to the termsand conditions of the subsequent transaction completed on March 26, 2008discussed below.  On March 13, 2008,the Company entered into a Note Purchase Agreement with one of the Company’scurrent stockholders, J. Shawn Chalmers. Pursuant to the Purchase Agreement Mr. Chalmers purchased a securedpromissory note from the Company in the principal amounts of $300,000.  The note has a maturity date of July 28,2008 and bears interest at the rate of LIBOR plus 2.5% per annum. Mr. Chalmershad the option and exercised the option to convert to the terms and conditionsof the subsequent transaction completed on March 26, 2008 discussed below.

 

OnMarch 26, 2008 the Company entered into a private placement transactionwith various current and new investors in the Company.  Pursuant to the Purchase Agreement enteredinto with these investors, the investors purchased secured promissory notesfrom the Company in the principal amount of $2,775,000. The notes areconvertible into shares of the Company’s Common Stock at a conversion price of$0.55 per share, subject to adjustment in the event of stock splits, stockdividends, and similar transactions. The notes are convertible into up to5,427,273 shares of the Company’s Common Stock, have a maturity date of March 26,2010 and bear interest at the rate of 8% per annum compounded on each July 15and January 15.  Pursuant to theterms of the transaction, the Company issued to the note holders 3 yearwarrants to purchase up to an additional 5,496,646 of shares of Common Stock.Assuming the conversion of all promissory notes and exercise of all warrants,up to 10,923,919 shares of the Company’s Common Stock may be issued as a resultof the private placement. Such an issuance, if it were to occur, would behighly dilutive to existing shareholders and may, under certain conditions,effect a change of control of the Company. The Company’s obligations under thenotes are secured by a security interest in substantially all of the Company’stangible and intangible assets, pursuant to the terms of a Security Agreementdated March 26, 2008. In addition, the Company entered into a notepurchase agreement with Great American Investors (GAI) for the amount of thetransaction fees of $210,000.  Pursuantto the terms of an agreement between the Company and GAI, the Company issuedwarrants to purchase such number of shares of Common Stock equal to the totalnumber of shares of Common Stock which shall be initially issuable uponconversion of the related Note plus and additional 69,375 warrants.  The transfer fee of $210,000 will berecognized over the shorter term of debt or date of conversion based on theeffective interest method. As of September 30, 2008, $52,500 of the transferfee was charged to earnings.  During the ninemonths ended September 30, 2008, the Company valued the warrants received inthe private placement and purchase agreement with GAI utilizing theBlack-Scholes Model and determined that the value of the warrants is $840,000.  The Company allocated the value of thewarrants as a contra discount to the principal amount of the notes and it isbeing recognized over the term of the notes. As of September 30, 2008, $210,000 of the value of the warrants wascharged to earnings.  In addition, thewarrant holders are getting a discount of $.025 per share, which gives rise toa beneficial conversion feature of $133,000 that is being charged to earningsover the period from the date of issuance to the date of which the holder canrealize a return.  As of September 30,2008 $33,250 of the beneficial conversion was charged to earnings.

 

Theobligations under the note and the security interest created by the SecurityAgreement are subordinate and junior in right of payment to the senior lien onthe Company’s assets held by Western Commercial Bank in connection with theCompany’s existing line of credit.

 

Simultaneouslywith the execution of the Purchase Agreement, the Company and each of theinvestors entered into a Registration Rights Agreement, pursuant to which eachof the investors shall be entitled to certain registration rights.

 

**Note 11-New AccountingPronouncements**

 

In December 2007, the FinancialAccounting Standards Board (“FASB”) issued Statement of Financial AccountingStandard No. 141 (Revised) (“SFAS 141(R)”),  Business Combinations. The provisions of thisstatement are effective for business combinations for which the acquisitiondate is on or after the beginning of the first annual reporting periodbeginning after December 15, 2008. Earlier application is not permitted. SFAS141(R) replaces SFAS 141 and provides new guidance for valuing assets andliabilities acquired in a business combination. The Companywill adopt SFAS 141(R) in calendar year 2009.  The adoption of SFAS No. 141 is notexpected to have a material impact on our consolidated financial statements.

 

8

----

Table of Contents

 

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements (SFAS 157). SFAS 157 establishes a framework formeasuring fair value in generally accepted accounting principles, and expandsdisclosures about fair value measurements. SFAS 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007. In February 2008,the FASB staff issued a staff position that delayed the effective date of SFAS No. 157for all non-financial assets and liabilities except for those recognized ordisclosed annually. The FASB also issued FAS-157-1, “application of FASBStatement No. 157 to FASB Statement No. 13 and other AccountingPronouncements that address Fair Value Measurements for Purposes of LeaseClassifications or Measurements under SFAS Statement No. 13”. The Companyis required to adopt the provision of SFAS 157, as applicable, beginning infiscal year 2008. The adoption of SFAS No. 157 did not have a materialeffect on our operating results or financial position.

 

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities”, whichprovides companies with an option to report selected financial assets andliabilities at fair value. The objective of SFAS No. 159 is to reduce bothcomplexity in accounting for financial instruments and the volatility inearnings caused by measuring related assets and liabilities differently. SFAS No. 159also establishes presentation and disclosure requirements designed tofacilitate comparisons between companies that choose different measurementattributes for similar types of assets and liabilities. SFAS No. 159 iseffective for the Company as of January 1, 2008.  The adoption of SFAS No. 159 did nothave a material effect on our operating results or financial position.

 

In December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interest in Consolidated Financial Statements” (“SFAS 160”).SFAS 160 establishes new accounting and reporting standards for the noncontrollinginterest in a subsidiary and for the deconsolidation of a subsidiary.Specifically, this statement requires the recognition of a noncontrollinginterest (minority interest) as equity in the consolidated financial statementsand separate from the parent’s equity. The amount of net income attributable tothe noncontrolling interest will be included in consolidated net income on theface of the income statement. SFAS 160 clarifies that changes in a parent’sownership interest in a subsidiary that do not result in deconsolidation areequity transactions if the parent retains it controlling financial interest. Inaddition, this statement requires that a parent recognize a gain or loss in netincome when a subsidiary is deconsolidated. Such gain or loss will be measuredusing the fair value of the noncontrolling equity investment on thedeconsolidation date. SFAS 160 also includes expanded disclosure requirementsregarding the interests of the parent and its noncontrolling interest. SFAS 160is effective for fiscal years, and interim periods within those fiscal years,beginning on or after December 15, 2008. Earlier adoption is prohibited.The adoption of SFAS 160 is not expected to have a material impact on theCompany’s consolidated financial position, cash flows and results ofoperations.

 

In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities which amendsSFAS No. 133. The statement is intended to improve transparency infinancial reporting by requiring enhanced disclosures of an entity’s derivativeinstruments and hedging activities and their effects on the entity’s financialposition, financial performance, and cash flows. SFAS 161 is effectiveprospectively for financial statements issued for fiscal years and interimperiods beginning after November 15, 2008. The adoption of SFAS No. 161is not expected to have a material impact on our consolidated financialstatements.

 

In May 2008, the FASB issued SFASNo. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS162). This statement identifies the sources of accounting principles and theframework for selecting the principles to be used in the preparation offinancial statements of nongovernmental entities that are presented inconformity with generally accepted accounting principles (GAAP) in theUnited States. This Statement shall be effective 60 days following theSEC’s approval of the Public Company Accounting Oversight Board(PCAOB) amendments to AU Section 411, “The Meaning of Present Fairly inConformity With Generally Accepted Accounting Principles”. The Company does notbelieve the adoption of SFAS 162 will have a material impact on theconsolidated financial statements.

 

9

----

Table of Contents

 

**Item 2.Management’s Discussion and Analysis of Financial Condition and Results****ofOperations**

 

**Forward Looking Statements**

 

The SEC encourages companies to disclose forward-looking information sothat investors can better understand a company’s future prospects and makeinformed investment decisions. This Quarterly Report on Form 10-Q containssuch “forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995, Section 27A of the Securities Act of 1933and Section 21E of the Securities Exchange Act of 1934.

 

Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,”“may,” “plan,” “project,” “seek,” “will” and words and terms of similarsubstance used in connection with any discussion of future events, operating orfinancial performance, financing sources, product development, capitalrequirements, market growth and the like, identify forward-looking statements.Forward-looking statements are merely predictions and therefore inherentlysubject to uncertainties and other factors which could cause the actual resultsto differ materially from the forward-looking statement.  These forward-looking statements include,among others:

 

·                    projectionsof revenues and other financial items;

 

·                    statementsof strategies and objectives for future operations;

 

·                    statementsconcerning proposed applications or services;

 

·                    statementsregarding future economic conditions, performance or business prospects;

 

·                    statementsregarding competitors or competitive actions; and

 

·                    statementsof assumptions underlying any of the foregoing.

 

All forward-looking statements are present expectations of futureevents and are subject to a number of factors and uncertainties that couldcause actual results to differ materially from those described in theforward-looking statements. The risks related to ASPYRA’s business discussedunder “Risk Factors” in our Annual Report on Form 10-KSB filed March 31,2008, among others, could cause actual results to differ materially from thosedescribed in the forward-looking statements. Such risks include, among others: the competitive environment;unexpected technical and marketing difficulties inherent in major productdevelopment efforts; the potential need for changes in our long-term strategyin response to future developments; future advances in clinical informationtechnology and procedures, as well as potential changes in governmentregulations and healthcare policies, both of which could adversely affect theeconomics of the products offered by ASPYRA; and rapid technological change inthe information technology and software industries.

 

The Company makes no representation as to whether any projected orestimated information or results contained in any forward-looking statementswill be obtained or achieved. Shareholders are cautioned not to place unduereliance on the forward-looking statements, which speak only as of the date ofthis Quarterly Report on Form 10-Q. The Company is under no obligation,and it expressly disclaims any obligation, to update or alter anyforward-looking statements after the date of this Quarterly Report on Form 10-Q,whether as a result of new information, future events or otherwise.

 

**Overview**

 

The following discussion relates to the consolidated business ofASPYRA, which includes the operations of its wholly owned subsidiary, AspyraDiagnostic Solutions, Inc. (ADSI), formerly StorCOMM, Inc., and itswholly owned subsidiary Aspyra Technologies, Ltd. (ATI), formerly StorCOMMTechnologies, Ltd.

 

ASPYRA operates in one business segment determined in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 131, andgenerates revenues primarily from the sale of its Clinical and DiagnosticInformation Systems, which includes the license of proprietary applicationsoftware, and may include the sale of servers and other hardware components tobe integrated with its application software. In connection with sales of itsproducts, the Company provides implementation services for the installation,integration, and training of end users’ personnel. The Company also generatessales of ancillary software and hardware to its customers and to third parties.We recognize these revenues under system sales in our financialstatements.  The Company also generatesrecurring revenues from the provision of comprehensive post-implementationservices to its customers, pursuant to extended service agreements. Werecognize these revenues under service revenues in our financialstatements.  This service relationship isan important aspect of our business, as the Company’s products are “missioncritical” systems that are used by healthcare providers, in most cases, 24hours per day and 7 days per week.  Inorder to retain this service relationship we must keep our products current forcompetitive, clinical, diagnostic, and regulatory compliance.  Enhancements to our products in the form ofsoftware upgrades are an integral part of our business model and are included asa contract obligation in our warranty and extended service agreements.  In order to generate such revenueopportunities our investment in software enhancements is significant and is akey component of our ongoing support obligations.

 

10

----

Table of Contents

 

Because of the nature of our business, ASPYRA makes significantinvestments in research and development for new products and enhancements toexisting products. Historically, ASPYRA has funded its research and developmentprograms through cash flow primarily generated from operations. Managementanticipates that future expenditures in research and development will continueat current levels.

 

Aspyra incurred a net loss applicable to shareholders of $719,462 orbasic and diluted loss per share of $0.06 for the quarter ended September 30,2008 as compared to a net loss applicable to shareholders of $1,461,784 orbasic and diluted loss per share of $0.13 for the quarter ended September 30, 2007.  For the nine months ended September 30, 2008, the Companyincurred a net loss applicable to shareholders of $3,114,145 or basic anddiluted loss per share of $0.25 as compared to a net loss applicable toshareholders of $3,670,697 or basic and diluted loss per share of $0.33 for thesame period of fiscal 2007.

 

The operating losses incurred by the Company during the three and ninemonths ended September 30, 2008 were attributable to adecrease in sales compared to the same periods in 2007, partially offset bylower costs as a result of actions taken in the first quarter of 2008  to reduce personnel and other expenses. Theresults are more fully discussed in the following section “Results of Operations.”

 

**Results of Operations**

 

The followingtable sets forth certain line items in our condensed consolidated statement ofoperations as a percentage of total revenues for the periods indicated:

 
| ** **                                  | ** ** | **Three Months  Ended  September 30, 2008** | ** ** | **Three Months  Ended  September 30, 2007** | ** ** | **Nine Months  Ended  September 30, 2008** | ** ** | **Nine Months  Ended  September 30, 2007** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Revenues:                                   |       |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| System sales                                |       | 21.6                                                       | %          | 35.8                                                       | %          | 23.3                                                      | %          | 31.6                                                      | %          |
| Service revenues                            |       | 78.4                                                       |       | 64.2                                                       |       | 76.7                                                      |       | 68.4                                                      |       |
| Total revenues                              |       | 100.0                                                      |       | 100.0                                                      |       | 100.0                                                     |       | 100.0                                                     |       |
| Cost of products and  services sold:        |       |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| System sales                                |       | 21.4                                                       |       | 24.9                                                       |       | 25.2                                                      |       | 24.1                                                      |       |
| Service revenues                            |       | 27.3                                                       |       | 23.9                                                       |       | 27.8                                                      |       | 27.8                                                      |       |
| Total cost of  products and services        |       | 48.7                                                       |       | 48.8                                                       |       | 53.0                                                      |       | 51.9                                                      |       |
| Gross profit                                |       | 51.3                                                       |       | 51.2                                                       |       | 47.0                                                      |       | 48.1                                                      |       |
| Operating expenses:                         |       |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| Selling, general and administrative         |       | 64.2                                                       |       | 53.5                                                       |       | 68.4                                                      |       | 62.4                                                      |       |
| Research and development                    |       | 18.1                                                       |       | 20.0                                                       |       | 20.6                                                      |       | 21.8                                                      |       |
| Total operating  expenses                   |       | 82.3                                                       |       | 73.5                                                       |       | 89.0                                                      |       | 84.2                                                      |       |
| Operating loss                              |       | (31.0                                                      | )          | (22.3                                                      | )          | (42.0                                                     | )          | (36.1                                                     | )          |
|                                        |       |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| Loss before  provision for income taxes     |       | (33.1                                                      | )          | (23.3                                                      | )          | (46.8                                                     | )          | (37.2                                                     | )          |
| Provision for  income taxes                 |       | —                                                     |       | —                                                     |       | —                                                    |       | —                                                    |       |
|                                        |       |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| Net loss                                    |       | (33.1                                                      | )          | (23.3                                                      | )          | (46.8                                                     | )          | (37.2                                                     | )          |
| Deemed dividend                             |       | —                                                     |       | (27.2                                                      | )          | —                                                    |       | (10.2                                                     | )          |
| Net loss applicable to  common shareholders |       | (33.1                                                      | )          | (50.5                                                      | )          | (46.8                                                     | )          | (47.4                                                     | )          |

 

*Revenues*

 

Sales for the quarter ended September 30, 2008 were $2,175,753, ascompared to $2,892,925 for the quarter ended September 30, 2007, anoverall decrease of $717,172 or 24.8%. For the nine months ended September 30,2008, sales decreased to $6,657,125, as compared to $7,745,550 for thecomparable nine-month period ended September 30, 2007, an overall decreaseof $1,088,425 or 14.1%.

 

11

----

Table of Contents

 

When analyzed by revenue category for the quarter and nine-month periodended September 30, 2008, sales of Clinical Information Systems (CIS) andDiagnostic Information Systems (DIS) decreased by $564,985 or 54.6% and $897,474or 36.7%, respectively, and service revenues decreased by $152,187 or 8.2% and$190,951 or 3.6%, respectively. The decrease in sales of DIS products wasprimarily attributable to the reduction in sales through the Company’sdistributors and channel partners.  Additionally,due to market conditions, there has been a slowing of sales cycles.  Management continues to believe that theimportance of imaging technologies such as the Company’s Radiology InformationSystem (“RIS”) / Picture Archive Communication System (“PACS”) productsjustifies them as an investment by end users to improve efficiencies.  The Company has been rebuilding its salesforce and hired several new experienced regional sales managers in an effort tocapitalize on market opportunities.

 

The decrease in service revenues is primarily attributable to a reducednumber of post-implementation services provided.  If and when the Company’s installed base ofCIS and DIS installations increases, then service revenues would be expected toincrease as well.

 

Sales cycles for Clinical Information Systems (CIS) and DiagnosticInformation Systems (DIS) products are generally lengthy and on average exceedsix months from inception to closure. Because of the complexity of the sales process, a number of factors thatare beyond the control of the Company can delay the closing oftransactions.  Furthermore, marketconditions have also affected the length of the sales cycle.  Additionally, the Company has been primarilyreliant on distributors and channel partners for the sales of its DiagnosticSystems and has been subject to inconsistent flow of orders.  ASPYRA’s sales force is now focusing on adirect sales model for the diagnostic system products to supplement thedistribution and channel network so that the Company will be less reliant onthird parties for the sale of its diagnostic systems.  ASPYRA has completed new versions of itslaboratory and radiology information systems products, as well as its newAccessRAD RIS/ PACS which it has begun marketing.

 

The Company continues to seek strategic joint marketing partnershipswith other companies, and channel partners. We expect that the Company’s future operating results will continue tobe subject to annual and quarterly variations based upon a wide variety offactors, including the volume mix and timing of orders received during anyquarter or annual period.  In addition,the Company’s revenues associated with CIS and DIS transactions may be delayeddue to customer related issues such as availability of funding, staff availability,IT infrastructure readiness, and the performance of third party contractors,all of which are issues outside of the control of ASPYRA.

 

*Costs of products and services sold*

 

Cost of products and services sold decreased by $352,806 or 25.0% forthe quarter ended September 30, 2008 as compared to the quarter ended September 30,2007. Cost of products and services sold decreased by $486,427 or 12.1% for thenine months ended September 30, 2008 as compared to the nine months ended September 30,2007.  For the quarter, the overalldecrease in cost of sales was primarily attributable to a decrease in laborcosts of $90,767 or 13.0%, a decrease in material costs of $177,596 or 76.1%and a decrease in other costs of sales of $84,443 or 17.6%.  For the nine-month period, the overalldecrease in cost of sales was primarily attributable to a decrease in laborcosts of $221,688 or 10.4%, a decrease in material costs of $160,785 or 31.2%,and a decrease in other costs of sales of $103,954 or 7.6%.  The decrease in labor costs and other costswas primarily attributable to reduction of personnel and overhead.  The decrease in material costs wasattributable to the decrease in system sales requiring hardware.

 

For the quarter and nine months ended September 30, 2008, cost ofproducts and services sold as a percentage of sales was 49% and 53%, ascompared to 49% and 52% for the quarter and nine months ended September 30,2007. The overall percentage increase in cost of sales, as a percentage ofsales, was primarily attributable to reduction in revenues as describedabove.  Management believes the grossprofit margin will improve in the remainder of fiscal 2008 due to reducedoperating expense; however, the Company could experience quarterly variationsin gross margin as a result of the factors discussed above. Management was ableto eliminate redundant personnel and achieve operational synergies that yieldedreductions in operating expenses during the first quarter of 2008 which weexpect to be evident in the remainder of fiscal 2008.

 

*Selling, general and administrative expenses*

 

Selling, general, and administrative expenses decreased by $149,484 or 9.7%for the quarter ended September 30, 2008 as compared to the quarter ended September 30,2007. For the nine months ended September 30, 2008, selling, general, andadministrative expenses decreased by $280,883 or 5.8%, as compared to the ninemonths ended September 30, 2007.

 

For the quarter ended September 30, 2008, the decrease in selling,general, and administrative expenses was primarily related to a decrease insalaries of $182,000 and a decrease in travel and lodging expenses of $27,000partially offset by an increase of approximately $64,000 in SFAS 123(R) stock-basedcompensation expense as compared to the same period in fiscal 2007.

 

12

----

Table of Contents

 

For the nine-month period, the reduction ofexpenses was primarily attributable to decreases of approximately $711,000related to salaries, $53,000 in trade show expense, and $133,000 in travel andlodging expenses, which were partially offset by an increase of $82,000 inlegal and accounting expenses, $213,000 in SFAS 123(R) stock-basedcompensation expense,  $51,000 in stockadministration expenses, $113,000 in recruitment fees and $169,000 consultingexpenses related to the documentation of the Company’s internal controls andconsulting fees compared to the same period in fiscal 2007. Managementcontinues to evaluate cost reductions in some of its selling, general andadministrative expenses while it also continues to plan further investment inits marketing programs.

 

*Research and development expenses*

 

For the quarter and nine months ended September 30,2008, research and development expenses decreased $186,819 or 32.2% and$317,070 or 18.8%, respectively, as compared to the quarter and nine monthsended September 30, 2007. The decrease was primarily attributable todecreases in salaries of personnel in product development.  Current development expenses were attributableto the development of AccessRAD, the RIS/PACS solution that integrates theCompany’s CyberRAD radiology information system with its AccessNET PACS system,and enhancements and new modules for the Company’s CIS and DIS products.  For the quarter ended September 30, 2008and 2007, the Company’s capitalized software costs were $155,769 and $207,096,respectively, which are generally amortized over the estimated useful life notto exceed five years.  For the ninemonths ended September 30, 2008 and 2007, the Company’s capitalizedsoftware costs were $443,854 and $662,037, respectively, which are generallyamortized over the estimated useful life not to exceed five years.

 

*Interest expense and other income*

 

Interest and other income was $179,104 and$199,011 for the quarter and nine months ended September 30, 2008 ascompared to $12,187 and $40,731 for the quarter and nine months ended September 30,2007 due to the settlement of an outstanding notes payable, which was recordedin other income.

 

Interest expense was $223,710 and $517,160for the quarter and nine months ended September 30, 2008 as compared to$38,385 and $131,287 for the quarter and nine months ended September 30,2007.  The increase was primarily due tonon-cash interest charges related to the value of outstanding warrants,beneficial conversion, and debt issuance costs resulting from the privateplacement transaction completed on March 26, 2008.  See “Liquidity and Capital Resources” foradditional information.

 

*Net loss*

 

As a result of the factors discussed above,the Company incurred a net loss applicable to shareholders of $719,462 or basicand diluted loss per share of $0.06 for the quarter ended September 30,2008 as compared to a net loss applicable to shareholders of $1,461,784 or basicand diluted loss per share of $0.13 for the quarter ended September 30,2007.  For the nine months ended September 30,2008, the Company incurred a net loss applicable to shareholders of $3,114,145or basic and diluted loss per share of $0.25 as compared to a net lossapplicable to shareholders of $3,670,697 or basic and diluted loss per share of$0.33 for the same period of fiscal 2007.

 

**Liquidity andCapital Resources**

** **

Historically, the Company’s primary need forcapital has been to invest in software development, and in computers andrelated equipment for its internal use. The Company invested $443,854 and $662,037, respectively, in softwaredevelopment during the nine months ended September 30, 2008 and 2007.  These expenditures related to investment inthe Company’s RIS/PACS integrated system, AccessRAD, enhancements to AccessNETPACS, the new browser version of the Company’s LIS product, CyberLAB, and otherproduct enhancements. The Company anticipates expending additional sums duringfiscal 2008 on product enhancements to all its products and the furtherdevelopment of AccessRAD.  During thenine months ended September 30, 2008, the Company invested an aggregate of$19,501 in fixed assets primarily consisting of computers and software, ascompared to an investment of $66,534 in fixed assets primarily consisting ofcomputers, network infrastructure, telephone and data communications systems,and software in the quarter ended September 30, 2007.

 

As of September 30, 2008, the Company’sworking capital amounted to a deficit of $2,944,853 as compared to a deficit of$4,007,912 as of December 31, 2007. The reduction in deficit was primarily attributable to the privateplacement transaction completed on March 26, 2008 with various current andnew investors which is described in more detail below.

 

13

----

Table of Contents

 

On March 26, 2008, the Company alsoexecuted agreements renewing its revolving line of credit with WesternCommercial Bank in the aggregate amount of $1,300,000.  The revolving line of credit is secured bythe Company’s accounts receivable and inventory and matures on February 27,2009.  The revolving line of credit is subjectto certain covenants including revised financial covenants. At September 30,2008, the balance outstanding on the Company’s revolving line of credit was$744,965.  As of September 30, 2008,the Company was in compliance with all covenants.  Advances under the revolving line of creditare on a formula based on eligible accounts receivable and inventory balances.

 

Cash used in operating activities was$1,358,253 for the nine months ended September 30, 2008, compared to cashused in operating activities of $761,113 for the nine months ended September 30,2007.  The increase in cash used foroperating activities was primarily attributable to the net change in accountspayable, accrued liabilities and prepaid expenses, which was partially offsetby the change in receivables and deferred service contract income along withincreased depreciation, stock-based compensation, and amortization ofcapitalized software.

 

Net cash used in investing activities totaled$463,355 for the nine months ended September 30, 2008, compared to$728,571 used in investing activities during the same period of 2007.  The change was primarily the result of adecrease in investment in fixed assets and software capitalization costscompared to the same period of 2007.

 

Cash provided by financing activitiesamounted to $2,209,564 during the nine months ended September 30, 2008compared to cash provided by financing activities of $2,560,856 in the sameperiod of 2007.  The decrease wasprimarily attributable to the exercise of outstanding warrants and the changein restricted cash in 2007, partially offset by the Company completing theprivate placement transaction described below on March 26, 2008.

 

The Company’s primary source of workingcapital has been generated from private placements of securities and fromborrowings.  The Company has experienceda history of losses due to the integration of its businesses and thesignificant investment in new products since the quarter ended March 31,2005 and negative cash flows from operations since the quarter ended December 31,2005.  An unanticipated decline in sales,delays in implementations where payments are tied to delivery and/orperformance of services or cancellations of contracts have had and in thefuture could have a negative effect on cash flow from operations and could inturn create short-term liquidity problems.

 

On March 26, 2008 the Company completeda private placement of promissory notes and warrants pursuant to a NotePurchase Agreement entered into with various current and new investors.  Under the terms of the Purchase Agreement,the investors purchased secured promissory notes from the Company in theprincipal amount of $2,775,000.  Thenotes are convertible into shares of the Company’s Common Stock at a conversionprice of $0.55 per share, subject to adjustment in the event of stock splits,stock dividends, and similar transactions. The notes are convertible into up to5,427,273 shares of the Company’s Common Stock, have a maturity date of March 26,2010 and bear interest at the rate of 8% per annum compounded on each July 15and January 15.  Under the terms ofthe transaction, the Company issued to the note holders 3-year warrants topurchase up to an aggregate of 5,496,646 additional shares of CommonStock.  As a result, assuming theconversion of all promissory notes and exercise of all warrants issued in theprivate placement, up to 10,923,919 shares of the Company’s Common Stock may beissued.  Such an issuance if it were tooccur, would be highly dilutive to existing shareholders and may, under certainconditions, effect a change of control of the Company. Simultaneously with theexecution of the Purchase Agreement, the Company and each of the investorsentered into a Registration Rights Agreement, pursuant to which each of theprivate placement investors shall be entitled to certain registration rightsfor all of the shares issuable in the transaction.

 

We believe that our current cash and cashequivalents, and cash flow from operations, will be sufficient to meet our currentanticipated cash needs, including for working capital purposes, capitalexpenditures and various contractual obligations, for at least the next 12months.  If the Company is unable togenerate cash from operations or meet revenue targets or obtain new cashinflows from financing or equity offerings, the Company would need to takeaction and reduce costs in order to operate for the next 12 months.  This requires the Company to plan forpotential courses of action to reduce costs and look for new sources offinancings and capital infusion.    Wemay also require additional cash resources due to changed business conditionsor other future developments, including any investments or acquisitions we maydecide to pursue.  If these sources areinsufficient to satisfy our cash requirements, we may seek to sell debtsecurities or additional equity securities or to obtain a credit facility witha lender.  The sale of additionalconvertible debt securities or equity securities could result in additionaldilution to our stockholders.  Theincurrence of additional indebtedness would result in increased debt serviceobligations and could result in additional operating and financial covenantsthat would restrict our operations.  Inaddition, there can be no assurance that any additional financing will beavailable on acceptable terms, if at all. 

 

14

----

Table of Contents

 

Although there are no present understandings, commitments or agreementswith respect to the acquisition of any other businesses, applications ortechnologies, we may from time to time evaluate acquisitions of otherbusinesses, applications or technologies.

 

**Seasonality,Inflation and Industry Trends**

** **

The Company’s sales are generally higher inthe spring and fall but are subject to a number of factors related to itscustomers’ budgetary cycles.  Inflationhas not had a material effect on the Company’s business since the Company hasbeen able to adjust the prices of its products and services in response toinflationary pressures.  Managementbelieves that most phases of the healthcare segment of the computer industrywill continue to be highly competitive, and that potential healthcare reformsincluding initiatives to establish a national standard for electronic healthrecords may have a long-term positive impact on its business.  The key issues driving demand for ASPYRA’sproducts are industry concerns about patient care and safety issues,development of a national standard for electronic health records that willaffect all clinical data, a shift from analog to digital imaging technologies,and regulatory compliance.  The Companyhas continued to invest heavily in new application modules to assist itscustomers in addressing these issues. Management believes that new application modules and features thatconcentrate on such issues will be key selling points and will provide acompetitive advantage.  In addition,management believes that the healthcare information technology industry will bemarked with more significant technological advances, which will improve thequality of service and reduce costs.

 

**CriticalAccounting Policies and Estimates**

** **

Management’s discussion and analysis of ASPYRA’sfinancial condition and results of operations are based upon the condensedconsolidated financial statements contained in this Quarterly Report on Form 10-Q,which have been prepared in accordance with accounting principles generallyaccepted in the United States.  Thepreparation of these financial statements requires management to make estimatesand judgments that affect the reported amounts of assets, liabilities, revenuesand expenses, and related disclosures of contingent assets andliabilities.  On an on-going basis,management evaluates estimates, including those related to the valuation ofinventory and the allowance for uncollectible accounts receivable. We base ourestimates on historical experience and on various other assumptions that managementbelieves to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources.  Actual results may differ from these estimatesunder different assumptions or conditions. We believe the following criticalaccounting policies affect our more significant judgments and estimates used inthe preparation of our consolidated financial statements:

 

*Inventory*

 

The Company’s inventory is comprised of acurrent inventory account that consists of items that are held for resale and along-term inventory account that consists of items that are held for repairsand replacement of hardware components that are serviced by the Company under long-termExtended Service Agreements with some of its customers.  Current inventory is valued at the lower ofcost to purchase or the current estimated market value of the inventory items.  Inventory is evaluated on a continual basisand adjustments to recorded costs are made based on management’s estimate offuture sales value, or in the case of the long-term component inventory, onmanagement’s estimation of the usage of specific inventory items and netrealizable value.  Management reviewsinventory quantities on hand and makes a determination of the excess orobsolete items in the inventory, which, are specifically reserved.  In addition, adjustments are made for thedifference between the cost of the inventory and the estimated market value andcharged to operations in the period in which the facts that give rise to theadjustments become known.  At September 30,2008, the inventory reserve was approximately $201,230.

 

*Accounts Receivable*

 

Accounts receivable balances are evaluated ona continual basis and allowances are provided for potentially uncollectibleaccounts based on management’s estimate of the collectability of customeraccounts. If the financial condition of a customer were to deteriorate,resulting in an impairment of their ability to make payments, an additionalallowance may be required. Allowance adjustments are charged to operations inthe period in which the facts that give rise to the adjustments becomeknown.  The accounts receivable balanceat September 30, 2008 was $928,057, net of an allowance for doubtfulaccounts of approximately $46,801.

 

15

----

Table of Contents

 

*Revenue Recognition*

 

Revenues are derived primarily from the saleof CIS and DIS products and the provision of services.  The components of the system sales revenuesare the licensing of computer software, installation, and the sale of computerhardware and sublicensed software. The components of service revenues aresoftware support and hardware maintenance, training, and implementationservices.  The Company recognizes revenuein accordance with the provisions of Statement of Position (SOP) No. 97-2,“Software Revenue Recognition,” as amended by SOP No. 98-4, SOP 98-9 andclarified by Staff Accounting Bulletin (SAB) 104 “Revenue Recognition inFinancial Statements.”  SOP No 97-2, asamended, generally requires revenue earned on software arrangements involvingmultiple-elements to be allocated to each element based on the relative fairvalues of those elements.  The Companyallocates revenue to each element in a multiple-element arrangement based onthe element’s respective fair value, with the fair value determined by theprice charged when that element is sold separately and specifically defined ina quotation or contract.  Deferredrevenue related to CIS and DIS sales are comprised of deferrals for licensefees, hardware, and other services for which the implementation has not yetbeen completed and revenues have not been recognized.  Revenues are presented net of discounts.  At September 30, 2008 deferred revenuewas $412,112.

 

Post-implementation software and hardwaremaintenance services are marketed under monthly, quarterly and annualarrangements and are recognized as revenue ratably over the contractedmaintenance term as services are provided. The Company determines the fair value of the maintenance portion of thearrangement based on the renewal price of the maintenance charged to customers,the professional services portion of the arrangement (other than installationservices) based on hourly rates which the Company charges for these serviceswhen sold apart from a software license, and the hardware and sublicense ofsoftware based on the prices for these elements when they are sold separatelyfrom the software.  At September 30,2008, deferred service contract income was $2,088,048.

 

*Software Development Costs*

 

Costs incurred internally in creatingcomputer software products are expensed until technological feasibility hasbeen established upon completion of a program design. Thereafter, applicablesoftware development costs are capitalized and subsequently reported at thelower of amortized cost or net realizable value.  Capitalized costs are amortized based oncurrent and expected future revenue for each product with minimum annualamortization equal to the straight-line amortization over the estimatedeconomic life of the product, not to exceed five years.  For the nine months ended September 30,2008 and 2007, the Company capitalized $443,854 and $662,037,respectively.  At September 30,2008, the balance of capitalized software costs was $2,918,925, net ofaccumulated amortization of $1,239,328.

 

*Intangible Assets*

 

Intangible assets, with definite andindefinite lives, consist of acquired technology, customer relationships,channel partners, and goodwill.  They arerecorded at cost and are amortized, except goodwill, on a straight-line basisbased on the period of time the asset is expected to contribute directly orindirectly to future cash flows, which range from four to 15 years.

 

In accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 142, goodwill is tested for impairmenton an annual basis or between annual tests if an event occurs or circumstanceschange that would indicate the carrying amount may be impaired.  In accordance with SFAS No. 144,Accounting for Impairment of Long-Lived Assets, management reviews definitelife intangible assets to determine if events or circumstances have occurredwhich may cause the carrying values of intangible assets to be impaired. Thepurpose of these reviews is to identify any facts or circumstances, eitherinternal or external, which may indicate that the carrying value of the assetsmay not be recoverable.

 

*Stock-based Compensation*

 

We have two stock-based compensation plans,the 2005 Equity Incentive Plan and the 1997 Stock Option Plan, under which wemay issue shares of our common stock to employees, officers, directors andconsultants. Upon effectiveness of the 2005 Equity Incentive Plan on November 22,2005, the 1997 Stock Option Plan was terminated for purposes of newgrants.  Both of these plans have beenapproved by our shareholders.  During thenine months ended September 30, 2008, the Board approved an increase inthe number of shares available for grant under the 2005 Equity Incentive Planfrom 1,290,875 to 3,040,875.  Theincrease has not yet been ratified by our shareholders, and any equity awardsmade from this share increase will be subject to shareholder approval, which weplan to solicit at our next annual meeting of shareholders.

 

Prior to January 1, 2006, we accountedfor these plans under the recognition and measurement provisions of APB OpinionNo. 25, Accounting for Stock Issued to Employees, and relatedInterpretations, as permitted by SFAS No. 123, Accounting for Stock-BasedCompensation.  Effective January 1,2006, we adopted the fair value recognition provisions of SFAS No. 123(R),Share-Based Payment, using the modified-prospective-transition method. Underthat transition method, compensation cost recognized in the three and ninemonths ended September 30, 2008 and 2007 includes: (a) compensation 

 

16

----

Table of Contents

 

cost for all share-based payments granted prior to, but not yet vestedas of January 1, 2006, based on the grant date fair value estimated inaccordance with the original provisions of SFAS No. 123, and (b) compensationcost for all share-based payments granted subsequent to January 1, 2006,based on the grant-date fair value estimated in accordance with the provisionsof SFAS No. 123(R). Results for prior periods have not been restated.

 

SFAS No. 123(R) requires us to makecertain assumptions and judgments regarding the grant date fair value. Thesejudgments include expected volatility, risk free interest rate, expected optionlife, dividend yield and vesting percentage. These estimations and judgmentsare determined by us using many different variables that in many cases areoutside of our control. The changes in these variables or trends, includingstock price volatility and risk free interest rate may significantly impact thegrant date fair value resulting in a significant impact to our financialresults.

 

*Income Taxes*

 

The Company accounts for income taxes inaccordance with SFAS No. 109 “Accounting for Income Taxes,” which requiresrecognition of deferred tax liabilities and assets for the expected future taxconsequences of events that have been included in our financial statements ortax returns.  Under this method, deferredtax liabilities and assets are determined based on the differences between thefinancial statements and the tax bases of assets and liabilities using enactedtax rates in effect for the year in which the differences are expected toreverse.  Valuation allowances areestablished when necessary to reduce deferred tax assets to the amount expectedto be realized.  Income tax expenserepresents the tax payable for the period and the change during the period indeferred tax assets and liabilities.  TheCompany has evaluated the net deferred tax asset taking into considerationoperating results and determined that a full valuation allowance should bemaintained.

 

### **New AccountingPronouncements**

 

In December 2007,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standard No. 141 (Revised) (“SFAS 141(R)”), BusinessCombinations.  The provisions of thisstatement are effective for business combinations for which the acquisitiondate is on or after the beginning of the first annual reporting periodbeginning after December 15, 2008. Earlier application is not permitted.SFAS 141(R) replaces SFAS 141 and provides new guidance for valuing assetsand liabilities acquired in a business combination. We will adopt SFAS 141(R) incalendar year 2009.  The adoption of SFASNo. 141 is not expected to have a material impact on our consolidated financialstatements.

 

In September 2006,the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair value measurements.SFAS 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007. In February 2008, the FASB staffissued a staff position that delayed the effective date of SFAS No. 157for all non-financial assets and liabilities except for those recognized ordisclosed annually. The FASB also issued FAS-157-1, “application of FASBStatement No. 157 to FASB Statement No. 13 and other AccountingPronouncements that address Fair Value Measurements for Purposes of Lease Classificationsor Measurements under SFAS Statement No. 13”. We are required to adopt theprovision of SFAS 157, as applicable, beginning in fiscal year 2008. Theadoption of SFAS No. 157 did not have a material effect on our operatingresults or financial position.

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities”, which provides companies with an option to reportselected financial assets and liabilities at fair value. The objective of SFAS No. 159is to reduce both complexity in accounting for financial instruments and thevolatility in earnings caused by measuring related assets and liabilitiesdifferently. SFAS No. 159 also establishes presentation and disclosurerequirements designed to facilitate comparisons between companies that choosedifferent measurement attributes for similar types of assets and liabilities.SFAS No. 159 is effective for the Company as of January 1, 2008. Theadoption of SFAS No. 159 did not have a material effect on our operatingresults or financial position.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interest in ConsolidatedFinancial Statements” (“SFAS 160”). SFAS 160 establishes new accounting andreporting standards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary. Specifically, this statement requires therecognition of a noncontrolling interest (minority interest) as equity in theconsolidated financial statements and separate from the parent’s equity. Theamount of net income attributable to the noncontrolling interest will beincluded in consolidated net income on the face of the income statement. SFAS160 clarifies that changes in a parent’s ownership interest in a subsidiarythat do not result in deconsolidation are equity transactions if the parentretains it controlling financial interest. In addition, this statement requiresthat a parent recognize a gain or loss in net income when a subsidiary isdeconsolidated. Such gain or loss will be measured using the fair value of thenoncontrolling equity investment on the deconsolidation date. SFAS 160 alsoincludes expanded disclosure requirements regarding the interests of the parentand its noncontrolling interest. SFAS 160 is effective for fiscal 

 

17

----

Table of Contents

 

years, and interimperiods within those fiscal years, beginning on or after December 15,2008. Earlier adoption is prohibited. The adoption of SFAS 160 is not expectedto have a material impact on the Company’s consolidated financial position,cash flows and results of operations.

 

In March 2008, theFASB issued SFAS No. 161, Disclosures about Derivative Instruments andHedging Activities which amends SFAS No. 133. The statement is intended toimprove transparency in financial reporting by requiring enhanced disclosuresof an entity’s derivative instruments and hedging activities and their effectson the entity’s financial position, financial performance, and cash flows. SFAS161 is effective prospectively for financial statements issued for fiscal yearsand interim periods beginning after November 15, 2008. The adoption ofSFAS No. 161 is not expected to have a material impact on our consolidatedfinancial statements.

 

In May 2008, theFASB issued SFAS No. 162, “The Hierarchy of Generally Accepted AccountingPrinciples” (SFAS 162). This statement identifies the sources of accountingprinciples and the framework for selecting the principles to be used in thepreparation of financial statements of nongovernmental entities that arepresented in conformity with generally accepted accounting principles(GAAP) in the United States. This Statement shall be effective 60 daysfollowing the SEC’s approval of the Public Company Accounting Oversight Board(PCAOB) amendments to AU Section 411, “The Meaning of Present Fairlyin Conformity With Generally Accepted Accounting Principles”. The Company doesnot believe the adoption of SFAS 162 will have a material impact on theconsolidated financial statements.

 

**Item 4T. Controls and Procedures.**

 

*Evaluation of Disclosure Controls and Procedures*

 

Our management, with the participation of our chiefexecutive officer and chief financial officer, evaluated the effectiveness ofour disclosure controls and procedures as of September 30, 2008. The term “disclosure controls andprocedures,” as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended, means controls and otherprocedures of a company that are designed to ensure that information requiredto be disclosed by a company in the reports that it files or submits under theExchange Act is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms. Disclosure controls and proceduresinclude, without limitation, controls and procedures designed to ensure thatinformation required to be disclosed by a company in the reports that it filesor submits under the Exchange Act is accumulated and communicated to thecompany’s management, including its principal executive and principal financialofficers, as appropriate, to allow timely decisions regarding requireddisclosure. Based on the evaluation of our disclosure controls andprocedures as of September 30, 2008, our chief executive officer and chieffinancial officer concluded that, as of such date, our disclosure controls andprocedures were effective.

 

*Changes in Internal Control Over Financial Reporting*

 

During the quarter ended September 30, 2008, there have been no changes in ourinternal control over financial reporting (as defined in Rule 13a-15(f) and15d-15(f) under the Exchange Act) that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

This quarterly report doesnot include an attestation report of the company’s registered public accountingfirm regarding internal control over financial reporting. Management’s reportwas not subject to attestation by the company’s registered public accountingfirm pursuant to temporary rules of the Securities and Exchange Commissionthat permit the company to provide only management’s report in this quarterlyreport.

 

18

----

Table of Contents

 

**Part II – OTHER INFORMATION**

 

**Item 1.    ****Legal Proceedings******

 

None.

 

**Item 2.    ****Unregistered Sales Of Equity Securities And Use OfProceeds.******

 

None.

 

**Item 3.    ****Defaults Upon Senior Securities.******

 

None.

 

**Item 4.    Submission Of Matters To A Vote Of SecurityHolders.**

 

None.

 

**Item 5.    ****Other Information.******

 

None.

 

**Item 6. Exhibits.**

 
| **Exhibit No.** | ** **         | **Description** |
|----------------------|--------------------|-----------------|
|                 |               |            |   |   |
| 3.1                  |     | (1)             |   | Restated Articles of  Incorporation, as amended. |
|                 |               |            |   |   |
| 3.2                  |               | (2)             |   | Amendment to the  Restated Articles of Incorporation filed with the Secretary of the State of  California on November 21, 2005. |
|                 |               |            |   |   |
| 3.3                  |               | (1)             |   | By-Laws, as amended. |
|                 |               |            |   |   |
| 31.1                 |               | *               |   | Certification of Chief  Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the  Securities Exchange Act of 1934. |
|                 |               |            |   |   |
| 31.2                 |               | *               |   | Certification of Chief  Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the  Securities Exchange Act of 1934. |
|                 |               |            |   |   |
| 32.1                 |               | *               |   | Certification of Chief  Executive Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the  Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. |
|                 |               |            |   |   |
| 32.2                 |               | *               |   | Certification of Chief  Financial Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the  Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. |

 

----

(1)   Previously filed as an exhibit to the Company’sRegistration Statement on Form S-18 dated September 22, 1983, SECFile No. 2- 85265.

 

(2)   Included as an Annex to the joint proxystatement/prospectus that is part of the Company’s Registration Statement on Form S-4,originally filed on October 3, 2005, SEC File No. 333-128795.

 

*     Filed herewith.

 

19

----

Table of Contents

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                               | ** ** | **ASPYRA, INC.**                              |
|-------------------------------|------------|-----------------------------------------------|
|                          |       |                                          |
| Date: November 14,  2008 |       | /s/ James Zierick                             |
|                          |       | Chief Executive Officer                       |
|                          |       | (Principal Executive  Officer)                |
|                          |       |                                          |
| Date: November 14,  2008 |       | /s/ Anahita Villafane                         |
|                          |       | Chief Financial Officer                       |
|                          |       | (Principal Financial and  Accounting Officer) |

 

20

----

Table of Contents

 

**EXHIBITINDEX**

 
| **Exhibit No.** | ** **         | **Description** |
|----------------------|--------------------|-----------------|
|                 |               |            |   |   |
| 3.1                  |     | (1)             |   | Restated Articles of  Incorporation, as amended. |
|                 |               |            |   |   |
| 3.2                  |               | (2)             |   | Amendment to the  Restated Articles of Incorporation filed with the Secretary of the State of  California on November 21, 2005. |
|                 |               |            |   |   |
| 3.3                  |               | (1)             |   | By-Laws, as amended. |
|                 |               |            |   |   |
| 31.1                 |               | *               |   | Certification of Chief  Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the  Securities Exchange Act of 1934. |
|                 |               |            |   |   |
| 31.2                 |               | *               |   | Certification of Chief  Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the  Securities Exchange Act of 1934. |
|                 |               |            |   |   |
| 32.1                 |               | *               |   | Certification of Chief  Executive Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the  Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. |
|                 |               |            |   |   |
| 32.2                 |               | *               |   | Certification of Chief  Financial Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the  Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. |

 

----

(1)   Previously filed as an exhibit to the Company’sRegistration Statement on Form S-18 dated September 22, 1983, SECFile No. 2- 85265.

 

(2)   Included as an Annex to the joint proxystatement/prospectus that is part of the Company’s Registration Statement on Form S-4,originally filed on October 3, 2005, SEC File No. 333-128795.

 

*      Filed herewith.

 

21

----