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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Commission File Number 001-33521

INFOLOGIX, INC.

(Exact name of registrant as specified in its charter)

(215) 604-0691

(Registrant’s telephone number, including area code)

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

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

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

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

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

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PART I - FINANCIAL INFORMATION

Item 1.        Financial Statements

INFOLOGIX, INC.

Condensed Consolidated Balance Sheets

(in thousands, except share amounts)

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

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INFOLOGIX, INC.

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except share and per share amounts)

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

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INFOLOGIX, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

The accompanying notes are an integral part of these unaudited consolidated 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

The accompanying condensed consolidated financial statements of InfoLogix, Inc. and subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and with the instructions for Form 10-Q and Article 10 of Regulation S-X. They do not include all of the disclosures normally made in the consolidated financial statements contained in Form 10-K.  In management’s opinion, all adjustments considered necessary for a fair presentation of the consolidated results of operations, financial position and cash flows for the periods shown have been made.  All such adjustments are of a normal and recurring nature.  The notes to the consolidated financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 2008 should be read in conjunction with these consolidated financial statements.  Operating results for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

The consolidated financial statements include the accounts of InfoLogix, Inc. and its wholly-owned subsidiaries: InfoLogix Systems Corporation, OPT Acquisition, LLC, Embedded Technologies, LLC, and InfoLogix—DDMS, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

Certain amounts in prior periods’ financial statements and related notes have been reclassified to conform to the 2009 presentation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Management considers materiality and uses the information available to prepare the consolidated financial statements including, the Company’s history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates.

Nature of Business

The Company is a provider of enterprise mobility solutions for the healthcare and commercial markets.  The Company’s solutions are designed to allow the real time usage of data throughout an enterprise in order to enhance workflow, improve customer service, increase revenue and reduce costs.  The products and services the Company provides include: consulting, software and software implementation, mobile managed services, system integration, wireless network design and hardware.

NOTE B—Recent Accounting Pronouncements

In April 2008, the Financial Accounting Standards Board (FASB) issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS 142-3) as codified in ASC Topic 350. FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under Statement 142. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. The application of the subtopic did not have a material impact on the consolidated financial statements.

In June 2009, FASB issued Statement of Financial Accounting Standards No. 168 (SFAS 168), The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. SFAS 168 establishes the FASB Accounting Standards Codification (ASC) as the source of authoritative accounting and reporting standards in the United States, in addition to guidance issued by the SEC.  The ASC is a restructuring of accounting and reporting standards designed to simplify user access to all authoritative U.S. GAAP by providing the authoritative literature in a topically organized structure.  The ASC reduces the U.S. GAAP hierarchy to two levels, one that is authoritative and one that is not.  The ASC is not intended to change U.S. GAAP or any requirements of the SEC.  The ASC became authoritative upon its release on July 1, 2009, is effective for interim and annual periods ending after September 15, 2009, and has been adopted by the Company.

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

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available to be issued.  Although there is new terminology, the topic is based on the same principles as those that have existed in auditing standards.  Under the provisions of ASC 855, companies are required to disclose the date through which an entity has evaluated subsequent events.  The provisions of the standard/topic are effective for interim and annual periods ending after June 15, 2009.  The adoption of ASC 855 did not have a significant impact on the consolidated balance sheet or consolidated statements of operations and cash flows.

Beginning January 1, 2009, the Company applied the provisions of Emerging Issues Task Force (EITF) Issue No. 07-5, Determining Whether an Instrument (or an Embedded Feature) is indexed to an Entity’s Own Stock (EITF 07-5) to its existing arrangements to reevaluate, in part, whether financial instruments or embedded features within those arrangements are exempt from accounting under Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133).  EITF 07-5 was codified in the ASC on July 1, 2009 under subtopic 815-40-15.  This subtopic clarifies how to determine whether certain instruments or features are indexed to an entity’s own stock and thereby possibly exempt from accounting as a derivative under ASC 815 or possibly qualify for consideration of equity accounting.  The Company will apply the provisions of this standard to its new arrangements as they arise.  The application of this subtopic did not have a material impact on the consolidated financial statements.

Beginning January 1, 2009, the Company applied the provisions of FASB Staff Position APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB 14-1) to its convertible notes payable.  FSP APB 14-1 was codified in the subtopic ASC 470-20 on July 1, 2009.  This subtopic requires companies to separately 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 that reflects a company’s nonconvertible debt borrowing rate.  The provisions of the standard are effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.  The application of the subtopic did not have a material impact on the consolidated financial statements.

In April 2009, the FASB issued Staff Position FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP), which amends Financial Accounting Standard No. 107, Disclosures about Fair Value of Financial Instruments (FAS 107), to require an entity to provide interim disclosures about the fair value of all financial instruments within the scope of FAS 107 and to include disclosures related to the methods and significant assumptions used in estimating those instruments. This FSP was codified in the ASC under subtopic 825-10-65-1 and is effective for interim and annual periods ending after June 15, 2009.  The adoption of this subtopic did not have a material effect on the condensed consolidated financial statements and related disclosures.

At its September 23, 2009 board meeting, the FASB ratified final EITF consensus on revenue arrangements with multiple deliverables (Issue 08-1).  Issue 08-1 supersedes Issue 00-21 (codified in ASC 605-25).  Issue 08-1 applies to all deliverables in contractual arrangements in all industries in which a vendor will perform multiple revenue-generating activities, except when some or all deliverables in a multiple deliverable arrangement are within the scope of other, more specific sections of the ASC and other sections of ASC 605 on revenue recognition.  Specifically, Issue 08-1 addresses the unit of accounting for arrangements involving multiple deliverables.  It also addresses how arrangement consideration should be allocated to the separate units of accounting, when applicable. However, guidance on determining when the criteria for revenue recognition are met and on how an entity should recognize revenue for a given unit of accounting are located in other sections of the Codification.  Issue 08-1 will ultimately be issued as an Accounting Standards Update (ASU) that will amend the ASC.  Final consensus is effective for fiscal years beginning on or after June 15, 2010.  Entities can elect to apply this Issue (1) prospectively to new or materially modified arrangements after the Issue’s effective date or (2) retrospectively for all periods presented.  The Company is in the process of evaluating the impact of this guidance on our consolidated financial statements.

At its September 23, 2009 board meeting, the FASB also ratified final EITF consensus on software revenue recognition (Issue 09-3) which will impact entities that sell tangible products containing both hardware elements and software elements that are currently within the scope of ASC 985-605 (formerly SOP 97-2).  This Issue amends ASC 985-605 and ASC 985-605-15-3 (formerly Issue 03-5) to exclude from their scope all tangible products containing both software and non-software components that function together to deliver the product’s essential functionality. That is, the entire product (including the software deliverables and non-software deliverables) would be outside the scope of ASC 985-605 and would be accounted for under other accounting literature. The consensus will include factors that entities should consider when determining whether the software and non-software components function together to deliver the product’s essential functionality and are thus outside the revised scope of ASC 985-605.  Issue 09-3 will ultimately be issued as an ASU that will amend the FASB Accounting Standards Codification (ASC).  The final consensus is effective for fiscal years beginning on or after June 15, 2010. Entities can elect to apply Issue 09-3 (1) prospectively to new or materially modified arrangements after the Issue’s effective date or (2) retrospectively for all periods presented. Early application is permitted.  The Company is in the process of evaluating the impact of this pronouncement on our consolidated financial statements.

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NOTE C—Inventory

Inventory consists of the following:

NOTE D—Customer and Vendor Concentrations

For the three and nine months ended September 30, 2009 and 2008, the Company had sales to significant customers, as a percentage of net revenues, as follows:

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

NOTE E—Debt

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

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

Borrowings under the revolving credit facility were limited by the Company’s asset base, as defined and bore interest at an annual rate equal to 1.50% interest paid in kind plus the greater of 14.25% or the prime rate plus 9.75% through September 30, 2009.  Thereafter, the revolving credit facility was to bear interest at an annual rate equal to 4.50% interest paid in kind plus the greater of

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

The Loan and Security Agreement contained various affirmative and negative covenants, including covenants requiring the Company to maintain a minimum cash balance and restricting the Company’s ability to incur indebtedness, make investments, make payments in respect of its capital stock, including dividends and repurchases of common stock, sell or license its assets, and engage in acquisitions without the prior satisfaction of certain conditions. Additional covenants will require compliance with certain financial tests, including earnings and leverage ratios and the closing of a Fundamental Event Transaction on July 31, 2009, defined as either (i) the sale of all or substantially all of the assets or capital stock of the Company, (ii) a cash equity infusion in an amount of at least $12,000 or (iii) the incurrence of subordinated indebtedness of at least $12,000 (subordinate to Hercules’s security interests in the Company’s property and assets), the proceeds of which would be used to repay the term loan. A Fundamental Event Transaction did not occur by July 31, 2009, and as such an event of default occurred. Hercules agreed to forbear from exercising its rights with respect to this event of default as described below. In addition, the Company was not permitted under the Loan and Security Agreement and a subordination agreement with Hercules to pay any amounts owing under the earn out agreements that were entered into in connection with the acquisitions of the assets of Healthcare Informatics Associates, Inc. (HIA) or Delta Health, Inc. (Delta) if the Company’s total leverage exceeded the predefined maximum.  Upon an event of default under the agreement, Hercules could opt to accelerate and demand payment of all or any part of the Company’s obligations under the Loan and Security Agreement.

Under the provisions of the term loan facility, the Company was required to pay a succession fee equal to the greater of $1,200 or 6% of the Company’s market capitalization that exceeded $11,327, if a Fundamental Event Transaction (described in the preceding paragraph) closed and the term loan was repaid by September 30, 2009.  The succession fee equals the greater of $1,500 or 6% of the Company’s market capitalization exceeding $11,327, if the loan is repaid after September 30, 2009. The succession fee would have been due upon the earliest to occur of (i) demand from Hercules at any time between June 30, 2009 and April 30, 2012, (ii) the acceleration of the Company’s obligations under the Loan and Security Agreement, (iii) the term loan maturity date, and (iv) prepayment in full of the Company’s obligations under the term loan facility.  At September 30, 2009, the Company has recorded a liability of $1,500 related to this obligation.

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

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

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

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

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

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

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

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

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

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

The term loans include a $5,500 (Term Loan A) 48-month amortizing loan and a $5,000 (Term Loan B) convertible note due on November 1, 2014. Amortization on Term Loan A begins on December 1, 2010. Term Loan B is convertible into the Company’s common stock at Hercules’ option, or automatically if its 90-day value weighted adjusted price exceeds five times the conversion price pursuant to the Debt Conversion Agreement. The conversion price of Term Loan B is $0.0743 per share.  The outstanding principal balance on each term loan will bear interest at 12% per annum for the initial twelve months; 18% per annum for the subsequent twelve months and 15% per annum thereafter.  This interest is payable in cash.  Term Loan B will bear an additional 2.5% interest that will be “paid in kind” (PIK).  The Company will have the option to turn the PIK interest into cash interest or additional equity shares if certain predefined metrics are maintained.  Each of the term loans will be assessed a prepayment charge beginning at 5% of the total term loan commitment, and reduced to 3% after twelve months and reduced again to 1% after two years.

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The Amended Loan Agreement has certain negative and financial covenants and other stipulations associated with the arrangement.

NOTE F—Related Party Transactions

Support services

An entity owned by a stockholder and former officer of the Company provides extended warranties and technical support services to certain customers on behalf of the Company.  Pursuant to this arrangement, the Company incurred $558 and $847 of charges for the three months ended September 30, 2009 and 2008, respectively, and $1,592 and $1,931 of charges for the nine months ended September 30, 2009 and 2008, respectively.  The Company made payments under the arrangement of $611 and $778 for the three months ended September 30, 2009 and 2008, respectively, and of $1,534 and $1,645 for the nine months ended September 30, 2009 and 2008, respectively.

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

Pursuant to the amended terms of this agreement, the Company has a minimum annual commitment to purchase technical services, consulting services with respect to software development, and to sell extended warranties on the entity’s behalf, all of which must total at least $1,500 per year. The agreement expires in 2013.

Professional Recruiting Services

The Company maintains a business relationship with Gulian & Associates, which is owned by the wife of David T. Gulian, the Company’s President and Chief Executive Officer and a director and stockholder of the Company.  Under the terms of the arrangement, Gulian & Associates provides the Company with retainer-based professional recruiting services on a non-exclusive basis.  Gulian & Associates is paid a fee of 20% of a newly hired person’s annual base salary for employees it introduces to the Company.  One-third of the estimated fee is due at the time the hiring request is made.  The remainder is due upon successful placement of a candidate into the role. During the three months ended September 30, 2009 and 2008, the Company paid Gulian & Associates approximately $21 and $68, respectively, and during the nine months ended September 30, 2009 and 2008, the Company paid approximately $132 and $153, respectively, in fees.

NOTE G—Commitments and Contingencies

Litigation

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

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

InfoLogix and the Individual Defendants deny any and all alleged wrongdoing, and intend to vigorously defend against the Claims brought by CDC.

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NOTE H—Income Taxes

The Company has net operating loss (NOL) carryforwards available in certain jurisdictions to reduce future taxable income.  Future tax benefits for net operating loss carryforwards are recognized to the extent that realization of these benefits is considered more likely than not.  As of September 30, 2009, a valuation allowance of $11,372 was recognized to offset the related deferred tax assets 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 will expire beginning 2025 and state net operating losses will expire in varying years between 2013 through 2027.

NOTE I—2008 Employee Stock Purchase Plan

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

The Company issued 82,098 shares on April 1, 2009 and 74,769 shares on July 1, 2009 in connection with the ESPP for the first and second quarters of 2009, for which it received $35 and $30 in cash in the respective periods.  The Company issued 21,955 shares on April 1, 2008 and 25,600 shares on July 1, 2008 in connection with the ESPP for the first and second quarters of 2008, for which it received $31 and $120 in cash in the respective periods. On July 20, 2009, the Company’s Board of Directors voted to amend the ESPP to provide that the Board of Directors may suspend the ESPP at any time and for any reason and later reinstate the ESPP at any time and for any reason.  The Board of Directors has determined that an indefinite suspension of the ESPP is in the best interests of the Company and its stockholders. Pursuant to the ESPP as amended, the Company suspended the ESPP effective as of July 1, 2009.

NOTE J—Stock Based Compensation

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

NOTE K—Subsequent Events

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

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

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

Forward-Looking Statements

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

·                     our ability to refinance, replace or restructure our current indebtedness and to comply with financial covenants and other terms and conditions contained in the agreements governing our indebtedness or any replacement indebtedness;

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

·                     further changes in economic, business or industry conditions;

·                     our ability to find additional financing necessary to support our operations and our strategic objectives while also maintaining our focus on operating and developing our business;

·                     our ability to successfully integrate acquisitions with our existing operations;

·                     our ability to retain, replace and hire experienced senior management;

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

·                     competition in the industries in which we compete;

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

·                     our ability to protect our intellectual property rights; and

·                     restrictions on our operations contained in our Amended Loan Agreement or agreements for any replacement indebtedness.

All statements, other than statements of historical facts, included in this report regarding our strategy, future operations, financial position, estimated revenue or losses, projected costs, prospects, current expectations, forecasts, and plans and objectives of management 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 identifying words.  All forward-looking statements speak only as of the date of this report.  We do not undertake any obligation to update any forward-looking statements or other information contained herein, except as required by federal securities laws.  You should not place undue reliance on these forward-looking statements.  Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements in this report are reasonable, we cannot assure you that these plans, intentions or expectations will be achieved.  We have disclosed important factors that could cause our actual 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, our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009, and in this Quarterly Report on Form 10-Q and elsewhere in this report.  These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

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Overview and Outlook

The following discussion and analysis of our financial condition and results of operations is intended to assist you in understanding our financial condition and results of operations. This discussion and analysis should be read in conjunction with our financial statements and the notes thereto included in Item 1 of this quarterly report. Many of the amounts and percentages presented in this discussion and analysis have been rounded for convenience of presentation, and all dollar amounts are presented in thousands.

Overview

InfoLogix is a provider of enterprise mobility solutions for the healthcare and commercial industries. We provide these solutions to our customers by utilizing a combination of products and services, including consulting, business software applications, mobile managed services, mobile workstations and devices, and wireless infrastructure. Our solutions are designed to allow the real time usage of data throughout a customer’s enterprise in order to enhance workflow, improve customer service, increase revenue and reduce costs. We sell wireless communication and computing devices, including mobile workstations that connect to a customer’s wireless network so that information can be accessed from any location within the enterprise. We also implement customized and third-party software applications and provide radio frequency identification (RFID) technology, which is a data-exchange method that uses transponders to store and remotely send or retrieve information to enable the transmission and processing of that information between the customer’s information system and its wireless communication and computing devices. In addition, we offer professional services that support and complement a customer’s wireless computing systems and enterprise-wide software implementations, including consulting, mobile managed services, training, engineering, technical support and network monitoring.

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

·                  Consulting with our customers to identify opportunities to use mobile technology in their enterprise to improve operations and the quality of their customer service by more efficiently managing people and assets.

·                  Providing our customers with ongoing managed services that are designed to supplement their information technology department, such as training, maintenance and repair, network monitoring, software application upgrades, network security and workflow consulting.

·                  Assessing our customer’s existing wireless infrastructure—the cables, routers and network adapters from which a wireless network is constructed—and developing improved network designs to ensure effective wireless connectivity and infrastructure systems integration.

·                  Developing and implementing custom software applications by using existing proprietary and third-party software.

·                  Delivering and installing wireless infrastructure and user devices, including mobile workstations.

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

Going Concern

Our condensed consolidated financial statements for the three and nine months ended September 30, 2009 have been prepared on a going concern basis, which contemplates continuing operations, securing additional debt or equity financing, selling certain assets, and realizing assets and liabilities in the ordinary course of business.  However, we have incurred significant net losses from 2006 through 2009, including net losses of $11,513 for the nine months ended September 30, 2009 and have accumulated a stockholders’ deficiency of $3,180.  We have substantial liquidity requirements including monthly interest on our outstanding debt and those related to the repayment of our revolving line of credit that comes due on May 1, 2011, as well as to earn out payments for past acquisitions.  Though we are taking measures to improve our liquidity, we do not currently expect to generate sufficient cash flow from operations to fund those obligations.  We entered into an Amended and Restated Loan Agreement with Hercules on November 20, 2009. As a result, we restructured our indebtedness and reduced our outstanding obligations payable to Hercules by $5,000, but we also continue to identify ways to optimize our capital structure and pursue strategic planning to continue as a going concern and provide for our future success.

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We have undertaken a series of actions to reduce costs and are pursuing various initiatives to secure equity or debt financing that will reduce our overall cost of capital.  Our plan to improve our liquidity also includes the possibility of selling certain assets of the business, and further evaluating our staffing model. Our continued operations are dependent on our ability to implement these plans successfully.  Our ability to implement these plans successfully is dependent on many circumstances outside of our direct control, including general economic conditions and the financial strength of our customers. Any additional financing we are able to secure will likely be subject to a number of conditions and involve additional costs. Given the current negative conditions in the economy generally and the credit markets in particular, there is uncertainty as to whether we will be able to generate sufficient liquidity to repay our outstanding debt, to make earn out payments and to meet working capital needs. There can be no assurance, however, that we will be able to achieve and sustain a level of liquidity sufficient to continue as a going concern.

Despite our history of losses and the difficult economic climate, we believe that we are still well-positioned to capitalize on the development, proliferation and convergence of enterprise mobility solutions in the marketplace. We believe that the application of our knowledge and experience in combining industry leading wireless infrastructure with proprietary and third-party software creates solutions that address our customers’ critical needs. Because we do not depend on any particular technology or network carrier, we believe that we can provide tailored solutions in a rapidly changing technological landscape. Also, as market conditions continue to evolve, we believe that our solutions are adaptable to customers in any industry and scalable to customers of varying size or technological sophistication.

Characteristics of our net revenues and expenses

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

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

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

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

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

Critical Accounting Estimates and Policies

Our condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP), which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management’s most difficult, subjective, or complex judgments,

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often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the financial statements, management utilized available information, including our history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in 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, which are primarily in the healthcare and commercial markets. Consequently, we are subject to potential customer credit risk related to changes in economic conditions within those markets. However, we believe that our billing and collection policies are adequate to minimize the potential credit risk.

We reserve for uncollectible accounts based on our best estimate of the amount of probable credit losses in our existing accounts receivable. We periodically review our accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt including historical experience and current economic and market conditions. Account balances deemed to be uncollectible are written off after all means of collection have been exhausted and the potential for recovery is considered remote.

Inventory

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

We periodically review our inventories and make provisions as necessary for estimated obsolete and slow-moving goods. We mark down inventory in an amount equal to the difference between cost of inventory and the estimated market value based on assumptions about future demands, selling prices and market conditions. The creation of such provision results in a write-down of inventory to 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 events or changes in circumstances indicate that the carrying value may not be recoverable. An asset’s value is impaired if management’s estimate of the aggregate future cash flows, undiscounted and without interest charges, generated by the asset are less than the carrying value of the asset. When estimating future cash flows, we consider factors such as expected future operating income and historical trends, as well as the effects of demand and competition. To the extent impairment has occurred, the loss is measured as the excess of the carrying amount of the asset over the estimated fair value of the asset. Such estimates require the use of judgment and numerous subjective assumptions, which, if actual experience varies, could result in material differences in the measurement of impairment charges.

Intangible assets

We capitalize the cost associated with procuring or developing intangible assets and amortize those costs through operations ratably over the estimated lives of the intangible assets.  The costs of successful registrations for patents are generally amortized over sixteen years.  The costs of unsuccessful registrations are charged to expense.  Acquired technology is recorded at its estimated fair value at the date of acquisition and generally amortized over four years.  Developed technology is generally amortized over five years. License fees are amortized over the respective license period.  Customer lists are recorded at their estimated fair values at the date of acquisition and are amortized over the estimated retention period, which generally ranges from six to ten years.  We assess our intangible assets for potential impairment in conjunction with our other long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

Software capitalization

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

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We capitalize certain costs related to the acquisition and development of software to be sold or licensed to our customers after technological feasibility has been achieved.  Technological feasibility is the point in time when all planning, designing, coding, and testing activities necessary to establish that our proprietary software can be produced to meet its design specifications have been completed.  We expense those costs incurred prior to achieving technological feasibility as they are incurred.  We amortize the capitalized costs on a straight-line basis over the developed product’s estimated economic life, which is generally three years.  We cease capitalizing costs when the software is ready for general release to our customers.  Potential impairment is assessed by comparing the balance of unamortized capitalized software costs to the estimated net revenues to be generated from the licensing of that software.  An impairment charge is recognized if efforts to sell that software are terminated, or if the estimated net revenues to be generated from the licensing of that software drops below the unamortized balance of the software.

Revenue recognition

Net revenues are generated through product sales, warranty and maintenance agreements, professional consulting, programming and engineering services, long-term support services, and educational learning programs. Net revenues from product sales are recognized when both the title and risk of loss transfer to the customer, generally upon shipment. We generate net revenues from the sale of extended warranties on wireless and mobile hardware and systems, including mobile workstations, computers, peripherals, and related products. We record revenue from the sale of original equipment manufacturers’ and other third party component warranties net of the amounts we remit to the third-party warranty provider at the time of execution of the warranty agreement.  As we have been transitioning our business away from the sale of hardware and related warranties, we are not selling new extended warranty programs except for those serviced by third parties and we have taken steps to confirm with our customers that third parties are the obligors under their warranties.

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

Income taxes

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

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

Share-based compensation

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

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Results of Operations

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

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

Net revenues

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

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

Cost of revenue

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

Our cost of revenues was $16,399 for the three months ended September 30, 2009, compared to $17,614 for the three months ended September 30, 2008, a decrease of $1,215 or 6.9%.  The decrease in our cost of revenues was the result of recording revenues

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

Gross profit

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

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

Our selling, general and administrative expenses were $6,534 for the three months ended September 30, 2009, compared with $7,914 for the three months ended September 30, 2008, a decrease of $1,380, or 17.4%.  Selling expenses were $2,699 for the three months ended September 30, 2009, compared with $2,963 for the three months ended September 30, 2008, a decrease of $264, or 8.9%.  The decrease in our selling expenses for the comparable period was primarily attributable to lower salary expense and travel related expenses resulting from staffing restrictions and other cost control measures.  General and administrative expenses were $3,835 for the three months ended September 30, 2009, compared with $4,951 for the three months ended September 30, 2008, a decrease $1,116, or 22.5%.  The decrease in our general and administrative expenses for the comparable period was primarily attributable to reductions in staff and associated benefits and travel expenses, lower purchases of demonstration and evaluation equipment, lower marketing expenses, and lower non-cash compensation costs.

Our interest expense was $1,469 for the three months ended September 30, 2009, compared to approximately $859 for the three months ended September 30, 2008, an increase of $610 or 71.0%. The increase in interest expense is a result of higher average amounts outstanding under our revolving credit and term loan facilities and higher base rates charged on these facilities than during the comparable period in 2008 and we recorded a non-cash expense of $300 related to a succession fee due to Hercules.  In addition to higher base rates, interest on our 2009 borrowings is charged at a higher rate as a result of certain financial covenant violations during 2009 that were not in effect during the comparable period in 2008. Borrowings under the revolving credit facility bear interest at an annual rate equal to 1.50% interest paid in kind plus 14.25%.  Borrowings under the term loan facility bear interest at an annual rate equal to 3.75% interest paid in kind plus 15.75%.  Our interest income was $2 for the three months ended September 30, 2009, compared to $43 for the three months ended September 30, 2008, a decrease of $41 or 95.3%.  The decrease in interest income is primarily the result of a lower average cash balance during the three months ended September 30, 2009 when compared to the same period of 2008.

Our depreciation and amortization expense, included with selling and general and administrative expenses discussed above, decreased to $465 for the three months ended September 30, 2009 from $701 for the three months ended September 30, 2008, a decrease of $236 or 33.7% as the result of the write-off of our demonstration units at December 31, 2008.

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

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current economic downturn resulting from customers choosing to delay consulting and professional services projects, which typically yield higher gross margins.

As of September 30, 2009, we had federal net operating losses (“NOLs”) of approximately $22,960 and state NOLs of approximately $17,102.  Federal NOLs will be available to offset future taxable income and expire at various dates beginning in 2025.  State NOLs expire at various dates beginning in 2013 through 2027.  At September 30, 2009, we have determined that our ability to realize the tax benefit of operating losses is uncertain.  Accordingly, we have recorded a valuation allowance against the tax effect of the NOLs.

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

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

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

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

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

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

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

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

Our interest expense, which results from our credit line and term loan was $3,803 for the nine months ended September 30, 2009, compared to approximately $1,766 for the nine months ended September 30, 2008, an increase of $2,037 or 115.3%. The increase in interest expense is a result of higher related average amounts outstanding under our revolving credit and term loan facilities and higher rates charged on these facilities during the comparable periods in 2008. In addition to higher base rates, interest on our 2009 borrowings is charged at a higher rate as a result of certain covenant violations during 2009 that were not in effect in 2008. Borrowings under the revolving credit facility bore interest at an annual rate equal to 11.25% through February 14, 2009, then increased to 12.25% through May 15, 2009, then increased to 13.25% through May 31, 2009, then increased to 14.25% through September 30, 2009 plus1.50% interest paid in kind beginning on May 31, 2009 through September 30,2 009. Borrowings under the term loan facility bore interest at an annual rate equal to 1.75% interest paid in kind plus, and then increased to 3.75% interest paid in kind plus 15.75%. In addition, the company paid default interest penalties of 3.0% from February 1, 2009 though May 31, 2009.  Our interest income was $17 for the nine months ended September 30, 2009, compared to $122 for the nine months ended September 30, 2008, a decrease of $105 or 86.1%. The decrease in interest income is primarily the result of lower average cash and cash equivalents balances during the nine months ended September 30, 2009 when compared to the same period of 2008.

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

Our net loss was $11,513 for the nine months ended September 30, 2009 compared with a net loss of $4,053 for the nine months ended September 30, 2008, an increase of $7,460 or 184.1%. Our net loss in the comparable periods increased primarily due to a substantial increase in our interest expense and related borrowing and default fees with our senior lender, and reduced sales and, during the first six months of 2009, lower gross margins due to the economic slowdown.

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Liquidity and Capital Resources

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

Our primary current and contingent cash obligations arise under our loan and security agreement with Hercules, our earn out agreements with Delta and HIA, and our note payable to HIA.

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

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

Line of Credit and Term Loan

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

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

Pursuant to the Amended Loan Agreement, Hercules agreed to provide us with a total senior loan facility of $22,500, including two term loans aggregating $10,500 and a revolving line of credit facility of $12,000 (which had an outstanding balance of $7,000 immediately following the closing). Under the Debt Conversion Agreement, the transaction included the issuance of 67,294,751 shares of our common stock and a warrant to purchase 16,823,688 shares of the Company’s common stock for an exercise price of $0.0743 per share in exchange for cancellation of $5,000 in obligations payable to Hercules.   We were assessed a transaction fee equal to 2% of the total commitment ($22,500), or $450, which is payable in twelve equal monthly installments of $38 beginning in May, 2010.

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

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

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

The Amended Loan Agreement contains various affirmative and negative covenants, including covenants that require us to maintain a minimum cash balance and restrict our ability to incur indebtedness, make investments, make payments in respect of our capital stock, including dividends and repurchases of common stock, sell or license its assets, and engage in acquisitions without the prior satisfaction of certain conditions. Additional covenants require compliance with certain financial tests, including earnings and leverage ratios.  In addition, we are not permitted under the Amended Loan Agreement and a subordination agreement with Hercules to pay any remaining amounts owing under the earn out agreements that were entered into in connection with the acquisitions of the assets of HIA or Delta if our total leverage exceeds the predefined maximum.  Upon an event of default under the Amended Loan Agreement Hercules may opt to accelerate and demand payment of all or any part of our obligations under the Amended Loan Agreement.

Under the terms of the Amended Loan Agreement, we are subject to the following financial covenants:

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

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

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