Table ofContents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

| **Mark  One**                                                                                                                                                                               |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                        |   |   |
| **ý**                                                                                                                                                                                  | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                                                                                                                                                        |
| **For The Quarterly Period Ended March 31, 2009**                                                                                                                                      |
|                                                                                                                                                                                        |
| **o**                                                                                                                                                                                       | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| ** **                                                                                                                                                                                  | ** ** | ** ** |
| **For the Transition Period  from               to          ** |

 

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

 

**INFOLOGIX, INC.**

(Exact name of registrant as specified in itscharter)

 

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

 

**(215) 604-0691**

(Registrant’s telephone number, includingarea code)

 

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

 

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

 

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

 

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

 

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

 

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

 

| **Class**                                       | ** ** | **Outstanding at May 5, 2009** |
|-------------------------------------------------|------------|-------------------------------------|
| **Common  Stock, $0.00001 par value per share** | ** ** | **25,684,372  Shares**              |

 

 

 

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Table of Contents

 

**TABLE OF CONTENTS**

 
| **PART I —  FINANCIAL INFORMATION** | ** **                                                                                                            |
|-----------------------------------------------|-----------------------------------------------------------------------------------------------------------------------|
|                                          |                                                                                                                  |   |
| Item 1.                                       | Financial Statements                                                                                                  | 3 |
|                                          |                                                                                                                  |   |
|                                          | Condensed Consolidated  Balance Sheets as of March 31, 2009 (unaudited) and December 31,  2008              | 3 |
|                                          |                                                                                                                  |   |
|                                          | Condensed Consolidated  Statements of Operations (unaudited) for the three months ended  March 31, 2009 and 2008 | 4 |
|                                          |                                                                                                                  |   |
|                                          | Condensed Consolidated  Statements of Cash Flows (unaudited) for the three months ended  March 31, 2009 and 2008 | 5 |
|                                          |                                                                                                                  |   |
|                                          | Notes to  Condensed Consolidated Financial Statements (unaudited)                                                     | 6 |
|                                          |                                                                                                                  |   |
| Item 2.                                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                           | 10 |
|                                          |                                                                                                                  |   |
| Item 3.                                       | Quantitative  and Qualitative Disclosures About Market Risk                                                           | 20 |
|                                          |                                                                                                                  |   |
| Item 4.                                       | Controls and  Procedures                                                                                              | 20 |
|                                          |                                                                                                                  |   |
| **PART II  — OTHER INFORMATION**    | ** **                                                                                                            |
|                                          |                                                                                                                  |   |
| Item 1.                                       | Legal Proceedings                                                                                                     | 21 |
|                                          |                                                                                                                  |   |
| Item 1A.                                      | Risk Factors                                                                                                          | 21 |
|                                          |                                                                                                                  |   |
| Item 2.                                       | Unregistered Sales  of Equity Securities and Use of Proceeds                                                          | 21 |
|                                          |                                                                                                                  |   |
| Item 3.                                       | Defaults Upon  Senior Securities                                                                                      | 21 |
|                                          |                                                                                                                  |   |
| Item 4.                                       | Submission of  Matters to a Vote of Security Holders                                                                  | 21 |
|                                          |                                                                                                                  |   |
| Item 5.                                       | Other Information                                                                                                     | 21 |
|                                          |                                                                                                                  |   |
| Item 6.                                       | Exhibits                                                                                                              | 21 |
|                                          |                                                                                                                  |   |
|                                          | Signatures                                                                                                            | 22 |

 

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**PART I- FINANCIAL INFORMATION**

 

**Item 1.        Financial Statements**

 

**INFOLOGIX,INC.**

**CondensedConsolidated Balance Sheets**

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

 
| ** **                                                                                                                                                                                       | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                       | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                                       |       |                     |       |                        |       |
| Currents assets:                                                                                                                                                                                 |       |                     |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                        |       | $                        | 4,072      |                        | $          | 3,037 |   |
| Accounts and other receivables (net of allowance for doubtful  accounts in the amount of $535 and $352 as of March 31, 2009 and  December 31, 2008, respectively)                      |       | 15,625                   |       | 22,610                      |       |
| Unbilled revenue                                                                                                                                                                                 |       | 1,563                    |       | 1,498                       |       |
| Inventory, net                                                                                                                                                                                   |       | 1,982                    |       | 1,775                       |       |
| Prepaid expenses and other current assets                                                                                                                                                        |       | 1,682                    |       | 1,228                       |       |
|                                                                                                                                                                                             |       |                     |       |                        |       |
| Total current assets                                                                                                                                                                             |       | 24,924                   |       | 30,148                      |       |
| Property and equipment, net                                                                                                                                                                      |       | 864                      |       | 944                         |       |
| Intangible assets, net                                                                                                                                                                           |       | 8,488                    |       | 8,709                       |       |
| Goodwill                                                                                                                                                                                         |       | 10,956                   |       | 10,540                      |       |
| Prepaid expenses                                                                                                                                                                                 |       | 33                       |       | —                      |       |
| Deferred financing costs                                                                                                                                                                         |       | 317                      |       | 501                         |       |
|                                                                                                                                                                                             |       |                     |       |                        |       |
| Total assets                                                                                                                                                                                     |       | $                        | 45,582     |                        | $          | 50,842 |   |
|                                                                                                                                                                                             |       |                     |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                   |       |                     |       |                        |       |
| Current liabilities:                                                                                                                                                                             |       |                     |       |                        |       |
| Accounts payable                                                                                                                                                                                 |       | $                        | 9,291      |                        | $          | 11,389 |   |
| Line of credit                                                                                                                                                                                   |       | 9,000                    |       | 9,000                       |       |
| Current portion of notes payable                                                                                                                                                                 |       | 11,844                   |       | 12,077                      |       |
| Current portion of capital lease obligations                                                                                                                                                     |       | 80                       |       | 86                          |       |
| Sales tax payable                                                                                                                                                                                |       | 251                      |       | 477                         |       |
| Accrued expenses                                                                                                                                                                                 |       | 3,158                    |       | 2,800                       |       |
| Accrued earn out payable                                                                                                                                                                         |       | 2,373                    |       | 1,958                       |       |
| Other current liabilities                                                                                                                                                                        |       | 900                      |       | 900                         |       |
| Deferred revenue                                                                                                                                                                                 |       | 906                      |       | 276                         |       |
|                                                                                                                                                                                             |       |                     |       |                        |       |
| Total current liabilities                                                                                                                                                                        |       | 37,803                   |       | 38,963                      |       |
| Notes payable, net of current maturities                                                                                                                                                         |       | 4,281                    |       | 4,215                       |       |
| Capital lease obligations, net of current maturities                                                                                                                                             |       | 176                      |       | 186                         |       |
| Deferred revenue                                                                                                                                                                                 |       | 190                      |       | —                      |       |
|                                                                                                                                                                                             |       |                     |       |                        |       |
| Total liabilities                                                                                                                                                                                |       | 42,450                   |       | 43,364                      |       |
|                                                                                                                                                                                             |       |                     |       |                        |       |
| 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 25,684,372 shares and 25,602,267 shares at  March 31, 2009 and December 31, 2008, respectively |       | —                   |       | —                      |       |
| Additional paid in capital                                                                                                                                                                       |       | 26,091                   |       | 25,766                      |       |
| Accumulated deficit                                                                                                                                                                              |       | (22,959                  | )          | (18,288                     | )          |
|                                                                                                                                                                                             |       |                     |       |                        |       |
| Total stockholders’ equity                                                                                                                                                                  |       | 3,132                    |       | 7,478                       |       |
|                                                                                                                                                                                             |       |                     |       |                        |       |
| Total liabilities and stockholders’ equity                                                                                                                                                  |       | $                        | 45,582     |                        | $          | 50,842 |   |

 

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

 

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**INFOLOGIX,INC.**

**CondensedConsolidated Statements of Operations (Unaudited)**

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

 
| ** **                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                              | ** ** | **2009**                              | ** ** | **2008** | ** ** |
|                                                    |       |                                  |       |   |   |
| Net revenues                                            |       | $                                     | 18,812     |   | $ | 23,786 |   |
| Cost of revenues                                        |       | 14,677                                |       | 17,581 |   |
|                                                    |       |                                  |       |   |   |
| Gross profit                                            |       | 4,135                                 |       | 6,205 |   |
| Selling, general and adminstrative expenses             |       | 7,663                                 |       | 7,517 |   |
|                                                    |       |                                  |       |   |   |
| Operating loss                                          |       | (3,528                                | )          | (1,312 | ) |
| Interest expense                                        |       | (1,146                                | )          | (286 | ) |
| Interest income                                         |       | 10                                    |       | 48 |   |
|                                                    |       |                                  |       |   |   |
| Loss before income tax (provision) benefit              |       | (4,664                                | )          | (1,550 | ) |
| Income tax (provision) benefit                          |       | (7                                    | )          | 559 |   |
|                                                    |       |                                  |       |   |   |
| Net loss                                                |       | $                                     | (4,671     | ) | $ | (991 | ) |
|                                                    |       |                                  |       |   |   |
| Loss per share - basic and diluted                      |       | $                                     | (0.18      | ) | $ | (0.04 | ) |
|                                                    |       |                                  |       |   |   |
| Weighted average shares outstanding - basic and diluted |       | 25,603,150                            |       | 24,918,441 |   |

 

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

 

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**INFOLOGIX,INC.**

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

**(in thousands)**

** **
| ** **                                          | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                          | ** ** | **2009**                              | ** ** | **2008** | ** ** |
|                                                |       |                                  |       |   |   |
| Operating activities:                               |       |                                  |       |   |   |
| Net cash provided by operating activities           |       | $                                     | 1,526      |   | $ | 203 |   |
|                                                |       |                                  |       |   |   |
| Investing activities:                               |       |                                  |       |   |   |
| Promissory notes issued                             |       | —                                |       | (200 | ) |
| Acquisition of property, software and equipment     |       | (198                                  | )          | (405 | ) |
| Net cash used in investing activities               |       | (198                                  | )          | (605 | ) |
|                                                |       |                                  |       |   |   |
| Financing activities:                               |       |                                  |       |   |   |
| Repayment of long-term debt and capital leases      |       | (328                                  | )          | (106 | ) |
| Net repayments on line of credit                    |       | —                                |       | (534 | ) |
| Payments received from employee stock purchase plan |       | 35                                    |       |   |   |
| Net cash used in financing activities               |       | (293                                  | )          | (640 | ) |
|                                                |       |                                  |       |   |   |
| Net change in cash and cash equivalents             |       | 1,035                                 |       | (1,042 | ) |
|                                                |       |                                  |       |   |   |
| Cash and cash equivalents at beginning of period    |       | 3,037                                 |       | 6,101 |   |
|                                                |       |                                  |       |   |   |
| Cash and cash equivalents at end of period          |       | $                                     | 4,072      |   | $ | 5,059 |   |

 

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

 

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

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

 

**NOTE A—****Nature of Business**

 

***Basis of Presentation***

 

Theaccompanying condensed consolidated financial statements of InfoLogix, Inc.and subsidiaries (collectively, the “Company”) have been prepared in accordancewith accounting principles generally accepted in the United States for interim financial reporting and with theinstructions for Form 10-Q and Article 10 of Regulation S-X. They donot include all of the disclosures normally made in the consolidated financialstatements contained in Form 10-K. In management’s opinion, all adjustments considered necessary for a fairpresentation of the consolidated results of operations, financial position andcash flows for the periods shown have been made.  All such adjustments are of a normal andrecurring nature.  The notes to theconsolidated financial statements contained in the Annual Report on Form 10-Kfor the year ended December 31, 2008 should be read in conjunction withthese consolidated financial statements. Operating results for the three months ended March 31, 2009 are notnecessarily indicative of the results that may be expected for the yearending December 31, 2009.

 

Theconsolidated financial statements include the accounts of InfoLogix, Inc.and its wholly-owned subsidiaries: InfoLogix Systems Corporation, OPTAcquisition, LLC, Embedded Technologies, LLC, and InfoLogix—DDMS, Inc. Allsignificant intercompany balances and transactions have been eliminated inconsolidation.  The results of operationsof the acquired businesses are included in the Company’s results from the datesof acquisition.

 

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

 

***Nature of business***

 

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

 

**NOTEB—Recent Accounting Pronouncements**

 

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

 

Beginning January 1, 2009, the Companyapplied the provisions of Financial Accounting Standards Board (FASB) Staff Position APB 14-1, *Accounting for Convertible Debt Instruments That May Be Settled inCash upon Conversion (Including Partial Cash Settlement)* (FSP APB14-1) to the outstanding Healthcare Informatics Associates (HIA) convertiblenote payable.  FSP APB 14-1requires companies to separately account for the liability (debt) and equity(conversion option) components of certain convertible debt instruments that maybe settled, partially or fully, in cash (or other assets) on conversion in amanner that reflects a company’s nonconvertible debt borrowing rate.  The provisions of FSP APB 14-1 are effectivefor financial statements issued for fiscal years beginning after December 15,2008, and interim periods within those fiscal years.  The application of FSP APB 14-1 did not havea material impact on the consolidated financial statements.

 

In April 2009, the FASB issued StaffPosition FAS 107-1 and APB 28-1, *InterimDisclosures about Fair Value of Financial Instruments*(FSP), which amends FinancialAccounting Standard No. 107, *Disclosuresabout Fair Value of Financial Instruments* (FAS 107)*,*to require an entity to provide interimdisclosures about the fair value of all financial instruments within the scopeof FAS 107 and to include disclosures related to the methods and significantassumptions used in estimating those instruments. This FSP is effective forinterim and annual periods ending after June 15, 2009.  The Company is currently evaluating theimpact the adoption of this FSP will have on the consolidated financialstatements and related disclosures.

 

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

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

 

**NOTEC—Inventory**

 

Inventoryconsists of the following:

 
| ** **                                             | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                             | ** ** | **(Unaudited)**          | ** ** | ** **                  | ** ** |
|                                                   |       |                     |       |                        |       |
| Finished goods                                         |       | $                        | 2,394      |                        | $          | 2,111 |   |
| Work in progress                                       |       | 85                       |       | 85                          |       |
| Less: allowance for slow moving and obsolete inventory |       | (497                     | )          | (421                        | )          |
|                                                   |       |                     |       |                        |       |
| Total assets                                           |       | $                        | 1,982      |                        | $          | 1,775 |   |

 

**NOTED—Customer and Vendor Concentrations**

 

Forthe three months ended March 31, 2009 and 2008, the Company had sales tosignificant customers, as a percentage of net revenues, as follows:

 
| ** ** | ** ** | **Three Months Ended March 31,** | ** ** |
|------------|------------|---------------------------------------|------------|
| ** ** | ** ** | **2009**                              | ** ** | **2008** | ** ** |
|       |       |                                  |       |   |   |
| Customer A |       | 12.2                                  | %          | 13.0 | % |
| Customer B |       | 14.6                                  | %          | 0.0 | % |

 

Forthe three months ended March 31, 2009 and 2008, purchases from the Company’ssignificant vendor as a percentage of total expenditures, are as follows:

 
| ** ** | ** ** | **Three Months Ended March 31,** | ** ** |
|------------|------------|---------------------------------------|------------|
| ** ** | ** ** | **2009**                              | ** ** | **2008** | ** ** |
|       |       |                                  |       |   |   |
| Vendor A   |       | 22.2                                  | %          | 27.7 | % |
| Vendor B   |       | 19.8                                  | %          | 14.9 | % |
| Vendor C   |       | 0.0                                   | %          | 11.5 | % |

 

**NOTEE—Debt**

 

On May 1, 2008, the Company entered into a loan and securityagreement, as amended on November 19, 2008, (Loan and Security Agreement)with Hercules Technology Growth Capital, Inc. (Lender) that provides theCompany with a revolving credit facility of up to $9,000 and a  term loan facility of up to $12,000.  The revolving credit facility expires on November 1,2009 and the term loan facility matures on May 1, 2012.  In addition to the scheduled principalpayments on the term loan facility, the Company is required to apply 25% of itsexcess cash flow, as defined, toward the principal balance.  Voluntary prepayments of principal on theterm loan facility are subject to a prepayment charge.  The Company’s obligations under the agreementare secured by all of its personal property, including all of the equityinterests in its subsidiaries.  At March 31,2009, $9,000 and $11,759, respectively, were outstanding under thesefacilities.

 

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

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

 

Borrowings under the revolving credit facility are limited by theCompany’s asset base, as defined and bear interest at an annual rate equal tothe greater of 11.25% or the prime rate plus 6.75%.  Borrowings under the term loan facility bearinterest at an annual rate equal to the greater of 13.25% or the prime rate plus8.75%, plus an additional 1.75% of interest that will be paid in kind and isadded to the principal amount of the term loan. The interest rates on outstanding borrowings under the revolving creditfacility and the term loan facility increased by 1% on February 15, 2009and will increase by an additional 1% on May 15, 2009 unless prior to thatdate the Company has either executed a definitive agreement to sell or mergethe Company or has raised $5,000 of additional equity or subordinated debt onterms acceptable to the Lender.  In theevent of a default on the Loan and Security Agreement, the borrowings will bearinterest at 3% higher than the then current rate.

 

The Loan and Security Agreement contains various affirmative andnegative covenants, including covenants that require the Company to maintain aminimum cash balance and restrict the Company’s ability to incur indebtedness,make investments, make payments in respect of its capital stock, includingdividends and repurchases of common stock, sell or license its assets, andengage in acquisitions without the prior satisfaction of certain conditions.Additional covenants require compliance with certain financial tests, includingleverage ratios.  In addition, theCompany is not permitted to pay any amounts owing under the earn out agreementsthat were entered into in connection with the acquisitions of the assets ofHealthcare Informatics Associates, Inc. (HIA) or Delta Health, Inc.(Delta) if the Company’s total leverage exceeds the predefined maximum.  Upon an event of default under the agreementthe Lender may opt to accelerate and demand payment of all or any part of theCompany’s obligations under the agreement.

 

Under the provisions of the term loan facility, the Company is requiredto pay a succession fee equal to the greater of $900 or 3% of the Company’smarket capitalization that exceeds $50,000. The succession fee is due 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 the Company’s obligations under the agreement, (iii) theterm loan maturity date, and (iv) prepayment in full of the Company’sobligations under the term loan facility. At March 31, 2009, the Company has recorded a liability of $900related to this obligation.

 

As of March 31, 2009, the Company was not in compliance withcertain financial covenants.  As a resultof the covenant violations, the Company is prohibited from satisfying its earnout obligations related to the Company’s acquisitions of HIA and Delta. TheCompany is in discussions with its Lender to amend the Loan and SecurityAgreement and restructure its terms, including to waive past violations and torevise the financial covenants and the amortization related to the term loanportion of the facility.  There can be noassurance that the Company will obtain, such an amendment.  As of March 31, 2009, outstandingborrowings under the credit and term loan facilities are classified as currentin the accompanying condensed consolidated balance sheet; however, the Lenderhas not demanded payment of the principal due under the facilities.  The Company has been charged the default rateof interest on outstanding borrowings since December 31, 2008.  The Company is also in discussions with HIAto obtain its consent to the payment restriction placed on the earn outobligation.

 

**NOTEF—Related Party Transactions**

 

***Support services***

 

Anentity owned by a stockholder and former officer of the Company providesextended warranties and technical support services to certain customers onbehalf of the Company.  Pursuant to thisarrangement, theCompany incurred $337 and $502 of charges for the three months ended March 31,2009 and 2008, respectively, and made payments under the agreement of $353 forthe three months ended March 31, 2009.

 

Acompany owned by this same stockholder provides the Company with consultingservices with respect to software development. Under this arrangement, the Company incurred $100 and$292 of charges for the three months ended March 31, 2009 and 2008,respectively, and made payments of $235 for the three months ended March 31,2009.  On March 2, 2009, thisagreement was amended to extend the terms through December 31, 2013.Pursuant to the amended terms of this agreement, the Company has a minimumannual commitment to purchase services of $1,500 through 2013.

 

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

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

 

***Professional Recruiting Services***

 

TheCompany maintains a business relationship with Gulian & Associates,which is owned by the wife of David T. Gulian, the Company’s President andChief Executive Officer and a director and stockholder of the Company.  Under the terms of the arrangement, Gulian & Associates provides theCompany with retainer-based professional recruiting services on a non-exclusivebasis.  Gulian & Associates is paid a fee of 20% of a newly hiredperson’s annual base salary for employees it introduces to the Company.  One-third of the estimated fee is due at thetime the hiring request is made.  Theremainder is due upon successful placement of a candidate into the role. Duringthe three months ended March 31, 2009 and 2008, the Company paid Gulian &Associates approximately $97 and $29, respectively, in fees.

 

**NOTEG—Commitments and Contingencies**

 

***Litigation***

 

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

 

**NOTE H—Income Taxes**

 

TheCompany has net operating loss (NOL) carryforwards available in certainjurisdictions to reduce future taxable income. Future tax benefits for net operating loss carryforwards are recognizedto the extent that realization of these benefits is considered more likely thannot.  As of March 31, 2009, avaluation allowance of $8,717 was recognized to offset the related deferred taxassets due to the uncertainty of realizing the benefits of certain tax credits,current operating losses and NOL carryforwards before they expire.  Federal net operating losses expire beginningafter 2024 and state net operating losses will expire in varying years between2013 through 2027.

 

**NOTEI—2008 Employee Stock Purchase Plan**

 

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

 

The Company issued 82,098and 21,955 shares for the three months ended March 31, 2009 and 2008,respectively.  In connection with theissue of these shares, the Company received $35 and $31, respectively.

 

**NOTEJ—Stock Based Compensation**

 

For the three monthsended March 31, 2009 and 2008, the Company recognized compensation costfor stock options and warrants granted to employees of $290 and $248,respectively. In addition, for the three months ended March 31, 2009 and2008, the Company recorded an income tax benefit of $110 and $98, respectively,related to the granting of the nonqualified options and warrants.

 

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

 

*Forward-Looking Statements*

 

This report contains “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Act of1995 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, 2008.  Important factors that may cause actualresults to differ from projections include, but are not limited to, forexample:

 

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

 

·                     changes ineconomic, business or industry conditions;

 

·                     our ability tofind additional financing necessary to support our operations and our strategicobjectives;

 

·                     our ability tosuccessfully integrate acquisitions with our existing operations;

 

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

 

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

 

·                     competition inthe industries in which we compete;

 

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

 

·                     our ability toprotect our intellectual property rights; and

 

·                     restrictions onour operations contained in our loan and security 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 31,2008 and elsewhere in this report.  Thesecautionary statements qualify all forward-looking statements attributable to usor persons acting on our behalf.

 

**Overviewand Outlook**

** **

**Overview**

 

InfoLogix is a provider of enterprise mobility solutions for thehealthcare and commercial industries. We provide these solutions to ourcustomers by utilizing a combination of products and services, including consulting,business software applications, mobile managed services, mobile workstationsand devices, and wireless infrastructure. Our solutions are designed to allowthe real time usage of data throughout a customer’s enterprise in order toenhance workflow, improve customer service, increase revenue and reduce costs.We sell wireless communication and computing devices, including mobileworkstations that connect to a customer’s wireless network so that informationcan be accessed from any location within the enterprise. We also implementcustomized and third-party software applications and provide radio frequencyidentification (RFID) technology, which is a data-exchange method that  uses transponders to store and remotely sendor retrieve information to enable the transmission and processing of thatinformation between the customer’s information system and its wirelesscommunication and computing devices. In addition, we offer professional 

 

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servicesthat support and complement a customer’s wireless computing systems andenterprise-wide software implementations, including consulting, mobile managedservices, training, engineering, technical support and network monitoring.

 

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

 

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

 

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

 

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

 

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

 

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

 

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.

 

**Going Concern**

 

Our condensed consolidated financial statements for the three monthsended March 31, 2009 have been prepared on a going concern basis, whichcontemplates continuing operations, securing additional debt or equityfinancing, selling certain assets, and realizing assets and liabilities in theordinary course of business.  However, wehave incurred significant net losses from 2006 through 2009, including netlosses of $4,671 for the three months ended March 31, 2009.  We have substantial liquidity requirementsrelated to the repayment of our revolving line of credit that comes due on November 1,2009 and to earn out payments for past acquisitions.  Though we are taking measures to improve ourliquidity, we do not currently expect to generate sufficient cash flow fromoperations to fund those obligations.

 

We have undertaken a series of actions to reduce costs and are pursuingvarious initiatives to continue as a going concern and provide for our futuresuccess. Our plan to improve our liquidity contemplates securing additionaldebt or equity financing, selling certain assets of the business, restructuringour debt and further evaluating our staffing model. We have been in discussionswith several strategic and institutional investors and lenders regardingsecuring additional financing. Our continued operations are dependent on ourability to implement these plans successfully. Our ability to implement these plans successfully is dependent on manycircumstances outside of our direct control, including general economicconditions and the financial strength of our customers. Any additionalfinancing we are able to secure will likely be subject to a number ofconditions and involve additional costs. Given the current negative conditionsin the economy generally and the credit markets in particular, there isuncertainty as to whether we will be able to generate sufficient liquidity torepay our outstanding debt, to make our earn out payments and to meet workingcapital needs. If we are unable to improve our liquidity position, we may notbe able to continue as a going concern.

 

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

 

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**Characteristics of our net revenuesand expenses**

 

We generate our net revenues through the resale of wireless and mobilehardware and systems, including mobile workstations, computers, peripherals,and related products under which the revenue is recognized. Sales revenue onproduct is recognized when both the title and risk of loss transfer to thecustomer, generally upon shipment. We also generate revenues from consultingand professional services on either a fixed fee or time and expense basis. Netrevenues from our consulting and professional services are recognized on a timeand expense basis at the time the service is delivered and the expenses areincurred. Net revenues from the sale of our proprietary learning technologiesand any professional consulting or engineering services provided on a fixed-feebasis are recognized according to a proportionate method of accounting and isrecognized ratably over the contract period based upon actual project hours ascompared to budgeted project hours.

 

We also generate net revenues from the sale of extended warranties onwireless and mobile hardware and systems, including mobile workstations,computers, peripherals, and related products. We sell original equipment manufacturers’ component warranties andrecognize the revenue on a net basis upon execution of the warrantyagreement.  In addition, we sellwarranties for which we are responsible for servicing and recognize the revenuegenerated from those sales ratably over the warranty period.

 

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 condensed consolidated balance sheet.

 

Cost of revenues consists of all expenses that are directlyattributable to the costs associated with the purchase, for resale, of wirelessand mobile hardware and systems, including computers, peripherals, and relatedproducts. Fluctuations in our gross margin may occur due to changes in ourability to obtain discounts on product sales or our ability to negotiate highermargins on sales contracts with large customers. Cost of revenues also consistsof the direct costs associated with those employees or sub-contractors thatperform our professional consulting services on behalf of our customers.

 

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

 

**CriticalAccounting Estimates and Policies**

 

Our condensed consolidated financial statements are prepared inconformity with accounting principles generally accepted in the United Statesof America (GAAP), which requires us to make estimates and assumptions thataffect the reported amounts of assets and liabilities at the date of thefinancial statements and the reported amounts of net revenues and expensesduring the reporting periods. Critical accounting policies are those thatrequire the application of management’s most difficult, subjective, or complexjudgments, often because of the need to make estimates about the effect ofmatters that are inherently uncertain and that may change in subsequentperiods. In preparing the financial statements, management utilized availableinformation, including our history, industry standards and the current economicenvironment, among other factors, in forming its estimates and judgments,giving due consideration to materiality. Actual results may differ from theseestimates. In addition, other companies may utilize different estimates, whichmay impact the comparability of our results of operations to those of companiesin similar businesses. We believe that of our significant accounting policies,the following may involve a 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 customer credit risk related to changes in economicconditions within those markets. However, we believe that our billing andcollection policies are adequate to minimize the potential credit risk.

 

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

 

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* *

*Inventory*

 

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

 

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

 

*Impairment of long-lived assets*

 

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

 

*Intangible assets*

 

We capitalize the cost associated with procuring or developingintangible assets and amortize those costs through operations ratably over theestimated lives of the intangible assets. The costs of successful registrations for patents are generallyamortized over sixteen years.  The costsof unsuccessful registrations are charged to expense.  Acquired technology is recorded at itsestimated fair value at the date of acquisition and generally amortized over fouryears.  Developed technology is generallyamortized over five years. License fees are amortized over the respectivelicense period.  Customer lists arerecorded at their estimated fair values at the date of acquisition and areamortized over the estimated retention period, which generally ranges from sixto ten years.  We assess our intangibleassets for potential impairment in conjunction with our other long-lived assetswhenever events or changes in circumstances indicate that the carrying valuemay not be recoverable.

 

*Software capitalization*

 

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

 

We capitalize certain costs related to the acquisition and developmentof software to be sold or licensed to our customers after technologicalfeasibility has been achieved. Technological feasibility is the point in time when all planning,designing, coding, and testing activities necessary to establish that ourproprietary software can be produced to meet its design specifications havebeen completed.  We expense those costsincurred prior to achieving technological feasibility as they areincurred.  We amortize the capitalizedcosts on a straight-line basis over the developed product’s estimated economiclife, which is generally three years.  Wecease capitalizing costs when the software is ready for general release to ourcustomers.  Potential impairment isassessed by comparing the balance of unamortized capitalized software costs tothe estimated net revenues to be generated from the licensing of thatsoftware.  An impairment charge isrecognized if efforts to sell that software are terminated, or if the estimatednet revenues to be generated from the licensing of that software drops below theunamortized balance of the software.

 

*Revenue recognition*

 

Net revenues are generated through product sales, warranty andmaintenance agreements, professional consulting, programming and engineeringservices, long-term support services, and educational learning programs. Netrevenues from product sales are recognized when both the title and risk of losstransfer to the customer, generally upon shipment. We generate net revenuesfrom the sale of extended warranties on wireless and mobile hardware andsystems, including mobile workstations, computers, peripherals, and relatedproducts. We record revenue from the sale of original equipment manufacturers’component warranties net of the amounts we remit to the third-party warrantyprovider at the time of execution of the warranty agreement.  We defer revenue associated with warrantysales where we are the primary obligor in servicing the warranty and recognizethat revenue ratably over the warranty period.

 

We also generate revenue from consulting and other professionalservices on either a fee-for service or fixed fee basis. Revenue fromconsulting and other professional services that is contracted asfee-for-service is recognized in the period in which the services areperformed. Direct costs for travel and accommodations are reimbursable in accordancewith the contract terms and are recognized as net revenue in the period therelated expense is incurred.  Revenuefrom the sale of proprietary learning technologies 

 

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andthose consulting and other professional services provided on a fixed-fee basisis recognized according to a proportionate method of revenue recognition and isrecognized ratably over the contract period based upon actual project hourscompleted compared to total budgeted project hours.

 

*Income taxes*

 

Our deferred tax assets and liabilities reflect temporary differencesbetween the amount of assets and liabilities for financial and tax reportingpurposes. Such amounts are based on estimates and assumptions and are adjusted,as appropriate, to reflect changes in tax rates expected to be in effect whenthe temporary differences reverse.  Ourcurrent and deferred income tax provision is based on estimates and assumptionsthat could differ from the actual results reflected in income tax returns filedin subsequent years.  Adjustments basedon filed returns are recorded when identified. A valuation allowance is recorded to reduce deferred tax assets to theamount that is more likely than not to be realized.  We consider future sources of taxable incomesuch as “future reversals of existing taxable temporary differences, futuretaxable income exclusive of reversing temporary differences and carryforwards”and “tax planning strategies” when establishing a valuation allowance.  In the event we determine that the deferredtax assets will not be realized in the future, the valuation adjustment to thedeferred tax assets is charged to earnings in the period in which we make sucha determination.

 

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

 

*Share-based compensation*

 

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

 

**Results of Operations**

 

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

 
| ** **                                  | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|
| ** **                                  | ** ** | **2009**                              | ** ** | **2008** | ** ** |
|                                        |       |                                  |       |   |   |
| Net revenues                                |       | 100.0                                 | %          | 100.0 | % |
| Cost of revenues                            |       | 78.0                                  | %          | 73.9 | % |
|                                        |       |                                  |       |   |   |
| Gross profit                                |       | 22.0                                  | %          | 26.1 | % |
| Selling, general and adminstrative expenses |       | 40.7                                  | %          | 31.6 | % |
|                                        |       |                                  |       |   |   |
| Operating loss                              |       | (18.8                                 | )%         | (5.5 | )% |
| Interest expense                            |       | (6.1                                  | )%         | (1.2 | )% |
| Interest income                             |       | 0.1                                   | %          | 0.2 | % |
|                                        |       |                                  |       |   |   |
| Loss before income tax (provision) benefit  |       | (24.8                                 | )%         | (6.5 | )% |
| Income tax (provision) benefit              |       | (0.1                                  | )%         | 2.3 | % |
|                                        |       |                                  |       |   |   |
| Net loss                                    |       | (24.9                                 | )%         | (4.2 | )% |

 

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***ThreeMonths ended March 31, 2009 compared with the Three Months ended March 31,2008***

 

***Netrevenues***

 

Net revenues for thethree months ended March 31, 2009 and 2008 were as follows:

 
| ** **                  | ** ** | **Three Months Ended March 31** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|-----------------------------|------------|--------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                  | ** ** | **2009**                             | ** ** | **2008**      | ** ** | **Change**     | ** ** | **Change** | ** ** |
|                        |       |                                 |       |          |       |           |       |   |   |
| Net revenues:               |       |                                 |       |          |       |           |       |   |   |
| Infrastructure and hardware |       | $                                    | 12,554     |          | $          | 15,429         |       | $ | (2,875 | ) | (18.6 | )% |
| Professional services       |       | 5,137                                |       | 6,182         |       | (1,045         | )          | (16.9 | )% |
| Other                       |       | 1,121                                |       | 2,175         |       | (1,054         | )          | (48.5 | )% |
|                        |       |                                 |       |          |       |           |       |   |   |
| Total net revenues          |       | $                                    | 18,812     |          | $          | 23,786         |       | $ | (4,974 | ) | (20.9 | )% |

 

Net revenues were $18,812for the three months ended March 31, 2009, compared to $23,786 for thethree months ended March 31, 2008, a decrease of $4,974 or 20.9%. Thedecrease in net revenues was due to lower infrastructure andhardware sales as the result of delays in customer purchases of our products inthe first quarter of 2009, the completion of a large professional services projectin the first and second quarters of 2008 that was not replaced in the firstquarter of 2009, and fewer professional service engagements, which typicallyprovide higher margins, resulting from the current economic downturn.

 

***Costof revenue***

 

Cost of revenue for thethree months ended March 31, 2009 and 2008 was as follows:

 
| ** **                  | ** ** | **Three Months Ended March 31** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|-----------------------------|------------|--------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                  | ** ** | **2009**                             | ** ** | **2008**      | ** ** | **Change**     | ** ** | **Change** | ** ** |
|                        |       |                                 |       |          |       |           |       |   |   |
| Cost of revenues:           |       |                                 |       |          |       |           |       |   |   |
| Infrastructure and hardware |       | $                                    | 10,015     |          | $          | 12,422         |       | $ | (2,407 | ) | (19.4 | )% |
| Professional services       |       | 4,237                                |       | 3,931         |       | 306            |       | 7.8 | )% |
| Other                       |       | 425                                  |       | 1,228         |       | (803           | )          | (65.4 | )% |
|                        |       |                                 |       |          |       |           |       |   |   |
| Total cost of revenues      |       | $                                    | 14,677     |          | $          | 17,581         |       | $ | (2,904 | ) | (16.5 | )% |

 

Our cost of revenues was$14,677 for the three months ended March 31, 2009, compared to $17,581 forthe three months ended March 31, 2008, a decrease of $2,904 or 16.5%.  The decrease in our cost of revenues was theresult of lower purchases of infrastructure and hardware to fulfill lower salesvolumes and lower costs related to subcontractors as the result of fewerprofessional services engagements in the comparable periods.

 

***Grossprofit***

 

Gross profit for thethree months ended March 31, 2009 and 2008 was as follows:

 

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| ** **                    | ** ** | **Three Months Ended March 31** | ** ** | **Amount of** | ** ** | **Percentage** | ** ** |
|-------------------------------|------------|--------------------------------------|------------|---------------|------------|----------------|------------|
| ** **                    | ** ** | **2009**                             | ** ** | **2008**      | ** ** | **Change**     | ** ** | **Change** | ** ** |
|                          |       |                                 |       |          |       |           |       |   |   |
| Gross profit:                 |       |                                 |       |          |       |           |       |   |   |
| Infrastructure and hardware   |       | $                                    | 2,539      |          | $          | 3,007          |       | $ | (468 | ) | (15.6 | )% |
| Professional services         |       | 900                                  |       | 2,251         |       | (1,351         | )          | (60.0 | )% |
| Other                         |       | 696                                  |       | 947           |       | (251           | )          | (26.5 | )% |
|                          |       |                                 |       |          |       |           |       |   |   |
| Total gross profit            |       | $                                    | 4,135      |          | $          | 6,205          |       | $ | (2,070 | ) | (33.4 | )% |
|                          |       |                                 |       |          |       |           |       |   |   |
| Gross profit percentage:      |       |                                 |       |          |       |           |       |   |   |
| Infrastructure and hardware   |       | 20.2                                 | %          | 19.5          | %          | 0.7            | %          | 3.8 | % |
| Professional services         |       | 17.5                                 | %          | 36.4          | %          | (18.9          | )%         | (51.9 | )% |
| Other                         |       | 62.1                                 | %          | 43.5          | %          | 18.5           | %          | 42.6 | % |
|                          |       |                                 |       |          |       |           |       |   |   |
| Total gross profit percentage |       | 22.0                                 | %          | 26.1          | %          | (4.1           | )%         | (15.7 | )% |

 

Our gross profit was$4,135 for the three months ended March 31, 2009, compared to $6,205 forthe three months ended March 31, 2008, a decrease of $2,070 or 33.4%,resulting in a gross margin of 22.0% at March 31, 2009, down from 26.1% atMarch 31, 2008. The decrease in our gross margin is the result of lower netrevenues on wireless infrastructure and hardware as the result of customersdeciding to defer purchases of third party hardware products until after thefirst quarter of 2009, the completion of a large professional services projectin the first and second quarters of 2008 that was not replaced in the firstquarter of 2009, and lower margins on fewer professional service engagements,which typically provide higher margins, as customers deferred projects duringthe current economic downturn.

 

Our selling, general andadministrative expenses were $7,663 for the three months ended March 31,2009, compared with $7,517 for the three months ended March 31, 2008, anincrease of $146, or 1.9%.  Selling expenses were $3,152 for the threemonths ended March 31, 2009, compared with $3,250 for the three monthsended March 31, 2008, a decrease of $98, or 3.0%.  The decrease in our selling expenses for thecomparable period was primarily attributable to lower commissions paid on alower sales volume. General and administrative expenses were $4,511 for the three months ended March 31,2009, compared with $4,267 for the three months ended March 31, 2008, anincrease of $244, or 5.7%.  The increase in our general and administrativeexpenses for the comparable period was primarily attributable to administrativesalaries and related employment benefits from the acquisitions made in thesecond quarter of 2008, partially offset by reduced travel expenses as wecontinued taking cost reduction actions in the first quarter of 2009.

 

Our interest expense was$1,146 for the three months ended March 31, 2009, compared toapproximately $286 for the three months ended March 31, 2008, an increaseof $860 or 300.7%. The increase in interest expense is a result of higheramounts outstanding under our revolving credit and term loan facilities as aresult of our 2008 acquisitions and higher base rates charged on thesefacilities during the comparable period in 2008.  In addition to higher base rates, interest onour 2009 borrowings is charged at a higher rate as a result of certainfinancial covenant violations during the first quarter of 2009 that did notoccur during the comparable period in 2008. Our interest income was $10 for the three months ended March 31,2009, compared to $48 for the three months ended March 31, 2008, adecrease of $38 or 79.2%.  The decreasein interest income is primarily the result of a lower average cash balanceduring the three months ended March 31, 2009 when compared to the sameperiod of 2008.

 

Our depreciation andamortization expense, included with selling and general and administrativeexpenses discussed above, decreased to $475 for the three months ended March 31,2009 from $533 for the three months ended March 31, 2008, a decrease of$58 or 10.8% as the result of the write-off of our demonstration units at December 31,2008.

 

Our net loss was $4,671for the three months ended March 31, 2009 compared with a net loss of $991for the three months ended March 31, 2008, an increase of $3,680 or371.3%.  Our net loss increased primarilydue to lower revenue of, and lower margins associated with, infrastructure andhardware sales as the result of delays in customer purchases of our products inthe first quarter of 2009, the completion of a large professional servicesproject in the first and second quarters of 2008 that was not replaced in thefirst quarter of 2009, and fewer professional service engagements, whichtypically contain higher margins, resulting from the current economic downturn.

 

As of March 31,2009, we had federal net operating losses (“NOLs”) of approximately $16,675 andstate NOLs of approximately $12,458. Federal state NOLs will be available to offset future taxable income andexpire at various date beginning in 2024. State NOLs expire at various dates beginning in 2013 through 2027.  At March 31, 2009, we have determinedthat our ability to realize the tax benefit of operating losses isuncertain.  Accordingly, we have recordeda valuation allowance against the tax effect of the NOLs.

 

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*** ***

***Liquidity and Capital Resources***

 

At March 31, 2009, we had cash and cash equivalents of $4,072,compared to $3,037 at December 31, 2008. Pursuant to a covenant in a loanand security agreement with our senior lender, we are required to maintain aminimum cash balance of $2,500. We have used, and plan to use, our unrestrictedcash for general corporate purposes, including working capital as well asacquisitions. We have funded our growth primarily through the private sale ofequity securities and through current and long term debt and workingcapital.  At March 31, 2009, ourtotal liabilities were $42,450 and were comprised mostly of term debt andborrowings outstanding under our credit line, and outstanding accounts payableand accrued expenses.  Net cash providedby operating activities for the three months ended March 31, 2009 was$1,526, primarily the result of collections from higher sales generated duringthe fourth quarter of 2008.  Net cashused in investing activities was $198 for the three months ended March 31,2009, primarily used to continue development of our proprietary software and topurchase office equipment.  Net cash usedin financing activities was $293 for the three months ended March 31,2009, primarily due to the payment of scheduled maturities of debt.

 

Our primary current and contingent cash obligations arise under ourloan and security agreement with Hercules Technology Growth Capital, Inc.(Hercules), our earn out agreements with Delta Health Systems, Inc.(Delta) and Healthcare Informatics associates, Inc. (HIA), and our notepayable to HIA. As more fully discussed below, we are currently in violation ofcertain of our financial covenants with respect to our loan and securityagreement with Hercules. As a result of these covenant violations andrestrictions in our loan and security agreement, we currently are not permittedto borrow additional funds under our revolver facility or to make earn outpayments under our agreements with Delta and HIA. Due to our inability tocomply with these covenants, we are in discussions with Hercules to amend ourloan and security agreement to restructure its terms, including to waive pastviolations and to revise the financial covenants and the amortization relatedto the term loan portion of the facility. While we remain in discussions withHercules regarding an amendment, we have not obtained, and there can be noassurance that we will obtain, any such amendment. We are also in discussionswith HIA regarding the earn out payment.

 

Giventhe amount of our current unrestricted cash and cash equivalents and accountsreceivable, and assuming we are able to agree to amended terms with Herculesand HIA, we believe that we will have sufficient liquidity to meet our currentcapital requirements with respect to our operations. However, we havesubstantial liquidity requirements related to our loan and security agreementwith Hercules and our earn out agreements with HIA and Delta. We are indiscussions to restructure our obligations with Hercules and HIA.  We are currently identifying ways to optimizeour capital structure and pursue strategic planning to continue as a goingconcern and provide for our future success. Our initiatives includerestructuring our debt, and pursuing additional debt and equity capital, one ormore strategic transactions, and further cost control actions. Our continuedoperations are dependent on our ability to implement those plans successfully.If we fail to do so, we may not be able to continue as a going concern.

 

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

 

HerculesTechnology Loan Agreement

 

On May 1, 2008, we entered into a loan and security agreement, asamended on November 19, 2008, (Loan and Security Agreement) with Herculesthat provides us with a  revolving creditfacility of up to $9,000 and a  term loanfacility of up to $12,000.  The revolvingcredit facility expires on November 1, 2009 and the term loan facilitymatures on May 1, 2012.  Ourobligations under the agreement are secured by all of our personal property,including all of the equity interests in our subsidiaries.  At March 31, 2009, $9,000 and $11,759,respectively, were outstanding under these facilities.

 

Borrowings under the revolving credit facility are limited to 85% ofour eligible accounts receivable, as defined, less $2,500.  Borrowings bear interest at an annual rateequal to the greater of 11.25% or the prime rate plus 6.75%.  Borrowings under the term loan facility bearinterest at an annual rate equal to the greater of 13.25% or the prime rateplus 8.75%, plus an additional 1.75% of interest that will be paid in kind andis added to the principal amount of the term loan.  The interest rates on outstanding borrowingsunder the revolving credit facility and the term loan facility increased by 1%on February 15, 2009 and will increase by an additional 1% on May 15,2009, unless prior to that date we have either executed a definitive agreementto sell or merge the Company or have raised $5,000 of additional equity orsubordinated debt on terms acceptable to Hercules.  We cannot guarantee that we can execute suchan agreement of sale or merger or raise additional equity or subordinated debtby May 15, 2009.  In the event of adefault on the Loan and Security Agreement, the borrowings will bear interestat 3% higher than then current rate (default rate of interest).  In addition, in the event of the late paymentof interest, we will be charged an additional 5% (late payment charge).

 

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

 

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Under the provisions of the term loan facility, we are required to paya succession fee equal to the greater of $900 or 3% of our marketcapitalization that exceeds $50,000.  Thesuccession fee is due upon the earliest to occur of (i) demand from theLender at any time between November 1, 2009 and May 1, 2012, (ii) theacceleration of our obligations under the agreement, (iii) the term loanmaturity date, and (iv) prepayment in full of our obligations under theterm loan facility.

 

The Loan and Security Agreement contains various affirmative andnegative covenants, including covenants that require us to maintain a minimumcash balance and restrict the Company’s ability to incur indebtedness, makeinvestments, make payments in respect of its capital stock, including dividendsand repurchases of common stock, sell or license its assets, and engage inacquisitions without the prior satisfaction of certain conditions. Additionalcovenants require compliance with certain financial tests, including leverageratios.  In addition, we are notpermitted to pay any amounts owing under the earn out agreements that wereentered into in connection with the acquisitions of the assets of HIA or Deltaif the Company’s total leverage exceeds the predefined maximum.  Upon an event of default under the agreementthe Lender may opt to accelerate and demand payment of all or any part of ourobligations under the agreement.

 

As of March 31, 2009, we were not in compliance with certainfinancial covenants.  As a result of thecovenant violations, we are prohibited from satisfying the earn out obligationsrelated to our acquisitions of HIA and Delta. We are in discussions withHercules to amend the Loan and Security Agreement and restructure its terms,including to waive past violations and to revise the financial covenants andthe amortization related to the term loan portion of the facility. There can beno assurance that we will obtain, such an amendment.  As of May 15, 2009, Hercules has notdemanded payment of the principal due under the credit and term loanfacilities.  We have been charged thedefault rate of interest on outstanding borrowings since December 31,2008.  We are also in discussions withHIA to obtain their consent to the payment restrictions placed on the earn outobligation.  There can be no assurancethat we will be able to obtain the consent on terms favorable to us or at all.

 

There have been no material changes to the measurement of covenants,our plans to address the covenant failures and the possible impact on ourliquidity from the information set forth in our Annual Report on Form 10-Kfor the year ended December 31, 2008.

 

***Significant Contractual Obligations***

 

Asof March 31, 2009, our significant contractual obligations were asfollows:

 
| ** **                  | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------|------------|----------------------------|------------|
| ** **                  | ** ** | **Total**                  | ** ** | **Less Than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More Than 5  Years** | ** ** |
|                        |       |                       |       |   |   |   |   |   |   |   |   |
| Long-term debt obligations  |       | $                          | 16,736     |   | $ | 11,873 |   | $ | 4,740 |   | $ | 123 |   | $ | — |   |
| Capital lease obligations   |       | 285                        |       | 94 |   | 127 |   | 64 |   | — |   |
| Operating lease obligations |       | 1,188                      |       | 532 |   | 656 |   | — |   | — |   |
| Vendor obligations          |       | 7,125                      |       | 1,875 |   | 5,250 |   | — |   | — |   |
|                             |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Inflation***

 

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

 

***OffBalance Sheet Arrangements***

 

We do not currently haveany off-balance sheet arrangements.

 

***New Accounting Standards***

 

Beginning January 1,2009, we have applied the provisions of Emerging Issues Task Force (EITF) IssueNo. 07-5, *“Determining Whether an Instrument (or anEmbedded Feature) is indexed to an Entity’s Own Stock”*(EITF 07-5) to our existing arrangements to reevaluate, in part, whetherfinancial instruments or embedded features within those arrangements are exemptfrom accounting under Statement of Financial Accounting Standard No. 133, *Accounting for Derivative Instruments and Hedging Activities*(FAS133).  EITF 07-5 clarifies how todetermine whether certain instruments or features are indexed to an entity’sown stock under EITF Issue No. 01-6, *“The Meaning of ‘Indexedto a Company’s Own Stock’”* (EITF 01-6) and thereby possibly exemptfrom 

 

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accounting under FAS133.  The consensus reached in EITF 07-5supersedes those reached in EITF 01-6. We will apply the provisions to our new arrangements as they arise.  The application of EITF 07-5 did not have amaterial impact on the consolidated financial statements.

 

Beginning January 1, 2009, we haveapplied the provisions of Financial Accounting Standards Board (FASB) Staff Position APB 14-1, *Accounting for Convertible Debt Instruments That May Be Settled inCash upon Conversion (Including Partial Cash Settlement)* (FSP APB14-1) to the outstanding HIA convertible note payable.  FSP APB 14-1 requires companies toseparately account for the liability (debt) and equity (conversion option)components of certain convertible debt instruments that may be settled(partially or fully) in cash (or other assets) on conversion in a manner thatreflects a company’s nonconvertible debt borrowing rate.  The provisions of FSP APB 14-1 are effectivefor financial statements issued for fiscal years beginning after December 15,2008, and interim periods within those fiscal years.  The provisions of FSP APB 14-1 must beapplied retrospectively to all periods presented. The application of FSP APB14-1 did not have a material impact on the consolidated financial statements.

 

In April 2009, theFASB issued Staff Position FAS 107-1 and APB 28-1, *Interim Disclosures about Fair Value of Financial Instruments*(FSP), which amends FinancialAccounting Standard No. 107, *Disclosuresabout Fair Value of Financial Instruments* (FAS 107)*,*to require an entity to provide interimdisclosures about the fair value of all financial instruments within the scopeof FAS 107 and to include disclosures related to the methods and significantassumptions used in estimating those instruments. This FSP is effective forinterim and annual periods ending after June 15, 2009.  We are currently evaluating the impact theadoption of this FSP will have on our consolidated financial statements andrelated disclosures.

 

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

 

Not required.

 

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

 

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

 

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

 

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

 

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**PART II— OTHER INFORMATION**

 

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

 

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

 

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

 

Therehave been no material changes in our risk factors from the information setforth in our Annual Report on Form 10-K for the year ended December 31,2008.

 

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

 

None.

 

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

 

None.

 

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

 

None.

 

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

 

None.

 

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

 
| **Exhibit No.** |   | **Description**                                                                                                                                                                                                                                               |
|----------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |   |                                                                                                                                                                                                                                                          |
| 10.1                 |   | Master Senior Agreement dated March 2, 2009 by  and between Futura Services, Inc. and InfoLogix, Inc. (incorporated  herein by reference to Exhibit 10.1 to the Company’s Current Report on  Form 8-K filed March 6, 2009) |
|                 |   |                                                                                                                                                                                                                                                          |
| 31.1                 |   | Certification pursuant to Exchange Act  Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.*                                                                                                          |
|                 |   |                                                                                                                                                                                                                                                          |
| 31.2                 |   | Certification pursuant to Exchange Act  Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.*                                                                                                          |
|                 |   |                                                                                                                                                                                                                                                          |
| 32.1                 |   | Certification pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.+                                                                                                                          |
|                 |   |                                                                                                                                                                                                                                                          |
| 32.2                 |   | Certification pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.+                                                                                                                          |

 

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

 

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**SIGNATURES**

 

Pursuant to the requirements of section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned; thereunto duly authorized, inHatboro, Pennsylvania on May 15, 2009.

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

 

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