**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 Washington,
D.C. 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 March 31, 2005
  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 No.: 0-22693**
  **InfoTech
USA, Inc.**
 (Exact
name of registrant as specified in its charter)
  **Delaware**
      (State
      or other jurisdiction of
      incorporation
      or organization)****
    **11-2889809**
      (I.R.S.
      Employer
      Identification
      No.)
  **7
Kingsbridge Road, Fairfield, New Jersey  07004**
 (Address,
including zip code, of registrant’s principal executive offices)
  Registrant’s
telephone number, including area code: **(973)
227-8772**
   Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 Yes 
x No 
o
  Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).  Yes  o No 
x
  As of May
13, 2005, 4,895,998 shares of our common stock were outstanding.
   
    
    **InfoTech
USA, Inc.**
 
 **Table
of Contents**
   
 **Item**
    **Page**Part
      I
    Financial
      Information
    3Item
      1Consolidated
      Condensed Financial Statements
    3Item
      2Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
    10Item
      3Quantitative
      and Qualitative Disclosures About Market Risk
    15Item
      4Controls and
      Procedures
    15Part
      II
    Other
      Information
    16Item
      1Legal
      Proceedings
    16Item
      4Submission
      of Matters to a Vote of Security Holders
    16Item
      6Exhibits
    16SignatureExhibits
  
   
    2
  **Part
I** **Financial
Information**
 **Item
1** **Consolidated
Condensed Financial Statements**
   **InfoTech
USA, Inc. and Subsidiaries**
 **Consolidated
Condensed Balance Sheets**
 (in
thousands, except par value)
 
 **March
      31, 2005**
    
    **September
      30, 2004**(unaudited)**Assets**Current
      assets:Cash
      and cash equivalents
    
    $
    442
    
    $
    291Accounts
      receivable, net of allowance for doubtful accounts
      of
      $85 and $97
    
    
    2,692
    
    
    3,377Inventories
    
    
    287
    
    
    113Note
      receivable - Parent Company
    
    
    1,000
    
    
    1,000Other
      current assets
    
    
    290
    
    
    414Total
      current assets
    
    
    4,711
    
    
    5,195Property,
      equipment and improvements, net
    
    
    159
    
    
    183Goodwill,
      net
    
    
    1,453
    
    
    1,453Other
      assets
    
    
    191
    
    
    174**Total
      assets**
    
    $
    6,514
    
    $
    7,005**Liabilities
      and Stockholders’ Equity**Current
      liabilities:Line
      of credit - Wells Fargo
    
    $
    -
    
    $
    812Amounts
      due to Parent Company
    
    
    104
    
    
    95Accounts
      payable
    
    
    481
    
    
    264Accrued
      expenses and other liabilities
    
    
    1,002
    
    
    921**Total
      liabilities**
    
    
    1,587
    
    
    2,092**Commitments
      and contingencies**
    
    
    −
    
    
    −**Stockholders’
      equity:**Preferred
      shares:Authorized
      5,000 shares, no par value; none issued
    
    
    −
    
    
    −Common
      shares:Authorized
      80,000 shares, $.01 par value; 5,757 shares issued; 4,896 shares
      outstanding
    
    
    58
    
    
    58Additional
      paid-in capital
    
    
    6,653
    
    
    6,653Accumulated
      deficit
    
    
    (866
    )
    
    (880
    )Treasury
      stock, 861 shares, carried at cost
    
    
    (918
    )
    
    (918
    )**Total
      stockholders’ equity**
    
    
    4,927
    
    
    4,913**Total
      liabilities and stockholders’ equity**
    
    $
    6,514
    
    $
    7,005
 
 See the
accompanying notes to consolidated condensed financial statements.
   3
   **InfoTech
USA, Inc. and Subsidiaries**
 **Consolidated
Condensed Statements of Operations**
 (in
thousands, except per share data)
 (unaudited)
 
 **For
      the three months ended**
      **March
      31**
    
    **For
      the six months ended**
      **March
      31****2005**
    
    
    **2004**
    
    
    **2005**
    
    
    **2004****Revenue:**Product
      revenue
    
    $
    3,190
    
    $
    3,613
    
    $
    7,525
    
    $
    6,534Service
      revenue
    
    
    532
    
    
    907
    
    
    1,241
    
    
    1,714Total
      revenue
    
    
    3,722
    
    
    4,520
    
    
    8,766
    
    
    8,248**Cost
      of sales:**Cost
      of products sold
    
    
    2,601
    
    
    3,131
    
    
    6,137
    
    
    5,618Cost
      of services sold
    
    
    453
    
    
    610
    
    
    867
    
    
    1,151Total
      cost of products and services sold
    
    
    3,054
    
    
    3,741
    
    
    7,004
    
    
    6,769**Gross
      profit**
    
    
    668
    
    
    779
    
    
    1,762
    
    
    1,479Selling,
      general and administrative expenses
    
    
    692
    
    
    748
    
    
    1,685
    
    
    1,603Depreciation
      and amortization
    
    
    23
    
    
    46
    
    
    45
    
    
    92**Income
      (loss) from operations**
    
    
    (47
    )
    
    (15
    )
    
    32
    
    
    (216
    )Other
      expense
    
    
    −
    
    
    13
    
    
    −
    
    
    19Interest
      expense (income)
    
    
    16
    
    
    (37
    )
    
    28
    
    
    (78
    )**(Loss)
      income before income tax (benefit) expense**
    
    
    (63
    )
    
    9
    
    
    4
    
    
    (157
    )Income
      tax (benefit) expense
    
    
    (15
    )
    
    4
    
    
    (10
    )
    
    (52
    )**Net
      (loss) income**
    
    $
    (48
    )
    $
    5
    
    $
    14
    
    $
    (105
    )**Net
      (loss) income per common share - basic and
diluted**
    
    $
    (0.01
    )
    $
    0.00
    
    $
    0.00
    
    $
    (0.02
    )**Weighted
      average number of common shares outstanding:**Basic
    
    
    4,896
    
    
    4,896
    
    
    4,896
    
    
    4,896Diluted
    
    
    5,023
    
    
    4,896
    
    
    5,024
    
    
    4,896
  See the
accompanying notes to consolidated condensed financial statements.
   
     4
  **InfoTech
USA, Inc. and Subsidiaries**
 **Consolidated
Condensed Statement of Stockholders’ Equity**
 (in
thousands)
 (unaudited)
 
 **Common
      Stock**
    
    **Additional
      Paid-in**
    
    **Accumulated**
    
    **Treasury
      Stock**
    
    **Total**
      **Stockholders’****Number**
    
    **Amount**
    
    **Capital**
    
    **Deficit**
    
    **Number**
    
    **Amount**
    
    **Equity****Balance,
      October 1, 2004**
    
    
    5,757
    
    $
    58
    
    $
    6,653
    
    $
    (880
    )
    
    861
    
    $
    (918
    )
    $
    4,913Net
      income
    
    
    −
    
    
    −
    
    
    −
    
    
    14
    
    
    −
    
    
    −
    
    
    14**Balance,
      March 31, 2005**
    
    
    5,757
    
    $
    58
    
    $
    6,653
    
    $
    (866
    )
    
    861
    
    $
    (918
    )
    $
    4,927
  See the
accompanying notes to consolidated condensed financial statements.
   
   
    5
  **InfoTech
USA, Inc. and Subsidiaries**
 **Consolidated
Condensed Statements of Cash Flows**
 (in
thousands)
 (unaudited)
 
 **For
      the six months ended**
      **March
      31****2005**
    
    **2004****Cash
      flows from operating activities**Net
      income (loss)
    
    $
    14
    
    $
    (105
    )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
    
    
    45
    
    
    92Deferred
      income taxes
    
    
    −
    
    
    (52
    )Changes
      in operating assets and liabilitiesDecrease
      (increase) in accounts receivable
    
    
    685
    
    
    (1,045
    )Increase
      in inventories
    
    
    (174
    )
    
    (67
    )Decrease
      (increase) in other current assets
    
    
    124
    
    
    (41
    )Increase
      in other assets
    
    
    (17
    )
    
    (1
    )Increase
      in accounts payable and accrued expenses
    
    
    298
    
    
    866**Net
      cash provided by (used in) operating activities**
    
    
    975
    
    
    (353
    )**Cash
      flows from investing activities**Capital
      expenditures
    
    
    (21
    )
    
    (29
    )Payments
      received on loan to Parent Company
    
    
    −
    
    
    13Proceeds
      from disposition of property and equipment
    
    
    −
    
    
    5**Net
      cash used in investing activities**
    
    
    (21
    )
    
    (11
    )**Cash
      flows from financing activities**Net
      payments on Wells Fargo line of credit
    
    
    (812
    )
    
    −Payments
      of capital lease obligations
    
    
    −
    
    
    (12
    )Net
      borrowings on Parent Company line of credit
    
    
    9
    
    
    30**Net
      cash (used in) provided by financing activities**
    
    
    (803
    )
    
    18**Net
      increase (decrease) in cash and cash equivalents**
    
    
    151
    
    
    (346
    )**Cash
      and cash equivalents - beginning of period**
    
    
    291
    
    
    855**Cash
      and cash equivalents - end of period**
    
    $
    442
    
    $
    509
  See the
accompanying notes to consolidated condensed financial statements.
   6
 **InfoTech
USA, Inc. and Subsidiaries**
 **Notes
to Consolidated Condensed Financial Statements**
 (in
thousands, except per share data)
 (unaudited)
 
  **1.**
    **Basis
      of Presentation**
  In the
opinion of management, the accompanying consolidated condensed financial
statements reflect all adjustments, consisting of normal recurring adjustments,
necessary to present fairly the financial position of InfoTech USA, Inc. and its
wholly-owned subsidiaries (the “Company”) as of March 31, 2005, their results of
operations for the three and six months ended March 31, 2005 and 2004, changes
in stockholders’ equity for the six months ended March 31, 2005 and cash flows
for the six months ended March 31, 2005 and 2004. Information included in the
consolidated condensed balance sheet as of September 30, 2004 has been derived
from the audited consolidated balance sheet included in the Company’s Annual
Report on Form 10-K for the year ended September 30, 2004 (the “10-K”)
previously filed with the Securities and Exchange Commission (the “SEC”).
Pursuant to the rules and regulations of the SEC, certain information and
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted from these consolidated condensed financial
statements unless significant changes have taken place since the end of the most
recent fiscal year. Accordingly, these unaudited consolidated condensed
financial statements should be read in conjunction with the consolidated
financial statements, notes to consolidated financial statements and the other
information in the 10-K.
 
 The
consolidated results of operations for the three and six months ended March 31,
2005 are not necessarily indicative of the results to be expected for the full
year ending September 30, 2005.
  **2.**
    **Principles
      of Consolidation**
  The
financial statements include the accounts of InfoTech USA, Inc. and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
  **3.**
    **Inventories**
  Inventories
at March 31, 2005 and September 30, 2004 consist of:
  **March
      31, 2005**
    
    **September
      30, 2004**Finished
      goods
    
    $
    315
    
    $
    142Allowance
      for excess and obsolescence
    
    
    (28
    )
    
    (29
    )Totals
    
    $
    287
    
    $
    113
  **4.**
    **Net
      Income (Loss) Per Common Share**
  As
further explained in Note 1 to the Company’s audited financial statements
included in the 10-K previously filed with the SEC, the Company presents basic
net income (loss) per common share and, if appropriate, diluted net income per
common share in accordance with the provisions of Statement of Financial
Accounting Standards No. 128, “Earnings per Share.”
  At March
31, 2005 and 2004, the Company had options and warrants outstanding for the
purchase of shares of common stock upon exercise as follows:
  **March
      31,****2005**
    
    
    **2004**Employee
      stock options
    
    
    3,825
    
    
    4,055Warrants
      (exercisable at $.5775 per share)
    
    
    300
    
    
    300Totals
    
    
    4,125
    
    
    4,355
  The
assumed effect of the exercise of employee stock options and warrants for the
six months ended March 31, 2005 and the three months ended March 31, 2004 was
immaterial. Since the Company had a net loss for the three months ended March
31, 2005 and the six months ended March 31, 2004, the assumed effects of the
exercise of employee stock options and warrants would have been
anti-dilutive.
  7
  **5.**
    **Stock-Based
      Compensation**
  The
Company measures compensation cost related to stock options issued to employees
using the intrinsic value method of accounting prescribed by Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued To Employees.” The
Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based
Compensation” and Statement of Financial Accounting Standards No. 148,
“Accounting for Stock-Based Compensation - Transition and Disclosures” (“SFAS
148”) of net income or loss as if the Black-Scholes option pricing model, which
is a fair value based method of accounting for stock options under SFAS 123, had
been applied if such amounts differ materially from the historical amounts.
Accordingly, no earned or unearned compensation cost was recognized in the
accompanying consolidated condensed financial statements for the stock options
granted by the Company to its employees since all of those options have been
granted at exercise prices that equaled or exceeded the market value at the date
of grant. As a result of amendments to SFAS 123, the Company will be required to
expense the fair value of employee stock options beginning with its fiscal
quarter ending December 31, 2005. The Company’s historical net income (loss) and
net income (loss) per common share and pro forma net income (loss) and net
income (loss) per common share assuming compensation cost had been determined
based on the fair value at the grant date for all awards by the Company and
amortized over the vesting period consistent with the provisions of SFAS 123 are
set forth below:
  **Three
      Months Ended**
      **March
      31,**
    
    **Six
      Months Ended**
      **March
      31,****2005**
    
    **2004**
    
    **2005**
    
    **2004**Net
      (loss) income - as reported
    
    $
    (48
    )
    $
    5
    
    $
    14
    
    $
    (105
    )Deduct
      total stock-based employee compensation expensedetermined
      under a fair value based method for all awards,net
      of related tax effects
    
    
    (22
    )
    
    (22
    )
    
    (45
    )
    
    (45
    )Net
      loss - pro forma
    
    $
    (70
    )
    $
    (17
    )
    $
    (31
    )
    $
    (150
    )Net
      income (loss) per share:Basic
      and diluted - as reported
    
    $
    (0.01
    )
    $
    0.00
    
    $
    0.00
    
    $
    (0.02
    )Basic
      and diluted - pro forma
    
    $
    (0.01
    )
    $
    0.00
    
    $
    (0.01
    )
    $
    (0.03
    )
  There
were no options issued during the three and six months ended March 31, 2005 and
2004.
  **6.**
    **Related
      Party Transactions**
  On June
27, 2003, the Company loaned $1.0 million to its Parent Company, Applied Digital
Solutions, Inc. (“Applied Digital”). Under the terms of the loan agreement,
interest, which accrues at an annual rate of 16%, is due and payable on a
monthly basis beginning July 31, 2003. The Company earned $40 in interest income
during the three months ended March 31, 2005 and 2004, and $81 during the six
months ended March 31, 2005 and 2004. The principal and any unpaid interest is
due June 30, 2005. As collateral for the loan, Applied Digital has pledged 750
shares of common stock of Digital Angel Corporation (“Digital Angel”), a
majority-owned subsidiary of Applied Digital. As of March 31, 2005, the market
value of the shares of stock of Digital Angel was $3,435 based on the closing
price of Digital Angel’s common stock. The Company assigned its rights under the
loan receivable from Applied Digital to Wells Fargo Business Credit, Inc.
(“Wells Fargo”) in connection with a credit agreement.
  **7.**
    **Financing
      Agreements**
  The
Company’s financing agreement with Wells Fargo, entered into on June 30, 2004,
provides financing up to $4,000. Amounts borrowed under the credit facility bear
interest at Wells Fargo’s prime rate plus 3%. Unless earlier terminated, the
credit facility matures on June 29, 2007 and automatically renews for successive
one-year periods thereafter unless terminated by Wells Fargo or the Company. The
Company also had a financing agreement with IBM Credit in effect as of March 31,
2005, that provides for inventory financing up to $600 and is secured by a
letter of credit in the amount of $600. The new wholesale financing agreement
with IBM Credit was executed in connection with the Wells Fargo credit facility
and replaced the IBM Credit Agreement for Wholesale Financing dated as of April
20, 1994.
  8
 Under the
terms of the credit agreement, Wells Fargo may, at its election, make advances
from time to time in the amounts requested by the Company up to an amount equal
to the difference between the borrowing base and the sum of (i) the amount
outstanding under the credit facility and (ii) the $600 letter of credit
outstanding under the credit facility which secures our obligations to IBM
Credit under the wholesale financing agreement. The borrowing base is equal to
the lesser of (x) $4,000 or (y) the amounts equal to (a) 85% of our eligible
accounts receivable plus (b) the amount of available funds in our deposit
account with Wells Fargo minus (c) certain specified reserves. As of March 31,
2005, the Company had a borrowing base of approximately $1,705 and availability
of approximately $1,105 under the credit facility.
  The
Company did not have any borrowings under the Wells Fargo line of credit at
March 31, 2005. Borrowings under the IBM Credit financing arrangement amounted
to $48 and $1,731 at March 31, 2005 and 2004, respectively, and are included in
either accounts payable or accrued expenses and other liabilities.
  The
credit facility requires the Company to maintain certain financial covenants,
and the Company was in compliance with all its financial covenants under the
credit facility as of March 31, 2005.
  **8.**
    **Legal**
  On April
13, 2005, the Company entered into a Settlement Agreement and General Release
with their former President, Chief Executive Officer and director, Anat
Ebenstein. Ms. Ebenstein filed a complaint against the Company, Applied Digital
and certain of Applied Digital’s officers and directors, on October 22, 2002 in
the Superior Court of New Jersey, Mercer County. Ms. Ebenstein’s complaint
sought compensatory and punitive damages of $1,000 arising from an alleged
improper termination of her employment.
  Under the
terms of the settlement agreement, Ms. Ebenstein agreed to release the Company
and the other defendants from any and all claims. Without admitting any
wrongdoing, the Company agreed to forgive a $20 loan payable by Ms. Ebenstein to
the Company and to pay Ms. Ebenstein $600, a portion of which will be in the
form of an annuity. The Company’s employment practices liability insurance
provider has agreed to cover 90% of the amount payable by the Company under the
settlement agreement less any remaining deductible under the policy that has not
been satisfied through the payment of defense costs.
  In prior
periods, the Company accrued for anticipated legal and settlement costs, based
on estimates, which were in excess of the final legal and settlement costs.
Accordingly the Company reversed the over-accrual in the quarter ended March 31,
2005, which resulted in a favorable adjustment to the statements of operations
for the three and six months ended March 31, 2005 of approximately $168.
   
   9
  **Item
2**  **Management’s
Discussion and Analysis of Financial Condition and Results of
Operations**
  This
discussion should be read in conjunction with the accompanying consolidated
condensed financial statements and related notes contained in Item 1 of this
report as well as our Annual Report on Form 10-K for the year ended September
30, 2004. Certain statements made in this report may contain forward-looking
statements. For a description of risks and uncertainties relating to such
forward-looking statements, see the section entitled “Forward-Looking Statements
and Associated Risk” later in this Item 2.
  **Business
Description**
  We are a
Delaware corporation incorporated in 1997. We are a full service provider of
information technology, or IT, services and products in the New York City
metropolitan area and in New Jersey. We specialize in tailoring our approach to
the individual customer needs.  We
provide IT consulting, networking, remote access, procurement, storage area
networks, deployment, integration and migration services. We also provide
on-going system and network maintenance services.
  **Results
of Operations**
  We
operate in a highly competitive industry, which in turn places constant
pressures on maintaining gross profit margins. Many of our sales are high volume
equipment sales, which produce lower than average gross profit margins, but are
often accompanied by a service arrangement, which yields higher than average
gross profit margins.
  The
following table sets forth, for the periods indicated, the percentage
relationship to total revenue of certain items in our consolidated condensed
statements of operations.
  **Three
      Months Ended**
      **March
      31,**
    
    **Six
      Months Ended**
      **March
      31,****2005**
    
    **2004**
    
    **2005**
    
    **2004****Revenue:**Product
      revenue
    
    
    85.7
    %
    
    79.9
    %
    
    85.8
    %
    
    79.2
    %Service
      revenue
    
    
    14.3
    
    
    20.1
    
    
    14.2
    
    
    20.8Total
      revenue
    
    
    100.0
    
    
    100.0
    
    
    100.0
    
    
    100.0**Cost
      of sales:**Cost
      of products sold
    
    
    69.9
    
    
    69.3
    
    
    70.0
    
    
    68.1Cost
      of services sold
    
    
    12.2
    
    
    13.5
    
    
    9.9
    
    
    14.0Total
      cost of products and services sold
    
    
    82.1
    
    
    82.8
    
    
    79.9
    
    
    82.1**Gross
      profit**
    
    
    17.9
    
    
    17.2
    
    
    20.1
    
    
    17.9Selling,
      general and administrative expenses
    
    
    18.6
    
    
    16.5
    
    
    19.2
    
    
    19.4Depreciation
      and amortization
    
    
    0.6
    
    
    1.0
    
    
    0.5
    
    
    1.1**(Loss)
      income from operations**
    
    
    (1.3
    )
    
    (0.3
    )
    
    0.4
    
    
    (2.6
    )Other
      expense
    
    
    0.0
    
    
    0.3
    
    
    0.0
    
    
    0.2Interest
      expense (income)
    
    
    0.4
    
    
    (0.8
    )
    
    0.3
    
    
    (0.9
    )**(Loss)
      income before income tax (benefit) expense**
    
    
    (1.7
    )
    
    0.2
    
    
    0.1
    
    
    (1.9
    )Income
      tax expense (benefit)
    
    
    (0.4
    )
    
    0.1
    
    
    (0.1
    )
    
    (0.6
    )**Net
      (loss) income**
    
    
    (1.3
    )
    
    0.1
    
    
    0.2
    
    
    (1.3
    )
 
   **Three
Months Ended March 31, 2005 Compared to the Three Months Ended March 31,
2004**
 (in
thousands unless otherwise noted)
  Sales for
the quarter ended March 31, 2005 decreased $798, or 17.7%, to $3,722 from
$4,520, for the same quarter last year. The decrease was  a result of lower
product sales to several of our large customers compared to the same quarter
last year, combined with a significant reduction in volume in one of our major
service contracts. Product sales decreased by $423, or 11.7%, in the second
quarter of 2005 to $3,190, compared to $3,613 in the second quarter
last
 
 
 10
 
 year.
Service sales decreased $375, or 41.3%, from $907 in the quarter ended March 31,
2004 compared to $532 in the same quarter this year. The decrease was primarily
due to a drop in time and material services sales with IBM Corporation. We
expect our sales volumes for the next two quarters of fiscal year 2005 to return
to levels at or above last year due to the improved IT market conditions and our
continued focus on high-end, Intel-based products and related services.
  Gross
profit decreased by $111, or 14.2%, in the quarter ended March 31, 2005 to $668
from $779 in the same quarter last year. The decrease in gross profit was
primarily due to the overall decrease in revenue in both product and service
which was somewhat offset by improved product margins. Total gross margin
increased from 17.2% in the second quarter of 2004, to 17.9% in the second
quarter of 2005. The increase was due to increased margins in our product sales
as a result of an increase in high-end product sales, which was somewhat offset
by low service margins stemming from an underutilization of technicians and
engineers during the second quarter. Product margins rose to 18.5% in the
quarter ended March 31, 2005 compared to 13.3% in the same quarter last year,
while service margins declined to 14.8% for the second quarter of 2005 from
32.7% in the second quarter of 2004. We expect the service margins to improve
and return to normal levels in the last two quarters of 2005 as a result of:
realizing the benefit of the staffing adjustments that were made at the end of
the second quarter, improved utilization of our engineers due to upcoming
projects, and continued focus on selling high-end products and related
services.
  Selling,
general and administrative expenses decreased $56, or 7.5%, to $692 in the
quarter ended March 31, 2005, compared to $748 for the same quarter last in
2004. The decrease in expense was primarily due to the reversal of an over
accrual in accrued litigation expense following the settlement of the lawsuit
with our former President, Chief Executive Officer and director, Anat Ebenstein
(see Legal Proceedings). This was somewhat offset by salary increases given to
non-management personnel, higher selling expense and increased accounting
expenses associated with the evaluation of our internal control required by
Section 404 of the Sarbanes-Oxley Act of 2002. We expect our management and
administrative staff to be sufficient for the remainder of fiscal year 2005,
however we may need to add additional personnel in the sales and technical areas
of the business as sales volume dictates. Accounting fees in 2005 are expected
to remain higher than last year due to expenses related to Section 404 of the
Sarbanes-Oxley Act of 2002.
  Depreciation
and amortization expense for the second quarter of 2005 decreased $23, or 50.0%,
from $46 in the second quarter of 2004 to $23 in the second quarter of 2005. The
decrease was primarily a result of certain assets being fully depreciated as of
the end of fiscal year 2004.
  Operating
loss for the second quarter of 2005 was $47 compared to an operating loss of $15
for the second quarter of 2004.
  Interest
expense was $16 in the second quarter of 2005 compared to interest income of $37
in the second quarter of 2004. The net interest expense for the quarter ended
March 31, 2005 was a result of interest expense of $56 incurred in connection
with the Wells Fargo credit facility, which was largely offset by interest
income of $40 earned in connection with the loan made to Applied Digital. In the
second quarter of last year, the interest income was a result of the loan made
to Applied Digital.
  Income
tax benefit was $15 for the second quarter of 2005 compared to an income tax
expense of $4 for the same period last year. The income tax benefit in 2005 was
the result of a reversal of a prior year state income tax over accrual and the
income tax expense in 2004 was the accrual for federal income tax for the second
quarter 2004 taxable income.
  Our net
loss for the quarter ended March 31, 2005 was $48, compared to a net income of
$5 in the quarter ended March 31, 2004.
  **Six
Months Ended March 31, 2005 Compared to the Six Months Ended March 31,
2004**
 (in
thousands unless otherwise noted)
  Revenue
for the first six months of fiscal year 2005 increased $518 or 6.3% to $8,766
from $8,248 in the first six months of fiscal year 2004. The increase in revenue
was primarily a result of improved market conditions and our focus on high-end,
Intel-based products and related services. Product sales during the six months
ended March 31, 2005 increased by $991, or 15.2%, to $7,525 from $6,534 last
fiscal year. Service sales decreased $473, or 27.6%, from $1,714 during the
first six months of fiscal year 2004 to $1,241 during the first six months of
fiscal year 2005. This decrease was primarily a result of the drop in time and
material services sales due to a significant reduction in volume in our IBM
Corporation service contract. We expect our sales volumes for the remaining
six
 
 
 11
 
 months of
fiscal year 2005 to return to levels at or above last year due to the improved
IT market conditions and our continued focus on high-end, Intel-based products
and related services.
  Gross
profit increased by 19.1%, or $283, in the first six months of fiscal year 2005
to $1,762 from $1,479 in the same period last year. The increase in gross profit
was primarily due to the overall increase in revenue combined with improved
gross profit margins. Total gross margin increased to 20.1% from 17.9% in the
first six months of 2005 compared to 2004. Product margin increased to 18.4% for
the six months ended March 31, 2005 compared to 14.0% for the same period last
year due to the increase in sales of high-end products, which yield higher
profit margins. Service margins decreased slightly to 30.1% in the first six
months of 2005 from 32.8% in 2004. This decrease was primarily due to the
underutilization of technicians and engineers during the second quarter of 2005.
We expect margins to be steady for the balance of the fiscal year due to our
focus on high-end products and related services and our efforts made during the
end of the second quarter it improve the utilization of our technicians and
engineers.
  Selling,
general and administrative expenses increased $82, or 5.1%, to $1,685 for the
first six months of 2005, compared to $1,603 for the same period in fiscal year
2004. The increase in expense was primarily due to an increase in commissions
and sales expense related to higher sales, an increase in salaries to
non-management personnel made in the second quarter and an increase in
accounting expenses associated with the evaluation of our internal control
required by Section 404 of the Sarbanes-Oxley Act of 2002. These increases were
largely offset by the reversal of an over accrual in accrued litigation expense
following the settlement of the lawsuit with our former President, Chief
Executive Officer and director, Anat Ebenstein (see Legal Proceedings).
Accounting fees in 2005 are expected to remain higher than last year due to the
expenses related to Section 404 of the Sarbanes-Oxley Act of 2002. We expect our
management and administrative staff to be sufficient for the balance of the
fiscal year; however, we may need to add additional personnel in the sales and
technical areas of the business as sales volume dictates.
  Depreciation
and amortization expense for first six months of 2005 decreased $47, or 51.1%,
to $45 in 2005 from $92 in the first six months of 2004. The decrease was
primarily a result of certain assets being fully depreciated as of the end of
fiscal year 2004.
  Operating
income for the first six months of 2005 was $32 compared to an operating loss of
$216 during the same period last year.
  Net
interest expense was $28 in the first six months of 2005, compared to a net
interest income of $78 in the same period of 2004. The net interest expense was
primarily a result of interest expense incurred in connection with the Wells
Fargo credit facility and was largely offset by the interest income earned from
the loan made to our majority stockholder, Applied Digital Solutions. The
interest income earned in 2004 was primarily a result of the loan made to
Applied Digital Solutions.
  Our net
income for the six months ended March 31, 2005 was $14, compared to a net loss
of $105 for the same period last year.
  **Liquidity
and Capital Resources**
 (in
thousands unless otherwise noted)
  Our
current ratio at March 31, 2005 was 2.97 compared to 2.48 at September 30, 2004.
Working capital at March 31, 2005 was $3,124 up from $3,103 at September 30,
2004, an increase of $21.
  Cash
provided by operating activities in the first six months of fiscal year 2005 was
$975, compared to cash used in operating activities in the first six months of
fiscal year 2004 of $353. The cash provided by operating activities in 2005 was
primarily due to a decrease in accounts receivable, stemming from good
collections and our lower sales volume, an increase in accounts payable and
accrued expenses, and a decrease in other current assets, somewhat offset by an
increase in inventory. The cash used in operating activities during 2004 was
primarily a result of our loss for the six-month period and an increase in
accounts receivable, largely offset by an increase in accounts payable and
accrued expenses.
  Cash used
in investing activities was $21 for the first six months of fiscal 2005,
compared to cash used in investing activities of $11 for the first six months of
fiscal 2004. Cash used in investing activities of $21 for the six months ended
March 31, 2005 was a result of capital expenditures. Cash used in investing
activities of $11 for the six months ended March 31, 2004 was primarily a result
of capital expenditures of $29, which was largely offset by an interest payment
of $13 made on the loan to Applied Digital.
  12
 
 Cash used
in financing activities for the six months ended March 31, 2005 was $803
compared to cash provided by financing activities of $18 for the six months
ended March 31, 2004. The use of cash in 2005 was primarily a result of payments
made to reduce the outstanding amount due on the Wells Fargo line of credit. The
net cash provided by financing activities for the six months ended March 31,
2004 was mainly due to an increase in the amount borrowed on our Parent Company
line of credit, somewhat offset by payments made on our capital lease
obligations.
  Our
business activities are capital-intensive and, consequently, we finance our
operations through arrangements with Wells Fargo and IBM Credit. Our financing
agreement with Wells Fargo, entered into on June 30, 2004, provides us with a
$4,000 credit facility. Amounts borrowed under the credit facility bear interest
at Wells Fargo’s prime rate plus 3%. Unless earlier terminated, the credit
facility matures on June 29, 2007 and automatically renews for successive
one-year periods thereafter unless terminated by Wells Fargo or us. Our
financing agreement with IBM Credit in effect as of March 31, 2005, provides for
inventory financing up to $600 and is secured by a letter of credit in the
amount of $600. The new wholesale financing agreement with IBM Credit was
executed in connection with the Wells Fargo credit facility and replaced the IBM
Credit Agreement for Wholesale Financing dated as of April 20,
1994.
  Under the
terms of the credit agreement, Wells Fargo may, at its election, make advances
from time to time in the amounts requested by us up to an amount equal to the
difference between the borrowing base and the sum of (i) the amount outstanding
under the credit facility and (ii) the $600 letter of credit outstanding under
the credit facility which secures our obligations to IBM Credit under the
wholesale financing agreement. The borrowing base is equal to the lesser of (x)
$4,000 or (y) the amount equal to (a) 85% of our eligible accounts receivable
plus (b) the amount of available funds in our deposit account with Wells Fargo
minus (c) certain specified reserves. As of March 31, 2005, we had a borrowing
base of approximately $1,705 and availability of approximately $1,105 under the
credit facility .
  In
connection with the execution of the credit agreement, we paid Wells Fargo an
origination fee of $40. Each year, we will pay Wells Fargo a facility fee of $15
and an unused line fee of 0.5% of the daily, unused amount under the credit
facility. In addition, we must pay Wells Fargo minimum monthly interest based on
minimum borrowings of $1,500. We will incur additional fees if Wells Fargo
terminates the credit facility upon default or if we terminate the credit
facility prior to its termination date. These fees are $120 during the first
year of the credit facility, $60 during the second year of the credit facility
and $20 after the second year of the credit facility.
  The
obligations under the credit agreement have been guaranteed by both of our
subsidiaries and by us. In addition, we have pledged the stock of our
subsidiaries and assigned our rights under the loan agreement to Applied
Digital. The credit facility is further secured by a first priority security
interest in substantially all of our assets.
  The
credit facility requires us to maintain certain financial covenants, including
(i) a debt to book net worth ratio, as defined in the credit agreement, of not
more than 1.5 to 1.0 for each fiscal quarter, (ii) a minimum book net worth, as
defined in the credit agreement, of at least $3,100 for each fiscal quarter and
(iii) a net loss, as defined in the credit agreement, not to exceed $28 for the
two fiscal quarters ended March 31, 2005, a minimum net income, as defined in
the credit agreement, of at least $2 for the three fiscal quarters ended June
30, 2005 and a net loss not to exceed $60 for the year ended September 30, 2005,
in order to accommodate the slower summer months. In addition, the credit
facility prohibits us from incurring or contracting to incur capital
expenditures exceeding $50 in the aggregate during any fiscal year or more than
$10 in any one transaction. The credit agreement contains other standard
covenants related to our operations, including prohibitions on the creation of
additional liens, the incurrence of additional debt, the payment of dividends,
the sale of assets and other corporate transactions by us, without Wells Fargo’s
consent. At March 31, 2005, we were in compliance with these
covenants.
  We had no
borrowings under the Wells Fargo line of credit as of March 31, 2005. Borrowings
under the IBM Credit financing arrangement amounted to $48 and $1,731 at March
31, 2005 and 2004, respectively, and are included in either accounts payable or
accrued expenses and other liabilities.
  We
believe that our present financing arrangements with Wells Fargo and IBM Credit,
and current cash position will be sufficient to fund our operations and capital
expenditures through at least March 31, 2006. Our long-term capital needs may
require additional sources of credit. There can be no assurances that we will be
successful in negotiating additional sources of credit for our long-term capital
needs. Our inability to have continuous access to such financing at reasonable
costs may materially and adversely impact our financial condition, results of
operations and cash flows.
  13
 **Recent
Accounting Pronouncements**
  In
December 2004, the Financial Accounting Standards Board (the “FASB”) issued SFAS
No. 123(R) (revised 2004), “Share-Based Payment”, which amends SFAS No. 123 and
will be effective for public companies for annual periods beginning after June
15, 2005. The new standard will require us to expense employee stock options and
other share-based payments over the related service period. The FASB believes
the use of a binomial lattice model for option valuation is capable of more
fully reflecting certain characteristics of employee share options compared to
the Black-Scholes options pricing model. The new standard may be adopted in one
of three ways - the modified prospective transition method, a variation of the
modified prospective transition method or the modified retrospective transition
method. We are currently evaluating how we will adopt the standard and
evaluating the effect that the adoption of SFAS No. 123(R) will have on our
financial position and results of operations.
  In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of
ARB No. 43, Chapter 4.” This statement amends the guidance in ARB No. 43,
Chapter 4, “Inventory Pricing”, to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB No. 43, Chapter 4, previously stated that
“...under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges...” SFAS No. 151 requires that those items
be recognized as current-period charges regardless of whether they meet the
criterion of “so abnormal.” In addition, this statement requires that allocation
of fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The provisions of SFAS No. 151 shall be
applied prospectively and are effective for inventory costs incurred during
fiscal years beginning after June 15, 2005, with earlier application permitted
for inventory costs incurred during fiscal years beginning after the date this
statement was issued. The adoption of SFAS No. 151 is not expected to have a
material impact on our financial position or results of operations.
  In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29.” The guidance in APB Opinion No. 29,
“Accounting for Nonmonetary Transactions”, is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
assets exchanged. The guidance in that opinion, however, included certain
exceptions to that principle. This statement amends Opinion 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets that do not
have commercial substance. A nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly as a
result of the exchange. SFAS No. 153 is effective for nonmonetary exchanges
occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS
No. 153 is not expected to have a material impact on our financial position or
results of operations.
  **Forward-Looking
Statements and Associated Risk**
  Certain
statements in this report, constitute “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, Section 21E of the
Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act
of 1995. We intend that such forward-looking statements be subject to the safe
harbors created thereby. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the
following:
  ·
    our
      continued ability to develop our service
offerings;
  ·
    the
      successful completion and integration of future acquisitions;
  ·
    the
      ability to hire and retain skilled
personnel;
  ·
    the
      continued development of our technical, manufacturing, sales, marketing
      and management capabilities;
  ·
    relationships
      with and dependence on technological
partners;
  ·
    uncertainties
      relating to economic conditions where we
operate;
  ·
    uncertainties
      relating to government and regulatory
policies;
  ·
    uncertainties
      relating to customer plans and commitments;
  14
 ·
    rapid
      technological developments and obsolescence in the industries in which we
      operate and compete;
  ·
    potential
      performance issues with suppliers and
customers;
  ·
    governmental
      export and import policies, global trade policies, worldwide political
      stability and economic growth;
  ·
    the
      highly competitive environment in which we
operate;
  ·
    potential
      entry of new, well-capitalized competitors into our
    markets;
  ·
    our
      ability to maintain available sources of financing;
and
  ·
    changes
      in our capital structure and cost of
capital.
  The words
“believe”, “expect”, “anticipate”, “intend” and “plan” and similar expressions
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
the statement was made.
  **Item
3**  **Quantitative
and Qualitative Disclosures About Market Risk**
  We
presently do not use any derivative financial instruments to hedge our exposure
to adverse fluctuations in interest rates, foreign exchange rates, fluctuations
in commodity prices or other market risks, nor do we invest in speculative
financial instruments. For InfoTech USA, borrowings under the financing
agreement with Wells Fargo are at Wells Fargo’s prime rate plus 3%. We do not
have any investments in any instruments that are sensitive to changes in the
general level of U.S. interest rates.
  Due to
the nature of our borrowings, we have concluded that there is no material market
risk exposure and, therefore, no quantitative tabular disclosures are
required.
  **Item
4**  **Controls
and Procedures**
  As of the
end of the period covered by this report, management, including our principal
executive officer and principal financial officer, evaluated the effectiveness
of the design and operation of our disclosure controls and procedures with
respect to the information generated for use in our reporting system. Based
upon, and as of the date of that evaluation, our principal executive officer and
principal financial officer concluded that our disclosure controls and
procedures were effective to provide reasonable assurance that information
required to be disclosed in the reports that we file or submit under the
Securities Exchange Act of 1934 are recorded, processed, summarized and reported
within the time periods specified by the Commission’s rules and
forms.
  There was
no change in our internal control over financial reporting during the quarter
ended March 31, 2005 that has materially affected, or that is reasonably likely
to materially affect, our internal control over financial
reporting.
  It should
be noted that our management, including our principal executive officer and
principal financial officer, does not expect that our disclosure controls and
procedures or internal controls over financial reporting will prevent all error
and all fraud. A control system, no matter how well conceived or operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
controls. The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be
detected.
   15
 **Part
II**  **Other
Information**
 
 **Item
1**  **Legal
Proceedings**
  On April
13, 2005, we entered into a Settlement Agreement and General Release with our
former President, Chief Executive Officer and director, Anat Ebenstein. Ms.
Ebenstein filed a complaint against us, Applied Digital and certain of Applied
Digital’s officers and directors, on October 22, 2002 in the Superior Court of
New Jersey, Mercer County. Ms. Ebenstein’s complaint sought compensatory and
punitive damages of $1 million arising from an alleged improper termination of
her employment.
  Under the
terms of the settlement agreement, Ms. Ebenstein agreed to release us and the
other defendants from any and all claims. Without admitting any wrongdoing, we
agreed to forgive a $20,000 loan payable by Ms. Ebenstein to us and to pay Ms.
Ebenstein $600,000, a portion of which will be in the form of an annuity. Our
employment practices liability insurance provider has agreed to cover 90% of the
amount payable by us under the settlement agreement less any remaining
deductible under the policy that has not been satisfied through the payment of
defense costs.
  In prior
periods, we accrued for anticipated legal and settlement costs, based on
estimates, which were in excess of the final legal and settlement costs.
Accordingly we reversed the over-accrual in the quarter ended March 31, 2005,
which resulted in a favorable adjustment to the statements of operations for
the three and six months ended March 31, 2005 of approximately $168,000.
  **Item
4**  **Submission
of Matters to a Vote of Security Holders**
  (i)
    An
      annual meeting of our shareholders was held on March 11, 2005
      to:
  ·
    elect
      Kevin H. McLaughlin as a director and to ratify the appointment of Jeffrey
      S. Cobb as a director; and
  ·
    ratify
      the appointment of J.H. Cohn LLP as our independent registered public
      accounting firm for the year ended September 30,
2005.
  (ii)
    The
      results of the votes were as follows:
  ****
    
    
    **For**
    
    
    **Against**
    
    
    **Abstain**Election
      of Mr. McLaughlin
    
    
    4,618,418
    
    
    133,525
    
    
    -Ratification
      of appointment of Mr. Cobb
    
    
    4,622,418
    
    
    129,525
    
    
    -Ratification
      of the appointment of J.H. Cohn LLP, independent registered public
      accounting firm
    
    
    4,614,601
    
    
    9,062
    
    
    128,280
  **Item
6**  **Exhibits**
  See list
of exhibits attached hereto.
  
  
    16
   **Signature**
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
  **InfoTech
USA, Inc.**
  By: /s/ J.
Robert Patterson
 J. Robert
Patterson
 Vice
President, Chief Financial Officer and Treasurer
 (Principal
Financial Officer and Principal Accounting Officer)
 
 Date: May
13, 2005
   17
  **Exhibits**
  **Exhibit**
      **Number**
    ****
    **Description**3.1
    Amended
      and Restated Certificate of Incorporation dated April 21, 1997
      (incorporated by reference to Exhibit 3.1 to the registrant’s Quarterly
      Report on Form 10-Q filed with the Commission on May 14,
    2003)3.2
    Certificate
      of Amendment of Certificate of Incorporation dated March 22, 2002
      (incorporated by reference to Exhibit 3.2 to the registrant’s Quarterly
      Report on Form 10-Q filed with the Commission on May 14,
    2003)3.3
    Certificate
      of Amendment of Certificate of Incorporation dated April 9, 2003
      (incorporated by reference to Exhibit 3.3 to the registrant’s Quarterly
      Report on Form 10-Q filed with the Commission on May 14,
    2003)3.4
    Amended
      and Restated By-Laws (incorporated by reference to Exhibit 3.4 to the
      registrant’s Quarterly Report on Form 10-Q filed with the Commission on
      May 14, 2003)10.1
    Settlement
      Agreement and General Release, effective as of April 13, 2005, by and
      among SysComm International Corp., Applied Digital Solutions, Inc., Jerome
      Artigliere, Richard Sullivan, Scott Silverman, Kevin McLaughlin and Anat
      Ebenstein (incorporated by reference to Exhibit 10.1 to the registrant’s
      Current Report on Form 8-K filed with the Commission on April 19,
      2005)10.2
    Office
      Lease Agreement, dated as of April 15, 2005, by and between Faircorp
      Associates, L.L.C. and InfoTech USA, Inc. (incorporated by reference to
      Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed with the
      Commission on April 19, 2005)31.1
    Certification
      by Chief Executive Officer of the registrant pursuant to Section 302 of
      the Sarbanes-Oxley Act of 200231.2
    Certification
      by Chief Financial Officer of the registrant pursuant to Section 302 of
      the Sarbanes-Oxley Act of 200232.1
    Certification
      by Chief Executive Officer of the registrant pursuant to Section 906 of
      the Sarbanes-Oxley Act of 200232.2
    Certification
      by Chief Financial Officer of the registrant pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002
 
 18