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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 
| **Mark  One**                                                                                                                                                                                                               |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                        |
| **x**                                                                                                                                                                                                                       | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                                                                                                                                                                                        |   |
| **For The  Quarterly Period Ended March 31, 2010**                                                                                                                                                                     |
|                                                                                                                                                                                                                        |   |
| **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 as specified in itscharter)

 

| **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 telephone number, includingarea code)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes x  No o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).  Yes o  No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company.  Seedefinitions of “large accelerated filer”, “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

The number of shares outstanding of each of theissuer’s classes of common stock as of the latest practicable date,

 

| **Class**                                       | ** ** | **Outstanding at May 14,  2010** |
|-------------------------------------------------|------------|---------------------------------------|
| **Common  Stock, $0.00001 par value per share** | ** ** | **3,729,648****Shares**               |

 

 

 

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**TABLE OF CONTENTS**

 
| **PART I — FINANCIAL INFORMATION** | ** **                                                                                                                 |
|----------------------------------------------|----------------------------------------------------------------------------------------------------------------------------|
|                                         |                                                                                                                       |   |
| Item 1.                                      | Financial  Statements                                                                                                      | 3 |
|                                         |                                                                                                                       |   |
|                                         | Condensed Consolidated Balance Sheets as of  March 31, 2010 (unaudited) and December 31, 2009                    | 3 |
|                                         |                                                                                                                       |   |
|                                         | Condensed Consolidated Statements of Operations  (unaudited) for the three months ended March 31, 2010 and 2009       | 4 |
|                                         |                                                                                                                       |   |
|                                         | Condensed Consolidated Statements of Cash Flows  (unaudited) for the three months ended March 31, 2010 and 2009       | 5 |
|                                         |                                                                                                                       |   |
|                                         | Condensed Consolidated Statement of Stockholders’  Deficit (unaudited) for the three months ended March 31, 2010 | 6 |
|                                         |                                                                                                                       |   |
|                                         | Notes to Condensed Consolidated Financial Statements  (unaudited)                                                          | 7 |
|                                         |                                                                                                                       |   |
| Item 2.                                      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                | 15 |
|                                         |                                                                                                                       |   |
| Item 3.                                      | Quantitative  and Qualitative Disclosures About Market Risk                                                                | 26 |
|                                         |                                                                                                                       |   |
| Item 4.                                      | Controls  and Procedures                                                                                                   | 27 |
|                                         |                                                                                                                       |   |
| **PART II  — OTHER INFORMATION**   | ** **                                                                                                                 |
|                                         |                                                                                                                       |   |
| Item 1.                                      | Legal Proceedings                                                                                                          | 28 |
|                                         |                                                                                                                       |   |
| Item 1A.                                     | Risk Factors                                                                                                               | 28 |
|                                         |                                                                                                                       |   |
| Item 2.                                      | Unregistered  Sales of Equity Securities and Use of Proceeds                                                               | 28 |
|                                         |                                                                                                                       |   |
| Item 3.                                      | Defaults  Upon Senior Securities                                                                                           | 29 |
|                                         |                                                                                                                       |   |
| Item 4.                                      | Reserved                                                                                                                   | 29 |
|                                         |                                                                                                                       |   |
| Item 5.                                      | Other  Information                                                                                                         | 29 |
|                                         |                                                                                                                       |   |
| Item 6.                                      | Exhibits                                                                                                                   | 29 |
|                                         |                                                                                                                       |   |
|                                         | Signatures                                                                                                                 | 30 |

 

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**PART I- FINANCIAL INFORMATION**

 

**Item 1.        Financial Statements**

 

**INFOLOGIX,INC.**

**CondensedConsolidated Balance Sheets**

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

 
| ** **                                                                                                                                                                                     | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                     | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| ** **                                                                                                                                                                                     | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                     |       |               |       |                  |       |
| Currents assets:                                                                                                                                                                               |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                      |       | $                  | 615        |                  | $          | 1,018 |   |
| Accounts and other receivables (net of allowance  for doubtful accounts in the amount of $34 and $2 as of March 31, 2010  and December 31, 2009, respectively)                       |       | 10,484             |       | 14,158                |       |
| Unbilled revenue                                                                                                                                                                               |       | 242                |       | 252                   |       |
| Inventory, net                                                                                                                                                                                 |       | 1,059              |       | 1,089                 |       |
| Inventory deposits                                                                                                                                                                             |       | 2,250              |       | —                |       |
| Prepaid expenses and other current assets                                                                                                                                                      |       | 884                |       | 674                   |       |
|                                                                                                                                                                                           |       |               |       |                  |       |
| Total current assets                                                                                                                                                                           |       | 15,534             |       | 17,191                |       |
| Property and equipment, net                                                                                                                                                                    |       | 512                |       | 600                   |       |
| Intangible assets, net                                                                                                                                                                         |       | 7,005              |       | 7,343                 |       |
| Goodwill                                                                                                                                                                                       |       | 10,633             |       | 10,337                |       |
| Deferred financing costs                                                                                                                                                                       |       | 401                |       | 471                   |       |
| Total assets                                                                                                                                                                                   |       | $                  | 34,085     |                  | $          | 35,942 |   |
|                                                                                                                                                                                           |       |               |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ DEFICIT**                                                                                                                                                |       |               |       |                  |       |
| Current liabilities:                                                                                                                                                                           |       |               |       |                  |       |
| Accounts payable                                                                                                                                                                               |       | $                  | 5,041      |                  | $          | 7,624 |   |
| Line of credit                                                                                                                                                                                 |       | 8,909              |       | 7,559                 |       |
| Current portion of notes payable                                                                                                                                                               |       | 14,870             |       | 12,336                |       |
| Current portion of capital lease obligations                                                                                                                                                   |       | 71                 |       | 81                    |       |
| Sales tax payable                                                                                                                                                                              |       | 122                |       | 276                   |       |
| Accrued expenses                                                                                                                                                                               |       | 3,307              |       | 3,150                 |       |
| Accrued earn out payable                                                                                                                                                                       |       | 2,254              |       | 1,958                 |       |
| Deferred revenue                                                                                                                                                                               |       | 947                |       | 1,690                 |       |
|                                                                                                                                                                                           |       |               |       |                  |       |
| Total current liabilities                                                                                                                                                                      |       | 35,521             |       | 34,674                |       |
| Notes payable, net of current maturities                                                                                                                                                       |       | 209                |       | 231                   |       |
| Capital lease obligations, net of current  maturities                                                                                                                                          |       | 104                |       | 114                   |       |
| Warrant liabilities                                                                                                                                                                            |       | 2,607              |       | 2,762                 |       |
| Deferred income taxes                                                                                                                                                                          |       | 608                |       | 592                   |       |
| Other liabilities                                                                                                                                                                              |       | —             |       | 113                   |       |
| Total liabilities                                                                                                                                                                              |       | 39,049             |       | 38,486                |       |
|                                                                                                                                                                                           |       |               |       |                  |       |
| Commitments and Contingencies                                                                                                                                                                  |       |               |       |                  |       |
| Stockholders’ deficit:                                                                                                                                                                    |       |               |       |                  |       |
| 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 3,729,648 shares and 3,722,156  shares at March 31, 2010 and December 31, 2009, respectively |       | —             |       | —                |       |
| Additional paid in capital                                                                                                                                                                     |       | 38,530             |       | 38,132                |       |
| Accumulated deficit                                                                                                                                                                            |       | (43,494            | )          | (40,676               | )          |
|                                                                                                                                                                                           |       |               |       |                  |       |
| Total stockholders’ deficit                                                                                                                                                               |       | (4,964             | )          | (2,544                | )          |
|                                                                                                                                                                                           |       |               |       |                  |       |
| Total liabilities and stockholders’ deficit                                                                                                                                               |       | $                  | 34,085     |                  | $          | 35,942 |   |

 

The accompanyingnotes are an integral part of these unaudited condensed consolidated financialstatements.

 

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**INFOLOGIX,INC.**

**CondensedConsolidated Statements of Operations (Unaudited)**

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

 
| ** **                                               | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                               | ** ** | **2010**                              | ** ** | **2009** | ** ** |
|                                                     |       |                                  |       |   |   |
| Net  revenues                                            |       | $                                     | 13,861     |   | $ | 18,812 |   |
| Cost  of revenues                                        |       | 9,599                                 |       | 14,677 |   |
|                                                     |       |                                  |       |   |   |
| Gross  profit                                            |       | 4,262                                 |       | 4,135 |   |
|                                                     |       |                                  |       |   |   |
| Selling,  general and administrative expenses            |       | 6,100                                 |       | 7,663 |   |
|                                                     |       |                                  |       |   |   |
| Operating  loss                                          |       | (1,838                                | )          | (3,528 | ) |
| Interest  expense                                        |       | (1,049                                | )          | (1,146 | ) |
| Interest  income                                         |       | —                                |       | 10 |   |
| Gain  on fair value adjustment on warrant liabilities    |       | 85                                    |       | — |   |
|                                                     |       |                                  |       |   |   |
| Loss  before income tax expense                          |       | (2,802                                | )          | (4,664 | ) |
| Income  tax expense                                      |       | (16                                   | )          | (7 | ) |
|                                                     |       |                                  |       |   |   |
| Net  loss                                                |       | $                                     | (2,818     | ) | $ | (4,671 | ) |
|                                                     |       |                                  |       |   |   |   |   |
| Loss  per share - basic and diluted                      |       | $                                     | (0.76      | ) | $ | (4.56 | ) |
|                                                     |       |                                  |       |   |   |   |   |
| Weighted  average shares outstanding - basic and diluted |       | 3,724,617                             |       | 1,024,126 |   |

 

The accompanying notes are an integral part of these unaudited condensedconsolidated financial statements.

 

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**INFOLOGIX,INC.**

**CondensedConsolidated Statements of Cash Flows (Unaudited)**

**(in thousands)**

 
| ** **                                            | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                            | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| Operating  activities:                                |       |                                  |       |   |   |
| Net  cash (used in) provided by operating activities  |       | $                                     | (3,934     | ) | $ | 1,526 |   |
| ** **                                            | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Investing  activities:                                |       |                                  |       |   |   |
| Acquisition  of property, software and equipment      |       | (27                                   | )          | (198 | ) |
| Net  cash used in investing activities                |       | (27                                   | )          | (198 | ) |
|                                                  |       |                                  |       |   |   |
| Financing  activities:                                |       |                                  |       |   |   |
| Proceeds  from employee stock purchases               |       | —                                |       | 35 |   |
| Repayment  of long-term debt and capital leases       |       | (42                                   | )          | (328 | ) |
| Proceeds  from equipment loan                         |       | 2,250                                 |       | — |   |
| Net  borrowings from line of credit                   |       | 1,350                                 |       | — |   |
| Net  cash provided by (used in) financing activities  |       | 3,558                                 |       | (293 | ) |
|                                                  |       |                                  |       |   |   |
| Net  (decrease) increase in cash and cash equivalents |       | (403                                  | )          | 1,035 |   |
|                                                  |       |                                  |       |   |   |
| Cash  and cash equivalents at beginning of period     |       | 1,018                                 |       | 3,037 |   |
|                                                  |       |                                  |       |   |   |
| Cash  and cash equivalents at end of period           |       | $                                     | 615        |   | $ | 4,072 |   |

 

The accompanying notes are an integral part of these unauditedcondensed consolidated financial statements.

 

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**INFOLOGIX, INC.**

**CondensedConsolidated Statements of Stockholders’ Deficit (Unaudited)**

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

** **
| ** **                                            | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **             | ** ** | **Total**   | ** ** |
|-------------------------------------------------------|------------|------------------|------------|-------------|------------|-----------------|------------|------------------------|------------|-------------|------------|
| ** **                                            | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** |
| ** **                                            | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit**            | ** ** | **Deficit** | ** ** |
|                                                  |       |             |       |        |       |            |       |                   |       |        |       |
| Balance,  January 1, 2010                        |       | 3,722,156        |       | $           | —     |            | $          | 38,132                 |       | $           | (40,676    | ) | $ | (2,544 | ) |
| Stock  based compensation                             | ** ** | **—**       |       | —      |       | 316             | ** ** | **—**             |       | 316         |       |
| Fractional  shares resulting from reverse stock split |       | (54              | )          | —      |       | —          | ** ** | **—**             |       | —      |       |
| Warrant  exercise                                     |       | 7,546            |       | —      |       | 70              |       | —                 |       | 70          |       |
| Allocated  finance costs                              |       | —           |       | —      |       | 12              |       | —                 |       | 12          |       |
| Net  loss                                             |       | —           |       | —      |       | —          |       | (2,818                 | )          | (2,818      | )          |
| Balance,  March 31, 2010                         |       | 3,729,648        |       | $           | —     |            | $          | 38,530                 |       | $           | (43,494    | ) | $ | (4,964 | ) |

 

The accompanying notes are an integral part of these unauditedcondensed consolidated financial statements**.**

 

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**INFOLOGIX, INC.**

**Notes to Condensed ConsolidatedFinancial Statements (Unaudited)**

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

 

**NOTE A—****Nature of Business and Basis of Presentation**

 

***Nature ofbusiness***

 

InfoLogix,Inc. and its subsidiaries (collectively, the “Company”) provide enterprise mobility solutions forthe healthcare and commercial markets.  TheCompany’s solutions are designed to allow the real time usage of datathroughout an enterprise in order to enhance workflow, improve customerservice, increase revenue and reduce costs. The products and services the Company provides include: wirelessnetwork design, hardware and infrastructure, software, consulting, systemintegration and network and device management solutions.

 

OnNovember 20, 2009, the Company completed a restructuring transaction withHercules Technology Growth Capital, Inc. (“Hercules”) and Hercules TechnologyI, LLC (“HTI”), a wholly-owned subsidiary of Hercules, pursuant to which $5,000of the Company’s outstanding debt was converted into shares of common stock anda warrant to purchase shares of the Company’s common stock, and the remainingoutstanding debt with Hercules was otherwise restructured (the “HerculesRestructuring”).  As a result of theHercules Restructuring, the Company experienced a change in control and underthe terms of the Debt Conversion Agreement, HTI has certain corporategovernance and other rights with respect to the Company. See Note F- Debt.

 

***Basis of presentation***

 

Theaccompanying condensed consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial reporting and with the instructions for Form 10-Q and Article10 of Regulation S-X. They do not include all of the disclosures normally madein the consolidated financial statements contained in the Company’s AnnualReport on Form 10-K. In management’s opinion, all adjustments considerednecessary for a fair presentation of the consolidated results of operations,financial position and cash flows for the periods shown have been made.  All such adjustments are of a normal andrecurring nature. The notes to the consolidated financial statements containedin the Annual Report on Form 10-K for the year ended December 31, 2009 shouldbe read in conjunction with these condensed consolidated financialstatements.  Operating results for thethree months ended March 31, 2010 are not necessarily indicative of the resultsthat may be expected for the year ending December 31, 2010.

 

Thecondensed consolidated financial statements include the accounts of InfoLogix, Inc.and its wholly-owned subsidiaries: InfoLogix Systems Corporation, OPTAcquisition, LLC, Embedded Technologies, LLC, and InfoLogix—DDMS, Inc. Allsignificant intercompany balances and transactions have been eliminated inconsolidation.

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the amounts reported in the consolidated financialstatements and the accompanying notes. Management considers materiality anduses the information available to prepare the consolidated financial statementsincluding the Company’s history, industry standards and the current economicenvironment, among other factors, in forming its estimates and judgments.Because of the uncertainty inherent in such estimates, actual results maydiffer from these estimates.

 

OnJanuary 5, 2010, the Company completed a reverse stock split of its issued andoutstanding 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 three months ended March 31, 2010have been prepared on a going concern basis, which contemplates continuingoperations, securing additional debt or equity financing, restructuring existingdebt, effecting one or more strategic transactions, and realizing assets andliabilities in the ordinary course of business. However, the Company hasincurred significant net losses from 2006 through the first quarter of 2010,including a net loss in the first quarter of 2010 of $2,818. The Company’slosses are attributable to the difficult economic conditions under which itoperates and challenges related to its transition over the last several years frombeing primarily a seller of infrastructure and hardware to becoming a providerof comprehensive enterprise mobility solutions.

 

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 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 included an 

 

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explanatoryparagraph which raises substantial doubt as to the Company’s ability tocontinue as a going concern in its report on the consolidated financialstatements for the year 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 plan to improve liquidity contemplates additional costcontrol measures and may also include additional financing, furtherrestructuring of its debt and effecting one or more strategic transactions. TheCompany’s ability to implement these plans successfully is dependent on manycircumstances outside of its direct control, including general economic conditionsand the financial strength of its customers. Any additional financing theCompany is able to secure will likely be subject to a number of conditions andinvolve additional costs. Given the current negative conditions in the economygenerally and the credit markets in particular, there is uncertainty as towhether the Company will be able to generate sufficient liquidity to repay itsoutstanding debt, to make its earn out payments and to meet working capitalneeds. If the Company is unable to improve its liquidity position, it may notbe able to continue as a going concern.

 

Certainamounts in the prior period presented have been reclassified to conform to thecurrent period financial statement presentation. These reclassifications haveno effect on previously reported net income.

 

**NOTEB—Recent Accounting Pronouncements**

 

InOctober 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition (Topic 605)- Multiple-Deliverable Revenue Arrangements.” ASU No. 2009-13 providesadditional guidance on the accounting for revenue recognition formultiple-deliverable arrangements to enable vendors to account for products orservices (deliverables) separately rather than as a combined unit. Thisguidance establishes a selling price hierarchy for determining the sellingprice of a deliverable, which is based on: (a) vendor-specific objectiveevidence; (b) third-party evidence; or (c) estimates. This guidance alsoeliminates the residual method of allocation and requires that arrangementconsideration be allocated at the inception of the arrangement to alldeliverables using the relative selling price method. In addition, thisguidance significantly expands required disclosures related to a vendor’smultiple-deliverable revenue arrangements. ASU No. 2009-13 is effectiveprospectively for revenue arrangements entered into or materially modified infiscal years beginning on or after June 15, 2010 and early adoption ispermitted. A company may elect, but will not be required, to adopt theamendments in ASU No. 2009-13 retrospectively for all prior periods. TheCompany is currently evaluating the requirements of ASU No. 2009-13 and has notyet determined itsimpact on the Company’s condensed consolidated financial statements.

 

In January 2010, the FASBissued an amendment to the accounting standards related to the disclosuresabout an entity’s use of fair value measurements. Among these amendments,entities will be required to provide enhanced disclosures about transfers intoand out of the Level 1 (fair value determined based on quoted prices in activemarkets for identical assets and liabilities) and Level 2 (fair valuedetermined based on significant other observable inputs) classifications,provide separate disclosures about purchases, sales, issuances and settlements relatingto the tabular reconciliation of beginning and ending balances of the Level 3(fair value determined based on significant unobservable inputs) classificationand provide greater disaggregation for each class of assets and liabilitiesthat use fair value measurements. Except for the detailed Level 3 roll-forwarddisclosures, the new standard is effective for the Company for interim andannual reporting periods beginning after December 31, 2009. The adoption ofthis accounting standards amendment did not have a material impact on theCompany’s consolidated financial statements. The requirement to providedetailed disclosures about the purchases, sales, issuances and settlements inthe roll-forward activity for Level 3 fair value measurements is effective forthe Company for interim and annual reporting periods beginning after December 31,2010. The Company does not expect that the adoption of these new disclosurerequirements will have a material impact on its consolidated financialstatements.

 

**NOTE C—Inventory**

 

Inventoryconsists of the following:

 
| ** **                                              | ** ** | **March 31,**   | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------|------------|-----------------|------------|------------------|------------|
| ** **                                              | ** ** | **2010**        | ** ** | **2009**         | ** ** |
| ** **                                              | ** ** | **(unaudited)** | ** ** | ** **       | ** ** |
| Finished  goods                                         |       | $               | 2,609      |             | $          | 2,547 |   |
| Work  in progress                                       |       | —          |       | 80               |       |
| Less:  allowance for slow moving and obsolete inventory |       | (1,550          | )          | (1,538           | )          |
|                                                    |       |            |       |             |       |
| Total  inventory, net                                   |       | $               | 1,059      |             | $          | 1,089 |   |

 

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Inventorydeposits of $2,250 at March 31, 2010 represent amounts paid to date towardsfuture purchases of mobile workstation inventory.

 

**NOTE D—****Goodwill**

 

Goodwill is the excess of the purchase price paid over the fair valueof the net assets of businesses acquired. In conjunction with the acquisitionof substantially all of the assets of Delta Health Systems, Inc. (“Delta”) in May2008, the Company entered into an earn out agreement with Delta in which Deltais eligible to earn additional consideration in the subsequent two year periodafter the closing of the transaction. During the three months ended March 31,2010, the Company recorded additional goodwill of $296 pursuant to the earn outagreement.

 

**NOTEE—Customer and Vendor Concentrations**

 

Forthe three months ended March 31, 2010 there were no individual customers whocomprised 10% or more of net revenues. For the three months ended March 31,2009, the top two customers represented approximately 28% of net revenues.

 

Forthe three months ended March 31, 2010 and 2009, the Company had one and twovendors, respectively, that individually comprised 10% or more of cost ofrevenues.

 

**NOTEF—Debt**

 

OnMay 1, 2008, the Company entered into a loan and security agreement withHercules (“Loan and Security Agreement”), which provided the Company with arevolving credit facility and a term loan facility.  The Loan and Security Agreement wassubsequently amended in November 2008 and May 2009, and the Company andHercules entered into a forbearance agreement with respect to certain defaultsunder the Loan and Security Agreement in July 2009, and the parties enteredinto five amendments to the forbearance agreement over the course of August throughOctober 2009.  In connection with theHercules Restructuring that closed on November 20, 2009, the Company enteredinto an amended loan agreement with Hercules (“Amended Loan Agreement”), whichamended and restated the Loan and Security Agreement. The HerculesRestructuring also provided the Company with up to $5,000 in additionalavailability under a revolving credit facility with Hercules. In connectionwith the Hercules Restructuring, the Company entered into a Debt ConversionAgreement with HTI, pursuant to which HTI exchanged $5,000 in existingindebtedness for (i) 2,691,790 shares of common stock, and (ii) a warrant topurchase 672,948 shares of common stock. The description of theAmended Loan Agreement below reflects the terms in place since November 20,2009, and as amended on February 19, 2010. ** **The Loan and Security Agreement wasfurther amended on April 6, 2010. See Note O - Subsequent Events.  At March 31, 2010, the Company’s indebtednessto Hercules consisted of a $5,500 term loan (“Term Loan A”), a $5,000convertible note (“Term Loan B”), a $12,000 revolving line of credit facility,of which $8,909 was outstanding at March 31, 2010, and an equipment loan withan outstanding balance of $2,250.

 

TermLoan A has a 48-month term, with principal amortization of approximately $153beginning December 1, 2010.  Theoutstanding principal balance on Term Loan A bears interest payable monthly at12% per annum for the initial year; 18% per annum for the subsequent twelvemonths and 15% per annum thereafter.

 

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 nationalexchanges. If not converted, the outstanding principal balance of Term Loan Bis due on November 1, 2014. The outstanding principal balance on Term Loan Bbears interest at 14.5% per annum for the initial twelve months followingclosing of the arrangement; 20.5% per annum for the subsequent twelve monthsand 17.5% per annum thereafter. A portion (2.5%) of the interest rate on TermLoan B is to be “paid in kind” (“PIK”) compounded monthly. 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 A and B will be assessed a prepayment charge between 1% and 5% of thetotal term loan commitment depending on when paid.

 

TermLoan B may be partially settled in cash upon conversion. In accordance with ASC470-20, “Debt with Conversion and other options”, the Company separatelyaccounted for the liability and equity components of this instrument byallocating the proceeds from issuance of the instrument between the liabilitycomponent and the embedded conversion option in a manner that reflects interestcost at the interest rate of similar nonconvertible debt. The differencebetween the principal amount of the debt and the amount of the proceedsallocated to the liability component was reported as a debt discount and isamortized as interest cost over the instrument’s expected life.

 

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Therevolving credit facility expires on May 1, 2011, but may be extended at theCompany’s option for six months if there is then no existing event of default.Any advances under the revolving credit facility bear interest initially at12.0% per annum until the Term Loans are repaid in full, at which time theinterest rate on outstanding advances will be prime plus 4%.The borrowingcapacity under the revolving credit facility is limited to the lesser of themaximum availability or 85% of the Company’s eligible accounts receivable asdefined in the Amended Loan Agreement. Borrowings under the revolving creditfacility include an over advance provision of up to $500, which will be due 28days after the over advance is drawn. Over advances bear interest at 15% perannum. On March 25,2010, Hercules advanced to the Company an additional $1,350, initially appliedto the outstanding balance on the Company’s revolving line of credit facility.The advance increased the outstanding indebtedness on the revolving line ofcredit to $8,909, and was provided as an extension above the Company’s eligibleborrowing base. See Note O- Subsequent Events.

 

OnFebruary 19, 2010,the Company entered into Amendment No. 1 (“Amendment 1”) to the Amended LoanAgreement, which provided 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 underthe Equipment Loan, subject to valid, verified purchase orders acceptable toHercules from suppliers approved by Hercules in its sole discretion.  In connection with any advances, the Companyis charged a fee of 3% of the purchase price identified in the relevantpurchase orders. All customer receipts related to sales of products financed bythe Equipment Loan are placed in a lockbox account under the exclusive controlof Hercules and customer receipts are applied first to payment of the EquipmentLoan fee, second, to the outstanding principal on the Equipment Loan and third,to all other obligations existing under the Equipment Loan. After suchapplication, the excess in the lockbox account will be returned to the Company,unless an event of default exists or could reasonably be expected to exist, inwhich case, Hercules may apply the excess in the lockbox account to anyobligation under the Amended Loan Agreement. The Equipment Loan bears interestat a rate of 1.5% per month and Hercules’ commitment to make additionalequipment advances terminated on April 30, 2010.

 

TheAmended Loan Agreement contains certain negative covenants and otherstipulations associated with the arrangement, including covenants that restrictthe Company’s ability to incur indebtedness, make investments, make payments inrespect of its capital stock, including dividends and repurchases of commonstock, sell or license its assets, and engage in acquisitions without the priorsatisfaction of certain conditions. Additionally, the Amended Loan Agreementcontains the following financial covenants (i) minimum consolidated adjustedEBITDA measured on a three month rolling basis as of the last day of each monthof between $150 and $2,000, until December 31, 2011 and thereafter when $3million of consolidated adjusted EBITDA is required, (ii) maximum leverageratio measured on a rolling twelve month basis as of the last day of a fiscalquarter commencing June 30, 2010 of 6.0 to 1.0 decreasing to 1.5 to 1.0 by thequarter ending June 30, 2012, (iii) minimum consolidated fixed charge coverageratio measured on a rolling twelve month basis as of the last day of a fiscal quarter commencing June30, 2010 of 0.75 to 1.0 increasing to 2.0 to 1.0 by the quarter ending June 30,2012, and (iv) at least $1,000 in unrestricted cash at all times. Failure tomaintain the financial covenants, as well as certain other events, are eventsof default under the Amended Loan Agreement. Upon an event of default under theAmended Loan Agreement, Hercules may opt to accelerate and demand payment ofall or any part of our obligations. Under the terms of the Amended LoanAgreement, late fees are equal to 5% of the past due amount and default rateinterest is equal to the applicable regular interest rate plus 3%.

 

On February 10, 2010,Hercules sent the Company a letter notifying the Company of an event of defaultas of February 5, 2010 and charging the Company a default interest rate of anadditional 3% to the applicable regular interest rate for the period starting February5, 2010. Events of default are continuing and default rate interest will bepayable monthly on the same date as regular interest unless Hercules chooses todemand payment of default interest on another date. As of March 31, 2010, the Companywas not in compliance with the borrowing base requirement related to therevolver, the minimum cash requirement of $1,000, and the minimum EBITDArequirement. As a result of the above defaults, all balances outstanding underthe Amended Loan Agreement at March 31, 2010 have been classified as current inthe accompanying consolidated balance sheet.  Hercules hasnot chosen to accelerate the Company’s obligations under the Amended LoanAgreement, but has expressly not waived any events of default or any of itsremedies. The Company does not have adequate liquidity to repay all outstandingamounts under the credit facility and payment acceleration would have amaterial adverse effect on the Company’s liquidity, business, financialcondition and results of operations.

 

Notes payable consist ofthe following:

 

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| ** **                                                                                                                                                                                                                                                                                 | ** ** | **March 31,**   | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                                                                                                                                                                                                                                                 | ** ** | **2010**        | ** ** | **2009**         | ** ** |
| ** **                                                                                                                                                                                                                                                                                 | ** ** | **(unaudited)** | ** ** | ** **       | ** ** |
| Term  Loan A note payable pursuant to the debt restructuring agreement with  Hercules.                                                                                                                                                                                                     |       | $               | 5,500      |             | $          | 5,500 |   |
|                                                                                                                                                                                                                                                                                       |       |            |       |             |       |
| Convertible  Term Loan B note payable pursuant to the debt restructuring agreement with  Hercules. At March 31, 2010 and December 31, 2009, the outstanding principal  balance was $5,098 and $5,015, respectively, net of original issuance  discount of $2,408 and $2,514, respectively. |       | 2,690           |       | 2,501            |       |
|                                                                                                                                                                                                                                                                                       |       |            |       |             |       |
| Note  payable to Hercules pursuant to the Equipment Loan.                                                                                                                                                                                                                                  |       | 2,250           |       | —           |       |
|                                                                                                                                                                                                                                                                                       |       |            |       |             |       |
| Convertible  note payable pursuant to an asset purchase agreement with Healthcare  Informatics Associates, Inc.  Principal  and accrued interest at 9.0% per annum is due September 30, 2010.                                                                                         |       | 4,346           |       | 4,252            |       |
|                                                                                                                                                                                                                                                                                       |       |            |       |             |       |
| Note  payable pursuant to an asset purchase agreement with AMT Systems, Inc. in  monthly installments of $9 including interest at 7.84%, maturing May 31,  2013.                                                                                                                           |       | 293             |       | 314              |       |
|                                                                                                                                                                                                                                                                                       |       |            |       |             |       |
| Total  notes payable                                                                                                                                                                                                                                                                       |       | 15,079          |       | 12,567           |       |
|                                                                                                                                                                                                                                                                                       |       |            |       |             |       |
| Less:  current maturities                                                                                                                                                                                                                                                                  |       | (14,870         | )          | (12,336          | )          |
|                                                                                                                                                                                                                                                                                       |       | $               | 209        |             | $          | 231 |   |

 

**NOTEG—Related Party Transactions**

 

*Notes payable—stockholders*

 

Asa result of the Hercules Restructuring, Hercules became the Company’s majoritystockholder through its wholly-owned subsidiary, HTI. During the first quarterof 2010 and 2009, Hercules charged the Company interest on outstanding debt of$762 and $743, respectively, including PIK interest.

 

*Professional recruiting services*

 

TheCompany maintains a business relationship with Gulian & Associates, whichis owned by the wife of David T. Gulian, the Company’s President and ChiefExecutive Officer and a director and stockholder of the Company.  Under the terms of the arrangement, Gulian & Associates provides the Companywith retainer-based professional recruiting services on a non-exclusive basis.  Gulian & Associates is paid a fee of 20%of a newly hired person’s annual base salary for employees it introduces to theCompany.  One-third of the estimated feeis due at the time the hiring request is made. The remainder is due upon successful placement of a candidate into therole. During the three months ended March 31, 2010 and 2009, Gulian &Associates charged fees to the Company of $82 and $97, respectively.

 

**NOTEH—Commitments and Contingencies**

 

*Litigation*

 

TheCompany is involved in disputes or legal actions arising in the ordinary courseof business. Management does not believe the outcome of such legal actions willhave a material adverse effect on the Company’s financial position, results ofoperations or cash flows.

 

*Vendorcommitments*

 

Underthe terms of a master service agreement, the Company granted exclusive rightsto a vendor to provide certain outsourcing services to support the Company’soperations. The Company has a minimum annual commitment to purchase supportservices in an aggregate amount of $1,500 per year through 2013. The Companyincurred costs of $68 and $100 for the three months ended March 31, 2010 and2009, respectively.

 

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**NOTE I—Income Taxes**

 

TheCompany has net operating loss carryforwards available for federal and certainstate tax obligations.  Because theCompany experienced a change in control as a result of the HerculesRestructuring, future utilization of the net operating losses is limited under Section382 of the Internal Revenue Code. The Company has determined that it is morelikely than not that it will not be able to use the net operating losses andother deferred tax assets and has recorded a full valuation allowance at March 31,2010.  Income tax expense of $16 and $7for the three months ended March 31, 2010 and 2009, respectively, results froma deferred tax provision for the difference between book and tax amortizationof indefinite lived assets and miscellaneous state taxes.

 

**NOTEJ—2008 Employee Stock Purchase Plan**

 

The Company has anemployee stock purchase plan (“ESPP”). The ESPP provides the Company’s employees the opportunity to purchasecommon stock through accumulated payroll deductions.  The Company has reserved 40,000 shares foruse in the ESPP. The ESPP has consecutive three month offering periodscommencing on the first trading day of each calendar quarter. The Company’sBoard of Directors suspended the ESPP indefinitely effective July 1, 2009.

 

The Company issued 82,098shares for the three months ended March 31, 2009.  In connection with the issue of these shares,the Company received $35. For the three months ended March 31, 2010, theCompany did not issue any shares under the ESPP.

 

**NOTEK—Stock Based Compensation**

 

For the three monthsended March 31, 2010 and 2009, the Company recognized compensation cost forstock options granted to employees of $316 and $290, respectively. Optionawards generally vest over a 3 to 4 year period of continuous service and havea ten year contractual term.  The fairvalue of each option is amortized on a straight-line basis over the option’svesting period.  The fair value of each optionis estimated on the date of grant using the Black-Scholes option valuationmodel. As of March 31, 2010, the total unrecognized compensation cost relatedto options amounted to approximately $2,300 which is expected to be recognizedover the options’ average remaining vesting period of 2.5 years.

 

During the three monthsended March 31, 2010 and 2009, the Company granted 713,706 and 400,870 options,respectively.

 

**NOTE L****—****Operating Segments**

 

The Company has two reportable operating segments:commercial and healthcare. Each of the reportable segments provides 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 Company evaluates the performance of itsoperating segments based on gross profit and does not allocate assets amongsegments. There are no intersegment sales or transfers.

 
| ** **        | ** ** | **Three months ended March 31, 2010** | ** ** |
|-------------------|------------|---------------------------------------|------------|
| ** **        | ** ** | **Healthcare**                        | ** ** | **Commercial** | ** ** | **Total** | ** ** |
| Net  revenues     |       | $                                     | 10,099     |   | $ | 3,762 |   | $ | 13,861 |   |
| Cost  of revenues |       | 6,788                                 |       | 2,811 |   | 9,599 |   |
| Gross  profit     |       | $                                     | 3,311      |   | $ | 951 |   | $ | 4,262 |   |

 
| ** **        | ** ** | **Three months ended March 31, 2009** | ** ** |
|-------------------|------------|---------------------------------------|------------|
| ** **        | ** ** | **Healthcare**                        | ** ** | **Commercial** | ** ** | **Total** | ** ** |
| Net  revenues     |       | $                                     | 12,576     |   | $ | 6,236 |   | $ | 18,812 |   |
| Cost  of revenues |       | 9,281                                 |       | 5,396 |   | 14,677 |   |
| Gross  profit     |       | $                                     | 3,295      |   | $ | 840 |   | $ | 4,135 |   |

 

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**NOTE M- FAIR VALUE 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 (Level 3).  If the inputs used to measure fair value fallwithin different levels of the hierarchy, the category level is based on thelowest priority level input that is significant to the fair value measurementof the instrument. Financial assets and liabilities recorded at fair value onthe Company’s consolidated balance sheets are categorized as follows:

 

Level1- Observable inputs such as quoted prices (unadjusted) for identical assets orliabilities in active markets

 

Level2-  Inputs, other than quoted prices inactive markets, that are observable either directly or indirectly

 

Level3-  Unobservable inputs for which thereis little or no market activity, which require the Company to develop its ownassumptions

 

Thefair value hierarchy also requires an entity to maximize the use of observableinputs and minimize the use of unobservable inputs when measuring fair value.

 

Thefollowing table details the assets and liabilities measured at fair value on arecurring basis:

 
| ** **          | ** ** | ** **          | ** ** | **Fair  Value Measurement at March 31, 2010** | ** ** |
|---------------------|------------|---------------------|------------|-----------------------------------------------|------------|
| ** **          | ** ** | **Carrying  Value** | ** ** | **Level  1**                                  | ** ** | **Level  2** | ** ** | **Level  3** | ** ** |
|                |       |                |       |                                          |       |   |   |   |   |
| Warrant liabilities |       | $                   | 2,607      |                                          | $          | — |   | $ | 2,607 |   | $ | — |   |
|                     |            |                     |            |                                               |            |  |  |  |  |  |  |  |  |

 

Thefair value of derivative instruments is estimated using the Black Scholesvaluation model with observable inputs.

 

**NOTE N—FINANCIAL INSTRUMENTS**

 

In accordance in ASCTopic 815-40, “Derivatives and Hedging”, the Company records its outstandingwarrants as liabilities because the warrants do not currently meet the criteriafor equity classification.  Theliabilities are marked to market at the end of each accounting period untilsuch time as the Company gains compliance with the requirements for equityclassification.

 

Thefair value of warrant liabilities was calculated under the Black-Scholespricing model using the Company’s stock price on the date of the warrant grant,the Company’s expected volatility, and the risk free interest rate matched tothe warrants’ expected life, adjusted for the impact of dilution. The Companydoes not anticipate paying dividends during the term of the warrants. TheCompany uses historical data to estimate volatility assumptions used in thevaluation model. The expected term of warrants granted is derived from ananalysis that represents the period of time that warrants granted are expectedto be outstanding. The risk-free rate for periods within the contractual lifeof the warrant is based on the U.S. Treasury yield curve in effect at the timeof grant.

 

Duringthe period ended March 31, 2010, the Company changed certain assumptionsrelated to volatility and dilution used in the valuation of its warrantliabilities and corrected the calculation used in the valuation of its warrantliabilities at December 31, 2009. Management has determined that these changes did not have a materialimpact on its 2009 financial position, results of operations or earnings pershare. The resulting charge of $787 is included in the accompanying statementof operations as a reduction to the gain in fair value adjustment on warrantliabilities for the three month period ended March 31, 2010.

 

On March 1, 2010, the Company issued to Hercules7,546 common shares upon the cashless exercise of a warrant to acquire up to10,000 underlying shares.

 

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Thefollowing table details warrant activity during the three-month period ended March31, 2010:

 
| Outstanding  as of December 31, 2009 |   | 788,948 |   |
|--------------------------------------|--------|---------|--------|
| Issued                               |   | —  |   |
| Exercised                            |   | 10,000  |   |
| Forfeited                            |   | —  |   |
| Outstanding  as of March 31, 2010    |   | 778,948 |   |

 
| **Expiration Date**         | ** ** | **Number of  Shares  Underlying  Warrants** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|-----------------------------|------------|---------------------------------------------|------------|----------------------------------------|------------|
| ** **                  | ** ** | ** **                                  | ** ** | ** **                             | ** ** |
| 2010                        |       | 106,000                                     |       | $                                      | 15.03      |   |
| 2011                        |       | —                                      |       | —                                 |       |
| 2012                        |       | —                                      |       | —                                 |       |
| 2013                        |       | —                                      |       | —                                 |       |
| 2014                        |       | 672,948                                     |       | $                                      | 1.86       |   |
|                        |       |                                        |       |                                   |       |
| Total  warrants outstanding |       | 778,948                                     |       | $                                      | 3.65       |   |

 

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:

 
| Exercise price |   | $1.86-$50.00    |   |
|----------------|--------|-----------------|--------|
| Estimated life |   | 0.66-4.64 years |   |
|           |   |            |   |
| Volatility     |   | 134.12%-233.53% |   |
|           |   |            |   |
| Risk free rate |   | 0.33%-2.08%     |   |
|           |   |            |   |
| Dividend rate  |   | 0%              |   |

 

**NOTE O****—****Subsequent Events**

 

On April 6, 2010, theCompany entered into Amendment No. 2 (“Amendment 2”) to the Amended LoanAgreement with Hercules. Pursuant to Amendment 2, Hercules funded a term loanin an original principal amount of $1,350 (“Term Loan C”). The proceeds of TermLoan C were used to repay outstanding over advances under the revolving creditfacility. Interest on Term Loan C will accrue at a rate of 8% per annum and, atthe discretion of Hercules, is payable either in cash or in kind by adding theaccrued interest to the principal of Term Loan C. All principal outstanding onTerm Loan C will be due and payable on April 1, 2013. Term Loan C may beconverted into shares of the Company’s common stock at a price of $3.276 pershare at any time at Hercules’ option. The Company may prepay Term Loan Cwithout incurring a prepayment penalty charge. The Company also entered into aregistration rights agreement with Hercules whereby it agreed to register theshares underlying Term Loan C and certain interest that may be paid in shares.

 

Amendment 2 also amendedthe interest payment options under Term Loan B such that Hercules now has theoption, in its sole discretion, to require any and all interest on Term Loan Bto be paid in cash, in kind or in shares of common stock of the Company, ratherthan 2.5% as PIK and the balance in cash or conversion of the 2.5% PIK interestinto cash or shares only if certain pre-defined metrics are maintained. Thenumber of shares into which accrued interest will be converted will bedetermined based on the adjusted 60-day average trading price of the Company’scommon stock on the date of Hercules’ election to convert the interest intoshares.

 

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Amendment 2 also amendedthe default interest payment options under the Amended Loan Agreement. Whereasprior to Amendment 2, default rate interest was payable in cash or in kind byadding the accrued interest to the outstanding principal amount. Pursuant toAmendment 2, Hercules now has the option to elect to have default rate interestpaid in cash, in kind or in shares of the Company’s common stock. All default rateinterest paid in kind will be added to the outstanding principal amount on TermLoan B, notwithstanding on which loan the interest has accrued. If Herculeselects to have default rate interest paid in shares, the number of shares intowhich such accrued default rate interest will be converted will be determinedbased on the adjusted 60-day average price on the date of Hercules’ election toconvert the interest into shares.

 

**Item 2.       ****Management’s Discussion****andAnalysis of Financial Condition and Results of Operations**

 

**ForwardLooking Statements**

 

This report contains “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, as amended,that are based on our current expectations, estimates, forecasts andprojections about our company and our industry. These forward-lookingstatements reflect our current views about future events and can be identifiedby terms such as “will,” “may,” “believe,” “anticipate,” “intend,” “estimate,” “expect,”“should,” “project,” “plan” and similar expressions, although not allforward-looking statements contain such identifying words. You arecautioned not to place undue reliance on these forward-lookingstatements. These forward-looking statements are not guarantees of futureevents and involve risks and uncertainties that are difficult to predict andare based upon assumptions that may prove to be incorrect. Our actual resultscould differ materially and adversely from those anticipated in suchforward-looking statements as a result of certain factors, including but notlimited to, for example:

 

·                  our ability to refinance, replace orrestructure our current indebtedness and to comply with the financial covenantsand other terms and conditions contained in the agreements governing ourindebtedness or any replacement indebtedness;

·                  our ability to operate profitably andmanage growth of our business;

·                  our ability to introduce new products andservices and maintain products and service quality;

·                  our ability to implement our businessplan in difficult 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 integrateacquisitions with our existing operations;

·                  our ability to retain, replace and hireexperienced senior management;

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

·                  competition in the industries in which wecompete;

·                  our ability to protect our intellectualproperty rights;

·                  restrictions on our operations containedin our loan and security agreement or agreement for any replacementindebtedness; and

·                  our ability to improve our internalcontrols over financial reporting.

 

We have disclosedimportant factors that could cause our actual results to differ materially fromour expectations under “Risk Factors” in our Annual Report on Form 10-K for theyear ended December 31, 2009 and elsewhere in this report.  These cautionary statements qualify allforward-looking statements attributable to us or persons acting on our behalf.  We do not undertake any obligation to updateor revise any forward-looking statements to reflect new information, futureevents or otherwise, except as required by federal securities laws.

 

**Overview**

 

The following discussionand analysis of our financial condition and results of operations is intendedto assist you in understanding our financial condition and results ofoperations. This discussion and analysis should be read in conjunction with ourfinancial statements and the notes thereto included in Item 1 of this quarterlyreport, and “Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations” included in our Annual Report on Form 10-Kfor the year ended December 31, 2009. Many of the amounts and percentagespresented in this discussion and analysis have been rounded for convenience ofpresentation, and all dollar amounts, except per share data, are presented inthousands.

 

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**Recent Developments**

 

*Reverse Stock Split*

 

On January 5, 2010, weeffected a one-for-twenty-five reverse stock split of our issued andoutstanding shares of common stock, par value $0.00001 per share. Unlessotherwise indicated, all share amounts discussed herein reflect the post-splitnumber of shares of our common stock.

 

*Hercules RestructuringTransactions*

 

On November 20, 2009, wecompleted a restructuring transaction with our senior lender HerculesTechnology Growth Capital, Inc. (“Hercules”) and its wholly-owned subsidiaryHercules Technology I, LLC (“HTI”), pursuant to which $5,000 of our outstandingdebt to Hercules 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 (the “Hercules Restructuring”). As a resultof the Hercules Restructuring, we experienced a 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)Hercules may convert a portion of our remaining indebtedness to Hercules intoan additional 2,691,790 shares of our common stock and has the option toconvert certain term loan interest into an indeterminate number of shares ofour common stock. In addition, on March 1, 2010, Hercules exercised a warrantinitially received on June 19, 2009 by which it acquired 7,546 shares of ourcommon stock. As a result of Amendment 2 to our Amended Loan Agreement on April6, 2010, Hercules may convert the principal of Term Loan C (defined below) intoan additional 412,087 shares of our common stock and has the option to convertdefault rate interest into an indeterminate number of shares of our commonstock.

 

In connection with theHercules Restructuring, on November 20, 2009, we and Hercules entered into anAmended and Restated Loan and Security Agreement (“Amended Loan Agreement”),whereby we and Hercules agreed to restructure our remaining debt not convertedinto shares of common stock and a warrant. The Amended Loan Agreement amendedand restated our prior loan and security agreement with Hercules.

 

On February 19, 2010, weentered into Amendment No. 1 (‘Amendment 1”) to the Amended LoanAgreement.  Under the Equipment Loanprovided by Amendment 1, we may request up to $3,000 for use in purchasingequipment (the “Equipment Loan”) subject to valid, verified purchase ordersacceptable to Hercules from suppliers approved by Hercules in its solediscretion.

 

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 therevolving line of credit to $8,909, and was provided as an extension above oureligible borrowing base provided in the Amended Loan Agreement.

 

On April 6, 2010, weentered into Amendment No. 2 (“Amendment 2”) to the Amended Loan Agreement.Pursuant to Amendment No. 2, Hercules funded a term loan in an originalprincipal amount of $1,350 (“Term Loan C”). The proceeds of Term Loan C wereused, in part, to repay outstanding over advances under the revolving creditfacility. Interest on Term Loan C will accrue at a rate of 8% per annum and, atthe discretion of Hercules, is payable either in cash or in kind by adding theaccrued interest to the principal of Term Loan C. All principal outstanding onTerm Loan C will be due and payable on April 1, 2013. Term Loan C may beconverted into shares of our common stock at a price of $3.276 per share at anytime at Hercules’ option. We may prepay Term Loan C without incurring aprepayment penalty charge. We also entered into a registration rights agreementwith Hercules whereby we agreed to register the shares underlying Term Loan C.

 

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 an additional 3%to the applicable regular interest rate for the period starting February 5,2010. Events of default are continuing and default rate interest will bepayable monthly on the same date as regular interest unless Hercules chooses todemand payment of default interest on another date. Hercules may elect to havedefault rate interest paid in cash, in kind or in shares of our common stock.

 

Hercules has not chosento accelerate our obligations under the Amended Loan Agreement, but hasexpressly not waived any events of default or any of its remedies. We do nothave 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.

 

*Nasdaq Delisting Notice/AppealHearing*

 

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 

 

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net income fromcontinuing operations of at least $500 in the most recently completed fiscalyear or in two of the three most recently completed fiscal years. On August 19,2009, we received a letter from Nasdaq, notifying us that we were not incompliance with these requirements. On October 30, 2009, we received noticethat Nasdaq granted our request for an extension to regain compliance withthese requirements. We had until November 20, 2009 to regain such compliance.On November 25, 2009, we received notice from Nasdaq that we had regainedcompliance with the $2,500 stockholders’ equity requirement for continuedlisting on The Nasdaq Capital Market, but noting that Nasdaq would continue tomonitor our compliance with this listing rule, and that, if at the time of ournext periodic report we did not evidence compliance, we might be again subjectto delisting.  On April 20, 2010, wereceived a new staff determination letter from Nasdaq regarding ournon-compliance with the Nasdaq continued listing standards.  At December 31, 2009, our stockholders’deficit of $2,544 again was below Nasdaq’s minimum stockholders’ equityrequirement. The Nasdaq staff determined to delist our commonstock on April 29, 2010 unless we requested a hearing before a Nasdaq ListingQualifications Panel (“Panel”) on or before April 27, 2010.  On April 27, 2010, we requested a hearingbefore the Panel and, as a result, our common stock will remain listed onNasdaq pending the issuance of a decision by the Panel following the hearing,which is currently scheduled for June 10, 2010. There can be no assurance thatthe Panel will grant our request for continued listing.  A delisting of our common stock from Nasdaqcould adversely affect the market liquidity of our common stock and cause themarket price of our common stock to decrease and could also adversely affectour ability to obtain financing for the continuation of our operations and/orresult in the loss of confidence by investors, customers, suppliers andemployees.  If our common stock isdelisted we may seek to have our stock quoted on the Pink OTC Market (alsoknown as the “Pink Sheets”) or trade on the OTC Bulletin Board, however, therecan be no assurance that we will be successful in such efforts.

 

**General**

 

Weprovide 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, offering mobility to caregivers andworkforces by making data accessible directly at the point of care or point ofactivity, and managingoperations with services to improve clinical and financial performance andsupply chain with services to drive greater efficiency.

 

We provide solutions 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.

 

The sale of mobile workstations and other wireless devices has been andcontinues to represent a majority of our net revenues. We are continuing totransition our business to offer higher margin consulting, other professionalservices and software applications. With our focus on selling services andsoftware, we believe that we can provide more comprehensive enterprise mobilitysolutions to our customers. These solutions involve:

 

·                  Consulting with ourcustomers 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.

 

·                  Providing our customers withongoing managed services that are designed to supplement their informationtechnology department, such as training, maintenance and repair, networkmonitoring including both on-site and remote, software application upgrades,network security and workflow consulting.

 

·                  Assessing our customer’sexisting wireless infrastructure—the cables, routers and network adapters fromwhich a wireless network is constructed—and developing improved network designsto ensure effective wireless connectivity and infrastructure systems integration.

 

·                  Developing and implementingcustom and industry specific software applications including healthcareclinical electronic medical records and enterprise-wide systems by usingexisting proprietary and third-party software.

 

·                  Delivering and installingwireless infrastructure and user devices, including mobile workstations.

 

We manage our business primarily by market verticals, driven by oursales organization. We have two reportable operating segments consisting of ourhealthcare and commercial businesses. The healthcare segment is principallycomposed of our activities in hospitals and other related healthcarefacilities. The commercial segment focuses on all other vertical marketsincluding pharmaceutical, manufacturing, wholesale and retail distribution andservice industries.

 

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In order to improve our operating efficiencies and gross margin, we aretransitioning from custom order processing for our mobile workstations to astandardized suite of products. In the first quarter of 2010, we startedpre-ordering our new standardized mobile workstations from a third-party vendorbased on our estimates of expected sales. If our estimates as to the amount ofworkstations to be sold or the timing of sales do not materially correspond toactual sales, we will be required to purchase and hold workstations asinventory.

 

Weserve the healthcare and commercial industries, which are experiencingsignificant challenges, primarily due to weak macroeconomic conditions thathave resulted in a decreased demand for their products and services. As aresult, some of our customers may face business and financial challenges in 2010.  For example, some of our customers are facingconstraints on their information technology budgets and are seeking moreflexibility in the type of mobility solutions they implement and the timing oftheir purchases from us. It is unclear when the general economic climate willimprove and when our customers may benefit from improved conditions.

 

We conduct substantially all of our operations through our wholly-ownedsubsidiary, InfoLogix Systems Corporation. We own our patents and patentapplications through our wholly-owned subsidiaries OPT Acquisition, LLC,Embedded Technologies, LLC and InfoLogix—DDMS, Inc.

 

**Going Concern**

 

The current weak macroeconomic conditions have had a major impact onthe industries we serve. During 2009, we experienced reduced sales andcompressed margins, particularly related to the sales of mobile workstationsand related infrastructure in the healthcare markets that we serve. We believethis slowdown is primarily the result of adverse economic conditions affectingthe healthcare industry, including constrained budgets promulgated by difficultaccess to capital in community and other not-for-profit hospitals. We haveresponded to the challenging times by undertaking a series of cost reductioninitiatives, including the elimination of executive bonuses, reduction ofemployee salaries and reduction in the number of employees. Economic conditionsdid not improve in the first quarter of 2010 and we expect 2010 to be achallenging year.

 

Our condensed consolidated financial statements for the three monthsended March 31, 2010 have been prepared on a going concern basis, whichcontemplates continuing operations, securing additional debt or equityfinancing, restructuring our existing debt, effecting one or more strategictransactions, and realizing assets and liabilities in the ordinary course ofbusiness.  However, we have incurredsignificant net losses from 2006 through the first quarter of 2010, including anet loss of $2,818 for the three months ended March 31, 2010.  Our losses are attributable to the difficulteconomic conditions under which we operate and challenges related to ourtransition over the last several years from being primarily a seller ofinfrastructure and hardware to becoming a provider of comprehensive enterprise mobilitysolutions. During this transition period, we have hired experienced managementand staff to execute our business plans and have made strategic acquisitions.We have also managed our liquidity through this transition, primarily byfunding operations with indebtedness, which at March 31, 2010 included $22,000of senior debt at high interest rates and other associated costs.

 

As a result of our capital and debt structure and recurring losses, wehave substantial liquidity requirements related to the repayment of a sellernote that comes due on September 30, 2010, our indebtedness to Hercules, andearn out payments for past acquisitions. We do not currently expect to generatesufficient cash flow from operations to fund those obligations. As a result, ourindependent registered public accounting firm included an explanatory paragraphwhich raises substantial doubt as to our ability to continue as a going concernin its report on our consolidated financial statements for the year ended December31, 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 also include additional financing, further restructuring of our debtand effecting one or more strategic transactions. Our ability to implementthese plans successfully is dependent on many circumstances outside of ourdirect control, including general economic conditions and the financialstrength of our customers. Any additional financing we are able to secure willlikely be subject to a number of conditions and involve additional costs. Giventhe current negative conditions in the economy generally and the credit marketsin particular, there is uncertainty as to whether we will be able to generatesufficient liquidity to repay our outstanding debt, to make our earn outpayments and to meet working capital needs. If we are unable to improve ourliquidity position, we may not be able to continue as a going concern.

 

**Characteristics of our net revenuesand expenses**

 

We generate our net revenues through the resale of wireless and mobilehardware and systems, including mobile workstations, handheld and wearablecomputers, peripherals, and related products under which the revenue isrecognized. Sales revenue on product is recognized when both the title and riskof loss transfer to the customer, generally upon shipment.

 

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We also generate revenues from consulting and professional services oneither a fixed fee or time and expense basis. Net revenues from our consultingand professional services are primarily 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 isrecognized ratably over the contract period based upon actual project hours ascompared to budgeted project hours. Payments received in advance of servicesperformed are recorded as deferred revenue. Certain contract payment terms mayresult in customer billing occurring at a pace slower than revenue recognition.The resulting revenue recognized in excess of amounts billed and project costis included in unbilled revenue on our condensed consolidated balance sheet.

 

We also generate net revenues from the sale of warranties on wirelessand mobile hardware and systems, including mobile workstations, computers,peripherals, and related products.  Wesell original equipment manufacturers’ component warranties and warrantyprograms sponsored by other third parties, including extended warranties, andrecognize the revenue on a net basis upon execution of the warrantyagreement.   As we have been transitioningour business away from the sale of hardware and related warranties, we are notselling new extended warranty programs except for those serviced bythird-parties and we have taken steps to confirm with our customers thatthird-parties are the obligors under their warranties.

 

Cost of revenues consists of all expenses that are directlyattributable to the costs associated with the purchase, for resale, of wirelessand mobile hardware and systems, including computers, peripherals, and relatedproducts. Fluctuations in our gross margin may occur due to changes in ourability to obtain discounts on product sales or our ability to negotiate highermargins on sales contracts with large customers. Cost of sales also consists ofthe direct costs associated with those employees or sub-contractors thatperform our professional consulting services on behalf of our customers.

 

Sellingexpenses primarily consist of the salaries, benefits, travel and other costs ofour regional and national account sales representatives, sales management andbusiness development expenses. General and administrative expenses primarilyconsist of the costs attributable to the support of our operations, such as:costs related to information systems, salaries, expenses and office space costs,inside sales and customer support, warehousing, technical support, financialaccounting, purchasing, administrative and human resources personnel,insurance, recruiting fees, legal, accounting and other professional services.

 

**CriticalAccounting Estimates and Policies**

 

Our condensed consolidated financial statements are prepared inconformity with accounting principles generally accepted in the United Statesof America (“GAAP”), which requires us to make estimates and assumptions thataffect the reported amounts of assets and liabilities at the date of thefinancial statements and the reported amounts of net revenues and expensesduring the reporting periods. Critical accounting policies are those thatrequire the application of management’s most difficult, subjective, or complexjudgments, often because of the need to make estimates about the effect ofmatters that are inherently uncertain and that may change in subsequentperiods. In preparing the condensed consolidated financial statements,management has made estimates and assumptions that affect the reported amountsof assets and liabilities at the date of the financial statements, and thereported amounts of net revenues and expenses during the reportingperiods.  In preparing the consolidatedfinancial 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.

 

*Revenue recognition*

 

Net revenues are generated through product sales, warranty andmaintenance agreements, professional consulting, programming and engineeringservices, long-term support services, and educational learning programs. Netrevenues from product sales are recognized when both the title and risk of losstransfer to the customer, generally upon shipment. Net revenue from the salesof warranties is recognized upon execution of the warranty agreement.  We do not bear associated warranty riskbecause it is contracted with third parties, the primary obligors, to fullyassume all risks and obligations.

 

Revenue from consulting and other professional services is recognizedon 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 revenue in the period the related expense is incurred.  Revenue from the sale of proprietary learningtechnologies and those consulting and other professional services provided on afixed-fee basis is recognized according to a proportionate method of revenuerecognition and is recognized ratably over the contract period based uponactual project hours completed compared to total budgeted 

 

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projecthours. Changes in these assumptions, including estimates on fixed feecontracts, can materially affect the amount of net revenue recognized in ournet income from operations.

 

We record amounts billed to our customers for shipping and handlingfees as revenue. All amounts billed in a sale transaction related to shippingand handling represent 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 of operations

 

*Inventory*

 

Inventory is stated at the lower of cost or market. Cost is determinedusing the first in, first out method.

 

We periodically review our inventories and make provisions as necessaryfor estimated obsolete and slow-moving goods. We mark down inventory in anamount equal to the difference between cost of inventory and the estimatedmarket value based on assumptions about future demands, selling prices andmarket conditions. The creation of such provisions results in a write-down ofinventory to net realizable value and a charge to cost of revenues.

 

*Goodwilland other intangible assets*

 

Goodwillis tested at least annually by comparing the fair value of the recorded assetsto their carrying amount. The carrying value of other intangible assets isreviewed for possible impairment whenever events or changes in circumstancesindicate that their carrying value may not be recoverable.  If the carrying amount of the goodwill orother intangible assets exceeds its fair value, an impairment loss isrecognized. The evaluation of goodwill and other intangible assets requires theuse of judgment and numerous subjective assumptions, which, if actualexperience varies, could result in material differences in the requirements forimpairment charges.

 

*Stock based compensation*

 

We measure employee stock based compensation awards using a fair valuemethod and amortize theresulting expense on a straight line basis over the requisite service period ofthe award, generally the vesting period.

 

We estimate thegrant date fair value of stock options using the Black-Scholes option-pricingmodel which requires the input of highly subjective assumptions. Theseassumptions include estimating the expected term of the award and the estimatedvolatility of our stock price over the expected term. Changes in theseassumptions and in the estimated forfeitures of stock option awards canmaterially affect the amount of stock based compensation recognized in ourconsolidated statements of operations.

 

*Fair value of warrant liabilities*

 

Our warrant liability isrecorded at fair value, which is estimated using relevant market informationand other assumptions. Fair value estimates involve uncertainties and mattersof judgment regarding assumptions used. Changes in our assumptions or marketconditions could significantly affect the estimates and have a material impacton our financial position and results of operations.

 

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**Results of Operations (unaudited)**

 

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

 
| ** **                                    | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **2010**                         | ** ** | **2009** | ** ** |
|                                          |       |                             |       |   |   |
| Net  revenues                                 |       | 100.0                            | %          | 100.0 | % |
| Cost  of revenues                             |       | 69.3                             | %          | 78.0 | % |
|                                          |       |                             |       |   |   |
| Gross  profit                                 |       | 30.7                             | %          | 22.0 | % |
| Selling,  general and administrative expenses |       | 44.0                             | %          | 40.7 | % |
|                                          |       |                             |       |   |   |
| Operating  loss                               |       | (13.3                            | )%         | (18.7 | )% |
|                                          |       |                             |       |   |   |
| Interest  expense                             |       | (7.5                             | )%         | (6.2 | )% |
| Interest  income                              |       | 0.0                              | %          | 0.1 | % |
| Fair  value adjustment on warrant liabilities |       | 0.6                              | %          | 0.0 | % |
|                                          |       |                             |       |   |   |
| Loss  before income tax expense               |       | (20.2                            | )%         | (24.8 | )% |
| Income  tax expense                           |       | (0.1                             | )%         | 0.0 | % |
|                                          |       |                             |       |   |   |
| Net  loss                                     |       | (20.3                            | )%         | (24.8 | )% |

 

***ThreeMonths ended March 31, 2010 compared with the Three Months ended March 31, 2009***

 

**Netrevenues**

 

Net revenues for thethree months ended March 31, 2010 and 2009 were as follows:

 
| ** **             | ** **   | **Three Months Ended March 31,** | ** **   | **Amount of** | ** **   | **Percentage** | ** **   |
|------------------------|--------------|----------------------------------|--------------|---------------|--------------|----------------|--------------|
| ** **             | ** **   | **2010**                         | ** **   | **2009**      | ** **   | **Change**     | ** **   | **Change** | ** ** |
| *** ***           | *** *** | *** ***                     | *** *** | *** ***  | *** *** | *** ***   | *** *** | *** *** | *** *** |
| Healthcare             |         |                             |         |          |         |           |         |   |   |
| Infrastructure         |         | $                                | 3,517        |          | $            | 7,926          |         | $ | (4,409 | ) | (56 | )% |
| Professional  Services |         | 6,457                            |         | 4,566         |         | 1,891          |         | 41 | % |
| Managed  Services      |         | 125                              |         | 84            |         | 41             |         | 49 | % |
| Total  Healthcare      |         | 10,099                           |         | 12,576        |         | (2,477         | )            | (20 | )% |
|                   |         |                             |         |          |         |           |         |   |   |
| Commercial             |         |                             |         |          |         |           |         |   |   |
| Infrastructure         |         | 1,807                            |         | 4,940         |         | (3,133         | )            | (63 | )% |
| Professional  Services |         | 1,678                            |         | 864           |         | 814            |         | 94 | % |
| Managed  Services      |         | 277                              |         | 432           |         | (155           | )            | (36 | )% |
| Total  Commercial      |         | 3,762                            |         | 6,236         |         | (2,474         | )            | (40 | )% |
|                   |         |                             |         |          |         |           |         |   |   |
| Total  net revenues    |         | $                                | 13,861       |          | $            | 18,812         |         | $ | (4,951 | ) | (26 | )% |

 

Net revenues were $13,861for the three months ended March 31, 2010, compared to $18,812 for the threemonths ended March 31, 2009, a decrease of $4,951 or 26%. The decrease in ourHealthcare segment net revenues was due to fewer infrastructure ordersresulting from the current macro-economic conditions and our transition awayfrom a former supplier of mobile workstations to the launch of our new suite ofmobile workstations and power systems in March 2010. This decrease waspartially offset by an increase in professional services from increased demandfor EMR implementation and strategic cost management services.  The decrease in our Commercial segment netrevenues was due to lower resales of infrastructure and hardware products as wecontinue to 

 

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transition our businessto offer higher margin consulting and other professional services. Thereimbursable expense revenue included in our professional services revenuetotaled $738 and $425 for the three months ended March 31, 2010 and 2009,respectively.

 

**Cost of revenues**

 

Cost of revenues for thethree months ended March 31, 2010 and 2009 was as follows:

 
| ** **              | ** ** | **Three months ended March 31,** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|-------------------------|------------|----------------------------------|------------|---------------|------------|----------------|------------|
| ** **              | ** ** | **2010**                         | ** ** | **2009**      | ** ** | **Change**     | ** ** | **Change** | ** ** |
|                    | ** ** | ** **                       | ** ** | ** **    | ** ** | ** **     | ** ** | ** ** | ** ** |
| Healthcare              | ** ** | ** **                       | ** ** | ** **    | ** ** | ** **     | ** ** | ** ** | ** ** |
| Infrastructure          |       | $                                | 2,821      |          | $          | 5,950          |       | $ | (3,129 | ) | (53 | )% |
| Professional  Services  |       | 3,964                            |       | 3,296         |       | 668            |       | 20 | % |
| Managed  Services       |       | 3                                |       | 35            |       | (32            | )          | (91 | )% |
| Total  Healthcare       |       | 6,788                            |       | 9,281         |       | (2,493         | )          | (27 | )% |
|                    |       |                             |       |          |       |           |       |   |   |
| Commercial              |       |                             |       |          |       |           |       |   |   |
| Infrastructure          |       | 1,315                            |       | 4,370         |       | (3,055         | )          | (70 | )% |
| Professional  Services  |       | 1,376                            |       | 811           |       | 565            |       | 70 | % |
| Managed  Services       |       | 120                              |       | 215           |       | (95            | )          | (44 | )% |
| Total  Commercial       |       | 2,811                            |       | 5,396         |       | (2,585         | )          | (48 | )% |
|                    |       |                             |       |          |       |           |       |   |   |
| Total  cost of revenues |       | $                                | 9,599      |          | $          | 14,677         |       | $ | (5,078 | ) | (35 | )% |

 

Our cost ofrevenues was $9,599 for the three months ended March 31, 2010, compared to$14,677 for the three months ended March 31, 2009, a decrease of $5,078 or 35%. The decreasein our Healthcare segment cost of revenues was a result of lower spending oninfrastructure due to decreased sales of our mobile workstation products as wetransition to our newsuite of mobile workstations and power systems. The decrease in ourCommercial segment cost of sales was a result of lower resales of hardware andinfrastructure as we transition our business, partially offset by costsassociated with increasing our consulting staff to support an increased numberof SCM engagements, and prepare for future growth as we expand our professionalservices business**.** The reimbursable expensesincluded in our professional services cost of revenue totaled $738 and $425 forthe three months ended March 31, 2010 and 2009, respectively.

 

**Gross profit**

 

Gross profit for thethree months ended March 31, 2010 and 2009 was as follows:

 
| ** **             | ** ** | **Three months ended March 31,** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|------------------------|------------|----------------------------------|------------|---------------|------------|----------------|------------|
| ** **             | ** ** | **2010**                         | ** ** | **2009**      | ** ** | **Change**     | ** ** | **Change** | ** ** |
|                   | ** ** | ** **                       | ** ** | ** **    | ** ** | ** **     | ** ** | ** ** | ** ** |
| Healthcare             |       |                             |       |          |       |           |       |   |   |
| Infrastructure         |       | $                                | 696        |          | $          | 1,976          |       | $ | (1,280 | ) | (65 | )% |
| Professional  Services |       | 2,493                            |       | 1,270         |       | 1,223          |       | 96 | % |
| Managed  Services      |       | 122                              |       | 49            |       | 73             |       | 149 | % |
| Total  Healthcare      |       | 3,311                            |       | 3,295         |       | 16             |       | 0 | % |
|                   |       |                             |       |          |       |           |       |   |   |
| Commercial             |       |                             |       |          |       |           |       |   |   |
| Infrastructure         |       | 492                              |       | 570           |       | (78            | )          | (14 | )% |
| Professional  Services |       | 302                              |       | 53            |       | 249            |       | 470 | % |
| Managed  Services      |       | 157                              |       | 217           |       | (60            | )          | (28 | )% |
| Total  Commercial      |       | 951                              |       | 840           |       | 111            |       | 13 | % |
|                   |       |                             |       |          |       |           |       |   |   |
| Total  gross profit    |       | $                                | 4,262      |          | $          | 4,135          |       | $ | 127 |   | 3 | % |

 

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Grossprofit percentage for the three months ended March 31, 2010 and 2009 wasas follows:

 
| ** **                     | ** ** | **Three months ended March 31,** | ** ** | **Amount of** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|---------------|------------|
| ** **                     | ** ** | **2010**                              | ** ** | **2009**      | ** ** | **Change** | ** ** |
| ** **                     | ** ** | ** **                            | ** ** | ** **    | ** ** | ** ** | ** ** |
| Healthcare                     |       |                                  |       |          |       |   |   |
| Infrastructure                 |       | 20                                    | %          | 25            | %          | -5 | % |
| Professional  Services         |       | 39                                    | %          | 28            | %          | 11 | % |
| Managed  Services              |       | 98                                    | %          | 58            | %          | 40 | % |
|                           |       |                                  |       |          |       |   |   |
| Commercial                     |       |                                  |       |          |       |   |   |
| Infrastructure                 |       | 27                                    | %          | 12            | %          | 15 | % |
| Professional  Services         |       | 18                                    | %          | 6             | %          | 12 | % |
| Managed  Services              |       | 57                                    | %          | 50            | %          | 7 | % |
|                           |       |                                  |       |          |       |   |   |
| Total  gross profit percentage |       | 31                                    | %          | 22            | %          | 9 | % |

 

Our gross profit was$4,262 for the three months ended March 31, 2010, compared to $4,135 forthe three months ended March 31, 2009, an increase of $127 or 3%,resulting in a gross margin of 31% for the three months ended March 31,2010, up from 22% for the three months ended March 31, 2009. The increasein our gross margin is the result of a shift in our overall product and servicemix from lower margin product and infrastructure sales and related hardwareresales, as we continue to emphasize higher margin consulting and professionalservices, which benefited our healthcare segment as that industry demonstrateda focus on EMR assessment and implementation projects and our commercialsegment benefited from customers evaluating of SCM solutions**.**We continue toexperience downward pressure on our gross margin from the sale ofinfrastructure and third-party hardware. Consistent with our overall strategicplan, we continue to migrate the business toward an overall greater mix ofconsulting and other professional****services.

 

**Selling,general and administrative expenses**

 

Certainreclassifications have been made to 2009 selling and general and administrativeexpenses to conform to the current year presentation. These reclassificationshad no effect on previously reported results of operations or stockholders’deficit.

 

Our selling, general andadministrative expenses were $6,100 for the three months ended March 31,2010, compared with $7,663 for the three months ended March 31, 2009, adecrease of $1,563, or 20%.  Selling expenses were $2,395 for the threemonths ended March 31, 2010, compared with $2,710 for the three monthsended March 31, 2009, a decrease of $315, or 12%.  The decrease in our selling expenses for thecomparable period was primarily attributable to lower salary and travel relatedcosts resulting from staffing reductions and other cost control measures. General and administrative expenses were $3,705 for the three months ended March 31,2010, compared with $4,953 for the three months ended March 31, 2009, adecrease of $1,248, or 25%.  The decrease in our general andadministrative expenses for the comparable period was primarily attributable toa reduction in consultants training expense, including related salaries,benefits and travel costs, and lower marketing expenses.

 

Our depreciation andamortization expense, included with general and administrative expensesdiscussed above, decreased to $453 for the three months ended March 31,2010 from $475 for the three months ended March 31, 2009, a decrease of$22 or 5%, as the result of fewer purchases of capitalized assets required torun our business, such as laptop computers, servers and communicationequipment.

 

**Interestexpense**

 

Our interest expense was$1,049 for the three months ended March 31, 2010, compared to $1,146 forthe three months ended March 31, 2009, a decrease of $97 or 8%. Thedecrease in interest expense is a result of the restructuring of our debt withHercules in the fourth quarter of 2009. As a result of the additionalborrowings in February and April 2010, and the default interest rateimposed in April 2010, we expect our interest expense will increase infuture quarters. See “Liquidity and Capital Resources” below**.**

 

**Netloss**

 

Our net loss was $2,818for the three months ended March 31, 2010 compared with a net loss of$4,671 for the three months ended March 31, 2009, a decrease of $1,853 or40%. The decrease in our net loss was primarily due to our continued efforts toreduce our selling, general and administrative costs through avariety of cost-cutting measures and an increase in gross profit percentage as 

 

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wecontinue to transition from infrastructure hardware sales to higher marginprofessional and consulting services in our role as a comprehensive solutionsprovider.

 

**Liquidityand capital resources**

 

At March 31, 2010, we had cash and cash equivalents of $615,compared to $1,018 at December 31, 2009. Historically, we have funded our operating lossesprimarily through the private sale of equity securities and through current andlong term debt and working capital. At March 31, 2010, our totalliabilities were $39,049 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 three months ended March 31, 2010 was $3,934**,**primarily related to interest payments on our borrowingsand other operating expenses. Net cash used in investing activities was $27 forthe three months ended March 31, 2010, primarily used to purchase equipment.****Net cash provided by financing activities was $3,558 forthe three months ended March 31, 2010, primarily due to increasedborrowings under our Amended Loan Agreement with Hercules.

 

Given the amount of our currentcash and cash equivalents, and accounts receivable, we believe that we willhave sufficient liquidity to meet our short-term operating cash flow needs. We have,however, substantial liquidity requirements related to the repayment of aseller note in the amount of approximately $4,346 that comes due on September 30,2010, our revolving line of credit under our Amended Loan Agreement withHercules, and earn out payment obligations from past acquisitions. We do notcurrently expect to generate sufficient cash flow from operations to fund thoseobligations. We have undertaken a series of actions to reduce costs and haveexplored potential sources of financing and other strategic initiatives. 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.Hercules has not chosen to accelerate our obligations under the Amended LoanAgreement, but has expressly not waived any events of default or any of itsremedies 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 restructureour debt, pursue additional debt and equity financing, complete one or morestrategic transactions, and continue further cost control actions to meet ourliquidity needs. Our continued operations are dependent on our ability toimplement those plans successfully. If we fail to do so, we may not be able tocontinue as a going concern. For a discussion of our plans with respect tothese matters, see “Going Concern.”

 

*Senior indebtedness*

 

On May 1, 2008, we and our subsidiaries entered into a loan andsecurity agreement with Hercules (Loan and Security Agreement), which providedus with a revolving credit facility and a term loan facility. The Loan andSecurity Agreement was subsequently amended in November 2008 and May 2009,and we entered into a forbearance agreement with respect to certain defaultsunder the Loan and Security Agreement in July 2009, and we entered intofive amendments to the forbearance agreement over the course of August throughOctober 2009. In connection with the Hercules Restructuring that closed onNovember 20, 2009, we entered into the Amended Loan Agreement withHercules, which amended and restated the Loan and Security Agreement. Thedescription of the Amended Loan Agreement below reflects the terms in placesince November 20, 2009, as amended on February 19, 2010 (to providethe Equipment Loan) and on April 6, 2010 (to issue Term Loan C).

 

Under the Amended Loan Agreement, our indebtedness to Hercules consistsof three term loans aggregating approximately $12,900 and a revolving creditfacility of $12,000, of which $8,909 was outstanding at May 7, 2010. Therevolving credit facility expires on May 1, 2011, but may be extended atour option for six months if there is no existing event of default. Anyadvances under the revolving credit facility bear interest initially at 12.0%per annum until the term loans, as described below, are repaid in full, whenthe interest rate on outstanding advances will be prime plus 4%. Borrowingsunder the revolving credit facility are based on eligible accounts receivables,including an over advance provision of up to $500, which will be due 28 daysafter the over advance is drawn. Over advances bear 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). Principal 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. If not converted, the principal balance on Term Loan Bis due November 2014. Term Loan C may be converted into shares ofour common stock at a price of $3.276 per share at Hercules’ option. If notconverted, the principal balance of Term Loan C is due April 2013.

 

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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. A portion (2.5%) ofthe interest rate on Term Loan B is to be “paid in kind” (“PIK”) compoundedmonthly. The balance of the interest on Term Loan B is payable in cash monthlycommencing December 1, 2009. Hercules also has theoption, in its sole discretion, to require any and all interest on Term Loan Bto be paid in cash, PIK or in shares of our common stock. The number of sharesinto which accrued interest will be converted will be determined based on anadjusted 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 is 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 then 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 PIK.  Interest is payablemonthly commencing on May 1, 2010. We may prepay Term Loan C withoutincurring a prepayment penalty charge.

 

OnFebruary 19, 2010, Hercules provided us with an Equipment Loan allowing usto request up to $3,000 in borrowings for use in purchasing equipment.  We could borrow in minimum increments of $250under the Equipment Loan, subject to valid, verified purchase orders acceptableto Hercules from suppliers approved by Hercules in its sole discretion.  In connection with any advances, we arecharged 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 are placed in a lockbox account under the exclusive control ofHercules and customer receipts are applied first to payment of the EquipmentLoan fee, second, to the outstanding principal on the Equipment Loan and third,to all other obligations existing under the Equipment Loan. After suchapplication, the excess in the lockbox account will be returned to us, unlessan event of default exists or could reasonably be expected to exist, in whichcase, Hercules may apply the excess in the lockbox account to any obligationunder the Amended Loan Agreement. The Equipment Loan bears interest at a rateof 1.5% per month and Hercules’ commitment to make additional equipmentadvances terminated on April 30, 2010. At March 31, 2010, we have anoutstanding balance of $2,250 outstanding under this facility. We are indiscussions with Hercules concerning an extension to the Equipment Loan.

 

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, (ii) maximum leverage ratio measured on arolling twelve month basis as of the last day of a fiscal quarter commencing June 30,2010 of 6.0 to 1.0 decreasing to 1.5 to 1.0 by the quarter ending June 30,2012, (iii) minimum consolidated fixed charge coverage ratio measured on arolling twelve month basis as of the last day of a fiscal quarter commencing June 30,2010 of 0.75 to 1.0 increasing to 2.0 to 1.0 by the quarter ending June 30,2012, and (iv) at least $1,000 in unrestricted cash at all times.  Failures to maintain the financial covenants,as well as certain other events, are events of default under the Amended LoanAgreement. Upon an event of default under the Amended Loan Agreement, Herculesmay opt to accelerate and demand payment of all or any part 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. The outstanding balance isincluded in accrued expenses on the accompanying balance sheet at March 31,2010. Our obligations under the Amended Loan Agreement are secured by all ofour personal property, including all of our equity interests in our respectivesubsidiaries.

 

On February 10, 2010, Hercules sent us a letter notifying us of anevent of default because our borrowings under the revolving credit facilityexceed our borrowing base as of February 5, 2010 and charging us defaultinterest of an additional 3% to the applicable regular interest rate for theperiod starting February 5, 2010. Events of default are continuing anddefault rate interest will be payable monthly on the same date as regularinterest unless Hercules chooses to demand payment of default interest onanother date. Under the terms of our Amended Loan Agreement late fees are equalto 5% of the past due amount and default rate interest is equal to theapplicable regular interest rate plus 3%. Hercules may elect to have defaultrate interest paid in cash, in kind or in shares of our common stock. Alldefault rate interest paid in kind will be added to the outstanding principalamount on Term Loan B, notwithstanding on which loan the interest hasaccrued.  If Hercules elects to havedefault rate interest paid in shares, the number of shares into which such accrueddefault rate interest will be converted will be determined based on theadjusted 60-day average trading price of our common stock on the date ofHercules’ election to convert the interest into shares.

 

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 the loan and security agreement. We do not have adequateliquidity to repay all 

 

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outstandingamounts under the credit facility and payment acceleration would have amaterial adverse effect on our liquidity, business, financial condition andresults of operations.

 

Asa result of the event of default and because our total leverage ratio exceeds3.00 to 1.00, we are prohibited from satisfying our earn out obligationsrelated to our acquisition of the assets of Healthcare Informatics Associates,Inc. (“HIA”) and Delta Health Systems, Inc. We also have a seller note to HIAthat is payable on September 30, 2010. If we are in default under ourindebtedness to Hercules at September 30, 2010, we will not be permittedto repay the seller note at the date. We are in discussions with HIA aboutmodifying the earn out payment and the seller note.

 

***Inflation***

 

Todate, the effects of inflation on our consolidated financial results have notbeen significant; however, we cannot be certain that inflation will not affectus materially in the future.

 

***OffBalance Sheet Arrangements***

 

We do not currently haveany off-balance sheet arrangements.

 

***New Accounting Standards***

 

InOctober 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition(Topic 605) - Multiple-Deliverable Revenue Arrangements.” ASU No. 2009-13provides additional guidance on the accounting for revenue recognition formultiple-deliverable arrangements to enable vendors to account for products orservices (deliverables) separately rather than as a combined unit. Thisguidance establishes a selling price hierarchy for determining the sellingprice of a deliverable, which is based on: (a) vendor-specific objectiveevidence; (b) third-party evidence; or (c) estimates. This guidancealso eliminates the residual method of allocation and requires that arrangementconsideration be allocated at the inception of the arrangement to alldeliverables using the relative selling price method. In addition, thisguidance significantly expands required disclosures related to a vendor’smultiple-deliverable revenue arrangements. ASU No. 2009-13 is effectiveprospectively for revenue arrangements entered into or materially modified infiscal years beginning on or after June 15, 2010 and early adoption ispermitted. A company may elect, but will not be required, to adopt theamendments in ASU No. 2009-13 retrospectively for all prior periods. Weare currently evaluating the requirements of ASU No. 2009-13 and have notyet determined its impact on our condensed consolidated financial statements.

 

In January 2010, theFASB issued an amendment to the accounting standards related to the disclosuresabout an entity’s use of fair value measurements. Among these amendments,entities will be required to provide enhanced disclosures about transfers intoand out of the Level 1 (fair value determined based on quoted prices in activemarkets for identical assets and liabilities) and Level 2 (fair valuedetermined based on significant other observable inputs) classifications,provide separate disclosures about purchases, sales, issuances and settlementsrelating to the tabular reconciliation of beginning and ending balances of theLevel 3 (fair value determined based on significant unobservable inputs)classification and provide greater disaggregation for each class of assets andliabilities that use fair value measurements. Except for the detailed Level 3roll-forward disclosures, the new standard is effective for the Company forinterim and annual reporting periods beginning after December 31, 2009.The adoption of this accounting standards amendment did not have a materialimpact on our consolidated financial statements. The requirement to providedetailed disclosures about the purchases, sales, issuances and settlements inthe roll-forward activity for Level 3 fair value measurements is effective forthe Company for interim and annual reporting periods beginning after December 31,2010.  We do not expect that the adoptionof these new disclosure requirements will have a material impact on our consolidatedfinancial statements.

 

**Item 3.****       ****Quantitativeand Qualitative Disclosures About Market Risk**

 

Theprimary objective of our investment activities is to preserve principal. Ourfunds are currently held in checking accounts and money market funds which donot subject us to risk of a loss of principal due to changes in prevailinginterest rates and from time to time, in a portfolio of cash and cashequivalents that include investments in investment-grade securities, such ascommercial paper, money market funds, government debt securities andcertificates of deposit with maturities of less than nine months. Some of thesesecurities may be subject to market risk due to changes in prevailing interestrates, which may cause fluctuations in market value.

 

Twoof the main risks associated with these investments are interest rate risk andcredit risk.  Typically, when interest rates rise, there is acorresponding decline in the market value of debt securities. Fluctuations in interest rates would not have a material effect on ourfinancial statements because of the short-term nature of the securities inwhich we invest and our intention to hold the securities to maturity. Credit risk refers to the possibility that the issuer of the debt securitieswill not be able to make principal and interest 

 

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payments. We have limited the investments to investment grade or comparable securitiesand have not experienced any losses on our investments to date due to creditrisk.

 

The fair value of our cash and short-term investment portfolio at March 31,2010, approximated its carrying value due to the short-term maturities of theseinvestments. The potential decrease in fair value resulting from a hypothetical10% increase in interest rates for our investment portfolio is not material.

 

The carrying valueof our long-term debt at March 31, 2010 approximated its fair value.Advances under our revolving credit facility bear interest initially at 12% perannum until our term loans are repaid in full, at which time the interest rateon the outstanding advances will be prime plus 4%.  Interest rates under our four term loansrange between 8% and 23% over the next several years (including the defaultinterest rate).  Because our interestrates are fixed, an increase in market rates of interest will not impact ourannual interest expense until the term loans are repaid.

 

The balance of our other long term liabilities consists of two notes,bearing interest at fixed rates of 7.84% per annum and 9% per annum, issued inconnection with acquisitions that took place during 2007. A change in interestrates would not haveany effect on our annual interest expense for this debt.

 

**Item 4.****       ****Controlsand Procedures**

 

**a)****    ****Evaluation of disclosure controls**

 

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.

 

Asrequired by SEC Rule 13a-15(b) under the Exchange Act, we carried outan evaluation, under the supervision and with the participation of ourmanagement, including the Chief Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of our disclosure controls andprocedures as of the end of the period covered by this report. Based on theresults of the evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures were noteffective.

 

**b)****    ****Changes in internal control overfinancial reporting**

 

Inconnection with its audit of our consolidated financial statements for theperiod ended December 31, 2009, our independent registered publicaccounting firm identified deficiencies in internal control related to ouraccounting for the Hercules Restructuring.  Specifically, our independentregistered public accounting firm found that 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 $6,777 loss on debt extinguishment and a$4,294 increase in additional-paid-in-capital.

 

Wehave taken and continue to take appropriate and reasonable steps to make thenecessary improvements to remediate these deficiencies, including:

 

·      continuingto educate our management and finance personnel concerning accounting andreporting requirements;

·      implementingpersonnel, policy and procedure changes as part of our on-going program tostrengthen the organization structure, financial reporting procedures andsystem of internal control over financial reporting;

·      engagingprofessional services firms to assist with accounting and financial reporting;and

·      increasingour management oversight of accounting and reporting functions in the future.

 

Additionally, we continueto improve and implement more rigorous period end reporting processes toinclude improved controls and procedures, resulting in frequent processrefinement.  Our remediation efforts arecontinuing and we expect to make additional changes to our control environmentand accounting and reporting processes that we believe will strengthen ourinternal control over financial reporting.  We have dedicatedconsiderable resources to the design, implementation, documentation, andtesting of our internal controls and although we believe the steps taken todate have improved the effectiveness of our internal control over financial 

 

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reporting, we have notcompleted all the corrective processes and procedures.  Accordingly,we will continue to monitor the effectiveness of our internal control overfinancial reporting and as required, perform additional procedures to ensurethat our financial statements are fairly stated in all material respects.  We do not expect that our disclosure controlsand procedures or our internal control over financial reporting will prevent ordetect all errors.  A control system, no matter how well designed andoperated, can provide only reasonable, not absolute, assurance that the controlsystem’s objectives will be met. The design of any system of controls isbased, in part, upon certain assumptions about the likelihood of future eventsand there can be no assurance that any design will succeed in achieving itsstated goals under all potential future conditions.

 

Exceptas set forth above, there was no change in our internal control over financialreporting that occurred during the period covered by this report that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

**PART II — OTHER INFORMATION**

 

**Item 1.****       ****LegalProceedings**

 

Inthe normal course of business, we have become and might in the future becomeinvolved in legal actions relating to our business. In management’s opinion,the resolution of any such pending legal actions is not expected to have amaterial adverse effect on our consolidated financial position or results ofoperations.

 

**Item 1A.****    ****RiskFactors**

 

Therisks and uncertainties described below are in addition to those included inour Annual Report on Form 10-K for the year ended December 31, 2009and are not the only risks we face. Additional risks and uncertainties notpresently known to us or that we currently deem immaterial may also affect ourbusiness and results of operations.

 

***Our stock may be delistedfrom The Nasdaq Capital Market if we do not maintain certain levels ofstockholders’ equity, market value of listed securities, or net income fromcontinuing operations.***

 

Ourcommon stock is listed on The Nasdaq Capital Market, which imposes, among otherrequirements, a requirement that a listed company maintain either a minimum of$2,500 in stockholders’ equity, a minimum of $35,000 of market value of listedsecurities, or 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 from Nasdaq, notifying us that we were not incompliance with these requirements.  On October 30,2009, we received notice that Nasdaq granted our request for an extension toregain compliance with these requirements. We had until November 20, 2009 to regain such compliance.  On November 25, 2009, we received noticefrom Nasdaq that we had regained compliance with the $2,500 stockholders’equity requirement for continued listing on The Nasdaq Capital Market, butnoting that Nasdaq would continue to monitor our compliance with this listingrule, and that, if at the time of our next periodic report we did not evidencecompliance, we might be subject to delisting. On April 20, 2010, we received a new staff determination letterfrom Nasdaq notifying us of our non-compliance with the Nasdaq continuedlisting standards.  At December 31,2009, our stockholders’ deficit of $2,544 was again below Nasdaq’s minimumstockholders’ equity requirement.  TheNasdaq staff determined to delist our common stock unless we requested ahearing before a Nasdaq Panel on or before April 27, 2010.  On April 27, 2010, we requested ahearing before the Panel and, as a result, our common stock will remain listedon Nasdaq pending the issuance of a decision by the Panel following thehearing, which is currently scheduled for June 10, 2010. There can be noassurance that the Panel will grant our request for continued listing. Adelisting of our common stock from Nasdaq could adversely affect the marketliquidity of our common stock and cause the market price of our common stock todecrease, and it could also adversely affect our ability to obtain financingfor the continuation of our operations and/or result in the loss of confidenceby investors, customers, suppliers and employees.  If our common stock is delisted we may seekto have our stock quoted on the Pink OTC Market (also known as the “Pink Sheets”)or traded on the OTC Bulletin Board, however, there can be no assurance that wewill be successful in such efforts.

 

**Item 2.****       ****Unregistered Sales of EquitySecurities and Use of Proceeds**

 

On March 1, 2010, we issued 7,546 commonshares in a cashless exercise of a Hercules warrant for 10,000 underlyingshares.  The common stock issued by the Company in these transactions wasissued in a private transaction exempt from registration under the SecuritiesAct of 1933, as amended, pursuant to Sections 3(a)(9) and/or 4(2) thereof. The shares were issued to an accredited investor.  This transactiondid not involve the use of underwriters, and no commissions were paid inconnection therewith.

 

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

 

None.

 

**Item 4.****       ****Reserved**

 

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

 

None.

 

**Item 6.****       ****Exhibits**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                      |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                 |
| 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.     |
|-----|--------|---------------------|
| (+) |   | Furnished herewith. |

 

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**SIGNATURES**

 

Pursuant to the requirements of section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned; thereunto duly authorized, inHatboro, Pennsylvania on May 17, 2010.

 
|     | INFOLOGIX, INC.                                                          |
|----------|--------------------------------------------------------------------------|
|     |                                                                     |   |
|     | By:                                                                      | /s/ David T. Gulian |
|     |    David T. Gulian                                             |
| * * | *   President  and Chief Executive Officer*                    |
| * * | * *                                                                 | * * |
|     | By:                                                                      | /s/ John A. Roberts |
|     |    John A. Roberts                                             |
| * * | *   Chief  Financial Officer and Principal Accounting Officer* |

 

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