Table ofContents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-Q**

 

**MarkOne**

 

**x****   QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For The Quarterly Period Ended  June 30, 2010**

 

**o****      TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

** **

**For the Transition Periodfrom               to**

 

**Commission File Number 001-33521**

 

**INFOLOGIX, INC.**

(Exact name of registrant as specified in its charter)

 

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

 

**(215) 604-0691**

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.   Yes x No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).    Yes o No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See definitions of “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” inRule 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) |   |                        |

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).   Yes o No x

 

Thenumber of shares outstanding of each of the issuer’s classes of common stock asof the latest practicable date,

 

| **Class**                                      | ** ** | **Outstanding at August 12, 2010** |
|------------------------------------------------|------------|--------------------------------------------------------|
| **Common Stock, $0.00001 par value per share** | ** ** | **3,729,647 Shares**                                   |

 

 

 

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Table ofContents

 

**TABLE OF CONTENTS**

 
| **PART I — FINANCIAL INFORMATION** |
|----------------------------------------------|
|                                         |   |   |
| Item 1.                                      | Financial Statements | 3 |
|                                         |   |   |
|                                         | Condensed  Consolidated Balance Sheets as of June 30, 2010 (unaudited) and  December 31, 2009 | 3 |
|                                         |   |   |
|                                         | Condensed  Consolidated Statements of Operations (unaudited) for the three and six  months ended June 30, 2010 and 2009 | 4 |
|                                         |   |   |
|                                         | Condensed  Consolidated Statements of Cash Flows (unaudited) for the six months ended  June 30, 2010 and 2009 | 5 |
|                                         |   |   |
|                                         | Condensed  Consolidated Statement of Stockholders’ Deficit (unaudited) for the six  months ended June 30, 2010 | 6 |
|                                         |   |   |
|                                         | Notes to Condensed Consolidated Financial Statements  (unaudited) | 7 |
|                                         |   |   |
| Item 2.                                      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 17 |
|                                         |   |   |
| Item 3.                                      | Quantitative  and Qualitative Disclosures About Market Risk | 32 |
|                                         |   |   |
| Item 4.                                      | Controls and  Procedures | 33 |
|                                         |   |   |
| **PART II  — OTHER INFORMATION**   |
|                                         |   |   |
| Item 1.                                      | Legal Proceedings | 34 |
|                                         |   |   |
| Item 1A.                                     | Risk Factors | 34 |
|                                         |   |   |
| Item 2.                                      | Unregistered  Sales of Equity Securities and Use of Proceeds | 35 |
|                                         |   |   |
| Item 3.                                      | Defaults  Upon Senior Securities | 35 |
|                                         |   |   |
| Item 4.                                      | Reserved | 35 |
|                                         |   |   |
| Item 5.                                      | Other Information | 35 |
|                                         |   |   |
| Item 6.                                      | Exhibits | 35 |
|                                         |   |   |
|                                         | Signatures | 36 |

 

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**PART I- FINANCIAL INFORMATION**

 

**Item 1.        Financial Statements**

 

**INFOLOGIX, INC.**

**CondensedConsolidated Balance Sheets**

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

 
| ** **                                                                                                                                                                          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                          | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| ** **                                                                                                                                                                          | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                          | ** ** | ** **        |       |                  |       |
| Current assets:                                                                                                                                                                     |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                                           |       | $                 | 2,384      |                  | $          | 1,018 |   |
| Accounts and other receivables (net of allowance for doubtful accounts  in the amount of $68 and $2 as of June 30, 2010 and December 31, 2009,  respectively)                       |       | 12,204            |       | 14,158                |       |
| Unbilled revenue                                                                                                                                                                    |       | 716               |       | 252                   |       |
| Inventory, net                                                                                                                                                                      |       | 2,182             |       | 1,089                 |       |
| Inventory deposits                                                                                                                                                                  |       | 1,219             |       | —                |       |
| Prepaid expenses and other current assets                                                                                                                                           |       | 1,124             |       | 674                   |       |
| Total current assets                                                                                                                                                                |       | 19,829            |       | 17,191                |       |
| Property and equipment, net                                                                                                                                                         |       | 443               |       | 600                   |       |
| Intangible assets, net                                                                                                                                                              |       | 6,578             |       | 7,343                 |       |
| Goodwill                                                                                                                                                                            |       | 10,837            |       | 10,337                |       |
| Deferred financing costs                                                                                                                                                            |       | 381               |       | 471                   |       |
| Total assets                                                                                                                                                                        |       | $                 | 38,068     |                  | $          | 35,942 |   |
|                                                                                                                                                                                |       |              |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ DEFICIT**                                                                                                                                     | ** ** | ** **        |       |                  |       |
| Current liabilities:                                                                                                                                                                |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                    |       | $                 | 7,380      |                  | $          | 7,624 |   |
| Line of credit                                                                                                                                                                      |       | 8,097             |       | 7,559                 |       |
| Current portion of notes payable                                                                                                                                                    |       | 16,992            |       | 12,336                |       |
| Current portion of capital lease obligations                                                                                                                                        |       | 61                |       | 81                    |       |
| Sales tax payable                                                                                                                                                                   |       | 135               |       | 276                   |       |
| Accrued expenses                                                                                                                                                                    |       | 3,490             |       | 3,150                 |       |
| Accrued earn out payable                                                                                                                                                            |       | 2,458             |       | 1,958                 |       |
| Deferred revenue                                                                                                                                                                    |       | 696               |       | 1,690                 |       |
| Total current liabilities                                                                                                                                                           |       | 39,309            |       | 34,674                |       |
| Notes payable, net of current maturities                                                                                                                                            |       | 187               |       | 231                   |       |
| Capital lease obligations, net of current maturities                                                                                                                                |       | 94                |       | 114                   |       |
| Derivative liabilities                                                                                                                                                              |       | 668               |       | 2,762                 |       |
| Deferred income taxes                                                                                                                                                               |       | 687               |       | 592                   |       |
| Other liabilities                                                                                                                                                                   |       | —            |       | 113                   |       |
| Total liabilities                                                                                                                                                                   |       | 40,945            |       | 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 3,729,647 shares and 3,722,156 shares at June 30, 2010 and  December 31, 2009, respectively |       | —            |       | —                |       |
| Additional paid in capital                                                                                                                                                          |       | 40,050            |       | 38,132                |       |
| Accumulated deficit                                                                                                                                                                 |       | (42,927           | )          | (40,676               | )          |
|                                                                                                                                                                                |       |              |       |                  |       |
| Total stockholders’ deficit                                                                                                                                                    |       | (2,877            | )          | (2,544                | )          |
|                                                                                                                                                                                |       |              |       |                  |       |
| Total liabilities and stockholders’ deficit                                                                                                                                    |       | $                 | 38,068     |                  | $          | 35,942 |   |

 

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

 

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**INFOLOGIX, INC.**

**CondensedConsolidated Statements of Operations (Unaudited)**

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

 
| ** **                                    | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                    | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                          |       |                                 |       |                               |       |   |   |   |   |
| Net revenues                                  |       | $                                    | 16,375     |                               | $          | 24,411 |   | $ | 30,236 |   | $ | 43,223 |   |
| Cost of revenues                              |       | 11,527                               |       | 19,833                             |       | 21,126 |   | 34,510 |   |
|                                          |       |                                 |       |                               |       |   |   |   |   |
| Gross profit                                  |       | 4,848                                |       | 4,578                              |       | 9,110 |   | 8,713 |   |
|                                          |       |                                 |       |                               |       |   |   |   |   |
| Selling, general and administrative expenses  |       | 5,521                                |       | 7,748                              |       | 11,621 |   | 15,411 |   |
| Gain on sale of intangible assets             |       | (1,863                               | )          | —                             |       | (1,863 | ) | — |   |
|                                          |       |                                 |       |                               |       |   |   |   |   |
| Operating income (loss)                       |       | 1,190                                |       | (3,170                             | )          | (648 | ) | (6,698 | ) |
|                                          |       |                                 |       |                               |       |   |   |   |   |
| Interest expense                              |       | (1,214                               | )          | (1,189                             | )          | (2,263 | ) | (2,334 | ) |
| Interest income                               |       | —                               |       | 5                                  |       | — |   | 15 |   |
| Loss on extinguishment of debt                |       | —                               |       | (420                               | )          | — |   | (420 | ) |
| Gain on fair value of derivative liabilities  |       | 679                                  |       | —                             |       | 764 |   | — |   |
|                                          |       |                                 |       |                               |       |   |   |   |   |
| Income (loss) before income tax expense       |       | 655                                  |       | (4,774                             | )          | (2,147 | ) | (9,437 | ) |
| Income tax expense                            |       | (88                                  | )          | (7                                 | )          | (104 | ) | (14 | ) |
|                                          |       |                                 |       |                               |       |   |   |   |   |
| Net income (loss)                             |       | $                                    | 567        |                               | $          | (4,781 | ) | $ | (2,251 | ) | $ | (9,451 | ) |
|                                          |       |                                 |       |                               |       |   |   |   |   |
| Income (loss) per share - basic               |       | $                                    | 0.15       |                               | $          | (4.65 | ) | $ | (0.60 | ) | $ | (9.21 | ) |
|                                          |       |                                 |       |                               |       |   |   |   |   |   |   |   |
| Income (loss) per share - diluted             |       | $                                    | 0.12       |                               | $          | (4.65 | ) | $ | (0.60 | ) | $ | (9.21 | ) |
|                                          |       |                                 |       |                               |       |   |   |   |   |
| Weighted average shares outstanding - basic   |       | 3,729,647                            |       | 1,027,408                          |       | 3,727,187 |   | 1,025,767 |   |
|                                          |       |                                 |       |                               |       |   |   |   |   |
| Weighted average shares outstanding - diluted |       | 7,420,896                            |       | 1,027,408                          |       | 3,727,187 |   | 1,025,767 |   |

 

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

 

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**INFOLOGIX, INC.**

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

**(in thousands)**

 
| ** **                                           | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                           | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| Operating activities:                                |       |                               |       |   |   |
| Net cash (used in) provided by operating  activities |       | $                                  | (4,536     | ) | $ | 1,259 |   |
|                                                 |       |                               |       |   |   |
| Investing activities:                                |       |                               |       |   |   |
| Acquisition of property, software and equipment      |       | (68                                | )          | (413 | ) |
| Proceeds from sale of patent                         |       | 1,980                              |       | — |   |
| Net cash provided by (used in) investing  activities |       | 1,912                              |       | (413 | ) |
|                                                 |       |                               |       |   |   |
| Financing activities:                                |       |                               |       |   |   |
| Proceeds from employee stock purchases               |       | —                             |       | 65 |   |
| Proceeds from issuance of warrants                   |       | —                             |       | 78 |   |
| Payment of deferred financing costs                  |       | (68                                | )          | (90 | ) |
| Repayment of long-term debt and capital leases       |       | (80                                | )          | (430 | ) |
| Proceeds from Equipment Loan                         |       | 2,250                              |       | — |   |
| Proceeds from Term Loan C                            |       | 1,350                              |       |   |   |
| Net borrowings from line of credit                   |       | 538                                |       | 12 |   |
| Net cash provided by (used in) financing  activities |       | 3,990                              |       | (365 | ) |
|                                                 |       |                               |       |   |   |
| Net increase in cash and cash equivalents            |       | 1,366                              |       | 481 |   |
|                                                 |       |                               |       |   |   |
| Cash and cash equivalents at beginning of period     |       | 1,018                              |       | 3,037 |   |
|                                                 |       |                               |       |   |   |
| Cash and cash equivalents at end of period           |       | $                                  | 2,384      |   | $ | 3,518 |   |

 

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                                        | ** ** | **—**       |       | —      |       | 642             | ** ** | **—**             |       | 642         |       |
| Fractional shares resulting from reverse stock  split           |       | (55              | )          | —      |       | —          | ** ** | **—**             |       | —      |       |
| Warrant exercise                                                |       | 7,546            |       | —      |       | —          |       | —                 |       | —      |       |
| Allocated finance costs                                         |       | —           |       | —      |       | 12              |       | —                 |       | 12          |       |
| Beneficial conversion feature associated with  convertible debt |       |             |       |        |       | 945             |       |                   |       | 945         |       |
| Adjustment of convertible debt discount (see Note  O)           |       | —           |       | —      |       | (2,500          | )          | —                 |       | (2,500      | )          |
| Reclassification of warrant liability                           |       |             |       |        |       | 2,819           |       |                   |       | 2,819       |       |
| Net loss                                                        |       | —           |       | —      |       | —          |       | (2,251                 | )          | (2,251      | )          |
| Balance, June 30, 2010                                     |       | 3,729,647        |       | $           | —     |            | $          | 40,050                 |       | $           | (42,927    | ) | $ | (2,877 | ) |
|                                                                 |            |                  |            |             |            |                 |            |                        |            |             |            |  |  |  |  |

 

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

 

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**INFOLOGIX, INC.Notes to Condensed Consolidated Financial Statements (Unaudited)**

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

 

**NOTEA—Nature of Business, Basis of Presentation and Liquidity**

 

***Nature ofbusiness***

 

InfoLogix, Inc.and its subsidiaries (collectively, the “Company”) provide enterprise mobilitysolutions for the healthcare and commercial markets.  The Company’ssolutions are designed to allow the real time usage of data throughout anenterprise in order to enhance workflow, improve customer service, increaserevenue and reduce costs.  The productsand services the Company provides include: wireless network design, hardwareand infrastructure, software, consulting, system integration and network anddevice management solutions.

 

OnNovember 20, 2009, the Company completed a restructuring transaction withHercules Technology Growth Capital, Inc. (“Hercules”) and HerculesTechnology I, LLC (“HTI”), a wholly-owned subsidiary of Hercules, pursuant towhich $5,000 of the Company’s outstanding debt was converted into shares ofcommon stock and a warrant to purchase shares of the Company’s common stock,and the remaining outstanding debt with Hercules was otherwise restructured(the “Hercules Restructuring”).  As a result of the HerculesRestructuring, the Company experienced a change in control and under the termsof the Debt Conversion Agreement, HTI has certain corporate governance andother rights with respect to the Company. See Note G- Debt.

 

***Basis of presentation***

 

Theaccompanying condensed consolidated financial statements have been prepared inaccordance with accounting principles generally accepted  in the United States for interim financialreporting and with the instructions for Form 10-Q and Article 10 ofRegulation S-X. They do not include all of the disclosures normally made in theconsolidated financial statements contained in the Company’s Annual Report onForm 10-K. In management’s opinion, all adjustments considered necessaryfor a fair presentation of the consolidated results of operations, financialposition 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 should be read in conjunction with these condensed consolidated financialstatements.  Operating results for thethree months and six months ended June 30, 2010 are not necessarilyindicative of the results that may be expected for the year endingDecember 31, 2010.

 

Thecondensed consolidated financial statements include the accounts ofInfoLogix, Inc. and its wholly-owned subsidiaries: InfoLogix Systems Corporation,OPT Acquisition, LLC, Embedded Technologies, LLC, and InfoLogix—DDMS, Inc.All significant 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 issuedand outstanding common stock by a ratio of one-for-twenty-five. All share andper share amounts in the accompanying consolidated financial statements havebeen adjusted to retroactively reflect the reverse stock split.

 

***Liquidity***

 

Theaccompanying financial statements for the three and six months ended June 30,2010 have been prepared on a going concern basis, which contemplates continuingoperations, securing additional debt or equity financing, restructuring  existing debt, effecting one or morestrategic transactions, and realizing assets and liabilities in the ordinarycourse of business. However, the Company has incurred significant net lossesfrom 2006 through the second quarter of 2010, including a net loss in the firstsix months of 2010 of $2,251. The Company’s losses are attributable to thedifficult economic conditions under which it operates and challenges related toits transition over the last several years from being primarily a seller ofinfrastructure and hardware to becoming a provider of comprehensive enterprisemobility solutions.

 

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Asa result of the Company’s capital and debt structure and recurring losses, ithas substantial near-term liquidity requirements related to the repayment of aseller note that becomes due on September 30, 2010, the revolving line ofcredit that comes due on May 19, 2011 and earn out payments for pastacquisitions. The Company does not currently expect to generate sufficient cashflow from operations to fund those obligations. As a result, these factorsraise substantial doubt as to the Company’s ability to continue as a goingconcern.

 

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 economicconditions and the financial strength of its customers. Any additionalfinancing the Company is able to secure will likely be subject to a number ofconditions and involve additional costs. Given the current negative conditionsin the economy generally and the credit markets in particular, there isuncertainty as to whether the Company will be able to generate sufficientliquidity to repay its outstanding debt, to make its earn out payments, and tomeet its working capital needs. If the Company is unable to improve itsliquidity position, it may not be able to continue as a going concern.

 

**NOTE B—Recent Accounting Pronouncements**

 

InOctober 2009, the Financial Accounting Standards Board (the “FASB”) issuedAccounting Standards Update (“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. TheCompany is currently evaluating the requirements of ASU No. 2009-13 andhas not yet determined its impact on the Company’s condensed consolidatedfinancial statements.

 

InJanuary 2010, the FASB issued ASU No. 2010-06, *“*ImprovingDisclosures About Fair Value Measurements,” which added disclosurerequirements about an entity’s use of fair value measurements. Among theserequirements, entities will be required to provide enhanced disclosures abouttransfers into and out of the Level 1 (fair value determined based on quotedprices in active markets for identical assets and liabilities) and Level 2(fair value determined based on significant other observable inputs)classifications, provide separate disclosures about purchases, sales, issuancesand settlements relating to the tabular reconciliation of beginning and endingbalances of the Level 3 (fair value determined based on significantunobservable inputs) classification and provide greater disaggregation for eachclass of assets and liabilities that use fair value measurements. Except forthe detailed Level 3 roll-forward disclosures, the new standard is effectivefor the Company for interim and annual reporting periods beginning after December 31,2009. The adoption of this accounting standards amendment did not have amaterial impact on the Company’s consolidated financial statements. Therequirement to provide detailed disclosures about the purchases, sales,issuances and settlements in the roll-forward activity for Level 3 fair valuemeasurements is effective for the Company for interim and annual reportingperiods beginning after December 31, 2010. The Company does not expectthat the adoption of these new disclosure requirements will have a materialimpact on its consolidated financial statements.

 

**NOTE C—Inventory**

 

Inventory consists of the following:

 
| ** **           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------|------------|-------------------|------------|-----------------------|------------|
| ** **           | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| ** **           | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| Finished goods       |       | $                 | 2,182      |                  | $          | 1,009 |   |
| Work in progress     |       | —            |       | 80                    |       |
|                 |       |              |       |                  |       |
| Total inventory, net |       | $                 | 2,182      |                  | $          | 1,089 |   |

 

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Inventorydeposits of $1,219 at June 30, 2010 represent amounts paid to date tovendors as advances on future purchases of mobile workstation inventory and arenot included in the table above.

 

**NOTE D—INTANGIBLE ASSETS**

 

Intangibleassets consist primarily of non-contractual customer relationships, salescontracts, patents and technology. Intangible assets that have a definite lifeare amortized on a straight—line basis over their estimated useful lives orcontract periods, generally ranging from 2 to 16 years.

 

Intangibleassets at June 30, 2010 and December 31, 2009 consist of thefollowing:

 
| ** **                   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| ** **                   | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| Patents                      |       | $                 | 2,696      |                  | $          | 2,824 |   |
| Computer software            |       | 2,132             |       | 2,063                 |       |
| Developed technology         |       | 890               |       | 890                   |       |
| Customer lists               |       | 4,285             |       | 4,285                 |       |
| Non compete agreements       |       | 289               |       | 289                   |       |
| Trademarks and trade names   |       | 1,471             |       | 1,469                 |       |
|                         |       | 11,763            |       | 11,820                |       |
| Less accumlated amortization |       | (5,185            | )          | (4,477                | )          |
|                         |       |              |       |                  |       |
| Total net intangible assets  |       | $                 | 6,578      |                  | $          | 7,343 |   |

 

InJune 2010, the Company completed the sale of a U.S. and correspondingKorean patent that it believes is not essential to its business, for $2,200,providing net proceeds of $1,980 after commissions. The Company has retained aworldwide, non exclusive, royalty-free license to use the technology covered bythe patent for all of its current and future products. In connection withthis sale, the Company recorded a gain of $1,863, during the three months endedJune 30, 2010.

 

Amortizationexpense for the three months ended June 30, 2010 and 2009 was $325 and$363, respectively, and $679 and $728 for the six months ended June 30,2010 and 2009, respectively.

 

**NOTE E—****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 May 2008, the Company entered into an earn out agreement with Delta inwhich Delta is eligible to earn additional consideration in the subsequent twoyear period after the closing of the transaction. During the three months endedJune 30, 2010 and the six months ended June 30, 2010, the Companyrecorded additional goodwill of $204 and $500, respectively, pursuant to theearn out agreement.

 

**NOTEF—Customer and Vendor Concentrations**

 

Forthe three months ended June 30, 2010, there was one customer thatrepresented approximately 12% of net revenues and 19% of net accountsreceivable, and for the six months ended June 30, 2010 there were noindividual customers that comprised 10% or more of net revenues.

 

Forthe three and six months ended June 30, 2009, the top two customersrepresented approximately 45% and 32%, respectively, of net revenues and 42% ofnet accounts receivable at June 30, 2009.

 

Forthe three months ended June 30, 2010 and 2009, the Company had two vendorsthat comprised 25% and 40%, respectively, of total operating costs. For the sixmonths ended June 30, 2010 and 2009, the Company had two vendors thatcomprised 21% and 39%, respectively, of total operating costs.

 

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**NOTEG—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 Companyand Hercules entered into a forbearance agreement with respect to certaindefaults under the Loan and Security Agreement in July 2009, and theparties entered into five amendments to the forbearance agreement over thecourse of August through October 2009.  In connection with the Hercules Restructuringthat closed on November 20, 2009, the Company entered into an amended loanagreement with Hercules (“Amended Loan Agreement”), which amended and restatedthe Loan and Security Agreement. The Hercules Restructuring also provided theCompany with up to $5,000 in additional availability under a revolving creditfacility with Hercules. In connection with the Hercules Restructuring, theCompany entered into a Debt Conversion Agreement with HTI (“Debt ConversionAgreement”), pursuant to which HTI exchanged $5,000 in existing indebtednessfor (i) 2,691,790 shares of common stock, and (ii) a warrant topurchase 672,948 shares of common stock. The description of the Amended LoanAgreement below reflects the terms in place since November 20, 2009, andas amended on February 19, 2010, April 6, 2010 and June 18,2010.  At June 30, 2010, the Company’sindebtedness to Hercules consisted of a $5,500 term loan (“Term Loan A”), a$5,000 convertible note (“Term Loan B”), a $1,350 convertible note (“Term LoanC”), a $12,000 revolving line of credit facility, of which $8,097 wasoutstanding at June 30, 2010, and an equipment loan with an outstandingbalance of $2,250 (“Equipment Loan”).

 

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. If Term Loan B converts pursuant to the mandatory conversionfeature,  the Company has the right topay a portion of the conversion amount in cash plus applicable fees, interestand other charges, instead of shares of common stock, under certaincircumstances and as long as the Company’s common stock is listed on certainnational exchanges. If not converted, the outstanding principal balance of TermLoan B is due on November 1, 2014. The outstanding principal balance onTerm Loan B bears interest at 14.5% per annum for the initial twelve monthsfollowing closing of the arrangement; 20.5% per annum for the subsequent twelvemonths and 17.5% per annum thereafter. A portion (2.5%) of the interest rate onTerm Loan B is to be “paid in kind” (“PIK”) compounded monthly. Pursuant toAmendment 2, as discussed below, Hercules has the option, at its solediscretion, to require any and all interest on Term Loan B to be payable incash, PIK or in shares of common stock of the Company. The number of sharesinto which accrued interest will be converted will be determined on 70% of theadjusted 60-day average trading price of the Company’s common stock on the dateof Hercules’ election to convert the interest into shares. Both term loans Aand B will be assessed a prepayment charge between 1% and 5% of the total termloan commitment depending on when paid.  TermLoan B may be partially settled in cash upon conversion.

 

Therevolving credit facility expires on May 1, 2011, but may be extended atthe Company’s option for six months if there is then no existing event ofdefault. Any advances under the revolving credit facility bear interestinitially at 12.0% per annum until the Term Loans are repaid in full, at whichtime the interest rate on outstanding advances will be prime plus 4%.Theborrowing capacity under the revolving credit facility is limited to the lesserof the maximum availability or 85% of the Company’s eligible accountsreceivable as defined in the Amended Loan Agreement. Borrowings under therevolving credit facility include an over advance provision of up to $500,which will be due 28 days after the over advance is drawn. Over advances bear interestat 15% per annum. On June 30, 2010, Hercules advanced to the Company anadditional $1,500, applied to the outstanding balance on the Company’srevolving line of credit facility. The advance increased the outstandingindebtedness on the revolving line of credit to $8,097, and was provided as anextension above the Company’s eligible borrowing base.

 

OnFebruary 19, 2010, the Company entered into Amendment No. 1 (“Amendment1”) to the Amended Loan Agreement, which provided the Company with an EquipmentLoan allowing the Company to request up to $3,000 in borrowings for use inpurchasing equipment. The Company was permitted to borrow in minimum incrementsof $250 under the Equipment Loan, subject to valid, verified purchase ordersacceptable to Hercules from suppliers approved by Hercules in its solediscretion.  In connection with anyadvances, the Company is charged a fee of 3% of the purchase price identifiedin the relevant purchase orders. All customer receipts related to sales ofproducts financed by the Equipment Loan are placed in a lockbox account underthe exclusive control of Hercules and customer receipts are applied first topayment of the Equipment Loan fee, second, to the outstanding principal on theEquipment Loan and third, to all other obligations existing under the EquipmentLoan. After such application, the excess in the lockbox account 

 

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willbe returned to the Company, unless an event of default exists or couldreasonably be expected to exist, in which case, Hercules may apply the excessin the lockbox account to any obligation under the Amended Loan Agreement. TheEquipment Loan bears interest at a rate of 1.5% per month and is due on December 31,2010. Hercules’ commitment to make additional equipment advances terminated on June 30,2010, which was extended from the original commitment termination date of April 30,2010.

 

OnApril 6, 2010, the Company entered into Amendment No. 2 (“Amendment 2”)to the Amended Loan Agreement with Hercules. Pursuant to Amendment 2, Herculesfunded Term Loan C in an original principal amount of $1,350. The proceeds ofTerm Loan C were used to repay outstanding over advances under the revolvingcredit facility. Interest on Term Loan C accrues at a rate of 8% per annum and,at the discretion of Hercules, is payable either in cash or in kind by addingthe accrued interest to the principal of Term Loan C. All principal outstandingon Term Loan C is 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.

 

TermLoan C conversion rights are considered a beneficial conversion feature as theywere in the money on the commitment date. In accordance with ASC 470-20, “Debtwith Conversion and other Options,” the Company separately accounted for theliability and equity components of this instrument by allocating the proceedsfrom issuance of the instrument between the liability component and theconversion option. The value ascribed to the beneficial conversion option,$945, was based upon the intrinsic value of the option on the commitment dateand was reported as a debt discount. The debt discount is being amortized asadditional interest expense over the instruments expected life.

 

OnJune 18, 2010, the Company entered into Amendment No. 3 (“Amendment 3”)to the Amended Loan Agreement with Hercules. Pursuant to Amendment 3, Herculesagreed to release its security interest in a U.S. and corresponding Koreanpatent to allow the sale as a permitted transfer under the Amended LoanAgreement.  The cash proceeds of $1,980from the sale of the patent were applied to reduce the outstanding balanceunder the revolving credit facility.

 

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 consolidatedadjusted EBITDA measured on a three month rolling basis as of the last day ofeach month of between $150 and $2,000, until December 31, 2011 andthereafter when $3,000 of consolidated adjusted EBITDA is required, (ii) maximumleverage ratio measured on a rolling twelve month basis as of the last dayof  each 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. Failureto maintain the financial covenants, as well as certain other events includinga change in control, are events of default under the Amended Loan Agreement.Upon an event of default under the Amended Loan Agreement, Hercules may opt toaccelerate and demand payment of all or any part of our obligations. Under theterms of the Amended Loan Agreement, late fees are equal to 5% of the past dueamount and default rate interest is equal to the applicable regular interestrate plus 3%. Hercules may elect to have default rate interest payable in cashor 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 discounted by 30%, on the date ofHercules’ election to convert the interest into shares.

 

Inconjunction with Hercules ability to elect to have default interest paid inshares at a discounted price, the Company recorded additional debt discount andembedded derivative liabilities totaling $748 at April 6, 2010, as furtherdiscussed in Note N. The debt discount was determined based on the fair valueof this embedded derivate and was allocated to Term Loans A, B and C. The debtdiscount is being amortized to interest expense using the effective interestmethod over the expected life of the related loan.

 

OnFebruary 10, 2010, Hercules sent the Company a letter notifying theCompany of an event of default as of February 5, 2010 and charging theCompany a default interest rate of an additional 3% to the applicable regularinterest rate for the period starting February 5, 2010. Events of defaultare continuing and default rate interest will be payable monthly on the samedate as regular interest unless Hercules chooses to demand payment of defaultinterest on another date. As of June 30, 2010, the Company was not incompliance with the borrowing base requirement related to the revolver, theminimum EBITDA requirement, Total Leverage Ratio and Fixed Charge Coverageratio. As a result of the above defaults, all balances outstanding under theAmended Loan Agreement at June 30, 2010 have been classified as current inthe accompanying consolidated balance sheet. Hercules has not chosen to accelerate the Company’s obligations underthe Amended Loan Agreement, but has expressly not waived any events of defaultor any of its remedies. The Company does not have adequate liquidity to repayall outstanding amounts under the credit facility and payment accelerationwould have a material adverse effect on the Company’s liquidity, business,financial condition and results of operations.

 

Notespayable consist of the following:

 

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| ** **                                                                                                                                                                                                                                                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                              | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| ** **                                                                                                                                                                                                                                                              | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| Term Loan A note payable to Hercules. At  June 30, 2010 and December 31, 2009, the outstanding principal  balance was $5,500 and $5,500, respectively, net of unamortized discount of $196  and zero, respectively.                                           |       | $                 | 5,304      |                  | $          | 5,500 |   |
|                                                                                                                                                                                                                                                                    |       |              |       |                  |       |
| Convertible Term Loan B note payable to Hercules.  At June 30, 2010 and December 31, 2009, the outstanding principal  balance including PIK was $5,502 and $5,015, respectively, net of unamortized  discount of $1,068 and $2,514, respectively. See Note O. |       | 4,434             |       | 2,501                 |       |
|                                                                                                                                                                                                                                                                    |       |              |       |                  |       |
| Convertible Term Loan C note payable to Hercules.  At June 30, 2010 and December 31, 2009, the outstanding principal  balance was $1,350 and zero, respectively, net of unamortized discount of $873  and zero, respectively.                                 |       | 477               |       | —                |       |
|                                                                                                                                                                                                                                                                    |       |              |       |                  |       |
| 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.                                                                  |       | 4,440             |       | 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.                                                                                               |       | 274               |       | 314                   |       |
|                                                                                                                                                                                                                                                                    |       |              |       |                  |       |
| Total notes payable                                                                                                                                                                                                                                                     |       | 17,179            |       | 12,567                |       |
|                                                                                                                                                                                                                                                                    |       |              |       |                  |       |
| Less: current maturities                                                                                                                                                                                                                                                |       | (16,992           | )          | (12,336               | )          |
|                                                                                                                                                                                                                                                                    |       | $                 | 187        |                  | $          | 231 |   |

 

**NOTE H—Related Party Transactions**

 

*NotesPayable - Stockholder*

 

Asa result of the Hercules Restructuring, Hercules became the Company’s majoritystockholder through its wholly-owned subsidiary, HTI. During the three monthsended June 30, 2010 and 2009, Hercules charged the Company interest onoutstanding debt of $824 and $936, respectively, and $1,584 and $1,791 for thesix months ended June 30, 2010 and 2009, respectively, which includes PIKand default interest.

 

*Professional recruiting services*

 

TheCompany maintains a business relationship with Gulian & Associates,which is owned by the wife of David T. Gulian, the Company’s President andChief Executive Officer and a director and stockholder of the Company.  Under the terms of the arrangement, Gulian & Associates provides theCompany with retainer-based professional recruiting services on a non-exclusivebasis.  Gulian & Associates is paid a fee of 20% of a newly hiredperson’s annual base salary for employees it introduces to the Company.  One-third of the estimated fee is due at thetime the hiring request is made.  Theremainder is due upon successful placement of a candidate into the role. Duringthe three months ended June 30, 2010 and 2009, Gulian &Associates charged fees to the Company of $42 and $78, respectively. During thesix months ended June 30, 2010 and 2009, Gulian & Associatescharged the Company fees of $123 and $146, respectively.

 

*Transactioncommission*

 

Duringthe three months ended June 30, 2010, the Company made a one-timecommission payment of $220 to The SAGE Group (“SAGE”), a company in whichThomas Miller, a member of the Company’s board of directors, is a partner. SAGEprovided assistance in identifying a buyer for the Company’s patent sale (asdescribed in Note D). No further payments are required to be made to SAGE.

 

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**NOTEI—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 rights toa 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 $141 and $696 for the three months ended June 30, 2010and 2009, respectively, and $212 and $1,033 of costs for the six months ended June 30,2010 and 2009, respectively.

 

**NOTEJ—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 Section 382of the Internal Revenue Code. The Company has determined that it is more likelythan not that it will not be able to use the net operating losses and otherdeferred tax assets and has recorded a full valuation allowance at June 30,2010.  Income tax expense of $88  and $7 for the three months ended June 30,2010 and 2009, respectively, and $104 and $14 for the six months ended June 30,2010 and 2009, respectively, results from a deferred tax provision for thedifference between book and tax amortization of indefinite lived assets andmiscellaneous state taxes.

 

**NOTEK—2008 Employee Stock Purchase Plan**

 

TheCompany has an employee stock purchase plan (“ESPP”). The ESPP provides theCompany’s employees the opportunity to purchase common stock throughaccumulated payroll deductions.  TheCompany has reserved 40,000 shares for use in the ESPP. The ESPP hasconsecutive three month offering periods commencing on the first trading day ofeach calendar quarter. The Company’s Board of Directors suspended the ESPPindefinitely effective July 1, 2009.

 

TheCompany issued 82,098 shares for the three months ended March 31, 2009 and74,769 shares for three months ended June 30, 2009.  In connection with the issuance of theseshares, the Company received $35 and $30 in cash in the respective periods. Forthe three months and six months ended June 30, 2010, the Company did notissue any shares under the ESPP.

 

**NOTEL—Stock Based Compensation**

 

Forthe three months ended June 30, 2010 and 2009, the Company recognizedcompensation cost for stock options granted of $325 and $240, respectively, andfor the six months ended June 30, 2010 and 2009, the Company recognizedcompensation cost for stock options granted of $642 and $530, respectively.Option awards generally vest over a 3 to 4 year period of continuous serviceand have a ten year contractual term.  The fair value of each optionis amortized on a straight-line basis over the option’s vestingperiod.  The fair value of each option is estimated on the date ofgrant using the Black-Scholes option valuation model. As of June 30, 2010,the total unrecognized compensation cost related to options amounted toapproximately $1,989 which is expected to be recognized over the options’average remaining vesting period of 2.5 years.

 

Duringthe three months ended June 30, 2010 the Company granted 6,000non-qualified stock options to a member of its board of directors in connectionwith his election to the board. During the three months ended June 30,2009, the Company did not grant any stock options.  During the six months ended June 30, 2010and 2009, the Company granted 719,706 and 400,870 options, respectively.

 

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**NOTE M— Operating Segments**

 

The Company has two reportable operatingsegments: commercial and healthcare. Each of the reportable segments providessimilar products 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. Although there is no intersegment sales or transfers, the Companyshares support, development and administration across both of its segments,.

 
| ** **       | ** ** | **Three months ended June 30, 2010** | ** ** | **Six months ended June 30, 2010** | ** ** |
|------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **       | ** ** | **Healthcare**                            | ** ** | **Commercial**                          | ** ** | **Total** | ** ** | **Healthcare** | ** ** | **Commercial** | ** ** | **Total** | ** ** |
| Net revenues     |       | $                                         | 10,459     |                                    | $          | 5,916 |   | $ | 16,375 |   | $ | 20,558 |   | $ | 9,678 |   | $ | 30,236 |   |
| Cost of revenues |       | 7,011                                     |       | 4,516                                   |       | 11,527 |   | 13,799 |   | 7,327 |   | 21,126 |   |
| Gross profit     |       | $                                         | 3,448      |                                    | $          | 1,400 |   | $ | 4,848 |   | $ | 6,759 |   | $ | 2,351 |   | $ | 9,110 |   |

 
| ** **       | ** ** | **Three months ended June 30, 2009** | ** ** | **Six months ended June 30, 2009** | ** ** |
|------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **       | ** ** | **Healthcare**                            | ** ** | **Commercial**                          | ** ** | **Total** | ** ** | **Healthcare** | ** ** | **Commercial** | ** ** | **Total** | ** ** |
| Net revenues     |       | $                                         | 12,982     |                                    | $          | 11,429 |   | $ | 24,411 |   | $ | 25,558 |   | $ | 17,665 |   | $ | 43,223 |   |
| Cost of revenues |       | 9,746                                     |       | 10,087                                  |       | 19,833 |   | 19,027 |   | 15,483 |   | 34,510 |   |
| Gross profit     |       | $                                         | 3,236      |                                    | $          | 1,342 |   | $ | 4,578 |   | $ | 6,531 |   | $ | 2,182 |   | $ | 8,713 |   |

 

**NOTE N- 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).  Ifthe inputs used to measure fair value fall within different levels of thehierarchy, the category level is based on the lowest priority level input thatis significant to the fair value measurement of the instrument. Financialassets and liabilities recorded at fair value on the Company’s consolidatedbalance sheets are categorized as follows:

 

Level1- Observable inputs such as quoted prices (unadjusted) for identicalassets or liabilities in active markets

 

Level2- Inputs, other than quoted prices in active markets that are observableeither directly or indirectly

 

Level3- Unobservable inputs for which there is little or no market activity,which require the Company to develop its own assumptions

 

Thefair value hierarchy also requires an entity to maximize the use of observableinputs and minimize the use of unobservable inputs when measuring fair value. Thefair value of the Company’s warrant derivative instruments is estimated usingthe Black-Scholes valuation model with observable inputs as discussed furtherin Note O. The fair value of the embedded derivatives associated with theCompany’s term loans is estimated using a Monte Carlo simulation model.

 

TheCompany recognizes all derivatives as assets or liabilities on its condensedconsolidated balance sheets at fair value with changes in fair value recognizedin current period earnings.

 

Thefollowing table summarizes the components of the derivative liabilities:

 
| ** **                     | ** ** | **Fair Value Measurement at June 30, 2010** | ** ** |
|--------------------------------|------------|---------------------------------------------|------------|
| ** **                     | ** ** | **Level 1**                                 | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Embedded  derivative liability |       | —                                      |       | — |   | 668 |   |
| Warrant  liability             |       | —                                      |       | — |   | — |   |
|                           |       | $                                           | —     |   | $ | — |   | $ | 668 |   |
|                                |            |                                             |            |  |  |  |  |  |  |  |

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

 

*Embeddedderivative*

 

OnApril 6, 2010, the Company entered into Amendment 2 to its loan agreementwith Hercules as disclosed in Note G. The amendment changed the terms of interest payment such that intereston Term Loan B as well as the default interest on Term Loans A, B and C, atHercules sole discretion, can be paid in cash, PIK or in shares of common stockof the Company at 70% of the value of the common stock using a 60-dayaverage.  This feature is considered to be an embedded derivative underASC 815-10. The fair value of the embedded derivative was determined to be$748 as of April 6, 2010 using a valuation model which considered theprojected stock price on the interest payment dates and the impact that thestock price would have on the form of interest payment.  Future stockprices were projected using a Monte Carlo simulation model.  Key inputsinto the model include the spot price of the common stock, estimated risk freerate and volatility of the common stock. The Company has classified thisembedded derivative within level 3 of the fair value hierarchy.

 

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Thefollowing tables summarize the changes in financial instruments measured atfair value for which the Company has used Level 3 inputs to determine fairvalue. Total realized and unrealized gains and losses recorded for Level 3instruments are included in the condensed consolidated statement of operationsas a component of the loss on fair value adjustment on derivative liabilities.

 
| ** **                                                                     | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                     | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** |
| ** **                                                                     | ** ** | **2010**               | ** ** | **2009**             | ** ** | **2010** | ** ** | **2009** | ** ** |
| Balance, beginning of period                                                   |       | $                      | —     |                 | $          | — |   | $ | — |   | $ | — |   |
| Transfers in (out) of level 3 net                                              |       | —                 |       | —               |       | — |   | — |   |
| Originations, net                                                              |       | 748                    |       | —               |       | 748 |   | — |   |
| Change in unrealized gains(losses)  included in earnings at the reporting date |       | (80                    | )          | —               |       | (80 | ) | — |   |
| Balance, end of period                                                         |       | $                      | 668        |                 | $          | — |   | $ | 668 |   | $ | — |   |

 

**NOTE O—FINANCIAL INSTRUMENTS**

 

Inaccordance in ASC Topic 815-40, “Derivatives and Hedging”, warrants outstandingat December 31, 2009 were recorded as derivative liabilities because thewarrants did not meet the criteria for equity classification.  The liabilities were marked to market at theend of each accounting period until such time as the Company met therequirements for equity classification. During the three months ended March 31, 2010, the Company recorded again of $888 related to the change in fair value of derivatives.

 

Duringthe three months ended March 31, 2010, the Company changed certainassumptions related to volatility and dilution used in the valuation of itswarrant liabilities and corrected the calculation used in the valuation of itswarrant liabilities at December 31, 2009. The resulting charge of $787 is included in the accompanying statementof operations as an increase to the loss in fair value adjustment on warrantliabilities for the six month period ended June 30, 2010.

 

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Duringthe three months ended June 30, 2010, the Company determined that it metthe criteria for equity classification of the warrants as of January 5,2010.  As a result, the Company recordeda charge of $125 during the second quarter of 2010 to appropriately reflect thechange in fair value on the effective date of the reclassification. The Companyhas reclassified the fair value of the warrants to equity as additional paid incapital.

 

Duringthe three months ended June 30, 2010, the Company determined that theinitially recognized debt discount on Term Loan B entered into in November 2009(see Note G) had been overstated by $1,760, that Term Loan B contained embeddedderivative liabilities that had been understated by $740 and that additionalpaid in capital had been overstated by a corresponding $2,500.    The value of these embedded derivativeliabilities in November and December 2009 as well as March 31,2010 was approximately $740.  On April 6,2010, in connection with Amendment 2 to its loan agreement with Hercules (seeNote G), the value of these embedded derivative liabilities became zero.  In order to correctly state its balance sheetat June 30, 2010, during the three months ended June 30, 2010, theCompany reduced additional paid in capital by $2,500, decreased the debtdiscount on Term Loan B by $1,760 and recorded a gain of $740 due to the changein the fair value of these derivative liabilities.

 

Thecorrection of the above items did not have any impact on the Company’sconsolidated statements of cash flows. Management evaluated the quantitativeand qualitative aspects of the adjustments on 2009 as well as the first andsecond quarters of 2010 and concluded these adjustments were not material tothe Company’s consolidated financial statements.

 

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 expected volatility, and the risk free interest rate matched to thewarrants’ expected life, adjusted for the impact of dilution. The Company doesnot anticipate paying dividends during the term of the warrants. The Companyuses historical data to estimate volatility assumptions used in the valuationmodel. The expected term of warrants is derived from an analysis thatrepresents the period of time that warrants are expected to be outstanding. Therisk-free rate for periods within the contractual life of the warrant is basedon the U.S. Treasury yield curve in effect at the time of grant.

 

On March 1, 2010, the Companyissued to Hercules 7,546 common shares upon the cashless exercise of a warrantto acquire up to 10,000 underlying shares.

 

Thefollowing table details warrant activity during the six-month period ended June 30,2010:

 
| Outstanding as of December 31, 2009 |   | 788,948 |   |
|------------------------------------------|--------|---------|--------|
| Issued                                   |   | —  |   |
| Exercised                                |   | 10,000  |   |
| Forfeited                                |   | —  |   |
| Outstanding as of June 30, 2010     |   | 778,948 |   |

 
| **Expiration Date**        | ** ** | **Number of  Shares  Underlying  Warrants** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|----------------------------|------------|---------------------------------------------|------------|----------------------------------------|------------|
| ** **                 | ** ** | ** **                                  | ** ** | ** **                             | ** ** |
| 2010                       |       | —                                      |       |                                   | —     |   |
| 2011                       |       | 106,000                                     |       | $                                      | 10.49      |   |
| 2012                       |       | —                                      |       | —                                 |       |
| 2013                       |       | —                                      |       | —                                 |       |
| 2014                       |       | 672,948                                     |       | $                                      | 1.86       |   |
|                       |       |                                        |       |                                   |       |
| Total warrants outstanding |       | 778,948                                     |       | $                                      | 3.03       |   |

 

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 |   | 0.90-4.89 years |   |
| Volatility      |   | 100.03%-145.36% |   |
| Risk  free rate |   | 0.29%-2.20%     |   |
| Dividend  rate  |   | 0%              |   |

 

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**NOTE P****—****Subsequent Events**

 

OnAugust 12, 2010, Hercules notified the Company of its election to convert$5,000 of aggregate principal amount of Term Loan B into shares of theCompany’s common stock at the conversion price of $1.8575 per share, for anissuance of 2,691,790 shares of common stock, effective August 13,2010.  As a result of the conversion, onAugust 13, 2010, the Company’s outstanding principal balance on Term LoanB, which includes PIK, was $662. Hercules continues to have the ability to acquire (i) 356,492shares of the Company’s common stock upon conversion of the Term Loan Bprincipal, (ii) 412,087 shares of the Company’s common stock upon conversionof the Term Loan C principal and (iii) an indeterminate number of sharesupon conversion of a portion of the interest on the Company’s indebtedness toHercules.

 

**Item 2.       ****Management’sDiscussion****and Analysis of Financial Condition andResults of Operations**

 

**ForwardLooking Statements**

 

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

 

·                  our ability to refinance,replace or restructure our current indebtedness and to comply with thefinancial covenants and other terms and conditions contained in the agreementsgoverning our indebtedness or any replacement indebtedness;

·                  our ability to operateprofitably and manage growth of our business;

·                  our ability to introduce newproducts and services and maintain products and service quality;

**·**                 our ability to implement ourbusiness plan in difficult economic conditions and to adapt to changes ineconomic, political, business or industry conditions;

**·**                 our ability to findadditional financing necessary to support our operations and or strategicobjectives while also maintaining our focus on operating and developing ourbusiness;

**·**                 our ability to identify,pursue and enter into strategic transactions, including acquisitions anddivestitures:

**·**                 our ability to retain,replace and hire experienced senior management;

**·**                 our relationships with ourcustomers, key industry relationships and other third parties on which we rely;

**·**                 competition in theindustries in which we compete;

**·**                 our ability to protect ourintellectual property rights;

**·**                 restrictions on ouroperations contained in our loan and security agreement or agreement for anyreplacement indebtedness; and

**·**                 our ability to improve ourinternal controls over financial reporting.

 

Wehave disclosed important factors that could cause our actual results to differmaterially from our expectations under “Risk Factors” in our Annual Report onForm 10-K for the year ended December 31, 2009, our Quarterly Reporton Form 10-Q for the quarterly period ended March 31, 2010 andelsewhere 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 update or revise any forward-lookingstatements to reflect new information, future events or otherwise, except asrequired by federal securities laws.

 

**Overview**

 

Thefollowing discussion and analysis of our financial condition and results ofoperations is intended to assist you in understanding our financial conditionand results of operations. This discussion and analysis should be read inconjunction with our financial statements and the notes thereto included inItem 1 of this quarterly report, and “Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations” included in ourAnnual Report on Form 10-K for the year ended December 31, 2009. Manyof the amounts and percentages presented in this discussion and analysis havebeen rounded for convenience of presentation, and all dollar amounts, exceptper share data, which are presented in thousands.

 

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**Recent Developments**

 

*Reverse Stock Split*

 

OnJanuary 5, 2010, we effected a one-for-twenty-five reverse stock split ofour issued and outstanding shares of common stock, par value $0.00001 pershare. Unless otherwise indicated, all share amounts discussed herein reflectthe post-split number of shares of our common stock.

 

*Hercules Restructuring Transactions*

 

OnNovember 20, 2009, we completed a restructuring transaction with oursenior lender Hercules Technology Growth Capital, Inc. (“Hercules”) andits wholly-owned subsidiary Hercules Technology I, LLC (“HTI”), pursuant towhich $5,000 of our outstanding debt to Hercules was converted into shares ofour common stock and a warrant to purchase shares of our common stock, and theremaining outstanding debt with Hercules was otherwise restructured (the “HerculesRestructuring”). As a result of the Hercules Restructuring, we experienced achange in control and (i) HTI owns 2,691,790 shares or 72% of ouroutstanding common stock, as well as a warrant to acquire up to an additional672,948 shares of our common stock, and (ii) Hercules may convert aportion of our remaining indebtedness to Hercules into an additional 2,691,790shares of our common stock and has the option to convert certain term loaninterest into an indeterminate number of shares of our common stock. Inaddition, on March 1, 2010, Hercules exercised a warrant initiallyreceived on June 19, 2009 by which it acquired 7,546 shares of our commonstock. As a result of Amendment 2 to our Amended Loan Agreement on April 6,2010, Hercules may convert the principal of Term Loan C (defined below) into anadditional 412,087 shares of our common stock and has the option to convertdefault rate interest into an indeterminate number of shares of our commonstock.

 

Inconnection with the Hercules Restructuring, on November 20, 2009, we andHercules entered into an Amended and Restated Loan and Security Agreement (“AmendedLoan Agreement”), whereby we and Hercules agreed to restructure our remainingdebt not converted into shares of common stock and a warrant. The Amended LoanAgreement amended and restated our prior loan and security agreement withHercules.

 

OnFebruary 19, 2010, we entered into Amendment No. 1 ( “Amendment 1”)to the Amended Loan Agreement.  Under theEquipment Loan provided by Amendment 1, we may request up to $3,000 for use inpurchasing equipment (the “Equipment Loan”) subject to valid, verified purchaseorders acceptable to Hercules from suppliers approved by Hercules in its solediscretion.

 

OnMarch 25, 2010, Hercules advanced to us an additional $1,350, initiallyapplied to the outstanding balance on our revolving line of credit facilityunder the Amended Loan Agreement. The advance increased our outstandingindebtedness on the revolving line of credit to $8,909, and was provided as anextension above our eligible borrowing base provided in the Amended LoanAgreement.

 

OnApril 6, 2010, we entered into Amendment No. 2 (“Amendment 2”) to theAmended Loan Agreement. Pursuant to Amendment No. 2, Hercules funded aterm loan in an original principal amount of $1,350 (“Term Loan C”). Theproceeds of Term Loan C were used, in part, to repay outstanding over advancesunder the revolving credit facility. Interest on Term Loan C will accrue at arate of 8% per annum and, at the discretion of Hercules, is payable either incash or in kind by adding the accrued interest to the principal of Term Loan C.All principal outstanding on Term Loan C will be due and payable on April 1,2013. Term Loan C may be converted into shares of our common stock at a priceof $3.276 per share at any time at Hercules’ option. We may prepay Term Loan Cwithout incurring a prepayment penalty charge. We also entered into aregistration rights agreement with Hercules whereby we agreed to register theshares underlying Term Loan C.

 

OnJune 18, 2010, we entered into Amendment No. 3 (“Amendment 3”) to theAmended Loan Agreement with Hercules. Pursuant to Amendment 3, Hercules agreedto release its security interest in a U.S. and corresponding Korean patent toallow the sale of that asset as a permitted transfer under the Amended LoanAgreement.  In June 2010, wecompleted the sale of the patents, which management believes are non-essentialto our business, for $2,200, providing net proceeds of $1,980 aftercommissions. The one time commission payment of $220 was paid to The SAGEGroup, a company in which Thomas Miller, a member of our board of directors, isa partner. We have retained a worldwide, non exclusive, royalty-free license touse the technology covered by the patent for all current and futureproducts. The cash proceeds of $1,980 from the sale of these patents wereapplied to reduce the outstanding balance under our revolving credit facility.

 

OnJune 30, 2010, Hercules advanced us an additional $1,500, which wasapplied to the outstanding balance on our revolving line of credit. The advanceincreased our outstanding indebtedness on the revolving line of credit, to$8,097, and was provided as an extension above our eligible borrowing base.

 

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

 

OnAugust 12, 2010, Hercules notified us of its election to convert $5,000 ofaggregate principal amount of Term Loan B into shares of our common stock atthe conversion price of $1.8575 per share, for an issuance of 2,691,790 sharesof common stock, effective August 13, 2010.  As a result of the conversion, on August 13,2010, our outstanding principal balance on Term Loan B, which includes PIK, was$662.  Hercules continues to have theability to acquire (i) 356,492 shares of our common stock upon conversionof the Term Loan B principal, (ii) 412,087 shares of our common stock uponconversion of the Term Loan C principal and (iii) an indeterminate numberof shares upon conversion of a portion of the interest on our indebtedness toHercules.

 

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Herculeshas not chosen to accelerate our obligations under the Amended Loan Agreement,but has expressly not waived any events of default or any of its remedies. Wedo not have adequate liquidity to repay all outstanding amounts under thecredit facility and payment acceleration would have a material adverse effecton our liquidity, business, financial condition and results of operations.

 

*Nasdaq Delisting Notice/Appeal Hearing*

 

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 fromNasdaq, notifying us that we were not in compliance with these requirements. OnOctober 30, 2009, we received notice that Nasdaq granted our request foran extension to regain compliance with these requirements. We had until November 20,2009 to regain such compliance. On November 25, 2009, we received noticefrom Nasdaq that we 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 again subject to delisting.  On April 20, 2010, we received a newstaff determination letter from Nasdaq regarding our non-compliance with theNasdaq continued listing standards.  At December 31, 2009, ourstockholders’ deficit of $2,544 was again below Nasdaq’s minimum stockholders’equity requirement. The Nasdaq staff determined to delist our common stock on April 29,2010 unless we requested a hearing before a Nasdaq Listing Qualifications Panel(“Panel”) on or before April 27, 2010.  On April 27, 2010, werequested a hearing before the Panel and, as a result, our common stockremained listed on Nasdaq pending the issuance of a decision by the Panelfollowing the hearing, which took place on June 10, 2010.  On July 8, 2010, we received a letterfrom Nasdaq stating that the Panel granted our request for continued listing onthe Nasdaq Stock Market subject to several conditions including, among otherthings, the occurrence of certain events, which may include restructuring ourdebt, pursuing additional debt and equity financing and completing one or morestrategic transactions, by August 15, 2010, and our ability to regaincompliance with all the requirements for continued listing on Nasdaq byOctober 18, 2010.  In connection with the conditions set by NASDAQ,on August 13, 2010, the original principal of Term Loan B was converted intoshares of our common stock (for more information, see Item 1, FinancialStatements, Note P—Subsequent Events).This extension represents the maximumlength of time that a Nasdaq Hearings Panel may grant to regain complianceunder the Nasdaq Listing Rules and, while we are diligently taking stepsto comply with the conditions of the Panel’s decision, there can be noassurances that we will be able to do so. A delisting of our common stock from Nasdaq could adversely affect themarket liquidity of our common stock and cause the market price of our commonstock to decrease and could also adversely affect our ability to obtainfinancing for our continued 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 trade on the OTC Bulletin Board, however, there can be no assurance that wewill be successful in such efforts.

 

*Changein independent registered public accounting firm*

 

OnJune 10, 2010, we were orally notified by McGladrey &Pullen, LLP (“McGladrey & Pullen”), our independent registered publicaccounting firm, that it was resigning as our independent registered publicaccounting firm, effective immediately.  The termination of theauditor-client relationship was subsequently confirmed in writing. During thetwo most recent fiscal years ended December 31, 2009 and 2008, and throughthe date of its resignation, we did not have any disagreements with McGladrey &Pullen on any matter of accounting principles or practices, financial statementdisclosure, or auditing scope or procedure, which disagreements, if notresolved to the satisfaction of McGladrey & Pullen, would have causedus to make reference to the subject matter of the disagreement. OnJune 22, 2010, the Audit Committee of our Board of Directors engaged KPMGLLP (“KPMG”) to serve as our new independent registered public accounting firmfor the year ending December 31, 2010, and its engagement commencedimmediately.

 

**General**

 

Weprovide end-to-end solutions for electronic medical record (“EMR”) and supplychain implementation and mobilization (“SCM”), with experience in over 2,200hospitals and businesses in North America. We assist our healthcare andcommercial customers 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 applications witha particular expertise in electronic medical records in the healthcare industryand SAP® back-

 

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endsystems in commercial enterprises. In addition, we offer professional servicesthat support and complement enterprise-wide software implementations and acustomer’s wireless computing systems, including consulting, mobile managedservices, training, engineering, technical support and network monitoring.

 

The sale of mobile workstations and other wireless devices has been,and continues 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’s existingwireless infrastructure—the cables, routers and network adapters from which awireless network is constructed—and developing improved network designs toensure 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 operating segments consisting of our healthcareand commercial businesses. The healthcare segment is principally composed ofour activities in hospitals and other related healthcare facilities. Thecommercial segment focuses on all other vertical markets includingpharmaceutical, manufacturing, wholesale and retail distribution and serviceindustries.

 

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, thereby increasing the amount of ouravailable inventory on-hand. If our estimates as to the amount of workstationsto be sold or the timing of sales do not materially correspond to actual sales,we will be required to hold workstations in our inventory for periods longerthan we expected.

 

We serve the healthcare and commercial industries,which are experiencing significant challenges, primarily due to the continuedweak macroeconomic conditions that have resulted in a decreased demand fortheir products and services. As a result, some of our customers may facebusiness and financial challenges for the remainder of 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, EmbeddedTechnologies, 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 two quarters of 2010 and although we continue toreduce our expenses successfully, we expect 2010 to continue to be achallenging year.

 

Our condensed consolidated financial statements for the three and sixmonths ended June 30, 2010 have been prepared on a going concern basis,which contemplates 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 second quarter of 2010, includinga net loss of $2,251 for the six months ended June 30, 2010.  Our losses are partly attributable to costsrelated to our debt and our debt restructuring, and the difficult economicconditions under which we operate, and challenges related to our transitionover the last several years from being primarily a seller of 

 

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infrastructureand 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 June 30, 2010 included$22,700 of 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 seller notethat 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,these factors raise substantial doubt as to our ability to continue as a goingconcern.

 

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.To facilitate this process, the Company’s Board of Directors has established aspecial committee of our independent directors to assist in evaluating andrecommending specific initiatives. Our plan to improve our liquiditycontemplates additional cost control measures and may also include additionalfinancing, further restructuring of our debt and effecting one or morestrategic transactions. Our ability to implement these plans successfully isdependent on many circumstances outside of our direct control, includinggeneral economic conditions and the financial strength of our customers.  Any additional financing we are able tosecure will likely be subject to a number of conditions and involve additionalcosts. Given the current negative conditions in the economy generally and thecredit markets in particular, there is uncertainty as to whether we will beable to generate sufficient liquidity to repay our outstanding debt, to makeour earn out payments, and to meet working capital needs. If we are unable toimprove our liquidity position, we may not be able to continue as a goingconcern.

 

**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.

 

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. Net revenuesfrom the sale of our proprietary learning technologies and any professionalconsulting or engineering services provided on a fixed-fee basis are recognizedaccording to a proportionate performance method of accounting and is recognizedratably over the contract period based upon actual project hours as compared tobudgeted project hours. Payments received in advance of services performed arerecorded as deferred revenue. Certain contract payment terms may result incustomer billing occurring at a pace slower than revenue recognition. Theresulting revenue recognized in excess of amounts billed and project cost isincluded in unbilled revenue on our condensed consolidated balance sheet.

 

We also generate net revenues from the sale of warranties on wireless andmobile 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 salaries for management, administrative and human resourcespersonnel, information systems, expenses and office space costs, inside salesand customer support, warehousing, technical support, financial accounting,purchasing, insurance, recruiting fees, legal, accounting and otherprofessional 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 

 

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andliabilities at the date of the financial statements and the reported amounts ofnet revenues and expenses during the reporting periods. Critical accountingpolicies are those that require the application of management’s most difficult,subjective, or complex judgments, often because of the need to make estimatesabout the effect of matters that are inherently uncertain and that may changein subsequent periods. 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 reporting periods.  In preparing the consolidated financialstatements, management has utilized available information, including our pasthistory, industry standards and the current economic environment, among otherfactors, in forming its estimates and judgments, giving due consideration tomateriality. Actual results may differ from these estimates. In addition, othercompanies may utilize different estimates, which may impact the comparabilityof our results of operations to those of companies in similar businesses. Webelieve that of our significant accounting policies, the following may involvea 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 performance methodof revenue recognition and is recognized over the contract period. Changes inthese assumptions, including estimates on fixed fee contracts, can materially affectthe amount of net revenue recognized in our net income from operations.Periodically, we recognize revenue and record unbilled revenue as an asset onour balance sheet to reflect services provided but not yet billed pursuant tocontract terms.

 

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 ofoperations.

 

*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 for impairment  annually in December bycomparing the fair value of the recorded assets to their carrying amount. Thecarrying value of other intangible assets is reviewed for possible impairmentwhenever events or changes in circumstances indicate that their carrying valuemay not be recoverable.  If the carryingamount of the goodwill or other intangible assets exceeds its fair value, animpairment loss is recognized. The evaluation of goodwill and other intangibleassets requires the use of judgment and numerous subjective assumptions, which,if actual experience varies, could result in material differences in therequirements for impairment charges.

 

*Stock based compensation*

 

We measure stock based compensation awards using a fair value methodand amortize the resulting expense on a straight line basis over the requisiteservice period of the award, generally the vesting period.

 

We estimate the grant date fair value of stock options using theBlack-Scholes option-pricing model which requires the input of highlysubjective assumptions. These assumptions include estimating the expected termof the award and the estimated volatility of 

 

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ourstock price over the expected term. Changes in these assumptions and in theestimated forfeitures of stock option awards can materially affect the amountof stock based compensation recognized in our consolidated statements ofoperations.

 

*Gain on fair value of derivative liabilities*

 

Our derivative liabilitiesare recorded at fair value, which is estimated using relevant marketinformation and other assumptions. Fair value estimates involve uncertaintiesand matters of judgment regarding assumptions used. Changes in our assumptionsor market conditions could significantly affect the estimates and have amaterial impact on our financial position and results of operations.

 

**Results of Operations (unaudited)**

 

Resultsof operations expressed as a percentage of net revenues were as follows:

 
| ** **                                      | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                      | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                            |       |                                 |       |                               |       |   |   |   |   |
| Net revenues                                    |       | 100.0                                | %          | 100.0                              | %          | 100.0 | % | 100.0 | % |
| Cost of revenues                                |       | 70.4                                 | %          | 81.2                               | %          | 69.9 | % | 79.8 | % |
|                                            |       |                                 |       |                               |       |   |   |   |   |
| Gross profit                                    |       | 29.6                                 | %          | 18.8                               | %          | 30.1 | % | 20.2 | % |
| Selling, general and administrative expenses    |       | 33.7                                 | %          | 31.7                               | %          | 38.4 | % | 35.6 | % |
| Gain on sale of intangibles                     |       | 11.4                                 | %          | 0.0                                | %          | 6.2 | % | 0.0 | % |
| Operating income (loss)                         |       | 7.3                                  | %          | (12.9                              | )%         | (2.1 | )% | (15.4 | )% |
|                                            |       |                                 |       |                               |       |   |   |   |   |
| Interest expense                                |       | (7.4                                 | )%         | (4.9                               | )%         | (7.6 | )% | (5.4 | )% |
| Interest income                                 |       | 0.0                                  | %          | 0.0                                | %          | 0.0 | % | 0.0 | % |
| Loss on extinguishment of debt                  |       | 0.0                                  | %          | (1.8                               | )%         | 0.0 | % | (1.0 | )% |
| Fair value adjustment on derivative liabilities |       | 4.1                                  | %          | 0.0                                | %          | 2.6 | % | 0.0 | % |
|                                            |       |                                 |       |                               |       |   |   |   |   |
| Income (loss) before income tax expense         |       | 4.0                                  | %          | (19.6                              | )%         | (7.1 | )% | (21.8 | )% |
| Income tax expense                              |       | (0.5                                 | )%         | (0.0                               | )%         | (0.3 | )% | (0.0 | )% |
|                                            |       |                                 |       |                               |       |   |   |   |   |
| Net Income (loss)                               |       | 3.5                                  | %          | (19.6                              | )%         | (7.4 | )% | (21.8 | )% |

 

***Three Months ended June 30, 2010 compared withthe Three Months ended June 30, 2009***

 

**Net revenues**

 

Netrevenues for the three months ended June 30, 2010 and 2009 were asfollows:

 

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| ** **            | ** **   | **Three Months Ended June 30,** | ** **   | **Amount of** | ** **   | **Percentage** | ** **   |
|-----------------------|--------------|--------------------------------------|--------------|---------------|--------------|----------------|--------------|
| ** **            | ** **   | **2010**                             | ** **   | **2009**      | ** **   | **Change**     | ** **   | **Change** | ** ** |
| *** ***          | *** *** | *** ***                         | *** *** | *** ***  | *** *** | *** ***   | *** *** | *** *** | *** *** |
| Healthcare            |         |                                 |         |          |         |           |         |   |   |
| Infrastructure        |         | $                                    | 2,780        |          | $            | 8,310          |         | $ | (5,530 | ) | (67 | )% |
| Professional Services |         | 7,426                                |         | 4,233         |         | 3,193          |         | 75 | % |
| Managed Services      |         | 253                                  |         | 439           |         | (186           | )            | (42 | )% |
| Total Healthcare      |         | 10,459                               |         | 12,982        |         | (2,523         | )            | (19 | )% |
|                  |         |                                 |         |          |         |           |         |   |   |
| Commercial            |         |                                 |         |          |         |           |         |   |   |
| Infrastructure        |         | 3,755                                |         | 9,275         |         | (5,520         | )            | (60 | )% |
| Professional Services |         | 1,843                                |         | 1,662         |         | 181            |         | 11 | % |
| Managed Services      |         | 318                                  |         | 492           |         | (174           | )            | (35 | )% |
| Total Commercial      |         | 5,916                                |         | 11,429        |         | (5,513         | )            | (48 | )% |
|                  |         |                                 |         |          |         |           |         |   |   |
| Total net revenues    |         | $                                    | 16,375       |          | $            | 24,411         |         | $ | (8,036 | ) | (33 | )% |

 

Netrevenues were $16,375 for the three months ended June 30, 2010, comparedto $24,411 for the three months ended June 30, 2009, representing adecrease of $8,036 or 33%. The decrease in our Healthcare segment net revenueswas due to fewer infrastructure orders resulting from our transition away froma former supplier of mobile workstations to the launch of our new suite ofmobile workstations and power systems and the current weak macro-economicconditions in the first half of 2010. This decrease was partially offset by anincrease in professional services net revenue resulting from increased demandfor EMR implementation and SCM services. The decrease in our Commercial segment net revenues was due to lowerresales of infrastructure and hardware products as we continue to transitionour business to offer higher margin consulting and other professional services.The reimbursable expense revenue included in our professional services revenuetotaled $788 and $592 for the three months ended June 30, 2010 and 2009,respectively.

 

**Cost ofrevenues**

 

Costof revenues for the three months ended June 30, 2010 and 2009 was asfollows:

 
| ** **             | ** ** | **Three Months Ended June 30,** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|------------------------|------------|--------------------------------------|------------|---------------|------------|----------------|------------|
| ** **             | ** ** | **2010**                             | ** ** | **2009**      | ** ** | **Change**     | ** ** | **Change** | ** ** |
| ** **             | ** ** | ** **                           | ** ** | ** **    | ** ** | ** **     | ** ** | ** ** | ** ** |
| Healthcare             |       |                                 |       |          |       |           |       |   |   |
| Infrastructure         |       | $                                    | 2,241      |          | $          | 6,389          |       | $ | (4,148 | ) | (65 | )% |
| Professional Services  |       | 4,729                                |       | 3,475         |       | 1,254          |       | 36 | % |
| Managed Services       |       | 41                                   |       | (118          | )          | 159            |       | 135 | % |
| Total Healthcare       |       | 7,011                                |       | 9,746         |       | (2,735         | )          | (28 | )% |
|                   |       |                                 |       |          |       |           |       |   |   |
| Commercial             |       |                                 |       |          |       |           |       |   |   |
| Infrastructure         |       | 3,008                                |       | 8,526         |       | (5,518         | )          | (65 | )% |
| Professional Services  |       | 1,369                                |       | 1,414         |       | (45            | )          | (3 | )% |
| Managed Services       |       | 139                                  |       | 147           |       | (8             | )          | (6 | )% |
| Total Commercial       |       | 4,516                                |       | 10,087        |       | (5,571         | )          | (55 | )% |
|                   |       |                                 |       |          |       |           |       |   |   |
| Total cost of revenues |       | $                                    | 11,527     |          | $          | 19,833         |       | $ | (8,306 | ) | (42 | )% |

 

Our cost of revenues was $11,527 for the three months ended June 30,2010, compared to $19,833 for the three months ended June 30, 2009, adecrease of $8,306 or 42%. The decrease in our Healthcare segment cost ofrevenues was a result of lower spending on infrastructure due to decreasedsales of our mobile workstation products as we transition to our new suite ofmobile workstations and power systems. The decrease in our Commercial segmentcost of sales was a result of lower resales of hardware and infrastructure 

 

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aswe transition our business to more consulting and professional services,partially offset by costs associated with increasing our consulting staff tosupport an increased number of SCM engagements and to prepare for future growthas we continue to expand our professional services business**.**The reimbursable expenses included in our professional services cost of revenuetotaled $788 and $595 for the three months ended June 30, 2010 and 2009,respectively.

** **

**Grossprofit**

 

Grossprofit for the three months ended June 30, 2010 and 2009 was as follows:

 
| ** **            | ** ** | **Three Months Ended June 30,** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|-----------------------|------------|--------------------------------------|------------|---------------|------------|----------------|------------|
| ** **            | ** ** | **2010**                             | ** ** | **2009**      | ** ** | **Change**     | ** ** | **Change** | ** ** |
| ** **            | ** ** | ** **                           | ** ** | ** **    | ** ** | ** **     | ** ** | ** ** | ** ** |
| Healthcare            |       |                                 |       |          |       |           |       |   |   |
| Infrastructure        |       | $                                    | 539        |          | $          | 1,921          |       | $ | (1,382 | ) | (72 | )% |
| Professional Services |       | 2,697                                |       | 758           |       | 1,939          |       | 256 | % |
| Managed Services      |       | 212                                  |       | 557           |       | (345           | )          | (62 | )% |
| Total Healthcare      |       | 3,448                                |       | 3,236         |       | 212            |       | 7 | % |
|                  |       |                                 |       |          |       |           |       |   |   |
| Commercial            |       |                                 |       |          |       |           |       |   |   |
| Infrastructure        |       | 747                                  |       | 749           |       | (2             | )          | (0 | )% |
| Professional Services |       | 474                                  |       | 248           |       | 226            |       | 91 | % |
| Managed Services      |       | 179                                  |       | 345           |       | (166           | )          | (48 | )% |
| Total Commercial      |       | 1,400                                |       | 1,342         |       | 58             |       | 4 | % |
|                  |       |                                 |       |          |       |           |       |   |   |
| Total gross profit    |       | $                                    | 4,848      |          | $          | 4,578          |       | $ | 270 |   | 6 | % |

 

Grossprofit percentage for the three months ended June 30, 2010 and 2009 was asfollows:

 
| ** **                    | ** ** | **Three Months Ended June 30,** | ** ** | **Amount of** | ** ** |
|-------------------------------|------------|--------------------------------------|------------|---------------|------------|
| ** **                    | ** ** | **2010**                             | ** ** | **2009**      | ** ** | **Change** | ** ** |
| ** **                    | ** ** | ** **                           | ** ** | ** **    | ** ** | ** ** | ** ** |
| Healthcare                    |       |                                 |       |          |       |   |   |
| Infrastructure                |       | 19                                   | %          | 23            | %          | (4 | )% |
| Professional Services         |       | 36                                   | %          | 18            | %          | 18 | % |
| Managed Services              |       | 84                                   | %          | 127           | %          | (43 | )% |
|                          |       |                                 |       |          |       |   |   |
| Commercial                    |       |                                 |       |          |       |   |   |
| Infrastructure                |       | 20                                   | %          | 8             | %          | 12 | % |
| Professional Services         |       | 26                                   | %          | 15            | %          | 11 | % |
| Managed Services              |       | 56                                   | %          | 70            | %          | (14 | )% |
|                          |       |                                 |       |          |       |   |   |
| Total gross profit percentage |       | 30                                   | %          | 19            | %          | 11 | % |

 

Ourgross profit was $4,848 for the three months ended June 30, 2010, comparedto $4,578 for the three months ended June 30, 2009, an increase of $270 or6%, resulting in a gross margin of 30% for the three months ended June 30,2010, up from 19% for the three months ended June 30, 2009. The increasein our gross margin was the result of a shift in our overall product andservice mix from lower margin product and infrastructure sales and relatedhardware resales, as we continue to emphasize higher margin consulting andprofessional services, which benefited our Healthcare segment as the industrydemonstrated a focus on EMR assessment and implementation projects and ourCommercial segment benefited from customers evaluating and initiating SCMsolutions**.**We continue to experience downwardpressure on our gross margin from the sale of infrastructure and third-partyhardware. Consistent with our overall strategic plan, we continue to migratethe business toward an overall greater mix of solutions that includesconsulting and other professional****services.

 

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**Selling,general and administrative expenses**

 

Ourselling, general and administrative expenses were $5,521 for the three monthsended June 30, 2010, compared with $7,748 for the three months ended June 30,2009, a decrease of $2,227, or 29%.  Selling expenses were $2,026 for thethree months ended June 30, 2010, compared with $2,943 for the threemonths ended June 30, 2009, a decrease of $917, or 31%.  The decrease in our selling expenses for thecomparable period was primarily attributable to lower salary expense, benefits,commissions and recruiting costs resulting from staffing reductions and othercost control measures.  General and administrative expenses were $2,750for the three months ended June 30, 2010, compared with $4,090 for thethree months ended June 30, 2009, a decrease of $1,340, or 33%.  Thedecrease in our general and administrative expenses for the comparable periodwas primarily attributable to a reduction in salary expense, includingconsultants training expense, benefits, travel costs, and lower marketingexpenses.

 

Ourdepreciation and amortization expense, included with selling, general andadministrative expenses discussed above, decreased to $420 for the three monthsended June 30, 2010 from $475 for the three months ended June 30,2009, a decrease of $55 or 11%, as the result of fewer purchases of capitalizedassets required to run our business, such as laptop computers, servers andcommunication equipment.

 

Ourstock based compensation expense, included with selling, general andadministrative expenses discussed above, increased to $325 for the three monthsended June 30, 2010 from $240 for the three months ended June 30,2009, a increase of $85 or 35%. The increase is primarily the result ofgranting options in the first quarter of 2010.

 

**Interestexpense**

 

Ourinterest expense was $1,214 for the three months ended June 30, 2010,compared to $1,189 for the three months ended June 30, 2009, an increaseof $25 or 2%. The increase in interest expense was a result of therestructuring of our debt with Hercules in the fourth quarter of 2009,additional borrowings in February and April 2010, and the defaultinterest rate imposed in April 2010. We expect our interest expense willincrease in future quarters. See “Liquidity and Capital Resources” below**.**

 

**Netloss**

 

Ournet income was $567 for the three months ended June 30, 2010 compared witha net loss of $4,781 for the three months ended June 30, 2009. Thedecrease in our net loss was primarily due to our continued efforts to reduceour selling, general and administrative costs through a variety of cost-cuttingmeasures and an increase in gross profit as we continue to transition frominfrastructure hardware sales to higher margin consulting and professionalservices in our role as a comprehensive solutions provider. In the three monthsended June 30, 2010, our net income included a gain on sale of patents of$1,863 and a gain of $679 for the fair value adjustment of our derivativeliabilities**.**During the****threemonths ended June 30, 2010, our warrants were reclassified from warrantliability to equity upon meeting the criteria for equity classification inaccordance with generally accepted accounting principles (“GAAP”). The chargeto earnings during the quarter was based upon the change in fair value from thelast measurement date to the date the warrants qualified for equity treatment.

 

***Six Months ended June 30, 2010 compared withthe Six Months ended June 30, 2009***

 

**Net revenues**

 

Netrevenues for the six months ended June 30, 2010 and 2009 were as follows:

 

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| ** **            | ** **   | **Six Months Ended June 30,** | ** **   | **Amount of** | ** **   | **Percentage** | ** **   |
|-----------------------|--------------|------------------------------------|--------------|---------------|--------------|----------------|--------------|
| ** **            | ** **   | **2010**                           | ** **   | **2009**      | ** **   | **Change**     | ** **   | **Change** | ** ** |
| *** ***          | *** *** | *** ***                       | *** *** | *** ***  | *** *** | *** ***   | *** *** | *** *** | *** *** |
| Healthcare            |         |                               |         |          |         |           |         |   |   |
| Infrastructure        |         | $                                  | 6,297        |          | $            | 16,236         |         | $ | (9,939 | ) | (61 | )% |
| Professional Services |         | 13,883                             |         | 8,799         |         | 5,084          |         | 58 | % |
| Managed Services      |         | 378                                |         | 523           |         | (145           | )            | (28 | )% |
| Total Healthcare      |         | 20,558                             |         | 25,558        |         | (5,000         | )            | (20 | )% |
|                  |         |                               |         |          |         |           |         |   |   |
| Commercial            |         |                               |         |          |         |           |         |   |   |
| Infrastructure        |         | 5,562                              |         | 14,215        |         | (8,653         | )            | (61 | )% |
| Professional Services |         | 3,522                              |         | 2,526         |         | 996            |         | 39 | % |
| Managed Services      |         | 594                                |         | 924           |         | (330           | )            | (36 | )% |
| Total Commercial      |         | 9,678                              |         | 17,665        |         | (7,987         | )            | (45 | )% |
|                  |         |                               |         |          |         |           |         |   |   |
| Total net revenues    |         | $                                  | 30,236       |          | $            | 43,223         |         | $ | (12,987 | ) | (30 | )% |

 

Netrevenues were $30,236 for the six months ended June 30, 2010, compared to$43,223 for the six months ended June 30, 2009, representing a decrease of$12,987 or 30%. The decrease in our Healthcare segment net revenues was due tofewer infrastructure orders resulting from our transition away from a formersupplier of mobile workstations to the launch of our new suite of mobileworkstations and power systems and the current weak macro-economic conditionsin the first half of 2010. This decrease was partially offset by an increase inprofessional services net revenue resulting from increased demand for EMRimplementation and SCM services.  Thedecrease in our Commercial segment net revenues was due to lower resales ofinfrastructure and hardware products as we continue to transition our businessto offer higher margin consulting and other professional services. Thereimbursable expense revenue included in our professional services revenuetotaled $1,525 and $1,020 for the six months ended June 30, 2010 and 2009,respectively.

 

**Cost ofrevenues**

 

Costof revenues for the six months ended June 30, 2010 and 2009 was asfollows:

 
| ** **             | ** ** | **Six Months Ended June 30,** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|------------------------|------------|------------------------------------|------------|---------------|------------|----------------|------------|
| ** **             | ** ** | **2010**                           | ** ** | **2009**      | ** ** | **Change**     | ** ** | **Change** | ** ** |
| ** **             | ** ** | ** **                         | ** ** | ** **    | ** ** | ** **     | ** ** | ** ** | ** ** |
| Healthcare             |       |                               |       |          |       |           |       |   |   |
| Infrastructure         |       | $                                  | 5,062      |          | $          | 12,339         |       | $ | (7,277 | ) | (59 | )% |
| Professional Services  |       | 8,693                              |       | 6,770         |       | 1,923          |       | 28 | % |
| Managed Services       |       | 44                                 |       | (82           | )          | 126            |       | (154 | )% |
| Total Healthcare       |       | 13,799                             |       | 19,027        |       | (5,228         | )          | (27 | )% |
|                   |       |                               |       |          |       |           |       |   |   |
| Commercial             |       |                               |       |          |       |           |       |   |   |
| Infrastructure         |       | 4,323                              |       | 12,896        |       | (8,573         | )          | (66 | )% |
| Professional Services  |       | 2,745                              |       | 2,225         |       | 520            |       | 23 | % |
| Managed Services       |       | 259                                |       | 362           |       | (103           | )          | (28 | )% |
| Total Commercial       |       | 7,327                              |       | 15,483        |       | (8,156         | )          | (53 | )% |
|                   |       |                               |       |          |       |           |       |   |   |
| Total cost of revenues |       | $                                  | 21,126     |          | $          | 34,510         |       | $ | (13,384 | ) | (39 | )% |

 

Our cost of revenues was $ 21,126 for the six months ended June 30,2010, compared to $34,510 for the six months ended June 30, 2009, adecrease of $13,384 or 39%. The decrease in our Healthcare segment cost ofrevenues was a result of lower spending on infrastructure due to decreasedsales of our mobile workstation products as we transition to our new suite ofmobile workstations and power systems. The decrease in our Commercial segmentcost of sales was a result of lower resales of hardware and infrastructure aswe transition our business, partially offset by costs associated withincreasing our consulting staff to support an increased number 

 

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ofSCM engagements and to prepare for future growth as we continue to expand ourprofessional services business**.** Thereimbursable expenses included in our professional services cost of revenuetotaled $1,525 and $ 1,020 for the six months ended June 30, 2010 and2009, respectively.

 

**Grossprofit**

 

Grossprofit for the six months ended June 30, 2010 and 2009 was as follows:

 
| ** **            | ** ** | **Six Months Ended June 30,** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|-----------------------|------------|------------------------------------|------------|---------------|------------|----------------|------------|
| ** **            | ** ** | **2010**                           | ** ** | **2009**      | ** ** | **Change**     | ** ** | **Change** | ** ** |
| ** **            | ** ** | ** **                         | ** ** | ** **    | ** ** | ** **     | ** ** | ** ** | ** ** |
| Healthcare            |       |                               |       |          |       |           |       |   |   |
| Infrastructure        |       | $                                  | 1,235      |          | $          | 3,897          |       | $ | (2,662 | ) | (68 | )% |
| Professional Services |       | 5,190                              |       | 2,029         |       | 3,161          |       | 156 | % |
| Managed Services      |       | 334                                |       | 605           |       | (271           | )          | (45 | )% |
| Total Healthcare      |       | 6,759                              |       | 6,531         |       | 228            |       | 3 | % |
|                  |       |                               |       |          |       |           |       |   |   |
| Commercial            |       |                               |       |          |       |           |       |   |   |
| Infrastructure        |       | 1,239                              |       | 1,319         |       | (80            | )          | (6 | )% |
| Professional Services |       | 777                                |       | 301           |       | 476            |       | 158 | % |
| Managed Services      |       | 335                                |       | 562           |       | (227           | )          | (40 | )% |
| Total Commercial      |       | 2,351                              |       | 2,182         |       | 169            |       | 8 | % |
|                  |       |                               |       |          |       |           |       |   |   |
| Total gross profit    |       | $                                  | 9,110      |          | $          | 8,713          |       | $ | 397 |   | 5 | % |

 

Grossprofit percentage for the six months ended June 30, 2010 and 2009 was asfollows:

 
| ** **                    | ** ** | **Six Months Ended June 30,** | ** ** | **Amount of** | ** ** |
|-------------------------------|------------|------------------------------------|------------|---------------|------------|
| ** **                    | ** ** | **2010**                           | ** ** | **2009**      | ** ** | **Change** | ** ** |
| ** **                    | ** ** | ** **                         | ** ** | ** **    | ** ** | ** ** | ** ** |
| Healthcare                    |       |                               |       |          |       |   |   |
| Infrastructure                |       | 20                                 | %          | 24            | %          | (4 | )% |
| Professional Services         |       | 37                                 | %          | 23            | %          | 14 | % |
| Managed Services              |       | 88                                 | %          | 116           | %          | (28 | )% |
|                          |       |                               |       |          |       |   |   |
| Commercial                    |       |                               |       |          |       |   |   |
| Infrastructure                |       | 22                                 | %          | 9             | %          | 13 | % |
| Professional Services         |       | 22                                 | %          | 12            | %          | 10 | % |
| Managed Services              |       | 56                                 | %          | 61            | %          | (5 | )% |
|                          |       |                               |       |          |       |   |   |
| Total gross profit percentage |       | 30                                 | %          | 20            | %          | 10 | % |

 

Ourgross profit was $9,110 for the six months ended June 30, 2010, comparedto $8,713 for the six months ended June 30, 2009, an increase of $397 or5%, resulting in a gross margin of 30% for the six months ended June 30,2010, up from 20% for the six months ended June 30, 2009. The increase inour 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 the industry demonstrated afocus on EMR assessment and implementation projects and our Commercial segmentbenefited from customers evaluating and initiating SCM solutions**.**We continue to experience downward pressure on our grossmargin from the sale of infrastructure and third-party hardware. Consistentwith our overall strategic plan, we continue to migrate the business toward anoverall greater mix of solutions that include consulting and other professional****services.

 

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**Selling,general and administrative expenses**

 

Ourselling, general and administrative expenses were $11,621 for the six monthsended June 30, 2010, compared with $15,411 for the six months ended June 30,2009, a decrease of $3,790, or 25%.  Selling expenses were $4,421 for thesix months ended June 30, 2010, compared with $5,653 for the six monthsended June 30, 2009, a decrease of $1,232, or 22%.  The decrease in our selling expenses for thecomparable period was primarily attributable to lower salary expense, benefits,commissions and recruiting related costs resulting from staffing reductions andother cost control measures.  General and administrative expenses were$5,685 for the six months ended June 30, 2010, compared with $8,278 forthe six months ended June 30, 2009, a decrease of $2,593, or 31%. The decrease in our general and administrative expenses for the comparableperiod was primarily attributable to a reduction in salary expense, includingconsultants training expense, benefits and travel costs, and lower marketingexpenses.

 

Ourdepreciation and amortization expense, included with selling, general andadministrative expenses discussed above, decreased to $873 for the six monthsended June 30, 2010 from $950 for the six months ended June 30, 2009,a decrease of $77 or 8%, as the result of fewer purchases of capitalized assetsrequired to run our business, such as laptop computers, servers andcommunication equipment.

 

Ourstock based compensation expense, included with selling, general and administrativeexpenses discussed above, increased to $642 for the six months ended June 30,2010 from $530 for the six months ended June 30, 2009, a increase of $112or 21%. The increase is primarily the result of granting options in the firstquarter of 2010.

 

**Interestexpense**

 

Ourinterest expense was $2,263 for the six months ended June 30, 2010,compared to $2,334 for the six months ended June 30, 2009, a decrease of $71or 3%. The decrease in interest expense is a result of the restructuring of ourdebt with Hercules in the fourth quarter of 2009 offset by 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**

 

Ournet loss was $2,251 for the six months ended June 30, 2010 compared with anet loss of $9,451 for the six months ended June 30, 2009, a decrease of $7,200or 76%. The decrease in our net loss was primarily due to our continued effortsto reduce our selling, general and administrative costs through a variety ofcost-cutting measures and an increase in gross profit as we continue totransition from infrastructure hardware sales to higher margin professional andconsulting services in our role as a comprehensive solutions provider.******In the six months ended June 30,2010, our net loss included a gain on sale of patents of $1,863 and a gain of$764 for the fair value adjustment of our derivative liabilities. During the****six months ended June 30, 2010, our warrants werereclassified from warrant liability to equity upon meeting the criteria forequity classification in accordance with GAAP. The charge to earnings was basedupon the change in fair value at the end of each reporting period or at thedate the warrants qualified for equity treatment offset by change inassumptions that impacted the warrant liability value at December 31, 2009that was reflected in the first quarter of 2010.

 

**Liquidityand capital resources**

 

At June 30, 2010, we had cash and cash equivalents of $2,384,compared to $1,018 at December 31, 2009. Historically, we have funded ouroperating losses primarily through the private sale of equity securities andthrough current and long term debt and working capital. At June 30, 2010,our total liabilities were $40,945 and were comprised mostly of term debt,borrowings outstanding under our credit line, notes due to sellers related toprior acquisitions, and outstanding accounts payable. Net cash used inoperating activities for the six months ended June 30, 2010 was $4,536,related to interest payments on our borrowings and other operating expenses.Net cash provided by investing activities was $1,912 for the six months ended June 30,2010, primarily from proceeds from the sale of a non-essential patent.****Net cash provided by financing activities was $3,990 forthe six months ended June 30, 2010, primarily due to increased borrowingsunder our Amended Loan Agreement with Hercules.

 

Giventhe amount of our current cash and cash equivalents, and accounts receivable,we believe that we will have sufficient liquidity to meet our short-termoperating cash flow needs. We have, however, substantial liquidity requirementsrelated to the repayment of a seller note in the amount of approximately $4,440that comes due on September 30, 2010, our revolving line of credit underour Amended Loan Agreement with Hercules, and earn out payment obligations frompast acquisitions. We do not currently expect to generate sufficient cash flowfrom operations to fund those obligations. We have undertaken a series ofactions to reduce costs and have explored potential sources of financing andother strategic initiatives. On February 10, 2010, Hercules sent us aletter notifying us of an event of default because our borrowings under therevolving credit facility exceeded our borrowing base. 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 under AmendedLoan Agreement. We do not have adequate liquidity to repay all outstandingamounts under the credit facility and payment acceleration would have amaterial adverse effect on our liquidity, business, financial condition andresults 

 

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ofoperations. Even without acceleration of our obligations to Hercules and evenwith the restructuring of our debt with Hercules on November 20, 2009,subsequent additional borrowings from Hercules in February and April 2010and the sale of a patent in June 2010, we continue to believe that we needto restructure our debt, pursue additional debt and equity financing, completeone or more strategic transactions, and continue further cost control actionsto meet our liquidity needs. Our continued operations are dependent on ourability to implement those plans successfully. If we fail to do so, we may notbe able to continue as a going concern. For a discussion of our plans withrespect to these 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), April 6, 2010 (to issue Term Loan C) and June 18,2010 (to facilitate sale of a patent).

 

Under the Amended Loan Agreement, our indebtedness to Hercules consistsof three term loans and an Equipment Loan aggregating approximately $14,600 anda revolving credit facility of $12,000, of which $8,097 was outstanding at August 3,2010. The revolving credit facility expires on May 1, 2011, but may beextended at our option for six months if there is no existing event of default.Any advances under the revolving credit facility bear interest initially at12.0% per annum until the term loans, as described below, are repaid in full,when the interest rate on outstanding advances will be prime plus 4%.Borrowings under the revolving credit facility are based on eligible accountsreceivables, including an over advance provision of up to $500, which will bedue 28 days after the over advance is drawn. On June 30, 2010, Herculesadvanced us an additional $1,500, which was applied to the outstanding balanceof our revolving line of credit and was provided as an extension above oureligible borrowing base. 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 onNovember 1, 2014 (“Term Loan B”), and a $1,350 convertible term loan dueon April 1, 2013 (“Term Loan C”). Principal amortization on Term Loan Abegins on December 1, 2010. Term Loan B may be converted into shares ofour common stock at a price of $1.8575 per share at Hercules’ option, orautomatically if the 90-day value weighted adjusted trading price of our commonstock exceeds five times the conversion price. Term Loan B also has a mandatoryconversion feature and we have the right to pay a portion of the conversionamount in cash plus applicable fees, interest and other charges instead ofshares of common stock under certain circumstances. If not converted, theprincipal balance on Term Loan B is due November 2014. Term Loan C may beconverted into shares of our common stock at a price of $3.276 per share atHercules’ option. If not converted, the principal balance of Term Loan C is dueApril 2013.

 

Term Loan A bears interest at (i) 12% per annumfor the first year, (ii) 18% per annum for the next year, and (iii) 15%thereafter. All interest on Term Loan A is payable in cash monthly commencing December 1,2009. Term Loan B bears interest at (i) 14.5% per annum for the firstyear, (ii) 20.5% per annum for the next year, and (iii) 17.5%thereafter. A portion (2.5%) of the interest rate on Term Loan B is to be “paidin kind” (“PIK”) compounded monthly. The balance of the interest on Term Loan Bis payable in cash monthly commencing December 1, 2009. Hercules also hasthe option, in its sole discretion, to require any and all interest on TermLoan B to be paid in cash, PIK or in shares of our common stock. The number ofshares into which accrued interest will be converted will be determined basedon 70% of the adjusted 60-day average trading price of our common stock on thedate of Hercules’ election to convert the interest into shares. In the eventTerm Loan A or Term Loan B is prepaid, a prepayment charge on the principalprepaid is 5% if prepaid during the first 12 months, 3% if prepaid during thenext 12 months and 1% thereafter will be due, provided that, if Term Loan A orTerm Loan B is prepaid during the first 12 months and there is then no event ofdefault, Hercules will waive the prepayment charge on both term loans. TermLoan C bears interest at a rate of 8% per annum and, at the discretion ofHercules, is payable either in cash or PIK. Interest is payable monthly commencing on May 1, 2010. We mayprepay Term Loan C without incurring 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 

 

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tous, unless an event of default exists or could reasonably be expected to exist,in which 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 June 30, 2010, which was extended fromthe original commitment termination date of April 30, 2010. At June 30,2010, we had an outstanding balance of $2,250 under this facility.

 

On April 6, 2010, we entered into Amendment No. 2(“Amendment 2”) to the Amended Loan Agreement with Hercules. Pursuant toAmendment 2, Hercules funded Term Loan C in an original principal amount of$1,350. The proceeds of Term Loan C were used to repay outstanding overadvances under the revolving credit facility. Interest on Term Loan C accruesat a rate of 8% per annum and, at the discretion of Hercules, is payable eitherin cash or in kind by adding the accrued interest to the principal of Term LoanC. All principal outstanding on Term Loan is due and payable on April 1,2013. Term Loan C may be converted into shares of our common stock at a priceof $3.276 per share at any time at Hercules’ option. We may prepay Term Loan Cwithout incurring a prepayment penalty charge. We 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 2also amended the interest payment options under Term Loan B such that Herculesnow has the option, in its sole discretion, to require any and all interest onTerm Loan B to be paid in cash, in kind or in shares of our common stock. Thenumber of shares into which accrued interest will be converted will bedetermined based on 70% of the adjusted 60-day average trading price of ourcommon stock on the date of Hercules’ election to convert the interest intoshares.

 

Amendment2 also amended the default interest payment options under the Amended LoanAgreement. Whereas prior to Amendment 2, default rate interest was payable incash or in kind by adding the accrued interest to the outstanding principalamount, pursuant to Amendment 2, Hercules now has the option to elect to havedefault rate interest paid in cash, in kind or in shares of our common stock.All default rate interest paid in kind will be added to the outstandingprincipal amount on Term Loan B, notwithstanding on which loan the interest hasaccrued. If Hercules elects to have default rate interest paid in shares, thenumber of shares into which such accrued default rate interest will beconverted will be determined based on 70% of the adjusted 60-day average priceon the date of Hercules’ election to convert the interest into shares.

 

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 our 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 each fiscal quarter commencingJune 30, 2010 of 6.0 to 1.0 decreasing to 1.5 to 1.0 by the quarter endingJune 30, 2012, (iii) minimum consolidated fixed charge coverage ratiomeasured on a rolling twelve month basis as of the last day of a fiscal quartercommencing June 30, 2010 of 0.75 to 1.0 increasing to 2.0 to 1.0 by thequarter ending June 30, 2012, and (iv) at least $1,000 inunrestricted cash at all times.  Failuresto maintain the financial covenants, as well as certain other events, areevents of default under the Amended Loan Agreement. Upon an event of defaultunder the Amended Loan Agreement, Hercules may opt to accelerate and demandpayment 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 June 30,2010. Our obligations under the Amended Loan Agreement are secured by all ofour personal property, including all of our equity interests in our respectivesubsidiaries.

 

OnFebruary 10, 2010, Hercules sent us a letter notifying us of an event ofdefault because our borrowings under the revolving credit facility exceeded ourborrowing base as of February 5, 2010 and charging us default interest ofan additional 3% to the applicable regular interest rate for the periodstarting February 5, 2010. Events of default are continuing and defaultrate interest will be payable monthly on the same date as regular interestunless Hercules chooses to demand payment of default interest on another date.Under the terms of our Amended Loan Agreement late fees are equal to 5% of thepast due amount and default rate interest is equal to the applicable regularinterest rate plus 3%. Hercules may elect to have default rate interest paid incash, in kind or in shares of our common stock. All default rate interest paidin kind will be added to the outstanding principal amount on Term Loan B,notwithstanding on which loan the interest has accrued. If Hercules elects tohave default rate interest paid in shares, the number of shares into which suchaccrued default 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 our noncompliance with the minimum EBITDArequirement, total leverage ratio and fixed charge coverage ratio requiredunder the Amended Loan Agreement, we are prohibited from satisfying our earnout obligations related to our acquisition of the assets of HealthcareInformatics Associates, Inc. (“HIA”) and Delta Health Systems, Inc.We also have a seller note to HIA that is payable on September 30, 2010.If we are in default under our indebtedness to Hercules at September 30,2010, we will not be permitted to repay the seller note at the date. We are indiscussions with HIA about modifying 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.

 

***Off Balance Sheet Arrangements***

 

Wedo not currently have any 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 ASU No. 2010-06, *“*Improving Disclosures About Fair ValueMeasurements,” which added disclosure requirements about an entity’s useof fair value measurements. Among these requirements, entities will be requiredto provide enhanced disclosures about transfers into and out of the Level 1(fair value determined based on quoted prices in active markets for identicalassets and liabilities) and Level 2 (fair value determined based on significantother observable inputs) classifications, provide separate disclosures aboutpurchases, sales, issuances and settlements relating to the tabularreconciliation of beginning and ending balances of the Level 3 (fair valuedetermined based on significant unobservable inputs) classification and providegreater disaggregation for each class of assets and liabilities that use fairvalue measurements. Except for the detailed Level 3 roll-forward disclosures,the new standard is effective for us for interim and annual reporting periodsbeginning after December 31, 2009. The adoption of this accountingstandards amendment did not have a material impact on our consolidatedfinancial statements. The requirement to provide detailed disclosures about thepurchases, sales, issuances and settlements in the roll-forward activity forLevel 3 fair value measurements is effective for us for interim and annualreporting periods beginning after December 31, 2010. We do not expect thatthe adoption of these new disclosure requirements will have a material impacton its consolidated financial statements.

 

**Item 3.****                      ****Quantitative and 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. We do not enter intoderivatives or other financial instruments for trading or speculative purposes.

 

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 

 

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onour financial 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 payments.  We have limitedthe investments to investment grade or comparable securities and have notexperienced any losses on our investments to date due to credit risk.

 

The fair value of our cash and cash equivalents at June 30, 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 value of our long-term debt at June 30, 2010approximated its fair value. Advances under our revolving credit facility bearinterest initially at 12% per annum until our term loans are repaid in full, atwhich time the interest rate on the outstanding advances will be prime plus4%.  Interest rates under our four termloans range between 8% and 23% over the next several years (including thedefault interest rate).  Because ourinterest rates are fixed, an increase in market rates of interest will notimpact our annual 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 have any effect on our annual interest expense for this debt.

 

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

 

**a)****             ****Evaluationof 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)****             ****Changesin internal control over financial reporting**

 

Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting, as such term is defined in SEC Rule 13a-15(f) underthe Exchange Act. Our internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. Our internal controlover financial reporting includes those policies and procedures that aredesigned to: (1) maintain records that in reasonable detail accurately andfairly reflect our transactions and dispositions of our assets;(2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that our receipts andexpenditures are being made only in accordance with authorizations of ourmanagement and our directors; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use ordisposition of our assets that could have a material effect on the financialstatements.

 

Inconnection with its audit of our consolidated financial statements for theperiod ended December 31, 2009, our independent registered publicaccounting firm at such time, McGladrey & Pullen, LLP, identified amaterial weakness in internal control related to our accounting for theHercules Restructuring.  Specifically, our independent registered publicaccounting firm found that we failed to properly apply the Debt Topic of theFASB Accounting Standards Codification and failed to timely make certainmaterial adjustments required in connection with the Hercules Restructuring,including recording a $6,777 loss on debt extinguishment and a $4,294 increasein additional-paid-in-capital.

 

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We have taken andcontinue to take appropriate and reasonable steps to make the necessaryimprovements 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;

·      continuingto utilize professional services firms to assist with accounting and financialreporting; and

·      maintainingincreased management oversight of accounting and reporting functions in thefuture.

 

Additionally,we continue to improve and implement more rigorous period end reportingprocesses to include improved controls and procedures, resulting in frequentprocess refinement.  Our remediationefforts are continuing and we expect to make additional changes to our controlenvironment and accounting and reporting processes that we believe willstrengthen our internal control over financial reporting.  We havededicated considerable resources to the design, implementation, documentation,and testing of our internal controls and although we believe the steps taken todate have improved the effectiveness of our internal control over financialreporting, we have not completed all the corrective processes andprocedures.  Accordingly, we will continue to monitor theeffectiveness of our internal control over financial reporting and as required,perform additional procedures to ensure that our financial statements arefairly stated in all material respects. We do not expect that our disclosure controls and procedures or ourinternal control over financial reporting will prevent or detect all errors.  Acontrol system, no matter how well designed and operated, can provide onlyreasonable, not absolute, assurance that the control system’s objectives willbe met. The design of any system of controls is based, in part, uponcertain assumptions about the likelihood of future events and there can be noassurance that any design will succeed in achieving its stated goals under allpotential 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.****                      ****Legal Proceedings**

 

In the normal course of business, we have become andmight in the future become involved in legal actions relating to our business.In management’s opinion, the resolution of any such pending legal actions isnot expected to have a material adverse effect on our consolidated financialposition or results of operations.

 

**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 our Quarterly Report on Form 10-Q for the quarterly period ended March 31,2010 and 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 delisted from The Nasdaq CapitalMarket if we do not maintain certain levels of stockholders’ equity, marketvalue of listed securities, or net income from continuing 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 fromNasdaq, notifying us that we were not in compliance with these requirements. OnOctober 30, 2009, we received notice that Nasdaq granted our request foran extension to regain compliance with these requirements. We had until November 20,2009 to regain such compliance. On November 25, 2009, we received noticefrom Nasdaq that we 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 again subject to delisting.  On April 20, 2010, we received a newstaff determination letter from Nasdaq regarding our non-compliance with theNasdaq continued listing standards.  At December 31, 2009, ourstockholders’ deficit of $2,544 again was below Nasdaq’s minimum stockholders’equity requirement. The Nasdaq staff determined to delist our common stock on April 29,2010 unless we requested a hearing before a Nasdaq Listing Qualifications Panel(“Panel”) on or before April 27, 2010.  On April 27, 2010, werequested a hearing before the Panel and, as a result, our common stockremained listed on Nasdaq pending the issuance of a decision by the Panelfollowing the hearing, which took place on June 10, 2010.  On July 8, 2010, we received a letterfrom Nasdaq stating that the Panel granted our request for continued listing onthe Nasdaq Stock 

 

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Marketsubject to several conditions including, among other things, the occurrence ofcertain events, which may include restructuring our debt, pursuing additionaldebt and equity financing and completing one or more strategic transactions, byAugust 15, 2010, and our ability to regain compliance with all therequirements for continued listing on Nasdaq by October 18, 2010.  Inconnection with the conditions set by NASDAQ, on August 13, 2010, the originalprincipal of Term Loan B was converted into shares of our common stock (formore information, see Item 1, Financial Statements, Note P—Subsequent Events).  This extension represents the maximum lengthof time that a Nasdaq Hearings Panel may grant to regain compliance under theNasdaq Listing Rules and, while we are diligently taking steps to complywith the conditions of the Panel decision, there can be no assurances that wewill be able to do so.  A delisting ofour common stock from Nasdaq could adversely affect the market liquidity of ourcommon stock and cause the market price of our common stock to decrease andcould also adversely affect our ability to obtain financing for our operationsand/or result 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.

 

**Item 2.****                      ****UnregisteredSales of Equity Securities and Use of Proceeds**

 

None.

 

**Item 3.****                      ****DefaultsUpon Senior Securities**

 

None.

 

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

 

**Item 5.****                      ****OtherInformation**

 

None.

 

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

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                       |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.1                  |       | Amendment No. 3,  dated as of June 18, 2010, to the Amended and Restated Loan and Security  Agreement, dated as of November 20, 2009, as amended, by and among  InfoLogix, Inc., InfoLogix Systems Corporation, Embedded  Technologies, LLC, Opt Acquisition LLC and InfoLogix-DDMS, Inc., as  Borrowers and Hercules Technology Growth Capital, Inc., as Lender.+ |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.1                 |       | Patent Purchase Agreement  by and among Embedded Technologies, LLC and Intellectual Ventures Fund 68 LLC  dated as of June 3, 2010.+                                                                                                                                                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.2                 |       | Letter Agreement dated  June 28, 2010 amending the Registration Rights Agreement dated as of April 6,  2010 by and between Hercules Technology Growth Capital, Inc. and  Infologix, Inc. +                                                                                                                                                                                        |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 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.

(+)             Furnishedherewith.

 

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** **

**SIGNATURES**

 

Pursuantto the requirements of section 13 or 15(d) of the Securities Exchange Actof 1934, the Registrant has duly caused this report to be signed on its behalfby the undersigned; thereunto duly authorized, in Hatboro, Pennsylvania on August 16,2010.

 
|     | 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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