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**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 June 30, 2009**

 
| **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

 

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

 

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

 

| Large accelerated filero                      |   | Accelerated filero          |
|-----------------------------------------------|--------|-----------------------------|
|                                          |   |                        |
| Non-accelerated filero                        |   | 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 August 7,  2009** |
|-------------------------------------------------|------------|-----------------------------------------|
| **Common  Stock, $0.00001 par value per share** | ** ** | **25,759,135  Shares**                  |

 

 

 

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**TABLE OF CONTENTS**

 
| **PART I — FINANCIAL INFORMATION** |
|----------------------------------------------|
|                                         |   |   |
| Item 1.                                      | Financial  Statements | 3 |
|                                         |   |   |
|                                         | Condensed Consolidated Balance Sheets as of  June 30, 2009 (unaudited) and December 31, 2008 | 3 |
|                                         |   |   |
|                                         | Condensed Consolidated Statements of Operations  (unaudited) for the three and six months ended June 30, 2009 and 2008 | 4 |
|                                         |   |   |
|                                         | Condensed Consolidated Statements of Cash Flows  (unaudited) for the six months ended June 30, 2009 and 2008 | 5 |
|                                         |   |   |
|                                         | Notes to Condensed Consolidated Financial Statements  (unaudited) | 6 |
|                                         |   |   |
| Item 2.                                      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 11 |
|                                         |   |   |
| Item 3.                                      | Quantitative  and Qualitative Disclosures About Market Risk | 21 |
|                                         |   |   |
| Item 4.                                      | Controls  and Procedures | 22 |
|                                         |   |   |
| **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 | 24 |

 

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**PART I- FINANCIAL INFORMATION**

 

**Item 1.        Financial Statements**

 

**INFOLOGIX,INC.**

**CondensedConsolidated Balance Sheets**

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

 
| ** **                                                                                                                                                                                       | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                       | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                       |       |                    |       |                        |       |
| Currents  assets:                                                                                                                                                                                |       |                    |       |                        |       |
| Cash  and cash equivalents                                                                                                                                                                       |       | $                       | 3,518      |                        | $          | 3,037 |   |
| Accounts  and other receivables (net of allowance for doubtful accounts in the amount  of $572 and $352 as of June 30, 2009 and December 31, 2008,  respectively)                      |       | 17,123                  |       | 22,610                      |       |
| Unbilled  revenue                                                                                                                                                                                |       | 261                     |       | 1,498                       |       |
| Inventory,  net                                                                                                                                                                                  |       | 2,272                   |       | 1,775                       |       |
| Prepaid  expenses and other current assets                                                                                                                                                       |       | 1,651                   |       | 1,228                       |       |
| Total  current assets                                                                                                                                                                            |       | 24,825                  |       | 30,148                      |       |
| Property  and equipment, net                                                                                                                                                                     |       | 781                     |       | 944                         |       |
| Intangible  assets, net                                                                                                                                                                          |       | 8,215                   |       | 8,709                       |       |
| Goodwill                                                                                                                                                                                         |       | 10,971                  |       | 10,540                      |       |
| Deferred  financing costs                                                                                                                                                                        |       | 264                     |       | 501                         |       |
| Total  assets                                                                                                                                                                                    |       | $                       | 45,056     |                        | $          | 50,842 |   |
|                                                                                                                                                                                             |       |                    |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                   |       |                    |       |                        |       |
| Current  liabilities:                                                                                                                                                                            |       |                    |       |                        |       |
| Accounts  payable                                                                                                                                                                                |       | $                       | 11,584     |                        | $          | 11,389 |   |
| Line  of credit                                                                                                                                                                                  |       | 9,012                   |       | 9,000                       |       |
| Current  portion of notes payable                                                                                                                                                                |       | 11,552                  |       | 12,077                      |       |
| Current  portion of capital lease obligations                                                                                                                                                    |       | 81                      |       | 86                          |       |
| Sales  tax payable                                                                                                                                                                               |       | 102                     |       | 477                         |       |
| Accrued  expenses                                                                                                                                                                                |       | 3,889                   |       | 2,800                       |       |
| Accrued  earn out payable                                                                                                                                                                        |       | 2,388                   |       | 1,958                       |       |
| Other  current liabilities                                                                                                                                                                       |       | 1,360                   |       | 900                         |       |
| Deferred  revenue                                                                                                                                                                                |       | 1,887                   |       | 276                         |       |
| Total  current liabilities                                                                                                                                                                       |       | 41,855                  |       | 38,963                      |       |
| Notes  payable, net of current maturities                                                                                                                                                        |       | 4,346                   |       | 4,215                       |       |
| Capital  lease obligations, net of current maturities                                                                                                                                            |       | 155                     |       | 186                         |       |
| Total  liabilities                                                                                                                                                                               |       | 46,356                  |       | 43,364                      |       |
| Commitments  and Contingencies                                                                                                                                                                   |       |                    |       |                        |       |
| Stockholders’  (deficiency) equity:                                                                                                                                                         |       |                    |       |                        |       |
| Preferred  stock, par value $.00001; authorized 10,000,000 shares; none issued or  outstanding                                                                                                   |       | —                  |       | —                      |       |
| Common  stock, par value $.00001; authorized 100,000,000 shares; issued and  outstanding 25,759,135 shares and 25,602,267 shares at June 30, 2009 and  December 31, 2008, respectively |       | —                  |       | —                      |       |
| Additional  paid in capital                                                                                                                                                                      |       | 26,439                  |       | 25,766                      |       |
| Accumulated  deficit                                                                                                                                                                             |       | (27,739                 | )          | (18,288                     | )          |
| Total  stockholders’ (deficiency) equity                                                                                                                                                    |       | (1,300                  | )          | 7,478                       |       |
| Total  liabilities and stockholders’ (deficiency) equity                                                                                                                                    |       | $                       | 45,056     |                        | $          | 50,842 |   |

 

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

 

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**INFOLOGIX,INC.**

**CondensedConsolidated Statements of Operations (Unaudited)**

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

 
| ** **                                               | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                               | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                     |       |                                 |       |                               |       |   |   |   |   |
| Net  revenues                                            |       | $                                    | 24,411     |                               | $          | 26,347 |   | $ | 43,223 |   | $ | 50,134 |   |
| Cost  of revenues                                        |       | 19,833                               |       | 19,059                             |       | 34,510 |   | 36,641 |   |
| Gross  profit                                            |       | 4,578                                |       | 7,288                              |       | 8,713 |   | 13,493 |   |
| Selling,  general and adminstrative expenses             |       | 7,748                                |       | 7,612                              |       | 15,411 |   | 15,128 |   |
| Operating  loss                                          |       | (3,170                               | )          | (324                               | )          | (6,698 | ) | (1,635 | ) |
| Interest  expense                                        |       | (1,189                               | )          | (619                               | )          | (2,334 | ) | (907 | ) |
| Interest  income                                         |       | 5                                    |       | 32                                 |       | 15 |   | 79 |   |
| Loss  on extinguishment of debt                          |       | (420                                 | )          | —                             |       | (420 | ) | — |   |
| Loss  before income tax benefit (provision)              |       | (4,774                               | )          | (911                               | )          | (9,437 | ) | (2,463 | ) |
| Income  tax benefit (provision)                          |       | (7                                   | )          | 371                                |       | (14 | ) | 930 |   |
| Net  loss                                                |       | $                                    | (4,781     | )                                  | $          | (540 | ) | $ | (9,451 | ) | $ | (1,533 | ) |
| Loss  per share - basic and diluted                      |       | $                                    | (0.19      | )                                  | $          | (0.02 | ) | $ | (0.37 | ) | $ | (0.06 | ) |
| Weighted  average shares outstanding - basic and diluted |       | 25,685,196                           |       | 25,193,700                         |       | 25,644,173 |   | 25,056,071 |   |

 

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

 

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**INFOLOGIX,INC.**

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

**(in thousands)**

** **
| ** **                                           | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                           | ** ** | **2009**                           | ** ** | **2008** | ** ** |
|                                                 |       |                               |       |   |   |
| Operating  activities:                               |       |                               |       |   |   |
| Net  cash provided by (used in) operating activities |       | $                                  | 1,259      |   | $ | (774 | ) |
| Investing  activities:                               |       |                               |       |   |   |
| Acquisition  of property, software and equipment     |       | (413                               | )          | (1,339 | ) |
| Acquisitions,  net of cash acquired                  |       | —                             |       | (2,975 | ) |
| Disposal  of property and equipment                  |       | —                             |       | 27 |   |
| Promissory  notes issued                             |       | —                             |       | (200 | ) |
| Net  cash used in investing activities               |       | (413                               | )          | (4,487 | ) |
| Financing  activities:                               |       |                               |       |   |   |
| Payments  received from employee stock purchase plan |       | 65                                 |       | 31 |   |
| Proceeds  from issuance of warrants                  |       | 78                                 |       | — |   |
| Payment  of deferred financing costs                 |       | (90                                | )          | (1,348 | ) |
| Issuance  of Hercules note payable                   |       | —                             |       | 9,000 |   |
| Issuance  of Herules line of credit             |       | —                             |       | 7,500 |   |
| Final  repayment of Sovereign notes payable          |       | —                             |       | (3,292 | ) |
| Final  repayment of Sovereign line of credit         |       | —                             |       | (9,334 | ) |
| Repayment  of long-term debt and capital leases      |       | (430                               | )          | (214 | ) |
| Net  borrowings on line of credit                    |       | 12                                 |       | 1,856 |   |
| Net  cash (used in) provided by financing activities |       | (365                               | )          | 4,199 |   |
| Net  change in cash and cash equivalents             |       | 481                                |       | (1,062 | ) |
| Cash  and cash equivalents at beginning of period    |       | 3,037                              |       | 6,101 |   |
| Cash  and cash equivalents at end of period          |       | $                                  | 3,518      |   | $ | 5,039 |   |

 

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

 

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

**(inthousands, except share information)**

 

**NOTEA—****Nature of Business**

 

***Basis of Presentation***

 

Theaccompanying condensed consolidated financial statements of InfoLogix, Inc.and subsidiaries (collectively, the “Company”) have been prepared in accordancewith accounting principles generally accepted in the United States for interim financial reporting and with theinstructions for Form 10-Q and Article 10 of Regulation S-X. They donot include all of the disclosures normally made in the consolidated financialstatements contained in Form 10-K. In management’s opinion, all adjustments considered necessary for a fairpresentation of the consolidated results of operations, financial position andcash flows for the periods shown have been made.  All such adjustments are of a normal andrecurring nature.  The notes to theconsolidated financial statements contained in the Annual Report on Form 10-Kfor the year ended December 31, 2008 should be read in conjunction withthese consolidated financial statements. Operating results for the three and six months ended June 30, 2009are not necessarily indicative of the results that may be expected for theyear ending December 31, 2009.

 

Theconsolidated 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.  The results of operationsof the acquired businesses are included in the Company’s results from the datesof acquisition.

 

Reclassifications:Certain amounts in prior years’ financial statements and related notes havebeen reclassified to conform to the 2009 presentation.

 

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

 

***Nature of business***

 

The Company is a providerof enterprise mobility solutions for the healthcare and commercialmarkets.  The Company’s solutions are designed to allow the real timeusage of data throughout an enterprise in order to enhance workflow, improvecustomer service, increase revenue and reduce costs.  The products and services the Companyprovides include: consulting, software and software implementation, mobilemanaged services, system integration, wireless network design and hardware.

 

**NOTE B—Recent AccountingPronouncements**

 

In June 2009, the FinancialAccounting Standards Board (FASB)issued Statement of Financial Accounting Standards No. 168 (SFAS 168), *the Accounting StandardsCodification and the Hierarchy of Generally Accepted Accounting Principles*.SFAS 168 replaces SFAS 162, TheHierarchy of Generally Accepted Accounting Principles. It names the FASB Accounting Standards Codification(Codification) as the single source of authoritative U.S. Generally AcceptedAccounting Principles (GAAP) for non-governmental entities recognized by the FASB. SFAS 168 is effective for reporting periods ending after September 15,2009, and once effective, will supersede all U.S. GAAP accounting standards,aside from rules and interpretive releases issued by the Securities andExchange Commission (SEC). The Codification is not intended to change U.S. GAAP;rather, it will change the referencing of U.S. GAAP. Therefore, we do notexpect the adoption of SFAS 168will have a material impact on our financial statements.

 

On June 3, 2009, theFASB voted to approve FASB*Accounting StandardsCodification*(ASC) as the source of authoritative accounting and reporting standards in theUnited States, in addition to guidance issued by the SEC.  FASB ASC is a restructuring of accounting andreporting standards designed to simplify user access to all authoritative U.S.GAAP by providing the authoritative literature in a topically organized structure.  FASB ASC will reduce the hierarchyestablished by FAS 162 to two levels, one that is authoritative and one that isnot.  FASB ASC is not intended to changeU.S. GAAP or any requirements of the SEC. FASB ASC becomes authoritative upon its release on July 1, 2009 andis effective for interim and annual periods ending after September 15,2009.

 

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InMay 2009, the FASB issued Statement of Financial Accounting Standard No. 165,*Subsequent Events* (FAS 165).  FAS 165 establishes general standards ofaccounting for and disclosure of events that occur after the balance sheet datebut before financial statements are issued or are available to be issued.  Although there is new terminology, thestandard is based on the same principles as those that currently exist inauditing standards.  FAS 165 requiresdisclosure of the date through which an entity has evaluated subsequentevents.  The standard is effective forinterim and annual periods ending after June 15, 2009.  The adoption of FAS 165 did not have asignificant impact on the consolidated balance sheet or consolidated statementsof operations and cash flows.

 

In April 2009, the FASB issued Staff Position FAS 107-1and APB 28-1, *Interim Disclosures about FairValue of Financial Instruments*(FSP), which amends Financial Accounting Standard No. 107, *Disclosures about Fair Value of Financial Instruments*(FAS 107)*,*to require an entityto provide interim disclosures about the fair value of all financialinstruments within the scope of FAS 107 and to include disclosures related tothe methods and significant assumptions used in estimating those instruments.This FSP is effective for interim and annual periods ending after June 15,2009.  The adoption of this FSP did nothave a material effect on the condensed consolidated financial statements andrelated disclosures.

 

Beginning January 1,2009, the Company applied the provisions of Emerging Issues Task Force (EITF)Issue No. 07-5, *Determining Whether anInstrument (or an Embedded Feature) is indexed to an Entity’s Own Stock*(EITF 07-5) to its existing arrangements to reevaluate, in part, whetherfinancial instruments or embedded features within those arrangements are exemptfrom accounting under Statement of Financial Accounting Standard No. 133, *Accounting for Derivative Instruments and Hedging Activities*(FAS133).  EITF 07-5 clarifies how todetermine whether certain instruments or features are indexed to an entity’sown stock under EITF Issue No. 01-6, *The Meaning of ‘Indexed toa Company’s Own Stock’* (EITF 01-6) and thereby possibly exempt fromaccounting under FAS 133.  The consensusreached in EITF 07-5 supersedes that reached in EITF 01-6.  The Company will apply the provisions to itsnew arrangements as they arise.  Theapplication of EITF 07-5 did not have a material impact on the consolidatedfinancial statements.

 

Beginning January 1, 2009, the Company applied theprovisions of FASB Staff Position APB 14-1,*Accounting for Convertible Debt Instruments That May BeSettled in Cash upon Conversion (Including Partial Cash Settlement)*(FSP APB 14-1) to the outstanding Healthcare Informatics Associates (HIA)convertible note payable.  FSP APB14-1 requires companies to separately account for the liability (debt) andequity (conversion option) components of certain convertible debt instrumentsthat may be settled, partially or fully, in cash (or other assets) onconversion in a manner that reflects a company’s nonconvertible debt borrowingrate.  The provisions of FSP APB 14-1 areeffective for financial statements issued for fiscal years beginning after December 15,2008, and interim periods within those fiscal years.  The application of FSP APB 14-1 did not havea material impact on the consolidated financial statements.

 

**NOTE C—Inventory**

 

Inventory consists of the following:

 
| ** **                                              | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                              | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
|                                                    |       |                    |       |                        |       |
| Finished goods                                          |       | $                       | 2,727      |                        | $          | 2,111 |   |
| Work in progress                                        |       | 71                      |       | 85                          |       |
| Less: allowance  for slow moving and obsolete inventory |       | (526                    | )          | (421                        | )          |
| Total inventory,  net                                   |       | $                       | 2,272      |                        | $          | 1,775 |   |

 

**NOTE D—Customer and VendorConcentrations**

 

Forthe three and six months ended June 30, 2009 and 2008, the Company hadsales to significant customers, as a percentage of net revenues, as follows:

 
| ** ** | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** ** | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|       |       |                                 |       |                               |       |   |   |   |   |
| Customer A |       | 35.9                                 | %          | 1.3                                | %          | 21.6 | % | 2.5 | % |
| Customer B |       | 9.1                                  | %          | 13.1                               | %          | 10.5 | % | 13.0 | % |

 

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Forthe three and six months ended June 30, 2009 and 2008, purchases from theCompany’s significant vendors as a percentage of total expenditures, are asfollows:

 
| ** ** | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** ** | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|       |       |                                 |       |                               |       |   |   |   |   |
| Vendor A   |       | 17.4                                 | %          | 20.7                               | %          | 18.5 | % | 23.9 | % |
| Vendor B   |       | 29.4                                 | %          | 1.1                                | %          | 26.1 | % | 1.2 | % |

 

**NOTE E—Debt**

 

OnMay 1, 2008, the Company entered into a loan and security agreement, asamended on November 19, 2008 and May 31, 2009 (Loan and SecurityAgreement) with Hercules Technology Growth Capital, Inc. (Hercules) thatprovides the Company with a revolving credit facility of up to $9,000 and aterm loan facility of up to $12,000.  Therevolving credit facility expires on January 1, 2010 and the term loanfacility matures on May 1, 2012. Voluntary prepayments of principal on the term loan facility are subjectto a prepayment charge.  The Company’sobligations under the Loan and Security Agreement are secured by all of itspersonal property, including all of the equity interests in itssubsidiaries.  At June 30, 2009,$9,012 and $11,473, respectively, were outstanding under these facilities.  The estimated fair value of these facilitiesapproximates their carrying values at June 30, 2009 because the underlyinginterest rates approximate market rates that the Company could obtain forsimilar instruments.

 

Pursuantto the second amendment to the Loan and Security Agreement on May 31, 2009(Second Amendment), Hercules waived the existing event of default arising fromthe violation of the minimum EBITDA financial covenants for the measurementperiods ending January 31, February 28, March 31, and April 30,2009, and the Company issued to Hercules a warrant to purchase 250,000 sharesof common stock of InfoLogix, Inc. on June 19, 2009.  The Second Amendment increased the interestrates on outstanding borrowings, amended certain financial covenants, postponedfurther principal payments on the term loan portion of the facility until January 2010and postponed the maturity date of the revolving credit facility until January 1,2010.  The following discussion of theterms of the Loan and Security Agreement incorporates the terms of the SecondAmendment.

 

Borrowingsunder the revolving credit facility are limited by the Company’s asset base, as defined and bearinterest at an annual rate equal to 1.50% interest paid in kind plus thegreater of 14.25% or the prime rate plus 9.75% through September 30,2009.  Thereafter, the revolving creditfacility will bear interest at an annual rate equal to 4.50% interest paid inkind plus the greater of 14.25% or the prime rate plus 9.75%.  Borrowings under the term loan facility bearinterest at an annual rate equal to 3.75% interest paid in kind plus thegreater of 15.75% or the prime rate plus 10.75% through September 30,2009.  Thereafter, the term loan facilitywill bear interest at an annual rate equal to 6.75% interest paid in kind plusthe greater of 15.75% or the prime rate plus 10.75%. Interest that is paid inkind is added to the principal amount of the term loan.    In the event of a default on the Loan andSecurity Agreement, the borrowings will bear interest at 300 basis pointshigher than the then current rate.

 

Underthe provisions of the term loan facility, the Company is required to pay asuccession fee equal to the greater of $1,200 or 6% of the Company’s marketcapitalization that exceeds $11,327, if a Fundamental Event Transaction (describedin the following paragraph) closes and the term loan is repaid by September 30,2009.  The succession fee equals thegreater of $1,500 or 6% of the Company’s market capitalization that exceeds$11,327, if a Fundamental Event Transaction (described in the followingparagraph) closes and the term loan is repaid after September 30, 2009.The succession fee is due upon the earliest to occur of (i) demand fromHercules at any time between June 30, 2009 and April 30, 2012, (ii) theacceleration of the Company’s obligations under the Loan and SecurityAgreement, (iii) the term loan maturity date, and (iv) prepayment infull of the Company’s obligations under the term loan facility.  At June 30, 2009, the Company hasrecorded a liability of $1,200 related to this obligation.

 

TheLoan and Security Agreement contains various affirmative and negativecovenants, including covenants that require the Company to maintain a minimumcash balance and restrict the Company’s ability to incur indebtedness, makeinvestments, make payments in respect of its capital stock, including dividendsand repurchases of common stock, sell or license its assets, and engage inacquisitions without the prior satisfaction of certain conditions. Additionalcovenants will require compliance with certain financial tests, includingearnings and leverage ratios and the closing, by July 31, 2009 of a FundamentalEvent Transaction, defined as either (i) the sale of all or substantiallyall of the assets or capital stock of the Company, (ii) a cash equityinfusion in an amount of at least $12,000 or (iii) the incurrence ofsubordinated indebtedness of at least $12,000 (subordinate to Hercules’ssecurity interests in the Company’s property and assets), the proceeds of whichare used to repay the term loan.  Inaddition, the Company is not permitted under the Loan and Security Agreementand a subordination agreement with Hercules to pay any amounts owing under theearn out agreements that were entered into in connection with the acquisitionsof the assets of Healthcare Informatics Associates, Inc. (HIA) or DeltaHealth, Inc. (Delta) if the Company’s total leverage exceeds thepredefined maximum.  Upon an event ofdefault under the agreement Hercules may opt to accelerate and demand paymentof all or any part of the Company’s obligations under the Loan and SecurityAgreement.

 

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Asof June 30, 2009, the Company was in compliance with its minimum cashbalance covenant. Outstanding borrowings under the credit and term loanfacilities are classified as current in the accompanying condensed consolidatedbalance sheet; however, Hercules has not demanded payment of the principal dueunder the facilities.  Due to pastdefaults and because its total leverage ratio exceeds 3.00 to 1.00 the Companyis prohibited from satisfying its earn out obligations related to the Company’sacquisitions of HIA and Delta. The Company remains in discussions with HIA andDelta to obtain their consent to the payment restriction placed on the earn outobligations.  There can be no assurancethat consent will be obtained on terms favorable to the Company or at all.

 

Managementdetermined that the May 31, 2009 amendment resulted in a significantmodification of the original loan and security agreement dated May 1,2008. Accordingly, the Company recorded a charge of $420 for a loss onextinguishment of debt in the second quarter 2009 statement of operations. Theloss is comprised primarily of fees paid Hercules in connection with theamendment.

 

TheCompany did not close a Fundamental Event Transaction by July 31, 2009, asrequired in the Loan and Security Agreement. See Note K-Subsequent Events.

 

**NOTE F—Related Party Transactions**

 

***Support services***

 

Anentity owned by a stockholder and former officer of the Company providesextended warranties and technical support services to certain customers onbehalf of the Company.  Pursuant to thisarrangement, theCompany incurred $696 and $582 of charges for the three months ended June 30,2009 and 2008, respectively, and $1,033 and $1,084 of charges for the sixmonths ended June 30, 2009 and 2008, respectively.  The Company made payments under the arrangementof $569 and $866 for the three months ended June 30, 2009 and 2008,respectively, and of $922 and $866 for the six months ended June 30, 2009and 2008, respectively.

 

Acompany owned by this same stockholder provides the Company with consultingservices with respect to software development. Under this arrangement, the Company incurred $4 and $882 of charges for the three monthsended June 30, 2009 and 2008, respectively, and incurred $104 and $1,174of charges for the six months ended June 30, 2009 and 2008,respectively.  The Company made paymentsof $42 and $846 for the three months ended June 30, 2009 and 2008,respectively, and made payments of $277 and$846 for the six months ended June 30, 2009 and 2008, respectively.  On March 2, 2009, thisagreement was amended to extend the terms through December 31, 2013.Pursuant to the amended terms of this agreement, the Company has a minimumannual commitment to purchase services of $1,500 through 2013.

 

***Professional Recruiting Services***

 

TheCompany maintains a business relationship with Gulian & Associates,which is owned by the wife of David T. Gulian, the Company’s President andChief Executive Officer and a director and stockholder of the Company.  Under the terms of the arrangement, Gulian & Associates provides theCompany with retainer-based professional recruiting services on a non-exclusivebasis.  Gulian & Associates is paid a fee of 20% of a newly hiredperson’s annual base salary for employees it introduces to the Company.  One-third of the estimated fee is due at thetime the hiring request is made.  Theremainder is due upon successful placement of a candidate into the role. Duringthe three months ended June 30, 2009 and 2008, the Company paid Gulian &Associates approximately $48 and $56, respectively, and during the six monthsended June 30, 2009 and 2008, the Company paid approximately $111 and $85,respectively, in fees.

 

**NOTE G—Commitments andContingencies**

 

***Litigation***

 

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

 

**NOTE H—Income Taxes**

 

TheCompany has net operating loss (NOL) 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.  As of June 30, 2009, avaluation allowance of $10,416 was recognized to offset the related deferredtax assets 

 

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due to the uncertainty of realizing thebenefits of certain tax credits, current operating losses and NOL carryforwardsbefore they expire.  Federal netoperating losses expire beginning after 2024 and state net operating losseswill expire in varying years between 2013 through 2027.

 

**NOTE I—2008 Employee StockPurchase Plan**

 

The Company maintains anemployee stock purchase plan (ESPP).  TheESPP provides the Company’s employees the opportunity to purchase common stockthrough accumulated payroll deductions. The Company has reserved 1,000,000 shares for use in the ESPP. The ESPPhas consecutive three month offering periods commencing on the first tradingday of each calendar quarter.

 

TheCompany issued 82,098 shares on April 1, 2009 and 74,769 shares on July 1,2009 in connection with the ESPP for the first and second quarters of 2009, forwhich it received $35 and $30 in cash in the respective periods.  The Company issued 21,955 shares on April 1,2008 and 25,600 shares on July 1, 2008 in connection with the ESPP for thefirst and second quarters of 2008, for which it received $31 and $39 in cash inthe respective periods. On July 20, 2009, the Company’s Board of Directorsvoted to amend the ESPP  to provide thatthe Board of Directors may suspend the ESPP at any time and for any reason andlater reinstate the ESPP at any time and for any reason.  The Board of Directors has determined that anindefinite suspension of the ESPP is in the best interests of the Company andits stockholders. Pursuant to the ESPP as amended, the Company suspended theESPP effective as of July 1, 2009.

 

**NOTE J—Stock Based Compensation**

 

For the three monthsended June 30, 2009 and 2008, the Company recognized compensation cost forstock options and warrants granted to employees of $240 and $276, respectively,and for the six months ended June 30, 2009 and 2008, the Companyrecognized compensation cost for stock options and warrants granted toemployees of $530 and $524, respectively. In addition, for the six months endedJune 30, 2009 and 2008, the Company recorded an income tax benefit of $202and $207, respectively, related to the granting of the nonqualified options andwarrants.

 

**NOTE K—Subsequent Events**

 

TheCompany has evaluated subsequent events for recognition or disclosure throughAugust 14, 2009.

 

On July 31,2009, the Company entered into a Forbearance Agreement with Hercules underwhich Hercules agreed to forbear from exercising its rights and remedies withrespect to an event of default under the Loan and Security Agreement betweenthe Company and Hercules dated May 1, 2008.

 

TheLoan and Security Agreement requires one of the following events to haveoccurred by July 31, 2009: the sale of substantially all of the assets orcapital stock of the Company, a cash equity infusion in an amount of at least$12,000 or the incurrence of subordinated indebtedness in an amount of at least$12,000 (each, a Fundamental Event Closing). A Fundamental Event Closing did not occur by July 31, 2009, and, asa result, an event of default occurred under the Loan and Security Agreement(Default).

 

Pursuantto the Forbearance Agreement, Hercules agreed to forbear from exercising itsrights and remedies with respect to the Default.  The Forbearance Agreement is effective untilthe earlier of (i) September 30, 2009 and (ii) the occurrence ofa termination event under the Forbearance Agreement.  A “termination event” includes, among otherthings: the Company’s failure to pay when due principal, interest, and anyother applicable fees under and in accordance with the Loan and SecurityAgreement; the Company’s failure to comply with any of the terms orundertakings of the Forbearance Agreement; the Company’s joining, assisting,cooperating or participating as an adverse party in certain suits or otherproceedings against Herclules or any of its affiliates; the occurrence ofanother event of default under the Loan and Security Agreement, subject tospecified exceptions; and the Company’s failure to provide evidence of theoccurrence of certain other events in connection with the Company’s attempts tosecure additional financing, which include the Company’s filing of a proxystatement or registration statement relating thereto with the SEC on or before August 14,2009.  The Forbearance Agreement wassubsequently amended on August 14, 2009 to extend the deadline by which theCompany must file the proxy statement or the registration statement to August20, 2009.  Upon the termination of theforbearance period, Herclules shall be free to proceed to enforce any or all ofits rights and remedies with respect to the Default, including, withoutlimitation, the right to demand the immediate repayment of the outstandingindebtedness.

 

Underthe Forbearance Agreement, the Company paid a forbearance fee of $412 (equal to2% of the total principal amount due to Hercules, including capitalizedinterest payments paid in kind and added to the principal amount of the loan).

 

CraigA. Wilensky, Executive Vice President, EMS, resigned from his employment withInfoLogix, Inc. (the Company) effective July 22, 2009 (TerminationDate).  In connection with hisresignation, Mr. Wilensky and the Company entered into a SeparationAgreement and General Release pursuant to which Mr. Wilensky will receivea cash separation payment equal to 90 days of pay at his rate of pay in effecton the Termination Date.  The expectedfinancial impact to the Company will be $65K in selling, general andadministrative expenses recognized in the third quarter of 2009.

 

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**Item 2.       ****Management’s Discussion****and Analysis of FinancialCondition and Results of Operations**

 

*Forward-LookingStatements*

 

This report contains “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995 thatinvolve risks and uncertainties, many of which are beyond our control.  Our actual results could differ materiallyand adversely from those anticipated in such forward-looking statements as aresult of certain factors, including those set forth in our Annual Report on Form 10-Kfor the year ended December 31, 2008. Important factors that may cause actual results to differ fromprojections include, but are not limited to, for example:

 

·                     our ability torefinance, replace or restructure our current indebtedness and to comply withfinancial covenants contained in the agreements governing our indebtedness orany replacement indebtedness;

 

·                     our ability tooperate profitably and manage the growth of our business;

 

·                     further changes in economic, businessor industry conditions;

 

·                     our ability tofind additional financing necessary to support our operations and our strategicobjectives while also maintaining our focus on operating and developing ourbusiness;

 

·                     our ability tosuccessfully integrate acquisitions with our existing operations;

 

·                     our ability toretain, replace and hire experienced senior management;

 

·                     ourrelationships with our customers, key industry relationships and other thirdparties on which we rely;

 

·                     competition inthe industries in which we compete;

 

·                     our ability tointroduce new products and services and maintain products and service quality;

 

·                     our ability toprotect our intellectual property rights; and

 

·                     restrictions onour operations contained in our Loan and Security Agreements or agreements forany replacement indebtedness.

 

All statements, other than statements of historicalfacts, included in this report regarding our strategy, future operations,financial position, estimated revenue or losses, projected costs, prospects,current expectations, forecasts, and plans and objectives of management areforward-looking statements.  When used inthis report, the words “will,” “may,” “believe,” “anticipate,” “intend,” “estimate,”“expect,” “should,” “project,” “plan” and similar expressions are intended toidentify forward-looking statements, although not all forward-lookingstatements contain such identifying words. All forward-looking statements speak only as of the date of thisreport.  We do not undertake anyobligation to update any forward-looking statements or other informationcontained herein, except as required by federal securities laws.  You should not place undue reliance on theseforward-looking statements.  Although webelieve that our plans, intentions and expectations reflected in or suggestedby the forward-looking statements in this report are reasonable, we cannotassure you that these plans, 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 31,2008 and elsewhere in this report, including under “Risk Factors” in Item 1A ofPart II of this report.  These cautionarystatements qualify all forward-looking statements attributable to us or personsacting on our behalf.

 

**Overviewand Outlook**

** **

Thefollowing discussion and analysis of our financial condition and results ofoperations is intended to assist you in understanding our financial conditionand results of operations. This discussion and analysis should be read inconjunction with our financial statements and the notes thereto included inItem 1 of this quarterly report. Many of the amounts and percentages presentedin this discussion and analysis have been rounded for convenience ofpresentation, and all dollar amounts are presented in thousands.

** **

**Overview**

 

InfoLogixis a provider of enterprise mobility solutions for the healthcare andcommercial industries. We provide these solutions to our customers by utilizinga combination of products and services, including consulting, business softwareapplications, mobile managed services, mobile workstations and devices, andwireless infrastructure. Our solutions are designed to allow the real timeusage of data throughout a customer’s enterprise in order to enhance workflow,improve customer service, increase revenue and reduce costs. We sell wirelesscommunication and computing devices, including mobile workstations that connectto a customer’s wireless network so that information can be accessed from anylocation within the enterprise. We also implement customized and third-partysoftware applications and provide radio frequency identification (RFID)technology, which is a data-exchange method that  

 

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uses transponders to storeand remotely send or retrieve information to enable the transmission andprocessing of that information between the customer’s information system andits wireless communication and computing devices. In addition, we offerprofessional services that support and complement a customer’s wirelesscomputing systems and enterprise-wide software implementations, includingconsulting, mobile managed services, training, engineering, technical supportand network monitoring.

 

Historically,the sale of mobile workstations and other wireless devices has represented amajority of our net revenues.  During thepast three years, we have been transitioning our business to offer highermargin software applications, consulting and other professional services. Withour focus on selling software and services, we believe that we can provide morecomprehensive enterprise mobility solutions to our customers. These solutionsinvolve:

 

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

 

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

 

·                  Developing andimplementing custom software applications by using existing proprietary andthird-party software.

 

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

 

·                  Providing ourcustomers with ongoing managed services that are designed to supplement theirinformation technology department, such as training, maintenance and repair,network monitoring, software application upgrades, network security andworkflow consulting.

 

Weconduct 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.

 

**Going Concern**

 

Ourcondensed consolidated financial statements for the three and six months ended June 30,2009 have been prepared on a going concern basis, which contemplates continuingoperations, securing additional debt or equity financing, selling certainassets, and realizing assets and liabilities in the ordinary course ofbusiness.  However, we have incurredsignificant net losses from 2006 through 2009, including net losses of $9,451for the six months ended June 30, 2009 and have accumulated a stockholders’deficiency of $1,300.  We havesubstantial current and near-term liquidity requirements related to therepayment of our revolving line of credit that comes due on January 1,2010 and to earn out payments for past acquisitions.  Though we are taking measures to improve ourliquidity, we do not currently expect to generate sufficient cash flow fromoperations to fund those obligations. Furthermore, though we amended our Loan and Security Agreement withHercules on May 31, 2009 (see “Liquidity and Capital Resources - Line ofCredit and Term Loan” for a description of our credit facility with Hercules),including the waiver by Hercules of certain existing defaults, an event ofdefault did occur under the Loan and Security Agreement when we failed to closea Fundamental Event Transaction (described in Note E to our financial statementsincluded in this quarterly report) by July 31, 2009.  We entered into a forbearance agreement tothe Loan and Security Agreement with Hercules on July 31, 2009(Forbearance Agreement), but cannot guarantee that another event of defaultwill not occur under the Loan and Security Agreement or that we will be able tocomply with the terms of the Forbearance Agreement in which case Hercules maychoose to accelerate all of our payment obligations, which amount to $21,844 onJune 30, 2009.  If Hercules were toaccelerate our payment obligations, we would be unable to fund them.  As a result, we remain largely dependent onHercules continuing to grant us waivers under the Loan and Security Agreementand not to accelerate our payment obligations under the Loan and SecurityAgreement. Accordingly, there is substantial doubt about our ability tocontinue as a going concern.

 

Wehave undertaken a series of actions to reduce costs and are pursuing variousinitiatives to continue as a going concern and to provide for our futuresuccess. Our plan to improve our liquidity contemplates securing additionaldebt or equity financing, selling certain assets of the business, restructuringour debt and further evaluating our staffing model. We have been in discussionswith several strategic and institutional investors and lenders regardingsecuring additional financing. Our continued operations are dependent on ourability to implement these plans successfully. Our ability to implement these plans successfully is dependent on manycircumstances outside of our direct control, including general economicconditions and the financial strength of our customers. Any additional financingwe are able to secure will likely be subject to a number of conditions andinvolve additional costs. Given the current negative conditions in the economygenerally and the credit markets in particular as well as the decreased demandfor our services from our customers, there is uncertainty as to whether we willbe able to generate sufficient liquidity to repay our outstanding debt, to makeearn out payments and to meet working capital needs. If we are unable toimprove our liquidity position, we may not be able to continue as a goingconcern and we may be compelled to seek bankruptcy protection.

 

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Despiteour history of losses and the difficult economic climate, we believe that weare still well-positioned to capitalize on the development, proliferation andconvergence of enterprise mobility solutions in the marketplace. We believethat the application of our knowledge and experience in combining industryleading wireless infrastructure with proprietary and third-party softwarecreates solutions that address our customers’ critical needs. Because we do notdepend on any particular technology or network carrier, we believe that we canprovide tailored solutions in a rapidly changing technological landscape. Also,as market conditions continue to evolve, we believe that our solutions areadaptable to customers in any industry and scalable to customers of varyingsize or technological sophistication.

 

**Characteristics of our net revenues and expenses**

 

Wegenerate our net revenues through the resale of wireless and mobile hardwareand systems, including mobile workstations, computers, peripherals, and relatedproducts under which the revenue is recognized. Sales revenue for theseproducts is recognized when both the title and risk of loss transfer to thecustomer, generally upon shipment. We also generate revenues from consultingand professional services on either a fixed fee or time and expense basis. Netrevenues from our consulting and professional services billed on a time andexpense basis are recognized at the time the service is delivered and theexpenses are incurred. Net revenues from the sale of our proprietary learningtechnologies and any professional consulting or engineering services providedon a fixed-fee basis are recognized according to a proportionate method ofaccounting and is recognized ratably over the contract period based upon actualproject hours as compared to budgeted project hours.

 

Wealso generate net revenues from the sale of extended warranties on wireless andmobile hardware and systems, including mobile workstations, computers,peripherals, and related products.  Wesell original equipment manufacturers’ component warranties and warrantyprograms sponsored by other third parties and recognize the revenue on a netbasis upon execution of the warranty agreement. In addition, we sell warranties for which we are responsible forservicing and recognize the revenue generated from those sales ratably over thewarranty period.

 

Paymentsreceived in advance of services performed are recorded as deferred revenue.Certain contract payment terms may result in customer billing occurring at apace that is slower than revenue recognition. The resulting revenue recognizedin excess of amounts billed and project cost is included in unbilled revenue onour condensed consolidated balance sheet.

 

Costof revenues consists of all expenses that are directly attributable to thecosts associated with the purchase, for resale, of wireless and mobile hardwareand 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 revenues also consists of thedirect costs associated with those employees or sub-contractors that performour professional consulting services on behalf of our customers.

 

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

 

**Critical Accounting Estimates andPolicies**

 

Ourcondensed 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 financial statementsand the reported amounts of net revenues and expenses during the reportingperiods. Critical accounting policies are those that require the application ofmanagement’s most difficult, subjective, or complex judgments, often because ofthe need to make estimates about the effect of matters that are inherentlyuncertain and that may change in subsequent periods. In preparing the financialstatements, management utilized available information, including our 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*

 

Wegrant credit, generally without collateral, to our customers, which areprimarily in the healthcare and commercial markets. Consequently, we aresubject to potential customer credit risk related to changes in economicconditions within those markets. However, we believe that our billing andcollection policies are adequate to minimize the potential credit risk.

 

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Wereserve for uncollectible accounts based on our best estimate of the amount ofprobable credit losses in our existing accounts receivable. We periodicallyreview our accounts receivable to determine whether an allowance is necessarybased on an analysis of past due accounts and other factors that may indicatethat the realization of an account may be in doubt including historicalexperience and current economic and market conditions. Account balances deemedto be uncollectible are written off after all means of collection have beenexhausted and the potential for recovery is considered remote.

 

*Inventory*

 

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

 

Weperiodically review our inventories and make provisions as necessary forestimated obsolete and slow-moving goods. We mark down inventory in an amountequal to the difference between cost of inventory and the estimated marketvalue based on assumptions about future demands, selling prices and marketconditions. The creation of such provision results in a write-down of inventoryto net realizable value and a charge to cost of revenues.

 

*Impairment of long-lived assets*

 

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

 

*Intangible assets*

 

Wecapitalize the cost associated with procuring or developing intangible assetsand amortize those costs through operations ratably over the estimated lives ofthe intangible assets.  The costs ofsuccessful registrations for patents are generally amortized over sixteenyears.  The costs of unsuccessfulregistrations are charged to expense. Acquired technology is recorded at its estimated fair value at the dateof acquisition and generally amortized over four years.  Developed technology is generally amortizedover five years. License fees are amortized over the respective licenseperiod.  Customer lists are recorded attheir estimated fair values at the date of acquisition and are amortized overthe estimated retention period, which generally ranges from six to tenyears.  We assess our intangible assetsfor potential impairment in conjunction with our other long-lived assetswhenever events or changes in circumstances indicate that the carrying valuemay not be recoverable.

 

*Software capitalization*

 

Internaluse software is developed for our use in operations or delivery of salableproducts and services to our customers and is not marketed for sale.  We capitalize the costs of internal usesoftware that are associated with developing the software.  Costs associated with the planning and designof the software are expensed as incurred. We cease capitalizing costs and commence amortization of the softwarewhen it is ready for its intended use. Amortization is recorded on a straight-line basis over the estimateduseful life of the software, which is typically three to five years.

 

Wecapitalize certain costs related to the acquisition and development of softwareto be sold or licensed to our customers after technological feasibility hasbeen achieved.  Technological feasibilityis the point in time when all planning, designing, coding, and testingactivities necessary to establish that our proprietary software can be producedto meet its design specifications have been completed.  We expense those costs incurred prior toachieving technological feasibility as they are incurred.  We amortize the capitalized costs on astraight-line basis over the developed product’s estimated economic life, whichis generally three years.  We ceasecapitalizing costs when the software is ready for general release to ourcustomers.  Potential impairment isassessed by comparing the balance of unamortized capitalized software costs tothe estimated net revenues to be generated from the licensing of thatsoftware.  An impairment charge isrecognized if efforts to sell that software are terminated, or if the estimatednet revenues to be generated from the licensing of that software drops belowthe unamortized balance of the software.

 

*Revenue recognition*

 

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

 

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recognized when both thetitle and risk of loss transfer to the customer, generally upon shipment. Wegenerate net revenues from the sale of extended warranties on wireless andmobile hardware and systems, including mobile workstations, computers,peripherals, and related products. We record revenue from the sale of originalequipment manufacturers’ and other third party component warranties net of theamounts we remit to the third-party warranty provider at the time of executionof the warranty agreement.  We deferrevenue associated with warranty sales where we are the primary obligor inservicing the warranty and recognize that revenue ratably over the warrantyperiod.

 

Wealso generate revenue from consulting and other professional services on eithera fee-for service or fixed fee basis. Revenue from consulting and otherprofessional services that is contracted as fee-for-service is recognized inthe period in which the services are performed. Direct costs for travel andaccommodations are reimbursable in accordance with the contract terms and arerecognized as net revenue in the period the related expense is incurred.  Revenue from the sale of proprietary learningtechnologies and those consulting and other professional services provided on afixed-fee basis is recognized according to a proportionate method of revenuerecognition and is recognized ratably over the contract period based uponactual project hours completed compared to total budgeted project hours.

 

*Income taxes*

 

Our deferred taxassets and liabilities reflect temporary differences between the amount ofassets and liabilities for financial and tax reporting purposes. Such amountsare based on estimates and assumptions and are adjusted, as appropriate, toreflect changes in tax rates expected to be in effect when the temporarydifferences reverse.  Our current and deferredincome tax provision is based on estimates and assumptions that could differfrom the actual results reflected in income tax returns filed in subsequentyears.  Adjustments based on filedreturns are recorded when identified.  Avaluation allowance is recorded to reduce deferred tax assets to the amountthat is more likely than not to be realized. We consider future sources of taxable income such as “future reversalsof existing taxable temporary differences, future taxable income exclusive ofreversing temporary differences and carryforwards” and “tax planning strategies”when establishing a valuation allowance. In the event we determine that the deferred tax assets will not be realizedin the future, the valuation adjustment to the deferred tax assets is chargedto earnings in the period in which we make such a determination.

 

Theamount of income taxes we pay is subject to ongoing audits by taxingjurisdictions around the world.  Ourestimate of the potential outcome of any uncertain tax issue is subject tomanagement’s assessment of relevant risks, facts, and circumstances existing atthat time. We believe that it has adequately provided for reasonablyforeseeable outcomes related to these matters. However, our future results mayinclude favorable or unfavorable adjustments to its estimated tax liabilitiesin the period the assessments are made or resolved, which may impact oureffective tax rate.

 

*Share-based compensation*

 

Wemeasure compensation cost for all share-based payments at fair value on thedate of the award.  Fair value forshare-based awards issued to non-employees for services is determined at eitherthe fair value of the services rendered or the instruments issued in exchangefor such services, whichever is more readily determinable.  Estimates of the fair value for share-basedawards issued to employees is determined based on estimates of: (i) thefair value of our common stock, (ii) the expected term of the award, (iii) theexpected volatility of the price of our common stock, (iv) a risk freeinterest rate and (v) an expected dividend yield of our common stock.  We recognize compensation expense fromshare-based payments ratably over the service period required in the award,which is generally four years for employees and upon completion of services fornon-employees.

 

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**Results of Operations**

 

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

 
| ** **                                   | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                   | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                         |       |                                 |       |                               |       |   |   |   |   |
| Net  Revenues                                |       | 100.0                                | %          | 100.0                              | %          | 100.0 | % | 100.0 | % |
| Cost  of revenues                            |       | 81.2                                 | %          | 72.3                               | %          | 79.8 | % | 73.1 | % |
| Gross  profit                                |       | 18.8                                 | %          | 27.7                               | %          | 20.2 | % | 26.9 | % |
| Selling,  general and adminstrative expenses |       | 31.7                                 | %          | 28.9                               | %          | 35.6 | % | 30.2 | % |
| Operating  loss                              |       | (12.9                                | )%         | (1.2                               | )%         | (15.4 | )% | (3.3 | )% |
| Interest  expense                            |       | (4.9                                 | )%         | (2.3                               | )%         | (5.4 | )% | (1.8 | )% |
| Interest  income                             |       | 0.0                                  | %          | 0.1                                | %          | 0.0 | % | 0.2 | % |
| Loss  on extinguishment of debt              |       | (1.8                                 | )%         | 0.0                                | %          | (1.0 | )% | 0.0 | % |
| Loss  before income tax benefit              |       | (19.6                                | )%         | (3.4                               | )%         | (21.8 | )% | (4.9 | )% |
| Income  tax benefit                          |       | 0.0                                  | %          | 1.4                                | %          | 0.0 | % | 1.9 | % |
| Net  loss                                    |       | (19.6                                | )%         | (2.0                               | )%         | (21.8 | )% | (3.0 | )% |

 

***ThreeMonths ended June 30, 2009 compared with the Three Months ended June 30,2008***

 

***Netrevenues***

 

Net revenues for thethree months ended June 30, 2009 and 2008 were as follows:

 
| ** **                   | ** ** | **Three Months Ended June 30** | ** ** | **Amount of** |       | **Percentage** | ** ** |
|------------------------------|------------|-------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                   | ** ** | **2009**                            | ** ** | **2008**      | ** ** | **Change**     | ** ** | **Change** | ** ** |
|                         |       |                                |       |          |       |           |       |   |   |
| Net  revenues:               |       |                                |       |          |       |           |       |   |   |
| Infrastructure  and hardware |       | $                                   | 17,184     |          | $          | 15,577         |       | $ | 1,607 |   | 10.3 | % |
| Professional  services       |       | 5,210                               |       | 7,823         |       | (2,613         | )          | (33.4 | )% |
| Other                        |       | 2,017                               |       | 2,947         |       | (930           | )          | (31.6 | )% |
|                         |       |                                |       |          |       |           |       |   |   |
| Total  net revenues          |       | $                                   | 24,411     |          | $          | 26,347         |       | $ | (1,936 | ) | (7.3 | )% |

 

Net revenues were $24,411for the three months ended June 30, 2009, compared to $26,347 for thethree months ended June 30, 2008, a decrease of $1,936 or 7.3%. Thedecrease in net revenues was due to lower consulting andprofessional services as the result of delays in customer purchases of ourservices in the second quarter of 2009, which typically provide higher margins,resulting from the current economic downturn, partially offset by higher salesof infrastructure and hardware.

 

***Costof revenue***

 

Cost of revenue for thethree months ended June 30, 2009 and 2008 was as follows:

 
| ** **                   | ** ** | **Three Months Ended June 30** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|------------------------------|------------|-------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                   | ** ** | **2009**                            | ** ** | **2008**      | ** ** | **Change**     | ** ** | **Change** | ** ** |
|                         |       |                                |       |          |       |           |       |   |   |
| Cost  of revenues:           |       |                                |       |          |       |           |       |   |   |
| Infrastructure  and hardware |       | $                                   | 14,438     |          | $          | 11,804         |       | $ | 2,634 |   | 22.3 | % |
| Professional  services       |       | 4,946                               |       | 5,369         |       | (423           | )          | (7.9 | )% |
| Other                        |       | 449                                 |       | 1,886         |       | (1,437         | )          | (76.2 | )% |
|                         |       |                                |       |          |       |           |       |   |   |
| Total  cost of revenues      |       | $                                   | 19,833     |          | $          | 19,059         |       | $ | 774 |   | 4.1 | % |

 

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Our cost of revenues was$19,833 for the three months ended June 30, 2009, compared to $19,059 forthe three months ended June 30, 2008, an increase of $774 or 4.1%.  The increase in our cost of revenues was theresult of higher purchases of infrastructure and hardware to fulfillan increased level of sales volumes for our products, partially offset by lowercosts related to subcontractors as the result of fewer professional servicesengagements in the comparable periods.

 

***Grossprofit***

 

Gross profit for thethree months ended June 30, 2009 and 2008 was as follows:

 
| ** **                     | ** ** | **Three Months Ended June 30** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|--------------------------------|------------|-------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                     | ** ** | **2009**                            | ** ** | **2008**      | ** ** | **Change**     | ** ** | **Change** | ** ** |
|                           |       |                                |       |          |       |           |       |   |   |
| Gross  profit:                 |       |                                |       |          |       |           |       |   |   |
| Infrastructure  and hardware   |       | $                                   | 2,746      |          | $          | 3,773          |       | $ | (1,027 | ) | (27.2 | )% |
| Professional  services         |       | 264                                 |       | 2,454         |       | (2,190         | )          | (89.2 | )% |
| Other                          |       | 1,568                               |       | 1,061         |       | 507            |       | 47.8 | % |
|                           |       |                                |       |          |       |           |       |   |   |
| Total  gross profit            |       | $                                   | 4,578      |          | $          | 7,288          |       | $ | (2,710 | ) | (37.2 | )% |
|                           |       |                                |       |          |       |           |       |   |   |
| Gross  profit percentage:      |       |                                |       |          |       |           |       |   |   |
| Infrastructure  and hardware   |       | 16.0                                | %          | 24.2          | %          | (8.2           | )%         | (34.0 | )% |
| Professional  services         |       | 5.1                                 | %          | 31.4          | %          | (26.3          | )%         | (83.8 | )% |
| Other                          |       | 77.7                                | %          | 36.0          | %          | 41.7           | %          | 115.9 | % |
|                           |       |                                |       |          |       |           |       |   |   |
| Total  gross profit percentage |       | 18.8                                | %          | 27.7          | %          | (8.9           | )%         | (32.2 | )% |

 

Our gross profit was$4,578 for the three months ended June 30, 2009, compared to $7,288 forthe three months ended June 30, 2008, a decrease of $2,710 or 37.2%,resulting in a gross margin of 18.8% at June 30, 2009, down from 27.7% at June 30,2008. The decrease in our gross margin is the result of higher net revenues onwireless infrastructure and hardware with lower than average gross margins onthese sales,  and lower margins on fewerprofessional service engagements, which typically provide higher margins, ascustomers continue to defer projects during the current economic downturn.

 

Our selling, general andadministrative expenses were $7,748 for the three months ended June 30,2009, compared with $7,612 for the three months ended June 30, 2008, anincrease of $136, or 1.8%.  Selling expenses were $2,943 for the threemonths ended June 30, 2009, compared with $2,857 for the three monthsended June 30, 2008, an increase of $86, or 3.0%.  The increase in our selling expenses for thecomparable period was primarily attributable to higher salary expense as theresult of more sales and pre-sales representatives.  General and administrative expenses were$4,805 for the three months ended June 30, 2009, compared with $4,754 forthe three months ended June 30, 2008, an increase of $51, or 1.1%. The increase in our general and administrative expenses for the comparableperiod was primarily attributable to administrative salaries andrelated employment benefits from the acquisitions made in the second quarter of2008, partially offset by reduced travel expenses as we continued taking costreduction actions in the second quarter of 2009.

 

Our interest expense was$1,189 for the three months ended June 30, 2009, compared to approximately$619 for the three months ended June 30, 2008, an increase of $570 or91.8%. The increase in interest expense is a result of higher amountsoutstanding under our revolving credit and term loan facilities as a result ofour 2008 acquisitions and higher base rates charged on these facilities duringthe comparable period in 2008.  Inaddition to higher base rates, interest on our 2009 borrowings is charged at ahigher rate as a result of certain financial covenant violations during thefirst quarter of 2009 that did not occur during the comparable period in2008.  Our interest income was $5 for thethree months ended June 30, 2009, compared to $32 for the three monthsended June 30, 2008, a decrease of $27 or 84.4%.  The decrease in interest income is primarilythe result of a lower average cash balance during the three months ended June 30,2009 when compared to the same period of 2008.

 

Our depreciation andamortization expense, included with selling and general and administrativeexpenses discussed above, decreased to $475 for the three months ended June 30,2009 from $652 for the three months ended June 30, 2008, a decrease of$177 or 27.1% as the result of the write-off of our demonstration units at December 31,2008.

 

Our net loss was $4,781for the three months ended June 30, 2009 compared with a net loss of $540for the three months ended June 30, 2008, an increase of $4,241 or785.4%.  Our net loss increased primarilydue to a substantial increase in our interest expense and related borrowing anddefault fees to our senior lender, and lower revenue of, and lowermargins associated with, consulting 

 

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andprofessional services as the result of delays in customer purchases of ourservices in the second quarter of 2009, which typically contain higher margins,resulting from the current economic downturn.

 

As of June 30, 2009,we had federal net operating losses (NOLs) of approximately $21,355 and stateNOLs of approximately $15,918.  Federalstate NOLs will be available to offset future taxable income and expire atvarious dates beginning in 2024.  State NOLsexpire at various dates beginning in 2013 through 2027.  At June 30, 2009, we have determinedthat our ability to realize the tax benefit of operating losses isuncertain.  Accordingly, we have recordeda valuation allowance against the tax effect of the NOLs.

 

***SixMonths ended June 30, 2009 compared with the Six Months ended June 30,2008***

 

Net revenues for the sixmonths ended June 30, 2009 and 2008 were as follows:

 
| ** **                   | ** ** | **Six Months Ended June 30** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|------------------------------|------------|-----------------------------------|------------|---------------|------------|----------------|------------|
| ** **                   | ** ** | **2009**                          | ** ** | **2008**      | ** ** | **Change**     | ** ** | **Change** | ** ** |
|                         |       |                              |       |          |       |           |       |   |   |
| Net  revenues:               |       |                              |       |          |       |           |       |   |   |
| Infrastructure  and hardware |       | $                                 | 29,717     |          | $          | 31,007         |       | $ | (1,290 | ) | (4.2 | )% |
| Professional  services       |       | 10,344                            |       | 14,005        |       | (3,661         | )          | (26.1 | )% |
| Other                        |       | 3,162                             |       | 5,122         |       | (1,960         | )          | (38.3 | )% |
|                         |       |                              |       |          |       |           |       |   |   |
| Total  net revenues          |       | $                                 | 43,223     |          | $          | 50,134         |       | $ | (6,911 | ) | (13.8 | )% |

 

Netrevenues were $43,223 for the six months ended June 30, 2009, compared to$50,134 for the six months ended June 30, 2008, a decrease of $6,911or13.8%. The decreasein net revenues was due to lower infrastructure and hardware sales as theresult of delays in customer purchases of our products in the first quarter andsecond quarter of 2009, the completion of a large professional services projectin the first and second quarters of 2008 that was not replaced in the firsthalf of 2009, and fewer professional service engagements, which typicallyprovide higher margins, resulting from the current economic downturn.

 

Cost of revenue for thesix months ended June 30, 2009 and 2008 was as follows:

 
| ** **                   | ** ** | **Six Months Ended June 30** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|------------------------------|------------|-----------------------------------|------------|---------------|------------|----------------|------------|
| ** **                   | ** ** | **2009**                          | ** ** | **2008**      | ** ** | **Change**     | ** ** | **Change** | ** ** |
|                         |       |                              |       |          |       |           |       |   |   |
| Cost  of revenues:           |       |                              |       |          |       |           |       |   |   |
| Infrastructure  and hardware |       | $                                 | 24,258     |          | 24,286     |           | $          | (28 | ) | (0.1 | )% |
| Professional  services       |       | 9,182                             |       | 9,301         |       | (119           | )          | (1.3 | )% |
| Other                        |       | 1,070                             |       | 3,054         |       | (1,984         | )          | (65.0 | )% |
|                         |       |                              |       |          |       |           |       |   |   |
| Total  cost of revenues      |       | $                                 | 34,510     |          | $          | 36,641         |       | $ | (2,131 | ) | (5.8 | )% |
|                              |            |                                   |            |               |            |                |            |  |  |  |  |  |

 

Ourcost of revenues was $34,510 for the six months ended June 30, 2009,compared to $36,641 for the six months ended June 30, 2008, a decrease of$2,131 or 5.8%. The decrease is attributable to lower sales revenues, partiallyoffset by lower margin hardware sales.

 

Gross profit for the sixmonths ended June 30, 2009 and 2008 was as follows:

 

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| ** **                     | ** ** | **Six Months Ended June 30** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|--------------------------------|------------|-----------------------------------|------------|---------------|------------|----------------|------------|
| ** **                     | ** ** | **2009**                          | ** ** | **2008**      | ** ** | **Change**     | ** ** | **Change** | ** ** |
|                           |       |                              |       |          |       |           |       |   |   |
| Gross  profit:                 |       |                              |       |          |       |           |       |   |   |
| Infrastructure  and hardware   |       | $                                 | 5,459      |          | $          | 6,721          |       | $ | (1,262 | ) | (18.8 | )% |
| Professional  services         |       | 1,162                             |       | 4,704         |       | (3,542         | )          | (75.3 | )% |
| Other                          |       | 2,092                             |       | 2,068         |       | 24             |       | 1.2 | % |
|                           |       |                              |       |          |       |           |       |   |   |
| Total  gross profit            |       | $                                 | 8,713      |          | $          | 13,493         |       | $ | (4,780 | ) | (35.4 | )% |
|                           |       |                              |       |          |       |           |       |   |   |
| Gross  profit percentage:      |       |                              |       |          |       |           |       |   |   |
| Infrastructure  and hardware   |       | 18.4                              | %          | 21.7          | %          | (3.3           | )%         | (15.3 | )% |
| Professional  services         |       | 11.2                              | %          | 33.6          | %          | (22.4          | )%         | (66.6 | )% |
| Other                          |       | 66.2                              | %          | 40.4          | %          | 25.8           | %          | 63.9 | % |
|                           |       |                              |       |          |       |           |       |   |   |
| Total  gross profit percentage |       | 20.2                              | %          | 26.9          | %          | (6.8           | )%         | (25.1 | )% |

 

Ourgross profit was $8,713 for the six months ended June 30, 2009, comparedto $13,493 for the six months ended June 30, 2008, a decrease of $4,780 or35.4%, resulting in a gross margin of 20.1% at June 30, 2009, down from26.9% at June 30, 2008. The decrease in our gross margin is the result ofslower than expected sales of our more profitable professional and consultingservices related to our mobile solutions and software implementation services,and increases in sales of lower margin third-party hardware.

 

Ourselling, general and administrative expenses were $15,412 for the six monthsended June 30, 2009, compared with $15,128 for the six months ended June 30,2008, an increase of $284 or 1.9%.  Selling expenses were $5,653 for thesix months ended June 30, 2009, compared with $5,602 for the six monthsended June 30, 2008, an increase of $51 or 0.9%. General and administrativeexpenses were $9,759 for the six months ended June 30, 2009, compared with$9,526 for the six months ended June 30, 2008, an increase of $233 or2.4%.  The increase in our general and administrative expenses for thecomparable periods was primarily attributable to an increase in allowance fordoubtful accounts and professional services, partially offset by lower accrualsfor state and local sales tax liabilities.

 

Our interest expense, whichis derived from our credit line and term loan was $2,334 for the six monthsended June 30, 2009, compared to approximately $906 for the six monthsended June 30, 2008, an increase of $1,428 or 157.6%. The increase ininterest expense is a result of higher interest rates and related amountsoutstanding under our asset-based line of credit facility, term loans and notespayable issued in connection with our acquisitions. Our interest income was $15for the six months ended June 30, 2009, compared to $79 for the six monthsended June 30, 2008, a decrease of $64 or 81.0%. The decrease in interestincome is primarily the result of a lower average cash and cash equivalentsbalance during the six months ended June 30, 2009 when compared to thesame period of 2008.

 

Ourdepreciation and amortization expense decreased to $950 for the six monthsended June 30, 2009 from $1,184 for the six months ended June 30,2008, a decrease of $234 or 19.8% as the result of demonstration units deployedbeing expensed when shipped to the field, offset by amortization expenserelated to our recent acquisitions of intangible assets from Delta and Aware.

 

Ournet loss was $9,451 for the six months ended June 30, 2009 compared with anet loss of $1,533 for the six months ended June 30, 2008, an increase of$7,918 or 516.5%. Our net loss in the comparable periods increased primarilydue to a substantialincrease in our interest expense and related borrowing and default fees withour senior lender, and reduced sales and reduced margins due to theeconomic slowdown.

 

***Liquidity and Capital Resources***

 

At June 30, 2009, we had cash and cash equivalents of $3,518,compared to $3,037 at December 31, 2008. Pursuant to a covenant in a loanand security agreement with our senior lender, we are required to maintain aminimum cash balance of $2,500. We have used, and plan to use, our unrestrictedcash for general corporate purposes, including working capital as well asacquisitions. We have funded our growth primarily through the private sale ofequity securities and through current and long term debt and workingcapital.  At June 30, 2009, ourtotal liabilities were $46,356 and were comprised mostly of term debt andborrowings outstanding under our credit line, and outstanding accounts payableand accrued expenses.  Net cash providedby operating activities for the six months ended June 30, 2009 was $1,259,primarily the result of collections from higher sales generated during thefourth quarter of 2008.  Net cash used ininvesting activities was $413 for the six months ended June 30, 2009,primarily used to continue development of our 

 

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proprietarysoftware and to purchase office equipment. Net cash used in financing activities was $365 for the six months ended June 30,2009, primarily due to the payment of scheduled maturities of debt.

 

Our primary current and contingent cash obligations arise under our Loanand Security Agreement with Hercules, our earn out agreements with Delta andHIA, and our note payable to HIA. We are in discussions with HIA and Deltaregarding the accrued earn out liabilities.

 

Wehave substantial current and near-term liquidity requirements related to ourloan and security agreement with Hercules and our earn out agreements with HIAand Delta. We are in discussions to restructure our obligations with Hercules,HIA and Delta.  We are currentlyidentifying ways to optimize our capital structure and pursue strategicplanning to continue as a going concern and provide for our future success. Ourinitiatives include pursuing additional debt and equity capital, one or morestrategic transactions, and further cost control actions. Our continuedoperations are dependent on our ability to implement those plans successfully.If we fail to do so, there is substantial doubt about our ability to continueas a going concern.

 

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

 

HerculesTechnology Loan Agreement

 

On May 1, 2008, we entered into a loan and security agreement, asamended on November 19, 2008 and May 31, 2009 (Loan and SecurityAgreement) with Hercules that provides us with a revolving credit facility ofup to $9,000 and a term loan facility of up to $12,000.  The revolving credit facility expires on January 1,2010 and the term loan facility matures on May 1, 2012.  Our obligations under the agreement aresecured by all of our personal property, including all of the equity interestsin our subsidiaries.  At June 30,2009, $9,012 and $11,473, respectively, were outstanding under thesefacilities.

 

Pursuant to the Second Amendment to the Loan and Security Agreement on May 31,2009 (Second Amendment), Hercules waived the existing event of default arisingfrom the violation of the minimum EBITDA financial covenants for the measurementperiods ending January 31, February 28, March 31, and April 30,2009, and we issued Hercules a warrant to purchase 250,000 shares of commonstock of InfoLogix, Inc. on June 19, 2009.  The Second Amendment increased the interestrates on outstanding borrowings, amended certain financial covenants, postponedfurther principal payments on the term loan portion of the facility until January 2010and postponed the revolving maturity date until January 1, 2010.  The following discussion of the terms of theLoan and Security Agreement incorporates the terms of the Second Amendment.

 

Borrowings under the revolving credit facility are limited to 85% ofour eligible accounts receivable, as defined, less $2,500.   Borrowings under the revolving credit facilityare limited by the Company’sasset base, as defined and bear interest at an annual rate equal to 1.50%interest paid in kind plus the greater of 14.25% or the prime rate plus 9.75%through September 30, 2009. Thereafter, the revolving credit facility will bear interest at anannual rate equal to 4.50% interest paid in kind plus the greater of 14.25% orthe prime rate plus 9.75%.  Borrowingsunder the term loan facility bear interest at an annual rate equal to 3.75%interest paid in kind plus the greater of 15.75% or the prime rate plus 10.75%through September 30, 2009. Thereafter, the term loan facility will bear interest at an annual rateequal to 6.75% interest paid in kind plus the greater of 15.75% or the primerate plus 10.75%. Interest that is paid in kind is added to theprincipal amount of the term loan.  Inthe event of a default on the Loan and Security Agreement, the borrowings willbear interest at 3% higher than then current rate (default rate of interest).  In addition, in the event of the late paymentof interest, we will be charged an additional 5% (late payment charge).

 

The revolving credit facility matures on January 1, 2010.  The term loan facility matures on May 1,2012.  Scheduled principal payments are apercentage of the total principal outstanding at the time of payment and aredue as follows: February 2, 2009 to May 1, 2009—5%; January 1,2010 to May 1, 2010—15%; June 1, 2010 to May 1, 2011—25% and June 1,2011 to the maturity date—55%.  Inaddition to the scheduled principal payments on the term loan facility, we arerequired to apply 25% of our excess cash flow, as defined, toward the principalbalance.  Voluntary prepayments ofprincipal on the term loan facility are subject to a prepayment charge.

 

Under the provisions of the term loan facility, we are required to paya succession fee equal to the greater of $1,200 or 6% of the our marketcapitalization that exceeds $11,327, if a Fundamental Event Transaction(described in the following paragraph) occurs and the term loan is repaid by September 30,2009.  The succession fee equals thegreater of $1,500 or 6% of our market capitalization that exceeds $11,327, ifthe loan is repaid after September 30, 2009.  The succession fee is due upon the earliestto occur of (i) demand from Hercules at any time between June 30,2009 and April 30, 2012, (ii) the acceleration of our obligationsunder the Loan and Security Agreement, (iii) the term loan maturity date,and (iv) prepayment in full of  ourobligations under the term loan facility. At June 30, 2009, we have recorded a liability of $1,200 related tothis obligation.

 

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The Loan and SecurityAgreement contains various affirmative and negative covenants, includingcovenants that require us to maintain a minimum cash balance and restrict ourability to incur indebtedness, make investments, make payments in respect ofour capital stock, including dividends and repurchases of common stock, sell orlicense its assets, and engage in acquisitions without the prior satisfactionof certain conditions. Additional covenants require compliance with certainfinancial tests, including earnings and leverage ratios and the closing, byJuly 30, 2009, of a Fundamental Event Transaction, defined as either (i) thesale of all or substantially all of our assets or capital stock, (ii) acash equity infusion in an amount of at least $12,000 or (iii) theincurrence of subordinated indebtedness of at least $12,000 (subordinate toHercules’s security interests in our property and assets), the proceeds of whichare used to repay the term loan.  Inaddition, we are not permitted under the Loan and Security Agreement and asubordination agreement with Hercules to pay any amounts owing under the earnout agreements that were entered into in connection with the acquisitions ofthe assets of HIA or Delta if our total leverage exceeds the predefinedmaximum.  Upon an event of default underthe Loan and Security Agreement Hercules may opt to accelerate and demandpayment of all or any part of our obligations under the Loan and SecurityAgreement.

 

As of June 30, 2009, wewere in compliance with our minimum cash balance covenant.  Due to the past defaults under the Loan andSecurity Agreement and because our total leverage ratio exceeds 3.00 to 1.00,as of June 30, 2009, we were prohibited from satisfying our earn outobligations related to our acquisitions related to our acquisitions of HIA andDelta.  We are in discussions with HIAand Delta to obtain their consent to the payment restriction placed on the earnout obligations.  There can be noassurance that we will obtain their consent on terms favorable to us or at all.

 

Though we amended our Loanand Security Agreement with Hercules on May 31, 2009, including the waiverof certain existing defaults, an event of default did occur under the Loan andSecurity Agreement when we failed to close a Fundamental Event Transaction by July 31,2009.  We entered into the ForbearanceAgreement to the Loan and Security Agreement with Hercules on July 31,2009, but cannot guarantee that another event of default will not occur underthe Loan and Security Agreement, in which case Hercules may choose toaccelerate our payment obligations, which amounted to $21,844 on June 30,2009.  Pursuant to the ForbearanceAgreement, Hercules agreed to forbear from exercising its rights and remedieswith respect to our default.  TheForbearance Agreement is effective until the earlier of (i) September 30, 2009and (ii) the occurrence of a termination event under the ForbearanceAgreement.  A “termination event”includes, among other things: our failure to pay when due principal, interest,and any other applicable fees under and in accordance with the Loan andSecurity Agreement; our failure to comply with any of the terms or undertakingsof the Forbearance Agreement; our joining, assisting, cooperating orparticipating as an adverse party in certain suits or other proceedings againstHercules or any of its affiliates; the occurrence of another event of defaultunder the Loan and Security Agreement, subject to specified exceptions; and ourfailure to provide evidence of the occurrence of certain other events inconnection with our attempts to secure additional financing, which include ourfiling of a proxy statement or registration statement relating thereto with theSEC on or before August 14, 2009.  TheForbearance Agreement was subsequently amended on August 14, 2009 to extend thedeadline by which the Company must file the proxy statement or registrationstatement to August 20, 2009.  Upon thetermination of the forbearance period, Hercules will be free to proceed toenforce any or all of its rights and remedies with respect to the default,including, without limitation, the right to demand the immediate repayment ofthe outstanding indebtedness.  If Herculeswere to accelerate our payment obligations, we would be unable to fundthem.  As a result, we remain largelydependent on Hercules continuing to grant us waivers under the Loan andSecurity Agreement and not to accelerate our payment obligations under the Loanand Security Agreement, and there is substantial doubt about our ability tocontinue as a going concern.

 

***Significant Contractual Obligations***

 

As of June 30, 2009, our significantcontractual obligations were as follows:

 
| ** **                  | ** ** | **Payments  Due by Period** | ** ** |
|-----------------------------|------------|-----------------------------|------------|
| ** **                  | ** ** | **Total**                   | ** ** | **Less Than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More Than  5  Years** | ** ** |
|                        |       |                        |       |   |   |   |   |   |   |   |   |
| Long-term debt obligations  |       | $                           | 20,406     |   | $ | 6,749 |   | $ | 13,564 |   | $ | 93 |   | $ | — |   |
| Capital lease obligations   |       | 236                         |       | 83 |   | 104 |   | 49 |   | — |   |
| Operating lease obligations |       | 1,040                       |       | 475 |   | 565 |   | — |   | — |   |
| Vendor obligations          |       | 6,750                       |       | 2,250 |   | 4,500 |   | — |   | — |   |
|                             |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Inflation***

 

To date, the effects of inflation on ourconsolidated financial results have not been significant; however, we cannot becertain that inflation will not affect us materially in the future.

 

***OffBalance Sheet Arrangements***

 

We do notcurrently have any off-balance sheet arrangements.

 

***New AccountingStandards***

 

Refer to Note B to Notesto Consolidated Condensed Financial Statements in Part I, Item 1 ofthis Quarterly Report on Form 10-Q for management’s discussion of recentlyissued accounting pronouncements and their expected impact, if any, on theCompany’s consolidated condensed financial statements.

 

**Item 3.****                      ****Quantitative and Qualitative Disclosures About Market Risk**

 

Not required.

 

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**Item 4.        Controls and Procedures**

 

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in our reports filed under the Securities Exchange Act of 1934,as amended (Exchange Act), is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms and thatsuch information is accumulated and communicated to our management, includingour Chief Executive Officer and Chief Financial Officer, as appropriate, toallow for timely decisions regarding required disclosure. In designing andevaluating the disclosure controls and procedures, management recognizes thatany controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives,and management is required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

 

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

 

There was no change in our internal control overfinancial reporting that occurred during the period covered by this report thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

**PART II— OTHER INFORMATION**

 

**Item 1.        Legal Proceedings**

 

In the normal course ofbusiness, we have become and might in the future become involved in legalactions relating to our business. In management’s opinion, the resolution ofany such pending legal actions is not expected to have a material adverseeffect on our consolidated financial position or results of operations.

 

On May 7, 2009, wefiled a complaint against AV Partners related to our purchase, in June 2007,of certain assets and the remaining portion of the purchase price payable to AVPartners, which was secured by a letter of credit.  On July 7, 2009, we settled the dispute,dismissing all claims.  In connectionwith the settlement, we paid AV Partners $175,000 and the remaining fundssecuring the letter of credit, which amounted to $175,000 were returned to us.

 

**Item 1A.     Risk Factors**

 

*The risks and uncertainties described below are in addition to thoseincluded in our Annual Report on Form 10-K for the year ended December 31,2008, and are not the only risks facing our company. Additional risks anduncertainties not presently known to us or that we currently deem immaterialmay also affect our business operations.*

 

**Risks Relating to Our Liquidity and Capital Resources and Our Abilityto Continue as a Going Concern**

** **

***We may not have adequate liquidity and capitalresources to fund our operating needs and continue as a going concern.***

 

We have incurred significant losses from 2006through 2009, including net losses of $9.5 million for the six months endedJune 30, 2009.  As of June 30, 2009, wehad cash and cash equivalents of $3.5 million, total liabilities of $45.4million and an accumulated stockholders’ deficit of $1.3 million.  We have substantial liquidity requirementsrelated to our Loan and Security Agreement with Hercules and to earn outpayments for past acquisitions.  ThoughHercules has agreed to forbear from exercising its remedies, we are currentlyin default of the Loan and Security Agreement. In light of our losses and liquidity requirements, we have been engagedin an extensive process to explore potential sources of financing and otherstrategic alternatives.  We believe thatwe need to raise additional capital and restructure our debt obligations tomeet our liquidity needs, to continue as a going concern and to moreeffectively pursue our strategic objectives. 

 

If we fail to reduce our debt, secure additionalcapital and strengthen our liquidity position and to implement our strategicplan successfully, there is substantial doubt about our ability to continue asa going concern and we may be compelled to file for bankruptcy protection.

 

**Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds**

 

On June 19, 2009, we issued a warrant topurchase 250,000 shares of our common stock at an exercise price of $0.42 pershare to Hercules pursuant to the Second Amendment to the Loan and SecurityAgreement.  The issuance of the warrantswas exempt from registration under Section 4(2) of the SecuritiesAct.

 

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

 

None.

 

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

 

None.

 

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

 

None.

 

**Item 6.        Exhibits**

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                          |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                     |
| 10.3                 |       | Second Amendment to Loan and Security Agreement  dated May 31, 2009 by and between Hercules Technology Growth  Capital, Inc. and InfoLogix, Inc. (incorporated herein by reference  to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed  June 4, 2009). |
|                 |       |                                                                                                                                                                                                                                                                                                     |
| 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 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned; thereunto duly authorized, inHatboro, Pennsylvania on August 14, 2009.

 
|     | 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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