Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

**Mark One**

 

| **x** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|------------|---------------------------------------------------------------------------------------------------------|

 

**For The Quarterly Period Ended June 30,2008**

 

| **o** | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|------------|----------------------------------------------------------------------------------------------------------|

 

**For theTransition Periodfrom               to               **

 

**CommissionFile Number****001-33521**

 

**INFOLOGIX, INC.**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                                    | ** ** | **20-1983837**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or  other jurisdiction of incorporation or organization) |       | (IRS  Employer Identification Number) |

 

| **101 E.  County Line Road  Hatboro, PA** |   | **19040**  |
|-------------------------------------------|--------|------------|
| (Address of  principal executive offices) |   | (Zip code) |

 

**(215)604-0691**

(Registrant’s telephone number,including area code)

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities 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 registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, ora smaller 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 registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

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

 
| **Class**                                       | ** ** | **Outstanding at August 13, 2008** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------------|------------|
| **Common  Stock, $0.00001 par value per share** | ** ** | **25,476,856 Shares**                                  | ** ** |

 

 

 

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Tableof Contents

 

**TABLE OFCONTENTS**

 
| **PART I – FINANCIAL INFORMATION** | ** **                                                                                                               |
|----------------------------------------------|--------------------------------------------------------------------------------------------------------------------------|
|                                         |                                                                                                                     |   |
| Item 1.                                      | Financial Statements                                                                                                     | 3 |
|                                         |                                                                                                                     |   |
|                                         | Consolidated Balance  Sheets as of June 30, 2008 (unaudited) and December 31, 2007                             | 3 |
|                                         |                                                                                                                     |   |
|                                         | Consolidated Statements of Operations (unaudited) for the three and  six months ended June 30, 2008 and 2007        | 4 |
|                                         |                                                                                                                     |   |
|                                         | Consolidated Statements of Changes in Stockholders’ Equity  (unaudited) for the six months ended June 30, 2008 | 5 |
|                                         |                                                                                                                     |   |
|                                         | Consolidated Statements of Cash Flows (unaudited) for the six months  ended June 30, 2008 and 2007                  | 6 |
|                                         |                                                                                                                     |   |
|                                         | Notes to  Unaudited Consolidated Financial Statements                                                                    | 7 |
|                                         |                                                                                                                     |   |
| Item  2.                                     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                              | 16 |
|                                         |                                                                                                                     |   |
| Item  3.                                     | Quantitative  and Qualitative Disclosures About Market Risk                                                              | 25 |
|                                         |                                                                                                                     |   |
| Item  4.                                     | Controls  and Procedures                                                                                                 | 25 |
|                                         |                                                                                                                     |   |
| **PART II – OTHER INFORMATION**    | ** **                                                                                                               |
|                                         |                                                                                                                     |   |
| Item 1.                                      | Legal  Proceedings                                                                                                       | 26 |
|                                         |                                                                                                                     |   |
| Item 1a.                                     | Risk Factors                                                                                                             | 26 |
|                                         |                                                                                                                     |   |
| Item  2.                                     | Unregistered  Sales of Equity Securities and Use of Proceeds                                                             | 26 |
|                                         |                                                                                                                     |   |
| Item  3.                                     | Defaults  Upon Senior Securities                                                                                         | 26 |
|                                         |                                                                                                                     |   |
| Item  4.                                     | Submission  of Matters to a Vote of Security Holders                                                                     | 26 |
|                                         |                                                                                                                     |   |
| Item 5.                                      | Other  Information                                                                                                       | 26 |
|                                         |                                                                                                                     |   |
| Item 6.                                      | Exhibits                                                                                                                 | 27 |
|                                         |                                                                                                                     |   |
|                                         | Signatures                                                                                                               | 28 |

 

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**PART I- FINANCIAL INFORMATION**

** **

**Item 1.        Financial Statements**

 

**INFOLOGIX,INC.**

**ConsolidatedBalance Sheets**

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

 
| ** **                                                                                                                                                                                      | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                      | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                      |       |                    |       |                        |       |
| Currents assets:                                                                                                                                                                                |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                       |       | $                       | 5,039      |                        | $          | 6,101 |   |
| Accounts and other receivables (net of  allowance for doubtful accounts in the amount of $393 and $409 as of  June 30, 2008 and December 31, 2007, respectively)                      |       | 19,556                  |       | 20,301                      |       |
| Unbilled revenue                                                                                                                                                                                |       | 1,375                   |       | 1,052                       |       |
| Inventory, net                                                                                                                                                                                  |       | 2,067                   |       | 1,899                       |       |
| Prepaid expenses and other current assets                                                                                                                                                       |       | 1,123                   |       | 603                         |       |
| Promissory notes receivable                                                                                                                                                                     |       | 50                      |       | —                      |       |
| Deferred tax assets - current                                                                                                                                                                   |       | 520                     |       | 451                         |       |
|                                                                                                                                                                                            |       |                    |       |                        |       |
| Total current assets                                                                                                                                                                            |       | 29,730                  |       | 30,407                      |       |
| Property and equipment, net                                                                                                                                                                     |       | 1,791                   |       | 1,247                       |       |
| Intangible assets, net                                                                                                                                                                          |       | 9,718                   |       | 8,362                       |       |
| Goodwill                                                                                                                                                                                        |       | 8,079                   |       | 5,668                       |       |
| Deferred tax assets - long-term                                                                                                                                                                 |       | 3,821                   |       | 2,956                       |       |
| Deferred financing costs                                                                                                                                                                        |       | 1,838                   |       | 57                          |       |
|                                                                                                                                                                                            |       |                    |       |                        |       |
| Total assets                                                                                                                                                                                    |       | $                       | 54,977     |                        | $          | 48,697 |   |
|                                                                                                                                                                                            |       |                    |       |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                  |       |                    |       |                        |       |
| Current liabilities:                                                                                                                                                                            |       |                    |       |                        |       |
| Accounts payable                                                                                                                                                                                |       | $                       | 7,762      |                        | $          | 8,650 |   |
| Line of credit                                                                                                                                                                                  |       | 9,982                   |       | 9,959                       |       |
| Current portion of notes payable                                                                                                                                                                |       | 636                     |       | 627                         |       |
| Current portion of capital lease  obligations                                                                                                                                                   |       | 103                     |       | 139                         |       |
| Sales tax payable                                                                                                                                                                               |       | 297                     |       | 299                         |       |
| Accrued expenses                                                                                                                                                                                |       | 4,238                   |       | 3,560                       |       |
| Deferred revenue                                                                                                                                                                                |       | 178                     |       | 75                          |       |
|                                                                                                                                                                                            |       |                    |       |                        |       |
| Total current liabilities                                                                                                                                                                       |       | 23,196                  |       | 23,309                      |       |
| Notes payable, net of current maturities                                                                                                                                                        |       | 12,528                  |       | 6,818                       |       |
| Capital lease obligations, net of current  maturities                                                                                                                                           |       | 62                      |       | 94                          |       |
| Other long term liabilities                                                                                                                                                                     |       | 625                     |       | —                      |       |
|                                                                                                                                                                                            |       |                    |       |                        |       |
| Total liabilities                                                                                                                                                                               |       | 36,411                  |       | 30,221                      |       |
|                                                                                                                                                                                            |       |                    |       |                        |       |
| Commitments and Contingencies                                                                                                                                                                   |       |                    |       |                        |       |
| Stockholders’ 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 25,451,256 shares and 24,909,301  shares at June 30, 2008 and December 31, 2007, respectively |       | —                  |       | —                      |       |
| Additional paid in capital                                                                                                                                                                      |       | 25,203                  |       | 23,580                      |       |
| Accumulated deficit                                                                                                                                                                             |       | (6,637                  | )          | (5,104                      | )          |
|                                                                                                                                                                                            |       |                    |       |                        |       |
| Total stockholders’ equity                                                                                                                                                                 |       | 18,566                  |       | 18,476                      |       |
|                                                                                                                                                                                            |       |                    |       |                        |       |
| Total liabilities and stockholders’ equity                                                                                                                                                 |       | $                       | 54,977     |                        | $          | 48,697 |   |

 

The accompanying notes are an integral partof these unaudited consolidated financial statements.

 

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**INFOLOGIX,INC.**

**UnauditedConsolidated Statements of Operations**

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

 
| ** **                                               | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                               | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                     |       |                                                |       |                                              |       |   |   |   |   |
| Revenues                                                 |       | $                                                   | 26,347     |                                              | $          | 21,812 |   | $ | 50,134 |   | $ | 34,986 |   |
| Cost of revenues                                         |       | 19,059                                              |       | 16,158                                            |       | 36,641 |   | 25,991 |   |
|                                                     |       |                                                |       |                                              |       |   |   |   |   |
| Gross profit                                             |       | 7,288                                               |       | 5,654                                             |       | 13,493 |   | 8,995 |   |
| Selling, general and adminstrative expenses              |       | 7,858                                               |       | 6,197                                             |       | 15,375 |   | 11,375 |   |
|                                                     |       |                                                |       |                                              |       |   |   |   |   |
| Operating loss                                           |       | (570                                                | )          | (543                                              | )          | (1,882 | ) | (2,380 | ) |
| Interest expense                                         |       | (373                                                | )          | (179                                              | )          | (660 | ) | (310 | ) |
| Interest income                                          |       | 32                                                  |       | 134                                               |       | 79 |   | 292 |   |
|                                                     |       |                                                |       |                                              |       |   |   |   |   |
| Loss before income tax benefits                          |       | (911                                                | )          | (588                                              | )          | (2,463 | ) | (2,398 | ) |
| Income tax benefit                                       |       | 371                                                 |       | 221                                               |       | 930 |   | 930 |   |
|                                                     |       |                                                |       |                                              |       |   |   |   |   |
| Net loss                                                 |       | $                                                   | (540       | )                                                 | $          | (367 | ) | $ | (1,533 | ) | $ | (1,468 | ) |
|                                                     |       |                                                |       |                                              |       |   |   |   |   |
| Loss per share - basic and diluted                       |       | $                                                   | (0.02      | )                                                 | $          | (0.02 | ) | $ | (0.06 | ) | $ | (0.06 | ) |
|                                                     |       |                                                |       |                                              |       |   |   |   |   |
| Weighted average shares outstanding - basic  and diluted |       | 25,193,700                                          |       | 24,039,991                                        |       | 25,056,071 |   | 23,817,827 |   |

 

The accompanying notes are an integral partof these unaudited consolidated financial statements.

 

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**INFOLOGIX,INC.**

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

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

 
| ** **                                          | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **             | ** ** | **Total**  | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|------------------------|------------|------------|------------|
| ** **                                          | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** |
| ** **                                          | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit**            | ** ** | **Equity** | ** ** |
|                                                |       |                  |       |        |       |            |       |                   |       |       |       |
| Balances, December 31, 2007                    |       | 24,909,301            |       | $           | —     |            | $          | 23,580                 |       | $          | (5,104     | ) | $ | 18,476 |   |
| Stock-based compensation                            |       | —                |       | —      |       | 524             |       | —                 |       | 524        |       |
| Common stock issued to advisor                      |       | 20,000                |       | —      |       | 38              |       | —                 |       | 38         |       |
| Common stock issued - employee stock  purchase plan |       | 21,955                |       | —      |       | 31              |       | —                 |       | 31         |       |
| Common stock issued - Aware purchase                |       | 500,000               |       | —      |       | 1,030           |       | —                 |       | 1,030      |       |
| Net loss                                            |       | —                |       | —      |       | —          |       | (1,533                 | )          | (1,533     | )          |
| Balances, June 30, 2008                        |       | 25,451,256            |       | $           | —     |            | $          | 25,203                 |       | $          | (6,637     | ) | $ | 18,566 |   |

 

The accompanying notes are an integral partof these unaudited consolidated financial statements.

 

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**INFOLOGIX,INC.**

**UnauditedConsolidated Statements of Cash Flows**

**(in thousands)**

 
| ** **                                                 | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                 | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
|                                                       |       |                                              |       |   |   |
| Operating activities:                                      |       |                                              |       |   |   |
| Net loss                                                   |       | $                                                 | (1,533     | ) | $ | (1,468 | ) |
| Adjustments to reconcile net loss to operating  cash flow: |       |                                              |       |   |   |
| Depreciation and amortization                              |       | 1,184                                             |       | 711 |   |
| Allowance for doubtful accounts receivable                 |       | (16                                               | )          | 45 |   |
| Loss on sale of property and equipment, net                |       | 3                                                 |       | 10 |   |
| Inventory obsolesence                                      |       | 63                                                |       | 215 |   |
| Amortization of deferred financing costs                   |       | 192                                               |       | — |   |
| Accrued interest expense added to note  payable            |       | 158                                               |       | — |   |
| Accrued interest income added to note  receivable          |       | (5                                                | )          | — |   |
| Share based compensation and other share  based payments   |       | 562                                               |       | 500 |   |
| Deferred income tax benefit                                |       | (934                                              | )          | (930 | ) |
| Changes in:                                                |       |                                              |       |   |   |
| Accounts and other receivables                             |       | 1,152                                             |       | (2,474 | ) |
| Unbilled revenue                                           |       | (323                                              | )          | — |   |
| Inventory                                                  |       | (231                                              | )          | (296 | ) |
| Prepaid expenses and other current assets                  |       | (502                                              | )          | 43 |   |
| Accounts payable                                           |       | (1,175                                            | )          | 2,281 |   |
| Sales tax payable                                          |       | (2                                                | )          | (28 | ) |
| Accrued expenses                                           |       | 530                                               |       | 945 |   |
| Deferred revenue                                           |       | 103                                               |       | — |   |
| Net cash used in operating activities                      |       | (774                                              | )          | (446 | ) |
|                                                       |       |                                              |       |   |   |
| Investing activities:                                      |       |                                              |       |   |   |
| Acquisitions, net of cash acquired                         |       | (2,975                                            | )          | (500 | ) |
| Acquisition of property, software and  equipment           |       | (1,339                                            | )          | (974 | ) |
| Disposal of property and equipment                         |       | 27                                                |       | — |   |
| Promissory notes issued                                    |       | (200                                              | )          | — |   |
| Net cash used in investing activities                      |       | (4,487                                            | )          | (1,474 | ) |
|                                                       |       |                                              |       |   |   |
| Financing activities:                                      |       |                                              |       |   |   |
| Payments received from employee stock  purchase plan       |       | 31                                                |       | — |   |
| Payment of deferred financing costs                        |       | (1,348                                            | )          | — |   |
| Issuance of Hercules note payable                          |       | 9,000                                             |       | — |   |
| Issuance of Herules line of credit                    |       | 7,500                                             |       | — |   |
| Final repayment of Sovereign notes payable                 |       | (3,292                                            | )          | — |   |
| Final repayment of Sovereign line of credit                |       | (9,334                                            | )          | — |   |
| Repayment of long-term debt and capital  leases            |       | (214                                              | )          | (434 | ) |
| (Repayments) borrowings on line of credit                  |       | 1,856                                             |       | 12 |   |
| Net cash provided by (used in) financing  activities       |       | 4,199                                             |       | (422 | ) |
|                                                       |       |                                              |       |   |   |
| Net change in cash and cash equivalents                    |       | (1,062                                            | )          | (2,342 | ) |
|                                                       |       |                                              |       |   |   |
| Cash and cash equivalents at beginning of  period          |       | 6,101                                             |       | 12,882 |   |
|                                                       |       |                                              |       |   |   |
| Cash and cash equivalents at end of period                 |       | $                                                 | 5,039      |   | $ | 10,540 |   |

 

The accompanying notes are an integral partof these unaudited consolidated financial statements.

 

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

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

** **

**NOTE A—Natureof Business**

 

***Basis of Presentation***

 

The accompanying unaudited consolidated financial statements ofInfoLogix, Inc. and subsidiaries (collectively, the “Company”) have beenprepared in accordance with United States generally accepted accountingprinciples (“GAAP”) for interim financial information and with the instructionsfor Form 10-Q and Article 10 of Regulation S-X. Accordingly, they donot include all of the information and footnotes required by GAAP for completeconsolidated financial statements. In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation have been included. The notes to the consolidated financialstatements contained in the Annual Report on Form 10-K for the year ended December 31,2007 should be read in conjunction with these consolidated financialstatements.  Operating results for thethree and six months ended June 30, 2008 are not necessarily indicative ofthe results that may be expected for the year ending December 31,2008.

 

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

 

***Nature of business***

 

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

 

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

 

***Useof estimates***

 

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

 

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

 

***Reclassifications***

 

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

 

**NOTE C—Recent Accounting Pronouncements**

 

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

 

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

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

 

**NOTE C—Recent Accounting Pronouncements (continued)**

 

InSeptember 2006, the FASB issued Statement of Financial AccountingStandards No. 157, *Fair Value Measurements*(SFAS 157), which defines fair value, establishes a framework for measuringfair value and expands disclosures about fair value measurements.  In February 2008, the FASB issuedFASB Staff Position (FSP) 157-2 which delays the effective date of SFAS 157 forone year, for all nonfinancial assets and nonfinancial liabilities, exceptthose that are recognized or disclosed at fair value in the financialstatements on a recurring basis (at least annually). SFAS 157 and FSP 157-2 areeffective for financial statements issued for fiscal years beginning after November 15,2007. The Company has elected a partial deferral of SFAS 157 under theprovisions of FSP 157-2 related to the measurement of fair value used whenevaluating goodwill, other intangible assets and other long-lived assets forimpairment. The impact of partially adopting SFAS 157 effective January 1,2008 did not have a material impact on the Company’s financial statements. The Company does not presently have anyassets or liabilities that are to be measured at their fair value on either a recurringor nonrecurring basis.

 

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

 

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

 

**NOTE D—Inventory**

 

Inventory consists of the following:

 
| ** **                                              | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                              | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
|                                                    |       |                    |       |                        |       |
| Finished goods                                          |       | $                       | 2,608      |                        | $          | 2,373 |   |
| Work in progress                                        |       | 7                       |       | 11                          |       |
| Less: allowance for slow moving and  obsolete inventory |       | (548                    | )          | (485                        | )          |
|                                                    |       |                    |       |                        |       |
| Total inventory, net                                    |       | $                       | 2,067      |                        | $          | 1,899 |   |

 

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

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

 

**NOTE E—Secured Promissory Notes Receivable**

 

On February 8, 2008, the Company made a $150 secured loan to AwareInterweave, Inc. (“Aware”), for which it received a Secured PromissoryNote bearing interest at 12% per annum, payable on a monthly basis commencing March 1,2008. The outstanding principal balance of the note plus accrued and unpaidinterest were applied to and set-off against amounts due to Aware in connectionwith its acquisition by the Company as discussed in Note I. The Companyrecorded interest income of $3 and $5 on this note during the three and sixmonths ended June 30, 2008, respectively.

 

OnMarch 30, 2008, the Company made a $50 secured loan to an entitythat it had been evaluating as an acquisition candidate. On April 1, 2008,the Company received a Secured Promissory Note bearing interest at 12% perannum, payable on a monthly basis commencing May 1, 2008. The amount ofany interest accrued and payable is to be paid-in-kind and added to theprincipal amount of the note. The note is due and payable at the earlier of: i)October 1, 2008 or ii) 30 days after negotiations between the partiescease. Negotiations ceased between the parties on June 26, 2008. Assecurity for the note, the Company holds a security interest in substantiallyall of the assets of the entity.

 

**NOTE F—Customer and Vendor Concentrations**

 

For the three and six months ended June 30, 2008 and 2007, theCompany had sales to significant customers as follows:

 
| ** ** | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** ** | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** ** | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Customer A |       | 13.1                                                | %          | 12.0                                              | %          | 13.0 | % | 13.9 | % |
| Customer B |       | —                                              |       | 18.5                                              | %          | — |   | 15.0 | % |

 

For the three and six months ended June 30, 2008 and 2007,purchases from the Company’s significant vendor are as follows:

 
| ** ** | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** ** | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|       |       |                                                |       |                                              |       |   |   |   |   |
| Vendor A   |       | 20.7                                                | %          | 37.1                                              | %          | 23.9 | % | 35.8 | % |

 

**NOTE G—Debt**

 

In May 2008, the Company entered into a loan agreement withHercules Technology Growth Capital, Inc. (“Hercules”). Under the terms ofthe agreement, Hercules provided the Company with up to $12,500 in a revolvingline of credit and up to $12,500 in term loans. On May 2, 2008, theCompany was advanced $9,000 from the term loan and $7,500 from the revolvingline of credit ($4,000 to pay off the Company’s existing senior bank debt, and$3,500 to be used for general working capital). The Company expects to use theremaining availability under the term loans and the revolving line of credit tofinance working capital and for general corporate purposes including permittedacquisitions. The loans are collateralized by all of the tangible andintangible assets owned or subsequently acquired by the Company and the equityinterests in each of the subsidiaries of InfoLogix, Inc. The agreementcontains certain financial covenants, which must be complied with, including:minimum trailing twelve month EBITDA (“TTM EBITDA”) and maximum total debtdivided by TTM EBITDA.

 

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

 

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

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

 

**NOTE G—Debt (continued)**

 

Upon the earliest to occur of (i) demandfrom Hercules at any time between November 1, 2009 and May 1, 2012, (ii) theacceleration of the Company’s obligations under the agreement, (iii) theterm loan maturity date, and (iv) prepayment in full of its obligationsunder the agreement, the Company will be required to pay to Hercules an amountequal to the greater, as of such date of determination, of (x) $625, and (y) anamount equal to 3.0% of the amount by which our market capitalization exceeds$100,000.

 

***Notes payable***

 

Notes payable, except for capital lease obligations,consist of the following:

 
| ** **                                                                                                                                                                                                                                                               | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Note payable, bank, principal payable $42  monthly over thirty-five months commencing March 2006. Interest was  payable monthly at the prime rate plus 1.0%. The note was paid in full  May 2008                                                               |       | $                       | 0          |                        | $          | 708 |   |
|                                                                                                                                                                                                                                                                     |       |                    |       |                        |       |
| Note payable, bank, principal payable $28  monthly over thirty-five months commencing December 2006. Interest was  payable monthly at the prime rate plus 1.0%. The note was paid in full  May 2008                                                            |       | 0                       |       | 694                         |       |
| Convertible note payable pursuant to the  asset purchase agreement with Healthcare Informatics  Associates, Inc.  Principal and interest payable at 9.0% is due September 30,  2010                                                                       |       | 3,736                   |       | 3,579                       |       |
| Amounts payable pursuant to the asset  purchase agreement with AMT Systems, Inc. in monthly installments of $9  interest included, at a rate of 7.84%, maturing May 31, 2013                                                                                   |       | 428                     |       | 463                         |       |
|                                                                                                                                                                                                                                                                     |       |                    |       |                        |       |
| Note payable, bank, principal payable $113  monthly over sixteen months commencing February 2009, payable $187,500  over twelve months, commencing June 2010, payable $412,500 over twelve  months commencing June 2011.                                  |       | 9,000                   |       |                        |       |
| Note payable, bank, principal payable  $55,556 monthly over thirty-six months commencing March 2008; interest  payable monthly , at prime rate plus 1.5% (8.75% at December 31, 2007),  maturing March 16, 2011. The note was paid in full May 2008. |       | 0                       |       | 2,000                       |       |
|                                                                                                                                                                                                                                                                     |       |                    |       |                        |       |
| Total notes payable                                                                                                                                                                                                                                                      |       | 13,164                  |       | 7,444                       |       |
| Less: current maturities                                                                                                                                                                                                                                                 |       | 636                     |       | 627                         |       |
| Total notes and long-term liabilities                                                                                                                                                                                                                                    |       | $                       | 12,528     |                        | $          | 6,818 |   |

 

**NOTE H—****Acquisition of Assets of DeltaHealth Systems, Inc.**

 

On May 2, 2008, the Company, through its wholly-owned subsidiaryInfoLogix Systems Corporation, acquired substantially all of the assets andassumed certain liabilities of Delta Health Systems, Inc. (“Delta”)pursuant to an asset purchase agreement.  The assets acquiredrelate to Delta’s business of providing strategic cost managementconsulting services and web-based management data collection and work-flowanalytics to the healthcare industry, and included cash, accounts receivables, the rights to existingrelationships with customers, vendors and partners, certain tangible personalproperty and certain intangible rights and property.  Theliabilities assumed related to customer contracts and accrued expenses.

 

The purchase price paid by the Company was $1,707, which consisted of$1,500 in cash and $207 in acquisition costs. The Company and Delta alsoentered into an Earn Out Agreement pursuant to which Delta is eligible to earnadditional consideration in the subsequent two year period (each year, an “EarnOut Period”) after the closing of the transaction.  Delta can earn up to$500 in the first Earn Out Period and up to $500 in the second Earn Out Periodupon achievement of gross revenue targets described in the Earn OutAgreement.  The additional cash consideration will not be accounted for bythe Company until such time as the consideration, if any, is earned pursuant tothe terms of the Earn Out Agreement.  Atthe end of the two year period, if Delta has not already earned the $1,000 ofadditional consideration in respect of each of the two Earn Out Periods, Deltamay earn an amount equal to the $1,000 of additional consideration less anyamounts previously paid in respect of the two Earn Out Periods upon theachievement of certain

 

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

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

 

**NOTE H—****Acquisition of Assets of DeltaHealth Systems, Inc. (continued)**

 

cumulative financial milestones. At the point the consideration is earned, the Company will record thecash paid as an adjustment to the purchase price. The acquisition was accountedfor under SFAS 141 and results are included in the statement of operations fromMay 2, 2008.

 

The purchase price was allocated to the assets acquired and liabilitiesassumed on a preliminary basis based on their estimated fair values on the dateof acquisition, as follows:

 
| Assets acquired:       | ** ** | ** ** | ** ** |
|------------------------|------------|------------|------------|
| Accounts receivable    |       | $          | 150        |   |
| Property and equipment |       | 2          |       |
| Goodwill               |       | 1,004      |       |
| Customer relationships |       | 601        |       |
| Non-compete agreements |       | 118        |       |
| Trademarks/trade names |       | 40         |       |
|                   |       |       |       |
| Total assets acquired  |       | 1,915      |       |
|                   |       |       |       |
| Liabilities assumed:   |       |       |       |
| Current liabilities    |       | 208        |       |
|                   |       |       |       |
| Net assets acquired    |       | $          | 1,707      |   |

 

Thecustomer relationships are being amortized on a straight-line basis over aneight year period; the average expected life for these customers. Thenon-compete agreements are amortized on a straight-line basis over a three yearperiod, which corresponds with the expiration date of the non-competeprovisions contained within the asset purchase agreement. Goodwill and thetrademarks/trade names have indefinite lives and therefore are not amortized,however, they will be evaluated annually for impairment.

 

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

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

 

**NOTE I—****Acquisition of Assets of AwareInterweave, Inc.**

 

OnMay 16, 2008, the Company, through its wholly-owned subsidiary InfoLogixSystems Corporation, acquired substantially all of the operating assets andassumed certain liabilities of Aware Interweave, Inc. pursuant to an assetpurchase agreement.  The assets acquired relate to Aware’s business ofproviding mobile solutions to a variety of industries including the healthcareand life sciences, and included cash, accounts receivable, the rights toexisting relationships with customers, vendors and partners, certain tangiblepersonal property and certain intangible rights and property.  Theliabilities assumed consist of current accounts payable and accrued expenses.

 

The purchase price paid by the Company consisted of cash and shares ofthe Company’s common stock. The acquisition was accounted for under SFAS141. The results of operations from the business acquired from Aware areincluded in the statement of operations beginning May 17, 2008. The total purchase price paid by theCompany is as follows:

 
| Cash paid, net of cash received |   | $     | 1,318  |   |
|---------------------------------|--------|-------|--------|--------|
| Common stock issued             |   | 1,030 |   |
| Acquisition costs               |   | 131   |   |
|                            |   | $     | 2,479  |   |

 

The cash portion of the purchase price was partially set-off againstthe amounts due from Aware in connection with its Secured Promissory Note (SeeNote E). The parties deposited $30 into an escrow account to be used to fundany working capital adjustment payable under the asset purchase agreement.

 

At closing, the Company issued 500,000 shares of common stock, whichwas valued at $1,030 for accounting purposes. This value of the common stockwas based on the average closing market price of the Company’s common stockfrom May 13, 2008 through May 21, 2008. The issuance of the shares ofcommon stock was unregistered and the shares are initially subject to atwo-year lockup. The Company has placed 105,820 shares of the common stock inan escrow account for a period of eighteen months as security forindemnification obligations under the asset purchase agreement.

 

The purchase price was allocated to the assets acquired and liabilitiesassumed on a preliminary basis based on their estimated fair values on the dateof acquisition, as follows:

 
| Assets acquired, excluding cash: | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|------------|------------|
| Accounts receivable                             |       | $          | 241        |   |
| Prepaid expenses                                |       | 18         |       |
| Property and equipment                          |       | 11         |       |
| Goodwill                                        |       | 1,406      |       |
| Customer relationships                          |       | 384        |       |
| Software                                        |       | 500        |       |
| Trademarks/trade names                          |       | 17         |       |
| Non-compete agreements                          |       | 102        |       |
|                                            |       |       |       |
| Total assets acquired                           |       | 2,679      |       |
|                                            |       |       |       |
| Liabilities assumed:                            |       |       |       |
| Current liabilities                             |       | 200        |       |
|                                            |       |       |       |
| Net assets acquired                             |       | $          | 2,479      |   |

 

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

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

 

**NOTE I—****Acquisition of Assets of AwareInterweave, Inc. (continued)**

 

Thecustomer relationships are being amortized on a straight-line basis over a twoyear period, which corresponds with the expected life of the underlyingcustomer contracts. Amortization of the software will not commence until suchtime as the software is available for sale. The non-compete agreements areamortized on a straight-line basis over a three year period, which correspondswith the expiration date of the non-compete provisions contained within theasset purchase agreement. Goodwill and the trademarks/trade names haveindefinite lives and therefore are not amortized, however, they will beevaluated annually for impairment.

 

**NOTE J—Related Party Transactions**

 

***Support services***

 

In2004, the Company entered into an agreement with an entity owned by astockholder and former officer of the Company whereby that entity providesextended warranties and technical support services to certain customers of theCompany. Under the agreement,the Company was charged $601 and $219 for the three months ended June 30,2008 and 2007, respectively, and made payments under this agreement of $866 and$290 for the three months ended June 30, 2008 and 2007, respectively. TheCompany was charged $893 and $351 for the six months ended June 30, 2008and 2007, respectively, and made payments under this agreement of $866 and $602for the six months ended June 30, 2008 and 2007, respectively.

 

In May 2006, the Company entered into another agreement with thisstockholder’s company to provide the Company with consulting services withrespect to software development. Payments under this agreement were $565 forboth the three and six months ended June 30, 2008 and $219 and $349 forthe three and six months ended June 30, 2007, respectively.  Pursuant to the terms of the two agreements,the Company has a minimum annual commitment to purchase services of $1,500 peryear through 2011.

 

***ProfessionalRecruiting Services***

 

The Company maintains a business relationship with Gulian &Associates, which is owned by the wife of David T. Gulian, the President andChief Executive Officer and 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 fee is invoiced at the timethe hiring request is made.  Theremainder is invoiced only upon successful placement of a candidate into therole. During the three months ended June 30, 2008 and 2007, theCompany paid Gulian & Associates approximately $56 and $11respectively in fees. During the six months ended June 30, 2008 and 2007,the Company paid approximately $85 and $46, respectively, in fees.

 

**NOTE K—Commitments and Contingencies**

 

***Litigation***

 

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

 

***Letter of Credit***

 

At June 30, 2008, the Company had contingent liabilities underletters of credit of $350.

 

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

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

 

**NOTE L—IncomeTaxes**

 

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

 

Forthe three months ended June 30, 2008 and 2007, the Company recorded anincome tax benefit amounting to $371 and $221 related to the net operating lossincurred during those periods. For the six months ended June 30, 2008 and2007, the Company recorded an income tax benefit amounting to $930 and $930related to the net operating loss incurred during those periods. TheCompany believes it is more likely than not that the deferred tax asset will berealizable as the result of achieving taxable income in the applicable periodsprior to related expiration dates. As of June 30, 2008, the Company hasnet operating losses of approximately $5,786 which will be available to offsetfuture taxable income. Included in the net operating losses are losses of $65generated by New Age Translation, Inc. which are subject to restrictionsunder Internal Revenue Code Section 382, due to change in ownership inthat entity. Therefore, the Company has recorded a valuation allowance againstthe net operating losses generated by New Age Translation, Inc. If notused, the net operating losses will expire beginning after 2024. The Company’sstate net operating losses will also be subject to expiration in varying yearsstarting in 2013 through 2027.

 

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

 

OnJanuary 1, 2008, the Company established the 2008 Employee Stock PurchasePlan (“ESPP”). The purpose of the ESPP is to provide the Company’s employeesthe opportunity to purchase common stock through accumulated payrolldeductions. The ESPP is be administered by the Board. The Company has reserved1,000,000 shares for use in the ESPP. The purchase price of the common stock isat an amount equal to 85% of the fair market value of a share of common stockon the enrollment date or the exercise date, whichever is lower. The ESPP hasbeen consecutive three month offering periods commencing on the first tradingday of each calendar quarter. An eligible employee may become a participant inthe ESPP by completing a subscription agreement authorizing payroll deductionsnot to exceed 10% of the employee’s compensation. These payroll deductionscommence on the first payroll following the enrollment date and end on the lastpayroll in the offering period.

 

Onthe enrollment date of each offering period, each eligible participatingemployee is granted an option to purchase on the exercise date of such offeringperiod up to a number of shares of the common stock determined by dividing theEmployee’s payroll deductions accumulated prior to such exercise date by theapplicable purchase price. Employees are not permitted to purchase more than2,500 shares during each offering period. The option for the purchase of sharesis exercised automatically on the exercise date, and the maximum number of fullshares subject to the option are purchased for such participant at theapplicable purchase price with the accumulated payroll deductions in his or heraccount.  The Company issued 21,955shares on April 1, 2008 and 25,600 shares on July 1, 2008 inconnection with the ESPP for the first and second quarters of 2008, for whichit received $31 and $39 in cash in the respective periods.

 

**NOTE N—Stock Based Compensation**

 

EffectiveJanuary 1, 2006, the Company adopted the provisions of SFAS 123(R), *Share-Based Payment*, under the modifiedprospective method which requires that stock based compensation transactions beaccounted for using a fair-value-based method. Under the modified prospectivemethod, the Company is required to recognize compensation cost for stock-basedpayments to employees based on their grant-date fair value from the beginningof the fiscal period in which the recognition provisions are first applied. Forthe three months ended June 30, 2008 and 2007, the recognized compensationcost for stock options and warrants granted to employees was $276 and $250,respectively. In addition, for the three months ended June 30, 2008 and2007, the Company recorded an income tax benefit of $109 and $99, respectively,related to the granting of the nonqualified options and warrants. For the sixmonths ended June 30, 2008 and 2007, the recognized compensation cost forstock options and warrants granted to employees was $524 and $500,respectively. In addition, for the six months ended June 30, 2008 and2007, the Company recorded an income tax benefit of $207 and $198,respectively, related to the granting of the nonqualified options and warrants.

 

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

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

 

**NOTE O—Reclassifications**

 

The Company reclassified shipping andhandling revenue as originally reported for the three and six months ended June 30,2007 in the amount of $402 and $698, respectively.  Prior to the reclassification, shipping andhandling revenue had been netted with freight expense in the selling, generaland administration expense section of the Unaudited Consolidated Statements ofOperations.  These amounts werereclassified to sales revenue and the matching shipping costs were reclassifiedto cost of sales.

 

The following table summarizes the changes tooriginally reported amounts and subtotals in the Unaudited ConsolidatedStatements of Operations for the three and six months ended June 30, 2007:

 
| ** **                                  | ** ** | **Three Months Ended June 30, 2007** | ** ** | **Six Months Ended June 30, 2007** | ** ** |
|---------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                  | ** ** | **As Originally  Reported**                              | ** ** | **As Reclassifed**                                     | ** ** | **As Originally  Reported** | ** ** | **As Reclassifed** | ** ** |
|                                        |       |                                                          |       |                                                        |       |   |   |   |   |
| Revenues                                    |       | $                                                             | 21,410     |                                                        | $          | 21,812 |   | $ | 34,288 |   | $ | 34,986 |   |
| Cost of revenues                            |       | 15,756                                                        |       | 16,158                                                      |       | 25,293 |   | 25,991 |   |
|                                        |       |                                                          |       |                                                        |       |   |   |   |   |
| Gross profit                                |       | 5,654                                                         |       | 5,654                                                       |       | 8,995 |   | 8,995 |   |
| Selling, general and adminstrative expenses |       | 6,197                                                         |       | 6,197                                                       |       | 11,375 |   | 11,375 |   |
|                                        |       |                                                          |       |                                                        |       |   |   |   |   |
| Operating loss                              |       | (543                                                          | )          | (543                                                        | )          | (2,380 | ) | (2,380 | ) |
| Interest expense, net of interest income    |       | (45                                                           | )          | (45                                                         | )          | (19 | ) | (18 | ) |
|                                        |       |                                                          |       |                                                        |       |   |   |   |   |
| Loss before provision for income taxes      |       | $                                                             | (588       | )                                                           | $          | (588 | ) | $ | (2,399 | ) | $ | (2,398 | ) |

 

The Company’s shipping and handling revenuetotaled $400 and $772 for the three and six months ended June 30, 2008,respectively.

 

**NOTEP—Noncash Investing and Financing**

 

Noncash investing and financing activities consist of the following:

 
| Acquisition of Aware Interweave, Inc.,  May 2008 |   |   |   |
|------------------------------------------------------------|--------|--------|--------|
| Issuance of common shares                                  |   | $      | 1,030  |   |
|                                                       |   | $      | 1,030  |   |
|                                                       |   |   |   |
| Common stock issued for services,  January 2008       |   | $      | 19     |   |
| Common stock issued for services,  May 2008           |   | 19     |   |
|                                                       |   | $      | 38     |   |

 

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

 

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

 

**Overview and Outlook**

** **

InfoLogix is a provider of enterprise mobility and radio frequencyidentification (RFID) solutions. We provide solutions to our customers byutilizing a combination of products and services, including consulting,application software, managed services, mobile workstations and devices, andwireless infrastructure. Our solutions are designed to allow the real timeusage of data throughout a customer’s enterprise in order to enhance workflow,improve customer service, increase revenue and reduce costs.  We sell wireless communication and computingdevices, including mobile workstations that connect to a customer’s wirelessnetwork so that information can be accessed from any location within theenterprise.  We also implement customizedsoftware applications and provide RFID technology, a data-exchange method usingtransponders that store and remotely send or retrieve information, to enablethe transmission and processing of that information between the customer’sinformation system and its wireless communication and computing devices.  We also offer professional services thatsupport and complement a customer’s workflow requirements, major softwareimplementations, and wireless computing systems, including consulting, managedservices, training, engineering, technical support, and network monitoring.

 

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

 

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

 

**2008 Acquisitions**

 

In May 2008, we acquired substantially all of the assets of DeltaHealth Systems, Inc. or Delta.  The assets acquired relate toDelta’s business of providing strategic cost management consultingservices and web-based management data collection and work-flow analytics tothe healthcare industry. We expect this acquisition to further our strategicplans by enabling us to combine our existing solutions with higher marginprofessional services.  We believe theDelta acquisition will allow us to reach further into our healthcare customer’sorganization to bring critical workflow and human resource utilizationefficiencies that support our mobile solutions.

 

InMay 2008, we acquired substantially all of the assets of Aware Interweave, Inc.or Aware. The assets acquired relate to Aware’s business of providing mobilesoftware solutions to a variety of customers including federal governmentagencies, fortune 1000 companies and healthcare and life science organizations.The acquisition is consistent with our strategic plan to add intellectualproperty and higher-margin services and application software licensing, whileallowing us to provide our customers with access to new solutions. We believethe acquisition of Aware allows us the opportunity to enable users of SAP®software and applications to significantly improve their visibility, responsetime, and revenues by providing access to business-critical applicationswithout being tied to the office or desktop computer. Aware has developed amobile product solution suite, the Co-Pilot series, which is tailoredspecifically for users of SAP software, while adaptable to other back-endsystems. The Co-Pilot Mobile Foundation achieved “Powered by NetWeaver”certification in August, 2006.

 

**Characteristics ofour revenue and expenses**

 

We generate revenue through the resale of wireless and mobile hardwareand systems, including mobile workstations, computers, peripherals, and relatedproducts.  Sales revenue on product isrecognized when both the title and risk of loss transfer to the customer,generally upon shipment. We also generate revenue from the sale of extendedwarranties on certain components. Revenue from the sale of component warrantiesis recognized upon execution of the warranty agreement. There is no associatedwarranty risk as we have contracted with a third party to fully assume allrisks and obligations. We also generate revenue from professional services oneither a fixed fee or time and expense basis. Revenue from our professionalconsulting services is recognized on a time and expense 

 

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basis at the time the serviceis delivered and the expenses are incurred. Revenue from the sale of ourproprietary learning technologies and any professional consulting orengineering services provided on a fixed-fee basis is recognized according to aproportionate performance method of revenue recognition.

 

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

 

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

 

Selling expenses primarily consist of the salaries, benefits, traveland other costs of our regional and national account sales representatives,sales and indirect project management and business development expenses.General and administrative expenses primarily consist of the costs attributableto the support of our operations, such as: costs related to informationsystems, salaries, expenses and office space costs for executive management,inside sales and customer support, warehousing, technical support, financialaccounting, purchasing, depreciation, amortization, administrative and humanresources personnel, insurance, recruiting fees, legal, accounting and otherprofessional services.

 

**Critical Accounting Estimates and Policies**

 

Our consolidated financial statements are prepared in conformity withaccounting principles generally accepted in the United States of America(GAAP), which requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting periods. Critical accounting policies are those that require theapplication of management’s most difficult, subjective, or complex judgments,often because of the need to make estimates about the effect of matters thatare inherently uncertain and that may change in subsequent periods. Inpreparing the consolidated financial statements, management has made estimatesand assumptions that affect the reported amounts of assets and liabilities atthe date of the financial statements, and the reported amounts of revenues andexpenses during the reporting periods. In preparing the financial statements,management has utilized available information, including our past history,industry standards and the current economic environment, among other factors,in forming its estimates and judgments, giving due consideration tomateriality. Actual results may differ from these estimates. In addition, othercompanies may utilize different estimates, which may impact the comparabilityof our results of operations to those of companies in similar businesses. Webelieve that of our significant accounting policies, the following may involvea higher degree of judgment and estimation.

 

***Accounts receivable***

 

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

 

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

 

***Intangible assets***

 

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

 

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***Revenue recognition***

 

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

 

***Income taxes***

 

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

 

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**Results of Operations**

 

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

 
| ** **                                  | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                  | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                        |       |                                                |       |                                              |       |   |   |   |   |
| Revenues                                    |       | 100.0                                               | %          | 100.0                                             | %          | 100.0 | % | 100.0 | % |
| Cost of revenues                            |       | 72.3                                                | %          | 74.1                                              | %          | 73.1 | % | 74.3 | % |
|                                        |       |                                                |       |                                              |       |   |   |   |   |
| Gross profit                                |       | 27.7                                                | %          | 25.9                                              | %          | 26.9 | % | 25.7 | % |
| Selling, general and adminstrative expenses |       | 29.8                                                | %          | 28.4                                              | %          | 30.7 | % | 32.5 | % |
|                                        |       |                                                |       |                                              |       |   |   |   |   |
| Operating loss                              |       | (2.1                                                | )%         | (2.5                                              | )%         | (3.8 | )% | (6.8 | )% |
| Interest expense                            |       | (1.4                                                | )%         | (0.8                                              | )%         | (1.3 | )% | (0.9 | )% |
| Interest income                             |       | 0.1                                                 | %          | 0.6                                               | %          | 0.2 | % | 0.8 | % |
|                                        |       |                                                |       |                                              |       |   |   |   |   |
| Loss before income tax benefits             |       | (3.5                                                | )%         | (2.7                                              | )%         | (4.9 | )% | (6.9 | )% |
| Income tax benefit                          |       | 1.4                                                 | %          | 1.0                                               | %          | 1.9 | % | 2.7 | % |
|                                        |       |                                                |       |                                              |       |   |   |   |   |
| Net loss                                    |       | (2.1                                                | )%         | (1.7                                              | )%         | (3.0 | )% | (4.2 | )% |

 

***ThreeMonths ended June 30, 2008 compared with the Three Months ended June 30,2007***

 

Revenues were $26,347 for the three months ended June 30, 2008,compared to $21,812 for the three months ended June 30, 2007, an increaseof $4,535 or 20.8%. The increase in revenue was due primarily to the expansionof our professional services across the organization, including revenue contributedas a result of the acquisitions of the businesses of Healthcare InformaticsAssociates, Inc. (“HIA”), Delta and Aware, and partially offset by adecline in infrastructure and hardware related revenue. Our professionalservices revenue was $8,306 in the second quarter of 2008, compared to $1,789in the second quarter 2007, an increase of $6,517, or 364%, in the comparablequarters. Our infrastructure and hardware revenue was $15,600 in the secondquarter of 2008, compared to $17,583 in the second quarter of 2007, a declineof $1,983, or 11.3%, in the comparable quarters. The revenue associated withthe acquisition of HIA, Delta and Aware totaled $4,900 for the three monthsended June 30, 2008. As we continue to shift our business from the resaleof hardware and infrastructure toward delivering professional services andsoftware applications, we expect that revenues generated from the sale ofhardware and infrastructure products may continue to decline as a percentage ofour total revenue, and we expect that revenues from the delivery ofprofessional services and software will continue to increase as a percentage ofour total revenue.

 

Our cost of revenues was $19,059 for the three months ended June 30,2008, compared to $16,158 for the three months ended June 30, 2007, anincrease of $2,901 or 18.0%. The increase in our cost of revenues was theresult of costs incurred as a result of higher sales of our expandedprofessional services. Our gross profit was $7,288 for the three months ended June 30,2008, compared to $5,654 for the three months ended June 30, 2007, anincrease of $1,634 or 28.9%, resulting in a gross margin of 27.7% at June 30,2008, up from 25.9% at June 30, 2007. The increase in our gross margin isthe result of increased sales of our more profitable professional andconsulting services related to our mobile solutions and software implementationservices.

 

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Our selling, general and administrative expenses were $7,858 for thethree months ended June 30, 2008, compared with $6,197 for the threemonths ended June 30, 2007, an increase of $1,661 or 26.8%.  Sellingexpenses were $2,857 for the three months ended June 30, 2008, comparedwith $2,578 for the three months ended June 30, 2007, an increase of $279or 10.8%. The increase in our selling expenses for the comparable periods wasprimarily attributable to an increase in wages related to the expanded salesstaff hired in 2007, and sales support related costs attributable to HIA duringthe three months ended June 30, 2008. General and administrative expenses were $5,001 for the three monthsended June 30, 2008, compared with $3,619 for the three months ended June 30,2007, an increase of $1,382 or 38.2%.  The increase in our general andadministrative expenses for the comparable periods was primarily attributableto an increase in amortization expenses related to acquisitions, and anincrease in salary expenses related to the addition of key members of ourmanagement and professional services staff.

 

Our interest expense, which is derived from our credit line and termloan, was $373 for the three months ended June 30, 2008, compared toapproximately $179 for the three months ended June 30, 2007, an increaseof $194 or 108.4%. The increase in interest expense is a result of higherinterest costs and related amounts outstanding under our asset-based line ofcredit facility, term loans and notes payable issued in connection with ouracquisitions. Our interest income was $32 for the three months ended June 30,2008, compared to $134 for the three months ended June 30, 2007, adecrease of $102 or 76.1%. The decrease in interest income is primarily theresult of a lower average cash and cash equivalents balance during the threemonths ended June 30, 2008 when compared to the same period of 2007.

 

Our depreciation and amortization expense increased to $652 for thethree months ended June 30, 2008 from $424 for the three months ended June 30,2007, an increase of $228 or 53.8% as the result of a greater number ofdemonstration units deployed to our sales force and amortization expenserelated to our recent acquisitions of intangible assets from AMTSystems, HIA,Delta and Aware.

 

Our net loss was $540 for the three months ended June 30, 2008compared with a net loss of $367 for the three months ended June 30, 2007,an increase of $173 or 47.1%. Our net loss in the comparable periods increasedprimarily due to additional overhead costs, including hiring experienced sales,administrative and operations personnel to support our organizational growthand the costs associated with our growth through acquisitions

 

As of June 30, 2008, we had net operating losses (“NOLs”) of approximately$5,786, which will be available to offset future taxable income. Our NOLsinclude losses of $65 generated by New Age Translation, Inc., thepredecessor to InfoLogix, Inc., which are subject to restrictions underInternal Revenue Code Section 382, due to the change in ownership in thatentity. Therefore, we have recorded a valuation allowance against the netoperating losses generated by New Age Translation, Inc. If not used, theNOL’s will expire beginning in the year 2024. Our state NOL’s will also besubject to expiration in varying years starting in 2013 through 2027.

 

***SixMonths ended June 30, 2008 compared with the Six Months ended June 30,2007***

 

Revenues were $50,134 for the six months ended June 30, 2008,compared to $34,986 for the six months ended June 30, 2007, an increase of$15,148 or 43.3%. The increase in revenue was due primarily to the expansion ofour professional services across the organization, including revenuecontributed as a result of the acquisitions of the businesses of HIA, Delta andAware, and an increase in infrastructure and hardware related revenue. Ourprofessional services revenue was $14,735 in the six month period ended June 30,2008, compared to $2,954 in the six month period ended June 30, 2007, anincrease of $11,781, or 399%, in the comparable periods. Our infrastructurerevenue was $31,060 in the six month period ended June 30, 2008, comparedto $27,878 in the six month period ended June 30, 2007, an increase of$3,182, or 11.4%, in the comparable periods. The revenue associated with theacquisition of HIA, Delta and Aware totaled $8,771 for the six months ended June 30,2008.

.

Our cost of revenues was $36,641 for the six months ended June 30,2008, compared to $25,991 for the six months ended June 30, 2007, anincrease of $10,650 or 41.0%. The increase in our cost of revenues was theresult of higher sales of wireless infrastructure, mobile point-of-careworkstations, and expanded professional services. Our gross profit was $13,493for the six months ended June 30, 2008, compared to $8,995 for the sixmonths ended June 30, 2007, an increase of $4,498 or 50.0%, resulting in agross margin of 26.9% at June 30, 2008, up from 25.7% at June 30,2007. The increase in our gross margin is the result of increased sales of ourmore profitable professional and consulting services related to our mobilesolutions and software implementation services, partially offset by an increasein sales of lower margin third-party hardware.

 

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Our selling, general and administrative expenses were $15,375 for thesix months ended June 30, 2008, compared with $11,375 for the six monthsended June 30, 2007, an increase of $4,000 or 35.2%.  Sellingexpenses were $5,602 for the six months ended June 30, 2008, compared with$4,722 for the six months ended June 30, 2007, an increase of $880 or18.6%. The increase in our selling expenses for the comparable periods wasprimarily attributable to an increase in wages related to the expanded salesstaff hired in 2007, and sales support related costs attributable to HIA duringthe six months ended June 30, 2008. General and administrative expenses were $9,773 for the six months endedJune 30, 2008, compared with $6,648 for the six months ended June 30,2007, an increase of $3,125 or 47.0%.  The increase in our general andadministrative expenses for the comparable periods was primarily attributableto an increase in amortization expenses related to acquisitions, an increase insalary expenses related to the addition of key members of our management andprofessional services staff hired in 2007; and an increase in professional feesrelated to legal, accounting and Sarbanes-Oxley compliance.

 

Our interest expense, which is derived from our credit line and termloan was $660 for the six months ended June 30, 2008, compared toapproximately $310 for the six months ended June 30, 2007, an increase of$350 or 112.9%. The increase in interest expense is a result of higher interestcosts and related amounts outstanding under our asset-based line of creditfacility, term loans and notes payable issued in connection with ouracquisitions. Our interest income was $79 for the six months ended June 30,2008, compared to $292 for the six months ended June 30, 2007, a decreaseof $213 or 72.9%. The decrease in interest income is primarily the result of alower average cash and cash equivalents balance during the six months ended June 30,2008 when compared to the same period of 2007.

 

Our depreciation and amortization expense increased to $1,184 for thesix months ended June 30, 2008 from $711 for the six months ended June 30,2007, an increase of $473 or 66.5% as the result of a greater number ofdemonstration units deployed to our expanded sales force and amortizationexpense related to our recent acquisitions of intangible assets fromAMTSystems, HIA, Delta and Aware.

 

Our net loss was $1,533 for the six months ended June 30, 2008compared with a net loss of $1,468 for the six months ended June 30, 2007,an increase of $65 or 4.4%. Our net loss in the comparable periods increasedprimarily due to additional overhead costs, including hiring experienced sales,administrative and operations personnel to support our organizational growthand the costs associated with our growth through acquisitions.

 

***Liquidity and Capital Resources***

 

At June 30, 2008, we had cash and cash equivalents of $5,039,compared to $6,101 at December 31, 2007. We have used, and plan to use, our cash for general corporate purposes,including working capital as well as acquisitions. We have funded our growthprimarily through the private sale of equity securities and through current andlong term debt and working capital.  At June 30,2008, our total liabilities were $36,411 and were comprised mostly of term debtand borrowings outstanding under our credit line, and outstanding accountspayable.  Net cash used in operatingactivities for the six months ended June 30, 2008 was $774, primarily theresult of the net loss incurred offset by various non-cash items. Net cash usedin investing activities was $4,487 for the six months ended June 30, 2008,primarily used to acquire the assets of Delta and Aware, purchase demonstrationequipment, office equipment, third-party software and loans made pursuant tocertain promissory note agreements entered into with potential acquisitiontargets.  Net cash provided by financingactivities was $4,199 for the six months ended June 30, 2008, primarilydue to the increased borrowings in connection with our Hercules Technology loanagreement.

 

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Given the amount of our current cash and cash equivalents, short-terminvestments, accounts receivable and funds available under our line of credit,we believe that we will have sufficient liquidity to meet our capitalrequirements for at least the next 12 months. We may increase our expenditures consistent with the anticipated growthof our business and we may seek to acquire complementary businesses ortechnologies, which may require us to raise additional funds sooner thanexpected. We may seek to raise additional funds through either one of or acombination of the following: the sale or issuance of equity securities, theissuance of debt securities, or obtaining additional credit facilities. Thesale of equity securities or issuance of equity securities in futureacquisitions could result in dilution to our stockholders and the incurrence ofdebt would result in an increase in our interest expense. Any debt financingobtained by us in the future could involve restrictive covenants similar tothose contained in our current loan and security agreement relating to capitalraising activities and other financial and operational matters that might makeit more difficult for us to pursue business opportunities, including potentialacquisitions.  There can be no assurancethat we will be able to sell additional equity or debt securities, or be ableto obtain financing on acceptable terms, if at all.

 

***Lineof Credit and Term Loan***

 

Hercules Technology Loan Agreement

 

On May 1, 2008, we entered into a Loan and Security Agreement withHercules Technology Growth Capital, Inc. (the “Lender”).  Theagreement provides us with a revolving credit facility with a maximumcommitment of up to $12,500 and a term loan facility of up to $12,500, subjectto certain limitations on the revolving line of credit.  On May 2,2008, we had availability of up to $10,000 under the revolving line of credit,and borrowed $9,000 under the term loan facility and $7,000 under the revolvingcredit facility.  The proceeds of the loans were used, in part, torefinance our indebtedness owing to Sovereign Bank under a Loan and SecurityAgreement that was entered into in March 2006 and terminated on May 2,2008.  Future borrowings under the new agreement may be used for permittedacquisitions and for general corporate and working capital purposes.  At June 30,2008, we had $9,000 of indebtedness outstanding under our senior and juniorterm loans and $9,982 outstanding under our senior line of credit facility,allowing $3,500 remaining available under our senior term loan.

 

The maximum availability under the revolving credit facility willincrease from $10,000 to $12,500 after our three month consolidated EBITDAexceeds $1,500.  The amount of the commitment that is available to beborrowed under the revolving credit facility is limited to the lesser of themaximum commitment at such time and 85% of our eligible accounts. Eligibleaccounts, as defined in the loan agreement, exclude certain account criteriathat the lender considers risky. Until our three month consolidated EBITDAexceeds $1,500, the borrowings under the revolving credit facility may notexceed 85% of our eligible accounts minus $2,500.  At any time before January 1,2009, the Company has the option to request additional term loans in minimumincrements of $100 up to an aggregate maximum amount of $3,500 provided that itcan demonstrate pro forma compliance with the financial covenants contained inthe agreement.

 

The term loan bears interest at an annual rate equal to the greater of10.5% or the prime rate plus 4.5%.  Borrowings under the revolving creditfacility bear interest based on our leverage.  If our leverage ratio isequal to or greater than 3.00 to 1.00, the interest rate for revolving loanswill be the greater of 8.5% or the prime rate plus 2.5%.  If our leverageratio is less than 3.00 to 1.00, the interest rate for revolving loans will bethe greater of 7.5% or the prime rate plus 1.5%.  Interest is payable onthe first business day of each month commencing June 1, 2008.  In theevent that any payment is not timely made, a late fee equal to 5% of the pastdue amount is payable on the demand of the Lender.  Upon the occurrenceand during the continuance of an event of default, all amounts then owing tothe Lender under the agreement and the other loan documents will bear interestat the then current rate plus 3%.

 

The term loan matures on May 1, 2012.  The principal amountof the term loan is required to be repaid in installments on the first businessday of each calendar month commencing on January 1, 2009 and continuingthrough the maturity date.  In addition, we are required to apply 25% ofour excess cash flow, as defined by the agreement, toward prepayments of theterm loan.  Voluntary prepayments of the term loan are subject to aprepayment charge equal to a percentage of the term loan being prepaid. Revolving loans mature on November 1, 2009.  Upon the earliest to occur of (i) demandfrom the Lender at any time between November 1, 2009 and May 1, 2012,(ii) the acceleration of our obligations under the agreement, (iii) theterm loan maturity date, and (iv) prepayment in full of our obligationsunder the agreement, we will be required to pay to the Lender an amount equalto the greater, as of such date of determination, of (x) $625, and (y) anamount equal to 3.0% of the amount by which our market capitalization exceeds$100,000.  Our obligations under theagreement are secured by all of our personal property, including all of theequity interests of the borrowers in their respective subsidiaries.

 

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The agreement contains various affirmative and negative covenants,including covenants that restrict our ability to incur indebtedness, makeinvestments, make payments in respect of our capital stock, including dividendsand repurchases of common stock, sell or license its assets, and engage inacquisitions without the prior satisfaction of certain conditions.  Theagreement also requires us to maintain a minimum consolidated EBITDA measuredon a twelve month rolling basis as of the last day of each month during theperiod from May 2008 through December 2008, a minimum consolidatedEBITDA measured on a rolling four quarter basis as of the last day of eachquarter commencing with the quarter ending March 31, 2009, a maximumleverage ratio measured as of the end of any fiscal quarter.  Upon anevent of default under the agreement the Lender may opt to accelerate anddemand payment of all or any part of our obligations under the agreement.  We did not meet the minimum consolidatedEBITDA covenant under the agreement for the 12 month period ended May 31,2008, but we did meet the minimum consolidated EBITDA covenant for the 12 monthperiod ended June 30, 2008. The Lender has waived the minimum consolidatedEBIDTA covenant for the 12 month period ended May 31, 2008.

 

***Significant Contractual Obligations***

 

As of June 30, 2008, our significant contractual obligations wereas follows:

 
| ** **                  | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------|------------|-------------------------------------------|------------|
| ** **                  | ** ** | **Total**                                 | ** ** | **Less Than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More Than 5  Years** | ** ** |
|                        |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt obligations  |       | $                                         | 13,164     |   | $ | 636 |   | $ | 7,803 |   | $ | 4,725 |   | $ | — |   |
| Capital lease obligations   |       | 165                                       |       | 103 |   | 62 |   | — |   | — |   |
| Operating lease obligations |       | 1,585                                     |       | 542 |   | 945 |   | 98 |   | — |   |
| Vendor obligations          |       | 5,250                                     |       | 1,500 |   | 3,000 |   | 750 |   | — |   |
|                             |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Inflation***

 

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

 

***OffBalance Sheet Arrangements***

 

We do not currently haveany off-balance sheet arrangements.

 

***New Accounting Standards***

 

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

 

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

 

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

 

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*Forward-Looking Statements*

 

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

 

·                  ourlimited operating history and the limited information available to evaluate ourbusiness;

 

·                  ourability to operate profitably and manage the growth of our business;

 

·                  changesin economic, business or industry conditions;

 

·                  ourability to find additional financing necessary to support our operations;

 

·                  ourability to successfully integrate acquisitions with our existing operations;

 

·                  ourability to retain, replace and hire experienced senior management;

 

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

 

·                  competitionin the industries in which we compete;

 

·                  ourability to introduce new products and services and maintain products andservice quality;

 

·                  ourability to protect our intellectual property rights; and

 

·                  restrictionson our operations contained in our loan and security agreement.

 

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

 

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

 

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

 

Two of the main risks associated with these investments are interestrate risk and credit risk.  Typically, when interest rates rise, there isa corresponding decline in the market value of debt securities. Fluctuations in interest rates would not have a material effect on ourfinancial statements because of the short-term nature of the securities inwhich we invest and our intention to hold the securities to maturity. Credit risk refers to the possibility that the issuer of the debt securitieswill not be able to make principal and interest payments.  We have limitedthe investments to investment grade or comparable securities and have notexperienced any losses on our investments to date due to credit risk.

 

The fair value of ourcash and short-term investment portfolio at June 30, 2008, approximatedits carrying value due to the short-term maturities of these investments. Thepotential decrease in fair value resulting from a hypothetical 10% increase ininterest rates for our investment portfolio is not material.

 

The carrying value of ourlong-term debt at June 30, 2008 approximates its fair value. Our long-termdebt is set at the higher of 10.5% or 4.5% over the then current prime interestrate.  An increase in market rates ofinterest would have to change by greater than 1.0% to have an impact on our annualinterest expense. An increase in the prime rate of 1.25% would increase ourannual interest expense by approximately $20, and a decrease in market interestrates by 1.25% would not have any effect on our annual interest expense.

 

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

 

**Item 4.****                       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, is recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules andforms and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow for timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, managementrecognizes that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and management is required to apply its judgment inevaluating the cost-benefit relationship of possible controls and procedures.

 

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

 

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

 

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**PART II— OTHER INFORMATION**

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

 

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

 

**Item 1A.****              Risk Factors**

 

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

 

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

 

On May 12, 2008 we issued 10,000 shares of our common stock toAlliance Advisors, Inc. in exchange for investor relations services, whichwas valued at $19,100. The shares of common stock were issued under exemptionsprovided by Section 4(2) of the Securities Act of 1933 astransactions not involving a public offering.

 

On May 16, 2008, in connection with our acquisition of the Awareassets, we issued 500,000 shares of our common stock to three stockholders ofAware Interweave, Inc.  The sharesof common stock were issued under exemptions provided by Section 4(2) ofthe Securities Act of 1933 as transactions not involving a public offering.

 

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

 

None.

 

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

 

Our 2008 Annual Meeting of Stockholders was heldon June 12, 2008.  At that meeting, (1) Messrs. David T.Gulian, Wayne D. Hoch, Richard D. Hodge, Thomas C. Lynch, Thomas O. Miller,Warren V. Musser, Jake Steinfeld, Richard A. Vermeil and Craig A. Wilensky werereelected to our Board of Directors to serve for a term ending at the 2009Annual Meeting and until their respective successors are elected and qualified,(2) McGladrey & Pullen, LLP was ratified as our independentauditor for 2008 and (3) the stockholders of the Company approved theInfoLogix, Inc. 2008 Employee Stock Purchase Plan. At the 2008 AnnualMeeting, the nominees to our Board of Directors received the following numberof votes for or withheld from such nominee:

 
| **Director**       | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|--------------------|------------|--------------------|------------|-------------------------|------------|
|               |       |               |       |                    |       |
| David T. Gulian    |       | 16,609,641         |       | 36,803                  |       |
| Wayne D. Hoch      |       | 16,608,141         |       | 38,303                  |       |
| Richard D. Hodge   |       | 16,609,641         |       | 36,803                  |       |
| Thomas C. Lynch    |       | 16,609,391         |       | 37,053                  |       |
| Thomas O. Miller   |       | 16,609,641         |       | 36,803                  |       |
| Warren V. Musser   |       | 16,582,591         |       | 63,853                  |       |
| Jake Steinfeld     |       | 16,607,464         |       | 38,980                  |       |
| Richard A. Vermeil |       | 16,607,464         |       | 38,980                  |       |
| Craig A. Wilensky  |       | 16,609,641         |       | 36,803                  |       |

 

The holders of 16,585,644 shares voted for theratification of the selection of McGladrey & Pullen, LLP as theCompany’s independent auditor for 2008, 4,300 shares voted against theratification of the selection of McGladrey & Pullen, LLP and 56,500shares abstained from voting for or against the ratification of the selectionof McGladrey & Pullen, LLP.

 

The holders of 14,179,287 shares voted for theapproval of the InfoLogix, Inc. 2008 Employee Stock Purchase Plan, 153,000shares voted against approving the InfoLogix, Inc. 2008 Employee StockPurchase Plan and 80,100 shares abstained from voting for or against theapproval of the InfoLogix, Inc. 2008 Employee Stock Purchase Plan.

 

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

 

None.

 

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

 
| **Exhibit No. ** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                           |
|----------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                       |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 2.1                        |       | Asset Purchase Agreement  by and among InfoLogix, Inc., InfoLogix Systems Corporation, Delta  Health Systems, Inc. and the stockholders of Delta Health  Systems, Inc. dated as of May 2, 2008. (incorporated herein by  reference to Exhibit 2.1 of our Current Report on Form 8-K filed  May 8, 2008).                                                                               |
|                       |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.1                       |       | Loan  and Security Agreement dated as of May 1, 2008 by and among  InfoLogix, Inc., InfoLogix SystemsCorporation, Embedded Technologies, LLC, Opt Acquisition, LLC, and  InfoLogix – DDMS, Inc., as Borrowers, and Hercules Technology Growth Capital, Inc., as Lender.  (incorporated herein by reference to Exhibit 10.1 of our Current Report  on Form 8-K filed May 7, 2008). |
|                       |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.2                       |       | Earn  Out Agreement by and between InfoLogix Systems Corporation and Delta Health  Systems, Inc. dated as of May 2,2008. (incorporated herein by  reference to Exhibit 10.1 of our Current Report on Form 8-K filed  May 8, 2008).                                                                                                                                                               |
|                       |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 31.1                       |       | Certification  pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.*                                                                                                                                                                                                                                                                      |
|                       |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 31.2                       |       | Certification pursuant to Exchange Act  Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.*                                                                                                                                                                                                                                                                      |
|                       |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 32.1                       |       | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.+                                                                                                                                                                                                                                                                                      |
|                       |       |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 32.2                       |       | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.+                                                                                                                                                                                                                                                                                      |

 

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(*)                       Filed herewith.

(+)                       Furnished herewith.

 

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**SIGNATURES**

 

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

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

 

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