Tableof Contents

** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-Q**

 

| **Mark  One**                                                                                                                                                                                                             |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                      |   |   |
| **x**                                                                                                                                                                                                                     | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                                                                                                                                                                                      |   |   |
| **For The Quarterly Period Ended September 30,  2009**                                                                                                                                                               |
|                                                                                                                                                                                                                      |   |   |
| **o**                                                                                                                                                                                                                     | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| ** **                                                                                                                                                                                                                | ** ** | ** ** |
| **For the Transition Period  from               to               ** |

 

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

 

**INFOLOGIX, INC.**

(Exact name of registrant as specified in itscharter)

 

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

 

**(215) 604-0691**

(Registrant’s telephone number, includingarea code)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of 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 filer o                |   | Accelerated filer o         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer o                  |   | Smaller reporting company x |
| (Do not check if a smaller reporting company) |   |                             |

 

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

 

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

 

| **Class**                                       | ** ** | **Outstanding at November 5,  2009** |
|-------------------------------------------------|------------|-------------------------------------------|
| **Common  Stock, $0.00001 par value per share** | ** ** | **25,759,135  Shares**                    |

 

 

 

----

Table of Contents

 

**TABLE OF CONTENTS**

 
| **PART I —  FINANCIAL INFORMATION** |
|-----------------------------------------------|
|                                          |   |   |
| Item 1.                                       | Financial Statements | 3 |
|                                          |   |   |
|                                          | Condensed Consolidated Balance Sheets as of  September 30, 2009 (unaudited) and December 31, 2008 | 3 |
|                                          |   |   |
|                                          | Condensed  Consolidated Statements of Operations (unaudited) for the three and nine  months ended September 30, 2009 and 2008 | 4 |
|                                          |   |   |
|                                          | Condensed  Consolidated Statements of Cash Flows (unaudited) for the nine months ended  September 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 | 13 |
|                                          |   |   |
| Item 3.                                       | Quantitative  and Qualitative Disclosures About Market Risk | 25 |
|                                          |   |   |
| Item 4.                                       | Controls  and Procedures | 25 |
|                                          |   |   |
| **PART II  — OTHER INFORMATION**    |
|                                          |   |   |
| Item 1.                                       | Legal  Proceedings | 25 |
|                                          |   |   |
| Item 1A.                                      | Risk Factors | 26 |
|                                          |   |   |
| Item 2.                                       | Unregistered  Sales of Equity Securities and Use of Proceeds | 27 |
|                                          |   |   |
| Item 3.                                       | Defaults  Upon Senior Securities | 27 |
|                                          |   |   |
| Item 4.                                       | Submission  of Matters to a Vote of Security Holders | 27 |
|                                          |   |   |
| Item 5.                                       | Other  Information | 27 |
|                                          |   |   |
| Item 6.                                       | Exhibits | 28 |
|                                          |   |   |
|                                          | Signatures | 29 |

 

2

----

Table ofContents

 

**PART I- FINANCIAL INFORMATION**

 

**Item 1.        Financial Statements**

 

**INFOLOGIX, INC.**

**CondensedConsolidated Balance Sheets**

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

** **
| ** **                                                                                                                                                                                            | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                            | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                            |       |                         |       |                        |       |
| Current  assets:                                                                                                                                                                                      |       |                         |       |                        |       |
| Cash  and cash equivalents                                                                                                                                                                            |       | $                            | 1,596      |                        | $          | 3,037 |   |
| Accounts  and other receivables (net of allowance for doubtful accounts in the amount  of $648 and $352 as of September 30, 2009 and December 31, 2008,  respectively)                      |       | 17,120                       |       | 22,610                      |       |
| Unbilled  revenue                                                                                                                                                                                     |       | 368                          |       | 1,498                       |       |
| Inventory,  net                                                                                                                                                                                       |       | 2,350                        |       | 1,775                       |       |
| Prepaid  expenses and other current assets                                                                                                                                                            |       | 1,151                        |       | 1,228                       |       |
|                                                                                                                                                                                                  |       |                         |       |                        |       |
| Total  current assets                                                                                                                                                                                 |       | 22,585                       |       | 30,148                      |       |
| Property  and equipment, net                                                                                                                                                                          |       | 679                          |       | 944                         |       |
| Intangible  assets, net                                                                                                                                                                               |       | 7,946                        |       | 8,709                       |       |
| Goodwill                                                                                                                                                                                              |       | 10,971                       |       | 10,540                      |       |
| Deferred  financing costs                                                                                                                                                                             |       | 151                          |       | 501                         |       |
|                                                                                                                                                                                                  |       |                         |       |                        |       |
| Total  assets                                                                                                                                                                                         |       | $                            | 42,332     |                        | $          | 50,842 |   |
|                                                                                                                                                                                                  |       |                         |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                        |       |                         |       |                        |       |
| Current  liabilities:                                                                                                                                                                                 |       |                         |       |                        |       |
| Accounts  payable                                                                                                                                                                                     |       | $                            | 10,989     |                        | $          | 11,389 |   |
| Line  of credit                                                                                                                                                                                       |       | 9,046                        |       | 9,000                       |       |
| Current  portion of notes payable                                                                                                                                                                     |       | 15,834                       |       | 12,077                      |       |
| Current  portion of capital lease obligations                                                                                                                                                         |       | 81                           |       | 86                          |       |
| Sales  tax payable                                                                                                                                                                                    |       | 266                          |       | 477                         |       |
| Accrued  expenses                                                                                                                                                                                     |       | 3,241                        |       | 2,800                       |       |
| Accrued  earn out payable                                                                                                                                                                             |       | 2,388                        |       | 1,958                       |       |
| Other  current liabilities                                                                                                                                                                            |       | 1,660                        |       | 900                         |       |
| Deferred  revenue                                                                                                                                                                                     |       | 1,621                        |       | 276                         |       |
|                                                                                                                                                                                                  |       |                         |       |                        |       |
| Total  current liabilities                                                                                                                                                                            |       | 45,126                       |       | 38,963                      |       |
| Notes  payable, net of current maturities                                                                                                                                                             |       | 252                          |       | 4,215                       |       |
| Capital  lease obligations, net of current maturities                                                                                                                                                 |       | 134                          |       | 186                         |       |
|                                                                                                                                                                                                  |       |                         |       |                        |       |
| Total  liabilities                                                                                                                                                                                    |       | 45,512                       |       | 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 September 30,  2009 and December 31, 2008, respectively |       | —                       |       | —                      |       |
| Additional  paid in capital                                                                                                                                                                           |       | 26,621                       |       | 25,766                      |       |
| Accumulated  deficit                                                                                                                                                                                  |       | (29,801                      | )          | (18,288                     | )          |
|                                                                                                                                                                                                  |       |                         |       |                        |       |
| Total  stockholders’ (deficiency) equity                                                                                                                                                         |       | (3,180                       | )          | 7,478                       |       |
|                                                                                                                                                                                                  |       |                         |       |                        |       |
| Total  liabilities and stockholders’ (deficiency) equity                                                                                                                                         |       | $                            | 42,332     |                        | $          | 50,842 |   |

 

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

 

3

----

Table of Contents

 

**INFOLOGIX,INC.**

**CondensedConsolidated Statements of Operations (Unaudited)**

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

 
| ** **                                               | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                               | ** ** | **2009**                                  | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                     |       |                                      |       |                                     |       |   |   |   |   |
| Net  revenues                                            |       | $                                         | 22,345     |                                     | $          | 23,824 |   | $ | 65,568 |   | $ | 73,958 |   |
| Cost  of revenues                                        |       | 16,399                                    |       | 17,614                                   |       | 50,909 |   | 54,255 |   |
|                                                     |       |                                      |       |                                     |       |   |   |   |   |
| Gross  profit                                            |       | 5,946                                     |       | 6,210                                    |       | 14,659 |   | 19,703 |   |
| Selling,  general and adminstrative expenses             |       | 6,534                                     |       | 7,914                                    |       | 21,945 |   | 23,042 |   |
|                                                     |       |                                      |       |                                     |       |   |   |   |   |
| Operating  loss                                          |       | (588                                      | )          | (1,704                                   | )          | (7,286 | ) | (3,339 | ) |
| Interest  expense                                        |       | (1,469                                    | )          | (859                                     | )          | (3,803 | ) | (1,766 | ) |
| Interest  income                                         |       | 2                                         |       | 43                                       |       | 17 |   | 122 |   |
| Loss  on extinguishment of debt                          |       | —                                    |       | —                                   |       | (420 | ) | — |   |
|                                                     |       |                                      |       |                                     |       |   |   |   |   |
| Loss  before income tax benefit (provision)              |       | (2,055                                    | )          | (2,520                                   | )          | (11,492 | ) | (4,983 | ) |
| Income  tax benefit (provision)                          |       | (7                                        | )          | —                                   |       | (21 | ) | 930 |   |
|                                                     |       |                                      |       |                                     |       |   |   |   |   |
| Net  loss                                                |       | $                                         | (2,062     | )                                        | $          | (2,520 | ) | $ | (11,513 | ) | $ | (4,053 | ) |
|                                                     |       |                                      |       |                                     |       |   |   |   |   |
| Loss  per share - basic and diluted                      |       | $                                         | (0.08      | )                                        | $          | (0.10 | ) | $ | (0.45 | ) | $ | (0.16 | ) |
|                                                     |       |                                      |       |                                     |       |   |   |   |   |
| Weighted  average shares outstanding - basic and diluted |       | 25,759,135                                |       | 25,477,308                               |       | 25,682,484 |   | 25,196,578 |   |

 

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

 

4

----

Table ofContents

 

**INFOLOGIX,INC.**

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

**(in thousands)**

** **
| ** **                                           | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                           | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
|                                                 |       |                                     |       |   |   |
| Operating  activities:                               |       |                                     |       |   |   |
| Net  cash used in operating activities               |       | $                                        | (866       | ) | $ | (389 | ) |
|                                                 |       |                                     |       |   |   |
| Investing  activities:                               |       |                                     |       |   |   |
| Acquisition  of property, software and equipment     |       | (411                                     | )          | (1,857 | ) |
| Acquisitions,  net of cash acquired                  |       | —                                   |       | (2,975 | ) |
| Disposal  of property and equipment                  |       | —                                   |       | 80 |   |
| Promissory  notes issued                             |       | —                                   |       | 15 |   |
| Net  cash used in investing activities               |       | (411                                     | )          | (4,737 | ) |
|                                                 |       |                                     |       |   |   |
| Financing  activities:                               |       |                                     |       |   |   |
| Payments  received from employee stock purchase plan |       | 65                                       |       | 120 |   |
| Proceeds  from issuance of warrants                  |       | 78                                       |       | — |   |
| Payment  of deferred financing costs                 |       | (90                                      | )          | (1,391 | ) |
| Issuance  of Hercules note payable                   |       | —                                   |       | 12,000 |   |
| Issuance  of Herules line of credit             |       | —                                   |       | 7,500 |   |
| Final  repayment of Sovereign notes payable          |       | —                                   |       | (3,292 | ) |
| Final  repayment of Sovereign line of credit         |       | —                                   |       | (9,334 | ) |
| Repayment  of long-term debt and capital leases      |       | (263                                     | )          | (467 | ) |
| Net  borrowings on line of credit                    |       | 46                                       |       | 875 |   |
| Net  cash (used in) provided by financing activities |       | (164                                     | )          | 6,011 |   |
|                                                 |       |                                     |       |   |   |
| Net  change in cash and cash equivalents             |       | (1,441                                   | )          | 885 |   |
|                                                 |       |                                     |       |   |   |
| Cash  and cash equivalents at beginning of period    |       | 3,037                                    |       | 6,101 |   |
|                                                 |       |                                     |       |   |   |
| Cash  and cash equivalents at end of period          |       | $                                        | 1,596      |   | $ | 6,986 |   |

 

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

 

5

----

Table ofContents

 

**INFOLOGIX, INC.**

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

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

 

**NOTE A—****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 interimfinancial reporting and with the instructions for Form 10-Q and Article 10of Regulation S-X. They do not include all of the disclosures normally made inthe consolidated financial statements contained in Form 10-K.  In management’s opinion, all adjustments considerednecessary for a fair presentation of the consolidated results of operations,financial position and cash flows for the periods shown have been made.  All such adjustments are of a normal andrecurring nature.  The notes to 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 nine months ended September 30,2009 are not necessarily indicative of the results that may be expectedfor the year 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.

 

Certainamounts in prior periods’ financial statements and related notes have beenreclassified to conform to the 2009 presentation.

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States (U.S. GAAP) requires management to makeestimates and assumptions that affect the amounts reported in the consolidatedfinancial statements and the accompanying notes. Management considersmateriality and uses the information available to prepare the consolidatedfinancial statements including, the Company’s history, industry standards andthe current economic environment, among other factors, in forming its estimatesand judgments. Because of the uncertainty inherent in such estimates, actualresults may differ 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.

 

**NOTEB—Recent Accounting Pronouncements**

 

In April 2008, the Financial Accounting Standards Board (FASB)issued FSP FAS 142-3, *Determination of theUseful Life of Intangible Assets* (FSP FAS 142-3) as codified in ASCTopic 350. FSP FAS 142-3 amends the factors that should be considered indeveloping renewal or extension assumptions used to determine the useful lifeof a recognized intangible asset under Statement 142. FSP FAS 142-3 iseffective for fiscal years beginning after December 15, 2008. Theapplication of the subtopic did not have a material impact on the consolidatedfinancial statements.

 

In June 2009, FASB issued Statement of FinancialAccounting Standards No. 168(SFAS 168), *The FASB AccountingStandards Codification and the Hierarchy of Generally Accepted AccountingPrinciples*. SFAS 168establishes the FASB*Accounting Standards Codification* (ASC) as the source of authoritativeaccounting and reporting standards in the United States, in addition toguidance issued by the SEC.  The ASC is arestructuring of accounting and reporting standards designed to simplify useraccess to all authoritative U.S. GAAP by providing the authoritative literaturein a topically organized structure.  TheASC reduces the U.S. GAAP hierarchy to two levels, one that is authoritativeand one that is not.  The ASC is notintended to change U.S. GAAP or any requirements of the SEC.  The ASC became authoritative upon its releaseon July 1, 2009, is effective for interim and annual periods ending after September 15,2009, and has been adopted by the Company.

 

InMay 2009, the FASB issued Statement of Financial Accounting Standard No. 165,*Subsequent Events* (FAS 165).  On July 1, 2009 FAS 165 was codified inthe ASC under topic 855, *Subsequent Events*(ASC 855).  ASC 855 establishes generalstandards of accounting for and disclosure of events that occur after thebalance sheet date but before financial statements are issued or are 

 

6

----

Table ofContents

 

availableto be issued.  Although there is newterminology, the topic is based on the same principles as those that haveexisted in auditing standards.  Under theprovisions of ASC 855, companies are required to disclose the date throughwhich an entity has evaluated subsequent events.  The provisions of the standard/topic areeffective for interim and annual periods ending after June 15, 2009.  The adoption of ASC 855 did not have asignificant impact on the consolidated balance sheet or consolidated statementsof operations and cash flows.

 

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 was codified in the ASCon July 1, 2009 under subtopic 815-40-15. This subtopic clarifies how to determine whether certain instruments orfeatures are indexed to an entity’s own stock and thereby possibly exempt fromaccounting as a derivative under ASC 815 or possibly qualify for considerationof equity accounting.  The Company willapply the provisions of this standard to its new arrangements as theyarise.  The application of this subtopicdid not have a material impact on the consolidated financial statements.

 

Beginning January 1, 2009, the Companyapplied the provisions of FASB StaffPosition APB 14-1, *Accounting for ConvertibleDebt Instruments That May Be Settled in Cash upon Conversion (IncludingPartial Cash Settlement)* (FSP APB 14-1) to its convertible notespayable.  FSP APB 14-1 wascodified in the subtopic ASC 470-20 on July 1, 2009.  This subtopic requires companies toseparately account for the liability (debt) and equity (conversion option)components of certain convertible debt instruments that may be settled,partially or fully, in cash (or other assets) on conversion in a manner thatreflects a company’s nonconvertible debt borrowing rate.  The provisions of the standard are effectivefor financial statements issued for fiscal years beginning after December 15,2008, and interim periods within those fiscal years.  The application of the subtopic did not havea material impact on the consolidated financial statements.

 

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 was codified in the ASC under subtopic 825-10-65-1 and is effectivefor interim and annual periods ending after June 15, 2009.  The adoption of this subtopic did not have amaterial effect on the condensed consolidated financial statements and relateddisclosures.

 

Atits September 23, 2009 board meeting, the FASB ratified final EITFconsensus on revenue arrangements with multiple deliverables (Issue 08-1).  Issue 08-1 supersedes Issue 00-21 (codifiedin ASC 605-25).  Issue 08-1 applies toall deliverables in contractual arrangements in all industries in which avendor will perform multiple revenue-generating activities, except when some orall deliverables in a multiple deliverable arrangement are within the scope ofother, more specific sections of the ASC and other sections of ASC 605 onrevenue recognition.  Specifically, Issue08-1 addresses the unit of accounting for arrangements involving multipledeliverables.  It also addresses howarrangement consideration should be allocated to the separate units ofaccounting, when applicable. However, guidance on determining when the criteriafor revenue recognition are met and on how an entity should recognize revenuefor a given unit of accounting are located in other sections of theCodification.  Issue 08-1 will ultimatelybe issued as an Accounting Standards Update (ASU) that will amend the ASC.  Final consensus is effective for fiscal yearsbeginning on or after June 15, 2010. Entities can elect to apply this Issue (1) prospectively to new ormaterially modified arrangements after the Issue’s effective date or (2) retrospectivelyfor all periods presented.  The Company is in the process ofevaluating the impact of this guidance on our consolidated financialstatements.

 

Atits September 23, 2009 board meeting, the FASB also ratified final EITFconsensus on software revenue recognition (Issue 09-3) which will impactentities that sell tangible products containing both hardware elements andsoftware elements that are currently within the scope of ASC 985-605 (formerlySOP 97-2).  This Issue amends ASC 985-605and ASC 985-605-15-3 (formerly Issue 03-5) to exclude from their scope alltangible products containing both software and non-software components thatfunction together to deliver the product’s essential functionality. That is,the entire product (including the software deliverables and non-softwaredeliverables) would be outside the scope of ASC 985-605 and would be accountedfor under other accounting literature. The consensus will include factors thatentities should consider when determining whether the software and non-softwarecomponents function together to deliver the product’s essential functionalityand are thus outside the revised scope of ASC 985-605.  Issue 09-3 will ultimately be issued as anASU that will amend the FASB Accounting Standards Codification (ASC).  The final consensus is effective for fiscalyears beginning on or after June 15, 2010. Entities can elect to applyIssue 09-3 (1) prospectively to new or materially modified arrangementsafter the Issue’s effective date or (2) retrospectively for all periodspresented. Early application is permitted. The Company isin the process of evaluating the impact of this pronouncement on ourconsolidated financial statements.

 

7

----

Table of Contents

 

**NOTEC—Inventory**

 

Inventoryconsists of the following:

 
| ** **                                              | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                              | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
|                                                    |       |                         |       |                        |       |
| Finished  goods                                         |       | $                            | 2,967      |                        | $          | 2,111 |   |
| Work  in progress                                       |       | 72                           |       | 85                          |       |
| Less:  allowance for slow moving and obsolete inventory |       | (689                         | )          | (421                        | )          |
| Total  inventory, net                                   |       | $                            | 2,350      |                        | $          | 1,775 |   |

 

**NOTED—Customer and Vendor Concentrations**

 

Forthe three and nine months ended September 30, 2009 and 2008, the Companyhad sales to significant customers, as a percentage of net revenues, asfollows:

 
| ** **  | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **  | ** ** | **2009**                                  | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
|        |       |                                      |       |                                     |       |   |   |   |   |
| Customer  A |       | 11.3                                      | %          | 4.3                                      | %          | 14.1 | % | 0 | % |
| Customer  B |       | 8.9                                       | %          | 0.7                                      | %          | 8.5 | % | 0.7 | % |
| Customer  C |       | 6.7                                       | %          | 2.9                                      | %          | 6.7 | % | 1.4 | % |

 

Forthe three and nine months ended September 30, 2009 and 2008, purchasesfrom the Company’s significant vendors as a percentage of total expenditures,are as follows:

 
| ** ** | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** ** | ** ** | **2009**                                  | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
|       |       |                                      |       |                                     |       |   |   |   |   |
| Vendor  A  |       | 18.1                                      | %          | 19.8                                     | %          | 18.4 | % | 22.8 | % |
| Vendor  B  |       | 23.3                                      | %          | 10.4                                     | %          | 25.3 | % | 3.8 | % |

 

**NOTEE—Debt**

 

On May 1, 2008, the Company entered into a loan and securityagreement, as amended on November 19, 2008 and May 31, 2009 (Loan andSecurity Agreement) with Hercules Technology Growth Capital, Inc.(Hercules) that provided the Company with a revolving credit facility of up to$9,000 and a term loan facility of up to $12,000.  The revolving credit facility was to expireon November 1, 2009 and the term loan facility was to mature on May 1,2012.  Voluntary prepayments of principalon the term loan facility were subject to a prepayment charge.  The Company’s obligations under the Loan andSecurity Agreement were secured by all of its personal property, including allof the equity interests in its subsidiaries. At September 30, 2009, $9,046 and $11,594, respectively, wereoutstanding under these facilities, including principal and accruedinterest.  The estimated fair value ofthese facilities approximates their carrying values at September 30, 2009because the underlying interest rates approximate market rates that the Companycould obtain for similar instruments. As described below, the Loan and SecurityAgreement was amended and restated on November 20, 2009.

 

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 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.

 

Borrowings under the revolving credit facility were limited by the Company’s asset base, as defined and boreinterest 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 was to bear interest at an annual rate equal to 4.50% interest paid inkind plus the greater of 

 

8

----

Table of Contents

 

14.25% or the prime rateplus 9.75%.  Borrowings under the termloan facility bore interest at an annual rate equal to 3.75% interest paid inkind plus the greater of 15.75% or the prime rate plus 10.75% through September 30,2009.  Thereafter, the term loan facilitywas to bear interest at an annual rate equal to 6.75% interest paid in kindplus the greater of 15.75% or the prime rate plus 10.75%. Interest thatis paid in kind would have been added to the principal amount of the termloan.    In the event of a default on theLoan and Security Agreement, the borrowings were to bear interest at 300 basispoints higher than the then current rate.

 

The Loan andSecurity Agreement contained various affirmative and negative covenants,including covenants requiring the Company to maintain a minimum cash balanceand restricting the Company’s ability to incur indebtedness, make investments,make payments in respect of its capital stock, including dividends andrepurchases 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 of a Fundamental Event Transactionon July 31, 2009, defined as either (i) the sale of all orsubstantially all of the assets or capital stock of the Company, (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 the Company’s property and assets), theproceeds of which would be used to repay the term loan. A Fundamental EventTransaction did not occur by July 31, 2009, and as such an event ofdefault occurred. Hercules agreed to forbear from exercising its rights withrespect to this event of default as described below. In addition, the Companywas not permitted under the Loan and Security Agreement and a subordinationagreement with Hercules to pay any amounts owing under the earn out agreementsthat were entered into in connection with the acquisitions of the assets ofHealthcare Informatics Associates, Inc. (HIA) or Delta Health, Inc.(Delta) if the Company’s total leverage exceeded the predefined maximum.  Upon an event of default under the agreement,Hercules could opt to accelerate and demand payment of all or any part of theCompany’s obligations under the Loan and Security Agreement.

 

Under the provisions of the term loan facility, the Company wasrequired to pay a succession fee equal to the greater of $1,200 or 6% of theCompany’s market capitalization that exceeded $11,327, if a Fundamental EventTransaction (described in the preceding paragraph) closed and the term loan wasrepaid by September 30, 2009.  Thesuccession fee equals the greater of $1,500 or 6% of the Company’s marketcapitalization exceeding $11,327, if the loan is repaid after September 30,2009. The succession fee would have been due upon the earliest to occur of (i) demandfrom Hercules 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 September 30, 2009, the Company hasrecorded a liability of $1,500 related to this obligation.

 

As of September 30, 2009, the Company was not in compliance withits minimum cash balance covenant requiring the Company to have unrestrictedcash on hand of $1,500. Outstanding borrowings under the credit and term loanfacilities are classified as current in the accompanying condensed consolidatedbalance sheet; however, Hercules agreed to forbear from exercising its right todemand payment of the principal due under the facilities through November 12,2009.  Due to past defaults and becauseits total leverage ratio exceeds 3.00 to 1.00 the Company is prohibited fromsatisfying its earn out obligations related to the Company’s acquisitions ofHIA and Delta.

 

On July 31,2009, the Company entered into a forbearance agreement (Forbearance Agreement)under which Hercules agreed to forbear from exercising its rights and remedieswith respect to an event of default that arose under the Loan and SecurityAgreement when a Fundamental Event Transaction did not close by July 31,2009 (Default).  The ForbearanceAgreement was effective until the earlier of (i) September 30, 2009or (ii) the occurrence of a termination event under the ForbearanceAgreement.  A “termination event”included, among other things: the Company’s failure to pay when due principal,interest, and any other applicable fees under and in accordance with the Loanand Security Agreement; the Company’s failure to comply with any of the termsor undertakings of the Forbearance Agreement; the Company’s joining, assisting,cooperating or participating as an adverse party in certain suits or otherproceedings against Hercules 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 included the Company’s filing of a proxystatement or registration statement relating thereto with the Securities andExchange Commission on or before August 14, 2009.  Under the Forbearance Agreement, the Companypaid a forbearance fee of $412 (equal to 2% of the total principal amount dueto Hercules, including capitalized interest payments paid in kind and added tothe principal amount of the loan).

 

On August 14,2009, the Company entered into an amendment of the Forbearance Agreement (FirstForbearance Amendment).  Pursuant to theFirst Forbearance Amendment, Hercules agreed to extend the deadline by whichthe Company was required to file a proxy statement or registration statementfrom August 14, 2009 to August 20, 2009.  The Company did not pay any fee to Herculesin connection with the First Forbearance Amendment.

 

On August 20,2009, the Company entered into a second amendment of the Forbearance Agreement(Second Forbearance Amendment).  Pursuantto the Second Forbearance Amendment, Hercules agreed to extend the deadline bywhich the Company must file a proxy statement or registration statement to August 21,2009.  The Company did not pay any fee toHercules in connection with the Second Forbearance Amendment.

 

9

----

Table of Contents

 

On September 23,2009, the Company entered into a third amendment to the Forbearance Agreement(Third Forbearance Amendment). Following the Third Forbearance Amendment, theForbearance Agreement was effective until the earlier of (i) October 12,2009 or (ii) the occurrence of a termination event under the ForbearanceAgreement.  A “termination event” included, among other things, theCompany’s failure to deliver to Hercules an executed term sheet on or before October 5,2009 providing for the terms and conditions of a restructure of the Loan andSecurity Agreement and the Company’s failure at any time to continue, in goodfaith, its negotiations with respect to a restructure of the Loan and SecurityAgreement.  The Company did not pay anyfee to Hercules in connection with the Third Forbearance Amendment.

 

Pursuant to theLoan and Security Agreement, the Company was required to pay to Hercules theremaining balance of a restructuring fee in the amount of $160 on the earliestof (i) September 30, 2009, (ii) the acceleration of the securedobligations under the Loan and Security Agreement, or (iii) payment infull of the secured obligations.  The Company did not pay the balance ofthe restructuring fee by the specified date, and as a result, an event ofdefault occurred under the Loan and Security Agreement.  On September 30,2009, the Company entered into a fourth amendment to the Forbearance Agreement(Fourth Forbearance Amendment), pursuant to which, Hercules agreed to forbearfrom exercising its rights and remedies under the Loan and Security Agreement asa result of this event of default for the period and subject to the terms andconditions specified in the Forbearance Agreement. The Company did not pay anyfee to Hercules in connection with the Fourth Forbearance Amendment.

 

On October 15,2009, the Company entered into a fifth amendment to the Forbearance Agreement(Fifth Forbearance Amendment) under which Hercules agreed to forbear fromexercising its rights and remedies with respect to certain events of defaultunder the Loan and Security Agreement. Under the Fifth Forbearance Amendment,Hercules agreed to reduce the amount of unrestricted cash that the Company isrequired to maintain from $1,500 to $750. During the period from July 31,2009 through October 9, 2009, the Company did not maintain the requiredamount of unrestricted cash, and as a result, an event of default occurredunder the Loan and Security Agreement.  Under the Fifth ForbearanceAmendment the Lender also agreed to forbear from exercising its rights andremedies under the Loan and Security Agreement as a result of this event ofdefault for the period and subject to the terms and conditions specified in theForbearance Agreement.  In addition, theFifth Forbearance Amendment extended the forbearance period until the earlierof (i) November 12, 2009 or (ii) the occurrence of a terminationevent under the Forbearance Agreement, which included, among other things, theoccurrence of another event of default under the Loan and Security Agreement,subject to specified exceptions. The Company did not pay any fee to Hercules inconnection with the Fifth Forbearance Amendment. Upon the termination of theforbearance period, Hercules would be free to proceed or enforce any or all ofits rights and remedies with respect to the Company’s default under the Loanand Security Agreement.

 

On November 20,2009, the Company entered into an Amended and Restated Loan and SecurityAgreement (“Amended Loan Agreement”), Debt Conversion Agreement, RegistrationRights Agreement with Hercules Technology I, LLC (“HTI”), Registration RightsAgreement with Hercules, and also issued warrants to purchase the Company’scommon stock.

 

Pursuant to theAmended Loan Agreement, Hercules agreed to provide the Company with a totalsenior loan facility of $22,500, including two term loans aggregating $10,500and a revolving line of credit facility of $12,000. Under the Debt ConversionAgreement, the transaction included the issuance of 67,294,751 shares of theCompany’s common stock and a warrant to purchase 16,823,688 shares of theCompany’s common stock for an exercise price of $0.0743 per share, in exchangefor cancellation of $5,000 in obligations payable to Hercules.  The Company was assessed a transaction feeequal to 2% of the total commitment , or $450, which is payable in twelve equalmonthly installments beginning in May 2010.

 

The revolving lineof credit facility has total availability of up to $12,000 (of which $7,000 wasdrawn immediately following the closing), and will expire on May 1, 2011,with a conditional ability to extend the term for an additional sixmonths.  Borrowings under the creditfacility are based on eligible accounts receivable, including an over advanceprovision up to $500, which are due four weeks after the over advance isdrawn.  Borrowings will bear interestinitially at 12.0% per annum until such time that the term loans are repaid,when the interest rate on outstanding borrowings will be prime plus 4%.  Over advances will bear interest at 15% perannum.

 

The term loansinclude a $5,500 (Term Loan A) 48-month amortizing loan and a $5,000 (Term LoanB) convertible note due on November 1, 2014. Amortization on Term Loan Abegins on December 1, 2010. Term Loan B is convertible into the Company’scommon stock at Hercules’ option, or automatically if its 90-day value weightedadjusted price exceeds five times the conversion price pursuant to the DebtConversion Agreement. The conversion price of Term Loan B is $0.0743 pershare.  The outstanding principal balanceon each term loan will bear interest at 12% per annum for the initial twelvemonths; 18% per annum for the subsequent twelve months and 15% per annumthereafter.  This interest is payable incash.  Term Loan B will bear anadditional 2.5% interest that will be “paid in kind” (PIK).  The Company will have the option to turn thePIK interest into cash interest or additional equity shares if certainpredefined metrics are maintained.  Eachof the term loans will be assessed a prepayment charge beginning at 5% of thetotal term loan commitment, and reduced to 3% after twelve months and reducedagain to 1% after two years.

 

10

----

Table of Contents

 

The Amended LoanAgreement has certain negative and financial covenants and other stipulationsassociated with the arrangement.

 

**NOTEF—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 $558 and $847 of charges for the three months ended September 30,2009 and 2008, respectively, and $1,592 and $1,931 of charges for the ninemonths ended September 30, 2009 and 2008, respectively.  The Company made payments under thearrangement of $611 and $778 for the three months ended September 30, 2009and 2008, respectively, and of $1,534 and $1,645 for the nine months ended September 30,2009 and 2008, respectively.

 

Acompany owned by this same stockholder provides the Company with consultingservices with respect to software development. Under this arrangement, the Company incurred $25 and$206 of charges for the three months ended September 30, 2009 and 2008,respectively, and incurred $129 and $1,379 of charges for the nine months endedSeptember 30, 2009 and 2008, respectively. The Company made payments of $22 and $566 for the three months ended September 30,2009 and 2008, respectively, and made payments of $299and $1,412 for the nine months ended September 30, 2009 and2008, respectively.  On March 2,2009, this agreement was amended to extend the terms through December 31,2013.

 

Pursuantto the amended terms of this agreement, the Company has a minimum annualcommitment to purchase technical services, consulting services with respect tosoftware development, and to sell extended warranties on the entity’s behalf,all of which must total at least $1,500 per year. The agreement expires in2013.

 

***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 September 30, 2009 and 2008, the Company paidGulian & Associates approximately $21 and $68, respectively, andduring the nine months ended September 30, 2009 and 2008, the Company paidapproximately $132 and $153, respectively, in fees.

 

**NOTEG—Commitments and Contingencies**

 

***Litigation***

 

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

 

On September 18,2009, CDC Software, Inc. (“CDC”) filed a Complaint against InfoLogix, Inc.(“InfoLogix”), Dominic Venieri, Kevin College, Gavin Klaus, Brian Thorn, JasonRusso, Kyle Sorenson, and Luis Castro Trejo (collectively, the “IndividualDefendants”) in the Superior Court of Fulton County, Georgia (the “Complaint”). In the Complaint, CDC has alleged that (i) the Individual Defendants havebreached their purported employment contacts with CDC, (ii) InfoLogix hasinterfered with the purported contractual relationships between the IndividualDefendants and CDC, and (iii) InfoLogix and the Individual Defendants havemisappropriated CDC’s claimed trade secrets (collectively, “the Claims”).

 

InfoLogix and theIndividual Defendants deny any and all alleged wrongdoing, and intend tovigorously defend against the Claims brought by CDC.

 

11

----

Table of Contents

 

**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 September 30, 2009, avaluation allowance of $11,372****was recognizedto offset the related deferred tax assets due to the uncertainty of realizingthe benefits of certain tax credits, current operating losses and NOLcarryforwards before they expire. Federal net operating losses will expire beginning 2025 and state netoperating losses will expire in varying years between 2013 through 2027.

 

**NOTEI—2008 Employee Stock Purchase 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 $120 in cashin the respective periods. On July 20, 2009, the Company’s Board ofDirectors voted to amend the ESPP to provide that the Board of Directors maysuspend the ESPP at any time and for any reason and later reinstate the ESPP atany time and for any reason.  The Board ofDirectors has determined that an indefinite suspension of the ESPP is in thebest interests of the Company and its stockholders. Pursuant to the ESPP asamended, the Company suspended the ESPP effective as of July 1, 2009.

 

**NOTEJ—Stock Based Compensation**

 

For the three monthsended September 30, 2009 and 2008, the Company recognized compensationcost for stock options and warrants granted to employees of $182 and $274,respectively, and for the nine months ended September 30, 2009 and 2008,the Company recognized compensation cost for stock options and warrants grantedto employees of $712 and $798, respectively. In addition, for the nine monthsended September 30, 2009 and 2008, the Company recorded an income taxbenefit of $271 and $304**,** respectively,related to the granting of the nonqualified options and warrants.

 

**NOTEK—Subsequent Events**

 

The Company has evaluatedsubsequent events for recognition or disclosure through November 23, 2009.

 

On October 15, 2009,the Company entered into the Fifth Amended Forbearance Agreement with itslender, Hercules, and on November 20, 2009, the Company entered into theAmended and Restated Loan Agreement, Debt Conversion Agreement, RegistrationRights Agreement with HTI, Registration Rights Agreement with Hercules, andalso issued warrants to purchase the Company’s common stock. See Note E — Debt.

 

12

----

Table ofContents

 

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

 

*Forward-Looking Statements*

 

This report contains “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995 that involve risks and uncertainties, many of which are beyond ourcontrol.  Our actual results could differmaterially and adversely from those anticipated in such forward-lookingstatements as a result of certain factors, including, for example:

 

·                     our ability torefinance, replace or restructure our current indebtedness and to comply withfinancial covenants and other terms and conditions contained in the agreementsgoverning our indebtedness or any 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 Amended Loan Agreement or agreements for anyreplacement indebtedness.

 

All statements, otherthan statements of historical facts, included in this report regarding ourstrategy, future operations, financial position, estimated revenue or losses,projected costs, prospects, current expectations, forecasts, and plans andobjectives of management are forward-looking statements.  When used in this report, the words “will,” “may,”“believe,” “anticipate,” “intend,” “estimate,” “expect,” “should,” “project,” “plan”and similar expressions are intended to identify forward-looking statements,although not all forward-looking statements contain such identifyingwords.  All forward-looking statementsspeak only as of the date of this report. We do not undertake any obligation to update any forward-lookingstatements or other information contained herein, except as required by federalsecurities laws.  You should not placeundue reliance on these forward-looking statements.  Although we believe that our plans,intentions and expectations reflected in or suggested by the forward-lookingstatements in this report are reasonable, we cannot assure you that these plans,intentions or expectations will be achieved. We have disclosed important factors that could cause our actual resultsto differ materially from our expectations under “Risk Factors” in our AnnualReport on Form 10-K for the year ended December 31, 2008, ourQuarterly Report on Form 10-Q for the quarterly period ended June 30,2009, and in this Quarterly Report on Form 10-Q and elsewhere in thisreport.  These cautionary statementsqualify all forward-looking statements attributable to us or persons acting onour behalf.

 

13

----

Table of Contents

 

**Overviewand Outlook**

** **

The followingdiscussion and analysis of our financial condition and results of operations isintended to assist you in understanding our financial condition and results ofoperations. This discussion and analysis should be read in conjunction with ourfinancial statements and the notes thereto included in Item 1 of this quarterlyreport. Many of the amounts and percentages presented in this discussion andanalysis have been rounded for convenience of presentation, and all dollaramounts are presented in thousands.

 

**Overview**

 

InfoLogix is a provider of enterprise mobility solutions for thehealthcare and commercial industries. We provide these solutions to ourcustomers by utilizing a combination of products and services, includingconsulting, business software applications, mobile managed services, mobileworkstations and devices, and wireless infrastructure. Our solutions aredesigned to allow the real time usage of data throughout a customer’senterprise in order to enhance workflow, improve customer service, increaserevenue and reduce costs. We sell wireless communication and computing devices,including mobile workstations that connect to a customer’s wireless network sothat information can be accessed from any location within the enterprise. Wealso implement customized and third-party software applications and provideradio frequency identification (RFID) technology, which is a data-exchangemethod that uses transponders to store and remotely send or retrieveinformation to enable the transmission and processing of that informationbetween the customer’s information system and its wireless communication and computingdevices. In addition, we offer professional services that support andcomplement a customer’s wireless computing systems and enterprise-wide softwareimplementations, including consulting, mobile managed services, training,engineering, technical support and network monitoring.

 

Historically, the sale of mobile workstations and other wirelessdevices has represented a majority of our net revenues.  During the past three years, we have beentransitioning our business to offer higher margin software applications,consulting and other professional services. With our focus on selling softwareand services and away from the sale of hardware and related warranties, webelieve that we can provide more comprehensive enterprise mobility solutions toour customers. These solutions involve:

 

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

 

·                  Providing our customers withongoing managed services that are designed to supplement their informationtechnology department, such as training, maintenance and repair, networkmonitoring, software application upgrades, network security and workflowconsulting.

 

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

 

·                  Developing and implementingcustom software applications by using existing proprietary and third-partysoftware.

 

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

 

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

 

**GoingConcern**

 

Our condensed consolidated financial statements for the three and ninemonths ended September 30, 2009 have been prepared on a going concernbasis, which contemplates continuing operations, securing additional debt orequity financing, selling certain assets, and realizing assets and liabilitiesin the ordinary course of business. However, we have incurred significant net losses from 2006 through 2009,including net losses of $11,513 for the nine months ended September 30,2009 and have accumulated a stockholders’ deficiency of $3,180.  We have substantial liquidity requirementsincluding monthly interest on our outstanding debt and those related to therepayment of our revolving line of credit that comes due on May 1, 2011,as well as 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.  Weentered into an Amended and Restated Loan Agreement with Hercules on November 20,2009. As a result, werestructured our indebtedness and reduced our outstanding obligations payableto Hercules by $5,000, but we also continue to identify ways to optimize ourcapital structure and pursue strategic planning to continue as a going concernand provide for our future success.

 

14

----

Table ofContents

 

We have undertaken a series of actions to reduce costs and are pursuingvarious initiatives to secure equity or debt financing that will reduce ouroverall cost of capital.  Our plan toimprove our liquidity also includes the possibility of selling certain assetsof the business, and further evaluating our staffing model. Our continuedoperations are dependent on our ability to implement these planssuccessfully.  Our ability to implementthese plans successfully is dependent on many circumstances outside of ourdirect control, including general economic conditions and the financialstrength of our customers. Any additional financing we are able to secure willlikely be subject to a number of conditions and involve additional costs. Giventhe current negative conditions in the economy generally and the credit marketsin particular, there is uncertainty as to whether we will be able to generatesufficient liquidity to repay our outstanding debt, to make earn out paymentsand to meet working capital needs. There can be no assurance, however, that we will beable to achieve and sustain a level of liquidity sufficient to continue as agoing concern.

 

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 revenuesand expenses**

 

We generate our net revenues through the resale ofwireless and mobile hardware and systems, including mobile workstations,computers, peripherals, and related products under which the revenue isrecognized. Sales revenue for these products is recognized when both the titleand risk of loss transfer to the customer, generally upon shipment. We alsogenerate revenues from consulting and professional services on either a fixedfee or time and expense basis. Net revenues from our consulting andprofessional services billed on a time and expense basis are recognized at thetime the service is delivered and the expenses are incurred. Net revenues fromthe sale of our proprietary learning technologies and any professionalconsulting or engineering services provided on a fixed-fee basis are recognizedaccording to a proportionate method of accounting and is recognized ratablyover the contract period based upon actual project hours as compared tobudgeted project hours.

 

We also generate net revenues from the sale of extended warranties onwireless and mobile hardware and systems, including mobile workstations,computers, peripherals, and related products. We sell original equipment manufacturers’ component warranties andwarranty programs sponsored by other third parties and recognize the revenue ona net basis upon execution of the warranty agreement. As we have beentransitioning our business away from the sale of hardware and related warranties,we are not selling new extended warranty programs except for those serviced bythird parties and we have taken steps to confirm with our customers that thirdparties are the obligors under their warranties.

 

Payments received in advance of services performedare recorded as deferred revenue. Certain contract payment terms may result incustomer billing occurring at a pace that is slower than revenue recognition.The resulting revenue recognized in excess of amounts billed and project costis included in unbilled revenue on our condensed consolidated balance sheet.

 

Cost of revenues consists of all expenses that aredirectly attributable to the costs associated with the purchase, for resale, ofwireless and mobile hardware and systems, including computers, peripherals, andrelated products. Fluctuations in our gross margin may occur due to changes inour ability to obtain discounts on product sales or our ability to negotiatehigher margins on sales contracts with large customers. Cost of revenues alsoconsists of the direct costs associated with those employees or sub-contractorsthat perform our professional consulting services on behalf of our customers.

 

Sellingexpenses primarily consist of the salaries, benefits, travel and other costs ofour regional and national account sales representatives, sales management andbusiness development expenses. General and administrative expenses primarilyconsist of the costs attributable to the support of our operations, such as:costs related to information systems, salaries, expenses and office space 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.

 

**CriticalAccounting Estimates and Policies**

 

Our condensed consolidated financial statements areprepared in conformity with accounting principles generally accepted in theUnited States of America (GAAP), which requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities at thedate of the financial statements and the reported amounts of net revenues andexpenses during the reporting periods. Critical accounting policies are thosethat require the application of management’s most difficult, subjective, orcomplex judgments, 

 

15

----

Table ofContents

 

oftenbecause of the need to make estimates about the effect of matters that areinherently uncertain and that may change in subsequent periods. In preparingthe financial statements, management utilized available information, includingour history, industry standards and the current economic environment, amongother factors, in forming its estimates and judgments, giving due considerationto materiality. Actual results may differ from these estimates. In addition,other companies may utilize different estimates, which may impact thecomparability of our results of operations to those of companies in similarbusinesses. We believe that of our significant accounting policies, thefollowing may involve a higher degree of judgment and estimation.

 

*Accounts receivable*

 

We grant credit, generally without collateral, toour customers, which are primarily in the healthcare and commercial markets.Consequently, we are subject to potential customer credit risk related tochanges in economic conditions within those markets. However, we believe thatour billing and collection policies are adequate to minimize the potentialcredit risk.

 

We reserve for uncollectible accounts based on ourbest estimate of the amount of probable credit losses in our existing accountsreceivable. We periodically review our accounts receivable to determine whetheran allowance is necessary based on an analysis of past due accounts and otherfactors that may indicate that the realization of an account may be in doubtincluding historical experience and current economic and market conditions.Account balances deemed to be uncollectible are written off after all means ofcollection have been exhausted and the potential for recovery is consideredremote.

 

*Inventory*

 

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

 

We periodically review our inventories and makeprovisions as necessary for estimated obsolete and slow-moving goods. We markdown inventory in an amount equal to the difference between cost of inventoryand the estimated market value based on assumptions about future demands,selling prices and market conditions. The creation of such provision results ina write-down of inventory to net realizable value and a charge to cost ofrevenues.

 

*Impairment of long-lived assets*

 

We assess the potential impairment of long-livedassets whenever events or changes in circumstances indicate that the carryingvalue may not be recoverable. An asset’s value is impaired if management’sestimate of the aggregate future cash flows, undiscounted and without interestcharges, generated by the asset are less than the carrying value of the asset.When estimating future cash flows, we consider factors such as expected futureoperating income and historical trends, as well as the effects of demand andcompetition. To the extent impairment has occurred, the loss is measured as theexcess of the carrying amount of the asset over the estimated fair value of theasset. Such estimates require the use of judgment and numerous subjectiveassumptions, which, if actual experience varies, could result in materialdifferences in the measurement of impairment charges.

 

*Intangible assets*

 

We capitalize the cost associated with procuring ordeveloping intangible assets and amortize those costs through operationsratably over the estimated lives of the intangible assets.  The costs of successful registrations forpatents are generally amortized over sixteen years.  The costs of unsuccessful registrations arecharged to expense.  Acquired technologyis recorded at its estimated fair value at the date of acquisition andgenerally amortized over four years. Developed technology is generally amortized over five years. Licensefees are amortized over the respective license period.  Customer lists are recorded at theirestimated fair values at the date of acquisition and are amortized over theestimated retention period, which generally ranges from six to ten years.  We assess our intangible assets for potentialimpairment in conjunction with our other long-lived assets whenever events orchanges in circumstances indicate that the carrying value may not berecoverable.

 

*Software capitalization*

 

Internal use software is developed for our use inoperations or delivery of salable products and services to our customers and isnot marketed for sale.  We capitalize thecosts of internal use software that are associated with developing thesoftware.  Costs associated with theplanning and design of the software are expensed as incurred.  We cease capitalizing costs and commenceamortization of the software when it is ready for its intended use.  Amortization is recorded on a straight-linebasis over the estimated useful life of the software, which is typically threeto five years.

 

16

----

Table ofContents

 

We capitalize certain costs related to theacquisition and development of software to be sold or licensed to our customersafter technological feasibility has been achieved.  Technological feasibility is the point intime when all planning, designing, coding, and testing activities necessary toestablish that our proprietary software can be produced to meet its design specificationshave been completed.  We expense thosecosts incurred prior to achieving technological feasibility as they areincurred.  We amortize the capitalizedcosts on a straight-line basis over the developed product’s estimated economiclife, which is generally three years.  Wecease capitalizing 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*

 

Net revenues are generated through product sales,warranty and maintenance agreements, professional consulting, programming andengineering services, long-term support services, and educational learningprograms. Net revenues from product sales are recognized when both the titleand risk of loss transfer to the customer, generally upon shipment. We generatenet revenues from the sale of extended warranties on wireless and mobilehardware and systems, including mobile workstations, computers, peripherals,and related products. We record revenue from the sale of original equipmentmanufacturers’ and other third party component warranties net of the amounts weremit to the third-party warranty provider at the time of execution of thewarranty agreement.  As we have been transitioningour business away from the sale of hardware and related warranties, we are notselling new extended warranty programs except for those serviced by thirdparties and we have taken steps to confirm with our customers that thirdparties are the obligors under their warranties.

 

We also generate revenue from consulting and otherprofessional services on either a fee for service or fixed-fee basis. Revenuefrom consulting and other professional services that is contracted asfee-for-service is recognized in the period in which the services areperformed. Direct costs for travel and accommodations are reimbursable inaccordance with the contract terms and are recognized as net revenue in theperiod the related expense is incurred. Revenue from the sale of proprietary learning technologies and thoseconsulting and other professional services provided on a fixed-fee basis isrecognized according to a proportionate method of revenue recognition and isrecognized ratably over the contract period based upon actual project hourscompleted compared to total budgeted project hours.

 

*Income taxes*

 

Our deferred tax assets and liabilities reflecttemporary differences between the amount of assets and liabilities for financialand tax reporting purposes. Such amounts are based on estimates and assumptionsand are adjusted, as appropriate, to reflect changes in tax rates expected tobe in effect when the temporary differences reverse.  Our current and deferred income tax provisionis based on estimates and assumptions that could differ from the actual resultsreflected in income tax returns filed in subsequent years.  Adjustments based on filed returns arerecorded when identified.  A valuationallowance is recorded to reduce deferred tax assets to the amount that is morelikely than not to be realized.  Weconsider future sources of taxable income such as “future reversals of existingtaxable temporary differences, future taxable income exclusive of reversingtemporary differences and carryforwards” and “tax planning strategies” whenestablishing a valuation allowance.  Inthe event we determine that the deferred tax assets will not be realized in thefuture, the valuation adjustment to the deferred tax assets is charged toearnings in the period in which we make such a determination.

 

The amount of income taxes we pay is subject toongoing audits by taxing jurisdictions around the world.  Our estimate of the potential outcome of anyuncertain tax issue is subject to management’s assessment of relevant risks,facts, and circumstances existing at that time. We believe that it hasadequately provided for reasonably foreseeable outcomes related to thesematters. However, our future results may include favorable or unfavorable adjustmentsto its estimated tax liabilities in the period the assessments are made orresolved, which may impact our effective tax rate.

 

*Share-based compensation*

 

We measure compensation cost for all share-basedpayments at fair value on the date of the award.  Fair value for share-based awards issued tonon-employees for services is determined at either the fair value of theservices rendered or the instruments issued in exchange for such services,whichever is more readily determinable. Estimates of the fair value for share-based awards issued to employeesis determined based on estimates of: (i) the fair value of our commonstock, (ii) the expected term of the award, (iii) the expectedvolatility of the price of our common stock, (iv) a risk free interestrate 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.

 

17

----

Table of Contents

 

**Results of Operations**

 

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

 
| ** **                                   | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                   | ** ** | **2009**                                  | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                         |       |                                      |       |                                     |       |   |   |   |   |
| Net  Revenues                                |       | 100.0                                     | %          | 100.0                                    | %          | 100.0 | % | 100.0 | % |
| Cost  of revenues                            |       | 73.4                                      | %          | 73.9                                     | %          | 77.6 | % | 73.4 | % |
| Gross  profit                                |       | 26.6                                      | %          | 26.1                                     | %          | 22.4 | % | 26.6 | % |
| Selling,  general and adminstrative expenses |       | 29.2                                      | %          | 33.3                                     | %          | 33.4 | % | 31.2 | % |
| Operating  loss                              |       | (2.6                                      | )%         | (7.2                                     | )%         | (11.0 | )% | (4.5 | )% |
| Interest  expense                            |       | (6.7                                      | )%         | (3.6                                     | )%         | (5.9 | )% | (2.4 | )% |
| Interest  income                             |       | 0.0                                       | %          | 0.2                                      | %          | 0.0 | % | 0.2 | % |
| Loss  on extinguishment of debt              |       | 0.0                                       | %          | 0.0                                      | %          | (0.6 | )% | 0.0 | % |
| Loss  before income tax benefit (provision)  |       | (9.2                                      | )%         | (10.6                                    | )%         | (17.5 | )% | (6.7 | )% |
| Income  tax                                  |       | 0.0                                       | %          | 0.0                                      | %          | 0.0 | % | 1.3 | % |
| Net  loss                                    |       | (9.2                                      | )%         | (10.6                                    | )%         | (17.6 | )% | (5.5 | )% |

 

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

 

***Netrevenues***

 

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

 
| ** **                   | ** ** | **Three Months Ended September 30** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|------------------------------|------------|------------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                   | ** ** | **2009**                                 | ** ** | **2008**      | ** ** | **Change**     | ** ** | **Change** | ** ** |
|                         |       |                                     |       |          |       |           |       |   |   |
| Net  revenues:               |       |                                     |       |          |       |           |       |   |   |
| Infrastructure  and hardware |       | $                                        | 13,445     |          | $          | 12,925         |       | $ | 520 |   | 4.0 | % |
| Professional  services       |       | 7,310                                    |       | 8,739         |       | (1,429         | )          | (16.4 | )% |
| Other                        |       | 1,590                                    |       | 2,160         |       | (570           | )          | (26.4 | )% |
|                         |       |                                     |       |          |       |           |       |   |   |
| Total  net revenues          |       | $                                        | 22,345     |          | $          | 23,824         |       | $ | (1,479 | ) | (6.2 | )% |

 

Net revenues were $22,345for the three months ended September 30, 2009, compared to $23,824 for thethree months ended September 30, 2008, a decrease of $1,479 or 6.2%. Thedecrease in net revenues was due to lower than expected sales inour consulting and professional services business as a result of our customerschoosing to defer projects during the current economic downturn, partiallyoffset by higher sales of infrastructure and hardware. We have noticed thatstarting late in the third quarter and into the fourth quarter, customers havebegun pursuing projects that had been earlier deferred. Net revenues for thethree months ended September 30, 2009 include $305 of net sales of thirdparty warranties that we reclassified from deferred revenue after notifying ourcustomers that third parties are the obligors under their warranties.

 

***Costof revenue***

 

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

 
| ** **                   | ** ** | **Three Months Ended September 30** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|------------------------------|------------|------------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                   | ** ** | **2009**                                 | ** ** | **2008**      | ** ** | **Change**     | ** ** | **Change** | ** ** |
|                         |       |                                     |       |          |       |           |       |   |   |
| Cost  of revenues:           |       |                                     |       |          |       |           |       |   |   |
| Infrastructure  and hardware |       | $                                        | 10,831     |          | $          | 10,536         |       | $ | 295 |   | 2.8 | % |
| Professional  services       |       | 5,514                                    |       | 5,417         |       | 97             |       | 1.8 | % |
| Other                        |       | 54                                       |       | 1,661         |       | (1,607         | )          | (96.7 | )% |
|                         |       |                                     |       |          |       |           |       |   |   |
| Total  cost of revenues      |       | $                                        | 16,399     |          | $          | 17,614         |       | $ | (1,215 | ) | (6.9 | )% |
|                              |            |                                          |            |               |            |                |            |  |  |  |  |  |  |

 

Our cost of revenues was$16,399 for the three months ended September 30, 2009, compared to $17,614for the three months ended September 30, 2008, a decrease of $1,215 or6.9%.  The decrease in our cost ofrevenues was the result of recording revenues 

 

18

----

Table of Contents

 

associated with extendedwarranties on a net basis in the third quarter of 2009 as compared to recordingrevenues and costs of revenues on a gross basis in the third quarter of 2008due to changes in the mix of warranties we sold in the periods as well asnotifying our customers that third parties are the primary obligors under theirwarranties, partially offset by increased costs of infrastructure and hardwarerelated to higher sales in the comparable periods.

 

***Grossprofit***

 

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

 
| ** **                     | ** ** | **Three Months Ended September 30** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|--------------------------------|------------|------------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                     | ** ** | **2009**                                 | ** ** | **2008**      | ** ** | **Change**     | ** ** | **Change** | ** ** |
|                           |       |                                     |       |          |       |           |       |   |   |
| Gross  profit:                 |       |                                     |       |          |       |           |       |   |   |
| Infrastructure  and hardware   |       | $                                        | 2,614      |          | $          | 2,389          |       | $ | 225 |   | 9.4 | % |
| Professional  services         |       | 1,796                                    |       | 3,322         |       | (1,526         | )          | (45.9 | )% |
| Other                          |       | 1,536                                    |       | 499           |       | 1,037          |       | 207.9 | % |
|                           |       |                                     |       |          |       |           |       |   |   |
| Total  gross profit            |       | $                                        | 5,946      |          | $          | 6,210          |       | $ | (264 | ) | -4.3 | % |
|                           |       |                                     |       |          |       |           |       |   |   |
| Gross  profit percentage:      |       |                                     |       |          |       |           |       |   |   |
| Infrastructure  and hardware   |       | 19.4                                     | %          | 18.5          | %          | 0.9            | %          | 4.6 | % |
| Professional  services         |       | 24.6                                     | %          | 38.0          | %          | (13.4          | )%         | (35.4 | )% |
| Other                          |       | 96.6                                     | %          | 23.1          | %          | 73.5           | %          | 318.3 | % |
|                           |       |                                     |       |          |       |           |       |   |   |
| Total  gross profit percentage |       | 26.6                                     | %          | 26.1          | %          | 0.5            | %          | 2.1 | % |

 

Our gross profit was$5,946 for the three months ended September 30, 2009, compared to $6,210for the three months ended September 30, 2008, a decrease of $264 or 4.3%,resulting in a gross margin of 26.6% at September 30, 2009, up from 26.1%at September 30, 2008. The increase in our gross profit is the result ofhigher net revenues on sales of extended warranties that we reclassified fromdeferred revenue after notifying our customers that third parties are theobligors under their warranties, partially offset by reduced gross profits onfewer professional service engagements as a result of our consulting andprofessional services customers choosing to defer projects during the currenteconomic downturn.

 

Our selling,general and administrative expenses were $6,534 for the three months ended September 30,2009, compared with $7,914 for the three months ended September 30, 2008,a decrease of $1,380, or 17.4%.  Selling expenses were $2,699 for thethree months ended September 30, 2009, compared with $2,963 for the threemonths ended September 30, 2008, a decrease of $264, or 8.9%.  The decrease in our selling expenses for thecomparable period was primarily attributable to lower salary expenseand travel related expenses resulting from staffing restrictions and other costcontrol measures.  General and administrative expenses were$3,835 for the three months ended September 30, 2009, compared with $4,951for the three months ended September 30, 2008, a decrease $1,116, or22.5%.  The decrease in our general and administrative expenses for thecomparable period was primarily attributable to reductions in staff andassociated benefits and travel expenses, lower purchases of demonstration andevaluation equipment, lower marketing expenses, and lower non-cash compensationcosts.

 

Our interest expense was$1,469 for the three months ended September 30, 2009, compared toapproximately $859 for the three months ended September 30, 2008, anincrease of $610 or 71.0%. The increase in interest expense is a result ofhigher average amounts outstanding under our revolving credit and term loanfacilities and higher base rates charged on these facilities than during thecomparable period in 2008 and we recorded a non-cash expense of $300 related toa succession fee due to Hercules.  In additionto higher base rates, interest on our 2009 borrowings is charged at a higherrate as a result of certain financial covenant violations during 2009 that werenot in effect during the comparable period in 2008. Borrowings under therevolving credit facility bear interest at an annual rate equal to 1.50% interest paid in kindplus 14.25%.  Borrowings under the termloan facility bear interest at an annual rate equal to 3.75% interest paid inkind plus 15.75%.  Our interest incomewas $2 for the three months ended September 30, 2009, compared to $43 forthe three months ended September 30, 2008, a decrease of $41 or95.3%.  The decrease in interest incomeis primarily the result of a lower average cash balance during the three monthsended September 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 $465 for the three months ended September 30,2009 from $701 for the three months ended September 30, 2008, a decreaseof $236 or 33.7% as the result of the write-off of our demonstration units at December 31,2008.

 

Our net loss was $1,641for the three months ended September 30, 2009 compared with a net loss of$2,520 for the three months ended September 30, 2008, a decrease of $879or 34.9% improvement.  Our net lossdecreased primarily due to reductions in selling, general and administrativeexpenses and higher gross margins partially offset by higher interest costs andreduced sales during the 

 

19

----

Table of Contents

 

currenteconomic downturn resulting from customers choosing to delay consulting andprofessional services projects, which typically yield higher gross margins.

 

As of September 30,2009, we had federal net operating losses (“NOLs”) of approximately $22,960 andstate NOLs of approximately $17,102**. **Federal NOLs will be available tooffset future taxable income and expire at various dates beginning in2025.  State NOLs expire at various datesbeginning in 2013 through 2027.  At September 30,2009, we have determined that our ability to realize the tax benefit ofoperating losses is uncertain. Accordingly, we have recorded a valuation allowance against the taxeffect of the NOLs.

 

***NineMonths ended September 30, 2009 compared with the Nine Months ended September 30,2008***

 

Net revenues for the ninemonths ended September 30, 2009 and 2008 were as follows:

 
| ** **                   | ** ** | **Nine Months Ended September 30** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|------------------------------|------------|-----------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                   | ** ** | **2009**                                | ** ** | **2008**      | ** ** | **Change**     | ** ** | **Change** | ** ** |
|                         |       |                                    |       |          |       |           |       |   |   |
| Net  revenues:               |       |                                    |       |          |       |           |       |   |   |
| Infrastructure  and hardware |       | $                                       | 43,193     |          | $          | 43,965         |       | $ | (772 | ) | (1.8 | )% |
| Professional  services       |       | 18,791                                  |       | 23,848        |       | (5,057         | )          | (21.2 | )% |
| Other                        |       | 3,584                                   |       | 6,145         |       | (2,561         | )          | (41.7 | )% |
|                         |       |                                    |       |          |       |           |       |   |   |
| Total  net revenues          |       | $                                       | 65,568     |          | $          | 73,958         |       | $ | (8,390 | ) | (11.3 | )% |

 

Netrevenues were $65,568 for the nine months ended September 30, 2009,compared to $73,958 for the nine months ended September 30, 2008, adecrease of $8,390 or 11.3%. The decrease in net revenues was due to a large professionalservices project that took place in the first and second quarters of 2008 andwas not replaced in the first half of 2009, and fewer professional serviceengagements as a result of our consulting and professional services customerschoosing to defer projects during the current economic downturn.  Net revenues for the nine months ended September 30,2009 include $394 of net sales of third party warranties that we reclassifiedfrom deferred revenue in the third quarter of 2009 after notifying ourcustomers that third parties are the obligors under their warranties.

 

Cost of revenues for thenine months ended September 30, 2009 and 2008 was as follows:

 
| ** **                   | ** ** | **Nine Months Ended September 30** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|------------------------------|------------|-----------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                   | ** ** | **2009**                                | ** ** | **2008**      | ** ** | **Change**     | ** ** | **Change** | ** ** |
|                         |       |                                    |       |          |       |           |       |   |   |
| Cost  of revenues:           |       |                                    |       |          |       |           |       |   |   |
| Infrastructure  and hardware |       | 35,363                                  |       | 34,822        |       | $              | 541        |   | 1.6 | % |
| Professional  services       |       | 14,718                                  |       | 14,718        |       | —         |       | 0.0 | )% |
| Other                        |       | 828                                     |       | 4,715         |       | (3,887         | )          | (82.4 | )% |
|                         |       |                                    |       |          |       |           |       |   |   |
| Total  cost of revenues      |       | $                                       | 50,909     |          | $          | 54,255         |       | $ | (3,346 | ) | (6.2 | )% |
|                              |            |                                         |            |               |            |                |            |  |  |  |  |  |

 

Ourcost of revenues was $50,909 for the nine months ended September 30, 2009,compared to $54,255 for the nine months ended September 30, 2008, adecrease of $3,346 or 6.2%. The decrease in our cost of revenues was the result of recordingrevenues associated with extended warranties on a net basis in the nine monthperiod of 2009 as compared to recording revenues and cost of revenues on agross basis in the nine month  period of2008 due to changes in the mix of warranties we sold in the periods as well asnotifying our customers that third parties are the primary obligors under theirwarranties, partially offset by increased costs of infrastructure and hardwarerelated to higher sales in the comparable periods.

 

Gross profit for the ninemonths ended September 30, 2009 and 2008 was as follows:

 

20

----

Table of Contents

 
| ** **                     | ** ** | **Nine Months Ended September 30** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|--------------------------------|------------|-----------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                     | ** ** | **2009**                                | ** ** | **2008**      | ** ** | **Change**     | ** ** | **Change** | ** ** |
|                           |       |                                    |       |          |       |           |       |   |   |
| Gross  profit:                 |       |                                    |       |          |       |           |       |   |   |
| Infrastructure  and hardware   |       | $                                       | 7,830      |          | $          | 9,143          |       | $ | (1,313 | ) | (14.4 | )% |
| Professional  services         |       | 4,073                                   |       | 9,130         |       | (5,057         | )          | (55.4 | )% |
| Other                          |       | 2,756                                   |       | 1,430         |       | 1,326          |       | 92.7 | % |
|                           |       |                                    |       |          |       |           |       |   |   |
| Total  gross profit            |       | $                                       | 14,659     |          | $          | 19,703         |       | $ | (5,044 | ) | (25.6 | )% |
|                           |       |                                    |       |          |       |           |       |   |   |
| Gross  profit percentage:      |       |                                    |       |          |       |           |       |   |   |
| Infrastructure  and hardware   |       | 18.1                                    | %          | 20.8          | %          | (2.7           | )%         | (13.0 | )% |
| Professional  services         |       | 21.7                                    | %          | 38.3          | %          | (16.6          | )%         | (43.3 | )% |
| Other                          |       | 76.9                                    | %          | 23.3          | %          | 53.6           | %          | 230.1 | % |
|                           |       |                                    |       |          |       |           |       |   |   |
| Total  gross profit percentage |       | 22.4                                    | %          | 26.6          | %          | (4.3           | )%         | (16.1 | )% |

 

Ourgross profit was $14,659 for the nine months ended September 30, 2009,compared to $19,703 for the nine months ended September 30, 2008, adecrease of $5,044 or 25.6%, resulting in a gross margin of 22.4% at September 30,2009, down from 26.6% at September 30, 2008. The decrease in our grossmargin is the result of lower than expected sales of our more profitableprofessional and consulting services related to our mobile solutions andsoftware implementation services.

 

Our selling, general and administrative expenses were $21,945 for thenine months ended September 30, 2009, compared with $23,042 for the ninemonths ended September 30, 2008, a decrease of $1,097 or 4.8%. Selling expenses were $8,352 for the nine months ended September 30, 2009,compared with $8,566 for the nine months ended September 30, 2008, adecrease of $214 or 2.5% primarily related to lower salary expense and travelrelated expenses resulting from staffing restrictions and other cost controlmeasures during the second and third quarters of 2009. General andadministrative expenses were $13,593 for the nine months ended September 30,2009, compared with $14,476 for the nine months ended September 30, 2008,a decrease of $884 or 6.1%.  The decrease in our general and administrativeexpenses for the comparable period was primarily attributable to reductions instaff and associated benefits and travel expenses, lower purchases ofdemonstration and evaluation equipment, lower marketing expenses, and lowernon-cash compensation costs.

 

Our interest expense, which results from our credit line and term loanwas $3,803 for the nine months ended September 30, 2009, compared toapproximately $1,766 for the nine months ended September 30, 2008, anincrease of $2,037 or 115.3%. The increase in interest expense is a result ofhigher related average amounts outstanding under our revolving credit and termloan facilities and higher rates charged on these facilities during thecomparable periods in 2008. In addition to higher base rates, interest on our2009 borrowings is charged at a higher rate as a result of certain covenantviolations during 2009 that were not in effect in 2008. Borrowings under therevolving credit facility bore interest at an annual rate equal to 11.25% through February 14,2009, then increased to 12.25% through May 15, 2009, then increased to13.25% through May 31, 2009, then increased to 14.25% through September 30,2009 plus1.50% interest paid in kind beginning on May 31, 2009 through September 30,2009. Borrowings under the term loan facility bore interest at an annual rateequal to 1.75% interest paid in kind plus, and then increased to 3.75% interestpaid in kind plus 15.75%. In addition, the company paid default interestpenalties of 3.0% from February 1, 2009 though May 31, 2009.  Our interest income was $17for the nine months ended September 30, 2009, compared to $122 for thenine months ended September 30, 2008, a decrease of $105 or 86.1%. Thedecrease in interest income is primarily the result of lower average cash andcash equivalents balances during the nine months ended September 30, 2009when compared to the same period of 2008.

 

Ourdepreciation and amortization expense decreased to $1,416 for the nine monthsended September 30, 2009 from $1,885 for the nine months ended September 30,2008, a decrease of $469 or 24.9% as the result of demonstration units deployedbeing expensed when shipped to the field during 2009, offset by amortizationexpense related to our 2008 acquisitions of intangible assets from Delta andAware.

 

Ournet loss was $11,513 for the nine months ended September 30, 2009 comparedwith a net loss of $4,053 for the nine months ended September 30, 2008, anincrease of $7,460 or 184.1%. Our net loss in the comparable periods increasedprimarily due to asubstantial increase in our interest expense and related borrowing and defaultfees with our senior lender, and reduced sales and, duringthe first six months of 2009, lower gross margins due to the economic slowdown.

 

21

----

Table of Contents

 

***Liquidity and Capital Resources***

 

At September 30, 2009, we had cash and cashequivalents of $1,596, compared to $3,037 at December 31, 2008. Pursuantto a forbearance agreement with our senior lender, at September 30, 2009,we were required to maintain a minimum cash balance of $1,500. Pursuant to asubsequent forbearance agreement dated October 15, 2009, our minimum cashbalance was reduced to $750. We have used, and plan to use, our unrestrictedcash for general corporate purposes, including working capital. We have fundedour growth primarily through the private sale of equity securities and throughcurrent and long term debt and working capital. At September 30, 2009, our total liabilities were $44,710 and werecomprised mostly of term debt and borrowings outstanding under our credit line,and outstanding accounts payable and accrued expenses.  Net cash used in operating activities for thenine months ended September 30, 2009 was $866, operating losses realizedpartially offset the result of collections from higher sales generated duringthe fourth quarter of 2008.  Net cashused in investing activities was $411 for the nine months ended September 30,2009, primarily used to continue development of our proprietary software and topurchase office equipment.  Net cash usedin financing activities was $164 for the nine months ended September 30,2009, primarily due to the payment of scheduled maturities of debt.

 

Our primary current and contingent cash obligationsarise under our loan and security agreement with Hercules, our earn outagreements with Delta and HIA, and our note payable to HIA.

 

We entered into an Amended and Restated Loan Agreement with Hercules onNovember 20, 2009.  As a result of these amended agreements, wereduced our outstanding obligations payable to Hercules by $5,000.  In addition, the amended terms of ourrevolving credit facility with Hercules provide for $12,000 in totalavailability, of which $7,000 was drawn immediately following closing and up to$5,000 remains available to us based on the level of our eligible accountsreceivable.  On November 20, 2009,we also restructured our obligations with Delta by entering into a letteragreement whereby Delta waived  theCompany’s first year earn out obligation in exchange for a contingent paymentarrangement based on future cash collections.

 

Wehave substantial near-term liquidity requirements related to our loan andsecurity agreement with Hercules and our earn out agreements with HIA. While wehave taken steps to improve our liquidity by restructuring our indebtedness toHercules , we continue to identify ways to optimize our capital structure andpursue strategic planning to continue as a going concern and provide for ourfuture success. Our initiatives include pursuing equity or debt financing thatwill reduce our overall cost of capital, one or more strategic transactions,and further cost control actions. Our continued operations are dependent on ourability to implement those plans successfully.

 

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

 

HerculesTechnology Growth Capital, Inc. (“Hercules”) Loan Agreement

 

OnNovember 20, 2009, we restructured our senior revolving credit and termloan facilities with Hercules. We entered into an Amended and Restated Loan andSecurity Agreement (“Amended Loan Agreement”), Debt Conversion Agreement,Registration Rights Agreement with HTI and Registration Rights Agreement withHercules, and we also issued warrants to purchase our common stock.

 

Pursuantto the Amended Loan Agreement, Hercules agreed to provide us with a total senior loan facilityof $22,500, including two term loans aggregating $10,500 and a revolving lineof credit facility of $12,000 (which had an outstanding balance of $7,000immediately following the closing). Under the Debt Conversion Agreement, thetransaction included the issuance of 67,294,751****sharesof our common stock and a warrant to purchase 16,823,688****sharesof the Company’s common stock for an exercise price of $0.0743 per share inexchange for cancellation of $5,000 in obligations payable to Hercules.   We were assessed a transaction fee equal to2% of the total commitment ($22,500), or $450, which is payable in twelve equalmonthly installments of $38 beginning in May, 2010.

 

The revolving line ofcredit facility has total availability of up to $12,000 (of which $7,000 wasoutstanding immediately following closing), and will expire on May 1,2011, with a conditional ability to extend the term for an additional sixmonths.  Borrowings under the creditfacility are based on eligible accounts receivable, including an over advanceprovision up to $500, which are due four weeks after the over advance isdrawn.  Borrowings will bear interestinitially at 12.0% per annum until such time that the term loans are repaid,when the interest rate on outstanding borrowings will be prime plus 4%.  Over advances will bear interest at 15% perannum.

 

Theterm loans include a $5,500 (“Term Loan A”) 48-month amortizing loan and a$5,000 (“Term Loan B”) convertible note due on November 1, 2014. Amortizationon Term Loan A begins on December 1, 2010. Term Loan B is convertible intoour common stock at Hercules’ option, or automatically if its 90-day valueweighted adjusted price exceeds five times the conversion price pursuant to theDebt Conversion Agreement. The conversion price is $0.0743.  The outstanding principal balance on eachterm loan will bear interest at 12% per annum for the initial twelve months;18% per annum for the subsequent twelve months and 15% per annumthereafter.  This interest is 

 

22

----

Table of Contents

 

payable in cash.  Term Loan B will bear an additional 2.5%interest that will be “paid in kind” (PIK).  We will have the option to turnthe PIK interest into cash interest or additional equity shares if certainpredefined metrics are maintained.  Eachof the term loans will be assessed a prepayment charge beginning at 5% of thetotal term loan commitment, and reduced to 3% after twelve months and reducedagain to 1% after two years.   In addition, inthe event of the late payment of interest, we will be charged an additional 5%(late payment charge).

 

The Amended Loan Agreement contains variousaffirmative and negative covenants, including covenants that require us tomaintain a minimum cash balance and restrict our ability to incur indebtedness,make investments, make payments in respect of our capital stock, includingdividends and repurchases of common stock, sell or license its assets, andengage in acquisitions without the prior satisfaction of certain conditions.Additional covenants require compliance with certain financial tests, includingearnings and leverage ratios.  Inaddition, we are not permitted under the Amended Loan Agreement and asubordination agreement with Hercules to pay any remaining amounts owing underthe earn out agreements that were entered into in connection with theacquisitions of the assets of HIA or Delta if our total leverage exceeds thepredefined maximum.  Upon an event ofdefault under the Amended Loan Agreement Hercules may opt to accelerate anddemand payment of all or any part of our obligations under the Amended LoanAgreement.

 

Underthe terms of the Amended Loan Agreement, we are subject to the followingfinancial covenants:

 

(a)           Consolidated Adjusted EBITDA. We shall not permit the Consolidated Adjusted EBITDA for any Three MonthMeasurement Period ending during any fiscal month, commencing with the monthending December 31, 2009, to be less than the amount set forth belowopposite such Three Month Measurement Period ending date:

 
| **Measurement Period Ending**                                      | ** ** | **Consolidated  Adjusted EBITDA** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------|------------|
| November 30, 2009                                             |       | $                                 | 0          |   |
| December 31, 2009                                             |       | $                                 | 1,000      |   |
| January 31, 2010                                              |       | $                                 | 150        |   |
| February 28, 2010                                             |       | $                                 | 250        |   |
| March 31, 2010                                                |       | $                                 | 1,000      |   |
| April 30, 2010                                                |       | $                                 | 200        |   |
| May 31, 2010                                                  |       | $                                 | 300        |   |
| June 30, 2010                                                 |       | $                                 | 1,250      |   |
| July 31, 2010 and August 31, 2010                        |       | $                                 | 1,000      |   |
| September 30, October 31, and  November 30, 2010    |       | $                                 | 1,250      |   |
| December 31, 2010, January 31 through  May 31, 2011 |       | $                                 | 1,500      |   |
| June 30 through November 30, 2011                        |       | $                                 | 2,000      |   |
| December 30, 2011 and thereafter                              |       | $                                 | 3,000      |   |

 

23

----

Table of Contents

 

(b)                                 Consolidated Total Leverage Ratio. We shall not permit the Consolidated Total Leverage Ratio for any TwelveMonth Measurement Period ending during any fiscal quarter, commencing with thequarter ending December 31, 2009, to be greater than the ratio set forthbelow opposite such Measurement Period ending date:

 
| **Measurement Period Ending**     | ** ** | **Consolidated  Total  Leverage Ratio** | ** ** |
|-----------------------------------|------------|-----------------------------------------|------------|
| June 30, 2010                |       | 6.00:1.00                               |       |
| September 30, 2010           |       | 6.00:1.00                               |       |
| December 31, 2010            |       | 5.00:1.00                               |       |
| March 31, 2011               |       | 4.00:1.00                               |       |
| June 30, 2011                |       | 3.00:1.00                               |       |
| September 30, 2011           |       | 2.50:1.00                               |       |
| December 31, 2011            |       | 2.00:1.00                               |       |
| March 31, 2012               |       | 1.75:1.00                               |       |
| June 30, 2012 and thereafter |       | 1.50:1.00                               |       |

 

(c)                                  Consolidated Fixed Charge Coverage Ratio. We shall not permit the Consolidated Fixed Charge Coverage Ratio for anyTwelve Month Measurement Period ending during any fiscal quarter, commencingwith the quarter ending December 31, 2009, to be less than the ratio set forthbelow opposite such Measurement Period ending date:

 
| **Measurement Period  Ending**     | ** ** | **Consolidated Fixed  Charge Coverage Ratio** | ** ** |
|------------------------------------|------------|-----------------------------------------------|------------|
| June 30, 2010                 |       | 0.75:1.00                                     |       |
| September 30, 2010            |       | 0.75:1.00                                     |       |
| December 31, 2010             |       | 1.00:1.00                                     |       |
| March 31, 2011                |       | 1.00:1.00                                     |       |
| June 30, 2011                 |       | 1.25:1.00                                     |       |
| September 30, 2011            |       | 1.25:1.00                                     |       |
| December 31, 2011             |       | 1.50:1.00                                     |       |
| March 31, 2012                |       | 1.50:1.00                                     |       |
| June 30, 2012 and  thereafter |       | 2.00:1.00                                     |       |

 

Minimum Cash On Hand. We shall not permit at any time our unrestricted cash on hand to be lessthan $1,000.

 

As of September 30, 2009, we were not in compliance with ourminimum cash balance covenant requiring us to have unrestricted cash on hand ofat least $1,500.  Due to defaults underthe Loan and Security Agreement and because our total leverage ratio exceeds3.00 to 1.00, as of September 30, 2009, we were prohibited from satisfyingour earn out obligations related to our acquisitions related to ouracquisitions of HIA and Delta.

 

On November 20, 2009, we entered into a letter agreement withDelta. Pursuant to the letter agreement, Delta waived the first earn out obligationof $430 in exchange for acontingent payment arrangement based on future cash collections  All other terms and obligations, includingthe rights and obligations related to the second earn out period ending May 2,2010, remain in effect.

 

***Significant Contractual Obligations***

 

Asof September 30, 2009, our significant contractual obligations were asfollows:

 

24

----

Table ofContents

 
| ** **                   | ** ** | **Payments Due by Period** | ** ** |
|------------------------------|------------|----------------------------|------------|
| ** **                   | ** ** | **Total**                  | ** ** | **Less Than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More Than 5  Years** | ** ** |
|                         |       |                       |       |   |   |   |   |   |   |   |   |
| Long-term  debt obligations  |       | $                          | 25,133     |   | $ | 16,312 |   | $ | 8,753 |   | $ | 68 |   | $ | — |   |
| Capital  lease obligations   |       | 215                        |       | 81 |   | 93 |   | 41 |   | — |   |
| Operating  lease obligations |       | 886                        |       | 412 |   | 474 |   | — |   | — |   |
| Vendor  obligations          |       | 6,375                      |       | 2,625 |   | 3,750 |   | — |   | — |   |
|                              |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Inflation***

 

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

 

***OffBalance Sheet Arrangements***

 

We do not currently haveany off-balance sheet arrangements.

 

***New Accounting Standards***

 

Refer to Note B to Notes toConsolidated Condensed Financial Statements in Part I, Item 1 of thisQuarterly 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.****                      ****Quantitativeand Qualitative Disclosures About Market Risk**

 

Not required.

 

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

 

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

 

Asrequired by SEC Rule 13a-15(b), we carried out an evaluation, under thesupervision and with the participation of our management, including the ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures as of the end ofthe period covered by this report. Based on the results of the evaluation, ourChief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective.

 

Therewas no change in our internal control over financial reporting that occurredduring the period covered by this report that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

**PART II — OTHER INFORMATION**

 

**Item 1.****                      ****Legal Proceedings**

 

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

 

On September 18,2009, CDC Software, Inc. (“CDC”) filed a Complaint against InfoLogix, Inc.(“InfoLogix”), Dominic Venieri, Kevin College, Gavin Klaus, Brian Thorn, JasonRusso, Kyle Sorenson, and Luis Castro Trejo (collectively, the “IndividualDefendants”) in the Superior Court of Fulton County, Georgia (the “Complaint”). In the Complaint, CDC has alleged that (i) the

 

25

----

Tableof Contents

 

Individual Defendantshave breached their purported employment contacts with CDC, (ii) InfoLogixhas interfered with the purported contractual relationships between theIndividual Defendants and CDC, and (iii) InfoLogix and the IndividualDefendants have misappropriated CDC’s claimed trade secrets (collectively, “theClaims”).

 

InfoLogix and theIndividual Defendants deny any and all alleged wrongdoing, and intend tovigorously defend against the Claims brought by CDC.

 

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

 

*The risksand uncertainties described below are in addition to those included in ourAnnual Report on Form 10-K for the year ended December 31, 2008 andare not the only risks facing our company. Additional risks and uncertaintiesnot presently known to us or that we currently deem immaterial may also affectour business operations.*

 

Risks Relating to OurIndebtedness

 

**The covenants in our credit facilitymay restrict our operations, which could inhibit our ability to execute ourgrowth strategy and have a negative effect on our results of operations.**

 

We have entered into anamended and restated loan and security agreement that provides us with a $9,000line of credit as well as two term loans with an aggregate principal amount of$10,500.  The term loans include a$5,000, 48 month amortizing loan and a $5,500 convertible note due on November 1,2014.  The loan agreement containsrestrictions and covenants and requires us to maintain specified financialratios and tests.  For example, the loanagreement restricts our ability, among other things, to incur additionalindebtedness, to acquire other companies or the assets of other companies andto pay dividends without the lender’s consent. If we fail to meet or satisfy any of the restrictions, covenants,financial ratios or financial tests, we would be in default under the loanagreement.  The loans are secured by allof our assets and the assets of our subsidiaries, as well as a pledge of thecommon stock of InfoLogix Systems Corporation (which is the entity throughwhich we conduct substantially all of our operations).  We have also provided the lender with a securityinterest in a company investment account that must maintain a minimum balanceof $1,000.

 

An event of default underthe loan agreement would give the lender the right to declare all amountsoutstanding under the credit facility due and payable and enforce its rights toforeclose on the collateral securing the loans. The restrictions contained in the loan agreement could inhibit ourability to obtain financing and engage in other business activities that areimportant to our business and growth strategies, which could inhibit ourability to operate our business and increase our revenues and profitability.

 

**Our indebtedness could adverselyimpact our financial condition.**

 

As a result of theamended and restated loan and security agreement, we had approximately **$26,600** of total indebtedness outstanding, includingshort-term debt and approximately **$7,000** underour credit facility, on November 20**,** 2009.  We may increase the amount of ourindebtedness in the future, which could have an important impact on ourstockholders.  An increase in our indebtednesscould:

 

·                  cause us to violate certain provisions contained inour loan agreement;

 

·                  make us more vulnerable to economic downturns andlimit our flexibility to plan for or react to changes in business and economicconditions;

 

·                  limit our ability to withstand competitive pressuresthrough increases in our cost of capital; and

 

·                  harm our ability to obtain additional debt or equityfinancing in the future.

 

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

 

**Interests of our controllingstockholder may conflict with the interests of our other stockholders.**

 

Hercules Technology I,LLC (“HTI”), a wholly owned subsidiary of our senior lender Hercules,  owns approximately 55% of our outstandingcommon stock on a fully diluted basis and shares having approximately 72**%** of our total voting power. HTI may have interests that differ from our other stockholders’interests, and it may vote in a way adverse to these interests.  Additionally, HTI has

 

26

----

Tableof Contents

 

and will continue to havecontrol over the outcome of certain matters requiring stockholder approval,including the power to, among other things, elect our board of directors, amendour certificate of incorporation or by-laws and approve extraordinarytransactions, including mergers, acquisitions or dispositions of all orsubstantially all of the assets of the Company.

 

HTI may also prevent orcause a change of control, delay a change of control, or cause a change ofcontrol to occur at a time when it is not favored by other stockholders.  This could deprive other stockholders of an opportunityto receive a premium for their common stock as part of a sale of the Companyand may adversely affect the market price of our common stock.

 

In addition, HTI and itsaffiliates may engage in business with companies that may compete with us or withour subsidiaries.  HTI is not obligatedto advise us of any investment or business opportunities of which they areaware, and they are not prohibited or restricted from competing with us or withour subsidiaries.

 

**Our controlling stockholder hasthe contractual right to nominate three members of our board of directors.**

 

Under the terms of a debtconversion agreement between us and HTI**,**HTI has thecontractual right to nominate three of the seven voting members of our Board ofDirectors.  In addition, another memberof our board of directors must be mutually agreed upon by the Company andHTI.   Our board of directors appointsthe members of our senior management.  Asa result, HTI has significant influence over the appointment of the members ofour senior management and may be able prevent any changes in senior managementthat other stockholders, or that other members of our board of directors, maydeem advisable.  Due to the significantinfluence of HTI on our board of directors, HTI has the power to influence alldecisions of the board of directors, including whether to approve extraordinarytransactions, mergers, acquisitions or dispositions of all or substantially allof the assets of the Company.

 

**Our stockholders do not have thesame protections available to other stockholders of Nasdaq listed companiesbecause we are a “controlled company” within the meaning of the Nasdaq ListingRules.**

 

Our controllingstockholder, HTI controls a majority of our outstanding common stock.  As a result, we are a “controlled company”within the meaning of the rules governing companies with stock quoted onthe Nasdaq Capital market.  As acontrolled company, the Company qualifies for, and may and intends to relyupon, exemptions from several corporate governance requirements, includingrequirements that:

 

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

 

·                  compensation of officers be determined or recommendedto the board of directors by a majority of its independent directors or by acompensation committee comprised solely of independent directors; and

 

·                  director nominees be selected or recommended to theboard of directors by a majority of its independent directors or by anominating committee that is composed entirely of independent directors.

 

Additionally,pursuant to our debt conversion agreement with HTI , HTI has the right to haveits nominees represented on our Compensation and Nominating and CorporateGovernance Committees.  Accordingly, ourstockholders will not be afforded the same protections as stockholders of otherNasdaq listed companies for so long as HTI****owns amajority of our outstanding common stock.

 

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

 

None

 

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

 

None.

 

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

 

None.

 

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

 

None.

 

27

----

Table of Contents

 

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

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                          |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                     |
| 10.1                 |       | Forbearance Agreement dated July 31, 2009 by  and among Hercules Technology Growth Capital, Inc. and  InfoLogix, Inc., InfoLogix Systems corporation, Embedded Technologies,  LLC, Opt Acquisition, LLC, and InfoLogix – DDMS, Inc. *                           |
|                 |       |                                                                                                                                                                                                                                                                                     |
| 10.2                 |       | Amendment to Forbearance Agreement dated  August 14, 2009 by and among Hercules Technology Growth  Capital, Inc. and InfoLogix, Inc., InfoLogix Systems corporation,  Embedded Technologies, LLC, Opt Acquisition, LLC, and InfoLogix –  DDMS, Inc. *           |
|                 |       |                                                                                                                                                                                                                                                                                     |
| 10.3                 |       | Second Amendment to Forbearance Agreement dated  August 20, 2009 by and among Hercules Technology Growth  Capital, Inc. and InfoLogix, Inc., InfoLogix Systems corporation,  Embedded Technologies, LLC, Opt Acquisition, LLC, and InfoLogix –  DDMS, Inc. *    |
|                 |       |                                                                                                                                                                                                                                                                                     |
| 10.4                 |       | Third Amendment to Forbearance Agreement dated  September 23, 2009 by and among Hercules Technology Growth  Capital, Inc. and InfoLogix, Inc., InfoLogix Systems corporation,  Embedded Technologies, LLC, Opt Acquisition, LLC, and InfoLogix –  DDMS, Inc. *  |
|                 |       |                                                                                                                                                                                                                                                                                     |
| 10.5                 |       | Fourth Amendment to Forbearance Agreement dated  September 30, 2009 by and among Hercules Technology Growth  Capital, Inc. and InfoLogix, Inc., InfoLogix Systems corporation,  Embedded Technologies, LLC, Opt Acquisition, LLC, and InfoLogix –  DDMS, Inc. * |
|                 |       |                                                                                                                                                                                                                                                                                     |
| 10.6                 |       | Fifth Amendment to Forbearance Agreement dated  October 15, 2009 by and among Hercules Technology Growth  Capital, Inc. and InfoLogix, Inc., InfoLogix Systems corporation,  Embedded Technologies, LLC, Opt Acquisition, LLC, and InfoLogix –  DDMS, Inc. *    |
|                 |       |                                                                                                                                                                                                                                                                                     |
| 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. |

 

28

----

Table ofContents

 

**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 November 23, 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* |

 

29

----