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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

| **Mark One**                                          |
|-------------------------------------------------------|
| ** **                                            | ** ** | ** ** |
| **x**                                                 | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                            | ** ** | ** ** |
| **For The Fiscal Year Ended  December 31, 2009** |
| ** **                                            |
| **OR**                                                |
| ** **                                            | ** ** | ** ** |
| **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 001-33521**

 

**INFOLOGIX, INC.**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                                    | ** ** | **20-1983837**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation or  organization) | ** ** | (IRS Employer Identification Number) |
|                                                            |       |                                 |
| **101 E. County Line Road**                                     | ** ** | ** **                           |
| **Hatboro, PA**                                                 | ** ** | **19040**                            |
| (Address of principal executive offices)                        | ** ** | (Zip code)                           |

 

**(215) 604-0691**

(Registrant’s telephonenumber, including area code)

 

Securities registeredpursuant to Section 12(b) of the Act:

 

| **Title  of each class**          | ** ** | **Names of each exchange on which  registered** |
|-----------------------------------|------------|-------------------------------------------------|
| Common Stock,  par value $0.00001 |       | The NASDAQ Stock Market, LLC               |

 

Securities registeredpursuant to Section 12(g) of the Act: **None**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes o  No x

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act. Yes o  No x

 

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 preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x  No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files).Yes o No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of the registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K.  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

| 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 June 30, 2009,the aggregate market value of the registrant’s common stock held bynon-affiliates of the registrant was $14,940,298 based on the closing price asreported on the NASDAQ Capital Market. (In determining the market value of theCommon Stock held by any non-affiliates, shares of Common Stock of theRegistrant beneficially owned by directors, officers and holders of more than10% of the outstanding shares of Common Stock of the Registrant have beenexcluded. This determination of affiliate status is not necessarily aconclusive determination for other purposes.)

 

The number of sharesoutstanding of each of the issuer’s classes of common stock as of the latestpracticable date,

 

| **Class**                                  | ** ** | **Outstanding at April 5, 2010** |
|--------------------------------------------|------------|----------------------------------|
| Common Stock,  $.00001 par value per share |       | 3,729,647 Shares                 |

 

**DOCUMENTS INCORPORATED BY REFERENCE**

None.

 

 

 

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**TABLE OF CONTENTS**

 
|             |   | **PART I**                                                                                                       |   |   |
|------------------|--------|-----------------------------------------------------------------------------------------------------------------------|--------|--------|
|             |   |                                                                                                                  |   |   |
| Item 1.     |   | Business                                                                                                              |   | 3      |
| Item 1A.    |   | Risk Factors                                                                                                          |   | 15     |
| Item 1B.    |   | Unresolved  Staff Comments                                                                                            |   | 27     |
| Item 2.     |   | Properties                                                                                                            |   | 27     |
| Item 3.     |   | Legal Proceedings                                                                                                     |   | 27     |
| Item 4.     |   | Submission  of Matters to a Vote of Security Holders                                                                  |   | 27     |
| ** **       |   |                                                                                                                  |   |   |
|             |   | **PART II**                                                                                                      |   |   |
|             |   | ** **                                                                                                            |   |   |
| Item 5.     |   | Market for  the Company’s Common Equity, Related Stockholder Matters, and Issuer  Purchases of Equity Securities |   | 28     |
| Item 6.     |   | Selected  Financial Data                                                                                              |   | 30     |
| Item 7.     |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                           |   | 30     |
| Item 7A.    |   | Quantitative  and Qualitative Disclosures About Market Risk                                                           |   | 49     |
| Item 8.     |   | Financial  Statements and Supplementary Data                                                                          |   | 49     |
| Item 9.     |   | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                                 |   | 80     |
| Item 9A(T). |   | Controls  and Procedures                                                                                              |   | 80     |
| Item 9B.    |   | Other  Information                                                                                                    |   | 81     |
| ** **       |   |                                                                                                                  |   |   |
|             |   | **PART III**                                                                                                     |   |   |
|             |   |                                                                                                                  |   |   |
| Item 10.    |   | Directors,  Executive Officers and Corporate Governance                                                               |   | 81     |
| Item 11.    |   | Executive  Compensation                                                                                               |   | 86     |
| Item 12.    |   | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                      |   | 91     |
| Item 13.    |   | Certain  Relationships, Related Transactions, and Director Independence                                               |   | 93     |
| Item 14.    |   | Principal  Accountant Fees and Services                                                                               |   | 96     |
| ** **       |   |                                                                                                                  |   |   |
|             |   | **PART IV**                                                                                                      |   |   |
|             |   |                                                                                                                  |   |   |
| Item 15.    |   | Exhibits  and Financial Statement Schedules                                                                           |   | 96     |
| Schedule II |   | Valuation  and Qualifying Account                                                                                     |   | 97     |
|             |   | Signatures                                                                                                            |   | 102    |

 

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**CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKINGSTATEMENTS**

 

Thisreport contains “forward-looking statements” within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended, that are based on our currentexpectations, estimates, forecasts and projections about our company and ourindustry. These forward-looking statements reflect our current viewsabout future events and can be identified by terms such as “will,” “may,” “believe,”“anticipate,” “intend,” “estimate,” “expect,” “should,” “project,” “plan” andsimilar expressions, although not all forward-looking statements containsuch identifying words. You are cautioned not to place undue reliance on theseforward-looking statements. These forward-looking statements arenot guarantees of future events and involve risks and uncertainties that aredifficult to predict and are based upon assumptions that may prove to beincorrect. Our actual results could differ materially and adversely from thoseanticipated in such forward-looking statements as a result of certain factors,including but not limited to, for example:

 

·                  our ability to refinance, replace or restructure our currentindebtedness and to comply with the financial covenants and other terms andconditions contained in the agreements governing our indebtedness or anyreplacement indebtedness;

·                  our ability to operate profitably and manage growth ofour business;

·                  our ability to introduce new products and services andmaintain products and service quality;

·                  our ability to implement our business plan indifficult economic conditions and to adapt to changes in economic, political,business or industry conditions;

·                  our ability to find additional financingnecessary to support our operations and or strategic objectives while alsomaintaining our focus on operating and developing our business;

·                  our ability to successfully integrate acquisitionswith our existing operations;

·                  our ability to retain, replace and hire experiencedsenior management;

·                  our relationships with our customers, key industryrelationships and other third parties on which we rely;

·                  competition in the industries in which we compete;

·                  our ability to protect our intellectual propertyrights;

·                  restrictions on our operations contained in our loanand security agreement or agreement for any replacement indebtedness; and

·                  our ability to remediate and compensate for the materialweakness identified in our internal controls over financial reporting.

 

Wehave disclosed additional important factors that could cause our actualoutcomes and results to differ materially from the forward-looking statementsunder Item 1A “Risk Factors” in Part I of this report and elsewherein this report. We do not undertake any obligation to update or revise anyforward-looking statements to reflect new information, future events orotherwise, except as required by federal securities laws.

 

**PART I**

 

**Item 1. Business**

 

**Overview**

 

InfoLogix, Inc. is aDelaware corporation that was organized under the laws of the State of Nevadaon November 22, 2004 and subsequently merged with and into a corporationorganized under the laws of the State of Delaware on November 22, 2006. OnNovember 29, 2006, InfoLogix Systems Corporation (formed in 2001), aDelaware corporation, merged with and into a wholly-owned subsidiary ofInfoLogix, Inc. As a result, InfoLogix, Inc. is a holding companyfor, and conducts substantially all of its operations through, its wholly-ownedsubsidiary InfoLogix Systems Corporation. References throughout this report to “we,”“us,” “our,” the “Company” and “InfoLogix” are references to InfoLogix, Inc.and its wholly-owned direct and indirect subsidiaries unless otherwiseindicated. Many of the amounts and percentages presented in Part I havebeen rounded for convenience of presentation, and all dollar amounts, exceptper share amounts, are presented in thousands.

 

On November 20, 2009, we completed arestructuring transaction with our senior lender Hercules Technology GrowthCapital, Inc. (Hercules) and its wholly-owned subsidiary HerculesTechnology I, LLC (HTI), pursuant to which $5,000 of our outstanding debt toHercules was converted into shares of our common stock and a warrant topurchase shares of our common stock, and the remaining outstanding debt withHercules was otherwise restructured (a transaction that we refer to as theHercules Restructuring). As a result of the Hercules Restructuring, we experienceda change in control and (i) HTIowns 2,691,790 shares or 72.3% of our outstanding common stock, as well as awarrant to acquire up to an additional 672,948 shares of our common stock, and (ii) Herculesmay convert a portion of our remaining indebtedness to Hercules into anadditional 2,691,790 shares of our common stock and has the option to convertcertain term loan interest into an indeterminate number of shares of our commonstock. In addition, on March 1, 2010, Hercules exercised a warrantinitially 

 

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received on June 19, 2009 by which it acquired 7,546 shares of ourcommon stock. As a result of Amendment 2 to our Amended LoanAgreement (described below under “-Recent Developments”) on April 6, 2010,Hercules may convert the principal of Term Loan C into an additional 412,087shares of our common stock and has the option to convert default rate interestinto an indeterminate number of shares of our common stock.

 

**Recent Developments**

 

On January 5, 2010, we effected aone-for-twenty-five reverse stock split of our issued and outstanding shares ofcommon stock, par value $0.00001 per share. Unless otherwise indicated, allshare amounts discussed herein reflect the post-split number of shares of ourcommon stock.

 

In connection with the Hercules Restructuring, on November 20,2009, we and Hercules entered into an Amended and Restated Loan and SecurityAgreement (Amended Loan Agreement), whereby we and Hercules agreed torestructure our remaining debt not converted into shares of common stock and awarrant. The Amended Loan Agreement amended and restated our prior loan andsecurity agreement with Hercules. On the same date and as a condition to theHercules Restructuring, we also restructured our earn out obligation related toour 2008 acquisition of the assets of Delta Health Systems, Inc.

 

OnFebruary 19, 2010, we entered into Amendment No. 1 (Amendment 1) tothe Amended Loan Agreement.  UnderAmendment 1, we may request up to $3,000 for use in purchasing equipment (theEquipment Loan) subject to valid, verified purchase orders acceptable toHercules from suppliers approved by Hercules in its sole discretion.

 

On March 25, 2010,Hercules advanced to us an additional $1,350, initially applied to theoutstanding balance on our revolving line of credit facility under the AmendedLoan Agreement. The advance increased our outstanding indebtedness on the revolvingline of credit to $8,909, and was provided as an extension above our eligibleborrowing base provided in the Amended Loan Agreement.

 

On April 6, 2010, weentered into Amendment No. 2 (Amendment 2) to the Amended Loan Agreementwith Hercules. Pursuant to Amendment No. 2, Hercules funded a term loan inan original principal amount of $1,350 (“Term Loan C”). The proceeds of TermLoan C were used, in part, to repay outstanding overadvances under therevolving credit facility under the Loan Agreement. Interest on Term Loan Cwill accrue at a rate of 8% per annum and, at the discretion of Hercules, ispayable either in cash or in kind by adding the accrued interest to theprincipal of Term Loan C. All principal outstanding on Term Loan C will be dueand payable on April 1, 2013. Term Loan C may be converted into shares ofour common stock at a price of $3.276 per share at any time at Hercules’option. We may prepay Term Loan C without incurring a prepayment penaltycharge. We also entered into a registration rights agreement with Herculeswhereby we agreed to register the shares underlying Term Loan C. As of April 7, 2010 the outstandingbalance on our revolving line of credit was $7,559.

 

OnFebruary 10, 2010, Hercules sent us a letter notifying us of an event ofdefault because our borrowings under the revolving credit facility exceeded ourborrowing base as of February 5, 2010 and charging us a default interestrate of an additional 3% to the applicable regular interest rate for the periodstarting February 5, 2010. Events of default are continuing and defaultrate interest will be payable monthly on the same date as regular interestunless Hercules chooses to demand payment of default interest on another date.Hercules may elect to have default rate interest paid in cash, in kind or inshares of our common stock.

 

Herculeshas not chosen to accelerate our obligations under the Amended Loan Agreement,but has expressly not waived any events of default or any of its remedies underAmended Loan Agreement. We do not have adequate liquidity to repay alloutstanding amounts under the credit facility and payment acceleration wouldhave a material adverse effect on our liquidity, business, financial conditionand results of operations.

 

**General**

 

InfoLogixprovides end-to-end solutions for electronic medical record (EMR) and supplychain (SCM) implementation and mobilization, with experience in over 2,200hospitals and businesses nationwide. We assist our healthcare and commercialcustomers by implementing and optimizing EMR and SCM systems, offer mobility tocaregivers and workforces by making data accessible directly at the point ofcare or point of activity, and manage operations with services to improveclinical and financial performance and supply chain with services to drivegreater efficiency.

 

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InfoLogix is a provider ofenterprise mobility solutions for the healthcare and commercial industries. Weprovide these solutions to our customers by utilizing a combination of productsand services, including consulting, business software applications, mobilemanaged services, mobile devices, and wireless infrastructure. Our solutionsare designed to allow the real time usage of data throughout a customer’senterprise in order to enhance workflow, improve customer service, increaserevenue and reduce costs. We sell wireless communication and computing devices,including mobile workstations that connect to a customer’s wireless network sothat information can be accessed from any location within the enterprise. Wealso implement customized and third-party software applications with aparticular expertise in electronic medical records in the healthcare industryand SAP® back-end systems in commercial enterprises. In addition, we offerprofessional services that support and complement enterprise-wide softwareimplementations and a customer’s wireless computing systems, includingconsulting, mobile managed services, training, engineering, technical supportand network monitoring.

 

The sale of mobileworkstations and other wireless devices has been and continues to represent amajority of our net revenues. We are continuing to transition our business tooffer higher margin consulting, other professional services and softwareapplications. With our focus on selling services and software, we believe thatwe can provide more comprehensive enterprise mobility solutions to ourcustomers. These solutions involve:

 

·                  Consulting withour customers to identify opportunities to use mobile technology in theirenterprise to improve operations and the quality of their customer service bymore efficiently managing people and assets.

 

·                  Assessing ourcustomer’s existing wireless infrastructure—the cables, routers and networkadapters from which a wireless network is constructed—and developing improvednetwork designs to ensure effective wireless connectivity and infrastructuresystems integration.

 

·                  Developing andimplementing custom and industry specific software applications includinghealthcare clinical electronic medical records and enterprise-wide systems byusing existing proprietary and third-party software.

 

·                  Delivering andinstalling wireless infrastructure and user devices, including mobileworkstations.

 

·                  Providing ourcustomers with ongoing managed services that are designed to supplement theirinformation technology department, such as training, maintenance and repair,network monitoring including both on-site and remote, software applicationupgrades, network security and workflow consulting.

 

We conduct substantially allof our operations through our wholly-owned subsidiary, InfoLogix SystemsCorporation. We own our patents and patent applications through ourwholly-owned subsidiaries OPT Acquisition, LLC, Embedded Technologies, LLC andInfoLogix—DDMS, Inc.

 

We have incurred significantnet losses from 2006 through 2009, including a net loss of $22,388 for the yearended December 31, 2009, including approximately $9,520 of non recurringcosts associated with the Hercules Restructuring. We have substantial liquidityrequirements related to the repayment of a seller note that comes due on September 30,2010 and our revolving line of credit, and to earn out payments for pastacquisitions. We do not currently expect to generate sufficient cash flow fromoperations to fund those obligations. As a result, our independent registeredpublic accounting firm has included an explanatory paragraph with respect toour ability to continue as a going concern in its report on our consolidatedfinancial statements for the year ended December 31, 2009. In light of ourlosses and liquidity requirements, we have undertaken a series of actions toreduce costs and have explored potential sources of financing and otherstrategic initiatives. Even with the restructuring of our debt with Hercules onNovember 20, 2009, and subsequent additional borrowings from Hercules in February andApril 2010 we continue to believe that we need to raise additional capitaland to further restructure our debt obligations to meet our liquidity needs tomore effectively pursue our strategic objectives. Our plans regarding theseinitiatives are discussed in “Item 7. Management’s Discussion and Analysisof Financial Condition and Results of Operations—Going Concern,” and includeadditional cost control measures and may include additional financing, one ormore strategic transactions, and further restructuring our debt. Our continuedoperations are dependent on our ability to implement those plans successfully.If we fail to do so, we may not be able to continue as a going concern.

 

Despite our history oflosses, the difficult economic climate and other challenges we face, we believethat our core business is positioned to capitalize on the development,proliferation and convergence of enterprise mobility solutions in themarketplace. We have focused our business on large, well-established customersthat are leading their respective markets in the application and implementationof mobile solutions to improve their businesses. We believe that our knowledgeand experience in combining industry leading proprietary and third-partysoftware creates solutions that address our customers’ critical needs. Becausewe do not depend on any particular technology or network carrier, we believethat we can provide tailored solutions in a rapidly changing technologicallandscape. Also, as market conditions continue to evolve, we believe that oursolutions are adaptable to customers in any industry and scalable to customersof varying size or technological sophistication.

 

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**Business Organization**

 

We manage our business primarily by marketverticals, driven by our sales organization. We have two reportable operatingsegments consisting of our healthcare and commercial or enterprise businesses.The healthcare segment is principally composed of our activities in hospitalsand other related healthcare facilities. The commercial segment focuses on allother vertical markets including pharmaceutical, manufacturing, wholesale andretail distribution and service industries. Further information regarding ourreportable operating segments may be found in Part II, Item 7 of this Form 10-Kunder the subheading “Results of Operations” and in Part II, Item 8 ofthis Form 10-K in Notes to Consolidated Financial Statements at Note T, “OperatingSegments”.

 

**Services and Products**

 

Our implementation andsupport organization provides solutions that include consulting, businesssoftware applications, mobile managed services, mobile workstations anddevices, and wireless infrastructure. Our services and products are designed tohelp our customers enhance workflow, improve customer service, increase revenueand reduce costs. We believe our services and products address severalfunctional applications including, for example, in enterprises in the followingindustries:

 

***Healthcare***

 

·                  Healthcareproviders are under constant pressure to increase the deployment, productivityand utilization of their EMR systems, while maximizing the safety and efficacyof the care they provide while maintaining the integrity and privacy ofinformation. The use of portable devices in combination with wirelesstechnology allows access to information at the point of care or wherever elsethe information may be required. RFID technology combined with customizedsoftware applications enables real time tracking of patients, medical equipmentand devices by the healthcare provider.

 

***Commercial***

 

·                  Distributionlogistics relies on analyzing real time information as it relates to productquantities, product movement and location throughout the supply chain. Examplesof distribution enterprise mobility solutions provided by us include wirelesshandheld computers used to scan products upon warehouse arrival and exit andwearable PCs used to permit warehouse operators to perform tasks, such asphysical inventory counts, in a hands-free environment.

 

·                  Manufacturinglogistics relies on accessing current information as it relates to materialsand parts inventory pipelines to enable just-in-time manufacturing processes.An example of a manufacturing enterprise mobility solutions are wirelessdevices used to capture information on the warehouse floor and integrate thatinformation into databases of the manufacturer, which facilitates improvedfinancial management, inventory control and tracking of customer orders.

 

·                  Transportationand field services logistics rely on effectively planning, scheduling andmanaging goods according to pre-determined delivery expectations. Examples oftransportation and field services enterprise mobility solutions includevehicle- mounted systems used to capture and transmit real time information ondriver performance, routes taken and hours worked and handheld computers toallow a customer’s employees to receive pick-up and delivery schedules at thebeginning and throughout a work shift.

 

·                  Retailapplications rely on accessing information at the point of sale and ensuringautomatic replenishment of inventories. In addition, retailers need toaccurately produce and capture shelf labels for in-store marketing. Examples ofretail enterprise mobility solutions include wireless point of sale devicesused by customers to securely complete financial transactions at a singlelocation by a credit or debit card and bar-code scanning devices used to enableemployees to quickly and efficiently perform physical inventories.

 

Ourservice and product offerings can be sold to a customer separately or together,in each case in a manner tailored to that particular customer. We offer thefollowing services and products: (i) consulting and professional services,(ii) products and software, and (iii) mobile managed services, asdescribed below.

 

***Consulting and Professional Services***

 

Our sales and implementationprocess takes a consultative approach, rather than the taking and filling ofproduct orders. We work closely with our customers to assess their operationsand identify the stress points in their organization where work processes andinformation management can be improved through the implementation of one of ourown or one of our partner’s solutions. Our professionals are experienced inproviding strategic planning and guidance in the areas of 

 

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information technology systems engineering,clinical systems, financial systems, operational systems and softwaredevelopment.

 

We have establishedcapabilities as a national management and clinical systems consulting companyfor the healthcare industry, including a trusted reputation as a software andservices partner within the SAP® supply chainexecution and mobility business(1). Through the recent formation of our SAP® Global Services Group, we aim to bringincreased efficiency to SAP® customers in multipleindustries, including pharmaceutical, retail, consumer packaged goods,logistics, wholesale distribution, and utilities.

 

Our professional servicesand solutions expertise in the healthcare market includes:

 

·                  EMR systemimplementation and support;

 

·                  computerizedphysician order entry;

 

·                  healthcareinformation system selection;

 

·                  strategic costmanagement;

 

·                  supply chainexecution design and implementation;

 

·                  informationtechnology strategic planning;

 

·                  return oninvestment analysis;

 

·                  e-charting; and

 

·                  workflowdesign.

 

Our professional servicesand solutions expertise in commercial markets includes designing andimplementing solutions using SAP® supply chainexecution and mobility applications, developing customized softwareapplications, and also designing, developing, and improving wireless networks.

 

We can provide the followingprofessional services through the project development and deployment process ofa complete mobile system implementation or on a discrete individual basis basedon the needs of our customers:

 

·                  ***Enterprise Assessment and Planning. ***We work with our clients tounderstand their current and future needs for enterprise class mobilecomputing. By employing a consultative approach to this marketplace, we aim toassist our clients to increase workforce efficiencies through the deployment ofeither vertical specific “Best in Class” mobility applications or by helpingthem to implement and deploy customer specific solutions. We assist our clientswith all aspects of assessment and planning, from application and device ornetwork selection and procurement through application and technology systemsimplementation and post-implementation support.

 

·                  ***SAP******®****** Supply ChainExecution Services.***Our SAP®* *Global ServicesGroup concentrates on helping our clients to maximize the value of their SAP®** **investment by implementingSAP’s leading edge supply chain execution components. We have developed worldclass knowledge and have renowned expertise in helping SAP® clients deploythe following applications:

 

·                  SAP® WarehouseManagement;

 

·                  SAP®** **ExtendedWarehouse Management;

 

·                  SAP®** **TransportationManagement;

 

·                  SAP®** **Console andITS;

 

·                  SAP® MobileNetweaver; and

 

·                  SAP®** **Auto IDInfrastructure.

 

·                  ***Training/e-Learning. ***We offer e-Learning solutions through an extensivelibrary of interactive and dynamic courses. Our e-Learning solutions range fromtraining programs that ready a customer’s employees to use their 

 

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(1)   SAP® is thetrademark or registered trademark of SAP AG in Germany and in several othercountries.

 

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softwareapplications efficiently to courses that educate employees on regulatory andcompliance issues. Our training modules customize course materials by capturinga customer’s application screens on their hardware and mapping the training tothe customer’s workflow. Unlike traditional classroom training, our e-Learningsolutions enable standardized and customized training solutions to beefficiently delivered to large numbers of employees of a customer both on theirschedules and directly at the point of access, typically by use of our mobilepoint of activity or mobile point of care workstations. Training methodsinclude interactive tutorials, on-line knowledge assessments, wide areaclassroom methods and instruction services. Delivery options include media suchas video, CD-ROM, video conferencing, web delivery, audio-desktop conferences,paper-based materials, and stand-up instruction. Whether used for anorganization-wide implementation of a new technology or a department-wideprocedural review, we believe that our e-Learning solutions address numerouschallenges faced by our customers, including:

 

·                  complexlogistics of training a large number of people effectively on a stricttimetable;

 

·                  minimizingtraining time spent by staff, which results in more time available for patientand customer interaction;

 

·                  developing,supporting and retaining a knowledgeable and skilled staff;

 

·                  providingtrainees with diverse levels of education, styles of learning and familiaritywith technology;

 

·                  delivering aconsistent, unified training message, communicating standard procedures andpolicies; and

 

·                  educatingemployees hired after training events.

 

Training modules developedand implemented to date include HIPAA privacy and security training, clinicalapplication training templates (Epic electronic medical records systems,MEDITECH computerized physician order entry and electronic medical recordsystems, Siemens AG Medication Administration Checker training, McKessonCorporation’s Horizon Expert Documentation clinical documentation training andMedical Information Technology, Inc.’s nursing training) and an assessmentand certification module, designed to test, certify, provide feedback, andreport on clinical courseware retention. We have several other e-Learningsoftware modules currently under development.

 

***Products and Software***

 

*Mobileand Wall-mount Workstations, Tablet Devices and Power Management Systems*

 

In early 2010, welaunched our ST7 integrated healthcare mobility solution product suite whichincludes mobile and wall-mounted workstations, and mobile clinical assistant(MCA) hand-held devices. The ST7 product line is designed specifically toadvance EMR implementations and mobilize clinicians at the point of care. Ournew ST7 Mobile Workstations are designed to provide hospitals with anend-to-end strategy for EMR implementation and mobilization. The ST7 MCA is a purpose-built mobilecomputing device based on a platform developed by Intel® to help improvepatient care and clinical workflows. Its ruggedized form, completelysanitizable surface and hot-swappable batteries allows the device to be carriedon long shifts through a busy medical environment. The ST7 Wall Mount wasdesigned by clinicians to specifically enhance workflow at the point of care.The ST7 Wall Mount creates a secure and convenient area to record patient dataand access technology for electronic bedside medication verification.

 

Our mobile point of careworkstations can be customized for hospital medication administration. Thisautomated point of care medication administration system, which operates inconjunction with a hospital pharmacy’s information technology systems, isdesigned to reduce medication errors and associated complications. Nurses scanthe bar-coded medication to confirm the correct dose of medication and thepatient’s bar-coded wristband to ensure that the correct patient is receivingthe appropriate dose of medication at the right time. We have been sellingmobile workstations since 2002, and currently have sold over 66,000 units deployedacross the healthcare market. Our point of care product line representedapproximately 30% of our total net revenue in 2009.

 

Our power management systemsinclude our newly launched ST7 LiFe Battery, which was developed through more than a year of researchand development provided by our supplier. We believe the ST7 LiFe Battery hasredefined the traditional battery design that powers most mobile computer cartsin the healthcare industry. As a result of this technological breakthrough, weintroduced an innovative lithium iron phosphate power system, whichsignificantly increases the performance of mobile computer workstations thatdoctors and nurses rely upon to deliver high-quality patient care.

 

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Drawing upon in-depthcustomer research and clinician feedback, with our business partner, weidentified the top features clinicians desired in order to enhance theperformance of their mobile computer workstations, including improved batterylife, reliability and charge time. Our new ST7 LiFe Battery not only deliversthese key features, but also provides a battery system that fully recharges insignificantly less time than other power solutions currently in place athospitals. This dramatic improvement in battery life is made possible as aresult of a proven, state-of-the art technology similar to that used in hybridautomobiles.

 

An additional benefit ofthe ST7 LiFe Battery is a reduction in downtime of mobile computerworkstations, a critical consideration for busy clinicians who struggle tospend as much quality time with patients as possible. The advanced batterytechnology also provides superior cell protection, eliminating the hightemperature safety risks associated with Lithium Ion, Sealed Lead Acid (SLA)and Nickel Metal Hydride batteries.

 

Our mobility solutions alsoinclude bar-code data collection devices, form-factor PCs, secure wirelessnetworks, handheld devices, tablet PCs, mobile wireless bar-code and labelprinters, vehicle-mounted computers, wearable computers, wireless connectivityand interconnectivity devices, and proprietary power solutions.

 

*Software*

 

We have dedicatedsignificant resources and capital to developing, acquiring and partnering withleading software firms to deliver a full range of software applications. Thesesoftware applications are designed to facilitate and integrate tracking anddelivery solutions for our customers. We continue to focus on developing ourmobility solutions to include robust software applications that have changedour business model to include recurring revenue from software licensing andsupport service. Our proprietary software applications include the following:

 

·                  ***HealthTrax Wireless Tracking Software. ***HealthTrax Wireless Trackingsoftware is designed to help hospitals identify the location of hospital assetsand patients. The HealthTrax solution includes RFID tags that are compatiblewith all hospital wireless network infrastructures and provide real time assetand patient monitoring information designed to increase productivity andpatient safety. Some of our specific solutions include:

 

·                  ***Patient location tracking. ***Patient location trackingsoftware is designed to enable hospitals to accurately track the location ofpatients to improve patient care and reduce medical errors. This software canalso be used to collect data regarding hospital operations such as the lengthof patient stays in a hospital’s waiting room.

 

·                  ***Equipment position tracking. ***Equipment position trackingsoftware allows hospital personnel to locate equipment and track its currentstatus (in use or available), which supports effective clinical workflow byhelping to ensure that the right people and equipment are in the right place atthe right time.

 

·                  ***Procedure tracking. ***Procedure tracking software is designed to enable ahospital to track and archive a patient’s medical stay while alerting hospitalpersonnel to potentially dangerous situations.

 

·                  ***Patient security. ***HealthTrax software can enable a hospital toincrease its security by allowing personnel to track and manage the identity ofinfants and other patients.

 

·                  ***MRS-Web.***We provide strategic costmanagement and productivity consulting services to hospitals across NorthAmerica. Through the use of our proprietary On-Demand Executive InformationSystem (*MRS-Web*) we license our software whichprovides all levels of hospital management with an on-demand tool forcontinuous monitoring of cost management performance metrics, includingspecific operational targets.

 

·                  ***Mobile Device Controller (MDC). ***Our mobile product solutionsuite is tailored specifically for users of SAP® software andis also adaptable to other back-end systems. This series allows us to provideour clients with access to business critical applications from mobileworkstations.

 

·                  ***Rapid development software. ***Our Windows-baseddevelopment environment includes routines, collection of development tools andbuilt-in mobile data interchange tools for rapidly creating and testing mobileapplications for mobile devices. Our design of these applications allows us tocreate robust business applications.

 

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Through the use of thesesoftware applications, our mobile field sales application manages our customer’smobile sales force from headquarters to the field. We allow the customer totrack activity by purchase order, customer name, salesperson, product or datein real time. Our mobile point of delivery solution allows our customer tomanage everything involved in delivering goods and services to their customers.

 

·                  ***Customer Care Portal (CCP). ***Our Customer Care Portal isan asset tracking and management solution that provides visibility into thelifecycle of our customer’s mobility solution using the Internet and a browser.Based on the Microsoft SharePoint portal server platform, the CCP seamlesslyintegrates into our help desk and delivers our customers with access toinformation technology asset information, support tickets, relevantdocumentation, and a custom-specific knowledge base.

 

We believe that the CCP provides a secure, easy to use method ofaccessing real-time service information such as technical support calls, repairhistory and maintenance, all maintained by our professional services staff.Asset management allows customers to sort and find equipment by item number,item type, serial number, location, and status. With one click, the icon nextto each asset opens up to enable review of the equipment properties. The CCPcan find where a device is installed, when it was installed and with whatconfiguration parameters. Additionally, the system can track the completehistory of every device, including repairs and installation history, and is atthe core of our mobile managed services delivery model.

 

***Mobile Managed Services***

 

We believe that the keydifferences between the functional capabilities of personal computers (PC) andmobile devices are steadily eroding. Increasingly, mobile PCs (notebook andtablet PCs) and mobile devices (smart phones and PDAs) are used ascomplementary tools to access the same business application in similar ways. Asthe trend toward device consolidation continues, we believe that the market formobile service providers remains highly-fragmented with no one providercapturing more than a 10% market share worldwide. We further believe that IBMGlobal services is a market leader for managed and professional networkservices (which includes their mobility offering), as is EDS. However, theoverall mobility market is served by a wide variety of technology providers,consulting organizations and mobility specialists. The types of mobilitysolutions these companies offer vary greatly, ranging from general, managednetwork services offerings to highly-specialized, mobility offerings tailoredto specific vertical markets and business process applications.

 

Our mobile managed servicesare designed to provide our customers with external asset management and systemmonitoring and support that enable their mobile technology to operate withoutinterruption and at peak performance levels. We offer mobile managed servicesto our customers through a dedicated in-house support staff that can monitor andmaintain as much of a customer’s information technology systems as the customerdesires. We take a proactive approach to identifying and solving problemswithin a customer’s wireless network systems, which we believe is an attractivealternative to the typical reactive approach to information technology support.

 

In general, we providemobile managed services through an ongoing contracted arrangement that isbudgeted and invoiced periodically as opposed to our professional services,which are typically one-time engagements that run through product deployment.Examples of our managed services include:

 

·                  ***Network Operations Center. ***Our network operationscenter provides remote systems monitoring and technical assistance oninformation technology related issues. The network operations center offersproactive network monitoring and management and remote support to ourcustomers.

 

·                  ***Asset Management. ***Our asset management system helps our customersmanage their wireless inventory. We maintain a database of all of the customer’sinstalled equipment, including hardware and software configurations, monitorcontract and licensing compliance and consolidate all cost information into asingle database for a complete view of a customer’s wireless assets. We alsooffer a replacement program for wireless devices that reduces the downtime ofwireless assets. We offer extended warranty and service programs on our mobileworkstations and batteries.

 

·                  ***Customer Care Portal. ***Through our Customer Care Portal, as describedabove, we are able to provide customers with access to the asset managementdatabase and also provide access to technical support information andconfiguration and installation resources.

 

·                  ***Help Desk. ***Our help deskservice provides support to resolve IT issues that our customers encounter.

 

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Our mobile managed servicesare generally offered through service level agreements that range from two tofive years.

 

***Sales and Marketing***

 

We employ several methods tosell our services and products, including direct selling, an inside salesapproach and channel partner programs. Our direct selling and inside salesapproach aims to align the compensation paid to our sales representatives withour business strategy. Sales representatives are paid largely on a commissionbasis based on revenue for services and gross profits for products sold.

 

Our direct sales force isprimarily geographically based to support a regional strategy focused onone-to-one selling. In addition, many of our sales representatives specializein a particular industry or industries, which we believe makes them moreeffective in understanding the needs of our customers and ultimately generatingmore sales. Over the past year we replaced a majority of our field sales force,with a focus on hiring experienced solutions sales representatives. Wecurrently employ 34 direct sales representatives located across the UnitedStates, including our inside sales staff. In general, new sales representativestake approximately six to nine months to generate leads, initiate contacts andbecome integrated into the purchasing cycle of our customers.

 

Our inside sales strategyfocuses on telephonic and email communications. These sales representativeswork from within our offices and are responsible for handling inbound salesorders and for following up with customers. To support this sales approach, weuse a sales force automation system that integrates our inside and outsidesales force, customer service representatives, marketing support staff andmanagement through our email system.

 

We also sell and market ourservices and products through a network of key relationships, including channelpartners. These relationships are synergistic—we refer business to our keyrelationships from our existing customers and, in exchange, we receivepreferential pricing and referrals from these key relationships. Our businessdevelopment and channel management staff develop relationships with our channelpartners both at the management level and, we believe more importantly, at thefield sales level. We provide incentives to our channel partners to activelypursue opportunities to market and sell our services and products with oursupport. In addition, we intend to continue to leverage our key relationshipsand channel partners by increasing the amount of business, in particular thatportion of our business surrounding hardware and wireless device sales, donethrough these partners while directing our direct sales team to focus onselling our higher margin consulting and other professional services.

 

We market our services andproducts through a variety of other methods, including industry trade shows andprofessional conferences, public relations and targeted marketing campaigns,our corporate website, and search engine optimization and marketing.

 

**Customers**

 

We have delivered enterprisemobility solutions to over 2,200 customers in North America, including over1,400 hospitals and 800 commercial enterprises since we began operations in2001. As a percentage of total net revenue, our five largest customersaccounted for, in the aggregate, approximately 38%, 38%, and 34% of our netrevenues for the years ended December 31, 2009, 2008 and 2007,respectively. During 2009, 2008 and 2007, we had one, one, and two customers,respectively, that individually comprised 10% or more of revenue. Managementdoes not believe that the loss of any single customer will have a materialadverse effect on our business or results of operations.

 

We generated net revenuesfrom customers located in the United States of $86,566, $100,216, and $75,474 inthe years ended December 31, 2009, 2008 and 2007, respectively. Wegenerated net revenues from customers located outside of the United States of$350, $500, and $3,300 in the years ended December 31, 2009, 2008, and2007, respectively.

 

**Past Strategic Acquisitions**

 

*Acquisition of Assets of Delta Health Systems, Inc.*

 

In May 2008, weacquired substantially all of the assets of Delta Health Systems, Inc., orDelta. The assets acquired related to Delta’s business of providing strategiccost management consulting services and web-based management data collectionand work-flow analytics to the healthcare industry. This acquisition hasenabled us to combine our existing solutions with higher margin professionalservices. We believe the Delta acquisition has allowed us to reach further intoour 

 

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healthcare customer organizations to bringcritical workflow and human resource utilization efficiencies that support ourmobile solutions. During 2008 and 2009, we began to realize economies of scalethrough selling combined solutions to mutual clients of Delta.

 

Thepurchase price was $1,673, which consisted of $1,465 in cash and $208 inacquisition costs. We also entered into an earn-out agreement pursuant to whichDelta was eligible to earn additional consideration in the subsequent two-yearperiod (each year, an Earn-out Period) after the closing of the transaction. Inconnection with the Hercules Restructuring that closed on November 20,2009, we restructured our earn-out obligations to Delta. In lieu of the $430payment that Delta earned for the first Earn-out Period, Delta is participatingin a commission plan under which it will receive a monthly commission of 11.5%of the collected revenue from Delta’s business that we generate during theapplicable month. No changes were made to the payment Delta can earn for theSecond Earn-out Period, which is up to $500 upon achievement of gross revenuetargets described in the Earn-out Agreement. At the end of the two year period,if Delta has not already earned the $1,000 of additional consideration inrespect of each of the two Earn-out Periods, Delta may earn an amount equal tothe $1,000 of additional consideration less any amounts previously paid inrespect of the two Earn-out Periods upon the achievement of certain cumulativefinancial milestones during the two-year earn-out period.

 

*Acquisition of Assets of Aware Interweave, Inc.*

 

In May 2008, weacquired substantially all of the assets of Aware Interweave, Inc., orAware. The assets acquired related to Aware’s business of providing mobilesoftware solutions to a variety of customers including federal governmentagencies, Fortune 1000 companies and healthcare and life science organizations.The acquisition was part of our strategic plan to add intellectual property andhigher-margin services and application software licensing, while allowing us toprovide our customers with access to new solutions. The acquisition of Awarehas allowed us the opportunity to enable users of SAP® software and applications to significantlyimprove their visibility, response time, and revenues by providing access tobusiness-critical applications without being tied to the office or desktopcomputer. Through our acquisition of Aware, we have gained a mobile productsolution suite that it developed, the Co-Pilot series, which is tailoredspecifically for users of SAP® software, and also adaptable toother back-end systems.

 

The purchase price was$2,479, which consisted of 20,000 shares of our common stock, valued at $1,030,cash net of cash acquired of $1,318, and $131 of acquisition costs. Theissuance of the shares of common stock was unregistered and the shares areinitially subject to a two-year lockup.

 

*Acquisition of Healthcare Informatics Associates, Inc.*

 

On September 30, 2007,we acquired substantially all of the assets of Healthcare InformaticsAssociates, Inc., or HIA, including all of HIA’s cash and cash equivalentsand certain bank accounts, accounts receivable, the rights to existingrelationships with customers, vendors and partners. All of the employees of HIAwere transitioned to us. The employees are a team of senior healthcareinformatics consultants who are also certified healthcare practitioners, andinclude registered nurses, pharmacists, ancillary clinicians, physicianassistants, revenue cycle personnel, administrative systems personnel,technical interface/report writing personnel, clinical transformationspecialists, engineers specializing in return on investment, benefitsrealization, and work redesign and certified project managers. The acquisitionof HIA has allowed us to expand the products and services we offer to hospitalsand other healthcare providers. The consideration paid for the acquired assetswas composed of cash, shares of our common stock, a convertible promissory noteand additional contingent consideration under an earn out agreement, each asdiscussed in more detail below. We believe that the acquisition of HIA and itscombination of IT and clinical experience has enabled us to expand thestrategic value of our current and future customer relationships.

 

The cash purchase pricepayable at closing was $5,500 (subject to a post-closing working capitaladjustment) of which $900 was placed into escrow to fund a portion of certainemployee retention payments to be made to HIA’s employees over a three-yearperiod after the closing. In addition, $1,557 from HIA’s cash account wasdeposited into an escrow account to be used to fund any working capitaladjustment payable to the Company, all of which was subsequently released backto HIA in January 2008. We also deposited approximately $83 into escrowrepresenting certain outstanding customer invoices due to HIA. We havecollected the amounts due under those invoices so we released an equivalentamount to HIA from the escrow in January 2008.

 

In addition to the cashconsideration described above, the purchase price for the assets of HIAincluded 30,219 unregistered shares of our common stock and a $3,500convertible subordinated promissory note issued by our wholly-owned subsidiary,InfoLogix Systems Corporation. The note bears interest at a rate of 9% perannum, compounding annually until the principal amount is paid in full. Theprincipal amount of the note and all accrued interest are payable in full on September 30,2010. The outstanding unpaid principal amount of the note is convertible at theoption of HIA into 

 

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unregistered shares of our common stock at aconversion price of $137.50 per share. We may also require HIA to convert allor any portion of the outstanding unpaid principal of the note into ourunregistered common stock at a conversion price of $137.50 per share if theclosing bid price of our common stock for at least 45 consecutive trading daysequals or exceeds $200.00 per share. Any accrued but unpaid interest on thenote at the time of any conversion will be paid, at our option, either in cashor in additional shares of our common stock at a conversion price of $137.50per share. HIA may also, at its option, declare the note payable in full uponthe occurrence of a change of control (as defined in the note) of InfoLogixSystems. The note also contains customary events of default that would allowHIA to accelerate the amounts payable under the note, including any default on oursenior debt. The note is subject to a subordination agreement with HerculesTechnology Growth Capital, Inc., our senior lender. The note also grantsHIA the right to require us to redeem a portion of the unpaid and outstandingprincipal of the note if we engage in an offering of our equity securities, theprimary purpose of which is to raise capital.

 

In addition, we entered intoan earn-out agreement pursuant to which HIA is eligible to earn additionalconsideration in respect of the two years after the closing of the acquisition.In August 2008, we entered into an amendment to the earn-out agreementthat extended the first earn-out period from twelve months to fifteen monthsending December 31, 2008, and amended certain financial calculations usedto determine our earn-out liability. Based on satisfaction of certain financialmilestones described in the earn-out agreement, we have recorded an adjustmentof approximately $1,958 to the purchase price as an increase to goodwill, whichreflects the amount that HIA earned under the earn-out for the first yearfollowing closing and is also the maximum amount HIA could have earned. We havenot yet made any payment in connection with this earn-out obligation, and arecurrently in discussions with HIA regarding this payment. Please seeItem 7. “Management’s Discussion and Analysis of Financial Condition andResults of Operations—Liquidity and Capital Resources” for further discussionregarding payment of the HIA earn-out.

 

**Patents and Proprietary Technology**

 

Wefile patent applications to protect technology, innovations and improvementsthat we consider important to the development of our business. Throughout ourhistory, we have proactively invested in and acquired intellectual propertyassets. We continue to partner and invest to develop, capture and deliverunique, high-quality, differentiated and cost-effective mobile workforcetechnology solutions for our customers. We have 23 issued patents in the U.S.and 13 in other countries related to wearable computers and surrounding RFIDtechnology that manages proper medication delivery and administration. We have5 patent applications pending with the U.S. Patent and Trademark Office and 6in other countries, likewise related to medication delivery and administrationand aspects of wearable computing devices. Our patents and patent applicationsare owned through our wholly-owned subsidiaries OPT Acquisition, LLC, EmbeddedTechnologies, LLC and InfoLogix—DDMS, Inc.

 

We have also developed otherproprietary solutions, including form-factor PC technologies designedspecifically for low power consumption, handheld and kiosk point-of-saledevices and several customized software applications. We seek to protect ourproprietary information and technology through licensing agreements,third-party nondisclosure agreements and other contractual provisions, as wellas through patent, trademark, copyright and trade secret laws in the U.S. andsimilar laws in other countries.

 

We also rely on tradesecrets and proprietary know-how that we seek to protect, in part, throughconfidentiality agreements with our employees, consultants, customers, businesspartners, and other third parties. As a condition of employment, we requirethat all full-time and part-time employees enter into an invention assignmentand non-disclosure agreement.

 

We intend to continue tomaintain and where possible to broaden our intellectual property portfolio,which we consider critical to our future product development and an importantsource of potential value. In the past, we have acquired intellectual propertythrough selective business acquisitions, and we might do so again in thefuture, as well as develop our own proprietary solutions. If we are unable toprotect our patents and proprietary rights, our reputation and competitivenessin the marketplace could be materially damaged.

 

Litigation may be necessaryin order to enforce any patents that we now hold or any patents that are issuedto us or acquired by us in the future.

 

**Competition**

 

We operate in a fragmentedmarketplace, competing with a variety of participants in the wireless mobilitymarket including companies that design systems, provide hardware and softwareapplications, integrate software and hardware 

 

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applications, provide consulting services andoffer management and maintenance services. Our primary competition comes fromregional and local firms that are similar to us in terms of revenue and numbersof employees.

 

We sell and support mobilepoint of care workstations with over 60,000 of our units currently in use inthe U.S. healthcare market. In this business, we compete with a variety ofcompanies, including furniture and fixture distributors and several nationallyknown mobile cart manufacturers and distributors. We believe that the largercompetitors include Stinger Medical (in business for over ten years and thefirst company to provide mobile carts to the healthcare industry), FloHealthcare (the holder of several patents on mobile computing and now owned byEmerson Storage Solutions), Ergotron, Rioux Vision (now owned by Omnicell),Rubbermaid, Lionville (also owned by Emerson Storage Solutions), HowardComputer, Artomick, EnovateIT and JACO.

 

In the healthcare market, wealso compete with device manufacturers, service providers and software platformcompanies that offer unique, specialty use products. For example, MotionComputing, Research In Motion (BlackBerry), Palm and Dictaphone compete formarket share in the sales of devices to physicians and other providers,Microsoft and Intel are positioning for wireless IP platform adoption, whilecompanies like MedQuist and Scribe vie for customers of specialty use softwareapplications and services. While we maintain our focus on enterprise mobilitysolutions, we will encounter these companies in the marketplace while competingfor a portion of the work-flow and voice-over-IP solution sets.

 

We encounter the very largeconsulting firms such as IBM Global Services, CTG (Computer Task Group),Accenture, Deloitte Consulting, EDS, Computer Sciences Corporation/FirstConsulting Group, and Affiliated Computer Services in both our commercial andhealthcare groups. Many of these national and international consulting firmsfocus on design and architecture of wireless networks, and work-flow or processimprovement. We believe there are also many small, local and regionalconsulting firms offering services similar to the larger firms, as well assite-surveys, infrastructure support and information technology outsourcing.Each of these participants will continue to compete with us for our coreservices around enterprise mobility solutions and mobile managed services.

 

We compete with handheldmobile computer products companies in our supply-chain solutions business,including Symbol/Motorola, Intermec, LXE and other makers of tablet computerssuch as Dell, Hewlett-Packard, Sony and Fujitsu. Symbol/Motorola is a globalleader in mobile data management systems and services with innovative customersolutions based on wireless local area networking for voice and data,application-specific mobile computing and bar-code data capture.

 

We also compete with asmaller group of companies that are more solutions oriented, but operate in thesectors in which we operate, including healthcare, transportation,manufacturing, distribution and retail. These companies include DecisionPoint, Inc.,Stratix Corporation, Enterprise Mobile, SOTI, Inc. Wavelink Corporation,Ennovative, Inc., ID Systems, and OAT Systems (a recognized RFID frameworkowned by Checkpoint Systems, Inc.). This group of companies competes forbusiness that delivers RFID software and solutions. Solution sets include dataand content management, materials management, e-commerce, e-Learning, customapplication and web interface development, and infrastructure management.

 

In addition to theforegoing, there are hundreds of firms that operate in a variety ofvertical-specific or technology-centric groupings. Due to the increasing levelof market activity related to these two general areas, an increasing number ofcompanies are claiming capabilities.

 

When evaluating ourcompetitive landscape, we consider:

 

·                  The largenumber of RFID and mobile wireless hardware solution providers. Many firmsattempt to differentiate their services by promoting “solution” integrationcapabilities. The larger enterprises understand the value added elements ofsoftware integration (either proprietary or third-party integration) as well asservice capabilities to integrate and manage.

 

·                  A growingnumber of private companies are establishing meaningful market presence byleveraging software integration and solution management capabilities.

 

·                  Cross industrypenetration seems to be a constant theme for many companies; however, webelieve industry specialization is viewed by customers as an importantdifferentiator.

 

**Product Development**

 

Toensure our ability to identify and develop new technologies and applicationsfor our mobile workforce solution platforms, InfoLogix starts with a structuredapproach to product development. We conduct intensive research to identify

 

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opportunitiesor needs that are not currently met, we establish a framework for a solutionthat we expect will fill those needs and use this framework to design thesystem. Once a system reaches the prototype stage, it is carefullyreviewed for adherence to requirements, and then thoroughly tested for qualityassurance. We believe this structured approach is comprehensive andflexible and allows us to produce high quality and customer-focused solutionswhile effectively using our resources to drive future growth for our business.

 

**Solution Delivery and Manufacturing**

 

Wepartner with advanced technology providers, and we aim to add value throughcustomization and service to deliver a comprehensive solution to our customerbase. We undertake a diligent partner review, product/service testing, andcontract administration processes to validate the quality of both the vendorand its offering, and when satisfied, we enter into long-term engagements toensure continued delivery of product according to our strict quality standards.We engage third parties to produce our mobile point of care and point ofactivity workstations, form factor and tablet computers, and wireless kioskproducts. We also have a long-term contract for the design and manufacturing ofour mobility products and power management systems for which we co-own certainelements of the technology. Most of the manufactured products are shippeddirectly from the manufacturing facility to our customer site. Our employeesprovide on-site customized assembly and installation, upon request of ourcustomers.

 

**Employees**

 

As of March 31, 2010,we had 168 full-time employees of which 34 were in sales and marketing, 97 werein professional consulting services and e-Learning, 12 were in softwareengineering, quality assurance, and field services, 15 were in operations andcustomer support, and 10 were in finance, executive and administrativecapacities. We are not subject to any collective bargaining agreements, and webelieve that our relationship with our employees is good.

 

In addition to full-timeemployees, we utilize the services of various independent contractors,primarily for certain product development and foreign sales, marketing andadministrative activity.

 

Our principal executiveoffices are located at 101 East County Line Road, Suite 210, Hatboro,Pennsylvania 19040. Our telephone number is (215) 604-0691. Our websiteaddress is *www.infologix.com*.

 

**Item 1A. Risk Factors**

 

*An investmentin our common stock involves a number of risks. Before deciding to invest in usor to maintain or increase your investment, you should carefully consider therisks described below, in addition to the other information contained in thisreport and other reports we have filed with the Securities and ExchangeCommission. The risks and uncertainties described below are not the only riskswe face. Additional risks and uncertainties not presently known to us or thatwe currently deem immaterial may also affect our business operations. If any ofthese risks are realized, our business, financial condition or results ofoperations could be harmed. In that event, the market price for our commonstock could decline and you may lose all or part of your investment.*

 

**RisksRelating to Our Ability to Continue as a Going Concern**

 

***Ourindependent registered public accounting firm has expressed doubt about ourability to continue as a going concern. We may need additional liquidity andcapital resources to achieve our goals.***

 

As discussed in Item 7.**“Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Going Concern,” we have incurred significant losses from 2006 through 2009,including a net loss of $22,388 for the year ended December 31, 2009. Asof December 31, 2009, we had cash and cash equivalents of $1,018, totalliabilities of $36,069 and an accumulated stockholders’ deficit of $2,544. Wehave substantial near-term liquidity requirements related to the repayment of aseller note that comes due on September 30, 2010 and our revolving line ofcredit under our Amended Loan Agreement with Hercules, and to earn out paymentobligations from past acquisitions. We do not currently expect to generatesufficient cash flow from operations to fund those obligations. Based on ourhistory of losses and substantial near-term liquidity requirements, ourindependent registered public accounting firm included an explanatory paragraphwith respect to our ability to continue as a going concern in its report on ourconsolidated financial statements for the year ended December 31, 2009.The presence of this explanatory paragraph may have an adverse impact on ourrelationship with third parties with whom we do business, including ourcustomers, vendors and employees and could make it more challenging for us toraise additional financing or refinance our existing indebtedness.

 

In light of our losses and liquidity requirements, wehave undertaken a series of actions to reduce costs and have explored potentialsources of financing and other strategic initiatives. Even with therestructuring of our debt with Hercules 

 

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on November 20, 2009and subsequent additional borrowings from Hercules in February and April 2010,we continue to believe that we need to raise additional capital and to furtherrestructure our debt obligations to meet our liquidity needs and to more effectivelypursue our strategic objectives. Future initiatives include additional costcontrol measures and may include additional financing and further restructuringof our debt.  Our continued operationsare dependent on our ability to implement these plans successfully. If we areunable to do so, we may be unable to continue as a going concern.

 

**RisksRelating to our Indebtedness**

 

***Wewill need additional financing to fund our operations and finance our growth;we may be unable to obtain financing on terms acceptable to us.***

 

We will be required toraise additional capital through either equity or debt financing to fund ouroperations, including any operating losses, and to implement our current orfuture strategies, including strategic acquisitions. Factors that couldincrease our need to seek additional financing include decreased demand andmarket acceptance for our products and services, the inability to successfullydevelop new products and services, competitive pressures resulting in lowerpricing, new products and services offered by our competitors, and acquisitionopportunities. In addition, if our obligations under existing indebtedness areaccelerated or when our existing credit facilities expire, we would likely needto obtain replacement debt financing. The capital and credit markets in theUnited States continue to experience extreme volatility and disruptions, andthe current turmoil affecting the financial markets and the banking system, aswell as the possibility that financial institutions may consolidate or go outof business, have resulted in a tightening in the credit markets and a lowlevel of liquidity in many financial markets. These developments have madefinancing terms materially less attractive and, in some cases, made financing unavailable.As a result, we may be unable to obtain any financing, including both new andreplacement financing, that we might require to operate our business. Inparticular, in this environment, it will be extremely difficult to obtainadditional debt financing or to refinance or replace our existing indebtedness.

 

There can be no assurancethat additional or replacement debt financing will be available to us oncommercially reasonable terms or at all. If we incur additional debt, ourinterest expense would increase. If we raise capital through the sale of equitysecurities, the percentage ownership of our existing stockholders would bediluted. Any new equity securities may have rights, preferences or privilegessenior to those of our common stock, including liquidation preferences,dividend rights, board representation, and blocking rights for certaintransactions and other matters. If we are unable to obtain additional orreplacement financing when we need it, our ability to fund our operations andmeet our plans for expansion would be materially adversely affected.

 

***We are currently indefault under the terms of our Amended Loan Agreement and there can be noassurance that we can cure the default.***

 

Our Amended Loan Agreement provides us with a$12,000 line of credit, three term loans with an aggregate principal amount of$11,850, and an equipment loan with availability of up to $3,000. The termloans include a $5,500, 48-month amortizing loan, a $5,000 convertible note dueon November 1, 2014, and a $1,350 convertible note due on April 1,2013. The Amended Loan Agreement contains restrictions and covenants andrequires us to maintain specified financial ratios and tests. For example, theAmended Loan Agreement restricts our ability, among other things, to incuradditional indebtedness, to acquire other companies or the assets of othercompanies and to pay dividends without the lender’s consent. If we fail to meetor satisfy any of the restrictions, covenants, financial ratios or financialtests, we would be in default under the Amended Loan Agreement. The loans aresecured by all of our assets. We are also required by our lender to maintain aminimum cash balance of $1,000. An event of default under the loan agreementwould give the lender the right to declare all amounts outstanding under thecredit facility due and payable and enforce its rights to foreclose on thecollateral securing the loans.

 

As of February 5, 2010, there was an event ofdefault existing under the Amended Loan Agreement because our advances underthe revolving line of credit portion of our credit facility exceeded ouravailable borrowing base. On February 10, 2010, Hercules sent us a letterserving as a notice of event of default and reservation of rights. As a resultof this violation and other financial covenant defaults that are continuing,Hercules is charging us default rate interest on all of our outstandingobligations under the Amended Loan Agreement, which rate is equal to theregular interest rate plus 3%. Hercules has the option to require payment ofdefault rate interest in cash, in kind or in shares of common stock. Herculeshas not accelerated our obligations under the Amended Loan Agreement, but hasexpressly not waived any events of default or any of its remedies under the AmendedLoan Agreement. We do not have adequate liquidity to repay all outstandingamounts under the credit facility and payment acceleration would have amaterial adverse effect on our liquidity, business, financial condition andresults of operations**.**

 

***The covenantsin our credit facility may restrict our operations, which could inhibit ourability to execute our growth strategy and have a negative effect on ourresults of operations.***

 

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Even without paymentacceleration, the restrictions contained in the loan agreement could inhibitour ability to obtain financing and engage in other business activities thatare important to our business and growth strategies, which could inhibit ourability to operate our business and increase our revenues and profitability.

 

***Our indebtedness could adversely impact our financialcondition.***

 

On December 31,2009, as a result of our Amended Loan Agreement, we had approximately $22,640of total indebtedness outstanding, including short-term debt and approximately$7,559 under our credit facility. We may increase the amount of ourindebtedness in the future, which could have an important impact on ourstockholders. An increase in our indebtedness could:

 

·                  cause us to violate certain provisions contained in our Amended LoanAgreement;

 

·                  make us more vulnerable to economic downturns and limit our flexibilityto plan for or react to changes in business and economic conditions;

 

·                  limit our ability to withstand competitive pressures through increasesin our cost of capital; and

 

·                  harm our ability to obtain additional debt or equity financing in thefuture.

 

If any of the foregoingwere to occur, our ability to execute our business and growth strategies wouldbe impaired and our results of operations could be harmed.

 

**RisksRelated to our Controlled Company /Status**

 

***Interests of our controlling stockholder may conflict withthe interest of our other stockholders*****.**

 

Our majority stockholder,HTI, a wholly owned subsidiary of our senior lender Hercules, ownsapproximately 40% of our outstanding common stock on a fully diluted basis andshares having approximately 72% of our total voting power. HTI may haveinterests that differ from our other stockholders’ interests, and it may votein a way adverse to these interests. Additionally, as more fully discussed in Item 7. “Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Recent Developments,” HTI has and will continue to have control over theoutcome of certain matters requiring stockholder approval, including the powerto, among other things, elect members of our board of directors, amend ourcertificate of incorporation or by-laws and approve extraordinary transactions,including mergers, acquisitions or dispositions of all or substantially all ofour assets.

 

HTI may also prevent orcause a change of control, delay a change of control, or cause a change ofcontrol to occur at a time when it is not favored by other stockholders. Thiscould deprive other stockholders of an opportunity to receive a premium fortheir common stock as part of a sale of our Company and may adversely affectthe market price of our common stock. HTI’s ability to employ anti-takeovermeasures is strengthened due to the security ownership of its parent, Hercules,which owns securities convertible into approximately 37% of our outstandingcommon stock on a fully diluted basis. See also the risk factor “*Provisionsin our organizational documents and under Delaware law, as well as governancerights and security ownership of HTI and Hercules, may delay or preventattempts by our stockholders to change our management and hinder efforts toacquire a controlling interest in us.*”

 

In addition, HTI and itsaffiliates may engage in business with companies that may compete with us orwith our subsidiaries. HTI is not obligated to advise us of any investment orbusiness opportunities of which they are aware, and they are not prohibited orrestricted from competing with us or with our subsidiaries.

 

***Our controlling stockholder has the contractual right tonominate three members of our Board of Directors.***

 

Under the terms of a debtconversion agreement between us and HTI, HTI has the contractual right tonominate three of the seven voting members of our Board of Directors. Our Boardof Directors appoints the members of our senior management. As a result, HTIhas significant influence over the appointment of the members of our seniormanagement and may be able to prevent any changes in senior management thatother stockholders, or that other members of our Board of Directors, may deemadvisable.  Due to the significant influenceof HTI on our Board of Directors, HTI has the power to influence all decisionsof the Board of Directors, including whether to approve extraordinarytransactions, mergers, acquisitions or dispositions of all or substantially allof our assets.

 

***Our stockholders do not have the same protections availableto other stockholders of NASDAQ-listed companies because we are currently a “controlledcompany” within the meaning of NASDAQ Listing Rules.***

 

Our majority stockholder,HTI, currently controls a majority of our outstanding common stock.  As a result, we are a “controlled company”within the meaning of the rules governing companies with stock quoted onThe NASDAQ Capital Market.  As acontrolled company, we qualify for, and may and intend to rely upon, exemptionsfrom several corporate governance requirements, including requirements that:

 

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·                  a majority of the board of directors consist of independent directors;

 

·                  compensation of officers be determined or recommended to the board ofdirectors by a majority of its independent directors or by a compensationcommittee comprised solely of independent directors; and

 

·                  director nominees be selected or recommended to the board of directorsby a majority of its independent directors or by a nominating committee that iscomposed entirely of independent directors.

 

Additionally, HTI has theright to have its nominees represented on our Compensation and Nominating andCorporate Governance Committees. Accordingly, our stockholders will not beafforded the same protections as stockholders of other NASDAQ-listed companiesfor so long as HTI owns a majority of our outstanding common stock.

 

**RisksRelating to our Business and Industry**

 

***Wehave incurred losses in the past and our ability to operate profitably in thefuture is uncertain.***

 

For the years ended December 31,2009 and 2008, we generated net revenues of $86,916 and $100,700, respectivelyand incurred net losses of $22,388 and $13,184, respectively. We have incurrednet losses in each of the last four full fiscal years, and we may incuradditional losses in the future. Even if we achieve profitability, we may notbe able to sustain or increase profitability on a quarterly or annual basis. Ifour business and revenues grow more slowly than we anticipate, our operatingexpenses exceed our expectations, we are unable to sell our products andservices at acceptable prices relative to our costs, or we fail to develop andintroduce on a timely basis new products and services from which we can deriveadditional revenues, our financial results will suffer.

 

***Achieving profitability may be affected by the continueddownturn in economic, business or industry conditions.***

 

In weak economic,business or industry conditions, customers or potential customers could reduceor delay their technology investments. Reduced or delayed technologyinvestments could decrease our sales and profitability.  In such an environment, our customers mayexperience financial difficulty, cease operations or fail to budget or reducebudgets for the purchase of our products and professional services. This maylead to longer sales cycles, delays in purchase decisions, payment andcollection, and may also result in downward price pressures, causing our salesand profitability to decline. In addition, general economic uncertainty andgeneral declines in capital spending in the information technology sector makeit likely that the purchasing requirements of our customers and the markets weserve will decline. There are many other factors that could affect our revenuesand profitability, including:

 

·                  the introduction and market acceptance of new technologies, productsand services;

 

·                  new competitors and new forms of competition;

 

·                  adverse changes in the credit quality of our customers and suppliers;

 

·                  changes in the pricing policies of, or the introduction of, newproducts and services by us or our competitors;

 

·                  changes in the terms on which we do business with our customers,suppliers or key relationships;

 

·                  the availability, pricing, quality, and delivery time of products fromour suppliers; and

 

·                  variations in costs for products and services and the mix of productsand services sold.

 

In particular, we servethe healthcare and commercial industries, which continue to experiencesignificant challenges, primarily due to macroeconomic conditions that haveresulted in a decreased demand for their products and services.  Some of our customers are facing constraintson their information technology budgets and are seeking more flexibility in thetiming of their purchases from us. As a result of the continuing macroeconomicdownturn, some of our customers may face financial challenges going forward. Itis unclear when the general economic climate will improve and when ourcustomers may benefit from improved conditions. These factors could adverselyaffect our business, profitability and financial condition and diminish ourability to achieve our strategic objectives.

 

***Achievingprofitability and managing our growth are necessary to achieve our strategicobjectives.***

 

The industries in whichwe operate are highly competitive. To meet our growth objectives, we believethat we need to continue to add and increasingly emphasize higher-value,proprietary solutions, including mobile managed services, software applicationsand consulting services. There can be no assurance that we will effectivelydeploy our initiatives or be successful in obtaining customer acceptance of ourcurrent and anticipated higher margin products and services or developing newproducts and services with higher margins, and if we do not, we would not meetour strategic objectives.

 

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In addition, theimplementation of our strategic initiatives to reduce costs and achieveprofitability may have the unintended effect of placing a significant burden onour management and our operational and financial resources. If we fail tosuccessfully implement these initiatives, or encounter unexpected difficultiesin that process, our business and results of operations could be adverselyaffected.

 

Also, to manage anyfuture growth of our business, we will need to hire, integrate and retainhighly skilled and motivated employees. We will also need to continue toimprove our financial and management controls, reporting and operationalsystems and procedures. If we do not effectively manage our growth and coststructure, we may not be able to meet our strategic objectives.

 

***Wemay engage in acquisitions that could disrupt our business, could be difficultto integrate with our existing operations, cause dilution to our stockholdersand harm our business, operating results and financial condition, and we may beunable to find suitable acquisition candidates consistent with our strategicobjectives.***

 

In the past, as part ofour acquisition strategy, we acquired the businesses and certain assets of DDMSHoldings, LLC, AMTSystems, Inc., Healthcare Informatics Associates, Inc.,Delta Health Systems, Inc. and Aware Interweave, Inc. during 2007 and2008. Though we did not complete any business acquisitions in 2009 and acquisitionsare not a primary focus of our current strategy, past and potential futureacquisitions of other companies or businesses may present us with growthopportunities, but also involve numerous risks, including:

 

·                  problems combining the acquired operations, technologies or products;

 

·                  unanticipated costs;

 

·                  diversion of management’s time and attention from our core business;

 

·                  adverse effects on existing business relationships with customers andsuppliers;

 

·                  risks associated with entering markets in which we have no or limitedprior experience;

 

·                  potential loss of key employees, particularly those of the acquiredbusiness; and

 

·                  continuing obligations to fund earn-out payments or to repayacquisition financing.

 

There can be no assurancethat we will be able to manage the integration of acquired businesseseffectively or be able to retain and motivate key personnel from thesebusinesses. Any difficulties we encounter in the integration process coulddivert management from day-to-day responsibilities, increase our expenses andhave a material adverse effect on our business, financial condition and resultsof operations.

 

For future acquisitions,we may not be able to find suitable acquisition candidates, we may not be ableto complete acquisitions on favorable terms, if at all, and we may not be ableto finance acquisitions on favorable terms, if at all. Though we have nocurrent plans for acquisitions, if we do complete acquisitions, we may notmaintain or may weaken our competitive position or may not achieve our goals,or may be viewed negatively by customers, financial commentators or investors.Acquisitions may disrupt our ongoing operations, divert management fromday-to-day responsibilities, increase our expenses and adversely impact ourbusiness, operating results and financial condition.  Future acquisitions may reduce our cashavailable for operations, debt service and other uses and could result in anincrease in amortization expense related to identifiable assets acquired,potentially dilutive issuances of equity securities or the incurrence of debt.

 

***Wedepend on our existing senior management team and on recruiting and retainingadditional senior managers in order to be successful, and the loss of orfailure to recruit key executives could materially and adversely affect ourbusiness.***

 

Our current and futureperformance depends, in significant part, upon retaining our existing seniormanagement team, whose knowledge, leadership and technical abilities would bedifficult to replace and recruiting and retaining qualified senior managers.Our success also depends in part upon the ability of our executives to workeffectively together and with the rest of our employees to continue to developour technologies and services and to manage the operation and potential growthof our business. We also must continue to develop and retain a strong coregroup of senior executives in order to realize our goal of growing our businessand achieving profitability. We may be unsuccessful in our efforts. The unplannedloss of the services of one or more of our executives could have an adverseeffect on our business and profitability.

 

***Weare dependent on our allied customers and key industry relationships.***

 

We maintain importantrelationships with hardware and software technology leaders. We regard theserelationships as more than traditional customer/supplier relationships andbelieve they represent an important lead referral source and sales channel forus.

 

There can be no assurancethat we or our key relationships can continue to be successful in maintainingrelationships with customers or that we or our allied customers could findadequate replacements if needed. The loss of any of these allied 

 

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customers or keyrelationships could result in the temporary or permanent cessation of a groupof products or solutions and result in the loss of a portion of our existing andanticipated customer base and related revenue.

 

***Wedepend on third-party suppliers and manufacturers to manufacture our products.If these third parties experience any delay, disruption or quality controlproblems in their operations, or cease manufacturing our products, we couldlose market share and revenues, and our reputation may be harmed.***

 

A substantial portion ofour products are manufactured, assembled, tested and packaged by third parties.We rely on several suppliers and manufacturers to procure components andvarious products that we sell and, in some cases, subcontract engineering work.Some of our products are manufactured by a single manufacturer and, if we wereto lose the services of this manufacturer, finding a suitable replacement couldprove particularly difficult. In most cases, we do not have long-term contractswith these third parties. If our suppliers and manufacturers encounterfinancial or other business difficulties, if their strategic objectives change,or if they perceive us to no longer be an attractive customer, they may ceaseto manufacture our products and our business could be harmed.

 

The loss of the servicesof any of our primary manufacturers or a material change in the terms on whichwe do business with them could cause a significant disruption in operations anddelays in product shipments, which could adversely impact our cash flow.Qualifying a new manufacturer and commencing volume production is expensive andtime consuming.

 

Our reliance onthird-party suppliers and manufacturers also exposes us to the following risksover which we have limited control:

 

·                  inability to procure key required components for our finished productsto meet our customers’ demands;

 

·                  unexpected increases in manufacturing and repair costs;

 

·                  unexpected reductions in payment terms;

 

·                  interruptions in shipments if one of our manufacturers is unable tocomplete production;

 

·                  inability to control the quality of finished products;

 

·                  inability to control delivery schedules;

 

·                  inability to obtain favorable pricing;

 

·                  unpredictability of manufacturing yields; and

 

·                  potential lack of adequate capacity to manufacture all or a part of theproducts we require.

 

***If weare unable to provide our third-party suppliers and manufacturers with anaccurate and timely forecast of our component and material requirements, we mayexperience delays in the manufacturing of our products and the costs of ourproducts may increase.***

 

We provide ourthird-party suppliers and manufacturers with forecasts of our demand that theyuse to determine their material and component requirements. Lead times forordering materials and components vary significantly and depend on variousfactors, such as the specific supplier, contract terms and demand and supplyfor a component at a given time. Some of our components require substantiallead times. If our forecasts are less than our actual requirements, or are notdelivered in a timely manner, our manufacturers may not be able to manufactureenough products to meet our needs.  Ifour forecasts are too high, our suppliers and manufacturers may be unable touse all of the components they have purchased on our behalf.  Therefore, the cost per unit of producingproducts for us may be higher and those costs may be passed through to us,which could reduce our margins or raise our product prices relative to ourcompetitors. Moreover, if they are unable to use certain components, we may berequired to reimburse them for any losses they incur.

 

***Our industry is highly competitive, and competitivepressures from existing and new companies may have a material adverse effect onour business, revenues, growth rates, market share, and profitability.***

 

Our industry is highly competitive and influenced bymany factors, including the following:

 

·                  advances in technology;

 

·                  introduction of new products and services;

 

·                  evolving industry standards;

 

·                  product improvements;

 

·                  rapidly changing customer needs;

 

·                  intellectual property invention and protection;

 

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·                  marketing and distribution capabilities;

 

·                  competition from highly capitalized companies;

 

·                  competition from companies with stronger brand recognition and greaterfinancial resources;

 

·                  entrance of new competitors;

 

·                  customer budget pressure on information technology spending; and

 

·                  price competition.

 

If we do not keep pacewith product and technology advances, our products and services could berendered obsolete, which would have a material adverse effect on ourcompetitive position, revenues and prospects for growth.  There is also likely to be continued pricingpressure resulting from the economic downturn or as competitors attempt tomaintain or increase market share.

 

The products manufacturedand marketed by us and our competitors are becoming more complex. As thetechnological and functional capabilities of our products increase, theseproducts may begin to compete with products being offered by companies thathave substantially greater financial, technical, marketing and manufacturing resourcesthan we do.  We may not be able tocompete successfully against these competitors, and competitive pressures mayresult in a material adverse effect on our business, revenues, growth rates,market share and profitability.

 

We also compete with certainof our key relationships from time to time. If we are unable to maintain ourrelationships with them, we may be forced to compete directly with them forcustomers that we previously had served through our relationships. We may alsolose our key relationships as customers. Our key relationships generally havesubstantially greater financial, technical, marketing and manufacturingresources than we do and may be able to directly offer their customerssolutions similar to those we offer.

 

***If wefail to continue to introduce new products and services that achieve sufficientmarket acceptance on a timely basis, we will not be able to compete effectivelyand we will be unable to increase or maintain revenues and profitability.***

 

Our future successdepends on our ability to develop and introduce new products, services andtechnology enhancements that achieve sufficient market acceptance. If we areunable to develop and introduce new products and services that respond toemerging technological trends and customers’ critical needs, our profitabilityand market share will suffer.  Theprocess of developing new technology and related services is complex anduncertain, and if we fail to accurately predict customers’ changing needs oremerging technological trends, our business could be harmed. We must commitresources to developing new products before knowing whether our investmentswill result in products the market will accept. We may also have difficultyobtaining the capital resources necessary to develop and introduce newproducts. We may encounter delays in manufacturing, producing and deploying newor improved products or offering new or improved services. Our new products andservices may not be commercially successful. If we expend a significant amountof resources and our efforts do not lead to the successful introduction of newor improved products or services, there could be a material adverse effect onour business, profitability, financial condition and market share.

 

Demand for existingproducts may decrease following the announcement of new or improved products.Further, since products under development are often announced beforeintroduction, these announcements may cause customers to delay purchases of ourproducts, even if newly introduced, until new or improved versions of thoseproducts are available. If customer orders decrease or are delayed during aproduct transition, we may experience a decline in revenue. Our profitabilitymight decrease if customers, who may otherwise choose to purchase existingproducts, instead choose to purchase lower priced models of new products.Delays or deficiencies in the development, manufacturing, and delivery of, ordemand for, our new or improved products would adversely affect our businessand profitability.

 

***If weare unsuccessful in expanding our professional services, we may fail to achieveour objectives.***

 

We have been expandingour professional services and enhancing our technical knowledge to broaden ourservice offerings and to transition our business to focus on higher marginsoftware applications, consulting and other professional services and away fromthe sale of hardware and related warranties. To do so, we have been increasingour in-house talent pool and introducing new products for support and professionalservices, including through acquisitions of businesses that we believecomplement our existing services. We look to leverage new employees that areskilled in our business to reduce our dependence on outside assistance. Ourinitiatives will include reducing dependence on outside service providers,determining specific methodologies and processes for meeting customer needs,conducting in-house training sessions, and leveraging business partnerships toincrease professional services opportunities. These initiatives have required,and will continue to require, significant investment by us, including expensesrelating to the recruiting and training of these new employees.  There is no assurance that we will haveadequate resources to continue to implement these initiatives or that they willimprove the sales and profitability of our professional services.

 

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***Anyfailure in our ability to offer high-quality support and other services couldhave a material adverse effect on our sales and results of operations.***

 

Once our products areintegrated within our customers’ hardware and software systems, our customersmay depend on our support organization to manage those systems and resolve anyissues that may arise. A high level of support is critical for the successfulmarketing and sale of our solutions. If we do not effectively assist ourcustomers in deploying our products, succeed in helping our customers quicklyresolve post-deployment issues, and provide effective ongoing support, ourability to sell our solutions to existing customers could be adverselyaffected, and our reputation with potential customers could be harmed. Inaddition, as we expand our operations internationally, our support organizationwill face additional challenges, including those associated with deliveringsupport, training and documentation in languages other than English. Ourfailure to maintain high-quality support and services, or to adequately assistour key relationships in providing high-quality support and services, couldresult in customers choosing to use our competitors’ products and servicesinstead of ours.

 

***Werely on information technology and could be adversely affected if we are unableto maintain and upgrade our technology to remain competitive.***

 

We have invested insophisticated technologies and information systems to allow us to providecustomized solutions to our customers’ needs. We anticipate that it will be necessary to select, invest in and upgradeour technology and systems to maintain our competitiveness.  In the event of substantial improvements intechnologies and equipment, we may be required to invest in new systems and equipmentand to hire and retain qualified persons to implement and maintain them.  There can be no guarantee that we will beable to maintain and upgrade the technology and systems necessary for ourbusiness to remain competitive, and any disruption to or infiltration of ourinformation technology systems could significantly harm our business andprofitability.

 

***If weare unable to protect our intellectual property rights or if third partiesassert we are in violation of their intellectual property rights, we could beprevented from selling our products, the time and attention of management couldbe diverted from operating our business and our ability to attract newcustomers and retain current customers could be hampered, any of which couldhave a material adverse effect on our business, financial condition and resultsof operations.***

 

We file patentapplications to protect technology, innovations and improvements that weconsider important to the development of our business. Throughout our history,we have invested in and acquired intellectual property assets. We continue topartner and invest to develop, capture and deliver unique, high-quality,differentiated and cost-effective mobile workforce technology solutions for ourcustomers. We have 23 issued patents in the U.S. and 13 in other countriesrelated to wearable computers and surrounding RFID technology that managesproper medication delivery and administration. We have 5 patent applicationspending with the U.S. Patent and Trademark Office and 6 in other countries,likewise related to medication delivery and administration and aspects ofwearable computing devices.

 

We have also developedother proprietary solutions, including form-factor PC technologies designedspecifically for low power consumption, handheld and kiosk point of saledevices and several customized software applications. We seek to protect ourproprietary information and technology through licensing agreements,third-party nondisclosure agreements and other contractual provisions, as well asthrough patent, trademark, copyright and trade secret laws in the U.S. andsimilar laws in other countries. There can be no assurance that theseprotections will be available in all cases or will be adequate to prevent ourcompetitors from copying, reverse engineering or otherwise obtaining and usingour technology, proprietary rights or products.

 

Our competitors mayindependently develop technologies that are substantially equivalent orsuperior to our technology or design around our proprietary rights. In eachcase, our ability to compete and to receive licensing revenues could besignificantly impaired. To prevent substantial unauthorized use of ourintellectual property rights, it may be necessary to prosecute actions forinfringement and/or misappropriation of our proprietary rights against thirdparties. Any such action could result in significant costs and diversion of ourresources and management’s attention, and we may be unsuccessful in any suchaction. In addition, third parties may seek to challenge, invalidate orcircumvent our patents, trademarks, copyrights and trade secrets, orapplications for any of the foregoing. Furthermore, the laws of certaincountries in which our products are or may be licensed do not protect ourproprietary rights to the same extent as the laws of the U.S.

 

Third parties may assertclaims of infringement of intellectual property rights against us or againstour partners for which we may be liable under certain indemnificationarrangements. The failure to obtain a license on commercially reasonable termsor the entry of an injunction that impairs our ability to market certainproducts or services could have a material adverse effect on our business,reputation, profitability or financial condition. Any litigation regardingpatent and other intellectual property rights could have a material adverseeffect on our business and our ability to compete.

 

We may also be subject toclaims from customers for indemnification. Any resulting litigation, regardlessof its resolution, could result in substantial costs and diversion ofresources. If it were determined that our products infringe upon theintellectual property rights of others, we would need to obtain licenses fromthese parties or reengineer our products in 

 

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order to avoidinfringement. We might not be able to obtain the necessary licenses onacceptable terms or at all, or to reengineer our products successfully.Moreover, if we are sued for infringement and lose the suit, we could berequired to pay substantial damages or be enjoined from licensing or using theinfringing products or technology, or both. Any of these events could cause usto incur significant costs and prevent us from selling our products and couldhave material adverse effect on our business and our ability to compete.

 

***Werely upon third parties for technology that is critical to our products, and ifwe are unable to continue to use this technology and future technology ourability to offer competitive products could be harmed and our costs ofproduction could increase.***

 

We obtain non-exclusivesoftware license rights to technologies from third parties that areincorporated into and necessary for the operation and functionality of certainof our products. Because the intellectual property for which we have obtainedlicenses is available from third parties, barriers to entry for our competitorsmay be lower than if we owned exclusive rights to these technologies. On theother hand, if a competitor enters into an exclusive arrangement with any ofour third-party technology providers, our ability to develop and sell productscontaining that technology could be severely limited. Our success depends inpart on our continued ability to have access to these technologies oncommercially reasonable terms. If we do not continue to hold or obtain licensesto use necessary technologies, we may be forced to acquire or developalternative technology that may be of lower quality or performance standards.This could limit and delay our ability to offer competitive products andincrease our costs of production. As a result, our profitability and marketshare could be harmed.

 

***Our productsare complex and may contain undetected and unexpected defects, errors orfailures.***

 

Substantial productdefects could result in product recalls, repairs or an increased amount ofproduct returns, loss of market acceptance and damage to our reputation, whichin turn could increase our costs, cause us to lose sales and have a materialadverse effect on our profitability. Product defects might also result inclaims against us by our customers or others. In addition, the occurrence ofany defects or errors in these products could result in cancellation of orders,difficulty in collecting accounts receivable, increased service and warrantycosts in excess of our estimates, diversion of resources, and increasedinsurance costs and other losses to our business or to end-users.

 

Incompatibilities,defects or bugs in our products may not be detected until our customers beginto install the products or later.  We mayneed to modify the design of our new or improved products if they have incompatibilities,defects or bugs, which could result in significant expenditures, delays inproduct purchases or canceled orders.

 

***Becausewe often sell our products on a purchase order basis, we are subject touncertainties and variability in demand from our customers.***

 

We sell our mobileworkstations and other devices on a purchase order basis rather than pursuantto long-term contracts or contracts with minimum purchase requirements.Consequently, the level and timing of our sales are subject to variations indemand from our customers. Orders can be cancelled, reduced or delayed due tocustomer budget cycles, the introduction or anticipated introduction of newproducts or technologies or general economic conditions. Generally, sales aresequentially down in the first quarter from the fourth quarter, higher in thesecond quarter, flat or slightly higher or lower in the third quarter, andstrongest in the fourth quarter.  If weare unable to anticipate and respond to the demands of our customers, ourbusiness, financial position and operating results may be adversely affected.

 

***Our products are subject to certain government regulationsand noncompliance with, or a change in, those regulations could have a materialadverse effect on our business, financial condition, and results of operations.***

 

Our products are subjectto regulation by federal, state and local agencies in the U.S. and agencies incertain foreign countries where our products are manufactured or sold. Therecan be no assurance that we will be able to maintain compliance with theseregulations, particularly if they were to change. Regulatory changes mayrequire us to make modifications to certain of our products so that we cancontinue to manufacture and market our products, which could result inunanticipated costs and delays.  Ourfailure to comply with these regulations, or delays resulting frommodifications could have a material adverse effect on our business, financialcondition and results of operations.

 

***Armedhostilities, terrorism, natural disasters, or public health issues could harmour business.***

 

Armed hostilities,terrorism, natural disasters, or public health issues, whether in the U.S. orabroad, could cause damage or disruption to us, our suppliers or customers, orcould create political or economic instability, any of which could harm ourbusiness.  Any such events could, amongother things, cause further instability in financial markets and coulddirectly, or indirectly through reduced demand, negatively affect ourfacilities and operations or those of our customers or suppliers.  If our customers experience any disruptionsin the solutions that we provide to them as a result of any such events, we maynot be successful in alleviating the disruptions, particularly if manycustomers are affected by any of these events.

 

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**RisksRelating to our Common Stock**

 

***Our stock may be subject to delisting from The NASDAQ CapitalMarket if the closing bid price for our common stock is not maintained at $1.00per share or higher.***

 

Our common stock islisted on The NASDAQ Capital Market, which imposes, among other requirements, aminimum bid requirement. The price of our common stock must trade at or above$1.00 to comply with the minimum bid requirement for continued listing. On September 16,2009, we received a deficiency letter from the NASDAQ Stock Market stating thatwe no longer met the minimum $1.00 per share requirement. We had a grace periodof 180 calendar days, or until March 15, 2010, to regain compliance, whichwould occur if the bid price of our stock closed at $1.00 per share or more fora minimum of 10 consecutive business days. On January 5, 2010, we amendedour certificate of incorporation to effect a one-for-twenty-five reverse stocksplit of our issued and outstanding shares of common stock in an attempt toincrease the trading price of our common stock and to regain compliance withthe minimum bid price rule and avoid delisting of our stock. The reversestock split was reflected on The NASDAQ Capital Market at the opening oftrading on January 6, 2010. Since that date, the closing price of ourcommon stock has ranged from a low of $1.67 to a high of $8.55. As such, on January 21,2010, we received a notice from NASDAQ that we have regained compliance withthe minimum bid price requirement and the matter is now closed. There is noguarantee that the market price of our common stock will continue to tradeabove $1.00 or that we will continue to comply with the minimum bidrequirement. If we fail to maintain compliance with the continued listingstandards, a delisting could adversely affect the market liquidity of ourcommon stock and the market price of our common stock could decrease and couldalso adversely affect our ability to obtain financing for the continuation ofour operations and/or result in the loss of confidence by investors, customers,suppliers and employees.

 

***Our stock may be delisted from The NASDAQ Capital Market ifwe do not maintain certain levels of stockholders’ equity, market value oflisted securities, or net income from continuing operations.***

 

Our common stock islisted on The NASDAQ Capital Market, which imposes, among other requirements, arequirement that a listed company maintain either a minimum of $2,500 instockholders’ equity, a minimum of $35,000 of market value of listedsecurities, or a net income from continuing operations of at least $500 in themost recently completed fiscal year or in two of the three most recentlycompleted fiscal years. On August 19, 2009, we received a letter fromNASDAQ, notifying us that we were not in compliance with these requirements. OnOctober 30, 2009, we received notice that NASDAQ granted our request foran extension to regain compliance with these requirements. We had until November 20,2009 to regain such compliance. On November 25, 2009, we received noticefrom NASDAQ that we have regained compliance with the $2,500 stockholders’equity requirement for continued listing on The NASDAQ Capital Market. NASDAQ,however, will continue to monitor our ongoing compliance with the stockholders’equity requirement and, because our stockholders’ deficiency of $2,544 at December 31,2009 does not evidence compliance with that requirement, we may be subject todelisting.  Any such delisting couldadversely affect the market liquidity of our common stock and the market priceof our common stock could decrease and could also adversely affect our abilityto obtain financing for the continuation of our operations and/or result in theloss of confidence by investors, customers, suppliers and employees.

 

***Themarket price of our common stock may continue to be highly volatile andcontinue to be subject to wide fluctuations.***

 

The market price of ourcommon stock is likely to be highly volatile and could be subject to widefluctuations in response to a number of factors that are beyond our control,including:

 

·                  announcements of new products or services by our competitors;

 

·                  quarterly variations in our revenues and operating expenses;

 

·                  our announcements of technological innovations or new products orprofessional services;

 

·                  sales of common stock by our directors and executive officers or HTI orHercules; and

 

·                  continuing uncertainty and adverse developments in the overall stockmarket.

 

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***If asubstantial number of our shares of common stock become available for sale andare sold in a short period of time, the market price of our shares of commonstock could decline.***

 

We have filed aregistration statement on Form S-3 with the SEC and it is anticipated thatprior to the effective date of this registration statement, we will haveapproximately 1,030,354 million shares of common stock that were available tobe publicly traded. The registration statement on Form S-3 that we havefiled covers the resale by the selling stockholder of up to 3,364,738 shares ofour common stock. Although our common stock is listed on The NASDAQ CapitalMarket, it does not generally have a high average trading volume. For example,since we became listed on NASDAQ in September 2007, our average dailytrading volume has been approximately 16,682.  Our low trading volume may cause the price ofour common stock to be volatile. The last reported sale price of our commonstock on NASDAQ on April 13, 2010 was $5.34.

 

If HTI sells substantialamounts of our shares of common stock, the market price of our shares of commonstock could decrease significantly. The perception in the public market thatHTI might sell our shares of common stock could also depress our market price.The number of shares of common stock that will be available to be publiclytraded after the effective date of the registration statement on Form S-3will increase by approximately 327%. Furthermore, we are obligated to file aregistration statement on Form S-3 with the SEC prior to May 31,2010.

 

***Theremay be a limited public market for our securities.***

 

Although we are listed onThe NASDAQ Capital Market, there can be no assurance that the trading of ourcommon stock will be sustained. If our common stock fails to qualify forcontinued listing on The NASDAQ Capital Market or for listing on anotherregistered stock exchange, trading, if any, in our common stock would beconducted on the Over-the-Counter Bulletin Board or in what are commonlyreferred to as “pink sheets.” As a result, our stockholders may find it moredifficult to dispose of, or to obtain accurate quotations as to the marketvalue of our common stock, and our common stock would become substantially lessattractive for margin loans, for investment by financial institutions, asconsideration in future capital raising transactions or other purposes. Anactive public market for shares of our common stock may not develop, or if oneshould develop, it may not be sustained. Therefore, our stockholders may not beable to find purchasers for their shares of our common stock.

 

***We donot expect to pay dividends for the foreseeable future.***

 

We currently intend toretain any future earnings to support the development and expansion of our businessand do not anticipate paying cash dividends in the foreseeable future. Anypayment of future dividends will be at the discretion of our Board of Directorsafter taking into account various factors, including, but not limited to, ourfinancial condition, operating results, cash needs, growth plans and the termsof any credit agreements that we may be a party to at the time. Our AmendedLoan Agreement with Hercules currently restricts our ability to pay dividendson our common stock. Accordingly, our stockholders must rely on sales of theircommon stock after price appreciation, which may never occur, as the only wayto make a positive return on their investment.

 

***Dueto a material weakness in our internal controls over financial reporting weredetermined not to be effective for the fiscal year ended December 31,2009.  Our disclosure controls andprocedures and internal control over financial reporting may not be effectivein future periods as a result of existing or newly identified material weaknessesin internal controls.***

 

Effective internalcontrols are necessary for us to provide reasonable assurance with respect toour financial reports and to effectively prevent fraud.  If we cannot provide reasonable assurancewith respect to our financial reports and effectively prevent fraud, ourreputation and operating results could be harmed.  Pursuant to the Sarbanes-Oxley Act of 2002,we are required to furnish a report by management on internal control overfinancial reporting, including management’s assessment of the effectiveness ofsuch control.  Internal control overfinancial reporting may not prevent or detect misstatements because of itsinherent limitations, including the possibility of human error, the circumventionor overriding of controls, or fraud. Therefore, even effective internal controls can provide only reasonableassurance with respect to the preparation and fair presentation of financialstatements.  In addition, projections ofany evaluation of effectiveness of internal control over financial reporting tofuture periods are subject to the risk that the control may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate. If we fail to maintain the adequacy of our internal controls, includingany failure to implement required new or improved controls, or if we experiencedifficulties in their implementation, our business and operating results couldbe adversely impacted, we could fail to meet our reporting obligations, and ourbusiness and stock price could be adversely affected.

 

Our Chief ExecutiveOfficer and Chief Financial Officer have evaluated the effectiveness of thedesign and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) and have concluded that, subject to theinherent limitations identified in Item 9A(T) of Part II of this Form 10-K,as of April 15, 2010, our disclosure controls and procedures were noteffective due to our independent public accountants’ identification of theexistence of a material weakness in our internal control over financialreporting as described below.

 

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A material weakness is adeficiency, or a combination of deficiencies, in internal control overfinancial reporting, such that there is a reasonable possibility that amaterial misstatement of the company’s annual or interim financial statementswill not be prevented or detected on a timely basis.  A deficiency in internal control overfinancial reporting exists when the design or operation of a control does notallow management or employees, in the normal course of performing theirassigned functions, to prevent or detect financial statement misstatements on atimely basis.  A deficiency in designexists when a control necessary to meet the control objective is missing, orwhen an existing control is not properly designed so that even in the controloperates as designed, the control objective would not be met.  A deficient in operation exists when aproperly designed control does not operate as designed or when the personperforming the control does not possess the necessary authority or competenceto perform the control effectively.

 

In connection with the auditon our consolidated financial statements as of and for the year ended December 31,2009, our independent public accountants, in accordance with the standards ofthe Public Company Accounting Oversight Board, identified deficiencies ininternal control related to our accounting for the Hercules Restructuring.  Specifically, we failed to properly apply theDebt Topic of the FASB Accounting Standards Codification and failed to timelymake certain material adjustments required in connection with the HerculesRestructuring, including recording a $5,800 loss on debt extinguishment and a$4,400 increase in additional paid-in capital. For further discussion of our internal control over financial reportingand our disclosure controls, see Item 9A(T). “—Controls and Procedures” in Part IIof this Form 10-K.

 

We intend to takeappropriate and reasonable steps to make the necessary improvements toremediate these deficiencies.  We cannotbe certain that our remediation efforts will ensure that our management designs,implements and maintains adequate controls over our financial processes andreporting in the future or will be sufficient to address and eliminate thematerial weakness identified.  Ourinability to remedy the identified material weakness or any additionaldeficiencies or material weaknesses that may be identified in the future could,among other things, could have a material adverse effect on our business,results of operations and financial condition, as well as impair our ability tomeet our quarterly, annual and other reporting requirements under theSecuritiesExchange Actof 1934 in a timely manner, and require us to incur additional costs or todivert management resources.

 

***Provisionsin our organizational documents and under Delaware law, as well as governancerights and security ownership of HTI and Hercules, may delay or preventattempts by our stockholders to change our management and hinder efforts toacquire a controlling interest in us.***

 

Certain provisions of ourcertificate of incorporation and by-laws may strengthen our Board of Directors’position in the event of a hostile takeover attempt. These provisions have theeffect of providing stockholders may only remove a director by a majority voteof all shares outstanding and entitled to vote at a special meeting called forthat purpose, that stockholders may only call a special meeting by the request,in writing, of stockholders owning individually or together 10% 

 

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or more of our entirecapital stock outstanding and entitled to vote, and that we may issue preferredstock with such rights, preferences, privileges and limitations as our Board ofDirectors may establish.

 

In addition, Section 203of the Delaware General Corporation Law prohibits a publicly held Delawarecorporation from engaging in a business combination with an interestedstockholder, generally a person which together with its affiliates owns orwithin the last three years has owned 15% of our voting stock, for a period ofthree years after the date of the transaction in which the person became aninterested stockholder, unless the business combination is approved in aprescribed manner.  Accordingly, Section 203may discourage, delay or prevent a change in control of our company.

 

Furthermore, HTI’s rightsto representation on our Board of Directors, the controlling ownership interestcurrently held by HTI and the ability of HTI and its parent corporation,Hercules, to further increase their holdings of our common stock could be asignificant deterrent to any other person interested in acquiring a controllinginterest in us. See the risk factor titled “*Our controllingstockholder has the contractual right to nominate three members of our Board ofDirectors.”*

 

**Item 1B. Unresolved Staff Comments**

 

Not applicable.

 

**Item 2. Properties**

 

Our headquarters are locatedin Hatboro, Pennsylvania in approximately 40,000 square feet of leased space.This facility accommodates our executive office, customer support, warehouse,development and shipping operations. On October 8, 2004, we entered into alease agreement to rent approximately 25,000 square feet. The initial annualbase rent under the lease was approximately $167 and increased 2% annuallyeffective on the annual anniversary of the lease commencement date. The initialterm of the lease agreement is 85 months, with an option to extend thelease term for up to one additional period of five years. On May 1, 2007,we entered into a sub-lease agreement to rent approximately 15,000 square feetof additional space. The initial annual base rent under the sub-lease wasapproximately $178, and increased 4% annually effective on the annualanniversary of the sub-lease commencement date. The sub-lease agreement expiredon December 29, 2009. We are also responsible for payments of common areaoperating expenses for the premises under the lease and sub-lease agreement.

 

On February 17, 2010,we entered into an amendment to the lease agreement with the landlord to rentapproximately 40,000 square feet of leased space, which encompasses all of theleased space previous occupied under the original and sub-lease space describedabove. The annual base rent under the amended lease agreement is approximately$529, with abatement of rental payments for March 1, 2010 through June 30,2010, and is increased 2.5% annually effective on the annual anniversary of thelease commencement date each year, except the rental rate is reduced to anannualized rental of $13 from July 1, 2011 and October 31, 2011. Theterm of the amended lease agreement expires January 31, 2017.

 

## The amended lease agreement requires the landlord,at its sole cost and expense, to construct certain improvements within thelease premises beginning on February 1, 2012 and expiring as of May 31,2012, as agreed upon between the Company and the landlord. However, thelandlord may condition the performance of its work (in the form of a cashsecurity deposit or letter of credit) in an amount deemed reasonably sufficientto landlord if our then-current financial statements do not meet or exceed thefollowing two conditions: (i) current ratio of 1.3; and (ii) minimumworking capital of $4,000.

##  

## **Item 3. Legal Proceedings**

##  

We are not a party to anylegal proceedings, the adverse outcome of which, individually or in theaggregate, management believes would have a material adverse effect on ourbusiness, financial condition or results of operations.

 

**Item 4. Submission of Matters to a Vote of Security Holders**

 

Our 2009 annual meeting of stockholders was held on December 30,2009 (the 2009 Meeting). At the 2009 Meeting, the following matters weresubmitted to a vote of stockholders: (1) approval of an amendment to ourCertificate of Incorporation to effect a reverse stock split of our issued andoutstanding common stock by a ratio of one-for-twenty-five (the CharterAmendment); (2) election of seven directors; (3) ratification of theselection of McGladrey & Pullen LLP as our independent registeredpublic accounting firm for 2009; and (4) approval of an amendment to our2006 Equity Compensation Plan to (a) increase the maximum aggregate numberof shares of common stock that may be issued under the plan to, after givingeffect to the reverse stock split pursuant to the Charter Amendment, 1,840,000shares of our common stock and (b) permit the Compensation Committee ofour Board of Directors, with the concurrence of the affected grantee, toreprice options and/or cancel any award under the plan (collectively, the “PlanAmendment”). The Charter Amendment and the Plan 

 

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Amendment were approved, our seven nominees for director were elected,and the selection of McGladrey & Pullen was ratified. The results ofthe voting were as follows:

 
| ** **        | ** ** | **Number of  Votes For** | ** ** | **Number of  Votes Against** | ** ** | **Number of  Votes Withheld** | ** ** |
|-------------------|------------|--------------------------|------------|------------------------------|------------|-------------------------------|------------|
|              |       |                     |       |                         |       |                          |       |
| Charter Amendment |       | 73,369,833               |       | 187,085                      |       |                          |       |

 
| ** **            | ** ** | **Number of  Votes For** | ** ** | **Number of  Votes Withheld** | ** ** | ** ** | ** ** |
|-----------------------|------------|--------------------------|------------|-------------------------------|------------|------------|------------|
|                  |       |                     |       |                          |       |       |       |
| Election for Director |       |                     |       |                          |       |       |       |
|                  |       |                     |       |                          |       |       |       |
| Mark S. Denomme       |       | 73,298,713               |       | 261,855                       |       |       |       |
|                  |       |                     |       |                          |       |       |       |
| David T. Gulian       |       | 73,308,078               |       | 252,490                       |       |       |       |
|                  |       |                     |       |                          |       |       |       |
| Manuel A. Henriquez   |       | 73,298,713               |       | 261,855                       |       |       |       |
|                  |       |                     |       |                          |       |       |       |
| Wayne D. Hoch         |       | 73,364,213               |       | 196,355                       |       |       |       |
|                  |       |                     |       |                          |       |       |       |
| Roy Y. Liu            |       | 73,298,713               |       | 261,855                       |       |       |       |
|                  |       |                     |       |                          |       |       |       |
| Thomas C. Lynch       |       | 73,364,213               |       | 196,355                       |       |       |       |
|                  |       |                     |       |                          |       |       |       |
| Thomas O. Miller      |       | 73,239,213               |       | 321,355                       |       |       |       |

 
| ** **                      | ** ** | **Number of  Votes For** | ** ** | **Number of  Votes Against** | ** ** | **Number of  Abstentions** | ** ** |
|---------------------------------|------------|--------------------------|------------|------------------------------|------------|----------------------------|------------|
|                            |       |                     |       |                         |       |                       |       |
| McGladrey & Pullen LLP |       | 73,556,573               |       | 1,595                        |       | 2,400                      |       |
|                            |       |                     |       |                         |       |                       |       |
| Plan Amendment                  |       | 72,909,423               |       | 649,295                      |       | 1,850                      |       |

 

**PART II**

 

**Item 5.  Marketfor the Company’s Common Equity, Related Stockholder Matters, and IssuerPurchases of Equity Securities**

 

*Market Information*

 

Our common stock is listedon the NASDAQ Capital Market under the symbol “IFLG.” On January 5, 2010,we completed a reverse stock split of our issued and outstanding common stockby a ratio of one-for-twenty-five. The table below sets forth the high and low closingsale prices of our common stock during 2009 and 2008, adjusted for the reversestock split:

 

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| ** **                            | ** ** | **Quarter Ended** | ** ** |
|---------------------------------------|------------|-------------------|------------|
| ** **                            | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| **Year ended December 31, 2009** |       |              |       |   |   |   |   |   |   |
| Price  range of common shares:        |       |              |       |   |   |   |   |   |   |
|                                  |       |              |       |   |   |   |   |   |   |
| High                                  |       | $                 | 19.75      |   | $ | 14.50 |   | $ | 14.75 |   | $ | 8.00 |   |
| Low                                   |       | 7.00              |       | 8.75 |   | 6.50 |   | 2.50 |   |
|                                       |            |                   |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                            | ** ** | **Quarter Ended** | ** ** |
|---------------------------------------|------------|-------------------|------------|
| ** **                            | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| **Year ended December 31, 2008** |       |              |       |   |   |   |   |   |   |
| Price  range of common shares:        |       |              |       |   |   |   |   |   |   |
|                                  |       |              |       |   |   |   |   |   |   |
| High                                  |       | $                 | 50.00      |   | $ | 62.50 |   | $ | 52.75 |   | $ | 37.00 |   |
| Low                                   |       | 41.00             |       | 38.75 |   | 35.00 |   | 12.00 |   |
|                                       |            |                   |            |  |  |  |  |  |  |  |  |  |  |

 

*Holders of Common Stock*

 

As of April 6, 2010, wehad approximately 279 holders of record of common stock and 3,729,647 shares of common stockoutstanding.

 

*Dividends*

 

We have not paid cashdividends and do not anticipate paying cash dividends in the foreseeablefuture. The declaration and payment of dividends is restricted in accordancewith covenants related to our Amended Loan Agreement with Hercules whichmatures in November 2014. The restriction on dividends will remain duringthe term of the Amended Loan Agreement. We expect to utilize any futureearnings to finance our operations. The actual amount of any dividends that maybe paid in the future will be subject to the discretion of our Board ofDirectors and will depend on our operations, financial and business requirementsand other factors.

 

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**Item 6. Selected Financial Data**

 

The following table presentsselected financial data for the last five years of the operation of ourbusiness. This information should be read in conjunction with the ConsolidatedFinancial Statements and Notes thereto in Item 8 and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inItem 7. The selected financial data for fiscal years 2005 through 2009,with the exception of proforma data, has been derived from our financialstatements which have been audited by an independent registered publicaccounting firm.

 

Theearnings per share and weighted average number of shares outstanding reflect atwenty-five-for-one reverse stock split of our issued and outstanding shares ofcommon stock, par value $0.00001 per share that was effected on January 5,2010. All dollar amounts are presented in thousands except per share data.

 
| ** **                                      | ** ** | **Year  ended December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                      | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Consolidated Statement of  Operations Data:** | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenues                                    |       | $                                 | 86,916     |   | $ | 100,716 |   | $ | 78,774 |   | $ | 62,113 |   | $ | 56,399 |   |
| Cost of revenues                                |       | 67,273                            |       | 74,176 |   | 58,049 |   | 47,163 |   | 43,532 |   |
| Gross profit                                    |       | 19,643                            |       | 26,540 |   | 20,725 |   | 14,950 |   | 12,867 |   |
| Operating (loss) income                         |       | (8,216                            | )          | (5,703 | ) | (4,486 | ) | (2,948 | ) | 1,206 |   |
| (Loss) income before income taxes               |       | (21,743                           | )          | (9,749 | ) | (4,901 | ) | (3,557 | ) | 681 |   |
| Income tax (expense) benefit (1)                |       | (645                              | )          | (3,435 | ) | 1,712 |   | 1,399 |   | (313 | ) |
| Net income (loss)                               |       | (22,388                           | )          | (13,184 | ) | (3,189 | ) | (2,158 | ) | 368 |   |
| Net (loss) income per share (2)                 |       | $                                 | (16.88     | ) | $ | (13.04 | ) | $ | (3.30 | ) | $ | (2.29 | ) | $ | 0.39 |   |
|                                            |       |                              |       |   |   |   |   |   |   |   |   |
| Weighted average shares outstanding             |       | 1,326                             |       | 1,011 |   | 967 |   | 944 |   | 944 |   |
|                                            |       |                              |       |   |   |   |   |   |   |   |   |
| **Other Data:**                                 |       |                              |       |   |   |   |   |   |   |   |   |
| Dividends (3)                                   |       | $                                 | —     |   | $ | — |   | $ | — |   | $ | 740 |   | $ | 170 |   |

 
| ** **                                | ** ** | **As  of December 31,** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|
| ** **                                | ** ** | **2009**                     | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Balance Sheet Data:**                   |       |                         |       |   |   |   |   |   |   |   |   |
| Total assets                              |       | $                            | 35,942     |   | $ | 50,842 |   | $ | 48,697 |   | $ | 31,813 |   | $ | 15,167 |   |
| Long-term debt                            |       | 345                          |       | 16,292 |   | 7,445 |   | 1,325 |   | 533 |   |
| Total stockholders’ equity (deficit) |       | (2,544                       | )          | 7,478 |   | 18,476 |   | 15,888 |   | 745 |   |
|                                           |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)                                  Unauditedproforma tax provision for the year 2006 as if the Company was a taxable entityfor the year ended December 31, 2006.

 

(2)                                  Unauditedproforma earnings per share calculation for the year 2006. See Note A ofthe Notes to the Consolidated Financial Statements in Item 8 forinformation concerning the calculation of net income or loss per common share.

 

(3)                                  Unauditedproforma amounts paid to stockholders with respect to taxes payable due to theCompany filing its federal and state income tax returns as a Sub-Chapter SCorporation. Prior to our November 29, 2006 merger with New AgeTranslation any income tax liability from operations was payable directly bystockholders.

 

**Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

Thefollowing discussion and analysis of our financial condition and results ofoperations is intended to assist you in understanding our financial conditionand results of operations. This discussion and analysis should be read inconjunction with our financial statements and the notes thereto included inItem 8 of this report. On January 5, 2010, we effected aone-for-twenty-five reverse stock split of our issued and outstanding shares ofcommon stock, par value $0.00001 per share. Unless otherwise indicated, all share amounts discussed herein reflectthe post-split number of shares of our common stock. 

 

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Many of the amounts and percentages presentedin this discussion and analysis have been rounded for convenience ofpresentation, and all dollar amounts, except per share data, are presented inthousands.

 

**Overview**

 

We provide enterprise mobility solutions for the healthcare andcommercial industries with experience in over 2,200 hospitals and businessesnationwide. We provide end-to-end solutions for electronic medical record andsupply chain implementation to our customers by utilizing a combination ofproducts and services, including consulting, business software applications,mobile managed services, mobile devices, and wireless infrastructure. Oursolutions are designed to allow the real time usage of data throughout acustomer’s enterprise in order to enhance workflow, improve customer service,increase revenue and reduce costs. We sell wireless communication and computingdevices, including mobile workstations that connect to a customer’s wirelessnetwork so that information can be accessed from any location within theenterprise. We also implement customized and third-party software applicationswith a particular expertise in electronic medical records in the healthcareindustry and SAP® back-end systems in commercial enterprises. In addition, weoffer professional services that support and complement enterprise-widesoftware implementations and a customer’s wireless computing systems, includingconsulting, mobile managed services, training, engineering, technical supportand network monitoring.

 

We manage our businessprimarily by market verticals, driven by our sales organization. We have tworeportable operating segments consisting of our healthcare and commercial orenterprise businesses. The healthcare segment is principally composed of ouractivities in hospitals and other related healthcare facilities. The commercialsegment focuses on all other vertical markets including pharmaceutical,manufacturing, wholesale and retail distribution and service industries.

 

Historically, the sale ofmobile workstations and other wireless devices has represented a majority ofour net revenues. More recently, we have been transitioning our business toprovide more consulting, professional services and software applications. Withour focus on selling services and software, we believe that we can offer morecomprehensive enterprise mobility solutions that provide greater value to ourcustomers and generate higher and more recurring revenue for our business.

 

We conduct substantially allof our operations through our wholly-owned subsidiary, InfoLogix SystemsCorporation. We own certain patents and patent applications through ourwholly-owned subsidiaries OPT Acquisition LLC, EmbeddedTechnologies, LLC and InfoLogix-DDMS, Inc. We consolidate OPTAcquisition LLC, Embedded Technologies, LLC, InfoLogix-DDMS, Inc.and InfoLogix Systems Corporation for financial reporting purposes.

 

We serve the healthcare andcommercial industries, which are experiencing significant challenges, primarilydue to weak macroeconomic conditions that have resulted in a decreased demandfor their products and services. As a result, some of our customers may facefinancial challenges in 2010. Some of our customers are facing constraints ontheir information technology budgets and are seeking more flexibility in thetype of mobility solutions they implement and the timing of their purchasesfrom us. It is unclear when the general economic climate will improve and whenour customers may benefit from improved conditions.

 

**Going Concern**

 

The current weakmacroeconomic conditions have had a major impact on the industries we serve.During 2009, we experienced reduced sales and compressed margins, particularlyrelated to the sales of mobile workstations and related infrastructure in thehealthcare markets that we serve. We believe this slowdown is primarily theresult of adverse economic conditions affecting the healthcare industry,including constrained budgets promulgated by difficult access to capital incommunity and other not-for-profit hospitals. We have responded to thechallenging times by undertaking a series of cost reduction initiatives,including the elimination of executive bonuses, reduction of employee salariesand reduction in the number of employees. Economic conditions did not improvein the first quarter of 2010 and we expect 2010 to be an extremely challengingyear.

 

Our financial statements forthe year ended December 31, 2009 have been prepared on a going concernbasis, which contemplates continuing operations, securing additional debt orequity financing, selling certain assets, and realizing assets and liabilitiesin the ordinary course of business. We have incurred significant net losseseach year from 2007 through 2009, including a net loss of $22,388 for the yearended December 31, 2009. Our losses are attributable to the difficulteconomic conditions under which we operate, challenges related to ourtransition over the last several years from being primarily a seller ofinfrastructure and hardware to becoming a provider of comprehensive enterprisemobility solutions, and the write-off of certain cash and non-cash expensesrelated to the Hercules Restructuring (as described under “Recent Developments”below) and to non-realizable assets. During this transition period, we havehired experienced management 

 

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and staff to execute our business plans andhave made strategic acquisitions, and we have also managed our liquidity inspite of carrying approximately $22,000 of senior debt at high interest ratesand other associated costs.

 

As a result of our capitaland debt structure and recurring losses, we have substantial liquidityrequirements related to the repayment of a seller note that comes due on September 30,2010 and our revolving line of credit under our Amended Loan Agreement withHercules and to earn out payments for past acquisitions. We do not currentlyexpect to generate sufficient cash flow from operations to fund thoseobligations. As a result, our independent registered public accounting firm hasincluded an explanatory paragraph which raises substantial doubt as to ourability to continue as a going concern in its report on our consolidatedfinancial statements for the year ended December 31, 2009.

 

Wehave undertaken a series of actions to reduce costs and are pursuing variousinitiatives to continue as a going concern and provide for our future success.Our plan to improve our liquidity contemplates additional cost control measuresand may include additional financing and further restructuring of our debt. Ourability to implement these plans successfully is dependent on manycircumstances outside of our direct control, including general economicconditions and the financial strength of our customers. Any additionalfinancing we are able to secure will likely be subject to a number ofconditions and involve additional costs. Given the current negative conditionsin the economy generally and the credit markets in particular, there isuncertainty as to whether we will be able to generate sufficient liquidity torepay our outstanding debt, to make our earn out payments and to meet workingcapital needs. If we are unable to improve our liquidity position, we may notbe able to continue as a going concern.

 

**Recent Developments**

 

OnNovember 20, 2009, we and our subsidiaries completed a restructuringtransaction with Hercules Technology Growth Capital, Inc. (Hercules) andHercules Technology I, LLC, a wholly-owned subsidiary of Hercules (HTI),pursuant to which $5,000 of our outstanding debt was converted into shares ofour common stock and a warrant to purchase shares of our common stock, and theremaining outstanding debt with Hercules was otherwise restructured (theHercules Restructuring). The Hercules Restructuring also provided us with up to$5,000 in additional availability under a revolving credit facility withHercules. In connection with the Hercules Restructuring, on November 20,2009, we entered into a Debt Conversion Agreement with HTI, pursuant to whichHTI exchanged $5,000 in existing indebtedness for (i) 2,691,790 shares ofour common stock, and (ii) a warrant to purchase 672,948 shares of ourcommon stock (the Debt Conversion Agreement). Under the terms of the Debt Conversion Agreement, HTI has certaincorporate governance and other rights with respect to our Company.

 

Inconnection with the Hercules Restructuring, on November 20, 2009, we andHercules entered into an Amended and Restated Loan and Security Agreement(Amended Loan Agreement), whereby we and Hercules agreed to restructure ourremaining debt not converted into shares of common stock and a warrant. TheAmended Loan Agreement amended and restated our prior loan and securityagreement with Hercules. On the same date and as a condition to the HerculesRestructuring, we also restructured our earn-out obligation related to our 2008acquisition of the assets of Delta Health Systems, Inc.

 

On February 19,2010, we entered into Amendment No. 1 (Amendment 1) to the Amended LoanAgreement with Hercules. Under Amendment 1, we may request up to $3,000 for usein purchasing equipment (the Equipment Loan) subject to valid, verifiedpurchase orders acceptable to Hercules from suppliers approved by Hercules inits sole discretion.

 

On March 25, 2010,Hercules advanced to us an additional $1,350, initially applied to theoutstanding balance on our revolving line of credit facility. The advanceincreased our outstanding indebtedness on the revolving line of credit to$8,909, and was provided as an extension above our eligible borrowing base asprovided in the Amended Loan Agreement. On April 6, 2010, we entered intoAmendment No.2 to the Amended Loan Agreement, under which we issued Hercules a$1,350 convertible note agreement and used the proceeds of this loan to paydown the revolving line of credit by the same amount. As of April 7, 2010,the outstanding balance on our revolving line of credit was $7,559.

 

Asa result of the Hercules Restructuring, Hercules has the right and willcontinue to have the right to nominate three directors to our Board ofDirectors until (i) we repay our term loans to Hercules and (ii) wemaintain a consolidated total leverage ratio of 1.5 to 1 for a rolling twelvemonths ending on each of four consecutive quarters, in which case, one of HTI’sappointed directors would not stand for re-election at the next annual meeting.None of HTI’s appointed directors would stand for re-election at the nextannual meeting of our stockholders following (i) our payment in full ofall obligations under our Amended Loan Agreement and (ii) HTI owning lessthan 10% of our issued and outstanding common stock.  In certain circumstances, HTI has the rightto nominate a fourth director, and HTI also has the right to have at least oneof its director representatives sit on the Nominating and Governance Committeeand the Compensation Committee of the Board of 

 

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Directors.

 

OnFebruary 10, 2010, Hercules sent us a letter notifying us of an event ofdefault because our borrowings under the revolving credit facility exceeded ourborrowing base as of February 5, 2010 and charging us a default interestrate of an additional 3% to the applicable regular interest rate for the periodstarting February 5, 2010. Events of default are continuing and defaultrate interest will be payable monthly on the same date as regular interestunless Hercules chooses to demand payment of default interest on another date.Hercules may elect to have default rate interest paid in cash, in kind or inshares of our common stock.

 

Herculeshas not chosen to accelerate our obligations under the Amended Loan Agreement,but has expressly not waived any events of default or any of its remedies underAmended Loan Agreement. We do not have adequate liquidity to repay alloutstanding amounts under the credit facility and payment acceleration wouldhave a material adverse effect on our liquidity, business, financial conditionand results of operations.

 

OnApril 6, 2010, our Board of Directors elected Melvin L. Keating to theBoard of Directors. Mr. Keating, an independent director, has beenappointed to the Audit Committee and now serves as its chairman.

 

**Past Acquisitions**

 

Wecontinue to transition our business model from being principally a reseller ofthird party and proprietary hardware to being a fully integrated software andservice solutions business. Acquiring businesses that allow us to improve andexpand our software, consulting and other professional services offerings hadbeen a central element of our strategic plan. Although we may completestrategic acquisitions in the future, we anticipate the focus of our businessin the near term will be on our internal operations and organic growth.

 

In May 2008, weacquired substantially all of the assets of Delta Health Systems, Inc., orDelta. The assets acquired related to Delta’s business of providing strategiccost management consulting services and web-based management data collectionand work-flow analytics to the healthcare industry. This acquisition hasenabled us to combine our existing solutions with higher margin professionalservices. We believe the Delta acquisition has allowed us to reach further intoour healthcare customer organization’s to bring critical workflow and humanresource utilization efficiencies that support our mobile solutions. During2008 and 2009, we began to realize economies of scale through selling combinedsolutions to mutual clients of Delta.

 

In May 2008, weacquired substantially all of the assets of Aware Interweave, Inc., orAware. The assets acquired related to Aware’s business of providing mobilesoftware solutions to a variety of customers including federal governmentagencies, fortune 1000 companies and healthcare and life science organizations.The acquisition was part of our strategic plan to add intellectual property andhigher-margin services and application software licensing, while allowing us toprovide our customers with access to new solutions. The acquisition of Awarehas allowed us the opportunity to enable users of SAP® software and applications to significantlyimprove their visibility, response time, and revenues by providing access tobusiness-critical applications without being tied to the office or desktopcomputer. Through our acquisition of Aware, we have gained a mobile productsolution suite that it developed, the Mobile Device Controller series, which istailored specifically for users of SAP® software, andalso adaptable to other back-end systems.

 

In September 2007, weacquired certain assets and assumed certain liabilities of HealthcareInformatics Associates, Inc., or HIA. The acquired assets included therights to existing relationships with customers, vendors and partners. All ofthe employees of HIA were transitioned to us. The employees are a team of seniorhealthcare informatics consultants who are also certified healthcarepractitioners, and include registered nurses, pharmacists, ancillaryclinicians, physician assistants, revenue cycle personnel, administrativesystems personnel, technical interface/report writing personnel, clinicaltransformation specialists, engineers specializing in return on investment,benefits realization, and work redesign and certified project managers. Theacquisition of HIA has allowed us to expand the products and services we offerto hospitals and other healthcare providers.

 

For more information withrespect to these transactions, see Notes N and O to our auditedconsolidated financial statements included in Item 8 of this report.

 

**Characteristics of our net revenues and expenses**

 

We generate our net revenuesthrough the resale of wireless and mobile hardware and systems, includingmobile workstations, handheld and wearable computers, peripherals, and relatedproducts under which the revenue is recognized. 

 

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Sales revenue on product is recognized whenboth the title and risk of loss transfer to the customer, generally uponshipment. We also generate revenues from consulting and professional serviceson either a fixed fee or time and expense basis. Net revenues from ourconsulting and professional services are recognized on a time and expense basisat the time the service is delivered and the expenses are incurred. Netrevenues from the sale of our proprietary learning technologies and anyprofessional consulting or engineering services provided on a fixed-fee basisare recognized according to a proportionate method of accounting and is recognizedratably over the contract period based upon actual project hours as compared tobudgeted project hours.

 

Wealso generate net revenues from the sale of extended warranties on wireless andmobile hardware and systems, including mobile workstations, computers,peripherals, and related products. We sell original equipment manufacturers’component warranties and warranty programs sponsored by other third-parties andrecognize the revenue on a net basis upon execution of the warranty agreement.As we have been transitioning our business away from the sale of hardware andrelated warranties, we are not selling new extended warranty programs exceptfor those serviced by third-parties and we have taken steps to confirm with ourcustomers that third-parties are the obligors under their warranties. We recordthe sales of extended warranties as net revenue immediately upon completion ofthe sale transaction.

 

Payments received in advanceof services performed are recorded as deferred revenue. Certain contractpayment terms may result in customer billing occurring at a pace slower thanrevenue recognition. The resulting revenue recognized in excess of amountsbilled and project cost is included in unbilled revenue on our consolidatedbalance sheet.

 

Cost of revenues consists ofall expenses that are directly attributable to the costs associated with thepurchase, for resale, of wireless and mobile hardware and systems, includingcomputers, peripherals, and related products. Fluctuations in our gross marginmay occur due to changes in our ability to obtain discounts on product sales orour ability to negotiate higher margins on sales contracts with largecustomers. Cost of sales also consists of the direct costs associated withthose employees or sub-contractors that perform our professional consultingservices on behalf of our customers.

 

Selling expenses primarilyconsist of the salaries, benefits, travel and other costs of our regional andnational account sales representatives, sales management and business developmentexpenses. General and administrative expenses primarily consist of the costsattributable to the support of our operations, such as: costs related toinformation systems, salaries, expenses and office space costs for executivemanagement, inside sales and customer support, warehousing, technical support,financial accounting, purchasing, administrative and human resources personnel,insurance, recruiting fees, legal, accounting and other professional services.

 

**Critical Accounting Estimates and Policies**

 

Our consolidated financial statements areprepared in conformity with accounting principles generally accepted in theUnited States of America (GAAP), which requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities at thedate of the financial statements and the reported amounts of net revenues andexpenses during the reporting periods. Critical accounting policies are thosethat require the application of management’s most difficult, subjective, orcomplex judgments, often because of the need to make estimates about the effectof matters that are inherently uncertain and that may change in subsequentperiods. In preparing the consolidated financial statements, management hasmade estimates and assumptions that affect the reported amounts of assets andliabilities at the date of the financial statements, and the reported amountsof net revenues and expenses during the reporting periods. In preparing thefinancial statements, management has utilized available information, includingour past history, industry standards and the current economic environment,among other factors, in forming its estimates and judgments, giving dueconsideration to materiality. Actual results may differ from these estimates.In addition, other companies may utilize different estimates, which may impactthe comparability of our results of operations to those of companies in similarbusinesses. We believe that of our significant accounting policies, thefollowing may involve a higher degree of judgment and estimation.

 

*Accounts receivable*

 

We grant credit, generallywithout collateral, to our customers, which are primarily in the healthcare andcommercial markets. Consequently, we are subject to potential customer creditrisk related to changes in economic conditions within those markets. However,we believe that our billing and collection policies are adequate to minimizethe potential credit risk.

 

We have a policy ofreserving for uncollectible accounts based on our best estimate of the amountof probable credit losses in our existing accounts receivable. We periodicallyreview our accounts receivable to determine whether an allowance is necessarybased on an analysis of past due accounts and other factors that may indicatethat the realization of an account may be in doubt including historicalexperience and current economic and market conditions. Account balances deemedto be 

 

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uncollectible are charged to the allowanceafter all means of collection have been exhausted and the potential forrecovery is considered remote.

 

*Inventory*

 

Inventory is stated at thelower of cost or market. Cost is determined using the first in, first outmethod.

 

We periodically review ourinventories and make provisions as necessary for estimated obsolete andslow-moving goods. We mark down inventory in an amount equal to the differencebetween cost of inventory and the estimated market value based on assumptionsabout future demands, selling prices and market conditions. The creation ofsuch provisions results in a write-down of inventory to net realizable valueand a charge to cost of revenues.

 

*Impairment of long-lived assets*

 

We assess the potentialimpairment of long-lived assets whenever events or changes in circumstancesindicate that the carrying value may not be recoverable. An asset’s value isimpaired if management’s estimate of the aggregate future cash flows,undiscounted and without interest charges, to be generated by the asset areless than the carrying value of the asset. When estimating future cash flows,we consider factors such as expected future operating income and historicaltrends, as well as the effects of demand and competition. To the extentimpairment has occurred, the loss is measured as the excess of the carryingamount of the asset over the estimated fair value of the asset. Such estimatesrequire the use of judgment and numerous subjective assumptions, which, ifactual experience varies, could result in material differences in therequirements for impairment charges.

 

*Intangible assets*

 

The costs of successfulregistrations for patents are amortized over the estimated useful lives of theassets, which is generally sixteen years, using the straight-line method. Thecosts of unsuccessful registrations are charged to expense. Acquired technologyis recorded at its estimated fair value at the date of acquisition andamortized over the estimated useful lives of the assets, which averages fouryears, using the straight-line method. Developed technology is also amortizedusing the straight-line method, generally over five years. License fees areamortized over the license period using the straight-line method. Customerlists are amortized over a period of six to ten years.

 

*Revenue recognition*

 

Net revenues are generatedthrough product sales, warranty and maintenance agreements, professionalconsulting, programming and engineering services, long-term support services,and educational learning programs. Net revenues from product sales arerecognized when both the title and risk of loss transfer to the customer,generally upon shipment. We generate net revenues from the sale of extendedwarranties on wireless and mobile hardware and systems, including mobileworkstations, computers, peripherals, and related products. Revenue from thesale of component extended warranties is recognized as net revenue uponexecution of the warranty agreement. We do not bear associated warranty riskbecause it is contracted with a third parties, the primary obligors, to fullyassume all risks and obligations.

 

We also generate revenuefrom consulting and other professional services on either a fee-for service orfixed fee basis. Revenue from consulting and other professional services thatis contracted as fee-for-service is recognized in the period in which theservices are performed. Direct costs for travel and accommodations arereimbursable in accordance with the contract terms and are recognized as netrevenue in the period the related expense is incurred. Revenue from the sale ofproprietary learning technologies and those consulting and other professionalservices provided on a fixed-fee basis is recognized according to aproportionate method of revenue recognition and is recognized ratably over thecontract period based upon actual project hours completed compared to totalbudgeted project hours.

 

We record amounts billed toour customers for shipping and handling fees as revenue. All amounts billed ina sale transaction related to shipping and handling represent revenues earnedfor the goods provided and requires such amounts are classified as revenue.Shipping and handling costs are recorded in general and administrative expensesin the consolidated statement of operations.

 

*Income taxes*

 

We account for income taxesusing the asset and liability method. Deferred tax assets and liabilities aredetermined based on the differences between the financial reporting bases andthe tax bases of existing assets and liabilities, and are measured at theprevailing enacted tax rates that will be in effect when these differences aresettled or realized. Deferred tax assets are reduced by a valuation allowanceif it is more likely than not that some portion or all of the deferred taxasset will not be realized.

 

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We have developed arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. As a result, we determined that there were no materialliabilities for tax benefits at December 31, 2009 or 2008. Any futureinterest accrued relating to unrecognized tax benefits will be included ininterest expense. In the event that we must accrue for any penalties, they willbe included as an operating expense.

 

While we believe that our tax positions are fullysupportable, there may certain positions that could be challenged and we maynot prevail. In these instances, we look to establish reserves. If we determinethat a tax position is more likely than not of being sustained upon audit,based solely on the technical merits of the position, we recognize the benefit.We measure the benefit by determining the amount that is greater than 50%likely of being realized upon settlement. We presume that all tax positionswill be examined by a taxing authority with full knowledge of all relevantinformation. We regularly monitors our tax positions, tax assets and taxliabilities. We reevaluate the technical merits of our tax positions andrecognize an uncertain tax benefit or derecognize a previously recorded taxbenefit when (i) there is a completion of a tax audit, (ii) there isa change in applicable tax law including a tax case or legislative guidance, or(iii) there is an expiration of the statute of limitations. Significantjudgment is required in accounting for tax reserves.

 

*Stock-based compensation*

 

Wemeasure all employee stock-based compensation awards using a fair value methodand record such expense in our Consolidated Financial Statements. Such expenseis amortized on a straight line basis over the requisite service period of theaward.

 

We estimate the grant date fair value of stock optionsusing the Black-Scholes option-pricing model which requires the input of highlysubjective assumptions. These assumptions include estimating the expected termof the award and the estimated volatility of our stock price over the expectedterm. Changes in these assumptions and in the estimated forfeitures of stockoption awards can materially affect the amount of stock-based compensationrecognized in our consolidated statements of operations.

 

**Results of Operations**

 

Results of operationsexpressed as a percentage of net revenues were as follows:

 
| ** **                                       | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|
| ** **                                       | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net  revenues                                    |       | 100.0                            | %          | 100.0 | % | 100.0 | % |
| Cost  of revenues                                |       | 77.4                             | %          | 73.6 | % | 73.7 | % |
| Gross  profit                                    |       | 22.6                             | %          | 26.4 | % | 26.3 | % |
| Selling,  general and adminstrative expenses     |       | 32.1                             | %          | 32.1 | % | 32.0 | % |
| Operating  loss                                  |       | (9.5                             | )%         | (5.7 | )% | (5.7 | )% |
| Interest  expense                                |       | (6.7                             | )%         | (2.7 | )% | (1.1 | )% |
| Interest  income                                 |       | 0.0                              | %          | 0.1 | % | 0.6 | % |
| Loss  on extinguishment of debt                  |       | (8.3                             | )%         | (1.4 | )% | — |   |
| Goodwill  impairment                             |       | (0.2                             | )%         | 0.0 | % | 0.0 | % |
| Fair  value adjustment on derivative liabilities |       | (0.3                             | )%         | — |   | — |   |
| Loss  before income tax (expense) benefit        |       | 25                               | %          | (9.7 | )% | (6.2 | )% |
| Income  tax (expense) benefit                    |       | (0.7                             | )%         | (3.4 | )% | 2.2 | % |
| Net  loss                                        |       | 25.7                             | %          | (13.1 | )% | (4.0 | )% |

 

***Net revenues***

 

Net revenues by operating segment for theyears ended December 31, 2009 and 2008 were as follows:

 

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| ** **             | ** ** | **2009**   | ** ** | **2008**   | ** ** | **Amount of  Change** | ** ** | **Percentage  Change** | ** ** |
|------------------------|------------|------------|------------|------------|------------|-----------------------|------------|------------------------|------------|
| *** ***           | ** ** | ** ** | ** ** | ** ** | ** ** | ** **            | ** ** | ** **             | ** ** |
| Healthcare             |       |       |       |       |       |                  |       |                   |       |
| Infrastructure         |       | $          | 27,704     |       | $          | 40,028                |       | $                      | (12,324    | ) | -31 | % |
| Professional  Services |       | 20,027     |       | 22,473     |       | (2,446                | )          | -11                    | %          |
| Managed  Services      |       | 2,622      |       | 1,903      |       | 719                   |       | 38                     | %          |
| Total  healthcare      |       | 50,353     |       | 64,404     |       | (14,051               | )          | -22                    | %          |
|                   |       |       |       |       |       |                  |       |                   |       |
| Commercial             |       |       |       |       |       |                  |       |                   |       |
| Infrastructure         |       | 28,978     |       | 22,598     |       | 6,380                 |       | 28                     | %          |
| Professional  Services |       | 5,770      |       | 7,560      |       | (1,790                | )          | -24                    | %          |
| Managed  Services      |       | 1,815      |       | 6,154      |       | (4,339                | )          | -71                    | %          |
| Total  commercial      |       | 36,563     |       | 36,312     |       | 251                   |       | 1                      | %          |
|                   |       |       |       |       |       |                  |       |                   |       |
| Total  net revenues    |       | $          | 86,916     |       | $          | 100,716               |       | $                      | (13,800    | ) | -14 | % |

 

Net revenues for 2009 of $86,916 decreased $13,800 or13.7% as compared to 2008. The decrease in net revenues was the result ofrecording revenues and cost of revenues associated with extended warranties ona net basis for 2009 as compared to recording revenues and cost of revenues ona gross basis for 2008 resulting from changes in the mix of warranties we soldin 2009 and notifying our customers that third parties are the primary obligorsunder their warranties as well as lower than expected sales as a result of ourcustomers choosing to defer projects during the current economic downturn. Wehave noticed that starting with the fourth quarter, and continuing into early2010 customers have begun pursuing projects that had been earlier deferred. Thereimbursable expense revenue included in our professional services revenuetotaled $2,623 and $2,412 for the years ended December 31, 2009 and 2008.

 

***Cost of revenues***

 

Cost of revenues by operating segment for theyears ended December 31, 2009 and 2008 were as follows:

 

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| ** **              | ** ** | **2009**   | ** ** | **2008**   | ** ** | **Amount of  Change** | ** ** | **Percentage  Change** | ** ** |
|-------------------------|------------|------------|------------|------------|------------|-----------------------|------------|------------------------|------------|
|                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** **            | ** ** | ** **             | ** ** |
| Healthcare              |       |       |       |       |       |                  |       |                   |       |
| Infrastructure          |       | $          | 21,569     |       | $          | 29,409                |       | $                      | (7,840     | ) | -27 | % |
| Professional  Services  |       | 15,056     |       | 14,368     |       | 688                   |       | 5                      | %          |
| Managed  Services       |       | (47        | )          | 587        |       | (634                  | )          | -108                   | %          |
| Total  healthcare       |       | 36,578     |       | 44,364     |       | (7,786                | )          | -18                    | %          |
|                    |       |       |       |       |       |                  |       |                   |       |
| Commercial              |       |       |       |       |       |                  |       |                   |       |
| Infrastructure          |       | 25,363     |       | 19,809     |       | 5,554                 |       | 28                     | %          |
| Professional  Services  |       | 4,782      |       | 5,029      |       | (247                  | )          | -5                     | %          |
| Managed  Services       |       | 550        |       | 4,974      |       | (4,424                | )          | -89                    | %          |
| Total  commercial       |       | 30,695     |       | 29,812     |       | 883                   |       | 3                      | %          |
|                    |       |       |       |       |       |                  |       |                   |       |
| Total  cost of revenues |       | $          | 67,273     |       | $          | 74,176                |       | $                      | (6,903     | ) | -9 | % |

 

Cost of revenues in 2009totaled $67,273, a decrease of $6,903 or 9.3% in 2009 as compared to $74,176for 2008. Thedecrease in our cost of revenues was the result of recording revenues and cost ofrevenues associated with extended warranties on a net basis for 2009 ascompared to recording revenues and cost of revenues on a gross basis for 2008resulting from changes in the mix of warranties we sold in 2009 as well asnotifying our customers that third parties are the primary obligors under theirwarranties. The reimbursable expenses included in ourprofessional services cost of revenue totaled $2,623 and $2,412 for the yearsended December 31, 2009 and 2008, respectively.

 

***Gross profit***

 

Gross profit by operatingsegment for the years ended December 31, 2009 and 2008 was as follows:

 

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| ** **             | ** ** | **2009**   | ** ** | **2008**   | ** ** | **Amount of  Change** | ** ** | **Percentage  Change** | ** ** |
|------------------------|------------|------------|------------|------------|------------|-----------------------|------------|------------------------|------------|
|                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** **            | ** ** | ** **             | ** ** |
| Healthcare             |       |       |       |       |       |                  |       |                   |       |
| Infrastructure         |       | $          | 6,134      |       | $          | 10,619                |       | $                      | (4,485     | ) | -42 | % |
| Professional  Services |       | 4,971      |       | 8,105      |       | (3,134                | )          | -39                    | %          |
| Managed  Services      |       | 2,670      |       | 1,316      |       | 1,354                 |       | 103                    | %          |
| Total  healthcare      |       | 13,775     |       | 20,040     |       | (6,265                | )          | -31                    | %          |
|                   |       |       |       |       |       |                  |       |                   |       |
| Commercial             |       |       |       |       |       |                  |       |                   |       |
| Infrastructure         |       | 3,615      |       | 2,789      |       | 826                   |       | 30                     | %          |
| Professional  Services |       | 988        |       | 2,530      |       | (1,542                | )          | -61                    | %          |
| Managed  Services      |       | 1,265      |       | 1,181      |       | 84                    |       | 7                      | %          |
| Total  commercial      |       | 5,868      |       | 6,500      |       | (632                  | )          | -10                    | %          |
|                   |       |       |       |       |       |                  |       |                   |       |
| Total  gross profit    |       | $          | 19,643     |       | $          | 26,540                |       | $                      | (6,897     | ) | -26 | % |

 

Gross profit percentage byoperating segment for the years ended December 31, 2009 and 2008 was asfollows:

 
| ** **                     | ** ** | **2009**   | ** ** | **2008**   | ** ** | **Amount of  Change** | ** ** |
|--------------------------------|------------|------------|------------|------------|------------|-----------------------|------------|
| ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** **            | ** ** |
| Healthcare                     |       |       |       |       |       |                  |       |
| Infrastructure                 |       | 22         | %          | 27         | %          | -5                    | %          |
| Professional  Services         |       | 25         | %          | 36         | %          | -11                   | %          |
| Managed  Services              |       | 102        | %          | 69         | %          | 33                    | %          |
|                           |       |       |       |       |       |                  |       |
| Commercial                     |       |       |       |       |       |                  |       |
| Infrastructure                 |       | 12         | %          | 12         | %          | 0                     | %          |
| Professional  Services         |       | 17         | %          | 33         | %          | -16                   | %          |
| Managed  Services              |       | 70         | %          | 19         | %          | 51                    | %          |
|                           |       |       |       |       |       |                  |       |
| Total  gross profit percentage |       | 23         | %          | 26         | %          | -3                    | %          |

 

Our overall gross profitdecreased by $6,897 and our gross profit percentage decreased by 3%. The decrease in our gross profit is theresult of lower than expected sales of our more profitable professional andconsulting services related to our mobile solutions and software implementationservices. We continue to experience downward pressure on our gross margin fromthe sale of infrastructure and third-party hardware. Consistent with ouroverall strategic plan, we continue to migrate the business toward an overallgreater mix of consulting and other professional services.

 

***Selling, general and administrativeexpenses***

 

Our selling, general andadministrative expenses were $27,859 for the year ended December 31, 2009,compared with $32,243 for the year ended December 31, 2008, a decrease of$4,384 or 13.6%. Selling expenses were $11,057 for the year ended December 31,2009, compared with $11,460 for the year ended December 31, 2008, adecrease of $403 or 3.5%. The decrease in our selling expenses for 2009 relates to lower salary and travelrelated costs resulting from staffing reductions and other cost controlmeasures. General and administrative expenses were $16,802 for the year ended December 31,2009, compared with $20,783 for the year ended December 31, 2008, adecrease of $3,981 or 19.2%. The decrease in our general and administrative expensesfor the comparable period was primarily attributable to reductions in 

 

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staff and associated benefits and travel expenses, lower purchases ofdemonstration and evaluation equipment, lower marketing expenses, and lowernon-cash compensation costs.

 

***Interest expense***

 

Our interest expense, whicharises in connection with our credit line, term loans, and certain transactionrelated expenses was $5,855 for the year ended December 31, 2009, comparedto $2,735 for the year ended December 31, 2008, an increase of $3,120 or114.08%. The increasein interest expense is also a result of higher related average amountsoutstanding under our revolving credit and term loan facilities and higherrates charged on these facilities than the rates charged during the comparableperiods in 2008. In addition to higher base rates, interest on our 2009borrowings was charged at a higher rate as a result of certain covenantviolations during 2009 that were not in effect in 2008.

 

Borrowings under the revolving credit facility boreinterest at an annual rate equal to 11.25% through February 14, 2009, thenincreased to 12.25% through May 15, 2009, then increased to 13.25% throughMay 31, 2009, then increased to 14.25% through September 30, 2009plus 1.50% interest paid in kind beginning on May 31, 2009 through September 30,2009. Borrowings under the term loan facilities bore interest at an annual rateequal to 1.75% interest paid in kind plus 13.75%, and then increased to 3.75%interest paid in kind plus 15.75%. In addition, we paid default interestpenalties of 3.0% from February 1, 2009 though May 31, 2009.

 

As a result of the Hercules Restructuring that closedon November 20, 2009, which was subsequently amended in February and April 2010,we expect our incremental borrowing rate on all outstanding and futureborrowings from Hercules, our senior lender, will increase. See “Liquidity andCapital Resources” below.

 

***Loss on extinguishment of debt***

 

We incurred a loss onextinguishment of debt of $6,377 for the year ended December 31, 2009 comparedwith a loss on the extinguishment of debt of $1,451 in 2008. The loss for 2009was related to the HerculesRestructuring that closed in the fourth quarter of 2009 and the2008 charge was related to an amendment to our credit agreement that we enteredinto in the fourth quarter of 2008.

 

***Depreciation and amortization***

 

Our depreciation andamortization expense decreased to $1,883 for the year ended December 31,2009 from $2,533 for the year ended December 31, 2008, a decrease of $650or 25.7%, partiallythe result of demonstration units deployed being expensed when shipped to thefield during 2009, offset by amortization expense related to our 2008acquisitions of intangible assets from Delta and Aware.

 

***Net loss***

 

Our net loss was $22,388 forthe year ended December 31, 2009 compared with a net loss of $13,184 forthe year ended December 31, 2008, an increase of $9,204 or 69.8% which is primarily due to a substantial increasein our interest expense and related non-recurring and non-cash borrowing andrestructuring costs related to the Hercules Restructuring, reduced sales and,during the first six months of 2009, lower gross margins due to the economicslowdown.

 

As a result of Hercules Restructuring,we underwent a change of ownership as defined by the Internal Revenue Code (Section 382).Section 382 imposes limitations on a corporation’s ability to utilizeits net operating losses (NOLs) if it experiences an “ownership change.” As aresult, the Company’s net operating losses have been limited.

 

As of December 31,2009, we had federal NOLs of approximately $20 million that would be availablefor use. As a result of the limitations under Section 382, the Companywill able to utilize approximately $156 per year over the next 20 years tooffset future taxable income. We have recorded a full valuation allowancerelated to the net operating loss carryforwards and other temporary items at December 31,2009 and 2008 as we determined it is more likely than not that we will not beable to use the assets to reduce future tax liabilities. If not used, the NOLswill expire beginning in the year 2024. Our state NOLs which are also limitedunder Section 382, will also be subject to expiration in varying yearsstarting in 2013 through 2027.

 

***Year ended December 31, 2008Compared with the Year ended December 31, 2007***

 

***Net revenues***

 

Net revenues by operatingsegment for the years ended December 31, 2008 and 2007 were as follows:

 

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| ** **             | ** ** | **2008**   | ** ** | **2007**   | ** ** | **Amount of  Change** | ** ** | **Percentage  Change** | ** ** |
|------------------------|------------|------------|------------|------------|------------|-----------------------|------------|------------------------|------------|
| *** ***           | ** ** | ** ** | ** ** | ** ** | ** ** | ** **            | ** ** | ** **             | ** ** |
| Healthcare             |       |       |       |       |       |                  |       |                   |       |
| Infrastructure         |       | $          | 40,028     |       | $          | 40,477                |       | $                      | (449       | ) | -1 | % |
| Professional  Services |       | 22,473     |       | 4,572      |       | 17,901                |       | 392                    | %          |
| Managed  Services      |       | 1,903      |       | 2,447      |       | (544                  | )          | -22                    | %          |
| Total  healthcare      |       | 64,404     |       | 47,496     |       | 16,908                |       | 36                     | %          |
|                   |       |       |       |       |       |                  |       |                   |       |
| Commercial             |       |       |       |       |       |                  |       |                   |       |
| Infrastructure         |       | 22,598     |       | 18,854     |       | 3,744                 |       | 20                     | %          |
| Professional  Services |       | 7,560      |       | 7,637      |       | (77                   | )          | -1                     | %          |
| Managed  Services      |       | 6,154      |       | 4,787      |       | 1,367                 |       | 29                     | %          |
| Total  commercial      |       | 36,312     |       | 31,278     |       | 5,034                 |       | 16                     | %          |
|                   |       |       |       |       |       |                  |       |                   |       |
| Total  net revenues    |       | $          | 100,716    |       | $          | 78,774                |       | $                      | 21,942     |   | 28 | % |

 

The increase in net revenueswas due primarily to the expansion of our consulting and other professionalservices across the organization, including revenue contributed as a result ofthe acquisitions of the businesses of Healthcare Informatics Associates, Inc.(HIA), Delta and Aware, and an increase in infrastructure and hardware relatedrevenue. The net revenues associated with HIA, Delta and Aware totaled $20,395for the year ended December 31, 2008. The net revenues associated with HIAtotaled $3,217 from the date of acquisition through December 31, 2007. Thereimbursable expense revenues included in our professional services revenuetotaled $2,412 and $332 for the years ended December 31, 2008 and 2007.

 

***Cost of revenues***

 

Cost of revenues byoperating segment for the years ended December 31, 2008 and 2007 were as follows:

 
| ** **              | ** ** | **2008**   | ** ** | **2007**   | ** ** | **Amount of  Change** | ** ** | **Percentage  Change** | ** ** |
|-------------------------|------------|------------|------------|------------|------------|-----------------------|------------|------------------------|------------|
|                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** **            | ** ** | ** **             | ** ** |
| Healthcare              |       |       |       |       |       |                  |       |                   |       |
| Infrastructure          |       | $          | 29,409     |       | $          | 28,410                |       | $                      | 999        |   | 4 | % |
| Professional  Services  |       | 14,368     |       | 4,199      |       | 10,169                |       | 242                    | %          |
| Managed  Services       |       | 587        |       | 714        |       | (127                  | )          | -18                    | %          |
| Total  healthcare       |       | 44,364     |       | 33,323     |       | 11,041                |       | 33                     | %          |
|                    |       |       |       |       |       |                  |       |                   |       |
| Commercial              |       |       |       |       |       |                  |       |                   |       |
| Infrastructure          |       | 19,809     |       | 16,507     |       | 3,302                 |       | 20                     | %          |
| Professional  Services  |       | 5,029      |       | 4,926      |       | 103                   |       | 2                      | %          |
| Managed  Services       |       | 4,974      |       | 3,293      |       | 1,681                 |       | 51                     | %          |
| Total  commercial       |       | 29,812     |       | 24,726     |       | 5,086                 |       | 21                     | %          |
|                    |       |       |       |       |       |                  |       |                   |       |
| Total  cost of revenues |       | $          | 74,176     |       | $          | 58,049                |       | $                      | 16,127     |   | 28 | % |

 

The increase in our cost ofrevenues was the result of costs incurred as a result of higher sales ofwireless infrastructure, mobile point-of-care workstations and our expandedconsulting and other professional services. The cost of revenues associatedwith HIA, Delta and Aware totaled $12,290 for the year ended December 31,2008. The cost of revenues associated with HIA totaled $1,978 from the date ofacquisition through December 31, 2007. The reimbursable expenses 

 

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included in our professional services cost ofrevenue totaled $2,412 and $332 for the years ended December 31, 2008 and2007.

 

***Gross profit***

 

Gross profit by operatingsegment for the years ended December 31, 2008 and 2007 was as follows:

 
| ** **             | ** ** | **2008**   | ** ** | **2007**   | ** ** | **Amount of  Change** | ** ** | **Percentage  Change** | ** ** |
|------------------------|------------|------------|------------|------------|------------|-----------------------|------------|------------------------|------------|
|                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** **            | ** ** | ** **             | ** ** |
| Healthcare             |       |       |       |       |       |                  |       |                   |       |
| Infrastructure         |       | $          | 10,619     |       | $          | 12,067                |       | $                      | (1,448     | ) | -12 | % |
| Professional  Services |       | 8,105      |       | 373        |       | 7,732                 |       | 2073                   | %          |
| Managed  Services      |       | 1,316      |       | 1,733      |       | (416                  | )          | -24                    | %          |
| Total  healthcare      |       | 20,040     |       | 14,173     |       | 5,867                 |       | 41                     | %          |
|                   |       |       |       |       |       |                  |       |                   |       |
| Commercial             |       |       |       |       |       |                  |       |                   |       |
| Infrastructure         |       | 2,790      |       | 2,347      |       | 443                   |       | 19                     | %          |
| Professional  Services |       | 2,530      |       | 2,711      |       | (181                  | )          | -7                     | %          |
| Managed  Services      |       | 1,180      |       | 1,495      |       | (315                  | )          | -21                    | %          |
| Total  commercial      |       | 6,500      |       | 6,553      |       | (52                   | )          | -1                     | %          |
|                   |       |       |       |       |       |                  |       |                   |       |
| Total  gross profit    |       | $          | 26,540     |       | $          | 20,725                |       | $                      | 5,815      |   | 28 | % |

 

Gross profit percentage byoperating segment for the years ended December 31, 2008 and 2007 was asfollows:

 
| ** **                     | ** ** | **2008** | ** ** | **2007** | ** ** | **Amount of  Change** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|-----------------------|------------|
|                           |       |     |       |     |       |                  |       |
| Healthcare                     |       |     |       |     |       |                  |       |
| Infrastructure                 |       | 27       | %          | 30       | %          | -3                    | %          |
| Professional  Services         |       | 36       | %          | 8        | %          | 28                    | %          |
| Managed  Services              |       | 69       | %          | 71       | %          | -2                    | %          |
|                           |       |     |       |     |       |                  |       |
| Commercial                     |       |     |       |     |       |                  |       |
| Infrastructure                 |       | 12       | %          | 12       | %          | 0                     | %          |
| Professional  Services         |       | 33       | %          | 35       | %          | -2                    | %          |
| Managed  Services              |       | 19       | %          | 31       | %          | -12                   | %          |
|                           |       |     |       |     |       |                  |       |
| Total  gross profit percentage |       | 26       | %          | 26       | %          |                  |       |

 

Our overall gross profitpercentage remained unchanged. The change in the makeup of our gross profitpercentage is a result of increased sales of our more profitable consulting andother professional services related to our mobile solutions and softwareimplementation services, offset by sales of lower margin infrastructure andthird-party hardware. We continue 

 

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to experience downward pressure on our grossmargin from the sale of infrastructure and third-party hardware. Consistentwith our overall strategic plan, we are migrating the business toward anoverall greater mix of consulting and other professional services.

 

***Selling, general and administrativeexpenses***

 

Our selling, general andadministrative expenses were $32,243 for the year ended December 31, 2008,compared with $25,211 for the year ended December 31, 2007, an increase of$7,032 or 27.9%. Selling expenses were $11,460 for the year ended December 31,2008, compared with $10,215 for the year ended December 31, 2007, anincrease of $1,245 or 12.2%. The increase in our selling expenses for thecomparable periods was primarily attributable to an increase in wages relatedto the expanded sales staff hired during 2007, and sales support related costsattributable to HIA during the year ended December 31, 2008. General andadministrative expenses were $17,291 for the year ended December 31, 2008,compared with $14,945 for the year ended December 31, 2007, an increase of$5,788 or 6%. The increase in our general and administrative expenses for thecomparable periods was primarily attributable to an increase in salary expensesrelated to the addition of key members of our management and professionalservices staff hired during 2007, which includes staff from acquisitions; anincrease in our marketing campaigns; and an increase in outside services ofnon-capitalized costs associated with product development. During the yearended December 31, 2008, we also incurred a loss of $1,340 in connectionwith the write-down and disposal of property, equipment and certain intangibleassets and non-cash charges for share-based compensation of approximately$1,000. Additionally, we wrote off $200 of previously capitalized costsincurred in connection with an offering of common stock since we have chosennot to complete the offering.

 

***Interest expense and interest income***

 

Our interest expense, whicharose in connection with our credit line and term loan, was $2,735 for the yearended December 31, 2008, compared to approximately $873 for the year endedDecember 31, 2007, an increase of $1,862 or 213.3%. The increase ininterest expense is a result of higher interest costs and greater amountsoutstanding under our asset-based line of credit facility, term loans and notespayable issued in connection with our acquisitions.

 

Our interest income was $140for the year ended December 31, 2008, compared to $458 for the year ended December 31,2007, a decrease of $318 or 69.4%. The decrease in interest income is primarilythe result of lower average cash and cash equivalents balance during the yearended December 31, 2008 when compared to the same period of 2007.

 

***Depreciation and amortization***

 

Our depreciation andamortization expense increased to $2,533 for the year ended December 31,2008 from $1,667 for the year ended December 31, 2007, an increase of $866or 51.9% as the result of a greater number of demonstration units deployed toour expanded sales force and amortization expense related to our acquisitionsof intangible assets from AMTSystems, HIA, Delta and Aware.

 

***Net loss***

 

Our net loss was $13,184 forthe year ended December 31, 2008 compared with a net loss of $3,189 forthe year ended December 31, 2007, an increase of $9,995 or 313.4%. Our netloss increased primarily due to additional overhead costs, includingrecruiting, salary and commissions expenses associated with hiring experiencedsales, administrative and operations personnel to support our organizationalgrowth, write-down and disposal of property, equipment and certain intangibleassets, elimination of the tax benefit and the costs associated with our growththrough acquisitions. In addition, the increase in our net loss is due in partto a nonrecurring extinguishment of debt charge in 2008 of $1,451 related toamending our loan and security agreement with Hercules during the fourthquarter.

 

As of December 31,2008, we had federal NOLs of approximately $11,245 available to offset futuretaxable income. Beginning with the fourth quarter of 2008, we recorded a fullvaluation allowance related to the net operating loss carryforwards and othertemporary items as we determined it is more likely than not that we will not beable to use the assets to reduce future tax liabilities. If not used, the NOLswill expire beginning in the year 2024. Our state NOLs will also be subject toexpiration in varying years starting in 2013 through 2027.

 

***Liquidity and Capital Resources***

 

At December 31, 2009, we had cash and cashequivalents of $1,018, compared to $3,037 at December 31, 2008. Pursuantto a covenant in the Amended Loan Agreement with Hercules, we are required tomaintain a minimum cash balance of $1,000. We have used, and plan to use, ourunrestricted cash for general corporate purposes, including working capital. Wehave funded our operating losses primarily through the private sale of equitysecurities and through current and long term 

 

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debt and working capital. At December 31, 2009, our totalliabilities were $38,487 and were comprised mostly of term debt, borrowingsoutstanding under our credit line, notes due to sellers related to prioracquisitions, and outstanding accounts payable. Net cash used in operatingactivities for the year ended December 31, 2009 was $1,416**,**primarily the result of operating net losses and financingrelated fees and expenses. Net cash used in investing activities was $446 forthe year ended December 31, 2009, primarily used to purchase equipment andsoftware.****Net cash used in financing activitieswas $157 for the year ended December 31, 2009, primarily due to costsassociated with the Hercules Restructuring,and increased borrowings under ourAmended Loan Agreement with Hercules in the second half of 2009, net of debtrepayments.

 

Ourprimary current and contingent cash obligations arise under our term loan andrevolving credit facilities under the Amended Loan Agreement with Hercules, ourearn out agreements related to our acquisitions of substantially all of theassets of HIA and Delta, and our note payable to HIA. In 2009, we were inviolation of certain of our financial covenants with respect to our loan andsecurity agreement with Hercules that was subsequently restructured on November 20,2009.  As a result of those covenantviolations, we were prohibited from making payments on our earn out obligationsrelated to our acquisitions of the assets of HIA and Delta. As a condition toand in connection with the Hercules Restructuring, InfoLogix Inc.’swholly-owned subsidiary, InfoLogix Systems Corporation (Systems) entered into aletter agreement (the Letter Agreement) with Delta whereby the parties agreedto restructure the outstanding obligations under the Earn Out Agreement dated May 2,2008 (Delta Earn-Out Agreement). Under the Delta Earn-Out Agreement, Delta hadearned $430 for the earn out period ended May 2, 2009. Under the LetterAgreement, in lieu of the $430 payment, commencing as of September 1,2009, Delta is participating in a commission plan, under which Systems paysDelta a monthly commission equal to 11.5% of collected revenue from Delta’sbusiness that we generate, if any, during the applicable month until thebalance is paid in full. Delta has released Systems from all obligations underthe Delta Earn-Out Agreement relating to the period ended May 2, 2009. Allother terms and conditions of the Delta Earn-Out Agreement, including therights and obligations of the parties with respect to the earn out period endingMay 2, 2010, if any, remain in full force and effect. Commissions earnedby Delta in 2009 equaled $132.

 

Additionally,we are not permitted under our Amended Loan Agreement to satisfy ourobligations on our earn out agreement with HIA that would otherwise be due andpayable. We also have a seller note to HIA that is payable on September 30,2010. We are in discussions with HIA about the earn out payment and the sellernote.

 

OnFebruary 19, 2010, we entered into Amendment No. 1 (Amendment 1) tothe Amended Loan Agreement with Hercules, which allows us to request up to$3,000 in borrowings for use in purchasing equipment (Equipment Loan).  We may borrow, in minimum increments of $250,under the Equipment Loan subject to valid, verified purchase orders acceptableto Hercules from suppliers approved by Hercules in its sole discretion.

 

On March 25, 2010,Hercules advanced to us an additional $1,350, initially applied to theoutstanding balance on our revolving line of credit facility. The advanceincreased our outstanding indebtedness on the revolving line of credit to$8,909, and was provided as an extension above our eligible borrowing base asdefined in our loan agreements with Hercules. On April 6, 2010, we enteredinto Amendment No. 2 to the Amended Loan Agreement, under which we issuedHercules a $1,350 convertible note, and used the proceeds of this loan to paydown the revolving line of credit by the same amount. We also entered into aregistration rights agreement whereby we agreed to register the sharesunderlying the convertible note. As of April 7, the outstanding balance onour revolving line of credit was $7,559.

 

Given the amount of ourcurrent unrestricted cash and cash equivalents, short-term investments,accounts receivable, and amounts available under our Equipment Loan, we believethat we will have sufficient liquidity to meet our short-term operationalcapital requirements. We have, however, substantial liquidity requirementsrelated to the repayment of a seller note in the amount of approximately $4,252that comes due on September 30, 2010 and our revolving line of creditunder our Amended Loan Agreement with Hercules, and to earn out paymentobligations from past acquisitions. We do not currently expect to generatesufficient cash flow from operations to fund those obligations. We haveundertaken a series of actions to reduce costs and have explored potentialsources of financing and other strategic initiatives. Furthermore, on February 10,2010, Hercules sent us a letter notifying us of an event of default because ourborrowings under the revolving credit facility exceeded our borrowing base asof February 5, 2010 and charging us a default interest rate of anadditional 3% to the applicable regular interest rate for the period starting February 5,2010. Hercules has not chosen to accelerate our obligations under the AmendedLoan Agreement, but has expressly not waived any events of default or any ofits remedies under Amended Loan Agreement. We do not have adequate liquidity torepay all outstanding amounts under the credit facility and paymentacceleration would have a material adverse effect on our liquidity, business,financial condition and results of operations. Even without acceleration of ourobligations to Hercules and even with the restructuring of our debt withHercules on November 20, 2009, and subsequent additional borrowings fromHercules in February and April 2010, we continue to believe that weneed to raise additional capital and to further restructure our debtobligations to meet our liquidity needs and to more effectively pursue ourstrategic objectives. Future initiatives include additional cost controlmeasures and 

 

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mayinclude additional financing and further restructuring of our debt. Our initiatives include restructuring ourdebt, and pursuing additional debt and equity capital, one or more strategictransactions, and further cost control actions. Our continued operations aredependent on our ability to implement those plans successfully. If we fail todo so, we may not be able to continue as a going concern. For a discussion ofour plans with respect to these matters, see “Going Concern.”

 

***Line of Credit and Term Loan***

 

On May 1, 2008, we and our subsidiaries entered into a loan and security agreement withHercules (Loan and Security Agreement), which provided us with a revolvingcredit facility and a term loan facility. The Loan and Security Agreement wassubsequently amended in November 2008 and May 2009, and we enteredinto a forbearance agreement with respect to certain defaults under the Loanand Security Agreement in July 2009, and we entered into five amendmentsto the forbearance agreement over the course of August through October 2009.In connection with the Hercules Restructuring that closed on November 20,2009, we entered into the Amended Loan Agreement with Hercules, which amendedand restated the Loan and Security Agreement. The description of the AmendedLoan Agreement below reflects the terms in place since November 20, 2009,as amended on February 19, 2010 (to provide the Equipment Loan) and on April 6,2010 (to issue Term Loan C).

 

Under the AmendedLoan Agreement, our indebtedness to Hercules consists of three term loansaggregating $11,850 and a revolving credit facility of $12,000, of which $7,559is outstanding at December 31, 2009. The revolving credit facility expireson May 1, 2011, but may be extended at our option for six months if thereis no existing event of default. Any advances under the revolving creditfacility bear interest initially at 12.0% per annum until the term loans, asdescribed below, are repaid in full, when the interest rate on outstanding advanceswill be prime plus 4%. Borrowings under the revolving credit facility are basedon eligible accounts receivables, including an overadvance provision of up to$500, which will be due 28 days after the overadvance is drawn. Overadvancesbear interest at 15% per annum.

 

The term loans are comprised of a $5,500 term loan dueon November 1, 2013 (Term Loan A), a $5,000 convertible term loan due on November 1,2014 (Term Loan B), and a $1,350 convertible term loan due on April 1,2013 (Term Loan C). Amortization on Term Loan A begins on December 1,2010. Term Loan B may be converted into shares of our common stock at a priceof $1.8575 per share at Hercules’ option, or automatically if the 90-day valueweighted adjusted trading price of our common stock exceeds five times theconversion price. We, however, have the right to pay a portion of theconversion amount in cash plus applicable fees, interest and other chargesinstead of shares of common stock if an automatic conversion occurs undercertain circumstances. Term Loan C may be converted into shares of ourcommon stock at a price of $3.276 per share at Hercules’ option.

 

Term Loan A bearsinterest at (i) 12% per annum for the first year, (ii) 18% per annumfor the next year, and (iii) 15% thereafter. All interest on Term Loan Ais payable in cash monthly commencing December 1, 2009. Term Loan B bearsinterest at (i) 14.5% per annum for the first year, (ii) 20.5% perannum for the next year, and (iii) 17.5% thereafter. 2.5% of the intereston Term Loan B is to be “paid in kind” (PIK) compounded monthly. The balance ofthe interest on Term Loan B is payable in cash monthly commencing December 1,2009. Hercules also has the option, in its sole discretion, to require anyand all interest on Term Loan B to be paid in cash, in kind or in shares of ourcommon stock, rather than 2.5% as PIK and the balance in cash. The number ofshares into which accrued interest will be converted will be determined basedon an adjusted 60-day average trading price of our common stock on the date ofHercules’ election to convert the interest into shares. In the event Term Loan A or Term Loan Bis prepaid, a prepayment charge on the principal prepaid of 5% if prepaidduring the first 12 months, 3% if prepaid during the next 12 months and 1%thereafter will be due, provided that, if Term Loan A or Term Loan B is prepaidduring the first 12 months and there is no event of default, Hercules willwaive the prepayment charge on both term loans. Term Loan C bears interestat a rate of 8% per annum and, at the discretion of Hercules, is payable eitherin cash or in kind.  Interest is payablemonthly commencing on May 1, 2010. We may prepay Term Loan C withoutincurring a prepayment penalty charge.

 

The Equipment Loan allows usto request up to $3,000 in borrowings for use in purchasing equipment. We mayborrow, in minimum increments of $250, subject to valid, verified purchaseorders acceptable to Hercules from suppliers approved by Hercules in its solediscretion. In connection with any advances, we will be charged a fee of 3% ofthe purchase price identified in the relevant purchase orders. All customerreceipts related to sales of products financed by the Equipment Loan will beplaced in a lockbox account under the exclusive control of Hercules andcustomer receipts will be applied first to payment of the Equipment Loan fee,second, to the outstanding principal on the Equipment Loan and third, to allother obligations existing under the Equipment Loan. After such application,the excess in the lockbox account will be returned to us, unless an event ofdefault exists or could reasonably be expected to exist, in which case,Hercules may apply the excess in the lockbox account to any obligation underthe Amended Loan Agreement. The Equipment Loan bears interest at a rate of 1.5%per month and Hercules’ commitment terminates on April 30, 2010.

 

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The Amended Loan Agreement contains certain negativecovenants and other stipulations associated with the arrangement, includingcovenants that restrict our ability to incur indebtedness, make investments,make payments in respect of our capital stock, including dividends andrepurchases of common stock, sell or license its assets, and engage inacquisitions without the prior satisfaction of certain conditions.Additionally, the Amended Loan Agreement contains the following financialcovenants (i) minimum consolidated adjusted EBITDA measured on a threemonth rolling basis as of the last day of each month of between $150 and$2,000, until December 31, 2011 and thereafter when $3,000 of consolidatedadjusted EBITDA is required, as more fully described in the table below, (ii) maximumleverage ratio measured on a rolling twelve month basis as of the last day of afiscal quarter commencing June 30, 2010 of 6.0 to 1.0 decreasing to 1.5 to1.0 by the quarter ending June 30, 2012, (iii) minimum consolidatedfixed charge coverage ratio measured on a rolling twelve month basis as of thelast day of a fiscal quarter commencing June 30, 2010 of 0.75 to 1.0increasing to 2.0 to 1.0 by the quarter ending June 30, 2012, and (iv) atleast $1,000 in unrestricted cash at all times. Failure to maintain thefinancial covenants, as well as certain other events, are events of defaultunder the Amended Loan Agreement. Upon an event of default under the AmendedLoan Agreement, Hercules may opt to accelerate and demand payment of all or anypart of our obligations.

 

We were assessed a transaction fee of $450 inconnection with the Hercules Restructuring, which is payable in 12 equalmonthly installments beginning in April 2010. Our obligations under theAmended Loan Agreement are secured by all of our personal property, includingall of our equity interests in our respective subsidiaries.

 

The amended monthly minimumEBITDA test is follows:

 
| **Period Ending**                                                                                                                                                                          | ** ** | **Consolidated  Adjusted  EBITDA** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| December 31, 2009                                                                                                                                                                     |       | $                                  | 1,000      |   |
| January 30, 2010                                                                                                                                                                      |       | 150                                |       |
| February 28, 2010                                                                                                                                                                     |       | 250                                |       |
| March 31, 2010                                                                                                                                                                        |       | 1,000                              |       |
| April 30, 2010                                                                                                                                                                        |       | 200                                |       |
| May 31, 2010                                                                                                                                                                          |       | 300                                |       |
| June 30, 2010                                                                                                                                                                         |       | 1,250                              |       |
| July 31, 2010                                                                                                                                                                         |       | 1,000                              |       |
| August 31, 2010                                                                                                                                                                       |       | 1,000                              |       |
| September 30, 2010 to  November 30, 2010                                                                                                                                         |       | 1,250                              |       |
| December 31, 2010 to  May 31, 2011                                                                                                                                               |       | 1,500                              |       |
| June 30, 2011 to  November 30, 2011                                                                                                                                              |       | 2,000                              |       |
| For each three month  measurement period ending during any fiscal month commencing with the month  ending on December 31, 2011 to and including the month ending  April 30, 2012 |       | 3,000                              |       |
|                                                                                                                                                                                            |            |                                    |            |  |

 

The first monthly maximumleverage ratio test is as of June 30, 2010, at which time it may notexceed 6.00 to 1.00.

 

As of December 31,2009, we were in compliance with the financial covenants required under theAmended Loan Agreement. However, beginning February 5, 2010 we were not incompliance with our borrowing base requirement related to the revolver. As aresult of the covenant violation and because our total leverage ratio exceeds3.00 to 1.00, we are prohibited from satisfying our earn-out obligation relatedto our acquisition of the assets of HIA.

 

On February 10, 2010,Hercules sent us a letter notifying us of an event of default because ourborrowings under the revolving credit facility exceed our borrowing base as of February 5,2010 and charging us default interest of an additional 3% to the applicableregular interest rate for the period starting February 5, 2010. Events ofdefault are continuing and default rate interest will be payable monthly on thesame date as regular interest unless Hercules chooses to demand payment ofdefault interest on another date. Under the terms of our Amended Loan Agreementwith Hercules, late fees are equal to 5% of the past due amount and defaultrate interest is equal to the applicable regular interest rate plus 3%.Hercules may elect to have default rate interest paid in cash, in kind or inshares of our common stock. All default rate interest paid in kind will beadded to the outstanding principal amount on Term Loan B, notwithstanding onwhich loan the interest has accrued.  IfHercules elects to have default rate interest paid in shares, the number ofshares into which such accrued default rate interest will be converted will bedetermined based on the adjusted 60-day average trading price of our commonstock on the date of Hercules’ election to convert the interest into shares.

 

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Herculeshas not chosen to accelerate our obligations under the Amended Loan Agreement,but has expressly not waived any events of default or any of its remedies underthe loan and security agreement. We do not have adequate liquidity to repay alloutstanding amounts under the credit facility and payment acceleration wouldhave a material adverse effect on our liquidity, business, financial conditionand results of operations.

 

Weentered into the Earn-out Agreement with HIA pursuant to which HIA is eligibleto earn additional consideration in respect of the two years (each year, an “Earn-outPeriod”) after the closing of our acquisition of substantially all of the assetsof HIA. We entered into an amendment to the Earn-out Agreement in August 2008that extended the first Earn-out Period from twelve months to fifteen monthsending December 31, 2008, and amended certain financial calculations usedto determine our earn-out liability. Based on satisfaction of certainmilestones described in the Earn-out Agreement, we recorded an adjustment of$1,958 to the purchase price as an increase to goodwill, which reflects theamount that HIA earned under the earn-out for the period ended December 31,2008.

 

Dueto the restrictions in our Amended Loan Agreement and due to our lack ofavailable cash flow, we are prohibited from making the earn-out payment to HIAthat would otherwise be currently due and payable. We are currently indiscussions with HIA regarding the earn out payment and the seller note.

 

***Significant Contractual Obligations***

 

Asof December 31, 2009, our significant contractual obligations were asfollows:

 

**Contractual Obligations**

 
| ** **                   | ** ** | **Payments Due by Period** | ** ** |
|------------------------------|------------|----------------------------|------------|
| ** **                   | ** ** | **Total**                  | ** ** | **Less Than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More  Than 5  Years** | ** ** |
|                         |       |                       |       |   |   |   |   |   |   |   |   |
| Long-term  debt obligations  |       | $                          | 15,081     |   | $ | 4,503 |   | $ | 3,860 |   | $ | 6,718 |   | $ | — |   |
| Capital  lease obligations   |       | 212                        |       | 90 |   | 90 |   | 32 |   | — |   |
| Operating  lease obligations |       | 3,706                      |       | 320 |   | 926 |   | 1,150 |   | 1,310 |   |
| Vendor  obligations          |       | 8,408                      |       | 1,837 |   | 3,113 |   | 1,500 |   | — |   |
|                              |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Inflation***

 

Todate, the effects of inflation on our financial results have not beensignificant; however, we cannot be certain that inflation will not affect usmaterially in the future.

 

***Off Balance Sheet Arrangements***

 

Wedo not currently have any off-balance sheet arrangements.

 

***New Accounting Standards***

 

Pursuant to Statement ofFinancial Accounting Standard No. 168, *TheFASB Accounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles,*issuedby the Financial Accounting Standards Board (FASB) in 

 

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June 2009 andeffective for us beginning July 1, 2009, the Financial AccountingStandards Board Accounting Standards Codification (referred to as theCodification or the ASC) officially became the single source of authoritativenongovernmental generally accepted accounting principles (GAAP), supersedingexisting FASB, American Institute of Certified Public Accountants, EmergingIssues Task Force (EITF), and related accounting literature. Only one level ofauthoritative GAAP now exists and all other accounting literature is considerednon-authoritative. The Codification reorganizes the thousands of GAAPpronouncements into roughly 90 accounting topics and displays them using aconsistent structure. Also included in the Codification is relevant SECguidance organized using the same topical structure in separate sections withinthe Codification. This has an impact on the disclosures in our financialstatements since all references to authoritative accounting literature will bethrough the Codification.

 

In August 2009, the FASB issued AccountingStandards Update (ASU) No. 2009-05 which provides clarification that incircumstances in which a quoted price in an active market for the identicalliability is not available, a reporting entity is required to measure fairvalue using one or more of the following methods: (i) a valuationtechnique that uses (a) the quoted market price of the identical liabilitywhen trades as an asset or (b) quoted prices for similar liabilities orsimilar liabilities when trades as assets, and/or (ii) a valuation techniquethat is consistent with the principles of ASC Topic 820. The new accountingpronouncement also clarifies that when estimating the fair value of aliability, a reporting entity is not required to adjust inputs relating to theexistence of transfer restrictions on that liability. The adoption of thisstandard did not have an impact on our consolidated financial statements.

 

In April 2009, theFASB provided guidance as codified in ASC Topic 820 on how to determine when atransaction is not orderly and for estimating fair value when there has been asignificant decrease in the volume and level of activity for an asset orliability. The guidance requires disclosure of the inputs and valuationtechniques used, as well as any changes in valuation techniques and inputs usedduring the period to measure fair value in interim and annual periods. Inaddition, the presentation of the fair value hierarchy is required to bepresented by major security type. The provisions set forth in the new guidancewere effective for interim periods ending after June 15, 2009. Theadoption of the new standard did not have a material impact on our consolidatedfinancial statements.

 

InApril 2009, the FASB provided guidance as codified in ASC Topics 270 and825 to require disclosures about the fair value of financial instruments ininterim financial statements as well as in annual financial statements. Inaddition, the guidance requires disclosures of the methods and significantassumptions used to estimate the fair value of those financial instruments. Weadopted this new guidance and it did not have a material impact on our consolidatedfinancial statements.

 

InMarch 2008, the FASB provided guidance about disclosures about derivative instruments and hedging activities as codifiedin ASC 815. The guidance requires enhanced disclosure about an entity’sderivative and hedging activities. The objective of the guidance is to provideusers of financial statements with an enhanced understanding of how and why anentity uses derivative instruments: how an entity accounts for derivativeinstruments and related hedged items and how derivative instruments and relatedhedged items affect an entity’s financial position, financial performance, andcash flows. SFAS 161 is effective for fiscal years beginning after November 15,2008. We adopted this pronouncement on January 1, 2009 and it did not have a material impact onour consolidated financial statements.

 

We adopted the guidancerelated to Accounting for convertible debt instruments that may be settled incash upon conversion as codified in ASC 470-20 as of January 1, 2009. Thepronouncement applies to convertible debt instruments that, by their statedterms, may be settled in cash (or other assets) upon conversion, includingpartial cash settlement, unless the embedded conversion option is required tobe separately accounted for as a derivative under ASC 815. The pronouncementrequires that the issuer of a convertible debt instrument within its scopeseparately account for the liability and equity components in a manner thatreflects the issuer’s nonconvertible debt borrowing rate when interest cost isrecognized in subsequent periods. The excess of the principal amount of theliability component over its initial fair value must be amortized to interestcost using the effective interest method. Because the Company is required toseparately account for the embedded conversion options contained in itsconvertible debt instruments, the adoption of this pronouncement did not have amaterial impact on the consolidated financial statements.

 

In June 2008, theFASB provided guidance related to determining whether an instrument (or anembedded feature) is indexed to an entity’s own stock as codified in ASC815-40. ASC 815 specifies that a contract issued or held by a company that isboth indexed to its own stock and classified in stockholders’ equity is notconsidered a derivative instrument for purposes of applying ASC 815. Thepronouncement provides guidance for applying the requirements of ASC 815, requiringthat both an instrument’s contingent exercise provisions and its settlementprovisions be evaluated to determine whether the instrument (or embeddedfeature) is indexed solely to an entity’s own stock. We adopted the guidance onJanuary 1, 2009 and it did not have a material impact on our consolidatedfinancial statements.

 

InDecember 2007, the FASB provided guidance as codified in ASC 805 relatedto business combinations. The guidance retains the fundamental requirementsthat the acquisition method of accounting be used for all business 

 

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combinationsand for an acquirer to be identified for each business combination. Theobjective of this pronouncement is to improve the relevance, and comparabilityof the information that a reporting entity provides in its financial reportsabout a business combination and its effects. To accomplish that, thepronouncement establishes principles and requirements for how the acquirerrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, and any non-controlling interest in theacquiree, recognizes and measures the goodwill acquired in the businesscombination or a gain from a bargain purchase and determines what informationto disclose to enable users of the financial statements to evaluate the natureand financial effects of the business combination. This Statement appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15,2008 and may not be applied before that date. We adopted the guidance on January 1,2009.

 

**Item 7A. Quantitative and Qualitative Disclosures About Market Risk**

 

Notrequired.

 

**Item 8. Financial Statements and Supplementary Data**

 

**INFOLOGIX, INC.**

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| Reports  of Independent Registered Public Accounting Firm                                                       | 50 |
|-----------------------------------------------------------------------------------------------------------------|----|
| Consolidated  Balance Sheets as of December 31, 2009 and 2008                                              | 51 |
| Consolidated  Statements of Operations for the Years Ended December 31, 2009, 2008 and  2007               | 52 |
| Consolidated Statements of Stockholders’ Equity for  the Years Ended December 31, 2009, 2008 and 2007 | 53 |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2009, 2008 and 2007                | 54 |
| Notes to Consolidated Financial Statements                                                                      | 55 |

 

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**Reportof Independent Registered Public Accounting Firm**

 

To the Board of Directorsand Stockholders

InfoLogix, Inc.

 

We have audited theaccompanying consolidated balance sheets of InfoLogix, Inc. andsubsidiaries as of December 31, 2009 and 2008, and the relatedconsolidated statements of operations, stockholders’ equity (deficit), and cashflows for each of the three years in the period ended December 31,2009.  Our audits also included thefinancial statement schedule of InfoLogix, Inc. listed in Item 15(a).  These financial statements and financialstatement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of InfoLogix, Inc. andsubsidiaries as of December 31, 2009 and 2008, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2009, in conformity with U.S. generally accepted accountingprinciples.  Also, in our opinion, therelated financial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly in allmaterial respects the information set forth therein.

 

We were not engaged toexamine management’s assessment of the effectiveness of InfoLogix, Inc.’sinternal control over financial reporting as of December 31, 2009,included in the accompanying *Management’s Report on Internal Control OverFinancial Reporting* and, accordingly, we do not express an opinionthereon.

 

The accompanyingconsolidated financial statements have been prepared assuming the Company willcontinue as a going concern.  Asdiscussed in Note A to the consolidated financial statements, the Company hassuffered recurring losses from operations, has negative working capital and anaccumulated deficit as of December 31, 2009. This raises substantial doubtabout the Company’s ability to continue as a going concern.  Management’s plans in regard to these mattersare also described in Note A.  Theconsolidated financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

 

 

/s/ McGladrey &Pullen, LLP

 

Blue Bell, Pennsylvania

April 15, 2010

 

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**INFOLOGIX, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(in thousands, except share amounts)**

** **
| ** **                                                                                                                                                                      | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                      | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                                                                                                                                                                            | ** ** | ** **            |       |   |   |
| **ASSETS**                                                                                                                                                                      | ** ** | ** **            |       |   |   |
| Currents assets:                                                                                                                                                                |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                       |       | $                     | 1,018      |   | $ | 3,037 |   |
| Accounts and other receivables (net of allowance  for doubtful accounts in the amount of $2 and $352 as of December 30, 2009  and 2008, respectively)                      |       | 14,158                |       | 22,610 |   |
| Unbilled revenue                                                                                                                                                                |       | 252                   |       | 1,498 |   |
| Inventory, net                                                                                                                                                                  |       | 1,089                 |       | 1,775 |   |
| Prepaid expenses and other current assets                                                                                                                                       |       | 674                   |       | 1,228 |   |
|                                                                                                                                                                            |       |                  |       |   |   |
| Total current assets                                                                                                                                                            |       | 17,191                |       | 30,148 |   |
| Property and equipment, net                                                                                                                                                     |       | 600                   |       | 944 |   |
| Intangible assets, net                                                                                                                                                          |       | 7,343                 |       | 8,709 |   |
| Goodwill                                                                                                                                                                        |       | 10,337                |       | 10,540 |   |
| Deferred financing costs                                                                                                                                                        |       | 471                   |       | 501 |   |
|                                                                                                                                                                            |       |                  |       |   |   |
| Total assets                                                                                                                                                                    |       | $                     | 35,942     |   | $ | 50,842 |   |
|                                                                                                                                                                            |       |                  |       |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                                                                        | ** ** | ** **            |       |   |   |
| Current liabilities:                                                                                                                                                            |       |                  |       |   |   |
| Accounts payable                                                                                                                                                                |       | $                     | 7,591      |   | $ | 11,099 |   |
| Line of credit                                                                                                                                                                  |       | 7,559                 |       | 9,000 |   |
| Current portion of notes payable                                                                                                                                                |       | 12,336                |       | 12,077 |   |
| Current portion of capital lease obligations                                                                                                                                    |       | 81                    |       | 86 |   |
| Sales tax payable                                                                                                                                                               |       | 276                   |       | 477 |   |
| Accrued expenses                                                                                                                                                                |       | 3,183                 |       | 3,090 |   |
| Accrued earn out payable                                                                                                                                                        |       | 1,958                 |       | 1,958 |   |
| Deferred revenue                                                                                                                                                                |       | 1,691                 |       | 276 |   |
| Other liabilities                                                                                                                                                               |       | —                |       | 900 |   |
|                                                                                                                                                                            |       |                  |       |   |   |
| Total current liabilities                                                                                                                                                       |       | 34,475                |       | 38,963 |   |
| Notes payable, net of current maturities                                                                                                                                        |       | 231                   |       | 4,215 |   |
| Capital lease obligations, net of current  maturities                                                                                                                           |       | 114                   |       | 186 |   |
| Warrant liability                                                                                                                                                               |       | 2,762                 |       | — |   |
| Deferred income taxes                                                                                                                                                           |       | 592                   |       | — |   |
| Other liabilities                                                                                                                                                               |       | 113                   |       | — |   |
|                                                                                                                                                                            |       |                  |       |   |   |
| Total liabilities                                                                                                                                                               |       | 38,487                |       | 43,364 |   |
|                                                                                                                                                                            |       |                  |       |   |   |
| Commitments and Contingencies                                                                                                                                                   |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                                                                      |       |                  |       |   |   |
| Preferred stock, par value $.00001; authorized  10,000,000 shares; none issued or outstanding                                                                                   |       | —                |       | — |   |
| Common stock, par value $.00001; authorized  100,000,000 shares; issued and outstanding 3,722,156 shares and 1,024,091  shares at December 31, 2009 and 2008, respectively |       | —                |       | — |   |
| Additional paid in capital                                                                                                                                                      |       | 38,132                |       | 25,766 |   |
| Accumulated deficit                                                                                                                                                             |       | (40,676               | )          | (18,288 | ) |
|                                                                                                                                                                            |       |                  |       |   |   |
| Total stockholders’ equity (deficit)                                                                                                                                       |       | (2,544                | )          | 7,478 |   |
|                                                                                                                                                                            |       |                  |       |   |   |
| Total liabilities and stockholders’ equity  (deficit)                                                                                                                      |       | $                     | 35,942     |   | $ | 50,842 |   |

 

The accompanying notes are an integral part of these financialstatements

 

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**INFOLOGIX, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(in thousands, except share and per share amounts)**

** **
| ** **                                               | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                     |       |                             |       |   |   |   |   |
| Net  revenues                                            |       | $                                | 86,916     |   | $ | 100,716 |   | $ | 78,774 |   |
| Cost  of revenues                                        |       | 67,273                           |       | 74,176 |   | 58,049 |   |
|                                                     |       |                             |       |   |   |   |   |
| Gross  profit                                            |       | 19,643                           |       | 26,540 |   | 20,725 |   |
| Selling,  general and adminstrative expenses             |       | 27,859                           |       | 32,243 |   | 25,211 |   |
|                                                     |       |                             |       |   |   |   |   |
| Operating  loss                                          |       | (8,216                           | )          | (5,703 | ) | (4,486 | ) |
| Interest  expense                                        |       | (5,855                           | )          | (2,735 | ) | (873 | ) |
| Interest  income                                         |       | 12                               |       | 140 |   | 458 |   |
| Loss  on extinguishment of debt                          |       | (7,197                           | )          | (1,451 | ) | — |   |
| Goodwill  impairment                                     |       | (205                             | )          | — |   | — |   |
| Fair  value adjustment on derivative liabilities         |       | (282                             | )          | — |   | — |   |
|                                                     |       |                             |       |   |   |   |   |
| Loss  before income tax (expense) benefit                |       | (21,743                          | )          | (9,749 | ) | (4,901 | ) |
| Income  tax (expense) benefit                            |       | (645                             | )          | (3,435 | ) | 1,712 |   |
|                                                     |       |                             |       |   |   |   |   |
| Net  loss                                                |       | $                                | (22,388    | ) | $ | (13,184 | ) | $ | (3,189 | ) |
|                                                     |       |                             |       |   |   |   |   |
| Loss  per share - basic and diluted                      |       | $                                | (16.88     | ) | $ | (13.04 | ) | $ | (3.30 | ) |
|                                                     |       |                             |       |   |   |   |   |
| Weighted  average shares outstanding - basic and diluted |       | 1,326,389                        |       | 1,011,082 |   | 966,927 |   |

 

The accompanying notes are an integral part of these financialstatements

 

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**INFOLOGIX, INC.**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)**

**(in thousands, except share and per share amounts)**

** **
| ** **                                          | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | **Retained**           | ** ** | **Total**            | ** ** |
|-----------------------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|------------------------|------------|----------------------|------------|
| ** **                                          | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Earnings**   | ** ** | **Stockholders’** | ** ** |
| ** **                                          | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **(Deficit)**          | ** ** | **Equity (Deficit)** | ** ** |
|                                                |       |             |       |        |       |           |       |                   |       |                 |       |
| Balance,  December 31, 2006                    |       | 943,827          |       | $           | —     |           | $          | 17,803                 |       | $                    | (1,915     | ) | $ | 15,888 |   |
|                                                |       |             |       |        |       |           |       |                   |       |                 |       |
| Common  stock issued - acquisitions                 |       | 51,746           |       | —      |       | 4,883          |       | —                 |       | 4,883                |       |
|                                                |       |             |       |        |       |           |       |                   |       |                 |       |
| Common  stock issued to advisor                     |       | 800              |       | —      |       | 66             |       | —                 |       | 66                   |       |
|                                                |       |             |       |        |       |           |       |                   |       |                 |       |
| Stock-based  compensation                           |       | —           |       | —      |       | 828            |       | —                 |       | 828                  |       |
|                                                |       |             |       |        |       |           |       |                   |       |                 |       |
| Net  loss                                           |       | —           |       | —      |       | —         |       | (3,189                 | )          | (3,189               | )          |
|                                                |       |             |       |        |       |           |       |                   |       |                 |       |
| Balance,  December 31, 2007                    |       | 996,372          |       | —      |       | 23,580         |       | (5,104                 | )          | 18,476               |       |
|                                                |       |             |       |        |       |           |       |                   |       |                 |       |
| Stock-based  compensation                           |       | —           |       | —      |       | 960            |       | —                 |       | 960                  |       |
|                                                |       |             |       |        |       |           |       |                   |       |                 |       |
| Common  stock issued to advisor                     |       | 800              |       | —      |       | 38             |       | —                 |       | 38                   |       |
|                                                |       |             |       |        |       |           |       |                   |       |                 |       |
| Common  stock issued - employee stock purchase plan |       | 6,919            |       | —      |       | 158            |       | —                 |       | 158                  |       |
|                                                |       |             |       |        |       |           |       |                   |       |                 |       |
| Common  stock issued - acquisition                  |       | 20,000           |       | —      |       | 1,030          |       | —                 |       | 1,030                |       |
|                                                |       |             |       |        |       |           |       |                   |       |                 |       |
| Net  loss                                           |       | —           |       | —      |       | —         |       | (13,184                | )          | (13,184              | )          |
|                                                |       |             |       |        |       |           |       |                   |       |                 |       |
| Balance,  December 31, 2008                    |       | 1,024,091        |       | —      |       | 25,766         |       | (18,288                | )          | 7,478                |       |
|                                                |       |             |       |        |       |           |       |                   |       |                 |       |
| Stock-based  compensation                           |       | —           |       | —      |       | 853            |       | —                 |       | 853                  |       |
|                                                |       |             |       |        |       |           |       |                   |       |                 |       |
| Common  stock issued - employee stock purchase plan |       | 6,275            |       | —      |       | 65             |       | —                 |       | 65                   |       |
|                                                |       |             |       |        |       |           |       |                   |       |                 |       |
| Warrant  issued                                     |       | —           |       | —      |       | 78             |       | —                 |       | 78                   |       |
|                                                |       |             |       |        |       |           |       |                   |       |                 |       |
| Equity  component of convertible debt security      |       |             |       |        |       | 2,368          |       |                   |       | 2,368                |       |
|                                                |       |             |       |        |       |           |       |                   |       |                 |       |
| Common  stock issued upon conversion of debt        |       | 2,691,790        |       |        |       | 9,002          |       |                   |       | 9,002                |       |
|                                                |       |             |       |        |       |           |       |                   |       |                 |       |
| Net  loss                                           |       | —           |       | —      |       | —         |       | (22,388                | )          | (15,611              | )          |
|                                                |       |             |       |        |       |           |       |                   |       |                 |       |
| Balance,  December 31, 2009                    |       | 3,722,156        |       | $           | —     |           | $          | 38,132                 |       | $                    | (40,676    | ) | $ | (2,544 | ) |

 

The accompanying notes are an integral part of these financialstatements.

 

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**INFOLOGIX, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands, except share and per share amounts)**

 
| ** **                                                          | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                          | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Operating  activities:                                              |       |                             |       |   |   |   |   |
| Net  loss                                                           |       | $                                | (22,388    | ) | $ | (13,184 | ) | $ | (3,189 | ) |
| Adjustments  to reconcile net loss to operating cash flow:          |       |                             |       |   |   |   |   |
| Depreciation  and amortization                                      |       | 1,883                            |       | 2,533 |   | 1,667 |   |
| Allowance  for doubtful accounts receivable                         |       | 476                              |       | (57 | ) | 91 |   |
| Loss  on write-down and disposal of equipment and intangible assets |       | 281                              |       | 1,340 |   | 274 |   |
| Goodwill  impairment                                                |       | 205                              |       |   |   |   |   |
| Inventory  obsolescence                                             |       | 1,117                            |       | (64 | ) | 286 |   |
| Loss  on extinguishment of debt                                     |       | 6,777                            |       | 1,451 |   | — |   |
| Change  in fair value of warrant liabilities                        |       | 282                              |       | — |   | — |   |
| Amortization  of deferred financing costs                           |       | 536                              |       | 720 |   | 11 |   |
| Amortization  of debt discount                                      |       | 76                               |       | — |   | — |   |
| Paid  in kind interest                                              |       | 366                              |       | 322 |   | — |   |
| Accrued  interest income on note receivable                         |       | —                           |       | (5 | ) | — |   |
| Share  based compensation                                           |       | 853                              |       | 998 |   | 894 |   |
| Interest  charge as a result of warrant liability                   |       | 292                              |       |   |   |   |   |
| Deferred  income tax benefit (expense)                              |       | 592                              |       | 3,407 |   | (1,720 | ) |
| Changes  in:                                                        |       |                             |       |   |   |   |   |
| Accounts  receivable                                                |       | 7,978                            |       | (2,020 | ) | (8,519 | ) |
| Unbilled  revenue                                                   |       | 1,245                            |       | (446 | ) | (1,052 | ) |
| Inventory                                                           |       | (430                             | )          | 188 |   | 107 |   |
| Prepaid  expenses and other current assets                          |       | 554                              |       | (613 | ) | 239 |   |
| Accounts  payable                                                   |       | (3,799                           | )          | 2,571 |   | 1,893 |   |
| Sales  tax payable                                                  |       | (201                             | )          | 178 |   | (43 | ) |
| Accrued  expenses                                                   |       | 474                              |       | (815 | ) | 2,133 |   |
| Deferred  revenue                                                   |       | 1,415                            |       | 201 |   | 75 |   |
| Net  cash used in operating activities                              |       | (1,416                           | )          | (3,295 | ) | (6,853 | ) |
|                                                                |       |                             |       |   |   |   |   |
| Investing  activities:                                              |       |                             |       |   |   |   |   |
| Acquisitions,  net of cash acquired                                 |       | —                           |       | (2,967 | ) | (3,159 | ) |
| Acquisition  of property, software and equipment                    |       | (446                             | )          | (2,559 | ) | (1,904 | ) |
| Proceeds  from disposal of property and equipment                   |       | —                           |       | 45 |   | — |   |
| Promissory  notes issued                                            |       | —                           |       | (200 | ) | — |   |
| Repayment  of promissory notes                                      |       | —                           |       | 50 |   | — |   |
| Net  cash used in investing activities                              |       | (446                             | )          | (5,631 | ) | (5,063 | ) |
|                                                                |       |                             |       |   |   |   |   |
| Financing  activities:                                              |       |                             |       |   |   |   |   |
| Payments  received from employee stock purchase plan                |       | 65                               |       | 158 |   | — |   |
| Payment  of financing costs                                         |       |                             |       | (1,715 | ) | (68 | ) |
| Issuance  of Hercules note payable                                  |       | —                           |       | 12,000 |   | — |   |
| Issuance  of Herules line of credit                            |       | —                           |       | 7,500 |   | — |   |
| Final  repayment of Sovereign notes payable                         |       | —                           |       | (3,292 | ) | — |   |
| Final  repayment of Sovereign line of credit                        |       | —                           |       | (9,334 | ) | — |   |
| Proceeds  from long-term debt                                       |       | —                           |       | — |   | 2,000 |   |
| Repayment  of long-term debt and capital leases                     |       | (767                             | )          | (330 | ) | (801 | ) |
| Net  borrowings from line of credit                                 |       | 545                              |       | 875 |   | 4,004 |   |
| Net  cash provided by (used in) financing activities                |       | (157                             | )          | 5,862 |   | 5,135 |   |
|                                                                |       |                             |       |   |   |   |   |
| Net  change in cash and cash equivalents                            |       | (2,019                           | )          | (3,064 | ) | (6,781 | ) |
|                                                                |       |                             |       |   |   |   |   |
| Cash  and cash equivalents at beginning of year                     |       | 3,037                            |       | 6,101 |   | 12,882 |   |
|                                                                |       |                             |       |   |   |   |   |
| Cash  and cash equivalents at end of year                           |       | $                                | 1,018      |   | $ | 3,037 |   | $ | 6,101 |   |

 

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**INFOLOGIX, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(in thousands, except share information)**

 

**NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

***Nature of business***

 

InfoLogix, Inc.(the Company) provides mobileworkforce technology solutions by enabling real time data communicationsanywhere in an enterprise. The Company provides wireless network design,hardware, software, consulting, system integration and network and devicemanagement solutions.

 

OnNovember 20, 2009, the Company and its subsidiaries completed arestructuring transaction with Hercules Technology Growth Capital, Inc.(Hercules) and Hercules Technology I, LLC, a wholly-owned subsidiary ofHercules (HTI), pursuant to which $5,000 of the Company’s outstanding debt wasconverted into shares of common stock and a warrant to purchase shares of theCompany’s common stock, and the remaining outstanding debt with Hercules wasotherwise restructured (the Hercules Restructuring). The Hercules Restructuringalso provided the Company with up to $5,000 in additional availability under arevolving credit facility with Hercules. In connection with the HerculesRestructuring, on November 20, 2009, the Company entered into a DebtConversion Agreement with HTI, pursuant to which HTI exchanged $5,000 inexisting indebtedness for (i) 2,691,790 shares of common stock, and (ii) awarrant to purchase 672,948 shares of common stock.  As a result of the Hercules Restructuring,the Company experienced a change in control and under the terms of the DebtConversion Agreement, HTI has certain corporate governance and other rightswith respect to the Company.

 

Inconnection with the Hercules Restructuring, on November 20, 2009, theCompany and its subsidiaries (collectively, the Borrowers) and Hercules enteredinto an Amended and Restated Loan and Security Agreement (Amended LoanAgreement), whereby the Borrowers and Hercules agreed to restructure ourremaining debt not converted into shares of common stock and a warrant pursuantto the Debt Conversion Agreement. The Amended Loan Agreement amended andrestated the Company’s prior loan and security agreement with Hercules. TheAmended Loan Agreement was further amended on February 19, 2010 and April 6,2010. See Note V — Subsequent Events. On the same date and as a condition tothe Hercules Restructuring, the Company also restructured our earn outobligation related to its 2008 acquisition of the assets of Delta HealthSystems, Inc.

 

***Basis ofpresentation***

 

Theaccompanying consolidated financial statements include the accounts ofInfoLogix, Inc. and its wholly-owned subsidiaries: InfoLogix SystemsCorporation, OPT Acquisition, LLC, Embedded Technologies, LLC, andInfoLogix—DDMS, Inc. All significant intercompany balances andtransactions have been eliminated in consolidation.

 

OnJanuary 5, 2010, the Company completed a reverse stock split of its issuedand outstanding common stock by a ratio of one-for-twenty-five. All share and pershare amounts in the accompanying consolidated financial statements have beenadjusted to retroactively reflect the reverse stock split.

 

Theaccompanying financial statements for the year ended December 31, 2009have been prepared on a going concern basis, which contemplates continuingoperations, securing additional debt or equity financing, selling certainassets, and realizing assets and liabilities in the ordinary course ofbusiness. However, the Company has incurred significant net losses from 2007through 2009, including a net loss in 2009 of $22,388. The Company’s losses areattributable to the difficult economic conditions under which it operates,challenges related to its transition over the last several years from beingprimarily a seller of infrastructure and hardware to becoming a provider ofcomprehensive enterprise mobility solutions, and the write-off of certain cashand non-cash expenses related to the Hercules Restructuring and non-realizableassets. 

 

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Asa result of the Company’s capital and debt structure and recurring losses, ithas substantial near-term liquidity requirements related to the repayment of aseller note that becomes due on September 30, 2010, the revolving line ofcredit that comes due on May 19, 2011 and to earn out payments for pastacquisitions. The Company does not currently expect to generate sufficient cashflow from operations to fund those obligations. As a result, the Company’sindependent registered public accounting firm has included an explanatoryparagraph which raises substantial doubt as to its ability to continue as agoing concern in its report on the consolidated financial statements for theyear ended December 31, 2009.

 

TheCompany has undertaken a series of actions to reduce costs and is pursuingvarious initiatives to continue as a going concern and provide for its futuresuccess. The Company’s plans to improve liquidity contemplates additional costcontrol measures and may include additional financing and further restructuringof its debt. The Company’s ability to implement these plans successfully isdependent on many circumstances outside of its direct control, includinggeneral economic conditions and the financial strength of its customers. Anyadditional financing the Company is able to secure will likely be subject to anumber of conditions and involve additional costs. Given the current negativeconditions in the economy generally and the credit markets in particular, thereis uncertainty as to whether the Company will be able to generate sufficientliquidity to repay its outstanding debt, to make its earn out payments and tomeet working capital needs. If the Company is unable to improve its liquidityposition, it may not be able to continue as a going concern.

 

Thepurchase price of acquired companies is allocated between tangible andintangible assets acquired and liabilities assumed from the acquired businessbased on their estimated fair values, with the residual of the purchase pricerecorded as goodwill. The results of operations of acquired businesses areincluded in the Company’s results from the dates of acquisition.

 

Pursuant to Statement of FinancialAccounting Standard No. 168, *The FASBAccounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles,*issuedby the Financial Accounting Standards Board (FASB) in June 2009 andeffective for the Company beginning July 1, 2009, the Financial AccountingStandards Board Accounting Standards Codification (referred to as theCodification or the ASC) officially became the single source of authoritativenongovernmental generally accepted accounting principles (GAAP), supersedingexisting FASB, American Institute of Certified Public Accountants, EmergingIssues Task Force (EITF), and related accounting literature. Only one level ofauthoritative GAAP now exists and all other accounting literature is considerednon-authoritative. The Codification reorganizes the thousands of GAAPpronouncements into roughly 90 accounting topics and displays them using aconsistent structure. Also included in the Codification is relevant SECguidance organized using the same topical structure in separate sections withinthe Codification. This has an impact on the disclosures in the consolidatedfinancial statements since all references to authoritative accountingliterature will be through the Codification.

 

***Use of estimates***

 

Thepreparation of financial statements in conformity with U.S. GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of netrevenues and expenses during the reporting period.

 

Inpreparing the financial statements, management has utilized availableinformation, including our past history, industry standards and the currenteconomic environment, among other factors, in forming its estimates andjudgments. Actual results may differ from these estimates. In addition, othercompanies may utilize different estimates, which may impact the comparabilityof our results of operations to those of companies in similar businesses.

 

Manyof the amounts and percentages presented in these notes to the consolidatedfinancial statements have been rounded, and all dollar amounts are presented inthousands, except share and per share information.

 

***Cash and cashequivalents***

 

TheCompany considers all highly liquid investments with original maturities ofthree months or less to be cash equivalents. Pursuant to a covenant in itsAmended Loan Agreement with Hercules (Note E), the Company is required tomaintain a minimum cash balance of $1,000.

 

***Fairvalue measurements***

 

TheCompany categorizes its financial instruments into a three-level fair valuehierarchy that prioritizes the inputs to valuation techniques used to measurefair value into three broad levels. The fair value hierarchy gives the highestpriority to quoted prices in active markets for identical assets or liabilities(Level 1) and the lowest priority to unobservable inputs 

 

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(Level3). If the inputs used to measure fair value fall within different levels ofthe hierarchy, the category level is based on the lowest priority level inputthat is significant to the fair value measurement of the instrument. Financialassets recorded at fair value on the Company’s consolidated balance sheets arecategorized as follows:

 

·                          Level 1: Observable inputs such as quotedprices for identical assets or liabilities in active markets;

·                          Level 2: Inputs, other than the quotedprices in active markets, that are observable either directly or indirectly;and

·                          Level 3: Unobservable inputs for whichthere is little or no market data, which require the reporting entity todevelop its own assumptions.

 

The fair value hierarchyalso requires an entity to maximize the use of observable inputs and minimizethe use of unobservable inputs in measuring fair value.

 

***Concentrations of credit risk***

 

TheCompany grants credit, generally without collateral, to its customers, whichare primarily in the healthcare and commercial markets. Consequently, theCompany is subject to potential credit risk related to changes in economicconditions within those markets. However, management believes that its billingand collection policies are adequate to minimize the potential credit risk.

 

TheCompany has a policy of reserving for uncollectible accounts based on its bestestimate of the amount of probable credit losses in its existing accountsreceivable. The Company periodically reviews its accounts receivable todetermine whether an allowance is necessary based on an analysis of past dueaccounts and other factors that may indicate that the realization of an accountmay be in doubt including historical experience and current economic and marketconditions. Account balances deemed to be uncollectible are charged to theallowance after all means of collection have been exhausted and the potentialfor recovery is considered remote.

 

***Inventory***

 

Inventoryis stated at the lower of cost or market. Cost is determined using the firstin, first out method.

 

TheCompany periodically reviews its inventories and makes provisions as necessaryfor estimated obsolete and slow-moving goods. The Company marks down inventoryto an amount equal to the difference between cost of inventory and theestimated market value based upon assumptions about future demands, sellingprices and market conditions. The creation of such provisions results in awrite-down of inventory to net realizable value and a charge to cost ofrevenues.

 

***Property andequipment***

 

Propertyand equipment are recorded at cost less accumulated depreciation. Depreciation offurniture and equipment is generally computed using the straight line method atrates based on the estimated useful lives of the related assets. Amortizationof leasehold improvements is computed over the lesser of the estimated usefullives or the lease term of the related assets using the straight line method.Maintenance and repairs that neither add to the value of the asset norappreciably prolong its useful life are charged to expense as incurred. The estimated lives of property andequipment are as follows:

 
| Equipment              |   | 3 to 5 years           |
|------------------------|--------|------------------------|
| Furniture and fixtures |   | 5 years                |
| Leasehold improvements |   | Lease term or 5  years |

*** ***

***Goodwill andother intangible assets***

 

Goodwillis the excess of the purchase price paid over the fair value of the net assetsof businesses acquired. Goodwill is tested at least annually for impairment bycomparing the fair value of the recorded assets to their carrying amount. Ifthe carrying amount of the intangible asset exceeds its fair value, animpairment loss is recognized. The annual evaluation of intangible assetsrequire the use of estimates about future operating results of each reportingunit to determine their estimated fair value. Changes in forecasted operationscan affect these estimates. Once an impairment of an intangible 

 

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assethas been recorded, it cannot be reversed. At December 31, 2009, theCompany recorded a charge of $205 related to the impairment of goodwill fromits acquisition of AMTSystems, Inc.

 

Otherintangible assets consist primarily of non-contractual customer relationships,sales contracts, patents and technology. Intangible assets that have adefinite-life are amortized on a straight-line basis over their estimateduseful lives. The Company reviews the carrying value of all intangible assetsfor possible impairment whenever events or changes in circumstances indicatethat their carrying value may not be recoverable. If the carrying amounts ofthe intangible assets that have a definite-life exceed their fair value, animpairment loss is recognized.  At December 31,2009, the Company recorded a charge of $281 for impairment of certain softwareand developed technology.

 

Theweighted average remaining useful lives for financial reporting and taxpurposes are as follows:

 
| ** **                  | ** ** | **Book**   | ** ** | **Tax** | ** ** |
|-----------------------------|------------|------------|------------|---------|------------|
| Patents                     |       | 11         |       | 10      |       |
| Computer  software          |       | 2          |       | 2       |       |
| Developed  technology       |       | 0          |       | 1       |       |
| Customer  lists             |       | 6          |       | 14      |       |
| Non  compete agreements     |       | 2          |       | 14      |       |
| Trademarks  and trade names |       | Indefinite |       | 14      |       |

 

***Deferredfinancing costs***

 

Deferredfinancing costs that are incurred by the Company in connection with theissuance of debt are deferred and amortized to interest expense in theconsolidated statement of operations over the life of the underlyingindebtedness, adjusted to reflect any early repayments.

 

***Impairment oflong-lived assets***

 

TheCompany assesses the potential impairment of long-lived assets whenever eventsor changes in circumstances indicate that the carrying value may not berecoverable. An asset’s value is impaired if management’s estimate of theaggregate future cash flows, undiscounted and without interest charges, to begenerated by the asset are less than the carrying value of the asset. Whenestimating future cash flows, the Company considers factors such as expectedfuture operating income and historical trends, as well as the effects of demandand competition. To the extent impairment has occurred, the loss is measured asthe excess of the carrying amount of the asset over the estimated fair value ofthe asset. Such estimates require the use of judgment and numerous subjectiveassumptions, which, if actual experience varies, could result in materialdifferences in the requirements for impairment charges.

 

***Softwarecapitalization***

 

TheCompany capitalizes the cost of internal use software. Costs for preliminarystage projects are expensed as incurred while application stage projects arecapitalized. The Company ceases capitalizing costs and commences amortizationof the software on a straight-line basis over the estimated useful life,typically three to five years, when it is ready for intended use.

 

TheCompany capitalizes certain costs related to the acquisition and development ofsoftware to be sold or licensed to its customers.* *The Company expenses as incurredthose costs incurred prior to achieving technological feasibility andcapitalizes those arising after technological feasibility has been achieved.The Company amortizes the capitalized costs using the straight-line method overthe developed product’s estimated economic life. The Company ceasescapitalizing costs when the software applications are ready for generalrelease.

 

***Revenuerecognition***

 

Netrevenues are generated through product sales, warranty and maintenanceagreements, professional consulting, programming and engineering services,long-term support services, and educational learning programs. Net revenuesfrom 

 

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productsales are recognized when both the title and risk of loss transfer to thecustomer, generally upon shipment. The Company generates net revenues from thesale of extended warranties on wireless and mobile hardware and systems,including mobile workstations, computers, peripherals, and related products.Revenue from the sale of component extended warranties are recognized as netrevenue upon execution of the warranty agreement. The Company does not bearassociated warranty risk because it has contracted with third parties, asprimary obligors, to fully assume all risks and obligations.

 

TheCompany also generates revenue from consulting and other professional serviceson either a fee-for service or fixed fee basis. Revenue from consulting andother professional services that is contracted as fee-for-service is recognizedin the period in which the services are performed. Direct costs for travel andaccommodations are reimbursable in accordance with the contract terms and arerecognized as net revenue in the period the related expense is incurred.Revenue from the sale of proprietary learning technologies and those consultingand other professional services provided on a fixed-fee basis is recognizedaccording to a proportionate method of revenue recognition and is recognizedratably over the contract period based upon actual project hours completedcompared to total budgeted project hours.

 

TheCompany records amounts billed to its customers for shipping and handling feesas revenue. All amounts billed in a sale transaction related to shipping andhandling represents revenues earned for the goods provided and requires suchamounts are classified as revenue. Shipping and handling costs are recorded ingeneral and administrative expenses in the consolidated statement ofoperations.

 

***Advertising costs***

 

Advertisingcosts are expensed when incurred. Certain cooperative advertisingreimbursements are netted against specific identifiable costs incurred inconnection with the selling of the vendor’s product. Advertising costs andcertain cooperative reimbursements are as follows:

 
| ** **                                      | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Advertising  Costs                              |       | $                                | 547        |   | $ | 858 |   | $ | 914 |   |
|                                            |       |                             |       |   |   |   |   |
| Certain  cooperative advertising reimbursements |       | $                                | 39         |   | $ | 121 |   | $ | 86 |   |

 

***Income taxes***

 

TheCompany accounts for income taxes using the asset and liability method.Deferred tax assets and liabilities are determined based on the differencesbetween the financial reporting bases and the tax bases of existing assets andliabilities, and are measured at the prevailing enacted tax rates that will bein effect when these differences are settled or realized. Deferred tax assetsare reduced by a valuation allowance if it is more likely than not that someportion or all of the deferred tax asset will not be realized.

 

TheCompany has developed a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of its tax position taken orexpected to be taken in a tax return. As a result, the Company determined thatthere were no material liabilities for tax benefits for predecessor andsuccessor periods. Any future interest accrued relating to unrecognized taxbenefits will be included in interest expense. In the event the Company mustaccrue for penalties, they will be included as an operating expense.

 

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While the Companybelieves that its tax positions are fully supportable, there may be certainpositions that could be challenged and that it may not prevail. In theseinstances, the Company looks to establish reserves. If the Company determinesthat a tax position is more likely than not of being sustained upon audit,based solely on the technical merits of the position, it recognizes thebenefit. The Company measures the benefit by determining the amount that isgreater than 50% likely of being realized upon settlement. The Company presumesthat all tax positions will be examined by a taxing authority with fullknowledge of all relevant information. The Company regularly monitors its taxpositions, tax assets and tax liabilities. The Company reevaluates thetechnical merits of its tax positions and recognize an uncertain tax benefit orderecognize a previously recorded tax benefit when (i) there is acompletion of a tax audit, (ii) there is a change in applicable tax lawincluding a tax case or legislative guidance, or (iii) there is anexpiration of the statute of limitations. Significant judgment is required inaccounting for tax reserves.

 

***Stock-based compensation***

 

TheCompany measures employee stock-based compensation awards using a fair valuemethod and amortizes the expense on a straight line basis over the requisiteservice period of the award.

 

The estimated grant date fair value of stock optionsusing the Black-Scholes option-pricing model requires the input of highlysubjective assumptions. These assumptions include estimating the expected termof the award and the estimated volatility of our stock price over the expectedterm. Changes in these assumptions and in the estimated forfeitures of stockoption awards can materially affect the amount of stock-based compensationrecognized in the consolidated statements of operations.

 

***Earnings per share***

 

TheCompany accounts for earnings per share based on a basic and dilutive basis.Basic earnings per share is computed by dividing income or loss available tocommon stockholders by the weighted average number of common shares outstandingduring the period. The Company also provides dual presentation of basic anddiluted earnings per share on the face of the statement of operations. Dilutedearnings per share reflects the amount of earnings for the period available toeach share of common stock outstanding during the reporting period, whilegiving effect to all dilutive potential common shares that were outstandingduring the period, such as common share equivalents that could result from thepotential exercise into common stock. The computation of diluted earnings pershare does not assume exercise of securities that would have an anti-dilutiveeffect on per share amounts (*i.e.*,increasing earnings per share or reducing loss per share). The dilutive effectof outstanding options are reflected in dilutive earnings per share by theapplication of the treasury stock method which recognizes the use of proceedsthat could be obtained upon the exercise of options and warrants in computingdiluted earnings per share. It assumes that any proceeds would be used topurchase common stock at the average market price during the period. Optionswill have a dilutive effect only when the average market price of the commonstock during the period exceeds the exercise price of the options.

 

***Recent accountingpronouncements***

 

In August 2009, the FASB issued AccountingStandards Update (ASU) No. 2009-05 which provides clarification that incircumstances in which a quoted price in an active market for the identicalliability is not available, a reporting entity is required to measure fairvalue using one or more of the following methods: (i) a valuationtechnique that uses a) the quoted market price of the identical liability whentrades as an asset or b) quoted prices for similar liabilities or similarliabilities when trades as assets, and/or (ii) a valuation technique thatis consistent with the principles of ASC Topic 820. The new accountingpronouncement also clarifies that when estimating the fair value of aliability, a reporting entity is not required to adjust inputs relating to theexistence of transfer restrictions on that liability. The adoption of thisstandard did not have an impact on the Company’s consolidated financialstatements.

 

In June 2009, the FASB provided guidance ascodified in ASC Topic 810**which amendscurrent practice in determining whether an enterprise has a controllingfinancial interest in a variable interest entity. This determination identifiesthe primary beneficiary of a variable interest entity as the enterprise thathas both the power to direct the activities of a variable interest entity thatmost significantly impacts the entity’s economic performance, and theobligation to absorb losses or the right to receive benefits of the entity thatcould potentially be significant to the variable interest entity. The revisedguidance requires ongoing reassessments of whether an enterprise is the primarybeneficiary and eliminates the quantitative approach previously required fordetermining the primary beneficiary. The Company does not expect the provisionsof the new guidance to have a material effect on its consolidated financialstatements.

 

InMay 2009, the FASB provided guidance as codified in ASC Topic 855 whichestablishes general standards of 

 

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accountingfor and disclosure of events that occur after the balance sheet date but beforefinancial statements are issued or available to be issued. The guidance setsforth the period after the balance sheet date during which management shallevaluate events or transactions that may occur for potential recognition ordisclosure in the financial statements, the circumstances under which an entityshall recognize events or transactions occurring after the balance sheet datein its financial statements and the disclosures that an entity shall make aboutevents or transactions that occurred after the balance sheet date. Thisguidance was effective for interim and annual periods ending after June 15,2009. The adoption of this standard did not have an impact on the Company’sconsolidated financial statements.

 

InApril 2009, the FASB provided guidance as codified in ASC Topic 820 on howto determine when a transaction is not orderly and for estimating fair valuewhen there has been a significant decrease in the volume and level of activityfor an asset or liability. The guidance requires disclosure of the inputs andvaluation techniques used, as well as any changes in valuation techniques andinputs used during the period to measure fair value in interim and annualperiods. In addition, the presentation of the fair value hierarchy is requiredto be presented by major security type. The provisions set forth in the newguidance were effective for interim periods ending after June 15, 2009.The adoption of the new standard did not have a material impact on the Company’sconsolidated financial statements.

 

In April 2009, the FASB provided guidance ascodified in ASC Subtopic 320-10 which amends the accounting for certaininvestments in debt and equity securities to modify the indicator ofother-than-temporary impairment for debt securities. Additionally, thisguidance changes the amount of other-than-temporary impairment that isrecognized in earnings when there are credit losses on a debt security thatmanagement does not intend to sell and it is more-likely-than-not that theentity will not have to sell prior to recovery of the noncredit impairment. Inthose situations, the portion of the total impairment that is attributable tothe credit loss would be recognized in earnings, and the remaining differencebetween the debt security’s amortized cost basis and its fair value would beincluded in other comprehensive income. The guidance is effective for interimand annual reporting periods ending after June 15, 2009 and did not have amaterial impact on the Company’s consolidated financial statements.

 

InApril 2009, the FASB provided guidance as codified in ASC Topics 270 and825 to require disclosures about the fair value of financial instruments ininterim financial statements as well as in annual financial statements. Inaddition, the guidance requires disclosures of the methods and significantassumptions used to estimate the fair value of those financial instruments. TheCompany adopted this new guidance and it did not have a material impact on the Company’sconsolidated financial statements.

 

InMarch 2008, the FASB provided guidance on disclosures about derivative instruments and hedging activities as codifiedin ASC 815. The guidance requires enhanced disclosure about an entity’sderivative and hedging activities. The objective of the guidance is to provideusers of financial statements with an enhanced understanding of how and why anentity uses derivative instruments: how an entity accounts for derivativeinstruments and related hedged items and how derivative instruments and relatedhedged items affect an entity’s financial position, financial performance, andcash flows. SFAS 161 is effective for fiscal years beginning after November 15,2008. The Company adopted this pronouncement on January 1, 2009 and it did not have a material impact onthe consolidated financial statements.

 

The Company adopted theguidance related to Accounting for convertible debt instruments that may besettled in cash upon conversion as codified in ASC 470-20 as of January 1,2009. The pronouncement applies to convertible debt instruments that, by theirstated terms, may be settled in cash (or other assets) upon conversion,including partial cash settlement, unless the embedded conversion option isrequired to be separately accounted for as a derivative under ASC 815. The pronouncementrequires that the issuer of a convertible debt instrument within its scopeseparately account for the liability and equity components in a manner thatreflects the issuer’s nonconvertible debt borrowing rate when interest cost isrecognized in subsequent periods. The excess of the principal amount of theliability component over its initial fair value must be amortized to interestcost using the effective interest method. Because the Company is required toseparately account for the embedded conversion options contained in itsconvertible debt instruments, the adoption of this pronouncement did not have amaterial impact on the consolidated financial statements. .

 

InJune 2008, the FASB provided guidance related to determining whether aninstrument (or an embedded feature) is indexed to an entity’s own stock ascodified in ASC 815-40. ASC 815 specifies that a contract issued or held by acompany that is both indexed to its own stock and classified in stockholders’equity is not considered a derivative instrument for purposes of applying ASC815. The pronouncement provides guidance for applying the requirements of ASC815, requiring that both an instrument’s contingent exercise provisions and itssettlement provisions be evaluated to determine whether the instrument (orembedded feature) is indexed solely to an entity’s own stock. The Companyadopted the pronouncement on January 1, 2009 and it did not have a material impact on the Company’sconsolidated financial statements.

 

InDecember 2007, the FASB provided guidance as codified in ASC 805 relatedto business combinations. The guidance retains the fundamental requirementsthat the acquisition method of accounting be used for all business 

 

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combinationsand for an acquirer to be identified for each business combination. Theobjective of this pronouncement is to improve the relevance, and comparabilityof the information that a reporting entity provides in its financial reportsabout a business combination and its effects. To accomplish that, thepronouncement establishes principles and requirements for how the acquirerrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, and any non-controlling interest in theacquiree, recognizes and measures the goodwill acquired in the businesscombination or a gain from a bargain purchase and determines what informationto disclose to enable users of the financial statements to evaluate the natureand financial effects of the business combination. This Statement appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15,2008 and may not be applied before that date. The Company adopted the guidanceon January 1, 2009 and it did not have a material impact on the Company’sconsolidated financial statements.

 

**NOTE B—INVENTORY**

 

Inventory consists of the following:

 
| ** **                                              | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------|------------|-----------------------|------------|
| ** **                                              | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                                                    | ** ** | ** **            |       |   |   |
| Finished  goods                                         |       | $                     | 2,547      |   | $ | 2,111 |   |
| Work  in progress                                       |       | 80                    |       | 85 |   |
| Less:  allowance for slow moving and obsolete inventory |       | (1,538                | )          | (421 | ) |
|                                                    |       |                  |       |   |   |
| Total  inventory, net                                   |       | $                     | 1,089      |   | $ | 1,775 |   |

 

**NOTE C—PROPERTY AND EQUIPMENT**

 

Propertyand equipment consists of the following:

 
| ** **                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                                    | ** ** | ** **            | ** ** | ** ** | ** ** |
| Demonstration  and evaluation equipment |       | $                     | —     |   | $ | 23 |   |
| Equipment                               |       | 1,139                 |       | 1,057 |   |
| Furniture  and fixtures                 |       | 936                   |       | 917 |   |
| Leasehold  improvements                 |       | 63                    |       | 63 |   |
|                                    |       | 2,138                 |       | 2,060 |   |
| Less:  accumulated depreciation         |       | (1,538                | )          | (1,116 | ) |
|                                    |       | $                     | 600        |   | $ | 944 |   |

 

Depreciationexpense was $423, $817 and $688 for the years ended December 31, 2009,2008 and 2007 respectively.

 

**NOTE D—INTANGIBLE ASSETS**

 

Intangibleassets consist of the following:

 

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| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                           | ** ** | ** **            | ** ** | ** ** | ** ** |
| Patents                        |       | $                     | 2,824      |   | $ | 2,746 |   |
| Computer  software             |       | 1,895                 |       | 1,820 |   |
| Developed  technology          |       | 1,058                 |       | 1,157 |   |
| Customer  Lists                |       | 4,285                 |       | 4,285 |   |
| Non  compete agreements        |       | 289                   |       | 289 |   |
| Trademarks  and trade names    |       | 1,469                 |       | 1,469 |   |
|                           |       | 11,820                |       | 11,766 |   |
| Less  accumulated amortization |       | (4,477                | )          | (3,057 | ) |
| Total  net intangible assets   |       | $                     | 7,343      |   | $ | 8,709 |   |

 

Amortizationexpense was $1,460, $1,716 and $979 for the years ended December 31, 2009,2008 and 2007, respectively.

 

Amortizationexpense subsequent to December 31, 2009 is expected to be as follows:

 
| **Years ended December 31:** | ** ** | **Amount** | ** ** |
|---------------------------------------------|------------|------------|------------|
|                                        |       |       |       |
| 2010                                        |       | $          | 1,197      |   |
| 2011                                        |       | 927        |       |
| 2012                                        |       | 744        |       |
| 2013                                        |       | 624        |       |
| 2014                                        |       | 280        |       |
|                                             |            |            |            |  |

 

**NOTE E—DEBT**

 

OnMay 1, 2008, the Company and its subsidiaries entered into a loan andsecurity agreement with Hercules (Loan and Security Agreement), which providedthe Company with a revolving credit facility and a term loan facility.  The Loan and Security Agreement wassubsequently amended in November 2008 and May 2009, and the Companyand Hercules entered into a forbearance agreement with respect to certaindefaults under the Loan and Security Agreement in July 2009, and theparties entered into five amendments to the forbearance agreement over thecourse of August through October 2009.  In connection with the Hercules Restructuringthat closed on November 20, 2009, the Company and its subsidiaries enteredinto the Amended Loan Agreement with Hercules, which amended and restated theLoan and Security Agreement.  Thedescription of the Amended Loan Agreement below reflects the terms in placesince November 20, 2009, however the Amended Loan Agreement wassubsequently amended on February 19, 2010 and April 6, 2010. See NoteV — Subsequent Events. Under the Amended Loan the Company’s indebtedness toHercules consists of a $5,500 term loan (Term Loan A), and a $5,000 convertiblenote (Term Loan B). In addition, the Company has a $12,000 revolving line ofcredit facility, of which $7,559 was outstanding at December 31, 2009.

 

Term Loan A has a 48-month term, with principalamortization of approximately $153 thousand beginning December 1,2010.  The outstanding principal balanceon Term Loan A will bear interest payable in cash at 12% per annum for theinitial year; 18% per annum for the subsequent six months and 15% per annumthereafter.

 

TermLoan B has a 60-month term and can be converted, at Hercules’ option, orautomatically if the 90 day value weighted adjusted trading price exceeds fivetimes the conversion price, into shares of the Company’s common stock at$1.8575 per share. The Company has the right to pay a portion of the conversionamount in cash plus applicable fees, interest and other charges, instead ofshares of common stock, if an automatic conversion occurs under certaincircumstances and the Company’s common stock is listed on certain national exchanges.If not converted, the outstanding principal balance of Term Loan B is due on November 1,2014. The outstanding principal balance on Term Loan B bears interest at 14.5%per annum for the 

 

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initialtwelve months following closing of the arrangement; 20.5% per annum for thesubsequent twelve months and 17.5% per annum thereafter, of which, 2.5% ispayable in kind. Term Loan B will bear an additional 2.5% interest that will be“paid in kind” (PIK) compounded monthly after the first year. The Company willhave the option to turn the PIK interest into cash interest or additionalshares of common stock if certain predefined metrics are maintained. Both termloans will be assessed a prepayment charge between 1% and 5% of the total termloan commitment depending on when paid.

 

TermLoan B may be partially settled in cash upon conversion. In accordance with ASC 470-20, *Debt with Conversion and other options*, the Company isrequired to separately account for the liability and equity components of thisinstrument by allocating the proceeds from issuance of the instrument betweenthe liability component and the embedded conversion option in a manner thatreflects interest cost at the interest rate of similar nonconvertible debt. Thedifference between the proceeds and the fair value of the liability or $2,368should then be ascribed to the embedded conversion option and recognized inequity. The difference between the principal amount of the debt and the amountof the proceeds allocated to the liability component should be reported as adebt discount and subsequently amortized as interest cost over the instrument’sexpected life using the interest method.

 

Theproceeds of the term loans and borrowings were used, in part, to refinance theCompany’s indebtedness to Hercules under the Loan and Security Agreement.Borrowings under the Amended Loan Agreement may be used for permittedacquisitions and for general corporate and working capital purposes. At December 31,2009, the Company had $10,515 of indebtedness outstanding under the Herculesterm loans, including paid in kind interest of $15, and $7,559 outstandingunder the revolving credit facility.

 

The amount that is availableto be borrowed under the revolving credit facility is limited to the lesser ofthe maximum availability at such time and 85% of the Company’s eligibleaccounts. Eligible accounts, as defined in the Amended Loan Agreement, excludecertain account criteria that Hercules considers risky. Until such time as theCompany’s three-month consolidated EBITDA exceeds $1,500, the borrowings underthe revolving credit facility may not exceed 85% of the Company’s eligibleaccounts minus $2,500.  The revolving credit facility expires on May 1,2011, but may be extended at our option for six months if there is no existingevent of default. Any advances under the revolving credit facility bearinterest initially at 12.0% per annum until the term loans, are repaid in full,at which time the interest rate on outstanding advances will be prime plus 4%.Borrowings under the revolving credit facility include an overadvance provisionof up to $500, which will be due 28 days after the overadvance is drawn.Overadvances bear interest at 15% per annum.

 

The Amended Loan Agreement contains certain negativecovenants and other stipulations associated with the arrangement, includingcovenants that restrict the Company’s ability to incur indebtedness, makeinvestments, make payments in respect of its capital stock, including dividendsand repurchases of common stock, sell or license its assets, and engage inacquisitions without the prior satisfaction of certain conditions. Additionally,the Amended Loan Agreement contains the following financial covenants (i) minimumconsolidated adjusted EBITDA measured on a three month rolling basis as of thelast day of each month of between $150 and $2,000, until December 31, 2011and thereafter when $3 million of consolidated adjusted EBITDA is required, (ii) maximumleverage ratio measured on a rolling twelve month basis as of the last day of afiscal quarter commencing June 30, 2010 of 6.0 to 1.0 decreasing to 1.5 to1.0 by the quarter ending June 30, 2012, (iii) minimum consolidatedfixed charge coverage ratio measured on a rolling twelve month basis as of thelast day of a fiscal quarter commencing June 30, 2010 of 0.75 to 1.0increasing to 2.0 to 1.0 by the quarter ending June 30, 2012, and (iv) atleast $1 million in unrestricted cash at all times. Failure to maintain thefinancial covenants, as well as certain other events, are events of defaultunder the Amended Loan Agreement. Upon an event of default under the AmendedLoan Agreement, Hercules may opt to accelerate and demand payment of all or anypart of our obligations. Under the terms of the Amended Loan Agreement, latefees are equal to 50% of the past due amount and default rate interest is equalto the applicable regular interest rate plus 3%. As of December 31, 2009, the Companywas in compliance with financial covenants under the Amended Loan Agreement.However, beginning February 5, 2010, the Company was not in compliance with theborrowing base requirement related to the revolver. As a result of the default,balances outstanding under the Term Loans at December 31, 2009 have beenclassified as current in the consolidated balance sheet.

 

Notespayable consist of the following:

 

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| ** **                                                                                                                                                                                                                                                                                  | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                  | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Term  Loan A note payable pursuant to the debt restructuring agreement with  Hercules. At December 31, 2009, the outstanding principal balance was  $5,500, net of original issuance discount and issuance costs of $660.                                                              |       | $                     | 5,500      |   | $ | — |   |
|                                                                                                                                                                                                                                                                                        |       |                  |       |   |   |
| Convertible  Term Loan B note payable pursuant to the debt restructuring agreement with  Hercules. At December 31, 2009, the outstanding principal balance was  $5,015, net of the equity component of $2,514.                                                                         |       | 2,501                 |       | — |   |
|                                                                                                                                                                                                                                                                                        |       |                  |       |   |   |
| Convertible  note payable pursuant to the asset purchase agreement with Healthcare  Informatics Associates, Inc.  Principal and interest payable at  9.0% is due September 30, 2010                                                                                          |       | 4,252                 |       | 3,901 |   |
|                                                                                                                                                                                                                                                                                        |       |                  |       |   |   |
| Amounts  payable pursuant to the asset purchase agreement with AMT Systems, Inc.  in monthly installments of $9 interest included, at a rate of 7.84%, maturing  May 31, 2013                                                                                                     |       | 314                   |       | 391 |   |
|                                                                                                                                                                                                                                                                                        |       |                  |       |   |   |
| Note  payable to Hercules, principal payable $150 monthly over sixteen months  commencing February 2009, payable $250 over twelve months, commencing  June 2010, payable $550 over twelve months commencing June 2011.  The note was restructured at November 20, 2009. |       | —                |       | 12,000 |   |
|                                                                                                                                                                                                                                                                                        |       |                  |       |   |   |
| Total  notes payable                                                                                                                                                                                                                                                                        |       | 12,567                |       | 16,292 |   |
|                                                                                                                                                                                                                                                                                        |       |                  |       |   |   |
| Less:  current maturities                                                                                                                                                                                                                                                                   |       | (12,336               | )          | (12,077 | ) |
|                                                                                                                                                                                                                                                                                        |       |                  |       |   |   |
|                                                                                                                                                                                                                                                                                        |       | $                     | 231        |   | $ | 4,215 |   |

 

Aggregatematurities of notes payable are as follows at December 31, 2009:

 
| **Years ended December 31:** | ** ** | **Amount** | ** ** |
|---------------------------------------------|------------|------------|------------|
| ** **                                  | ** ** | ** ** | ** ** |
| 2010                                        |       | $          | 14,850     |   |
| 2011                                        |       | 90         |       |
| 2012                                        |       | 98         |       |
| 2013                                        |       | 43         |       |
|                                             |            |            |            |  |

 

**NOTE F—FINANCIAL INSTRUMENTS**

 

In connection with the Hercules Restructuring, theCompany issued 2,691,790 shares of the Company’s common stock and a warrant topurchase 672,948 fully paid and non-assessable shares of the Company’s commonstock which were valued at $9,421 and $2,159, respectively.  As a result of the Hercules restructure, theCompany determined that an extinguishment of debt occurred.  In accordance with ASC 470-50, *Debt Modifications and Extinguishments,*a loss onextinguishment of debt, which amount to $6,777 was recorded.  The loss represented the difference betweenthe fair value of the common stock and warrants issued to Hercules of $11,580over the total debt extinguished.  Inaddition, the Company included $197 of fees paid in connection with theHercules Restructure as additional loss on extinguishment of debt.

 

The Company hasdetermined that, at the time of issuance, the warrant did not meet all of thecriteria for equity classification.  As aresult, the Company has recorded the warrant in accordance with ASC Topic815-40, *Financial Instruments*, at its fair valueof $2,159, as a derivative liability as of November 20, 2009.  The Company will mark the warrant liabilityto market at the end of each period until the Company complies with therequirements for equity classification of the warrant at which time the warrantliability will be reclassified to equity. Upon recording the warrant liability, because the warrant was issuedconcurrently with the debt as part of the Hercules Restructuring described inNote A, the Company recorded the offset as a loss on extinguishment of debt of$2,159 as of November 20, 2009.  At December 31,2009, the Company recorded a charge of $282, which represents the change in thefair value of the warrant liabilities for the period from the HerculesRestructure date to December 31, 2009.

 

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The fair value of warrant liabilities was calculatedunder the Black-Scholes pricing model using the Company’s stock price on thedate of the warrant grant as the warrant exercise price, the Company’s expectedvolatility, and the risk free interest rate matched to the warrants’ expectedlife. The Company does not anticipate paying dividends during the term of thewarrants. The Company uses historical data to estimate volatility assumptionsused in the valuation model. The expected term of warrants granted is derivedfrom an analysis that represents the period of time that warrants granted areexpected to be outstanding. The risk-free rate for periods within thecontractual life of the warrant is based on the U.S. Treasury yield curve ineffect at the time of grant.

 

The followingtable details warrant activity:

 
| Warrants  outstanding at January 1, 2007 and 2008 |   | $       | 106,000 |   |
|--------------------------------------------------------|--------|---------|---------|--------|
| Issued                                                 |   | —  |    |
| Excercised                                             |   | —  |    |
| Forfeited                                              |   | —  |    |
| Warrants  oustanding as of December 31, 2008      |   | 106,000 |    |
|                                                   |   |    |    |
| Issued                                                 |   | 682,948 |    |
| Excercised                                             |   | —  |    |
| Forfeited                                              |   | —  |    |
| Warrants  oustanding as of December 31, 2009      |   | $       | 788,948 |   |

 
| **Expiration Date**         | ** ** | **Number of  Shares  Underlying  Warrants** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|-----------------------------|------------|---------------------------------------------|------------|----------------------------------------|------------|
| ** **                  | ** ** | ** **                                  | ** ** | ** **                             | ** ** |
| 2010                        |       | 106,000                                     |       | $                                      | 15.03      |   |
| 2011                        |       | 10,000                                      |       | 1.86                                   |       |
| 2012                        |       | —                                      |       | —                                 |       |
| 2013                        |       | —                                      |       | —                                 |       |
| 2014                        |       | 672,948                                     |       | 1.86                                   |       |
|                        |       |                                        |       |                                   |       |
| Total  warrants outstanding |       | 788,948                                     |       | $                                      | 3.63       |   |

 

Alloutstanding warrants expire no later than November 19, 2014.

 

Therange of assumptions used in the Black Scholes pricing model to calculate thefair value of the financial instruments was as follows:

 

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| Exercise price  |   | $1.86-$50.00    |   |
|-----------------|--------|-----------------|--------|
|            |   |            |   |
| Estimated  life |   | 0.91-4.89 years |   |
|            |   |            |   |
| Volatility      |   | 137.89%-205.73% |   |
|            |   |            |   |
| Risk  free rate |   | 0.45%-2.20%     |   |
|            |   |            |   |
| Dividend  rate  |   | 0%              |   |

 

**NOTE G—CAPITAL LEASE OBLIGATIONS**

 

Equipment acquired under capital lease obligations is classified asproperty and equipment in the accompanying consolidated financial statementsand consisted of the following:

 
| ** **                      | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                      | ** ** | ** **            | ** ** | ** ** | ** ** |
| Equipment                       |       | $                     | 324        |   | $ | 492 |   |
| Less:  accumulated depreciation |       | (86                   | )          | (220 | ) |
|                            |       |                  |       |   |   |   |   |
|                            |       | $                     | 238        |   | $ | 272 |   |

 

Amortization of equipment under capital lease obligations is includedwith depreciation and amortization in the consolidated statement of cash flows.

 

Future minimum capital lease payments as of December 31, 2009 areas follows:

 
| 2010                                         |   | $      | 90     |   |
|----------------------------------------------|--------|--------|--------|--------|
| 2011                                         |   | 46     |   |
| 2012                                         |   | 44     |   |
| 2013                                         |   | 32     |   |
| Total                                        |   | 212    |   |
| Less:  amount representing interest          |   | (18    | )      |
| Net  present value of minimum lease payments |   | 194    |   |
| Less:  current portion                       |   | (81    | )      |
|                                         |   |   |   |
|                                         |   | $      | 113    |   |

 

**NOTE H—LEASE COMMITMENTS**

 

TheCompany leases facilities in Pennsylvania under an amended operating leaseagreement which is set to expire January 31, 2017. Rent expense for theyears ended December 31, 2009, 2008 and 2007 was $585, $574 and $468,respectively.

 

Futureminimum lease payments required under operating leases subsequent to December 31,2009 are as follows:

 

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| **Years ended December 31:** | ** ** | **Amount** | ** ** |
|---------------------------------------------|------------|------------|------------|
| ** **                                  | ** ** | ** ** | ** ** |
| 2010                                        |       | $          | 320        |   |
| 2011                                        |       | 372        |       |
| 2012                                        |       | 554        |       |
| 2013                                        |       | 568        |       |
| 2014                                        |       | 582        |       |
| Thereafter                                  |       | 1,310      |       |
|                                             |            |            |            |  |

 

**NOTE I—RELATED PARTY TRANSACTIONS**

 

***Notes Payable—Stockholders***

 

As a result of the Hercules Restructuring, the Company’s majoritystockholder is HTI, a wholly owned subsidiary of its senior lender, Hercules.During 2009, Hercules charged the Company approximately $3,700 in interest onoutstanding debt and $1,200 in finance fees and other costs associated withloan amendments, a forbearance agreement and the restructuring.  Included in finance fees is a $450restructuring charge payable to Hercules in monthly installments ofapproximately $38 beginning in April 2010. Of the finance fees and costscharged during 2009, approximately $800 has been deferred at December 31,2009 and will be charged to interest expense over the term of the creditarrangement. During 2008, Hercules charged the Company approximately $2,725 ininterest on outstanding debt and $1,660 in other costs associated with the loanagreement. Fees charged during 2008 were outstanding at December 31, 2008and included as a component of aggregate outstanding debt at the November 20,2009 restructuring date.

 

***Consulting Services***

 

During 2006, the Company entered into a consulting agreement withCorrugated Service Corp. which does business as Amtech and is owned by Cosmo T.DeNicola, an officer and director of InfoLogix prior to the Company’s mergerwith New Age Translation, Inc., and a stockholder of InfoLogix. Theconsulting agreement continued until December 31, 2008. Despite thetermination of the consulting agreement, the Company continued to use Amtechfor services during 2009.

 

Amtechprovided certain software development consulting services. For the years ended December 31,2009, 2008 and 2007, the Company paid Amtech approximately $173, $1,661 and$812, respectively.

 

***Support Services****.*

 

During2006, the Company entered into a services agreement with Futura Services, Inc.  (“Futura”) which is owned by the wife ofCosmo T. DeNicola, an officer and director of InfoLogix prior to its mergerwith New Age Translation, Inc., and a stockholder of InfoLogix.  The services agreement granted Futura theexclusive right to provide certain outsourcing services and functions tosupport certain equipment that is used in the Company’s business.

 

OnMarch 2, 2009, the Company entered into a master services agreement, whichsuperseded the services agreement with Futura. The master services agreementwill continue until December 31, 2013, unless terminated earlier. Pursuantto the master services agreement, Futura is granted the exclusive right toprovide certain outsourcing services and functions to support equipment that isused in the Company’s business. The Company issues purchase orders forspecified services to be provided by Futura and the services are set forth inmutually agreed statements of work. Futura will maintain its exclusive right toprovide services until the earlier of the termination of the master servicesagreement or the fulfillment by Futura of services under statements of work inthe amount of $1,500 for any calendar year during the term of the masterservices agreement, after which point the Company may use other providers toperform the services for the balance of that calendar year, provided thatFutura is given the right to perform the services on the same terms andconditions as the other providers.

 

Underthe terms of the master services agreement, Futura bears the risk of loss forthe services rendered under the master services agreement and statements ofwork, including, but not limited to all costs (subject to certain exclusions)related to warranty, extended warranty and call center services that are soldby the Company to its customers and to post- and pre-production of kitting(assembly and packaging), imaging and shipments to customers. The Company has aminimum annual commitment to purchase services from Futura as described abovein an aggregate amount of $1,500 per year through

 

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2013.

 

***Professional Recruiting Services***

 

The Company maintains a business relationship with Gulian &Associates, which is owned by the wife of David T. Gulian, the President andChief Executive Officer and director and stockholder. Under the terms of thearrangement, Gulian & Associates provides the Company withretainer-based professional recruiting services, on a non-exclusive basis.Gulian & Associates is paid a success fee of 20% of a newly hiredperson’s annual base salary for employees introduced to the Company by Gulian &Associates; one-third of the fee is invoiced at the time the hiring request ismade, the remainder is invoiced only upon successful placement of a candidateinto the role. Fees earned for the years ended December 31, 2009, 2008 and2007 were $178, $225 and $159, respectively.

 

**NOTE J—EMPLOYEE BENEFIT PLAN**

 

The Company has a defined contribution plan covering substantially allemployees. As allowed under Section 401(k) of the Internal RevenueCode, the plan provides tax deferred salary deductions for eligible employees.Company contributions are at the discretion of the board of directors. TheCompany did not make a contribution to the plan for 2009, 2008 or 2007.

 

**NOTE K—CONCENTRATIONS OF CREDIT RISK**

 

During the years ended December 31,2009, 2008 and 2007, the Company had one, one and two vendors, respectively,that individually comprised 10% or more of cost of revenues.

 

As a percentage of total netrevenue, the Company’s five largest customers accounted for, in the aggregate,approximately 38%, 34%, and 34% of net revenues for the years ended December 31,2009, 2008 and 2007, respectively.

 

**NOTE L—COMMITMENTS AND CONTINGENCIES**

 

***Litigation***

 

The Company is involved in disputes or legal actions arising in theordinary course of business. Management does not believe the outcome of suchlegal actions will have a material adverse effect on the Company’s financialposition, results of operations or cash flows.

 

***Employment Agreements***

 

The Company’s employment agreements with its Chief Executive Officerand President and Chief Financial Officer (collectively Executives) expired on December 31,2008. On March 13, 2009 the Company entered into severance agreements withboth Executives. Each severance agreement provides, in the event of terminationof the Executive’s employment, for predefined payments based on the Executive’sthen current wage base in exchange for non-compete and non-solicitationagreements.

 

**NOTE M—INCOME TAXES**

 

The Company accounts for income taxes using the asset and liabilitymethod. Accordingly deferred income tax assets and liabilities are recognizedfor the estimated future tax consequences attributable to temporary differencesbetween the financial statement carrying amounts of existing assets andliabilities and their respective tax bases. These assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in theyears in which the temporary differences are expected to reverse.

 

The Company has net operating loss carryforwards available in certainjurisdictions to reduce future taxable income. Future tax benefits for net operatingloss carryforwards are recognized to the extent that realization of thesebenefits is considered more likely than not. This determination is based on theexpectation that related operations will be sufficiently profitable or varioustax business and other planning strategies will enable the Company to utilizethe operating loss carryforwards. The Company’s evaluation of the realizabilityof deferred tax assets considers both positive and negative evidence. Theweight given to the potential effects of positive and negative evidence isbased on the extent to which it can be objectively verified.

 

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As of December 31, 2009, the Company has federal net operatinglosses (NOLs) of approximately $20 million.. As a result of limitations under Section 382for the change in control, the Company’s ability to utilize the NOLs to offsetfuture taxable income is limited to approximately $156 per year over the next20 years. The Company determined that it is more likely than not that it willnot be able to use the net operating losses and other deferred tax assets toreduce future tax liabilities and has recorded a full valuation allowance at December 31,2009 and 2008.  If not used, the NOLswill expire beginning in the year 2024.State NOLs which are also limited under Section 382,are subject to expiration in varying years starting in 2013 through 2027.

 

The provision for income taxes is as follows:

 
| ** **                              | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                    |       |                             |       |   |   |   |   |
| Current  income tax expense (benefit):  |       |                             |       |   |   |   |   |
| Federal                                 |       | $                                | —     |   | $ | — |   | $ | — |   |
| State                                   |       | 53                               |       | 28 |   | 8 |   |
|                                    |       |                             |       |   |   |   |   |
|                                    |       | 53                               |       | 28 |   | 8 |   |
| Deferred  income tax expense (benefit): |       |                             |       |   |   |   |   |
| Federal                                 |       | 529                              |       | 2,939 |   | (1,487 | ) |
| State                                   |       | 63                               |       | 468 |   | (233 | ) |
|                                    |       |                             |       |   |   |   |   |
|                                    |       | 592                              |       | 3,407 |   | (1,720 | ) |
|                                    |       |                             |       |   |   |   |   |
| Income  tax expense (benefit)           |       | $                                | 645        |   | $ | 3,435 |   | $ | (1,712 | ) |

 

Deferred tax assets and liabilities are detailed as follows:

 

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| ** **                            | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                                  | ** ** | ** **            | ** ** | ** ** | ** ** |
| Allowance  for doubtful accounts      |       | $                     | 1          |   | $ | 153 |   |
| Inventory                             |       | 651                   |       | 198 |   |
| Accrued  expenses                     |       | 716                   |       | 170 |   |
| Valuation  allowance                  |       | (1,368                | )          | (521 | ) |
|                                  |       |                  |       |   |   |
| Deferred  tax asset-current           |       | —                |       | — |   |
|                                  |       |                  |       |   |   |
| Property  and equipment               |       | (25                   | )          | (127 | ) |
| Intangible  assets                    |       | (144                  | )          | (37 | ) |
| Operating  loss carry forwards        |       | 1,917                 |       | 4,885 |   |
| Stock  based compensation             |       | 611                   |       | 1,729 |   |
| Valuation  allowance                  |       | (2,951                | )          | (6,450 | ) |
|                                  |       |                  |       |   |   |
| Net  deferred tax liability-long-term |       | (592                  | )          | — |   |
|                                  |       |                  |       |   |   |
| Total  net deferred tax liability     |       | $                     | (592       | ) | $ | — |   |

 

A reconciliation of the United States statutory income tax rate to theeffective income tax rate is as follows:

 

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| ** **                                     | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                     | ** ** | **Amount**                       | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** | **Amount** | ** ** | **Rate** | ** ** |
|                                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Tax  at the Federal statutory rate             |       | $                                | (5,088     | ) | 34.0 | % | $ | (3,315 | ) | 34.0 | % | $ | (1,656 | ) | 34.0 | % |
| State  taxes                                   |       | (26                              | )          | 0.2 | % | (243 | ) | 2.5 | % | (225 | ) | 4.6 | % |
| Permanent  differences                         |       | 304                              |       | -2.0 | % | 38 |   | (0.5 | )% | 11 |   | (0.2 | )% |
| Other                                          |       | 570                              |       | -3.8 | % | (17 | ) | 0.2 | % | 158 |   | (3.3 | )% |
| Limitation  of net operating loss carryforward |       | 7,538                            |       | -50.4 | % | — |   | 0.0 | % | — |   | 0.0 | )% |
| Valuation  allowance                           |       | (2,653                           | )          | 17.7 | % | 6,972 |   | (71.5 | )% | — |   | 0.0 | % |
|                                           |       | $                                | 645        |   | -4.3 | % | $ | 3,435 |   | (35.3 | )% | $ | (1,712 | ) | 35.10 | % |

 

**NOTE N—ACQUISITION OF ASSETS OF DELTA HEALTHSYSTEMS, INC.**

 

On May 2, 2008, the Company, through its wholly-owned subsidiaryInfoLogix Systems Corporation (Systems), acquired substantially all of theassets and assumed certain liabilities of Delta Health Systems, Inc.(Delta) pursuant to an asset purchase agreement. The assets acquired related toDelta’s business of providing strategic cost management consulting services andweb-based management data collection and work-flow analytics to the healthcareindustry, and included cash, accounts receivables, the rights to existingrelationships with customers, vendors and partners, certain tangible personalproperty and certain intangible rights and property. The liabilities assumedrelated to customer contracts and accrued expenses.

 

The purchase price paid by the Company was $1,673, which consisted of $1,465in cash and $208 in acquisition costs. The Company and Delta also entered intoan earn-out agreement pursuant to which Delta is eligible to earn additionalconsideration in the subsequent two year period (each year, an “Earn-out Period”)after the closing of the transaction. Under the terms of the Earn-outAgreement, Delta was able earn up to $500 in the first Earn-out Period and upto $500 in the second Earn-out Period upon achievement of gross revenue targetsdescribed in the Earn-out Agreement. The additional cash consideration will notbe accounted for by the Company until such time as payment of this additionalconsideration is considered probable, if any pursuant to the terms of theagreement. At the end of the two year period, if Delta has not already earnedthe $1,000 of additional consideration in respect of each of the two Earn-outPeriods, Delta may earn an amount equal to the $1,000 of additionalconsideration less any amounts previously paid in respect of the two Earn-outPeriods upon the achievement of certain cumulative financial milestones duringthe two-year earn-out period. At the point the consideration is consideredprobable, the Company will record it as an adjustment to the purchase price.

 

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Thepurchase price was allocated to the assets acquired and liabilities assumedbased on their estimated fair values on the date of acquisition, as follows:

 
| Assets  acquired:       | ** ** | ** ** | ** ** |
|-------------------------|------------|------------|------------|
| Accounts  receivable    |       | $          | 28         |   |
| Property  and equipment |       | 2          |       |
| Goodwill                |       | 1,179      |       |
| Customer  relationships |       | 402        |       |
| Non-compete  agreements |       | 62         |       |
| Trademarks/trade  names |       | 43         |       |
| Total  assets acquired  |       | 1,716      |       |
|                    |       |       |       |
| Liabilities  assumed:   |       |       |       |
| Current  liabilities    |       | 43         |       |
| Net  assets acquired    |       | $          | 1,673      |   |

 

The customer relationshipsare being amortized on a straight-line basis over an eight year period, whichis the average expected life of the underlying customer contracts. Thenon-compete agreements are amortized on a straight-line basis over a three yearperiod, which corresponds with the expiration date of the non-competeprovisions contained within the asset purchase agreement. Goodwill and thetrademarks/trade names have indefinite lives and therefore are not amortized,however, they will be evaluated annually for impairment.

 

Delta earned $430for the earn-out period ended May 2, 2009. As a condition to and inconnection with the Hercules Restructuring on November 20, 2009, theCompany’s wholly-owned subsidiary, Systems entered into a letter agreement withDelta whereby the parties agreed to restructure the outstanding obligationunder the earn-out.  In lieu of the $430payment, commencing as of September 1, 2009, Delta is participating in acommission plan, under which Systems pays Delta a monthly commission equal to11.5% of collected revenue from Delta’s business that the Company generates, ifany, during the applicable month.  Delta released Systems from allobligations under the Delta Earn-out Agreement relating to the earn-out periodended May 2, 2009.  All other terms and conditions of the DeltaEarn-out Agreement, including the rights and obligations of the parties withrespect to the earn-out period ending May 2, 2010, if any, remain in fullforce and effect.  Commissions earned forthe year-ended December 31, 2009 was $132.

 

**NOTE O—ACQUISITION OF ASSETS OF AWAREINTERWEAVE, INC.**

 

On May 16, 2008, theCompany, through its wholly-owned subsidiary InfoLogix Systems Corporation,acquired substantially all of the operating assets and assumed certainliabilities of Aware Interweave, Inc. (Aware) pursuant to an assetpurchase agreement. The assets acquired related to Aware’s business ofproviding mobile solutions to a variety of industries including the healthcareand life sciences industries, and included cash, accounts receivable, therights to existing relationships with customers, vendors and partners, certaintangible personal property and certain intangible rights and property. Theliabilities assumed consist of current accounts payable and accrued expenses.

 

The purchase price paid bythe Company consisted of cash and shares of the Company’s common stock. Thetotal purchase price paid by the Company is as follows:

 
| Cash  paid, net of cash received |   | $     | 1,318  |   |
|----------------------------------|--------|-------|--------|--------|
| Common  stock issued             |   | 1,030 |   |
| Acquisition  costs               |   | 131   |   |
|                             |   | $     | 2,479  |   |

 

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At closing, the Companyissued 20,000 shares of common stock, which was valued at $1,030 based on theaverage closing market price of the Company’s common stock from May 13,2008 through May 21, 2008. The issuance of the shares of common stock wasunregistered and the shares are subject to a two-year lockup.

 

The purchase price wasallocated to the assets acquired and liabilities assumed based on theirestimated fair values on the date of acquisition, as follows:

 
| Assets  acquired, excluding cash: | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|
| Accounts  receivable              |       | $          | 204        |   |
| Prepaid  expenses                 |       | 12         |       |
| Property  and equipment           |       | 11         |       |
| Goodwill                          |       | 1,697      |       |
| Customer  relationships           |       | 175        |       |
| Software                          |       | 500        |       |
| Trademarks/trade  names           |       | 18         |       |
| Non-compete  agreements           |       | 54         |       |
| Total  assets acquired            |       | 2,671      |       |
|                              |       |            |       |
| Liabilities  assumed:             |       |       |       |
| Current  liabilities              |       | 192        |       |
| Net  assets acquired              |       | $          | 2,479      |   |

 

The customer relationshipsare being amortized on a straight-line basis over a two year period, whichcorresponds with the expected life of the underlying customer contracts.Amortization of the software will not commence until such time as the softwareis available for sale. The non-compete agreements are amortized on astraight-line basis over a three year period, which corresponds with theexpiration date of the non-compete provisions contained within the assetpurchase agreement. Goodwill and the trademarks/trade names have indefinitelives and therefore are not amortized, however, they will be evaluated annuallyfor impairment.

 

**NOTE P—2008 EMPLOYEE STOCK PURCHASE PLAN**

 

On January 1, 2008, theCompany established the 2008 Employee Stock Purchase Plan (ESPP). The purposeof the ESPP is to provide the Company’s employees the opportunity to purchasecommon stock through accumulated payroll deductions. The ESPP is administeredby the Board of Directors. The Company has reserved 40,000 shares for use inthe ESPP. The purchase price of the common stock is at an amount equal to 85%of the fair market value of a share of common stock on the enrollment date orthe exercise date, whichever is lower. The ESPP has consecutive three monthoffering periods commencing on the first trading day of each calendar quarter.An eligible employee may become a participant in the ESPP by completing asubscription agreement authorizing payroll deductions not to exceed 10% of theemployee’s compensation. These payroll deductions commence on the first payrolldate following the enrollment date and end on the last payroll date in theoffering period.

 

On the enrollment date ofeach offering period, each eligible participating employee is granted an optionto purchase on the exercise date of such offering period up to a number ofshares of the common stock determined by dividing the employee’s payrolldeductions accumulated prior to such exercise date by the applicable purchaseprice. Employees are not permitted to purchase more than 100 shares during eachoffering period. The option for the purchase of shares is exercisedautomatically and purchases of shares are effective on the last day of eachquarter. The maximum number of full shares subject to the option are purchasedfor such participant at the applicable purchase price with the accumulatedpayroll deductions in his or her account.

 

On July 20,2009, the Company’s Board of Directors voted to amend the ESPP to provide thatthe Board of Directors may suspend the ESPP at any time and for any reason andlater reinstate the ESPP at any time and for any reason.  The Board ofDirectors has determined that an indefinite suspension of the ESPP is in thebest interests of the

 

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Company and itsstockholders. Pursuant to the ESPP as amended, the Company suspended the ESPPeffective as of July 1, 2009.

 

During 2009, theCompany issued 6,275 shares in connection with the ESPP for which it received$65 in cash.  The Company issued 6,919 shares during 2008 for which itreceived $158 in cash.

 

**NOTE Q—STOCK-BASED COMPENSATION**

 

In November 2006, theCompany’s Board of Directors approved the 2006 Equity Compensation Plan (Plan).In accordance with the Plan, the Board of Directors may grant options topurchase shares of the Company’s common stock to employees, officers,consultants and non-employee directors. The Plan, as originally approvedprovides for the issuance of options to purchase up to 154,400 shares of theCompany’s common stock. The Plan was amended in January 2010, to increasethe number of shares authorized to 1,840,000 shares.

 

The Plan provides thatemployees, consultants and non-employee directors are eligible to receivenonqualified stock options, while only employees are eligible to receiveincentive stock options. The incentive stock options offer employees certaintax advantages that are not available under nonqualified stock options. TheBoard of Directors, or a committee thereof whose members are appointed by theBoard of Directors, administers the Plan, and has discretion in setting theterms of options granted to employees, consultants and non-employee directors.

 

The Company estimates thefair value of stock options granted using the Black-Scholes option pricingmodel.  Expected volatilities arecalculated based on the historical volatility of the stock.  Management monitors share option exercise andemployee termination patterns to estimate forfeiture rates within the valuationmodel. The simplified method is used to estimate the period of time thatoptions granted are expected to be outstanding. The risk free interest rate forperiods within the contractual life of an option is based on the interest rateof a 5-year U.S. Treasury Note in effect on the grant date. The estimated fairvalue is amortized on a straight line basis over the requisite service periodof the award, which is generally the vesting period.  Employee options typically vest with respectto 25% of the shares one year after the options’ grant date and the remainderratably on an annual basis over the following three years. Director optionstypically vest with respect to 50% of the shares six months after the options’grant date and the remainder ratably on a monthly basis over the followingthree years.

 

The Company estimated thefair value of options granted using the following range of assumptions:

 
| ** **               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                     |       |                             |       |   |   |   |   |
| Expected  life in years  |       | 6.00                             |       | 5.00 |   | 5.00 |   |
| Risk-free  interest rate |       | 1.25%-2.15%                      |       | 2.5% - 3.3% |   | 3.5% - 4.0% |   |
| Volatility               |       | 123.36%-137.89%                  |       | 64.3% - 81.2% |   | 57.9% - 61.4% |   |
| Dividend  yield          |       | 0.0%                             |       | 0.0% |   | 0.0% |   |
| Fair  value of grants    |       | $1.35-$10.25                     |       | $15.25-$36.25 |   | $30.25-$34.25 |   |
|                     |       |                             |       |   |   |   |   |
| Number  of Shares        |       | 129,635                          |       | 32,440 |   | 25,400 |   |

 

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The following table details stock optionactivity:

 
| ** **                                    | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Life (years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------------------|------------|------------|------------|----------------------------------------|------------|------------------------------------------------|------------|---------------------------------|------------|
|                                          |       |       |       |                                   |       |                                           |       |                            |       |
| Outstanding  at January 1, 2007          |       | 84,480     |       | $                                      | 50.00      |                                           | 9.92       |                            | $          | 6,653 |   |
| Granted                                       |       | 25,400     |       | 68.25                                  |       |                                           |       |                            |       |
| Forfeited                                     |       | (1,460     | )          | 50                                     |       |                                           |       |                            |       |
| Expired                                       |       | —     |       | —                                 |       |                                           |       |                            |       |
| Exercised                                     |       | —     |       | —                                 |       |                                           |       |                            |       |
| Outstanding  at January 1, 2008          |       | 108,420    |       | 56.50                                  |       | 9.27                                           |       | 415                             |       |
| Granted                                       |       | 32,440     |       | 36.75                                  |       |                                           |       |                            |       |
| Forfeited                                     |       | (9,160     | )          | 52.00                                  |       |                                           |       |                            |       |
| Expired                                       |       | —     |       | —                                 |       |                                           |       |                            |       |
| Exercised                                     |       | —     |       | —                                 |       |                                           |       |                            |       |
| Outstanding  at January 1, 2009          |       | 131,700    |       | 50.00                                  |       | 8.49                                           |       | —                          |       |
| Granted                                       |       | 18,035     |       | 11.00                                  |       |                                           |       |                            |       |
| Forfeited                                     |       | (11,980    | )          | 43.75                                  |       |                                           |       |                            |       |
| Expired                                       |       | (8,120     | )          | 52.00                                  |       |                                           |       |                            |       |
| Exercised                                     |       | —     |       | —                                 |       |                                           |       |                            |       |
| Outstanding  at December 31, 2009        |       | 129,635    |       | $                                      | 45.25      |                                           | 7.74       |                            | $          | — |   |
| Vested  shares at December 31, 2009      |       | 69,450     |       |                                   |       |                                           |       | $                               | 6,858      |   |
| Exercisable  shares at December 31, 2009 |       | 69,450     |       |                                   |       |                                           |       | $                               | 7,275      |   |

 

The intrinsic value of stockoptions is the amount by which the market price of the stock on a given date,such as at the end of the period or on the day of exercise, exceeded the marketprice of stock on the date of grant.

 

The recognized compensationcost for stock options granted to employees was approximately $853, $960 and$828 for the years ended December 31, 2009, 2008 and 2007respectively.  At December 31, 2009,the amount of stock based compensation to be recognized over future periods isapproximately $1,500.

 

The Company recorded anincome tax benefit for 2007 of approximately $1,418 related to the granting ofthe nonqualified options and warrants. The Company did not record an income taxbenefit for options during 2009 and 2008.

 

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**NOTE R- FAIR VALUE MEASUREMENTS**

 

The Company categorizes itsfinancial instruments into a three-level fair value hierarchy that prioritizesthe inputs to valuation techniques used to measure fair value into three broadlevels. The fair value hierarchy gives the highest priority to quoted prices inactive markets for identical assets or liabilities (Level 1) and the lowestpriority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels ofthe hierarchy, the category level is based on the lowest priority level inputthat is significant to the fair value measurement of the instrument. Financialassets recorded at fair value on the Company’s consolidated balance sheets arecategorized as follows:

 

Level 1-  Observable inputs such as quoted prices(unadjusted) for identical assets or liabilities in active markets

 

Level 2-  Inputs, other than quoted prices in activemarkets, that are observable either directly or indirectly

 

Level 3-  Unobservable inputs for which there is littleor no market activity, which require the Company to develop its own assumptions

 

The fair value hierarchy also requires anentity to maximize the use of observable inputs and minimize the use ofunobservable inputs when measuring fair value.

 

The followingtable details the assets and liabilities measured at fair value on a recurringbasis:

 
| ** **         | ** ** | ** **         | ** ** | **Fair Value Measurement at December 31, 2009** | ** ** |
|--------------------|------------|--------------------|------------|------------------------------------------------------|------------|
| ** **         | ** ** | **Carrying Value** | ** ** | **Level 1**                                          | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|               |       |               |       |                                                 |       |   |   |   |   |
| Warrant  liability |       | $                  | 2,762      |                                                 | $          | — |   | $ | 2,762 |   | $ | — |   |
|                    |            |                    |            |                                                      |            |  |  |  |  |  |  |  |  |

 

The fair value of derivative instruments is estimated using the BlackScholes valuation model with observable inputs.

 

As discussed in Note F, in connection with the Hercules Restructuring,the Company issued 2,691,790 shares of the Company’s common stock and a warrantto purchase 672,948 fully paid and non-assessable shares of the Company’scommon stock which were valued at $9,421 and $2,159, respectively.  The fair value of the common stock wasdetermined to be $3.50 per share which represents the closing price of theCompany’s common stock as traded on the NASDAQ Capital Market.

 

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**NOTE S—SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA(UNAUDITED)**

** **
| **2009 Quarter Ended**     | ** ** | **December 31** | ** ** | **September 30** | ** ** | **June 30** | ** ** | **March 31** | ** ** |
|--------------------------------------|------------|----------------------|------------|-----------------------|------------|------------------|------------|-------------------|------------|
| ** **                           | ** ** | ** **           | ** ** | ** **            | ** ** | ** **       | ** ** | ** **        | ** ** |
| Revenues                             |       | $                    | 21,348     |                  | $          | 22,345           |       | $                 | 24,411     |   | $ | 18,812 |   |
| Gross  profit                        |       | 4,984                |       | 5,946                 |       | 4,578            |       | 4,135             |       |
| Net  loss                            |       | (10,874              | )          | (2,062                | )          | (4,781           | )          | (4,671            | )          |
| Loss  per share - basic and diluted  |       | $                    | (4.89      | )                     | $          | (2.00            | )          | $                 | (4.65      | ) | $ | (4.56 | ) |
|                                 |       |                 |       |                  |       |             |       |              |       |
| Weighted  average shares outstanding |       | 2,223,726            |       | 1,030,365             |       | 1,027,408        |       | 1,024,126         |       |

** **
| **2008 Quarter Ended**     | ** ** | **December 31** | ** ** | **September 30** | ** ** | **June 30** | ** ** | **March 31** | ** ** |
|--------------------------------------|------------|----------------------|------------|-----------------------|------------|------------------|------------|-------------------|------------|
| ** **                           | ** ** | ** **           | ** ** | ** **            | ** ** | ** **       | ** ** | ** **        | ** ** |
| Revenues                             |       | $                    | 26,759     |                  | $          | 23,824           |       | $                 | 26,347     |   | $ | 23,786 |   |
| Gross  profit                        |       | 6,837                |       | 6,210                 |       | 7,288            |       | 6,205             |       |
| Net  loss                            |       | (9,133               | )          | (2,520                | )          | (540             | )          | (991              | )          |
| Loss  per share - basic and diluted  |       | $                    | (8.95      | )                     | $          | (2.47            | )          | $                 | (0.54      | ) | $ | (0.99 | ) |
|                                 |       |                 |       |                  |       |             |       |              |       |
| Weighted  average shares outstanding |       | 1,020,737            |       | 1,019,092             |       | 1,007,748        |       | 996,738           |       |

 

**NOTE T- OPERATING SEGMENTS**

 

The Company has two reportable operating segments:commercial and healthcare. Each of the reportable segments provide similarproducts and services, with a focus on primary vertical markets. The implementationand support organizations in both the healthcare and commercial segmentsprovide solutions that include consulting, business software applications,mobile managed services, mobile workstations and devices, and wirelessinfrastructure. The accounting policiesof each segment are the same as those described in Note A - Summary ofSignificant Accounting Policies. The Company evaluates the performance of itsoperating segments based on gross profit and does not allocate assets amongsegments. There are no intersegment sales or transfers.

 
| ** **        | ** ** | **Year ended December 31, 2009** | ** ** |
|-------------------|------------|---------------------------------------|------------|
| ** **        | ** ** | **Healthcare**                        | ** ** | **Commercial** | ** ** | **Total** | ** ** |
| Net  revenues     |       | $                                     | 50,352     |   | $ | 36,564 |   | $ | 86,916 |   |
| Cost  of revenues |       | 36,577                                |       | 30,696 |   | 67,273 |   |
| Gross  profit     |       | $                                     | 13,775     |   | $ | 5,868 |   | $ | 19,643 |   |

 
| ** **        | ** ** | **Year ended December 31, 2008** | ** ** |
|-------------------|------------|---------------------------------------|------------|
| ** **        | ** ** | **Healthcare**                        | ** ** | **Commercial** | ** ** | **Total** | ** ** |
| Net  revenues     |       | $                                     | 64,404     |   | $ | 36,312 |   | $ | 100,716 |   |
| Cost  of revenues |       | 44,364                                |       | 29,812 |   | 74,176 |   |
| Gross  profit     |       | $                                     | 20,040     |   | $ | 6,500 |   | $ | 26,540 |   |

 

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**NOTE U- SUPPLEMENTAL CASH FLOW INFORMATION**

** **
| ** **                                                                           | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                           | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Supplemental  disclosure of cash flow information:                                   |       |                             |       |   |   |   |   |
| Cash  paid for interest                                                              |       | $                                | 3,924      |   | $ | 2,253 |   | $ | 873 |   |
|                                                                                 |       |                             |       |   |   |   |   |
| Non-cash  investing and financing activities:                                        |       |                             |       |   |   |   |   |
| Capital  lease obligations incurred for new equipment                                |       | 12                               |       | 186 |   | 125 |   |
|                                                                                 |       |                             |       |   |   |   |   |
| Issuance  of common shares in connection with acquisitions                           |       | —                           |       | 1,030 |   | 3,363 |   |
| Issuance  of long-term debt in connection with acquisitions                          |       | —                           |       | — |   | 4,000 |   |
| Issuance  of common shares to advisor for services rendered                          |       | —                           |       | 38 |   | 66 |   |
| Liability  incurred for financing cost                                               |       | 450                              |       | 900 |   | — |   |
| Issuance  of common shares and warrants in connection with the Hercules  Restructure |       | 11,580                           |       | — |   | — |   |
| Reclassification  of equity component of Term Loan B                                 |       | 2,368                            |       | — |   | — |   |
|                                                                                      |            |                                  |            |  |  |  |  |  |  |  |

 

**NOTE V- SUBSEQUENT EVENTS**

 

On February 19, 2010, the Company and its subsidiaries enteredinto the Amendment No. 1 (Amendment 1) to the Amended Loan Agreement withHercules, which provides the Company with an Equipment Loan allowing it torequest up to $3,000 in borrowings for use in purchasing equipment (theEquipment Loan). The Company may borrow in minimum increments of $250 under theEquipment Loan, subject to valid, verified purchase orders acceptable toHercules from suppliers approved by Hercules in its sole discretion.  In connection with any advances, the Companywill be charged a fee of 3% of the purchase price identified in the relevant purchaseorders. All customer receipts related to sales of products financed by theEquipment Loan will be placed in a lockbox account under the exclusive controlof Hercules and customer receipts will be applied first to payment of theEquipment Loan fee, second, to the outstanding principal on the Equipment Loanand third, to all other obligations existing under the Equipment Loan. Aftersuch application, the excess in the lockbox account will be returned to theCompany, unless an event of default exists or could reasonably be expected toexist, in which case, Hercules may apply the excess in the lockbox account toany obligation under the Amended Loan Agreement. The Equipment Loan bearsinterest at a rate of 1.5% per month and Hercules’ commitment terminates on April 30,2010

 

OnMarch 25, 2010, Hercules advanced to the Company an additional $1,350,initially applied to the outstanding balance on the Company’s revolving line ofcredit facility. The advance increased the outstanding indebtedness on therevolving line of credit to $8,909, and was provided as an extension above theCompany’s eligible borrowing base.

 

OnApril 6, 2010, the Company entered into Amendment No. 2 (Amendment 2)to the Amended Loan Agreement with Hercules. Pursuant to Amendment 2, Herculesfunded a term loan in an original principal amount of $1,350 (Term Loan C). Theproceeds of Term Loan C were used to repay outstanding overadvances under therevolving credit facility under the Amended Loan Agreement. Interest on TermLoan C will accrue at a rate of 8% per annum and, at the discretion ofHercules, is payable either in cash or in kind by adding the accrued interestto the principal of Term Loan C. All principal outstanding on Term Loan C willbe due and payable on April 1, 2013. Term Loan C may be converted intoshares of the Company’s common stock at a price of $3.276 per share at any timeat Hercules’ option. The Company may prepay Term Loan C without incurring aprepayment penalty charge. The Company also entered into a registration rightsagreement with Hercules whereby it agreed to register the shares underlyingTerm Loan C and certain interest that may be paid in shares.

 

Amendment 2also amended the interest payment options under Term Loan B such that Herculesnow has the option, in its sole discretion, to require any and all interest onTerm Loan B to be paid in cash, in kind or in shares of common stock of theCompany rather than 2.5% as PIK and the balance in cash or conversion of the2.5% PIK interest into cash or shares only if certain pre-defined metrics aremaintained. The number of shares into which accrued interest will be convertedwill be determined based on the adjusted 60-day average trading price of theCompany’s common stock on the date of Hercules’ election to convert theinterest into shares.

 

Amendment2 also amends the default interest payment options under the Amended LoanAgreement. Whereas prior to Amendment 2, default rate interest was payable incash or in kind by adding the accrued interest to the outstanding principalamount, pursuant to Amendment 2, Hercules now has the option to elect to havedefault rate interest paid in cash, in kind or in shares of the Company’scommon stock. All default rate interest paid in kind will be added to theoutstanding principal amount on Term Loan B, notwithstanding on which loan theinterest has accrued. If Hercules elects to have default

 

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rateinterest paid in shares, the number of shares into which such accrued defaultrate interest will be converted will be determined based on the adjusted 60-dayaverage price on the date of Hercules’ election to convert the interest intoshares.

 

On February 10, 2010, Hercules sent the Company a letter notifyingthe Company of an event of default as of February 5, 2010 and charging theCompany a default interest rate of an additional 3% to the applicable regularinterest rate for the period starting February 5, 2010. Events of Defaultare continuing and default rate interest will be payable monthly on the samedate as regular interest unless Hercules chooses to demand payment of defaultinterest on another date.

 

Hercules has not chosen to accelerate the Company’s obligations underthe Amended Loan Agreement, but has expressly not waived any events of defaultor any of its remedies under the loan and security agreement. The Company doesnot have adequate liquidity to repay all outstanding amounts under the creditfacility and payment acceleration would have a material adverse effect on ourliquidity, business, financial condition and results of operations.

 

OnFebruary 17, 2010, Wayne D. Hoch resigned as a director of the Company.His resignation was not due to any disagreement with the Company. As of thedate of his resignation, Mr. Hoch was the chairman of the Audit Committeeof the Board of Directors, as well as a member of the Compensation Committeeand the Nominating and Governance Committee of the Board of Directors.

 

OnApril 6, 2010, the Board of Directors elected Melvin L. Keating to theBoard of Directors. Mr. Keating, an independent director, has beenappointed to the Audit Committee and now serves as its chairman.

 

**Item 9.  Changes in and Disagreements with Accountantson Accounting and Financial Disclosure**

 

None

 

**Item 9A(T).  Controls and Procedures**

 

We maintain disclosure controls and procedures that are designed toensure that information required to be disclosed in our reports filed under theSecurities Exchange Act of 1934, as amended (Exchange Act), is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms and that such information is accumulated and communicatedto our management, including our Chief Executive Officer and Chief FinancialOfficer, as appropriate, to allow for timely decisions regarding requireddisclosure. In designing and evaluating the disclosure controls and procedures,management recognizes that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives, and management is required to apply its judgment inevaluating the cost-benefit relationship of possible controls and procedures.

 

Our Chief Executive Officer and Chief Financial Officer concluded thatour disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) were designed to ensure that theinformation we are required to disclose in our reports under the Exchange Actis recorded, processed and reported in an accurate manner and on a timely basisand the information that we are required to disclose in our Exchange Actreports is accumulated and communicated to management to permit timelydecisions with respect to required disclosure but based on a letter receivedfrom our independent registered public accounting firm discussed below were notoperating in an effective manner.

 

*Management’s Report on Internal Control Over FinancialReporting*

 

Our management is responsible for establishing and maintaining internalcontrol over financial reporting. As required by SEC Rule 15d-15(b), wecarried out an evaluation under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures as of December 31, 2009. As defined in the rules ofthe Securities and Exchange Commission, internal control over financialreporting is a process designed by, or under the supervision of, our principalexecutive and principal financial officers and effected by our Board ofDirectors, management and other personnel, to provide reasonable assurance regardingthe reliability of financial reporting and the preparation of consolidatedfinancial statements for external purposes in accordance with U.S. generallyaccepted accounting principles.

 

Our internal control over financial reporting includes those policiesand procedures that:

 

1.                                       Pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the Company’s transactions and the dispositions of assets of theCompany;

 

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2.                                       Providereasonable assurance that transactions are recorded as necessary to permitpreparation of consolidated financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of theCompany are being made only in accordance with authorizations of our managementand Board of Directors; and

 

3.                                       Providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of the Company’s assets that could have amaterial effect on the financial statements.

 

Because of its inherent limitations, a system of internal control overfinancial reporting can provide only reasonable assurance with respect tofinancial statement preparation and presentation and may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

 

In connection with the preparation of our annual consolidated financialstatements, management has conducted an assessment of the effectiveness of ourinternal control over financial reporting based on the framework set forth in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). Management’s assessment included an evaluation of the design of ourinternal control over financial reporting and testing of the operationaleffectiveness of those controls. Based on this evaluation, we have concludedthat, as of December 31, 2009, our internal control over financialreporting was not effective due to the existence of a material weakness.  A material weakness is a deficiency or acombination of deficiencies in internal control over financial reporting suchthat there is a reasonable possibility that a material misstatement of theannual or interim statements will not be prevented or detected on a timelybasis.

 

This annual report does not include an attestation report of theCompany’s independent registered public accounting firm regarding internalcontrol over financial reporting. Management’s report was not subject toattestation by the Company’s independent registered public accounting firmpursuant to temporary rules of the Securities and Exchange Commission thatpermit the Company to provide only management’s report in this annual report.

 

*Material Weakness Identified*

 

In connection with its auditof our consolidated financial statements for the period ended December 31,2009, our independent registered public accounting firm identified deficienciesin internal control related to our accounting for the HerculesRestructuring.  Specifically, ourindependent registered public accounting firm found that we failed to properlyapply the Debt Topic of the FASB Accounting Standards Codification and failed totimely make certain material adjustments required in connection with theHercules Restructuring, including recording a $5,800 loss on debtextinguishment and a $4,400 increase in additional-paid-in-capital.

 

*Plan for Remediation of MaterialWeaknesses*

 

We intend to takeappropriate and reasonable steps to make the necessary improvements toremediate these deficiencies. 

 

*Changes in internal controls over financial reporting*

 

We continually seek ways to improve the effectiveness and efficiency ofthe Company’s internal controls over financial reporting, resulting in frequentprocess refinement. However, there have been no changes in our internal controlover financial reporting that occurred during our last fiscal period to whichthis Annual Report on Form 10-K relates that have materially affected, orare reasonably likely to materially affect, our internal control over financialreporting.

 

**Item 9B.  Other Information**

 

None.

 

**PART III**

 

**Item 10.  Directors, Executive Officers and CorporateGovernance**

 

***Directors***

 

TheBoard of Directors believes that it is necessary for each of the Company’sdirectors to possess many qualities and skills. When assessing new candidates,the Nominating and Governance Committee considers the evolving needs of theBoard of Directors and identifies prospective directors that fill any currentor anticipated need. In addition, pursuant to the terms of the Debt ConversionAgreement, HTI, our majority stockholder, currently has the contractual rightto nominate at least three members of our Board of Directors and the Chief ExecutiveOfficer will also be one of our directors. Our goal is to assemble a Board ofDirectors that operates cohesively and works with management in a constructiveway so as to deliver long term stockholder value. Although we do not have aformal diversity policy, our Nominating and Governance Committee and Board ofDirectors consider the diversity of directors in many different forms,including diversity of executive and professional experience and perspectives,in our nominating process.

 

Webelieve that our current Board of Directors consists of individuals who haveachieved success in their chosen professions and possess high integrity andintellect. They are committed to being informed about our industry, ourcompany, and its key constituents including customers, suppliers, stockholdersand management. Our Board of Directors has identified the following skills thatare most important to our long-term success: accounting and finance knowledge,business judgment, leadership ability, experience in the informationtechnology, healthcare and/or commercial industries, and development of

 

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early stage and/or growingmiddle market companies.

 

Informationabout each director’s specific experience, qualifications and skills can befound in the biographical information below. Each of our directors serves aone-year term until his successor has been duly elected and qualified.

 

**Mark S.Denomme**, 43,joined our Board of Directors in November 2009. He is a Managing Directorat Hercules (NASDAQ: HTGC), a specialty finance company providing venture debtand equity to venture capital and private equity-backed technology and life sciencecompanies at all stages of development and the parent corporation of HTI. Mr. Denommehas over 20 years of experience in financial services. Prior to joiningHercules, Mr. Denomme was a Senior Vice President at Brown BrothersHarriman & Co., focusing on investments in middle market healthcarecompanies. From 2000 to 2006, Mr. Denomme was a Managing Director andco-founder of Consilium Partners, an investment banking firm focused primarilyon sell-side and buy-side engagements for lower middle market companies. From1997 to 2000, Mr. Denomme was a Director in the Leveraged Finance group ofBancBoston Robertson Stephens, focusing on originating loan syndication andhigh yield debt opportunities for the firm’s technology and media clients. From1988 to 1997, Mr. Denomme was a commercial lender with Bank of Bostonfocused on structured debt opportunities with technology and media-relatedcompanies. Mr. Denomme holds a BBA degree from the University of Michigan.Mr. Denomme was nominated for election as director by HTI pursuant to itsrights under the Debt Conversion Agreement. We and Mr. Denomme are partyto a director indemnification agreement whereby we have agreed to indemnifyhim, to the fullest extent permitted by the law of the State of Delaware, fromindemnifiable losses arising as a result of his role as a member of our Boardof Directors.

 

Mr. Denomme’sexperience in financial services positions, including significantmanagement-level experience working in an investor or lender capacity withdeveloping and middle markets companies in the technology, healthcare and lifesciences industries, provides him with a strong understanding of the needs of agrowing middle market company in our industry and finance knowledge, which isparticularly useful in understanding our financial and liquidity needs.

 

**David T.Gulian**, 45,co-founded InfoLogix in 2001 and serves as our President and Chief ExecutiveOfficer. Mr. Gulian has served as a member of our Board of Directors sinceNovember 2006 and as a member of the Board of Directors of InfoLogixSystems Corporation, our wholly-owned subsidiary, since 2001. Mr. Gulianguided InfoLogix from a privately held company to a NASDAQ listed publiccompany raising over $17,000 in initial capital and over $40,000 in growth capitalto date. He has acquired and integrated several technology and IP companies atInfoLogix. Mr. Gulian has over 20 years of industry experience withleading information technology and enterprise mobility firms includingextensive experience in the mobile technology space for commercial andhealthcare industries. Setting the vision, he has cultivated business forproduct and go to market strategies for all entities and subsidiaries ofInfoLogix. Prior to the formation of InfoLogix, Mr. Gulian co-founded, andfrom 1996 to 2001 served as President of, Prologix, a provider of mobilitysystems and wireless platforms. Prologix merged with Datavision in 1999. Priorto Prologix, Mr. Gulian was the Vice President of RF Mobile Solutions from1994 to 1996. Mr. Gulian has provided advisory services to multiplecompanies and boards through the years.

 

Mr. Gulian,as co-founder of the Company and President and Chief Executive Officer ofInfoLogix, Inc., possesses a thorough knowledge of our day-to-dayoperations, well-developed business judgment, leadership ability and a deepworking knowledge of our industry.

 

**Manuel A. Henriquez**, 46, joined our Board ofDirectors in November 2009. Mr. Henriquez is the co-founder, Chairmanand CEO of Hercules (NASDAQ: HTGC), a specialty finance company providingventure debt and equity to venture capital and private equity-backed technologyand life science companies at all stages of development and the parentcorporation of HTI. Prior to co-founding Hercules, Mr. Henriquez was apartner at VantagePoint Venture Partners, a $2.5 billion multi-stage venturecapital firm, where he was an active equity investor and board member of manyleading communications and software companies. From 1997 to March 2000, Mr. Henriquezwas at Comdisco Ventures, where he was the president and chief investmentofficer, along with other senior level positions. While at Comdisco Ventures,he co-headed the investment activities for more than $2 billion in investmentsto venture backed companies. Earlier in his career, Mr. Henriquez was avice president at Robertson Stephens & Co.’s late stage equity venturefund, CrossLink Capital (fka Omega Ventures). From 1987 to early 1991, Mr. Henriquezwas a vice president at BancBoston Ventures, the Bank of Boston’s early stageventure capital fund. He also was in the Bank of Boston’s specialized HighTechnology Lending Group. In addition to his extensive debt and equityinvestment experience, Mr. Henriquez has held various senior executivelevel operating positions at companies, including ON Technology (NASDAQ: ONTC),a Kleiner Perkins Caufield & Byers

 

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venturebacked software company acquired by Symantec (NASDAQ: SYMC). He was also thefounder of various technology companies including HealthyPets, acquired byPetopia.com. Mr. Henriquez earned his B.S. in Business Administration andFinance from Northeastern University. Mr. Henriquez has also served on theboard of directors of many technology companies, including Alopa Networks(acquired by C-Cor: CCBL), Asiner, S.A. (Mexico City), eAssist Solutions(acquired by Talisma), New Channel (acquired by LivePerson: LPSN), Qiva(acquired by TradeBeam). Savvion, STSN, and Think Engines (acquired byCognitronics: CGN). Mr. Henriquez was nominated for election as directorby HTI pursuant to its rights under the Debt Conversion Agreement. We and Mr. Henriquezare party to a director indemnification agreement whereby we have agreed toindemnify him, to the fullest extent permitted by the law of the State ofDelaware, from indemnifiable losses arising as a result of his role as a memberof our Board of Directors.

 

Mr. Henriquezco-founded Hercules and currently serves as its Chairman and Chief ExecutiveOfficer. As the founder and leader of a NASDAQ-listed company, he possesseswell-developed business judgment and leadership ability in running and growinga company. Through these roles, he also understands the needs of a growingmiddle market company in our industry and has financial knowledge. Mr. Henriquezis a member of the Compensation Committee and the Nominating and GovernanceCommittee of our Board of Directors.

 

**Melvin L. Keating**, 63, joined our Board of Directors in April 2010:Mr. Keating is currently providing investment advice and other services tovarious private equity forms. He was President and Chief Executive Officer ofAlliance Semiconductor Corporation, a worldwide manufacturer and seller ofsemiconductors, from 2005 to 2008.  From2004 to 2005, Mr. Keating served as Executive Vice President, ChiefFinancial Officer and Treasurer of Quovadx Inc., a healthcare software company.Mr. Keating was employed as a Strategy Consultant for Warburg PincusEquity Partners from 1997 to 2004, providing acquisition and investment targetanalysis and transactional advice. Mr. Keating also was President andChief Executive Officer of Sunbelt Management Company, a private,European-owned real estate development firm, from 1995 to 1997. From 1986 to1995, Mr. Keating was Senior Vice President, Financial Administration ofOlympia & York Companies/Reichmann International, responsible forjoint ventures, financial reporting and acquisitions. Mr. Keating is alsoa director of White Electronic Designs Corp., serving on its Audit Committeeand Operations Committee, a director of Aspect Medical Systems Inc., serving onits Strategic Committee and Compensation Committee, and serves on the advisoryboard of BTI Systems, Inc. During the course of his career, Mr. Keatinghas served on the Board of Directors of seven publicly-traded organizations,including serving as audit committee chair at Integrated Silicon SolutionsInc., Plymouth Rubber Co., Price Legacy Corp., a REIT that he helped to create,Tower Semiconductor, and LCC International, Inc.  Mr. Keating holds a B.A. degree fromRutgers University, as well as an M.S. in Accounting and M.B.A in Finance, bothfrom The Wharton School of the University of Pennsylvania.

 

Mr. Keatinghas significant executive-level leadership experience and possesses businessjudgment and leadership ability in establishing, developing and running growingcompanies like ours. His experience and education has also provided him withfinancial expertise, including in roles where has been called on to exercise animportant oversight function.  Mr. Keatingis the Chairman of the Audit Committee of our Board of Directors

 

**ThomasC. Lynch**, 67,joined our Board of Directors in November 2006. He has served as a SeniorVice President of The Musser Group, a private equity and venture advisory firmsince January 2008. Since September 2008 he serves as a managingdirector for Jones Lang LaSalle. From 2001 through September 2008, heserved as a Senior Vice President of The Staubach Company, a real estateadvisory firm. From 1995 to 2000, Mr. Lynch served as a Senior VicePresident for Safeguard Scientifics, Inc., a public investment firmspecializing in expansion financing, management buyout, recapitalization,industry consolidation, and early-stage transactions. While at Safeguard, heserved from 1998 to 2000 as President and Chief Operating Officer at CompuComSystems, a subsidiary of Safeguard. Following a 31 year career of Naval serviceafter graduating from the U.S. Naval Academy, he retired with the rank of RearAdmiral in 1995. Mr. Lynch’s Naval service included Chief, NavyLegislative Affairs, command of the Eisenhower Battle Group during OperationDesert Shield and Superintendent of the U.S. Naval Academy from 1991 to 1994. Mr. Lynchserves as a director on the following boards: PRWT Services, Buckeye InsuranceCompany, Pennsylvania Eastern Technology Council, the Armed Forces BenefitAssociation (5 Star Life), Mikros Communications (serves on the auditcommittee), Telkonet (serves on the audit committee), and USO World Board ofGovernors. He also serves as a trustee of the U.S. Naval Academy Foundation.

 

Mr. Lynch hassignificant executive-level leadership experience in the areas of venturecapital, private equity and expansion financing, and developed leadershipqualities from his experience in command positions with the United States Navyand as the superintendent of the Naval Academy. By virtue of these experiences and his participation on the boards ofdirectors of other companies, he brings business judgment, leadership ability,financial knowledge and an understanding of the needs of developing middlemarket companies like ours.  Mr. Lynchis the Chairman of the Nominating and Governance Committee of our Board ofDirectors.

 

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**Roy Y.Liu**, 49, joinedour Board of Directors in November 2009. He is is a Managing Director atHercules (NASDAQ: HTGC), a specialty finance company providing venture debt andequity to venture capital and private equity-backed technology and life sciencecompanies at all stages of development and the parent corporation of HTI.Previously, he was a Vice President at GrandBanks Capital and led the firm’sinvestment in Colubris Networks (acquired by Hewlett-Packard), and was a boardobserver for CXO Systems and GlassHouse Technologies. Mr. Liu co-foundedImperial Bank’s Boston office in 1997, providing debt financing forventure-backed companies. In addition, Mr. Liu has served as ChiefFinancial Officer of several technology start-ups. Mr. Liu started hisfinance career in the Acquisition Finance Division of the Bank of Boston. Priorto his career in finance, Mr. Liu worked at IBM in research &product development. He holds a BS degree in Electrical Engineering and aMasters in Business Administration from the University of Michigan. Mr. Liuwas nominated for election as director by HTI pursuant to its rights under theDebt Conversion Agreement. We and Mr. Liu are party to a directorindemnification agreement whereby we have agreed to indemnify him, to thefullest extent permitted by the law of the State of Delaware, fromindemnifiable losses arising as a result of his role as a member of our Boardof Directors.

 

Mr. Liu’sexperience in financial services positions, including significant experienceworking with developing and middle markets companies and his experience servingas the chief financial officer of several companies in the technology,healthcare and life sciences industries, provide him with a strongunderstanding of the needs of a growing middle market company and accountingand financial knowledge, which is particularly useful in understanding ourfinancial and liquidity needs.

 

**ThomasO. Miller**, 58,joined our Board of Directors in November 2006. He is currently a partnerin The SAGE Company, which assists small to mid-size companies by providingconsulting services to build increased levels of company performance and value.Mr. Miller was President of Intermec Technologies, a supply chaininformation systems provider, from 2004 to 2005 and a corporate officer inUNOVA Corporation, Intermec’s parent company, from 2001 to 2006. Mr. Milleralso served as Intermec’s Executive Vice President, Global Sales and Marketingfrom 2001 to 2003 and Senior Vice President, Sales Americas and as Senior VicePresident of System and Solutions from 1999 to 2001. From 1982 to 1999, heserved in various positions with Norand Corporation including President andSenior Vice President of Sales, Marketing and Operations, helping in thedevelopment of Norand’s point-of-sale, wireless and direct store deliveryautomation businesses and in its 1997 sale to Western Atlas Corporation. Mr. Millerserves on the board of directors for Socket Mobile, Inc. From 1996 to2001, Mr. Miller was a member of the board of directors of Eagle PointSoftware, a NASDAQ-listed architecture, civil engineering, and landscaping softwarecompany and, from 2003 to 2006, Mr. Miller served as Chairman of the Boardof directors of the Automatic Identification and Mobility Association.

 

Mr. Miller’sexperience as a partner in The SAGE Group, prior executive leadership roles,and current and prior service on boards of directors of other companies providehim with well-developed business judgment and accounting and financialknowledge, as well as a particular understanding of developing middle marketcompanies. As a result of his experiences with Intermec, UNOVA and Norand, hepossesses a deep knowledge of our industry and product offerings. Mr. Milleris the Chairman of the Audit Committee of our Board of Directors.

 

***Executive Officers***

 

Set forth below is biographical information concerning the non-directorexecutive officers of InfoLogix, Inc.:

 

**John A. Roberts**, 51, has served as ourChief Financial Officer since September 2006 and our Secretary since November 2006.Mr. Roberts served as Acting Chief Financial Officer and Secretary ofClarient, Inc., a publicly-traded provider of diagnostic laboratoryservices, from February 2006 until August 2006. Mr. Robertsserved as Chief Financial Officer and Secretary of Daou Systems, Inc., apublicly-traded professional services consulting business specializing inhealthcare information technology, from 2003 to 2006. From 2001 to 2002, Mr. Robertsserved as the Vice President of Business Development for MEDecision, Inc.,a software products company providing medical management solutions for managedcare organizations. From 1999 to 2001, Mr. Roberts held the position ofSenior Vice President of Corporate Development and Chief Financial Officer forHealthOnline, Inc., a provider of web-based community hosting services.Since 2009, Mr. Roberts is a member of the Board of Directors for the DrugInformation Association and is chairman of the association’s audit committee.His term expires in 2011. Mr. Roberts earned a Bachelor of Science and aMaster’s degree in Business Administration from the University of Maine.

 

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**Eric N. Rubino**, 51, has served as ourChief Operating Officer since November 2007. Before joining InfoLogix, Mr. Rubinoserved as the Chief Operating Officer of Neoware, a publicly-traded provider ofthin client computing devices, software and services, where he was responsiblefor overseeing operations, customer service, engineering, informationtechnology, administration and human resources from 2002 to September 2007.Before joining Neoware, Mr. Rubino worked for SAP Americas, a subsidiaryof business software company SAP AG, from 1991 to 2002 and served as its SeniorVice President, General Counsel and Corporate Secretary from 1995 to 1999 andChief Operating Officer from 1999 to 2002. Mr. Rubino earned a Bachelor ofScience in Marketing from Rider University, a Master’s degree in BusinessAdministration from St. Joseph’s University, and a Juris Doctor from WidenerUniversity School of Law.

 

**Gerald E. Bartley**, 67, has served asExecutive Vice President and as Managing Director of our HIA Consulting groupsince September 2007. Mr. Bartley served as President and ChiefExecutive Officer of Healthcare Informatics Associates, Inc., aspecialized healthcare consulting business, from 1996 to September 2007.Before joining Healthcare Informatics Associates, Inc., Mr. Bartleyserved as Vice President for BRC Healthcare, a hospital IT outsourcing firmfrom 1994 to 1996. In addition, Mr. Bartley served in various managementcapacities for the Healthcare Division of Alltel/TDS Healthcare Systems, an HISsoftware and outsourcing corporation, from 1982 to 1994, Mr. Bartleyserved as Chief Information Officer of Washoe Medical Center, Reno Nevada andKettering Medical Center, Kettering, Ohio. Mr. Bartley earned his MedicalTechnology degree and was a pre-med student for Veterinary Medicine.

 

***Board Structure***

 

Wehave chosen to combine the role of Chief Executive Officer and President inDavid T. Gulian because we believe doing so facilitates the exchange ofinformation between the Board of Directors and our employees as well as theexecution by management of the strategic goals developed by the Board ofDirectors. Because Mr. Gulian is the only employee director, we are a “controlledcompany” and exempt from certain NASDAQ corporate governance requirements, andthe Audit Committee is composed solely of independent directors (as defined bythe NASDAQ listing standards), the Board of Directors does not believeestablishing the position of an independent chairman or lead independentdirector would provide an additional benefit that would outweigh theefficiencies of the current structure.

 

***Audit Committee***

 

Theboard of directors has a standing Audit Committee which is comprised of MelvinL. Keating (Chairman), Thomas O. Miller and Thomas C. Lynch. The principalduties of the Audit Committee are to oversee management’s conduct of ouraccounting and financial reporting processes, the audit of our financialstatements and our compliance with applicable legal and regulatoryrequirements, to select and retain our independent registered public accountingfirm, to review with management and the independent registered publicaccounting firm our annual financial statements and related footnotes, toreview our internal audit activities, to review with the independent registeredpublic accounting firm the planned scope and results of the annual audit andtheir reports and recommendations, and to oversee management’s maintenance of,and review with the independent registered public accounting firm mattersrelating to, our system of internal controls. From the date of Wayne D. Hoch’sresignation from our Board of Directors and Audit Committee on February 17,2010, to the election of Melvin L. Keating to our Board of Directors andappointment to the Audit Committee, we did not have an audit committeefinancial expert. Our Board of Directors has determined that Mr. Keatingis an “audit committee expert” in accordance with the definition of that termset forth in Item 4079d0(5)(ii) of Regulation S-K, as adopted by the SEC.

 

***Code of Ethics***

 

InfoLogix maintains a code of business conduct and ethics fordirectors, officers and employees, including its Chief Executive Officer andChief Financial Officer. The code is available free of charge on our website at*www.infologix.com*, as well as inprint to any stockholder upon request by writing to InfoLogix at 101 E. CountyLine Road, Suite 210, Hatboro, Pennsylvania, 19040 or by calling215-604-0691. Our Board of Directors and Nominating and Governance Committeeregularly reviews corporate governance developments and modifies the code aswarranted. Any modifications are reflected on our website. We intend to satisfythe disclosure requirements under Item 10 of Form 8-K regarding anamendment to, or waiver from, a provision of our code by posting suchinformation on our website.

 

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***Section 16(a) BeneficialOwnership Reporting Compliance***

 

Section 16(a) of the Securities Exchange Act of 1934 requiresour executive officers and directors and persons who own more than ten percent ofa registered class of our equity securities (collectively, the “reportingpersons”) to file reports of ownership and changes in ownership with theSecurities and Exchange Commission and to furnish InfoLogix with copies ofthese reports. Based on our review of the copies of the reports we havereceived, and written representations received from certain reporting personswith respect to the filing of reports on Forms 3, 4 and 5, InfoLogixbelieves that all filings required to be made under Section 16(a) bythe reporting persons since our common stock became registered pursuant to Section 12of the Exchange Act were made on a timely basis, except that David T. Gulian,Richard D. Hodge and Warren V. Musser were each inadvertently late in filing a Form 4related to the cancellation of a warrant and a grant of a new warrant toacquire shares of our common stock.

 

**Item 11.  Executive Compensation**

 

**Executive Compensation**

 

*Compensation Committee*

 

During2008 and through November 20, 2009, the Compensation Committee of ourBoard of Directors was comprised of Thomas O. Miller (Chairman), Wayne D. Hoch,and Richard A. Vermeil. Mr. Henriquez joined our Compensation Committee onNovember 20, 2009 and Mr. Vermeil resigned. Mr. Hoch resignedfrom our Board of Directors on February 17, 2010. Currently, theCompensation Committee consists of Thomas O. Miller (Chairman) and Manuel A.Henriquez. The principal duties of the Compensation Committee are to review andapprove goals and objectives relevant to the compensation and benefits of ourChief Executive Officer, to recommend to the independent directors the annualand long term compensation of our Chief Executive Officer in accordance withthose goals and objectives and in light of existing agreements, to review,approve and recommend to the independent directors the annual compensation forall executive officers, to make recommendations to our board of directorsregarding incentive compensation and stock incentive plans, and to administerstock incentive plans. The Compensation Committee may form, and delegate all orany portion of its functions to, a subcommittee consisting of one or more ofits members.

 

The Compensation Committee met twice during 2009. Meeting agendas areset by the Chairman. The Compensation Committee approves all employment orseverance agreements entered into with the Chief Executive Officer and otherexecutives. In the absence of a formal agreement, base salaries for the ChiefExecutive Officer and the other executive officers are set annually by the CompensationCommittee and our board of directors, typically in March of each yearafter our financial results are known. In determining whether to recommend tothe independent directors for approval merit based increases to the basesalaries of the Chief Executive Officer and our other executive officers, theCompensation Committee considers our overall performance compared to our statedstrategic plan, including objective performance criteria such as the levels ofnet income, EBITDA and revenues that we achieved from year to year and overlonger time periods. In accordance with our statement on corporate governance,the Compensation Committee also considers the following criteria whenevaluating the performance of our Chief Executive Officer for potential meritbased salary increases and other compensation awards: (i) the creation ofour vision and strategy; (ii) the execution of our vision and strategy; (iii) thedevelopment of sound long term and annual business plans in support of theapproved strategy; (iv) maintenance of consistent values and exemplaryconduct; and (v) the development, retention and motivation of an effectiveexecutive management team and succession plans for our executive managementteam.

 

The Compensation Committee considers the recommendations of our ChiefExecutive Officer in establishing compensation for other executive officers andinvited our Chief Executive Officer to participate in its meetings to discussthe compensation of our other executive officers. When considering whether to awardstock options to the Chief Executive Officer and other executive officers, andthe size of any such award, the Compensation Committee considers previousequity awards made to the Chief Executive Officer and other executive officers,the size of their equity interest in InfoLogix, their job duties andresponsibilities, and the overall contribution made to InfoLogix. TheCompensation Committee also considers conditions in the market for executivetalent in which it competes when determining the size of any option award to bemade to a candidate for a position as an executive officer. To date, theCompensation Committee has made grants of stock options to executive officersupon the consummation of the merger with New Age Translation, Inc. or inconnection with the officer’s initial hiring and subsequent incentive awardsgranted in 2008.

 

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TheCompensation Committee has the exclusive authority to retain and terminateexecutive compensation consultants that assist in the evaluation of executiveofficer or director compensation. To date, the Compensation Committee has notengaged a compensation consultant to assist it in setting executive officer ordirector compensation. The Board of Directors and the Compensation Committeehas reviewed our compensation policies and practices for executive officers andother employees and to not believe they create risks that are reasonably likelyto have a material adverse effect on the Company.

 

**SummaryCompensation Table—2009 and 2008**

 

Thefollowing table summarizes the compensation of our named executive officers in2008 and 2009. The named executive officers are our Chief Executive Officer andthe two other executive officers who were most highly compensated in 2009.

 
| **Name and Principal Position**        | ** ** | **Year** | ** ** | **Salary($)** | ** ** | **Bonus($)** | ** ** | **Option  Awards($)(1)** | ** ** | **All Other  Compensation($)** | ** ** | **Total($)** | ** ** |
|----------------------------------------|------------|----------|------------|---------------|------------|--------------|------------|--------------------------|------------|--------------------------------|------------|--------------|------------|
| David  T. Gulian(2)                    |       | 2009     |       | 356,849       |       | 50,000       |       | —                   |       | 43,000                         |       | 449,849      |       |
| President  and Chief Executive Officer |       | 2008     |       | 335,452       |       | 118,731      |       | 90,900                   |       | 38,016                         |       | 464,368      |       |
| Richard  D. Hodge(3)                   |       | 2009     |       | 296,396       |       | 10,000       |       | —                   |       | 48,000                         |       | 354,396      |       |
| Executive  Vice President              |       | 2008     |       | 295,524       |       | 96,923       |       | —                   |       | 43,130                         |       | 552,802      |       |
| John  A. Roberts(4)                    |       | 2009     |       | 226,485       |       | 60,000       |       | —                   |       | 16,400                         |       | 302,885      |       |
| Chief  Financial Officer               |       | 2008     |       | 215,000       |       | 42,126       |       | 45,450                   |       | 16,000                         |       | 318,576      |       |

 

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(1)                                  The amounts shown in theOption Awards column represent the aggregate grant date fair value amounts for2009 and 2008 in connection with options granted to the named executiveofficers, and warrants awarded to Messrs. Gulian and Hodge, as computed inaccordance with the Financial Accounting Standards Board (FASB) guidanceregarding share-based payments. The amounts previously reported in 2008 havebeen restated in accordance with new SEC rules relating to executivecompensation disclosure. For information regarding significant factors,assumptions and methodologies used in our computations pursuant to the FASBguidance see Note Q, “Stock-Based Compensation Expense” to ourconsolidated financial statements in Item 8 of Part II of this Form 10-K.

 

(2)                                  The amounts reported for Mr. Gulianin the Salary column represent the base salary paid by us of $335 in 2008 and$357 in 2009. In November 2009,in connection with the Hercules Restructuring, we cancelled a warrantpreviously granted to Mr. Gulian to acquire 30,000 shares of our commonstock at an exercise price of $50.00 per share and granted him a warrant toacquire up to 30,000 shares of our common stock at an exercise price of $1.8575per share and otherwise on substantially the same terms as the cancelledwarrant. The amounts reported for Mr. Gulian in the All Other Compensationcolumn represent health insurance premiums, life and disability insurancepremiums and auto allowance, respectively, paid by us of $16, $4 and $18 in2008 and $18, $7, and $18 in 2009.

 

(3)                                  The amounts reported for Mr. Hodgein the Salary column represent the base salary paid by us of $296 in 2008 and$296 in 2009. In November 2009,in connection with the Hercules Restructuring, we cancelled a warrantpreviously granted to Mr. Hodge to acquire 15,000 shares of our commonstock at an exercise price of $50.00 per share and granted him a warrantacquire up to 15,000 shares of the Company’s common stock at an exercise priceof $1.8575 per share and otherwise on substantially the same terms as thecancelled warrant. The amounts reported for Mr. Hodge in the AllOther Compensation column represent health insurance premiums, life anddisability insurance premiums and auto allowance, respectively, paid by us of$16, $9 and $18 in 2008 and $18, $12 and $18 in 2009. Mr. Hodge’semployment with the Company terminated on February 12, 2010.

 

(4)                                  The amounts reported for Mr. Robertsin the Salary column represent the base salary paid by us of $215 in 2008 and$226 in 2009. The amounts reported for Mr. Roberts in the All OtherCompensation column represent health insurance premiums, life and disabilityinsurance premiums and auto allowance, respectively, paid by us of $6,$2 and $8in 2008 and $0.4, $8 and $8 in 2009.

 

**Employment Arrangements**

 

***David T. Gulian.***  We entered into an employment agreement withDavid T. Gulian in July 2006. Under this agreement, Mr. Gulian agreedto continue acting as our President and Chief Executive Officer, under thesupervision of our Board of Directors, and to perform such duties and to havesuch authority consistent with his position as may from time to time bespecified by our Board of Directors. Mr. Gulian’s employment agreement hada two-year term and expired on December 31, 

 

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2008. On March 13,2009, we entered into a severance agreement with Mr. Gulian. Under theseverance agreement, Mr. Gulian agreed to continue as our President andChief Executive Officer, under the supervision of our Board of Directors, andto perform such duties and to have such authority consistent with his positionas may from time to time be specified by our Board of Directors. Ascompensation for his services pursuant to the severance agreement, we pay Mr. Guliana base salary of $361 per year beginning January 1, 2009 and terminatingon December 31, 2010. Thereafter, the term of the agreement willautomatically extend an additional year on each anniversary date unless ourBoard of Directors, at its discretion, elects not to continue the severanceagreement. TheCompensation Committee did not set bonus targets for the fiscal year ending December 31,2009 and a $50 bonus was paid to Mr. Gulian in December 2009. Under the termsof his severance agreement, Mr. Gulian has agreed to standardconfidentiality restrictions. He is also subject to a noncompetition covenantthat generally restricts his ability to compete with us in the United Statesfor a period of one year following the termination of his employment for anyreason. Mr. Gulian has also agreed to a nonsolicitation covenant that isapplicable during the term of his employment and for a period of one yearfollowing the termination of employment.

 

In2009, we cancelled a warrant to purchase 30,000 shares of our common stock atan exercise price of $50.00 per share that had been granted to Mr. Gulianin 2006 and issued him a warrant to purchase up to 30,000 shares of our commonstock at an exercise price is $1.8575 per share and otherwise on substantiallythe same terms as the cancelled warrant. In 2008, we granted Mr. Gulianoptions to purchase 6,000 shares of our common stock at an exercise price of$23.00 per share and in 2006, Mr. Gulian was also granted options topurchase up to 12,000 shares of our common stock at an exercise price of $50.00per share. We have obtained a long-term disability insurance policy for Mr. Gulianand pay all premiums on that policy.

 

***Richard D. Hodge.***  We entered into an employment agreement withRichard D. Hodge in July 2006. Under this agreement, Mr. Hodge agreedto continue acting as Executive Vice President, under the supervision of ourChief Executive Officer, and to perform such duties and to have such authorityconsistent with his position as may from time to time be specified by our ChiefExecutive Officer. Mr. Hodge’s employment agreement expired on December 31,2008. On March 13, 2009, we entered into a severance agreement with Mr. Hodge.Under the severance agreement, Mr. Hodge agreed to continue as ourExecutive Vice President, under the supervision of our Chief Executive Officer,and to perform such duties and to have such authority consistent with hisposition as may from time to time be specified by our Chief Executive Officer.As compensation for his services pursuant to the severance agreement, we paid Mr. Hodgea salary of $295 in 2009.

 

The Compensation Committee did not set bonus targetsfor the fiscal year ending December 31, 2009 and a $10 bonus was paid to Mr. Hodgein December 2009. Mr. Hodge’s employment with us ended on February 12,2010 (the “Termination Date”). Under the terms of the severance agreement, hewas paid, during 2010, a severance payment equal to one year’s base salary. Fora period of one year following the Termination Date, Mr. Hodge is subjectto standard non-solicitation and non-competition covenants. He is also bound toconfidentiality covenants indefinitely. In 2009, we cancelled a warrant topurchase 12,000 shares of our common stock at an exercise price of $50.00 pershare that had been granted to Mr. Hodge in 2006 and issued him a warrantto purchase up to 15,000 shares of our common stock at an exercise price is$1.8575 per share and otherwise on substantially the same terms as thecancelled warrant. In 2006, Mr. Hodge was granted options to purchase upto 15,000 shares of our common stock at an exercise price of $50.00 per share.All of Mr. Hodge’s outstanding options will terminate three months afterhis Termination Date.

 

***John A. Roberts.*** We entered into anemployment agreement with John A. Roberts in September 2006. Under thisagreement, Mr. Roberts agreed to serve as our Chief Financial Officer,under the supervision of our Chief Executive Officer, and to perform suchduties and to have such authority consistent with his position as may be fromtime to time specified by the Chief Executive Officer. Mr. Roberts’employment agreement had a two year term and expired on December 31, 2008.On March 13, 2009, we entered into a severance agreement with Mr. Roberts.As compensation for his services pursuant to the severance agreement, we pay Mr. Robertsa salary of $226 per year starting on January 1, 2009 and ending on December 31,2010. Thereafter, the term of the agreement will automatically extend anadditional year on each anniversary date unless our Board of Directors, at itsdiscretion, elects not to continue the severance agreement. The CompensationCommittee did not set bonus targets for the fiscal year ending December 31,2009 and a $60 bonus was paid to Mr. Roberts in December 2009. Underthe terms of his severance agreement, Mr. Roberts has agreed to standard confidentialityrestrictions. He is also subject to a noncompetition covenant that generallyrestricts his ability to compete in the United States for a period of one yearfollowing the termination of his employment for any reason. Mr. Robertshas also agreed to a nonsolicitation covenant that is applicable during theterm of his employment and for a period of one year following the terminationof employment.

 

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In2008, we granted Mr. Roberts options to purchase 3,000 shares of commonstock under our equity incentive compensation plan at an exercise price of$23.00 per share and, in 2006, Mr. Roberts was granted options to purchaseup to 12,000 shares of our common stock at an exercise price of $50.00 pershare.

 

**Outstanding Equity Awards at Fiscal Year End 2009**

 

The following table shows information concerning outstanding equityawards at December 31, 2009 made by InfoLogix to our Chief ExecutiveOfficer and our two other most highly compensated officers.

 
| ** **          | ** ** | **Executive Incentive Plan Awards**                                        |       |
|---------------------|------------|----------------------------------------------------------------------------|------------|
| **Name**            | ** ** | **Number of  securities  underlying  Unexercised Awards  (#) exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised Awards  Unexercisable (#)** | ** ** | **Award Exercise  Price($)** | ** ** | **Award  Expiration Date** |   |
| David T. Gulian     |       | 1,500                                                                      |       | 4,500 | (4) | 23.00 |   | 11/06/2018 |   |
|                |       | 9,000                                                                      |       | 3,000 | (1) | 50.00 |   | 11/29/2016 |   |
|                |       | —                                                                     |       | 30,000 | (2) | 50.00 |   | 11/29/2011 |   |
| Richard D. Hodge(5) |       | 9,000                                                                      |       | 3,000 | (1) | 50.00 |   | 11/29/2016 |   |
|                |       | —                                                                     |       | 15,000 | (3) | 50.00 |   | 11/29/2011 |   |
| John A. Roberts     |       | 750                                                                        |       | 2,250 | (4) | 23.00 |   | 11/29/2018 |   |
|                |       | 9,000                                                                      |       | 3,000 | (1) | 50.00 |   | 11/29/2016 |   |

 

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| (1)    | Represents  options vesting in equal annual installments over four years on November 29  of each year beginning on November 29, 2007.                                                                                                                                                  |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                             |
| (2)    | Represents  warrants that vested with respect to 23,750 shares on January 5, 2010  and that vest, starting on February 28, 2010, with respect to 625 shares  per month until fully vested.                                                                                             |
|   |                                                                                                                                                                                                                                                                                             |
| (3)    | Represents  warrants that vested with respect to 11,250 shares on January 5, 2010  and that vest, starting on February 28, 2010, with respect to 625 shares  per month until fully vested.                                                                                             |
|   |                                                                                                                                                                                                                                                                                             |
| (4)    | Represents  options vesting in equal annual installments over four years on  November 6 of each year beginning on November 6, 2009.                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                             |
| (5)    | On  December 30, 2009, it was determined that Mr. Hodge’s  employment with the Company would terminate on February 12, 2010. On  such date, all of his unvested options became immediately exercisable. All of  his outstanding options will terminate on May 12, 2010. |

 

**Potential Payments Upon Termination or Change ofControl or Retirement**

 

As described under “Employment Arrangements” in this Item 11, on March 13,2009, we entered into severance agreements with our named executive officers.The following is a summary of the arrangements that provide for payment to ourChief Executive Officer and our two other most highly compensated officers,following or in connection with any Change of Control of InfoLogix or change intheir responsibilities or other event that results in termination, includingresignation, severance, retirement or constructive termination. Under theseverance agreements, a “Change of Control” is defined as a merger orconsolidation of InfoLogix, a sale, lease, exchange or transfer of all orsubstantially all of our assets, a dissolution and liquidation of InfoLogix,any person or group becoming the beneficial owner of a majority of our votingsecurities or, during any twelve-month period, the current directors no longerconstitute a majority of our board of directors, unless the election of atleast 75% of the new directors was approved by two-thirds of the directors inoffice at the time. As a result of the Hercules restructuring we experienced aChange of Control on November 20, 2009.

 

*David T. Gulian, Richard D. Hodge, and John A.Roberts (each, an “Executive”)*

 

*Termination by Us following a Change of Control ofInfoLogix.* If, following the occurrence of a Change of Controlof InfoLogix,

 

(i)                                    the Executiveis not offered employment by the successor company,

 

(ii)                                 within one yearafter the Change of Control, the Executive is terminated by the successorcompany for a reason other than for “Cause” (“Cause” being defined to include, amongother things, embezzlement, 

 

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indictment for fraud, gross incompetence (after 15 days’ noticespecifying the applicable deficiencies), and disclosure of our confidentialinformation) or other than due to the Executive’s disability, or

 

(iii)                              within one yearafter the Change of Control, the Executive terminates his employment with thesuccessor company for “Good Reason,” after having provided the successorcompany with written notice that he believes he has the right to terminate forGood Reason and the successor has failed to eliminate the Good Reason within15 days of the notice (“Good Reason” being defined to include, among otherthings, demotion, reduction of compensation, and/or relocation),and, providedthat the Executive signs a full release in our favor, then:

 

(a)         we will pay him any accruedbut unpaid salary and vacation, as well as severance of (1) the Executive’sannual base salary in effect as of the date of his termination plus (2) anamount equal to his maximum annual cash bonus at the rate in effect on thetermination date; and

 

(b)        all of the Executive’sgranted but unvested stock options will vest and become immediatelyexercisable.

 

*Termination Other than following a Change of Controlof InfoLogix.* If the Executive’s employment with us is terminatedprior to a Change in Control other than by us for Cause, by the Executive ordue to Executive’s disability and, provided the Executive signs a full releasein our favor, then:

 

(i)                                    we will pay himany accrued but unpaid salary and vacation, as well as severance of (a) theExecutive’s annual base salary in effect as of the date of his termination plus(b) an amount equal to pro rata portion of his maximum annual cash bonusat the rate in effect on the termination date, which will be calculated basedon a numerator equal to the number of days between January 1 and thetermination date and a denominator of 365; and

 

(ii)                                 all of theExecutive’s granted but unvested stock options will vest and become immediatelyexercisable.

 

If the Executive’s employment is terminated for any other reason, or ifhe fails to execute a release in our favor, he would only be entitled toreceive a payment equal to his accrued but unpaid salary and vacation. Therewere no terminations of executive officers following the recent Change ofControl except for the termination of Mr. Hodge’s employment, which waseffective February 12, 2009 and resulted in him being eligible to receiveseverance payments equal to one year’s base salary.

 

**2009 Director Compensation**

 

TheChairman of our Board of Directors and the Chairman of the Audit Committee ofour Board of Directors each receive an annual retainer of $25, reduced from $30after March 31, 2009 and each other non-employee director receives anannual retainer of $15, reduced from $20 after March 31, 2009. Eachdirector who is not an officer of InfoLogix received $1,000 per Board of Directorsor Board committee meeting in which the director participated attended inperson. Upon first becoming a director, each non-employee director received agrant of an option to purchase 2,000 shares. Fifty percent of the optionsvested on the six month anniversary of the date of grant. The remaining 50%vested pro rata over the subsequent 18-month period. In January 2010, wegranted each of our non-employee directors, except Messrs. Denomme,Henriquez and Liu, who declined the grant, an option to purchase up to 6,000shares of our common stock. The option vests 50% on July 26, 2010 and ineighteen equal monthly installments thereafter. Our employee director, Mr. Gulian,does not receive compensation for their service as a director.

 

The following table summarizes the compensation of non-employeedirectors for their service on our Board of Directors and any committees of ourboard of directors during 2009.

 
| **Name(4)**           | ** ** | **Fees Earned or  Paid in Cash($)** | ** ** | **Option  Awards($)(1)** | ** ** | **Total ($)** | ** ** |
|-----------------------|------------|-------------------------------------|------------|--------------------------|------------|---------------|------------|
| Mark S. Denomme       |       | —                              |       | —                   |       | —        |       |
| Manual A. Henriquez   |       | —                              |       | —                   |       | —        |       |
| Wayne D. Hoch(3)      |       | 41,250                              |       | —                   |       | 41,250        |       |
| Roy Y. Liu            |       | —                              |       | —                   |       | —        |       |
| Thomas C. Lynch       |       | 29,250                              |       | —                   |       | 29,250        |       |
| Thomas O. Miller      |       | 29,000                              |       | —                   |       | 29,000        |       |
| Warren V. Musser(2)   |       | 35,250                              |       | —                   |       | 35,250        |       |
| Jake Steinfeld(2)     |       | 18,500                              |       | —                   |       | 18,500        |       |
| Richard A. Vermeil(2) |       | 18,500                              |       | —                   |       | 18,500        |       |

 

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(1)          We did not grant any stock-based compensation tonon-employee directors in 2009.

 

(2)          Mr. Steinfeld resignedfrom our Board of Directors on October 8, 2009. Messrs. Musser andVermeil resigned from our Board of Directors on November 20, 2009, but Mr. Mussercontinues to serve as non-voting Chairman Emeritus.

 

(3)          Mr. Hoch resigned from our Board on February 17,2010.

 

(4)          Mr. Melvin L. Keating joined our Board ofDirectors on April 6, 2010.

 

The following table sets forth the aggregate number of options held byeach InfoLogix director as of December 31, 2009:

 
| **Name**         | ** ** | **Exercisable  Options** | ** ** |
|------------------|------------|--------------------------|------------|
| Warren V. Musser |       | 2,000                    | (a)        |
| Wayne D. Hoch    |       | 2,000                    |       |
| Thomas C. Lynch  |       | 2,000                    |       |
| Thomas O. Miller |       | 2,000                    |       |

 

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(a)                                  Does notinclude 24,000 shares that may be obtained upon exercise of a warrant grantedto Mr. Musser at an exercise price of $50.00 per share.

 

**Item 12.**     **Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder MattersEquity Compensation Plans**

 

The following table summarizes our equity compensation plans as of December 31,2009:

 
| **Plan category**                                       | ** ** | **Number of shares to be  issued upon exercise of  outstanding options,  warrants  and rights** | ** ** | **Weighted average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of shares  remaining available for  future issuance under  equity compensation  plans(1)** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by stockholders      |       | 129,635                                                                                         |       | $                                                                                  | 45.25      |                                                                                                | 1,712,227  |   |
| Equity compensation plans not approved by  stockholders |       | 106,000                                                                                         | (2)        | $                                                                                  | 15.03      |                                                                                                | —     |   |
| Total                                                   |       | 235,635                                                                                         |       | $                                                                                  | 31.65      |                                                                                                | 1,712,227  |   |

 

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(1)                                  Does notinclude shares reflected in the column entitled “Number of shares to be issuedupon exercise of outstanding options, warrants and rights.”

 

(2)                                  Represents 29,000shares issuable upon exercise of warrants at an exercise price of $50.00 pershare and 22,000 shares issuable upon exercise of warrants at an exercise priceof $1.86 per share. For more information, refer to Note F to ourconsolidated financial statements in Item 8 of Part II of this Form 10-K.

 

**PrincipalStockholders and Security Ownership of Management**

 

The followingtable shows the beneficial ownership of InfoLogix, Inc. common stock foreach of our executive officers and directors, each person known to us tobeneficially own more than 5% of our common stock and all directors andexecutive officers as a group as of March 31, 2010. This information isbased solely on statements filed with the SEC and other reliable information.

 

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| **Name**                                                                     | ** ** | **Shares  Beneficially Owned(1)(2)** | ** ** | **%(3)** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------|------------|
| Hercules Technology Growth Capital, Inc.(4)                             |       | 6,064,074                            |       | 85.48    | %          |
| Manuel A. Henriquez(4)(5)                                                    |       | 6,064,074                            |       | 85.48    | %          |
| Hercules Technology I, LLC(4)                                                |       | 3,364,738                            |       | 76.43    | %          |
| Mark S. Denomme(4)(6)                                                        |       | 3,364,738                            |       | 76.43    | %          |
| Roy Y. Liu(4)(6)                                                             |       | 3,364,738                            |       | 76.43    | %          |
| David T. Gulian(7)                                                           |       | 129,851                              |       | 3.45     | %          |
| Richard D. Hodge(8)                                                          |       | —                               |       | —   |       |
| Gerald E. Bartley(9)                                                         |       | 31,218                               |       | *        |       |
| John A. Roberts(10)                                                          |       | 10,198                               |       | *        |       |
| Eric N. Rubino(11)                                                           |       | 9,950                                |       | *        |       |
| Wayne D. Hoch(12)                                                            |       | —                               |       | —   |       |
| Thomas C. Lynch(13)                                                          |       | 3,360                                |       | *        |       |
| Thomas O. Miller(14)                                                         |       | 2,200                                |       | *        |       |
| All directors and executive officers as a group  (consists of 9 persons)(15) |       | 6,250,851                            |       | 87.36    | %          |

 

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*The percentage of shares beneficially owned does not exceed 1%.

 

(1)          The numbers of shares setforth in this column are calculated in accordance with the provisions of Rule 13d-3under the Exchange Act. As a result, these figures assume the exercise orconversion by each beneficial owner of all securities that are exercisable orconvertible within 60 days of March 31, 2010.

 

(2)          Unless otherwise indicated,each director, executive officer or beneficial owner of 5% or more of ourcommon stock has sole voting and investment power with respect to all suchshares of common stock.

 

(3)          Based on 3,729,647 sharesof common stock outstanding as of March 31, 2010.

 

(4)          The following is based, inpart, on information provided pursuant to a Schedule 13D filed jointly byHercules Technology Growth Capital, Inc. (Hercules) and HerculesTechnology I, LLC (HTI) on November 30, 2009 with the Securities andExchange Commission, as well as other reliable information known to us inconnection with our Amended Loan Agreement with Hercules. Hercules, the parent corporation of HTI,has sole voting and dispositive power over 7,546 shares of our common stockthat were acquired directly by Hercules upon the exercise of a warrant on March 1,2010 and 2,691,790 shares that may be acquired upon the conversion of a termloan held directly by Hercules. It also has shared voting anddispositive power, with HTI, over 3,364,738 shares, consisting of 2,691,790shares held directly by HTI and 672,948 shares that may be acquired upon theexercise of a warrant held directly by HTI. The number of shares beneficiallyowned does not include 412,087 shares that may be acquired upon the conversionof a term loan entered into on April 6, 2010. The principal place ofbusiness of both Hercules and HTI is 400 Hamilton Avenue, Suite 310, PaloAlto, California 94301.

 

(5)          Includes the aggregate6,064,074 shares over which Hercules has sole and shared voting and dispositivepower, as to which Mr. Henriquez may be deemed to have investment andvoting power because of his position with Hercules and his role as one of HTI’snominees to our Board of Directors. The number of shares beneficially owneddoes not include 412,087 shares that may be acquired upon the conversion of aterm loan entered into on April 6, 2010. Mr. Henriquez disclaimsbeneficial ownership of the shares beneficially owned by Hercules and HTI. Theaddress of Mr. Henriquez is c/o Hercules Technology Growth Capital, Inc.,400 Hamilton Avenue, Suite 310, Palo Alto, CA 94301.

 

(6)          Includes the 3,364,738shares over which HTI has sole and shared voting and dispositive power, as towhich Messrs. Denomme and Liu may be deemed to have investment and votingpower because of their roles as HTI nominees to our Board of Directors. Each ofthese individuals disclaims beneficial ownership of the shares beneficiallyowned by HTI. The address for Messrs. Denomme and Liu is c/o HerculesTechnology Growth Capital, Inc., 31 St. James Ave., Suite 790,Boston, MA 02116.

 

(7)          Includes 93,101 sharesowned by Mr. Gulian directly (including 2,000 shares owned by Mr. Gulianand his wife) and 10,500 shares subject to options exercisable within 60 daysof March 31, 2010, and 26,250 shares that may be acquired upon theexercise of a warrant held directly by Mr. Gulian.  Mr. Gulian shares voting and dispositivepower over the shares he holds with his wife.

 

(8)          Mr. Hodge’s employment with usterminated on February 12, 2010 and on such date, all of his unvestedoptions became immediately exercisable. As such, we believe that he has 12,000shares subject to options exercisable within 60 days of March 31, 2010 and12,500 shares that may be acquired upon the exercise of a warrant directly by Mr. Hodge.We cannot verify the number of shares of common stock he continues to hold.

 

(9)          Includes 15,109 sharesowned by Mr. Bartley directly, 1,000 shares subject to options exercisablewithin 60 days of March 31, 2010, and 15,109 shares owned by Mr. Bartley’sspouse.

 

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(10)    Includes 448 shares ownedby Mr. Roberts directly and 9,750 shares subject to options exercisablewithin 60 days of March 31, 2010.

 

(11)    Includes 200 shares ownedby Mr. Rubino directly and 9,750 shares subject to options exercisablewithin 60 days of March 31, 2010.

 

(12)    Mr. Hoch resigned from our Board of Directors on February 17,2010, and as such, all of his outstanding options will terminate three monthsafter that date. We believe that he has 2,000 shares subject to optionsexercisable within 60 days of March 31, 2010, but we cannot verify thenumber of shares of common stock he continues to hold.

 

(13)    Includes 1,360 shares ownedby Mr. Lynch directly and 2,000 shares subject to options exercisablewithin 60 days of March 31, 2010.

 

(14)    Includes 200 shares ownedby Mr. Miller directly and 2,000 shares subject to options exercisablewithin 60 days of March 31, 2010.

 

(15)    Includes 734,198 shares thatmay be acquired upon the exercise of options and warrants and convertible termloan. The shares that may be acquired upon the exercise of options and warrantsand conversion of a convertible term loan are included in the numerator and thedenominator for the purpose of calculating the percentage of shares of commonstock beneficially owned by the group.

 

**Item 13. Certain Relationshipsand Related Transactions, and Director Independence**

 

***Director Independence***

 

InfoLogix is a “controlledcompany” as defined in Rule 5615(c)(1) of the NASDAQ Marketplace Rules becausemore than 50% of our voting power is held by HTI. See Item 12. “SecurityOwnership of Certain Beneficial Owners and Management, and Related StockholderMatters — Principal Stockholders and Security Ownership of Management” and “RelatedParty Transactions — Our Relationship with Hercules and HTI.” Therefore, we areexempt from certain requirements of NASDAQ Rule 5605 with respect to (1) havinga majority of independent directors on our Board of Directors, (2) havingthe compensation of our executive officers determined by a majority ofindependent directors or a compensation committee composed solely ofindependent directors, and (3) having nominees for director selected orrecommended for selection by either a majority of independent directors or anominating committee composed solely of independent directors.

 

Three of the members of our Board of Directors are independentdirectors. For a director to be considered independent, our Board of Directorsmust determine that the director does not have any direct or indirect materialrelationship with us. Our Board of Directors has established guidelines toassist it in determining director independence. The guidelines that our Boardof Directors uses to determine whether a director is independent specify that:

 

1.                                       A director willnot be deemed independent if, within the previous five years: (i) thedirector was employed by us; (ii) someone in the director’s immediatefamily was employed by us as an officer; (iii) the director was employedby or affiliated with us present or former independent registered publicaccounting firms; (iv) someone in the director’s immediate family wasemployed or affiliated with our present or former independent registered publicaccounting firms as an officer, partner, principal or manager; and (v) thedirector or someone in her/his immediate family was employed as an executivewith another entity that concurrently has or had as a member of itscompensation (or equivalent) committee of the board of directors any of ourexecutive officers.

 

2.                                       The followingcommercial or charitable relationships will not be considered to be materialrelationships that would impair a director’s independence: (i) thedirector or any of his or her immediate family members accept payment(including political contributions and payments pursuant to personal servicesor consulting contracts) directly or indirectly from us, an affiliate ofInfoLogix, the Chairman of the board of directors, Chief Executive Officer orother executive officer, other than for service as a member of our board ofdirectors or a committee of our board of directors, of less than $60 during thecurrent year; and (ii) the director is a partner in, or an executiveofficer or a stockholder owning less than 10% of, any for profit or not forprofit organization to which we made or from which we receive payments (otherthan those arising solely from investments in our securities) that are lessthan 5% of our or the organization’s consolidated gross revenues or $200,whichever is greater, in the current year or in any of the past three years.

 

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3.                                       Forrelationships not covered by the objective independence guidelines inparagraph 2 above, the determination of whether the relationship ismaterial or not, and therefore whether the director would be independent ornot, shall be made by the directors who clearly satisfy the objectiveindependence guidelines set forth in paragraphs 1 and 2 above.

 

Our board of directors has determined that Melvin L. Keating, Thomas C.Lynch and Thomas O. Miller satisfy our independence guidelines and theindependence requirements set forth in the NASDAQ Marketplace Rules.

 

All members of the Compensation Committee, Audit Committee, andNominating and Governance Committee of our Board of Directors are independentdirectors, except Manuel A. Henriquez, a Hercules representative, is a memberof the Compensation Committee and Nominating and Governance Committee. Membersof the Audit Committee must also satisfy additional Securities and ExchangeCommission and NASDAQ independence requirements.

 

**Related Party Transactions**

 

Wedo not have a written policy specifically relating to responsibility for reviewof related party transactions, our Board of Directors exercises theresponsibility for reviewing and approving related party transactions. Inaccordance with our conflict of interest policy, if a member of our Board ofDirectors is a party to a transaction, he or she will not vote on approval ofthe transaction. Our Board of Directors reviews all transactions with relatedparties that are required to be disclosed in our filings with the SEC and/or inthe notes to our audited financial statements and our management regularlyreports to our Board of Directors regarding the details of related partytransactions and the status of each active related party transaction.

 

Threeof our current directors, Messrs. Denomme, Henriquez and Liu, areemployees of Hercules, our current senior lender. If matters arise involvingconflicting interests between Hercules and us, Messrs. Denomme, Henriquezand Liu may be required to abstain from voting on those matters. A ‘‘relatedparty’’ includes any executive officer, director, nominee for director orbeneficial holder of more than 5% of our Common Stock, any immediate family memberof those persons and any entity that is owned or controlled by any of theforegoing persons or any entity in which such a person is an executive officer.

 

***Our Relationship with Hercules and HTI***

 

On November 20, 2009, we entered into a series of agreements withour senior lender, Hercules, designed to restructure our outstandingindebtedness. On that date, certain events of default existed under our Loanand Security Agreement with Hercules dated May 1, 2008, as amended (Loanand Security Agreement), and though Hercules had agreed to forbear fromexercising its rights, due to the events of default, Hercules had the right toaccelerate and demand payment of all or any part of our obligations under theLoan and Security Agreement. Our obligations amounted to approximately $22,500,including accrued interest and fees. In an effort to cure the events ofdefault, we and Hercules restructured the indebtedness by converting a portionof our outstanding debt to Hercules, which portion Hercules had assigned to itswholly-owned subsidiary HTI, to shares of our common stock and warrants topurchase our common stock and by restructuring the remaining outstanding debt,including by making a portion of it convertible into shares of our common stock(Hercules Restructuring). The Hercules Restructuring resulted in thecancellation of $5,000 in indebtedness and has provided us with up to $5,000 inadditional availability under a revolving credit facility with Hercules. As aresult of the Hercules Restructuring (i) HTI now owns 2,691,790 shares or 72.4% of ouroutstanding common stock as of March 31, 2010, as well as a warrant toacquire up to an additional 672,948 shares of our common stock, and (ii) Herculesmay convert a portion of our remaining indebtedness to Hercules into anadditional 2,691,790 shares of our common stock and has the option to convertcertain term loan interest into an indeterminate number of shares of our commonstock. In addition, on March 1, 2010, Hercules exercised a warrantinitially received on June 19, 2009 by which it acquired 7,546 shares ofour common stock. As a result of Amendment 2 to our Amended Loan Agreement on April 6,2010, Hercules may convert the principal of Term Loan C into an additional412,087 shares of our common stock and has the option to convert default rateinterest into an indeterminable number of shares of our common stock.

 

Asa result of the Hercules Restructuring, pursuant to the Debt ConversionAgreement, Hercules has the right and will continue to have the right to nominatethree directors to our Board of Directors until (i) we repay our termloans to Hercules and (ii) we maintain a consolidated total leverage ratioof 1.5 to 1 for a rolling twelve months ending on each of four consecutivequarters, in which case, one of HTI’s appointed directors would not stand forre-election at the next annual meeting. None of HTI’s appointed directors wouldstand for re-election at the next annual meeting of our stockholders following (i) ourpayment in full of all obligations under our Amended Loan Agreement and (ii) HTIowning less than 10% of our issued and outstanding common stock. In certaincircumstances, HTI has the right to nominate a fourth director, and HTI alsohas the right to have at least one of its director representatives sit on theNominating and Governance Committee 

 

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and the CompensationCommittee of the Board of Directors. Currently, Messrs. Denomme, Henriquezand Liu serve as directors pursuant to HTI’s rights under the Debt ConversionAgreement and Mr. Henriquez is a member of both the Nominating andGovernance Committee and the Compensation Committee.

 

Asof April 7, 2010, $21,659 of principal was outstanding under our AmendedLoan Agreement with Hercules.  Thelargest amount of principal outstanding at any time in 2009 was $21,000. In2009, we paid Hercules a total of $700 in principal, $ 3,130 in interest (at anaverage interest rate of 13% per annum),not including interest paid in kind,and $ 1,199 in fees.

 

***Certain Other Relationships andTransactions***

 

*Corrugated Service Corp., d/b/a Amtech*

 

InJuly 2006, we entered into a consulting agreement with Corrugated ServiceCorp. which does business as Amtech and is owned by Cosmo T. DeNicola, anofficer and director of InfoLogix prior to our merger with New Age Translation, Inc.,and a stockholder of InfoLogix. The consulting agreement became effective uponconsummation of the merger between InfoLogix and New Age Translation, Inc.on November 29, 2006 and continued until December 31, 2008. Despitethe termination of the consulting agreement, we continued to use Amtech forservices during 2009.

 

Pursuantto the consulting agreement, Amtech provided certain software developmentconsulting services to us for our products, projects and customer deliverables.In consideration of Amtech’s services, we paid Amtech a monthly fee equal to$17 per month for calendar year 2008 and $17 per month for calendar year 2009.In 2008 and 2009, we paid Amtech approximately $1,661 and $173, respectively,for services provided under the consulting agreement.

 

*Futura Services, Inc.*

 

InJuly 2006, we entered into a services agreement with Futura Services, Inc.,which is owned by the wife of Cosmo T. DeNicola, an officer and director ofInfoLogix prior to our merger with New Age Translation, Inc., and astockholder of InfoLogix. The agreement was amended in August 2007. Theservices agreement granted Futura the exclusive right to provide certainoutsourcing services and functions to support certain equipment that is used inour business. In 2008 and 2009, we paid Futura approximately$2,700 and 2,600, respectively, for services provided under this agreement.

 

Theterm of the services agreement commenced upon the consummation of our mergerwith New Age Translation, Inc. on November 29, 2006 and wasterminated on March 2, 2009.  On March 2,2009, we entered into a master services agreement, which supersedes andreplaces our services agreement with Futura. The term of the master servicesagreement commenced on March 2, 2009 and will continue until December 31,2013, unless terminated earlier. The master services agreement may beterminated by (i) either party if the other party materially breaches themaster services agreement and fails to cure the breach within 60 days ofreceipt of notice thereof, (ii) either party upon the insolvency orbankruptcy of the other party or (iii) either party if an amount from theother party in excess of $100 remains due and unpaid or if any amount from theother party remains due and unpaid for 90 days or more. We may also terminatethe master services agreement for any reason or no reason upon 45 days noticeto Futura. If Futura terminates the master services agreement as a result ofour breach, or we terminate the master services agreement as a result of Futura’sbreach or for no reason, we will be required to (x) pay Futura atermination fee of $750 and (y) sublease at Futura’s option up to 10,000square feet of Futura’s office space in Fort Washington, Pennsylvania for theremaining term of Futura’s lease with the landlord. The rental term of Futura’slease is 66 months and began on October 15, 2006. The current minimummonthly rent under the lease is $37 for 22,215 square feet of office space andincreases approximately $0.9 on October 15 of each year of the rentalterm.

 

Pursuantto the master services agreement, Futura is granted the exclusive right toprovide certain outsourcing services and functions to support the equipmentthat is used in our business. We will issue purchase orders for specifiedservices to be provided by Futura and the services will be set forth inmutually agreed statements of work. Futura will maintain its exclusive right toprovide services until the earlier of the termination of the master servicesagreement or the fulfillment by Futura of services under statements of work inthe amount of $1,500 for any calendar year during the term of the master servicesagreement, after which point we may use other providers to perform the servicesfor the balance of that calendar year, provided that Futura is given the rightto perform the services on the same terms and conditions as the other providerswith our consent not to be unreasonably withheld. The fees payable to Futurafor services will be specified in the applicable statement of work.

 

Pursuantto the master services agreement, Futura agreed to certain confidentiality,non-solicitation and warranty provisions and we agreed to certainconfidentiality and non-solicitation provisions as well. Futura will bear therisk of loss for

 

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the services rendered underthe master services agreement and statements of work, including, but notlimited to all costs (subject to certain exclusions) related to warranty,extended warranty and call center services that are sold by us to our customersand to post- and pre-production of kitting (assembly and packaging), imagingand shipments to our customers, in each case as such services are specified inan applicable statement of work. Futura’s liability for damages is limited tothe aggregate compensation actually received by Futura under any applicablestatement of work, except in the event of any liability arising from a breachof Futura’s confidentiality and non-solicitation obligations or from its grossnegligence or willful misconduct, or to the extent contrary to the laws of anyapplicable jurisdiction. Pursuant to the terms of the amended agreement, wehave a minimum annual commitment to purchase services in an aggregate amount of$1,500 per year through 2013.

 

During2008 and 2009, we maintained a business relationship with Gulian &Associates, which is owned by the wife of David T. Gulian, the President andChief Executive Officer and director and stockholder. Under the terms of thearrangement, Gulian & Associates provided us with retainer-basedprofessional recruiting services, on a non-exclusive basis. Gulian &Associates was paid a success fee of 20% of a newly hired person’s annual basesalary for employees it introduces to us; one-third of the fee is invoiced atthe time of the engagement, the remainder is invoiced only upon successfulplacement of a candidate into the role. In 2008 and 2009, we paid Gulian &Associates approximately $225 and $178, respectively, in success fees.

 

**Item 14**.  **Principal Accountant Fees and Services**

 

We retained McGladrey & Pullen to audit our consolidatedfinancial statements for the years ended December 31, 2009 and 2008. Weunderstand the need for our independent registered public accounting firm tomaintain objectivity and independence in its audit of our financial statements.To minimize relationships that could appear to impair the objectivity of ourindependent registered public accounting firm, the Audit Committee of our Boardof Directors has adopted and approved a policy related to the pre-approval ofall non-audit work to be performed by our independent registered publicaccounting firm.

 

Consistent with the rules established by the Securities andExchange Commission (SEC), proposed services to be provided by our independentregistered public accounting firm are evaluated by grouping the service feesunder one of the following four categories: *AuditServices, Audit-Related Services*, *TaxServices* and *All Other Services*.All proposed services are discussed and approved by the Audit Committee. In orderto render approval, the Audit Committee has available a schedule of servicesand fees approved by category for the current year for reference and specificdetails are provided. The Audit Committee does not pre-approve services relatedonly to the broad categories noted above.

 

The Audit Committee has delegated pre-approval authority to itschairman for cases where services must be expedited. Our management providesthe Audit Committee with reports of all pre-approved services and related feesby category incurred during the current fiscal year with forecasts ofadditional services anticipated during the upcoming year.

 

All of the services related to fees disclosed below were pre-approvedby the Audit Committee.

 

The aggregate fees paid for professional services to McGladrey &Pullen in 2008 and 2009 for their services were:

 
| **Type of Fees** | ** ** | **2008** | ** ** | **2009** | ** ** |
|------------------|------------|----------|------------|----------|------------|
| Audit Fees       |       | $        | 271,000    |     | $          | 319,000 |   |
| Total            |       | $        | 271,000    |     | $          | 319,000 |   |

 

In the table above, in accordance with the SEC definitions and rules, “auditfees” are fees we paid or were billed by McGladrey & Pullen forprofessional services for the audit of our consolidated financial statementsincluded in our Forms 10-K, and for services that are normally provided bythe accountant in connection with the review of SEC registration statements andother filings, comfort letters and consents.

 

We did not engage McGladrey & Pullen to provide any auditrelated services, tax services or other services during 2008 or 2009.

 

**PART IV**

 

**Item 15.  Exhibits and Financial Statement Schedules**

 

*(a)**                              **FinancialStatements and Schedules*

 

The following financial statements and schedules listed below areincluded in this Form 10-K.

 

FinancialStatements (See Item 8)

 

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Reportof Independent Registered Public Accounting Firm

ConsolidatedBalance Sheets as of December 31, 2009 and 2008

ConsolidatedStatements of Operations for the Years Ended December 31, 2009, 2008, and2007

ConsolidatedStatements of Stockholders’ Equity for the Years Ended December 31, 2009,2008, and 2007

ConsolidatedStatements of Cash Flows for the Years Ended December 31, 2009, 2008, and2007

Notesto Consolidated Financial Statements

FinancialStatement Schedules

 

Schedule II—Valuationand Qualifying Account

 

**INFOLOGIX, INC.**

**SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS**

 
| ** **                         | ** ** | **Allowance for** | ** ** | ** **            | ** ** |
|------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **Doubtful**           | ** ** | **Reserve**           | ** ** |
| ** **                         | ** ** | **Receivables**        | ** ** | **for Excess**   | ** ** |
| ** **                         | ** ** | **and**                | ** ** | **and Obsolete** | ** ** |
| ** **                         | ** ** | **Sales Returns** | ** ** | **Inventory**         | ** ** |
|                               |       |                   |       |                  |       |
| Balance  at December 31, 2007 |       | $                      | 409        |                  | $          | 485 |   |
| Charges  to operations             |       | 6                      |       | 189                   |       |
| Acquired  in asset purchase        |       | 34                     |       | —                |       |
| Deductions                         |       | (97                    | )          | (253                  | )          |
|                               |       |                   |       |                  |       |
| Balance  at December 31, 2008 |       | 352                    |       | 421                   |       |
| Charges  to operations             |       | 476                    |       | 1,117                 |       |
| Deductions                         |       | (826                   | )          | —                |       |
| Balance  at December 31, 2009 |       | $                      | 2          |                  | $          | 1,538 |   |

** **

*(b) Exhibits*

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                 |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                  |       | Agreement and Plan of  Merger between New Age Translation, Inc., INFLX Acquisition Corp. and  InfoLogix, Inc. dated as of November 29, 2006 (incorporated herein  by reference to Exhibit 2.1 of our Current Report on Form 8-K filed  December 5, 2006).                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 2.2                  |       | Asset Purchase  Agreement by and among InfoLogix, Inc., InfoLogix Systems Corporation,  Healthcare Informatics Associates, Inc. and the stockholders of  Healthcare Informatics Associates, Inc. dated as of September 30,  2007 (incorporated herein by reference to Exhibit 2.1 of our Current  Report on Form 8-K filed October 4, 2007). |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 2.3                  |       | Asset Purchase  Agreement by and among InfoLogix, Inc., InfoLogix Systems Corporation,  Delta Health Systems, Inc. and the stockholders of Delta Health  Systems, Inc. dated as of May 2, 2008 (incorporated by reference to  Exhibit 2.1 of our Current Report on Form 8-K filed May 8, 2008).                                              |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.1                  |       | Certificate of Incorporation  of New Age Translation, Inc. (incorporated herein by reference to  Exhibit 3.1 of our Current Report on Form 8-K filed  November 28, 2006).                                                                                                                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.2                  |       | Certificate of  Amendment of New Age Translation, Inc. changing corporate name to  InfoLogix, Inc. (incorporated herein by reference to Exhibit 3.2 of  our Current Report on Form 8-K filed December 5, 2006).                                                                                                                                        |

 

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| 3.3    |   | Certificate of  Amendment of InfoLogix, Inc. (incorporated herein by reference to  Exhibit 3.1 of our Current Report on Form 8-K filed January 1,  2010).                                                                                                                                                                                                                                                                                                                                                 |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.4    |   | Certificate of  Correction to Certificate of Amendment to Certificate of Incorporation of  InfoLogix, Inc.*                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.5    |   | By-laws of New Age  Translation, Inc. (incorporated herein by reference to Exhibit 3.2  of our Current Report on Form 8-K filed November 28, 2006).                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.1    |   | Amended and Restated  Loan and Security Agreement by and among InfoLogix, Inc., InfoLogix  Systems Corporation, Embedded Technologies, LLC, Opt Acquisition, LLC, and  InfoLogix-DDMS, Inc., as Borrowers, and Hercules Technology Growth  Capital, Inc., as Lender, dated as of November 20, 2009  (incorporated by reference to Exhibit 4.1 of our Current Report on  Form 8-K filed November 25, 2009).                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.2    |   | Amendment No. 1,  dated as of February 19, 2010, to the Amended and Restated Loan and  Security Agreement, dated as of November 20, 2009, by and among  InfoLogix, Inc., InfoLogix Systems Corporation, Embedded Technologies,  LLC, Opt Acquisition, LLC, and InfoLogix — DDMS, Inc., as Borrowers and  Hercules Technology Growth Capital, Inc., as Lender (incorporated herein  by reference to Exhibit 4.1 of our Current Report on Form 8-K filed  February 23, 2010). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.3    |   | Amendment  No. 2, dated as of April 6, 2010, to the Amended and Restated Loan  and Security Agreement, dated as of November 20, 2009, as amended, by  and among InfoLogix, Inc., InfoLogix Systems Corporation, Embedded  Technologies, LLC, Opt Acquisition LLC, and InfoLogix-DDMS, Inc., as  Borrowers, and Hercules Technology Growth Capital, Inc., as Lender  (incorporated herein by reference to Exhibit 4.3 of our Current Report  on Form 8-K filed April 8, 2010).    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.4    |   | Warrant dated as of November 29,  2006 between InfoLogix, Inc. and Karen Keating Mara (incorporated herein  by reference to Exhibit 4.3 of our Current Report on Form 8-K filed  December 5, 2006).                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.5    |   | Warrant dated as of  November 29, 2006 between InfoLogix, Inc. and Craig A. Wilensky  (incorporated herein by reference to Exhibit 4.6 of our Current Report  on Form 8-K filed December 5, 2006).                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.6    |   | Warrant dated as of  November 20, 2009 between InfoLogix, Inc. and Hercules Technology  Growth Capital, Inc. (incorporated herein by reference to  Exhibit 4.2 of our Current Report on Form 8-K filed  November 25, 2009).                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.7    |   | Warrant dated as of  November 20, 2009 between InfoLogix, Inc. and Hercules Technology  I, LLC (incorporated herein by reference to Exhibit 4.3 of our Current Report  on Form 8-K filed November 25, 2009).                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.8    |   | Warrant dated as of  November 20, 2009 between InfoLogix, Inc. and Warren V. Musser  (incorporated herein by reference to Exhibit 4.4 of our Current Report  on Form 8-K filed November 25, 2009).                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.9    |   | Warrant dated as of  March 6, 2010 between InfoLogix, Inc. and Michael M. Carter.*                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.10   |   | Warrant dated as of  November 20, 2009 between InfoLogix, Inc. and David T. Gulian  (incorporated herein by reference to Exhibit 4.6 of our Current Report  on Form 8-K filed November 25, 2009).                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.11   |   | Warrant dated as of  November 20, 2009 between InfoLogix, Inc. and Richard D. Hodge  (incorporated herein by reference to Exhibit 4.7 of our Current Report  on Form 8-K filed November 25, 2009).                                                                                                                                                                                                                                                                                                   |

 

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| 4.12   |   | Warrant dated as of  November 20, 2009 between InfoLogix, Inc. and Fairmount Partners LP  (incorporated herein by reference to Exhibit 4.8 of our Current Report  on Form 8-K filed November 25, 2009).                                                                                                                                                                                                             |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.1   |   | InfoLogix, Inc.  2006 Equity Compensation Plan (incorporated herein by reference to  Exhibit 10.1 of our Current Report on Form 8-K filed  November 28, 2006).                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.2   |   | Amendment No. 1 to  InfoLogix, Inc. 2006 Equity Compensation Plan (incorporated herein by  reference to Exhibit 4.6 of our Registration Statement on Form S-8  filed January 15, 2010).                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.3   |   | Employment Agreement  dated as of November 29, 2007 by and between Eric N. Rubino and  InfoLogix, Inc. (incorporated by reference to Exhibit 10.6 of our  Annual Report on Form 10-K filed March 28, 2008).                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.4   |   | Employment Agreement by  and between InfoLogix Systems Corporation and Gerry Bartley dated as of  September 30, 2007 (incorporated herein by reference to  Exhibit 10.1 of our Current Report on Form 8-K filed  October 4, 2007).                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.5   |   | Earn Out Agreement by  and between InfoLogix Systems Corporation and Healthcare Informatics  Associates, Inc. dated as of September 30, 2007 (incorporated  herein by reference to Exhibit 10.2 of our Current Report on  Form 8-K filed October 4, 2007).                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.6   |   | First Amendment to Earn  Out Agreement by and between InfoLogix Systems Corporation and Healthcare  Informatics Associates, Inc. dated as of August 23, 2008  (incorporated by reference to Exhibit 10.2 of our Quarterly Report on  Form 10-Q filed November 19, 2008).                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.7   |   | Promissory Note  executed in favor of Healthcare Informatics Associates, Inc. by  InfoLogix Systems Corporation dated as of September 30, 2007  (incorporated herein by reference to Exhibit 10.3 of our Current Report  on Form 8-K filed October 4, 2007).                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.8   |   | Loan and Security  Agreement by and among InfoLogix, Inc., InfoLogix Systems Corporation,  Embedded Technologies, LLC, Opt Acquisition LLC, InfoLogix-DDMS, Inc.,  as Borrowers, and Hercules Technology Growth Capital, Inc., as Lender,  dated May 1, 2008 (incorporated by reference to Exhibit 10.1 of our  Current Report on Form 8-K filed May 7, 2008).                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.9   |   | First Amendment to Loan  and Security Agreement by and between InfoLogix, Inc., InfoLogix Systems  Corporation, Embedded Technologies, LLC, Opt Acquisition LLC, and InfoLogix -  DDMS, Inc., as Borrowers, and Hercules Technology Growth  Capital, Inc., as Lender, dated November 19, 2008 (incorporated by  reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q  filed November 19, 2008). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.10  |   | Second Amendment to  Loan and Security Agreement by and between InfoLogix, Inc., InfoLogix  Systems Corporation, Embedded Technologies, LLC, Opt Acquisition LLC, and  InfoLogix-DDMS, Inc., as Borrowers, and Hercules Technology Growth  Capital, Inc., as Lender, dated May 31, 2009 (incorporated by  reference to Exhibit 10.3 of our Current Report on Form 8-K filed  June 4, 2009).               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.11  |   | Forbearance Agreement  dated July 31, 2009 by and among Hercules Technology Growth  Capital, Inc. and InfoLogix, Inc., InfoLogix Systems corporation,  Embedded Technologies, LLC, Opt Acquisition, LLC, and InfoLogix —  DDMS, Inc (incorporated by reference to Exhibit 10.1 of our  Quarterly Report on Form 10-Q filed November 23, 2009).                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.12  |   | Amendment to  Forbearance Agreement dated August 14, 2009 by and among Hercules  Technology Growth Capital, Inc. and InfoLogix, Inc., InfoLogix  Systems corporation, Embedded Technologies, LLC, Opt Acquisition, LLC, and  InfoLogix — DDMS, Inc. (incorporated by reference to Exhibit 10.2  of our Quarterly Report on Form 10-Q filed November 23, 2009).                                       |

 

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| 10.13  |   | Second Amendment to  Forbearance Agreement dated August 20, 2009 by and among Hercules  Technology Growth Capital, Inc. and InfoLogix, Inc., InfoLogix  Systems corporation, Embedded Technologies, LLC, Opt Acquisition, LLC, and  InfoLogix — DDMS, Inc. (incorporated by reference to Exhibit 10.3  of our Quarterly Report on Form 10-Q filed November 23, 2009).    |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.14  |   | Third Amendment to  Forbearance Agreement dated September 23, 2009 by and among Hercules  Technology Growth Capital, Inc. and InfoLogix, Inc., InfoLogix  Systems corporation, Embedded Technologies, LLC, Opt Acquisition, LLC, and  InfoLogix — DDMS, Inc. (incorporated by reference to Exhibit 10.4  of our Quarterly Report on Form 10-Q filed November 23, 2009).  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.15  |   | Fourth Amendment to  Forbearance Agreement dated September 30, 2009 by and among Hercules  Technology Growth Capital, Inc. and InfoLogix, Inc., InfoLogix  Systems corporation, Embedded Technologies, LLC, Opt Acquisition, LLC, and  InfoLogix — DDMS, Inc. (incorporated by reference to Exhibit 10.5  of our Quarterly Report on Form 10-Q filed November 23, 2009). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.16  |   | Fifth Amendment to  Forbearance Agreement dated October 15, 2009 by and among Hercules  Technology Growth Capital, Inc. and InfoLogix, Inc., InfoLogix  Systems corporation, Embedded Technologies, LLC, Opt Acquisition, LLC, and  InfoLogix — DDMS, Inc. (incorporated by reference to Exhibit 10.6  of our Quarterly Report on Form 10-Q filed November 23, 2009).    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.17  |   | Earn Out Agreement by  and between InfoLogix Systems Corporation and Delta Health Systems, Inc.  dated as of May 2, 2008 (incorporated by reference to Exhibit 10.1  of our Current Report on Form 8-K filed May 8, 2008).                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.18  |   | Letter Agreement dated as  of November 20, 2009 by and between InfoLogix Systems Corporation and  Delta Health Systems, Inc. (incorporated by reference to  Exhibit 10.4 of our Current Report on Form 8-K filed  November 25, 2009).                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.19  |   | Master Services  Agreement by and between Futura Services, Inc. and InfoLogix, Inc.  dated March 2, 2009 (incorporated by reference to Exhibit 10.1 of  our Current Report on Form 8-K filed March 6, 2009).                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.20  |   | Severance Agreement  dated March 13, 2009 by and between InfoLogix, Inc. and David T.  Gulian (incorporated by reference to Exhibit 10.1 our Current Report on  Form 8-K filed March 17, 2009).                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.21  |   | Severance Agreement  dated March 13, 2009 by and between InfoLogix, Inc. and John A.  Roberts (incorporated by reference to Exhibit 10.2 our Current Report on  Form 8-K filed March 17, 2009).                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.22  |   | Severance Agreement  dated March 13, 2009 by and between InfoLogix, Inc. and Richard  Hodge (incorporated by reference to Exhibit 10.3 our Current Report on  Form 8-K filed March 17, 2009).                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.23  |   | Severance Agreement  dated March 13, 2009 by and between InfoLogix, Inc. and Craig A.  Wilensky (incorporated by reference to Exhibit 10.4 our Current Report  on Form 8-K filed March 17, 2009).                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.24  |   | Debt Conversion  Agreement dated as of November 20, 2009 by and between  InfoLogix, Inc. and Hercules Technology I, LLC (incorporated by  reference to Exhibit 10.1 of our Current Report on Form 8-K filed  November 25, 2009).                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.25  |   | Registration Rights  Agreement dated as of November 20, 2009 by and between  InfoLogox, Inc. and Hercules Technology I, LLC (incorporated by  reference to Exhibit 10.2 of our Current Report on Form 8-K filed  November 25, 2009).                                                                                                                                                    |

 

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| 10.26  |   | Registration Rights  Agreement dated as of November 20, 2009 by and between  InfoLogox, Inc. and Hercules Technology Growth Capital, Inc.  (incorporated by reference to Exhibit 10.3 of our Current Report on  Form 8-K filed November 25, 2009).  |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                              |
| 10.27  |   | Form of  Indemnification Agreement dated as of November 20, 2009 (incorporated by  reference to Exhibit 10.5 of our Current Report on Form 8-K filed  November 25, 2009).                                                                                |
|   |   |                                                                                                                                                                                                                                                                              |
| 10.28  |   | Registration  Rights Agreement, dated as of April 6, 2010, by and between  InfoLogix, Inc. and Hercules Technology Growth Capital, Inc.  (incorporated herein by reference to Exhibit 10.1 of our Current Report  on Form 8-K filed April 8, 2010). |
|   |   |                                                                                                                                                                                                                                                                              |
| 21     |   | Direct and Indirect  Subsidiaries of the Registrant.*                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                              |
| 23.1   |   | Consent of McGladrey & Pullen LLP,  Independent Registered Public Accounting Firm.*                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                              |
| 31.1   |   | Certification pursuant  to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.*                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                              |
| 31.2   |   | Certification pursuant  to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.*                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                              |
| 32.1   |   | Certification pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.*                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                              |
| 32.2   |   | Certification pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.*                                                                                                                                         |

 

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(*)                                 Filed herewith.

 

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**SIGNATURES**

 

Pursuant to the requirements of section 13 or 15(d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned; thereunto duly authorized, inHatboro, Pennsylvania on April 15, 2010.

 
|     | INFOLOGIX, INC. |
|----------|----------------------|
|     |                 |
|     | By:                  | /s/  DAVID T. GULIAN |
|     |                 | David  T. Gulian |
| * * | * *             | *President and Chief Executive Officer* |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed by the following persons in the capacitiesindicated on April 15, 2010.

 
| **Signatures**          | ** ** | **Title(s)**                                                 |
|-------------------------|------------|--------------------------------------------------------------|
|                    |       |                                                         |
|                    |       |                                                         |
| /s/ DAVID T. GULIAN     |       | President,  Chief Executive Officer and Director (Principal  |
| David T. Gulian         |       | Executive  Officer)                                          |
|                    |       |                                                         |
| /s/ JOHN A. ROBERTS     |       | Chief  Financial Officer (Principal Financial and Accounting |
| John A. Roberts         |       | Officer)                                                     |
|                    |       |                                                         |
| /s/ MANUEL A. HENRIQUEZ |       | Director                                                     |
| Manuel A. Henriquez     |       |                                                         |
|                    |       |                                                         |
| /s/ MARK S. DENOMME     |       | Director                                                     |
| Mark S. Denomme         |       |                                                         |
|                    |       |                                                         |
| /s/ THOMAS C. LYNCH     |       | Director                                                     |
| Thomas C. Lynch         |       |                                                         |
|                    |       |                                                         |
| /s/ THOMAS O. MILLER    |       | Director                                                     |
| Thomas O. Miller        |       |                                                         |
|                    |       |                                                         |
| /s/ ROY Y. LIU          |       | Director                                                     |
| Roy Y. Liu              |       |                                                         |
|                    |       |                                                         |
| /s/ MELVIN L. KEATING   |       | Director                                                     |
| Melvin L. Keating       |       |                                                         |

 

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