**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

**MarkOne**

 
| **x**                                                  | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|--------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| ** **                                             | ** ** | ** **                                                                                               |
| **For The Quarterly Period Ended March 31, 2008** |
|                                                   |       |                                                                                                     |
| **o**                                                  | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

** **

**For the Transition Periodfrom               to**

 

**Commission File Number****001-33521**

 

**INFOLOGIX, INC.**

(Exact name of registrant as specified in itscharter)

 

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

 

**(215) 604-0691**

(Registrant’s telephone number, includingarea code)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes x  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

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

 

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

 

| **Class**                                        | ** ** | **Outstanding at May 12, 2008** |
|--------------------------------------------------|------------|--------------------------------------|
| **Common Stock, $0.00001 par  value per  share** | ** ** | **24,941,256 Shares**                |

 

** **

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**TABLE OF CONTENTS**

 
| **PART I – FINANCIAL INFORMATION** |       |
|----------------------------------------------|------------|
|                                         |       |   |   |
| Item 1.                                      |       | Financial Statements | 3 |
|                                         |       |   |   |
|                                         |       | Consolidated Balance Sheets as of  March 31, 2008 (unaudited) and December 31, 2007 | 3 |
|                                         |       |   |   |
|                                         |       | Consolidated Statements of  Operations (unaudited) for the three months ended March 31, 2008 and  2007 | 4 |
|                                         |       |   |   |
|                                         |       | Consolidated Statements of  Changes in Stockholders’ Equity (unaudited) for the three months ended  March 31, 2008 | 5 |
|                                         |       |   |   |
|                                         |       | Consolidated Statements of  Cash Flows (unaudited) for the three months ended March 31, 2008 and  2007 | 6 |
|                                         |       |   |   |
|                                         |       | Notes to  Unaudited Consolidated Financial Statements | 7 |
|                                         |       |   |   |
| Item 2.                                      |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 13 |
|                                         |       |   |   |
| Item 3.                                      |       | Quantitative  and Qualitative Disclosures About Market Risk | 21 |
|                                         |       |   |   |
| Item 4.                                      |       | Controls and Procedures | 21 |
|                                         |       |   |   |
| **PART II – OTHER  INFORMATION**   | ** ** |
|                                         |       |   |   |
| Item 1.                                      |       | Legal Proceedings | 22 |
|                                         |       |   |   |
| Item 1a.                                     |       | Risk Factors | 22 |
|                                         |       |   |   |
| Item 2.                                      |       | Unregistered  Sales of Equity Securities and Use of Proceeds | 22 |
|                                         |       |   |   |
| Item 3.                                      |       | Defaults Upon  Senior Securities | 22 |
|                                         |       |   |   |
| Item 4.                                      |       | Submission of  Matters to a Vote of Security Holders | 22 |
|                                         |       |   |   |
| Item 5.                                      |       | Other Information | 22 |
|                                         |       |   |   |
| Item 6.                                      |       | Exhibits | 22 |
|                                         |       |   |   |
|                                         |       | Signatures | 23 |

 

2

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**PART I- FINANCIAL INFORMATION**

 

**Item 1.        Financial Statements**

 

**INFOLOGIX,INC.**

**ConsolidatedBalance Sheets**

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

 
| ** **                                                                                                                                                                                        | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                        | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                        |       |                     |       |                        |       |
| Currents assets:                                                                                                                                                                                  |       |                     |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                         |       | $                        | 5,059      |                        | $          | 6,101 |   |
| Accounts and other receivables (net of allowance for doubtful  accounts in the amount of $495 and $409 as of March 31, 2008 and  December 31, 2007, respectively)                       |       | 20,118                   |       | 20,301                      |       |
| Unbilled revenue                                                                                                                                                                                  |       | 1,421                    |       | 1,052                       |       |
| Inventory, net                                                                                                                                                                                    |       | 1,680                    |       | 1,899                       |       |
| Prepaid expenses and other current assets                                                                                                                                                         |       | 843                      |       | 603                         |       |
| Promissory notes receivable                                                                                                                                                                       |       | 202                      |       | —                      |       |
| Deferred tax assets - current                                                                                                                                                                     |       | 532                      |       | 451                         |       |
| Total current assets                                                                                                                                                                              |       | 29,855                   |       | 30,407                      |       |
| Property and equipment, net                                                                                                                                                                       |       | 1,535                    |       | 1,247                       |       |
| Intangible assets, net                                                                                                                                                                            |       | 7,946                    |       | 8,362                       |       |
| Goodwill                                                                                                                                                                                          |       | 5,668                    |       | 5,668                       |       |
| Deferred tax assets - long-term                                                                                                                                                                   |       | 3,461                    |       | 2,956                       |       |
| Deferred financing costs                                                                                                                                                                          |       | 53                       |       | 57                          |       |
| Total assets                                                                                                                                                                                      |       | $                        | 48,518     |                        | $          | 48,697 |   |
|                                                                                                                                                                                              |       |                     |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                    |       |                     |       |                        |       |
| Current liabilities:                                                                                                                                                                              |       |                     |       |                        |       |
| Accounts payable                                                                                                                                                                                  |       | $                        | 9,967      |                        | $          | 8,650 |   |
| Line of credit                                                                                                                                                                                    |       | 9,425                    |       | 9,959                       |       |
| Current portion of notes payable                                                                                                                                                                  |       | 740                      |       | 627                         |       |
| Current portion of capital lease obligations                                                                                                                                                      |       | 126                      |       | 139                         |       |
| Sales tax payable                                                                                                                                                                                 |       | 244                      |       | 299                         |       |
| Accrued expenses                                                                                                                                                                                  |       | 3,394                    |       | 3,560                       |       |
| Deferred revenue                                                                                                                                                                                  |       | 86                       |       | 75                          |       |
| Total current liabilities                                                                                                                                                                         |       | 23,982                   |       | 23,309                      |       |
| Notes payable, net of current maturities                                                                                                                                                          |       | 6,711                    |       | 6,818                       |       |
| Capital lease obligations, net of current maturities                                                                                                                                              |       | 74                       |       | 94                          |       |
| Total liabilities                                                                                                                                                                                 |       | 30,767                   |       | 30,221                      |       |
|                                                                                                                                                                                              |       |                     |       |                        |       |
| Commitments and Contingencies                                                                                                                                                                     |       |                     |       |                        |       |
| Stockholders’ equity:                                                                                                                                                                        |       |                     |       |                        |       |
| Preferred stock, par value $0.00001; authorized 10,000,000 shares; none  issued or outstanding                                                                                                    |       | —                   |       | —                      |       |
| Common stock, par value $0.00001; authorized 100,000,000 shares;  issued and outstanding 24,919,301 shares and 24,909,301 shares at  March 31, 2008 and December 31, 2007, respectively |       | —                   |       | —                      |       |
| Additional paid in capital                                                                                                                                                                        |       | 23,846                   |       | 23,580                      |       |
| Accumulated deficit                                                                                                                                                                               |       | (6,095                   | )          | (5,104                      | )          |
|                                                                                                                                                                                              |       |                     |       |                        |       |
| Total stockholders’ equity                                                                                                                                                                   |       | 17,751                   |       | 18,476                      |       |
| Total liabilities and stockholders’ equity                                                                                                                                                   |       | $                        | 48,518     |                        | $          | 48,697 |   |

 

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

 

3

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**INFOLOGIX,INC.**

**UnauditedConsolidated Statements of Operations**

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

 
| ** **                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                              | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
|                                                    |       |                                                 |       |   |   |
| Revenues                                                |       | $                                                    | 23,786     |   | $ | 13,174 |   |
| Cost of revenues                                        |       | 17,581                                               |       | 9,833 |   |
| Gross profit                                            |       | 6,205                                                |       | 3,341 |   |
| Selling, general and adminstrative expenses             |       | 7,517                                                |       | 5,177 |   |
| Operating loss                                          |       | (1,312                                               | )          | (1,836 | ) |
| Interest expense                                        |       | (286                                                 | )          | (131 | ) |
| Interest income                                         |       | 48                                                   |       | 158 |   |
| Loss before income tax benefit                          |       | (1,550                                               | )          | (1,809 | ) |
| Income tax benefit                                      |       | 559                                                  |       | 709 |   |
| Net loss                                                |       | $                                                    | (991       | ) | $ | (1,100 | ) |
| Loss per share - basic and diluted                      |       | $                                                    | (0.04      | ) | $ | (0.05 | ) |
| Weighted average shares outstanding - basic and diluted |       | 24,918,441                                           |       | 23,595,663 |   |

 

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

 

4

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**INFOLOGIX,INC.**

**UnauditedConsolidated Statement of Changes in Stockholders’ Equity**

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

 
| ** **                       | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **             | ** ** | **Total**  | ** ** |
|----------------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|------------------------|------------|------------|------------|
| ** **                       | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** |
| ** **                       | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit**            | ** ** | **Equity** | ** ** |
|                             |       |                  |       |        |       |            |       |                   |       |       |       |
| Balances, December 31, 2007 |       | 24,909,301            |       | $           | —     |            | $          | 23,580                 |       | $          | (5,104     | ) | $ | 18,476 |   |
|                             |       |                  |       |        |       |            |       |                   |       |       |       |
| Stock-based compensation         |       | —                |       | —      |       | 248             |       | —                 |       | 248        |       |
|                             |       |                  |       |        |       |            |       |                   |       |       |       |
| Common stock issued to advisor   |       | 10,000                |       | —      |       | 18              |       | —                 |       | 18         |       |
|                             |       |                  |       |        |       |            |       |                   |       |       |       |
| Net loss                         |       | —                |       | —      |       | —          |       | (991                   | )          | (991       | )          |
|                             |       |                  |       |        |       |            |       |                   |       |       |       |
| Balances, March 31, 2008    |       | 24,919,301            |       | $           | —     |            | $          | 23,846                 |       | $          | (6,095     | ) | $ | 17,751 |   |

 

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

 

5

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**INFOLOGIX,INC.**

**UnauditedConsolidated Statements of Cash Flows**

**(in thousands)**

 
| ** **                                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Operating activities:                                     |       |                                                 |       |   |   |
| Net loss                                                  |       | $                                                    | (991       | ) | $ | (1,100 | ) |
| Adjustments to reconcile net loss to operating cash flow: |       |                                                 |       |   |   |
| Depreciation and amortization                             |       | 533                                                  |       | 287 |   |
| Allowance for doubtful accounts receivable                |       | 86                                                   |       | 16 |   |
| Inventory obsolesence                                     |       | 123                                                  |       | — |   |
| Amortization of deferred financing costs                  |       | 4                                                    |       | — |   |
| Accrued interest expense added to note payable            |       | 79                                                   |       | — |   |
| Accrued interest income added to note receivable          |       | (2                                                   | )          | — |   |
| Share based compensation and other share based payments   |       | 266                                                  |       | 250 |   |
| Deferred income tax benefit                               |       | (586                                                 | )          | (709 | ) |
| Changes in:                                               |       |                                                 |       |   |   |
| Accounts receivable                                       |       | 97                                                   |       | 1,594 |   |
| Unbilled revenue                                          |       | (369                                                 | )          | — |   |
| Inventory                                                 |       | 96                                                   |       | (45 | ) |
| Prepaid expenses and other current assets                 |       | (240                                                 | )          | (146 | ) |
| Accounts payable                                          |       | 1,317                                                |       | (1,597 | ) |
| Sales tax payable                                         |       | (55                                                  | )          | (105 | ) |
| Accrued expenses                                          |       | (166                                                 | )          | 353 |   |
| Deferred revenue                                          |       | 11                                                   |       | — |   |
| Net cash provided by (used in) operating activities       |       | 203                                                  |       | (1,202 | ) |
| Investing activities:                                     |       |                                                 |       |   |   |
| Promissory notes issued                                   |       | (200                                                 | )          | — |   |
| Acquisition of property, software and equipment           |       | (405                                                 | )          | (524 | ) |
| Net cash used in investing activities                     |       | (605                                                 | )          | (524 | ) |
| Financing activities:                                     |       |                                                 |       |   |   |
| Repayment of long-term debt and capital leases            |       | (106                                                 | )          | (200 | ) |
| (Repayments) borrowings on line of credit                 |       | (534                                                 | )          | 570 |   |
| Net cash (used in) provided by financing activities       |       | (640                                                 | )          | 370 |   |
| Net change in cash and cash equivalents                   |       | (1,042                                               | )          | (1,356 | ) |
| Cash and cash equivalents at beginning of period          |       | 6,101                                                |       | 12,882 |   |
| Cash and cash equivalents at end of period                |       | $                                                    | 5,059      |   | $ | 11,526 |   |

 

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

 

6

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**INFOLOGIX,INC.Notes to Unaudited Consolidated Financial Statements**

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

** **

**NOTE A—Natureof Business**

 

***Basis of Presentation***

 

The accompanying unaudited consolidated financial statements ofInfologix, Inc. and subsidiaries (collectively, the “Company”) have beenprepared in accordance with United States generally accepted accountingprinciples (“GAAP”) for interim financial information and with the instructionsfor Form 10-Q and Article 10 of Regulation S-X. Accordingly, they donot include all of the information and footnotes required by GAAP for completeconsolidated financial statements. In the opinion of management, alladjustments (consisting of normal recurring accruals) considered necessary fora fair presentation have been included. The notes to the consolidated financialstatements contained in the Annual Report on Form 10-K for the year ended December 31,2007 should be read in conjunction with these consolidated financialstatements.  Operating results for the threemonths ended March 31, 2008 are not necessarily indicative of the resultsthat may be expected for the year ending December 31, 2008.

 

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

 

***Nature of business***

 

TheCompany provides mobile intelligence technology solutions by enabling real timedata communications anywhere in an enterprise. The Company provides wirelessnetwork design, hardware, software and software implementation, consulting,system integration and network management solutions.

 

**NOTE B—Summary of Significant Accounting Policies**

 

***Useof estimates***

 

The preparation of financial statements in conformity with GAAPrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenue and expenses during the reporting period. Many ofthe amounts and percentages presented have been rounded, and all amounts have000’s omitted, except share and per share information.

 

In preparing the financial statements, management has utilizedavailable information, including our past history, industry standards and thecurrent economic environment, among other factors, in forming its estimates andjudgments, giving due consideration to materiality. Actual results may differfrom these estimates. In addition, other companies may utilize differentestimates, which may impact the comparability of our results of operations tothose of companies in similar businesses.

 

***Reclassifications***

 

In 2007, the Company reclassified amounts billed to their customers forshipping and handling fees as revenue in accordance with EITF 00-10, *Accounting  for Shipping andHandling Fees and Costs.*The EITF**requires thatall amounts billed to a customer in a sale transaction related to shipping andhandling represents revenues earned for the goods provided and should beclassified as revenue.  Reclassificationshave been made to all prior period financial statementsto conform to the current year presentation as more fullydescribed in Note M.

 

**NOTE C—Recent Accounting Pronouncements**

 

InFebruary 2007, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities — Including an Amendment ofFASB Statement No. 115* (SFAS 159). SFAS No. 159permits entities to choose to measure many financial instruments and certainother items at fair value and is effective for fiscal years beginning after November 15,2007.  SFAS 159 provided entities with aone-time election to apply the fair-value option to existing eligible assetsand liabilities. The one-time election date for the Company was January 1,2008. The Company has not elected the fair value option for any of its existingeligible assets or liabilities. In the future, the Company may elect the fairvalue option for eligible assets and liabilities upon certain events asdiscussed in SFAS 159.

 

7

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

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

 

**NOTEC—Recent Accounting Pronouncements (continued)**

 

InSeptember 2006, the FASB issued Statement of Financial AccountingStandards No. 157, *Fair Value Measurements*(SFAS 157), which defines fair value, establishes a framework for measuringfair value and expands disclosures about fair value measurements.  The provisions of SFAS 157 are effective asof the beginning of the Company’s 2008 fiscal year. The Company does notpresently have any assets or liabilities that are to be measured at their fairvalue on either a recurring or nonrecurring basis.

 

InDecember 2007, the FASB issued SFAS No. 141(R) *Business Combinations* (SFAS 141(R)). This Statement replacesthe original FASB Statement No. 141. This Statement retains thefundamental requirements in Statement 141 that the acquisition method ofaccounting (which Statement 141 called the *purchasemethod*) be used for all business combinations and for an acquirer tobe identified for each business combination. The objective of this SFAS 141(R) isto improve the relevance, and comparability of the information that a reportingentity provides in its financial reports about a business combination and itseffects. To accomplish that, SFAS 141(R) establishes principles andrequirements for how the acquirer recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, and anynoncontrolling interest in the acquiree, recognizes and measures the goodwillacquired in the business combination or a gain from a bargain purchase anddetermines what information to disclose to enable users of the financialstatements to evaluate the nature and financial effects of the businesscombination.  This Statement applies prospectively to businesscombinations for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning on or after December 15, 2008 andmay not be applied before that date.  Weare in the process of evaluating the impact of this pronouncement on ourconsolidated financial statements.

 

InDecember 2007, the FASB issued SFAS No. 160 *NoncontrollingInterests in Consolidated Financial Statements – an amendment of ARB No. 51*(SFAS 160). This Statement amends the original Accounting Review Board (ARB) No. 51*Consolidated Financial Statements* toestablish accounting and reporting standards for the noncontrolling interest ina subsidiary and for the deconsolidation of a subsidiary. It clarifies that anoncontrolling interest in a subsidiary is an ownership interest in theconsolidated entity that should be reported as equity in the consolidatedfinancial statements. This Statement is effective for fiscal years and interimperiods within those fiscal years, beginning on or after December 15, 2008and may not be applied before that date. The Company is unable at this time todetermine the effect that its adoption of SFAS 160 will have on its results ofoperations and financial condition.

 

**NOTE D—Inventory**

 

Inventory consists of the following:

 
| ** **                                              | ** ** | **March 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                              | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
|                                                    |       |                     |       |                        |       |
| Finished goods                                          |       | $                        | 2,266      |                        | $          | 2,373 |   |
| Work in progress                                        |       | 22                       |       | 11                          |       |
| Less: allowance for slow moving and  obsolete inventory |       | (608                     | )          | (485                        | )          |
| Total Inventory                                         |       | $                        | 1,680      |                        | $          | 1,899 |   |

 

8

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

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

 

**NOTE E—Secured Promissory Notes Receivable**

 

On February 8, 2008, the Company made a $150 secured loan to anentity that it is presently evaluating as an acquisition candidate, for whichit received a Secured Promissory Note bearing interest at 12% per annum,payable on a monthly basis commencing March 1, 2008. Prior to June 1,2008 the amount of any interest accrued and payable is to be paid in-kind andadded to the principal amount of the note. The outstanding principal balance ofthe note plus accrued and unpaid interest will be applied to and set-offagainst amounts due to the target company in connection with the proposedacquisition if the acquisition is consummated. If the acquisition is not consummated, the note matures on May 1,2009.  The Company recorded interestincome of $2 on this note during the three months ended March 31, 2008.

 

OnMarch 30, 2008, the Company made a $50 secured loan to an entitythat it is presently evaluating as an acquisition candidate. On April 1,2008, the Company received a Secured Promissory Note bearing interest at 12%per annum, payable on a monthly basis commencing May 1, 2008. The amountof any interest accrued and payable is to be paid-in-kind and added to theprincipal amount of the note. The note is due and payable at the earlier of: i)October 1, 2008 or ii) 30 days after negotiations between the partiescease. Upon the consummation of the acquisition of the entity’s businessassets, the outstanding principal balance of the note plus accrued and unpaidinterest will be applied to and set-off against amounts due in connection withthe acquisition. As security for the note, the Company holds a securityinterest in substantially all of the assets of the entity.

 

**NOTE F—Customer and Vendor Concentrations**

 

For the three months ended March 31, 2008 and 2007, the Companyhad sales to a significant customer as follows:

 
| ** ** | ** ** | **Three Months Ended March 31,** | ** ** |
|------------|------------|------------------------------------------------------|------------|
| ** ** | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
|       |       |                                                 |       |   |   |
| Customer A |       | 13.0%                                                |       | 17.1% |   |

 

For the three months ended March 31, 2008 and 2007, the Companyhad significant vendors providing hardware as follows:

 
| ** ** | ** ** | **Three Months Ended March 31,** | ** ** |
|------------|------------|------------------------------------------------------|------------|
| ** ** | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
|       |       |                                                 |       |   |   |
| Vendor A   |       | 27.7%                                                |       | 33.9% |   |
| Vendor B   |       | 14.9%                                                |       | — |   |
| Vendor C   |       | 11.5%                                                |       | — |   |

 

**NOTE G—Debt**

 

In May 2008, the Company entered into a loan agreement withHercules Technology Growth Capital, Inc. (“Hercules”). Under the terms ofthe agreement, Hercules provided the Company with up to $12,500 in a revolvingline of credit and up to $12,500 in term loans. On May 2, 2008, theCompany was advanced $9,000 from the term loan and $4,000 from the revolvingline of credit to pay off the Company’s existing senior bank debt, and $3,500 fromthe revolving line of credit to be used for general working capital. TheCompany expects to use up to $3,500 from the remaining availability under theterm loans and the remaining $5,000 from the revolving line of credit, to theextent available, to finance working capital and for general corporate purposesincluding permitted acquisitions. The loans are collateralized by all of thetangible and intangible assets owned or subsequently acquired by the Companyand the equity interests in each of the subsidiaries of InfoLogix, Inc.The agreement contains certain financial covenants, which must be compliedwith, including: minimum trailing twelve month EBITDA (“TTM EBITDA”) and maximumtotal debt divided by TTM EBITDA.

 

The revolving line of credit matures on November 1, 2009 and bearsinterest at the greater of the prime rate plus 2.5% or 8.5%; reducing to thegreater of the prime rate plus 1.5% or 7.5% when total debt divided by TTMEBITDA is 3:1 or less. The term loans mature on May 1, 2012 and bearinterest at the greater of the prime rate plus 4.5% or 10.5%. The term loansare interest-only for the first nine months and then must be repaid monthlybased on the following principal repayment schedule thereafter: February 2,2009 to May 1, 2009 – 5%; June 1, 2009 to May 1, 2010 – 15%; June 1,2010 to May 1, 2011 – 25% and June 1, 2011 to the maturity date –55%.

 

9

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

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

 

**NOTEG—Debt (continued)**

 

Under the agreement, Hercules is also entitled to ayield enhancement fee, which will be the larger of 5.0% of the term loancommitment amount or 3.0% of the amount by which the Company’s marketcapitalization exceeds $100,000 based on a trailing 30 day average prior todate of payment.  The yield enhancement fee is payable at anytime within 20 days of demand by Hercules, providedthat Hercules may not make such demand prior to November 1,2009.

 

**NOTE H—Related Party Transactions**

 

***Support services***

 

In2004, the Company entered into an agreement with an entity owned by astockholder and former officer of the Company whereby that entity providesextended warranties and technical support services to certain customers of theCompany. Under the agreement,the Company was charged $397 and $292 for the three months ended March 31,2008 and 2007, respectively. The Company made payments under this agreement of$312 for the three months ended March 31, 2007. The Company did not makeany payments under this agreement for the three months ended March 31,2008.  In May 2006, theCompany entered into another agreement with this stockholder’s company toprovide the Company with consulting services with respect to softwaredevelopment. Payments under this agreement were $130 for the three months endedMarch 31, 2007. The Company didnot make any payments under this agreement for the three months ended March 31,2008.  Pursuant to the terms ofthe two agreements, the Company has a minimum annual commitment to purchaseservices of $1,500 per year through 2011.

 

***ProfessionalRecruiting Services***

 

The Company maintains a business relationship with Gulian &Associates, which is owned by the wife of David T. Gulian, the President andChief Executive Officer and director and stockholder 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 success fee of 20% of anewly hired person’s annual base salary for employees it introduces to theCompany.  One-third of the fee isinvoiced at the time the hiring request is made.  The remainder is invoiced only uponsuccessful placement of a candidate into the role. During the threemonths ended March 31, 2008 and 2007, the Company paid Gulian &Associates approximately $29 and $35 respectively in success fees.

 

**NOTE I—Commitments and Contingencies**

 

***Litigation***

 

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

 

***Letter of Credit***

 

At March 31, 2008, the Company had contingent liabilities underletters of credit of $350.

 

10

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

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

 

**NOTEJ—INCOME TAXES**

 

The Company has net operating loss carryforwards available in certainjurisdictions to reduce future taxable income. Future tax benefits for net operating loss carryforwards are recognizedto the extent that realization of these benefits is considered more likely thannot.  This determination is based on theexpectation that related operations will be sufficiently profitable or varioustax, business and other planning strategies will enable us to utilize theoperating loss carryforwards.  To theextent that available evidence raises doubt about the realization of a deferredincome tax asset, a valuation allowance is established.  We cannot be assured that we will be able torealize these future tax benefits or that future valuation allowances will notbe required.

 

Forthe three months ended March 31, 2008 and 2007, the Company recorded anincome tax benefit amounting to $559 and $709 related to the net operating lossincurred during those periods. The Company believes it is more likelythan not that the deferred tax asset will be realizable as the result ofachieving taxable income in the applicable periods prior to related expirationdates. As of March 31, 2008, the Company has net operating losses ofapproximately $4,951 which will be available to offset future taxable income.Included in the net operating losses are losses of $65 generated by New AgeTranslation, Inc. which are subject to restrictions under Internal RevenueCode Section 382, due to change in ownership in that entity. Therefore,the Company has recorded a valuation allowance against the net operating lossesgenerated by New Age Translation, Inc. If not used, the net operatinglosses will expire beginning after 2024. The Company’s state net operatinglosses will also be subject to expiration in varying years startingin 2013 through 2027.

 

**NOTE K—2008 Employee Stock Purchase Plan**

 

OnJanuary 1, 2008, the Company established the 2008 Employee Stock PurchasePlan (“ESPP”). The purpose of the ESPP is to provide the Company’s employeesthe opportunity to purchase common stock through accumulated payrolldeductions. The ESPP will be administered by the Board or a committee ofmembers established by the Board. The Company has reserved 1,000,000 shares foruse in the ESPP. The purchase price of the common stock will be at an amountequal to 85% of the fair market value of a share of common stock on theenrollment date or the exercise date, whichever is lower. The ESPP will beimplemented by consecutive three month offering periods commencing on the firsttrading day of each calendar quarter. An eligible employee may become aparticipant in the ESPP by completing a subscription agreement authorizing payrolldeductions not to exceed 10% of the employee’s compensation. These payrolldeductions commence on the first payroll following the enrollment date and endon the last payroll in the offering period.

 

Onthe enrollment date of each offering period, each eligible participatingemployee will be granted an option to purchase on the exercise date of suchoffering period up to a number of shares of the common stock determined bydividing the Employee’s payroll deductions accumulated prior to such exercisedate by the applicable purchase price. Employees are not permitted to purchasemore than 2,500 shares during each offering period. The option for the purchaseof shares will be exercised automatically on the exercise date, and the maximumnumber of full shares subject to the option will be purchased for suchparticipant at the applicable purchase price with the accumulated payrolldeductions in his or her account.  TheCompany did not issue any shares in connection with the ESPP during the initialoffering period, pending final closing calculations subsequent to March 31,2008.

 

**NOTE L—Stock based compensation**

 

EffectiveJanuary 1, 2006, the Company adopted the provisions of SFAS 123(R), *Share-Based Payment*, under the modifiedprospective method which requires that stock based compensation transactions beaccounted for using a fair-value-based method. Under the modified prospectivemethod, the Company is required to recognize compensation cost for stock-basedpayments to employees based on their grant-date fair value from the beginningof the fiscal period in which the recognition provisions are first applied. Forthe three months ended March 31, 2008 and 2007, the recognizedcompensation cost for stock options and warrants granted to employees was $248and $250, respectively. In addition, the Company recorded an income tax benefitof $98 and $99, respectively, related to the granting of the nonqualifiedoptions and warrants.

 

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

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

 

**NOTE M—Reclassifications**

 

The Company reclassified shipping andhandling revenue as originally reported for the three months ended March 31,2007 in the amount of $296.  Prior to thereclassification, shipping and handling revenue had been netted with freightexpense in the selling, general and administration expense section of theUnaudited Consolidated Statements of Operations.  These amounts were reclassified to salesrevenue and the matching shipping costs were reclassified to cost of sales.

 

The following table summarizes the changes tooriginally reported amounts and subtotals in the Unaudited ConsolidatedStatements of Operations for the three months ended March 31, 2007:

 
| ** **                                                                          | ** ** | **As Originally  Reported** | ** ** | **As Reclassifed** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------|------------|-------------------------|------------|
| ** **                                                                          | ** ** | ** **                       | ** ** | ** **              | ** ** |
| Revenues                                                                            |       | $                                | 12,878     |                    | $          | 13,174 |   |
| Cost of revenues                                                                    |       | 9,537                            |       | 9,833                   |       |
| Gross profit (not reclassifed, for  presentation only)                              |       | 3,341                            |       | 3,341                   |       |
| Selling, general and adminstrative expenses                                         |       | 5,177                            |       | 5,177                   |       |
| Operating loss (not reclassified, for  presentation only)                           |       | (1,836                           | )          | (1,836                  | )          |
| Interest income, net of interest expense  (not reclassified, for presentation only) |       | 27                               |       | 27                      |       |
| Loss before income tax benefit (not  reclassified, for presentation only)           |       | $                                | (1,809     | )                       | $          | (1,809 | ) |

 

The Company’s shipping and handling revenuetotaled $372 for the three months ended March 31, 2008.

 

**NOTE N—****Subsequent Events**

 

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

 

On May 2, 2008, the Company, through its wholly-owned subsidiaryInfoLogix Systems Corporation, acquired substantially all of the assets ofDelta Health Systems, Inc. (“Delta”) pursuant to an asset purchaseagreement.  The assets acquired relate to Delta’s business of providingstrategic cost management consulting services and web-based management datacollection and work-flow analytics to the healthcare industry, and included cash, accounts receivables, therights to existing relationships with customers, vendors and partners, certaintangible personal property and certain intangible rights and property. The Company assumed certain liabilities related to customer contracts andrelated accrued expenses.

 

The purchase price paid by the Company consisted of $1,500 in cash. TheCompany and Delta also entered into an Earn-out Agreement pursuant to whichDelta is eligible to earn additional consideration in respect of the two years(each year, an “Earn Out Period”) after the closing of the transaction. Delta can earn up to $500 in the first Earn Out Period and up to $500 in thesecond Earn Out Period upon achievement of gross revenue targets described inthe Earn Out Agreement.  The additional cash consideration will not beaccounted for by the Company until such time as the consideration, if any, isearned pursuant to the terms of the Earn Out Agreement.  At the end of the two year period, if Deltahas not already earned the $1,000 of additional consideration in respect of thetwo Earn Out Periods, Delta may earn an amount equal to the $1,000 ofadditional consideration less any amounts paid in respect of the two Earn OutPeriods upon the achievement of certain cumulative financial milestones.  At the point the consideration is earned, theCompany will record the cash paid as an adjustment to the purchase price. Theacquisition will be accounted for under SFAS 141 “Business Combinations” (“SFAS141”) and results will be included in the statement of operations from May 2,2008.

 

12

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

 

The following discussion and analysis of ourfinancial condition and results of operations is intended to assist you inunderstanding our financial condition and results of operations.  This discussion and analysis should be readin conjunction with our unaudited consolidated financial statements and thenotes thereto included elsewhere in this report and our annual report filedwith the U.S. Securities and Exchange Commission on Form 10-K.  Many of the amounts and percentages presentedin this discussion and analysis have been rounded for convenience ofpresentation, and all amounts have 000’s omitted for clarity.

 

**Overviewand Outlook**

 

InfoLogix is a provider of enterprise mobility and radio frequency identification(RFID) solutions. We provide solutions to our customers by utilizing acombination of products and services, including consulting, applicationsoftware, managed services, mobile workstations and devices, and wirelessinfrastructure. Our solutions are designed to allow the real time usage of datathroughout a customer’s enterprise in order to enhance workflow, improvecustomer 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 customizedsoftware applications and provide RFID technology, a data-exchange method usingtransponders that store and remotely send or retrieve information, to enablethe transmission and processing of that information between the customer’sinformation system and its wireless communication and computing devices.  We also offer professional services that supportand complement a customer’s wireless computing systems, including consulting,managed services, training, engineering, technical support, and networkmonitoring.

 

Historically, the sale of mobile workstations and other wirelessdevices has represented a majority of our revenues.  In the past two years, we have beentransitioning our business to provide more software applications andprofessional services.  With our newfocus on selling software and services, we believe that we can offer morecomprehensive enterprise mobility solutions that provide greater value to ourcustomers and generate higher and more recurring revenue for our business.

 

We conduct substantially all of our operations through our wholly-ownedsubsidiary, InfoLogix Systems Corporation. We own certain patents and patent applications through our wholly-ownedsubsidiaries OPT Acquisition LLC, Embedded Technologies, LLC and InfoLogix-DDMS, Inc.  We consolidate OPT Acquisition LLC, EmbeddedTechnologies, LLC, InfoLogix-DDMS, Inc. and InfoLogix Systems Corporationfor financial reporting purposes.

 

**Characteristics ofour revenue and expenses**

 

We generate revenue through the resale of wireless and mobile hardwareand systems, including mobile workstations, computers, peripherals, and relatedproducts.  Sales revenue on product isrecognized when both the title and risk of loss transfer to the customer,generally upon shipment. We also generate revenue from the sale of extendedwarranties on certain components. Revenue from the sale of component warrantiesis recognized upon execution of the warranty agreement. There is no associatedwarranty risk as we have contracted with a third party to fully assume allrisks and obligations. We also generate revenue from professional services oneither a fixed fee or time and expense basis. Revenue from our professionalconsulting services is recognized on a time and expense basis at the time theservice is delivered and the expenses are incurred. Revenue from the sale ofour proprietary learning technologies and any professional consulting orengineering services provided on a fixed-fee basis is recognized according to aproportionate performance method of revenue recognition.

 

Payments received in advance of services performed are recorded asdeferred revenue. Certain contract payment terms may result in customer billingoccurring at a pace slower than revenue recognition. The resulting revenuerecognized in excess of amounts billed and project cost is included in unbilledrevenue on our balance sheet.

 

Cost of revenue consists of all expenses that are directly attributableto the costs associated with the purchase, for resale, of wireless and mobilehardware and systems, including computers, peripherals, and related products.Fluctuations in our gross margin may occur due to changes in our ability toobtain discounts on product sales or our ability to negotiate higher margins onsales contracts with large customers. Cost of sales also consists of the directcosts associated with those employees or sub-contractors that perform ourprofessional consulting services on behalf of our customers.

 

Selling expenses primarily consist of the salaries, benefits, traveland other costs of our regional and national account sales representatives,sales management and business development expenses. General and administrativeexpenses primarily consist of the costs attributable to the support of ouroperations, such as: costs related to information systems, salaries, expensesand office space costs for executive management, inside sales and customersupport, warehousing, technical support, financial accounting, purchasing,depreciation, amortization, administrative and human resources personnel,insurance, recruiting fees, legal, accounting and other professional services.

 

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**Critical Accounting Estimates and Policies**

 

Our consolidated financial statements are prepared in conformity withaccounting principles generally accepted in the United States of America(GAAP), which requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting periods. Critical accounting policies are those that require theapplication of management’s most difficult, subjective, or complex judgments,often because of the need to make estimates about the effect of matters thatare inherently uncertain and that may change in subsequent periods. Inpreparing the consolidated financial statements, management has made estimatesand assumptions that affect the reported amounts of assets and liabilities atthe date of the financial statements, and the reported amounts of revenues andexpenses during the reporting periods. In preparing the financial statements,management has utilized available information, including our past history,industry standards and the current economic environment, among other factors,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.

 

***Accounts receivable***

 

We grant credit, generally without collateral, to our customers, whichare primarily in the healthcare and commercial markets. Consequently, we aresubject to potential credit risk related to changes in economic conditionswithin those markets. However, we believe that our billing and collectionpolicies are adequate to minimize the potential credit risk.

 

We have a policy of reserving for uncollectible accounts based on ourbest estimate of the amount of probable credit losses in our existing accountsreceivable. We periodically review our accounts receivable to determine whetheran allowance is necessary based on an analysis of past due accounts and otherfactors that may indicate that the realization of an account may be in doubt,including historical experience and current economic and market conditions.Account balances that we deem to be uncollectible are charged to the allowanceafter we have exhausted all means of collection and when the potential forrecovery is considered remote.

* *

***Intangible assets***

 

We account for intangible assets in accordance with Statement ofFinancial Accounting Standards (SFAS) 142,*Goodwill and Other Intangible Assets*. The costs of successfulregistrations for patents are amortized over the estimated useful lives of theassets, which is generally sixteen years, using the straight-line method. Thecosts of unsuccessful registrations are charged to expense. Acquired technologyis recorded at its fair value at the date of acquisition and amortized over theestimated useful lives of the assets, which averages four years, using thestraight-line method. Developed technology is also amortized using thestraight-line method, generally over five years. License fees are amortizedover the license period using the straight-line method.  The goodwill attributable to customer listsis amortized over a period of six to ten years.

 

***Revenue recognition***

 

Revenue is generated through product sales, warranty and maintenanceagreements, professional consulting, programming and engineering services,long-term support services, and educational learning programs. Revenue fromproduct sales is recognized when both the title and risk of loss transfer tothe customer, generally upon shipment. Warranty revenue is recognized upon execution of the warranty agreement.We do not believe there is any associated warranty risk as we have contractedwith other parties to fully assume all risks and obligations. We also generaterevenue from professional services on either a fee-for service or fixed feebasis. Revenue from our professional consulting services is contracted asfee-for-service and is recognized in the period in which the services areperformed.  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. Revenuefrom the sale of our proprietary learning technologies and those professionalconsulting or engineering services provided on a fixed-fee basis is recognizedratably over the contract period based upon actual project hours as compared tobudgeted project hours.

 

***Income taxes***

 

We account for income taxes in accordance with SFAS 109,*Accounting for Income Taxes*. UnderSFAS 109, deferred tax assets and liabilities are determined based on thedifferences between the financial statement carrying amounts and the tax basesof existing assets and liabilities, and are measured at the prevailing enactedtax rates that will be in effect when these differences are settled orrealized. SFAS 109 also requires that deferred tax assets be reduced by avaluation allowance if it is more likely than not that some portion or all ofthe deferred tax asset will not be realized.

 

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We believe it is more likely than not that the deferred tax asset isrealizable as the result of achieving taxable income in the applicable periodsprior to related expiration dates.

 

**Results of Operations**

 

Results of operations expressed as a percentage of revenues were asfollows:

 
| ** **                                  | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                  | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
|                                        |       |                                                 |       |   |   |
| Revenues                                    |       | 100.0                                                | %          | 100.0 | % |
| Cost of revenues                            |       | 73.9                                                 | %          | 74.6 | % |
| Gross profit                                |       | 26.1                                                 | %          | 25.4 | % |
| Selling, general and adminstrative expenses |       | 31.6                                                 | %          | 39.3 | % |
| Operating loss                              |       | (5.5                                                 | )%         | (13.9 | )% |
| Interest expense                            |       | (1.2                                                 | )%         | (1.0 | )% |
| Interest income                             |       | 0.2                                                  | %          | 1.2 | % |
| Loss before income tax benefits             |       | (6.5                                                 | )%         | (13.7 | )% |
| Income tax benefit                          |       | 2.3                                                  | %          | 5.4 | % |
| Net loss                                    |       | (4.2                                                 | )%         | (8.3 | )% |

 

***ThreeMonths ended March 31, 2008 compared with the Three Months ended March 31,2007***

 

Revenues were $23,786 for the three months ended March 31, 2008,compared to $13,174 for the three months ended March 31, 2007, an increaseof $10,612 or 80.6%. The increase in revenue was due to the expansion of oursolution-oriented sales staff and their results of increasing mobilepoint-of-care solutions in healthcare, sales of wireless infrastructure, andthe expansion of professional services across our organization, includingrevenue contributed through the acquisition of Healthcare InformaticsAssociates, Inc. (“HIA”).  Therevenue associated with HIA totaled $3,872 for the three months ended March 31,2008.

 

Our cost of revenues was $17,581 for the three months ended March 31,2008, compared to $9,833 for the three months ended March 31, 2007, anincrease of $7,748 or 78.8%. The increase in our cost of revenues was theresult of higher sales of wireless infrastructure, mobile point-of-careworkstations, and expanded professional services. Our gross profit was $6,205for the three months ended March 31, 2008, compared to $3,341 for thethree months ended March 31, 2007, an increase of $2,864 or 85.7%,resulting in a gross margin of 26.1% at March 31, 2008, up from 25.4% at March 31,2007. The increase in our gross margin is the result of increased sales of ourmore profitable professional and consulting services related to our mobilesolutions and software implementation services, partially offset by an increasein sales of lower margin third-party hardware.

 

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Our selling, general and administrative expenses were $7,517 for thethree months ended March 31, 2008, compared with $5,177 for the threemonths ended March 31, 2007, an increase of $2,340, or 45.2%. Selling expenses were $3,250 for the three months ended March 31, 2008,compared with $2,144 for the three months ended March 31, 2007, anincrease of $1,106, or 51.6%. The increase in our selling expenses for thecomparable periods was primarily attributable to an increase in wages relatedto the expanded sales staff hired in 2007, and sales support related costsattributable to HIA during the three months ended March 31, 2008.  General and administrative expenses were$4,267 for the three months ended March 31, 2008, compared with $3,033 forthe three months ended March 31, 2007, an increase of $1,234, or40.7%.  The increase in our general and administrative expenses for thecomparable periods was primarily attributable to an increase in amortizationexpenses related to acquisitions, an increase in salary expenses related to theaddition of key members of our management and professional services staff hiredin 2007; and an increase in professional fees related to legal, accounting andSarbanes-Oxley compliance.

 

Our interest expense, which is derived from our credit line, term loanand stockholders’ loans was $286 for the three months ended March 31,2008, compared to approximately $131 for the three months ended March 31,2007, an increase of $155 or 118.3%. The increase in interest expense is aresult of higher amounts outstanding under our asset-based line of creditfacility, term loans and notes payable issued in connection with our 2007acquisitions. Our interest income was $48 for the three months ended March 31,2008, compared to $158 for the three months ended March 31, 2007, adecrease of $110 or 69.6%. The decrease in interest income is primarily theresult of a lower average cash balance during the three months ended March 31,2008 when compared to the same period of 2007.

 

Our depreciation and amortization expense increased to $533 for thethree months ended March 31, 2008 from $287 for the three months ended March 31,2007, an increase of $246 or 85.7% as the result of a greater number ofdemonstration units deployed to our expanded sales force and amortizationexpense related to our recent acquisitions of intangible assets from AMTSystemsand HIA.

 

Our net loss was $991 for the three months ended March 31, 2008compared with a net loss of $1,100 for the three months ended March 31,2007, a decrease of $109 or 9.9%. Our net loss decreased primarily due tohigher revenue, improved gross margins, and improvements in our selling,general and administrative expenses as a percentage of revenue.

 

As of March 31, 2008, we had net operating losses (“NOLs”) ofapproximately $4,951, which will be available to offset future taxable income.Our NOLs include losses of $65 generated by New Age Translation, Inc., thepredecessor to InfoLogix, Inc., which are subject to restrictions underInternal Revenue Code Section 382, due to the change in ownership in thatentity. Therefore, we have recorded a valuation allowance against the net operatinglosses generated by New Age Translation, Inc. If not used, the NOL’s willexpire beginning in the year 2024. Our state NOL’s will also be subject toexpiration in varying years starting in 2013 through 2027.

 

***Liquidity and Capital Resources***

 

At March 31, 2008, we had cash and cash equivalents of $5,059,compared to $6,101 at December 31, 2007. We have used, and plan to use, our cash for general corporate purposes,including working capital as well as acquisitions. We have funded our growthprimarily through the private sale of equity securities and through long termdebt and working capital.  At March 31,2008, our total liabilities were $30,767 and were comprised mostly of term debtand borrowings outstanding under our credit line, and outstanding accountspayable.  In May 2008, we obtained a newsenior credit facility that consists of a revolving line of credit and termloans, and repaid our previous senior credit facility.  For a description of our new credit facility,see “Line of Credit and Term Loan.”  Netcash provided by operating activities for the three months ended March 31,2008 was $203, primarily the result of increased accounts payables. Net cashused in investing activities was $605 for the three months ended March 31,2008, primarily used to acquire demonstration equipment, office equipment,third-party software and loans to potential acquisition targets.  Net cash used in financing activities was$640 for the three months ended March 31, 2008, primarily due to the netdecrease in borrowings under our asset-based line of credit, the principalpayments for our notes payable and capital leases.

 

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Given the amount of our current cash and cash equivalents, short-terminvestments, accounts receivable and funds available under our line of credit,we believe that we will have sufficient liquidity to meet our capitalrequirements for at least the next 12 months. We may increase our expenditures consistent with the anticipated growthof our business and we may seek to acquire complementary businesses ortechnologies, which may require us to raise additional funds sooner thanexpected. We may seek to raise additional funds through the sale of equity ordebt securities or obtaining additional credit facilities. The sale of equitysecurities or issuance of equity securities in future acquisitions could resultin dilution to our stockholders and the incurrence of debt would result in anincrease in our interest expense. Any debt financing obtained by us in thefuture could involve restrictive covenants similar to those contained in ourcurrent loan and security agreement relating to capital raising activities andother financial and operational matters that might make it more difficult forus to pursue business opportunities, including potential acquisitions.  There can be no assurance that we will beable to sell additional equity or debt securities, or be able to obtainfinancing on acceptable terms, if at all.

 

***Lineof Credit and Term Loan***

 

On May 1,2008, we entered into a Loan and Security Agreement with Hercules TechnologyGrowth Capital, Inc. (the “Lender”).  The agreement provides us witha revolving credit facility with a maximum commitment of up to $12,500 and aterm loan facility of up to $12,500, subject to certain limitations on therevolving line of credit.  On May 2, 2008, the Company hadavailability of up to $10,000 under the revolving line of credit, and borrowed$9,000 under the term loan facility and $7,500 under the revolving creditfacility.  The proceeds of the loans were used, in part, to refinance theCompany’s indebtedness owing to Sovereign Bank under a Loan and SecurityAgreement that was entered into in March 2006 and terminated on May 2,2008.  Future borrowings under the new agreement may be used for permittedacquisitions and for general corporate and working capital purposes. After giving effect to the borrowings under the term loan facility and therevolving credit facility and the repayment of indebtedness owing to SovereignBank, we had $20,800 of indebtedness outstanding and $6,000 of availableborrowing capacity under the credit facilities.

 

The maximumavailability under the revolving credit facility will increase from $10,000 to$12,500 after our three month consolidated EBITDA exceeds $1,500.  Theamount of the commitment that is available to be borrowed under the revolvingcredit facility is limited to the lesser of the maximum commitment at such timeand 85% of our eligible accounts.  Until our three month consolidatedEBITDA exceeds $1,500, the borrowings under the revolving credit facility maynot exceed 85% of our eligible accounts minus $2,500.  At any time before January 1,2009, the Company has the option to request additional term loans in minimumincrements of $100 up to an aggregate maximum amount of $3,500 provided that itcan demonstrate pro forma compliance with the financial covenants contained inthe agreement.

 

The term loanbears interest at an annual rate equal to the greater of 10.5% or the primerate plus 4.5%.  Borrowings under the revolving credit facility bearinterest based on our leverage.  If our leverage ratio is equal to orgreater than 3.00 to 1.00, the interest rate for revolving loans will be thegreater of 8.5% or the prime rate plus 2.5%.  If our leverage ratio isless than 3.00 to 1.00, the interest rate for revolving loans will be thegreater of 7.5% or the prime rate plus 1.5%.  Interest is payable on thefirst business day of each month commencing June 1, 2008.  In theevent that any payment is not timely made, a late fee equal to 5% of the pastdue amount is payable on the demand of the Lender.  Upon the occurrenceand during the continuance of an event of default, all amounts then owing tothe Lender under the agreement and the other loan documents will bear interestat the then current rate plus 3%.

 

The term loanmatures on May 1, 2012.  The principal amount of the term loan isrequired to be repaid in installments on the first business day of eachcalendar month commencing on January 1, 2009 and continuing through thematurity date.  In addition, the Company is required to apply 25% of itsexcess cash flow, as defined by the agreement, toward prepayments of the termloan.  Voluntary prepayments of the term loan are subject to a prepaymentcharge equal to a percentage of the term loan being prepaid.  Revolvingloans mature on November 1, 2009.  

 

Upon theearliest to occur of (i) demand from the Lender at any time between November 1,2009 and May 1, 2012, (ii) the acceleration of our obligations underthe agreement, (iii) the term loan maturity date, and (iv) prepaymentin full of our obligations under the agreement, we will be required to pay tothe Lender an amount equal to the greater, as of such date of determination, of(x) $625, and (y) an amount equal to 3.0% of the amount by which ourmarket capitalization exceeds $100,000. Our obligations under the agreement are secured by all of our personalproperty, including all of the equity interests of the borrowers in theirrespective subsidiaries.

 

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The agreementcontains various affirmative and negative covenants, including covenants thatrestrict our 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.  The agreement also requires us tomaintain a minimum consolidated EBITDA measured on a twelve month rolling basisas of the last day of each month during the period from May 2008 through December 2008,a minimum consolidated EBITDA measured on a rolling four quarter basis as ofthe last day of each quarter commencing with the quarter ending March 31,2009, a maximum leverage ratio measured as of the end of any fiscalquarter.  Upon an event of default under the agreement the Lender may opt toaccelerate and demand payment of all or any part of our obligations under theagreement.

 

***Significant Contractual Obligations***

 

As of March 31, 2008, our significant contractual obligations wereas follows:

 
| ** **                       | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**                                 | ** ** | **Less Than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More Than 5  Years** | ** ** |
| Long-term debt obligations       |       | $                                         | 7,451      |   | $ | 740 |   | $ | 6,503 |   | $ | 208 |   | — |   |
| Capital lease obligations        |       | 200                                       |       | 126 |   | 74 |   | — |   | — |   |
| Operating lease obligations      |       | 1,391                                     |       | 511 |   | 720 |   | 161 |   | — |   |
| Vendor obligations               |       | 5,625                                     |       | 1,500 |   | 3,000 |   | 1,125 |   | — |   |
|                                  |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

As a result of entering into the Loan and Security Agreement, on May 2,2008 as discussed above, our significant contractual long-term debt obligationshave changed. Our significant contractual long-term debt obligations are now asfollows:

 
| ** **                 | ** ** | **Payments Due by Period** | ** ** |
|----------------------------|------------|-------------------------------------------|------------|
| ** **                 | ** ** | **Total**                                 | ** ** | **Less Than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More Than 5  Years** | ** ** |
| Long-term debt obligations |       | $                                         | 13,749     |   | $ | 522 |   | $ | 8,073 |   | $ | 5,154 |   |   |   |
|                            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Inflation***

 

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

 

***OffBalance Sheet Arrangements***

 

We do not currently haveany off-balance sheet arrangements.

 

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***New Accounting Standards***

 

Several new accounting standards have been issued and are beingevaluated. None of these standards are expected to have a material impact onour financial position, results of operations, or liquidity.

 

In December 2007, the FASB issued SFAS No. 141(R) *Business Combinations* (SFAS 141(R)). This Statement replacesthe original FASB Statement No. 141. This Statement retains thefundamental requirements in Statement 141 that the acquisition method ofaccounting (which Statement 141 called the *purchasemethod*) be used for all business combinations and for an acquirer tobe identified for each business combination. The objective of this SFAS 141(R) isto improve the relevance, and comparability of the information that a reportingentity provides in its financial reports about a business combination and itseffects. To accomplish that, SFAS 141(R) establishes principles andrequirements for how the acquirer recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, and anynon-controlling interest in the acquiree, recognizes and measures the goodwillacquired in the business combination or a gain from a bargain purchase anddetermines what information to disclose to enable users of the financialstatements to evaluate the nature and financial effects of the businesscombination.  This Statement applies prospectively to businesscombinations for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning on or after December 15, 2008 andmay not be applied before that date. We are in the process of evaluating theimpact of this pronouncement on our consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 160 *Noncontrolling Interests in Consolidated Financial Statements – anamendment of ARB No. 51* (SFAS 160). This Statement amends theoriginal Accounting Review Board (ARB) No. 51 “Consolidated FinancialStatements” to establish accounting and reporting standards for thenoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary. It clarifies that a noncontrolling interest in a subsidiary is anownership interest in the consolidated entity that should be reported as equityin the consolidated financial statements. This Statement is effective forfiscal years and interim periods within those fiscal years, beginning on orafter December 15, 2008 and may not be applied before that date. We areunable at this time to determine the effect that its adoption of SFAS 160 willhave on our results of operations and financial condition.

 

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*Forward-Looking Statements*

 

This report contains “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995 that involve risks and uncertainties, many of which are beyond ourcontrol.  Our actual results could differmaterially and adversely from those anticipated in such forward-lookingstatements as a result of certain factors, including those set forth in ourAnnual Report on Form 10-K for the year ended December 31, 2007.  Important factors that may cause actualresults to differ from projections include, but are not limited to, forexample:

 

·           our limited operating history and thelimited information available to evaluate our business;

 

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

 

·           changes in economic, business orindustry conditions;

 

·           our ability to find additionalfinancing necessary to support our operations;

 

·           our ability to successfully integrateacquisitions with our existing operations;

 

·           our ability to retain, replace andhire experienced senior management;

 

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

 

·           competition in the industries inwhich we compete;

 

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

 

·           our ability to protect ourintellectual property rights; and

 

·           restrictions on our operationscontained in our loan and security agreement.

 

All statements, otherthan statements of historical facts, included in this report regarding ourstrategy, future operations, financial position, estimated revenue or losses,projected costs, prospects, current expectations, forecasts, and plans andobjectives of management are forward-looking statements.  When used in this report, the words “will,” “may,”“believe,” “anticipate,” “intend,” “estimate,” “expect,” “should,” “project,” “plan”and similar expressions are intended to identify forward-looking statements,although not all forward-looking statements contain such identifyingwords.  All forward-looking statementsspeak only as of the date of this report. We do not undertake any obligation to update any forward-lookingstatements or other information contained herein, except as required by federalsecurities laws.  You should not placeundue reliance on these forward-looking statements.  Although we believe that our plans,intentions and expectations reflected in or suggested by the forward-lookingstatements in this report are reasonable, we cannot assure you that theseplans, intentions or expectations will be achieved.  We have disclosed important factors thatcould cause our actual results to differ materially from our expectations under“Risk Factors” in our Annual Report on Form 10-K for the year ended December 31,2007 and elsewhere in this report.  Thesecautionary statements qualify all forward-looking statements attributable to usor persons acting on our behalf.

 

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**Item3.****                       Quantitativeand Qualitative Disclosures About Market Risk**

 

The primary objective ofour investment activities is to preserve principal. Our funds are currentlyheld in checking accounts and money market funds which do not subject us torisk of a loss of principal due to changes in prevailing interest rates and ina portfolio of cash and cash equivalents that include investments in investment-gradesecurities, such as commercial paper, money market funds, government debtsecurities and certificates of deposit with maturities of less than ninemonths. Some of these securities may be subject to market risk due to changesin prevailing interest rates, which may cause fluctuations in market value.

 

Two of the main risks associated with these investments are interestrate risk and credit risk.  Typically, when interest rates rise, there isa corresponding decline in the market value of debt securities. Fluctuations in interest rates would not have a material effect on ourfinancial statements because of the short-term nature of the securities inwhich we invest and our intention to hold the securities to maturity. Credit risk refers to the possibility that the issuer of the debt securitieswill not be able to make principal and interest 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 ourcash and short-term investment portfolio at March 31, 2008, approximatedits carrying value due to the short-term maturities of these investments. Thepotential decrease in fair value resulting from a hypothetical 10% increase ininterest rates for our investment portfolio is not material.

 

The carrying value of ourlong-term debt at March 31, 2008 approximates its fair value. Ourlong-term debt was set at our former senior lender’s prime rate (5.25%) plus1.0% to 1.5% at March 31, 2008. We have subsequently paid off this loanand have entered into new long-term senior debt financing. The interest ratefor this debt is set at the higher of 10.5% or 4.5% over the then current primeinterest rate.  Under our new facilityand based on amounts outstanding as of May 12, 2008, an increase in marketrates of interest would have to change by greater than 1.0% to have an impacton our annual interest expense. An increase in the prime rate of 1.25% wouldincrease our annual interest expense by approximately $20 thousand, and adecrease in market interest rates by 1.25% would not have any effect on ourannual interest expense.

 

The balance of our otherlong term liabilities consists of two notes, bearing interest at fixed rates of7.84% per annum and 9.0% per annum, issued in connection with acquisitions thattook place during 2007. A change in interest rates would not have any effect onour annual interest expense for this debt.

 

**Item 4.        Controls and Procedures**

 

We maintain disclosure controls and procedures that are designed toensure that information required to be disclosed in our reports filed under theSecurities Exchange Act of 1934, as amended, is recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules andforms and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow for timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, managementrecognizes that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and management is required to apply its judgment inevaluating the cost-benefit relationship of possible controls and procedures.

 

As required by SEC Rule 13a-15(b), we carried out an evaluation,under the supervision and with the participation of our management, including theChief Executive Officer and Chief Financial Officer, of the effectiveness ofthe design and operation of our disclosure controls and procedures as of theend of the period covered by this report. Based on the foregoing, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were effective to provide reasonable assurance that wewould meet our disclosure obligations. 

 

There was no change in our internal controls over financial reportingthat occurred during the period covered by this report that has materiallyaffected, or is reasonably likely to affect, our internal controls overfinancial reporting.

 

 

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**PART II— OTHER INFORMATION**

 

**Item 1.        Legal Proceedings**

 

In the normal course of business, we havebecome and might in the future become involved in legal actions relating to ourbusiness. In management’s opinion, the resolution of any such pending legalactions is not expected to have a material adverse effect on our consolidatedfinancial position or results of operations.

 

**Item 1A.     Risk Factors**

 

There have been no material changes in our risk factors from theinformation set forth in our Annual Report on Form 10-K for the year endedDecember 31, 2007.

 

**Item 2.        Unregistered Sales of Equity Securitiesand Use of Proceeds**

 

On January 8, 2008 we issued 10,000 shares of our common stock toAlliance Advisors, Inc. in exchange for investor relations services, whichwas valued at $18,400. The shares of common stock were issued under exemptionsprovided by Section 4(2) of the Securities Act of 1933 astransactions not involving a public offering.

 

**Item 3.        Defaults Upon Senior Securities**

 

None.

 

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

 

None.

 

**Item 5.        Other Information**

 

None.

 

**Item 6.        Exhibits**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                      |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                 |
| 31.1                 |       | Certification  pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.* |
|                 |       |                                                                                                                                                 |
| 31.2                 |       | Certification  pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.* |
|                 |       |                                                                                                                                                 |
| 32.1                 |       | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.+                 |
|                 |       |                                                                                                                                                 |
| 32.2                 |       | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.+                 |

 

----

| (*) | Filed herewith.    |
|-----|--------------------|
| (+) | Furnished herewith |

 

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**SIGNATURES**

 

Pursuant to the requirements of section 13 or15(d) of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned; thereuntoduly authorized, in Hatboro, Pennsylvania on May 14, 2008.

 
|     | 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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