UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





(Mark
One)


R
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended September 30, 2009OR£
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from January 1, 2009 to September 30,
      2009





Commission
file number: 1-31949





INX
Inc.


(Exact
name of Registrant as specified in its charter)





Delaware
            76-0515249(State
      of incorporation)
            (I.R.S.
      Employer Identification Number)





11757
Katy Freeway


Houston,
Texas 77079


(Address
of principal executive offices)


(Zip
code)





(713)
795-2000


(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 R   No
£





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 during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).  R
Yes  £
No





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
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large
      accelerated filer £
            Accelerated
      filer £
            Non-accelerated
      filer £
            Smaller
      reporting company R(Do
      not check if a smaller reporting company)





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





The
Registrant has 9,020,541 shares of common stock outstanding as of November 4,
2009.





1




INX
Inc. and Subsidiaries


FORM
10-Q for the Quarter Ended September 30, 2009





INDEX





Part I.
      Financial Information
              3Item
      1. Financial Statements (Unaudited):
              3Condensed
      Consolidated Statements of Operations for the three months ended September
      30, 2009 and 2008
              3Condensed
      Consolidated Statements of Operations for the nine months ended September
      30, 2009 and 2008
              4Condensed
      Consolidated Balance Sheets at September 30, 2009 and December 31,
      2008
              5Condensed
      Consolidated Statement of Stockholders’ Equity for the nine months ended
      September 30, 2009
              6Condensed
      Consolidated Statements of Cash Flows for the nine months ended September
      30, 2009 and 2008
              7Notes
      to Condensed Consolidated Financial Statements
              9Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
              20Item
      4T. Controls and Procedures
              26Part
      II. Other Information
              26Item
      1. Legal Proceedings
              26Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
              26Item
      6. Exhibits
              27Signature
              27








2


PART
1. FINANCIAL INFORMATION





Item
1. Financial Statements (Unaudited):





INX INC.
AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(In
thousands, except share and per share amounts)


(Unaudited)





Three
      Months
                    Ended
      September 30,2009
                  
                  
                  2008(As
      Restated,
                    Note
      10)Revenue:Products
                  
                  $
                  46,813
                  
                  
                  $
                  59,576Services
                  
                  
                  11,046
                  
                  
                  
                  12,366Total
      revenue
                  
                  
                  57,859
                  
                  
                  
                  71,942Cost
      of products and services:Products
                  
                  
                  36,620
                  
                  
                  
                  49,509Services
                  
                  
                  8,272
                  
                  
                  
                  9,107Total
      cost of products and services
                  
                  
                  44,892
                  
                  
                  
                  58,616Gross
      profit
                  
                  
                  12,967
                  
                  
                  
                  13,326Selling,
      general and administrative expenses
                  
                  
                  13,284
                  
                  
                  
                  12,595Operating
      (loss) income
                  
                  
                  (317
                  )
                  
                  
                  731Interest
      and other income, net
                  
                  
                  83
                  
                  
                  
                  106(Loss)
      income from continuing operations before income taxes
                  
                  
                  (234
                  )
                  
                  
                  837Income
      tax expense
                  
                  
                  93
                  
                  
                  
                  466Net
      (loss) income from continuing operations
                  
                  
                  (327
                  )
                  
                  
                  371(Loss)
      income from discontinued operations, net of income taxes
                  
                  
                  (48
                  )
                  
                  
                  9Net
      (loss) income
                  
                  $
                  (375
                  )
                  
                  $
                  380Net
      (loss) income per share:Basic:(Loss)
      income from continuing operations
                  
                  $
                  (0.04
                  )
                  
                  $
                  0.04Loss
      from discontinued operations, net of income taxes
                  
                  
                  —
                  
                  
                  
                  —Net
      (loss) income per share
                  
                  $
                  (0.04
                  )
                  
                  $
                  0.04Diluted:(Loss)
      income from continuing operations
                  
                  $
                  (0.04
                  )
                  
                  $
                  0.04Loss from
      discontinued operations, net of income taxes
                  
                  
                  —
                  
                  
                  
                  —Net
      (loss) income per share
                  
                  $
                  (0.04
                  )
                  
                  $
                  0.04Shares
      used in computing net (loss) income per share:Basic
                  
                  
                  8,927,549
                  
                  
                  
                  8,746,691Diluted
                  
                  
                  8,927,549
                  
                  
                  
                  9,338,353





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





3







INX INC.
AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(In
thousands, except share and per share amounts)


(Unaudited)





Nine
      Months
                  Ended
      September 30,2009
                
                
                2008(As
      Restated,
                  Note
      10)Revenue:Products
                
                $
                137,834
                
                
                $
                161,497Services
                
                
                35,706
                
                
                
                34,079Total
      revenue
                
                
                173,540
                
                
                
                195,576Cost
      of products and services:Products
                
                
                109,619
                
                
                
                132,457Services
                
                
                25,926
                
                
                
                23,894Total
      cost of products and services
                
                
                135,545
                
                
                
                156,351Gross
      profit
                
                
                37,995
                
                
                
                39,225Selling,
      general and administrative expenses
                
                
                38,337
                
                
                
                34,850Operating
      (loss) income
                
                
                (342
                )
                
                
                4,375Interest
      and other income (expense), net
                
                
                100
                
                
                
                (65
                )(Loss)
      income from continuing operations before income taxes
                
                
                (242
                )
                
                
                4,310Income
      tax expense
                
                
                212
                
                
                
                1,829Net
      (loss) income from continuing operations
                
                
                (454
                )
                
                
                2,481(Loss)
      income from discontinued operations, net of income taxes
                
                
                (104
                )
                
                
                23Net
      (loss) income
                
                $
                (558
                )
                
                $
                2,504Net
      (loss) income per share:Basic:(Loss)
      income from continuing operations
                
                $
                (0.05
                )
                
                $
                0.31Loss from
      discontinued operations, net of income taxes
                
                
                (0.01
                )
                
                
                —Net
      (loss) income per share
                
                $
                (0.06
                )
                
                $
                0.31Diluted:(Loss)
      income from continuing operations
                
                $
                (0.05
                )
                
                $
                0.29Loss from
      discontinued operations, net of income taxes
                
                
                (0.01
                )
                
                
                —Net
      (loss) income per share
                
                $
                (0.06
                )
                
                $
                0.29Shares
      used in computing net (loss) income per share:Basic
                
                
                8,818,793
                
                
                
                7,958,966Diluted
                
                
                8,818,793
                
                
                
                8,579,268





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





4







INX INC.
AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


(In
thousands, except share and par value amounts)


(Unaudited)





September
      30,
                      2009
                    
                    
                    December
      31,
                      2008ASSETSCurrent
      Assets:Cash
      and cash equivalents
                    
                    $
                    12,116
                    
                    
                    $
                    10,937Accounts
      receivable, net of allowance of $895 and $735
                    
                    
                    45,807
                    
                    
                    
                    52,866Inventory,
      net
                    
                    
                    1,681
                    
                    
                    
                    2,406Other
      current assets
                    
                    
                    1,408
                    
                    
                    
                    1,275Total
      current assets
                    
                    
                    61,012
                    
                    
                    
                    67,484Property
      and equipment, net of accumulated depreciation of $6,957 and
      $5,429
                    
                    
                    4,576
                    
                    
                    
                    5,207Goodwill
                    
                    
                    13,954
                    
                    
                    
                    12,751Intangible
      assets, net of accumulated amortization of $2,943 and
    $2,346
                    
                    
                    1,554
                    
                    
                    
                    1,852Other
      assets
                    
                    
                    53
                    
                    
                    
                    —Total
      assets
                    
                    $
                    81,149
                    
                    
                    $
                    87,294LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable
                    
                    $
                    5,721
                    
                    
                    $
                    5,170Accounts
      payable - floor plan
                    
                    
                    31,294
                    
                    
                    
                    40,002Accrued
      expenses
                    
                    
                    6,910
                    
                    
                    
                    6,899Current
      portion of capital lease obligations
                    
                    
                    198
                    
                    
                    
                    77Notes
      payable
                    
                    
                    —
                    
                    
                    
                    91Other
      current liabilities
                    
                    
                    1,042
                    
                    
                    
                    1,072Total
      current liabilities
                    
                    
                    45,165
                    
                    
                    
                    53,311Long-term
      Liabilities:Long-term
      portion of capital lease obligations
                    
                    
                    267
                    
                    
                    
                    163Other
      long-term liabilities
                    
                    
                    608
                    
                    
                    
                    250Total
      long-term liabilities
                    
                    
                    875
                    
                    
                    
                    413Commitments
      and contingencies (Note 9)Stockholders’
      Equity:Preferred
      stock, $.01 par value, 5,000,000 shares authorized, no shares
      issued
                    
                    
                    —
                    
                    
                    
                    —Common
      stock, $.01 par value, 15,000,000 shares authorized, 8,975,403 and
      8,709,304 shares issued and outstanding
                    
                    
                    89
                    
                    
                    
                    87Additional
      paid-in capital
                    
                    
                    52,837
                    
                    
                    
                    50,742Accumulated
      deficit
                    
                    
                    (17,817
                    )
                    
                    
                    (17,259
                    )Total
      stockholders’ equity
                    
                    
                    35,109
                    
                    
                    
                    33,570Total
      liabilities and stockholders’ equity
                    
                    $
                    81,149
                    
                    
                    $
                    87,294





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





5








INX INC.
AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


(In
thousands, except share amounts)


(Unaudited)





$.01
      par value
                    Common
      Stock
                  
                  
                  Additional
                    Paid-In
                  
                  
                  AccumulatedShares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  Deficit
                  
                  
                  TotalBalance
      at December 31, 2008
                  
                  
                  8,709,304
                  
                  
                  $
                  87
                  
                  
                  $
                  50,742
                  
                  
                  $
                  (17,259
                  )
                  
                  $
                  33,570Issuance
      of common stock under restricted stock grants
                  
                  
                  84,564
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Issuance
      of common stock grants to directors
                  
                  
                  19,149
                  
                  
                  
                  —
                  
                  
                  
                  90
                  
                  
                  
                  —
                  
                  
                  
                  90Issuance
      of common stock under employee stock purchase plan
                  
                  
                  161,928
                  
                  
                  
                  2
                  
                  
                  
                  324
                  
                  
                  
                  —
                  
                  
                  
                  326Share-based
      compensation expense
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,524
                  
                  
                  
                  —
                  
                  
                  
                  1,524Tax
      withholdings related to net share settlements of restricted stock
      awards
                  
                  
                  (16,156
                  )
                  
                  
                  —
                  
                  
                  
                  (60
                  )
                  
                  
                  —
                  
                  
                  
                  (60
                  )Purchase
      and retirement of common stock
                  
                  
                  (19,466
                  )
                  
                  
                  —
                  
                  
                  
                  (66
                  )
                  
                  
                  —
                  
                  
                  
                  (66
                  )Exercise
      of stock options
                  
                  
                  5,500
                  
                  
                  
                  —
                  
                  
                  
                  22
                  
                  
                  
                  —
                  
                  
                  
                  22Excess
      tax benefit from stock option exercises
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  66
                  
                  
                  
                  —
                  
                  
                  
                  66Issuance
      of shares as additional purchase price consideration and broker’s fees for
      Access Flow, Inc. acquisition
                  
                  
                  28,580
                  
                  
                  
                  —
                  
                  
                  
                  185
                  
                  
                  
                  —
                  
                  
                  
                  185Issuance
      of shares as purchase price consideration for AdvancedNetworX, Inc.
      acquisition
                  
                  
                  2,000
                  
                  
                  
                  —
                  
                  
                  
                  10
                  
                  
                  
                  —
                  
                  
                  
                  10Net
      loss
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (558
                  )
                  
                  
                  (558
                  )Balance
      at September 30, 2009
                  
                  
                  8,975,403
                  
                  
                  $
                  89
                  
                  
                  $
                  52,837
                  
                  
                  $
                  (17,817
                  )
                  
                  $
                  35,109





The
accompanying notes are an integral part of this condensed consolidated financial
statement.





6




INX INC.
AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(In
thousands)


(Unaudited)





Nine
      Months
                  Ended
      September 30,2009
                
                
                2008CASH
      FLOWS FROM OPERATING ACTIVITIES:
                
                
                
                
                (As
      Restated,
                  Note
      10)Net
      (loss) income
                
                $
                (558
                )
                
                $
                2,504Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Net
      loss (income) from discontinued operations
                
                
                104
                
                
                
                (23
                )Tax
      expense from discontinued operations
                
                
                —
                
                
                
                7Depreciation
      and amortization
                
                
                2,310
                
                
                
                1,766Share-based
      compensation expense
                
                
                1,614
                
                
                
                1,205Excess
      tax benefits from stock option exercises
                
                
                (66
                )
                
                
                (1,590
                )Loss
      on retirement of assets
                
                
                35
                
                
                
                27Bad
      debt expense
                
                
                260
                
                
                
                —Changes
      in operating assets and liabilities, net of effect of
      acquisitions:Accounts
      receivable
                
                
                6,799
                
                
                
                (5,949
                )Inventory
                
                
                725
                
                
                
                (428
                )Accounts
      payable
                
                
                551
                
                
                
                (292
                )Other
      assets and liabilities
                
                
                (421
                )
                
                
                4,702Net
      cash provided by operating activities
                
                
                11,353
                
                
                
                1,929CASH
      FLOWS FROM INVESTING ACTIVITIES, net of effect of
      acquisitions:Acquisition
      of AdvancedNetworX, Inc.
                
                
                (465
                )
                
                
                —Acquisition
      of Access Flow, Inc.
                
                
                (209
                )
                
                
                (2,500
                )Acquisition
      of Select, Inc.
                
                
                (25
                )
                
                
                10Transaction
      costs paid for acquisitions
                
                
                —
                
                
                
                (161
                )Proceeds
      from sale of property and equipment
                
                
                8
                
                
                
                —Increase
      in restricted cash for lease deposit
                
                
                (53
                )
                
                
                —Capital
      expenditures
                
                
                (813
                )
                
                
                (1,785
                )Net
      cash used in investing activities
                
                
                (1,557
                )
                
                
                (4,436
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:(Payments)
      borrowings under floor plan financing, net
                
                
                (8,708
                )
                
                
                5,813Proceeds
      from issuance of common stock under registered direct
    offering
                
                
                —
                
                
                
                8,870Proceeds
      from issuance of common stock under employee stock purchase
      plan
                
                
                326
                
                
                
                164Payment
      of short-term credit facility
                
                
                —
                
                
                
                (6,000
                )Exercise
      of stock options
                
                
                22
                
                
                
                827Excess
      tax benefits from stock option exercises
                
                
                66
                
                
                
                1,590Purchase
      of common stock
                
                
                (66
                )
                
                
                (2,096
                )Tax
      withholdings related to net share settlements of restricted stock
      awards
                
                
                (60
                )
                
                
                (12
                )Proceeds
      from other short-term borrowings
                
                
                —
                
                
                
                251Payments
      on notes payable and capital lease obligations
                
                
                (197
                )
                
                
                (434
                )Net
      cash (used in) provided by financing activities
                
                
                (8,617
                )
                
                
                8,973NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                
                
                1,179
                
                
                
                6,466CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                
                
                10,937
                
                
                
                9,340CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                
                $
                12,116
                
                
                $
                15,806





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





7




INX INC.
AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(In
thousands)


(Unaudited)










Nine
      Months
                  Ended
      September 30,2009
                
                
                2008SUPPLEMENTAL
      NONCASH INVESTING AND FINANCING ACTIVITIES:Capital
      lease obligation:Cost
      of assets acquired
                
                $
                297
                
                
                $
                —Capital
      lease obligation incurred
                
                
                (297
                )
                
                
                —Acquisition
      of AdvancedNetworX, Inc.:Fair
      value of assets acquired
                
                
                1,142
                
                
                
                —Estimated
      additional purchase price accrued
                
                
                (477
                )
                
                
                —Liabilities
      assumed and accrued
                
                
                (190
                )
                
                
                —Common
      stock issued
                
                
                (10
                )
                
                
                —Acquisition
      of Access Flow, Inc.:Fair
      value of assets acquired
                
                
                394
                
                
                
                6,011Common
      stock issued
                
                
                (185
                )
                
                
                (3,272
                )Transaction
      costs and noncompete agreements accrued
                
                
                —
                
                
                
                (78
                )Acquisition
      of Network Architects, Corp.:Fair
      value of assets acquired
                
                
                —
                
                
                
                740Common
      stock issued
                
                
                —
                
                
                
                (740
                )





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





8





INX
INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(In
thousands, except share and per share amounts)





1.
Description of Business





INX Inc.
(“INX” or the “Company”) is a provider of technology infrastructure solutions
for enterprise-class organizations such as corporations, schools and federal,
state and local governmental agencies. The solutions INX provides consist of
three broad categories of technology infrastructure: network infrastructure,
unified communications and data center. Network infrastructure solutions consist
of network routing and switching, wireless networking and network security
solutions. Unified communications solutions consist of Internet Protocol (“IP”)
network-based voice or telephone solutions as well as IP network-based video
communications solutions. Data center solutions consist of network storage
solutions and data center server virtualization solutions. The accompanying
condensed consolidated financial statements include the accounts of INX Inc. and
its wholly-owned subsidiaries, Select, Inc. and Valerent, Inc. All intercompany
transactions and accounts are eliminated in consolidation. Select, Inc. and
Valerent, Inc. were merged into INX Inc. as of the close of business on
December 31, 2008.





The
accompanying unaudited financial data as of September 30, 2009 and for the
three-month and nine-month periods ended September 30, 2009 and 2008 have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. The December 31, 2008 Condensed
Consolidated Balance Sheet was derived from audited financial statements, but
does not include all disclosures required by accounting principles generally
accepted in the United States. However, the Company believes the disclosures are
adequate to make the information presented not misleading. These Condensed
Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements and the notes thereto, included in the
Company’s Annual Report on Form 10-K/A for the year ended December 31,
2008.





In the
opinion of management, all adjustments (which include normal recurring
adjustments, except as disclosed herein) necessary for a fair presentation of
financial position as of September 30, 2009, results of operations for the
three-month and nine-month periods ended September 30, 2009 and 2008, cash flows
for the nine months ended September 30, 2009 and 2008, and stockholders’ equity
for the nine months ended September 30, 2009, have been included. The results of
the interim periods are not necessarily indicative of results for the full year
or any future period.





During
2009, the Company adopted accounting for subsequent events requiring the
disclosure of the date through which an entity has evaluated subsequent events
and the basis for selecting that date. For the period ended September 30, 2009,
the Company evaluated subsequent events from September 30, 2009 to November 12,
2009, the filing date with the Securities and Exchange Commission of this report
on Form 10-Q.





3.
Recent Accounting Pronouncements





During
the third quarter of 2009, the Company adopted the codification of accounting
hierarchy (the “Codification”). The Codification became the single source of
authoritative Generally Accepted Accounting Principles (“GAAP”) in the United
States, other than rules and interpretive releases issued by the United States
Securities and Exchange Commission (“SEC”). The Codification reorganized GAAP
into a topical format that eliminates the previous GAAP hierarchy and instead
established two levels of guidance – authoritative and nonauthoritative. All
non-grandfathered, non-SEC accounting literature that was not included in the
Codification became nonauthoritative. The adoption of the Codification did not
change previous GAAP, but rather simplified user access to all authoritative
literature related to a particular accounting topic in one place. Accordingly,
the adoption had no impact on the Company’s consolidated financial position and
results of operations.





In
October 2009, the Financial Accounting Standards Board (“FASB”) issued
“Multiple-Deliverable Revenue Arrangements”, amending guidance to require an
entity to use an estimated selling price when vendor specific objective evidence
or acceptable third party evidence does not exist for any products or services
included in a multiple element arrangement. The arrangement consideration should
be allocated among the products and services based upon their relative selling
prices, thus eliminating the use of the residual method of
allocation.  Expanded qualitative and quantitative disclosures
regarding significant judgments made and changes in applying this guidance are
required. This guidance is effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after
June 15, 2010. Early adoption and retrospective application are also
permitted. The Company is currently evaluating the impact of adopting this
provision.





9


In
October 2009, the FASB issued “Certain Revenue Arrangements That Include
Software Elements”, amending guidance to exclude tangible products containing
software components and non-software components that function together to
deliver the product’s essential functionality. Entities that sell joint hardware
and software products that meet this scope exception will be required to follow
this guidance, effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010.
Early adoption and retrospective application are also permitted. The Company is
currently evaluating the impact of adopting this provision.





In April
2009, the FASB amended disclosure requirements regarding Fair Value of Financial
Instrumentsto
require additional disclosures about fair value of certain financial instruments
for interim reporting periods of publicly traded companies as well as in annual
financial statements. The amendment is effective for interim periods ending
after June 15, 2009.  The Company does not have material financial
instruments within the scope of the amendment.  The adoption of the
amended disclosure requirements did not have a material impact on the Company’s
consolidated financial statements.





On
January 1, 2009 the Company changed its method of determining whether
instruments granted in share-based payment transactions are
participating securities in response to changes in FASB interpretive
guidance.  Subsequent to January 1, 2009, all outstanding unvested
share-based payment awards that contain rights to nonforfeitable dividends
participate in undistributed earnings with common shareholders are considered
participating securities and the two-class method of computing basic and diluted
EPS must be applied.  The changes did not have a material effect on
the Company’s basic earnings per share.




In
December 2007, the FASB revised accounting for business combinations to better
represent the economic value of a business combination transaction. The
revisions from the previous requirements include, but are not limited to:
(1) acquisition costs are  recognized separately from the
acquisition; (2) known contractual contingencies at the time of the
acquisition are  considered part of the liabilities acquired and
measured at their fair value; all other contingencies are part of the
liabilities acquired measured at their fair value only if it is more likely than
not that they meet the definition of a liability; (3) contingent
consideration based on the outcome of future events are recognized and measured
at the time of the acquisition; (4) business combinations achieved in
stages (step acquisitions)  recognize the identifiable assets and
liabilities, as well as noncontrolling interests, in the acquiree, at the full
amounts of their fair values; and (5) a bargain purchase (defined as a
business combination in which the total acquisition-date fair value of the
identifiable net assets acquired exceeds the fair value of the consideration
transferred plus any noncontrolling interest in the
acquiree)  requires that excess to be recognized as a gain
attributable to the acquirer. The Company adopted the revised guidance on
January 1, 2009. All business combinations entered into after January 1,
2009 have been recorded in accordance with the revised guidance.





4.
Acquisitions





The
following acquisitions were consummated to improve the Company’s geographical
presence and enhance its technical capabilities.





AdvancedNetworX





Under an
Asset Purchase Agreement dated July 17, 2009 (the “Agreement”), the Company
purchased the operations and certain assets, and assumed specified liabilities
of AdvancedNetworX, Inc. (“AdvancedNetworX”).  AdvancedNetworX, a
Raleigh, North Carolina-based network consulting organization founded in
September 2007, generated revenue of approximately $1,700 for the 12 months
ended June 30, 2009. The acquisition will create a presence for INX in the Mid
Atlantic region.  The Company completed the acquisition simultaneously
with the execution of the Agreement. The Agreement contains customary
representations and warranties and requires AdvancedNetworX and its shareholders
to indemnify the Company for certain liabilities arising under the Agreement,
subject to certain limitations and conditions.





The
consideration paid and liabilities assumed at closing pursuant to the Agreement
totaled $665, consisting of (a) $465 in cash, (b) $156 in liabilities under
customer contracts, (c) $34 in capital lease obligations assumed and (d) 2,000
shares of the Company’s common stock, $0.01 par value (the “Common Stock”),
which are held in escrow under holdback provisions defined in the
Agreement.  The Common Stock was valued at the share price on July 17,
2009, which was $5.08 per share totaling $10.  Transaction costs
of $16 were expensed as incurred.





10


Additional
purchase consideration is payable based on AdvancedNetworX’s branch office
operating income contribution during each of the one-year periods ending July
31, 2010, July 31, 2011, and July 31, 2012.  The Agreement specifies
the computation of additional purchase consideration earned including a minimum
of zero and a maximum of $700 for each of the aforementioned
periods.  At the Company’s option, up to 60% of such additional
purchase price may be paid in the form of Common Stock. Estimated additional
purchase consideration payable under the terms of the Agreement was recorded at
fair value on the acquisition date in the amount of $477.  The
estimated additional purchase consideration payable is classified as other
long-term liabilities in the accompanying condensed consolidated balance sheet
as of September 30, 2009. The Company estimates such amounts will be earned
during the one-year periods ending July 31, 2011 and 2012.  The
estimated additional consideration will be remeasured to fair value at each
reporting date until settled with changes in fair value recorded in selling,
general and administrative expense.





The
following table summarizes the allocation of the purchase price to the fair
value of the assets acquired and liabilities assumed:





Intangible
      assets:Customer
      relationships, amortized over 2 years
                      
                      $
                      30Noncompete
      agreements, amortized over 2 years
                      
                      
                      269Property
      and equipment
                      
                      
                      59Goodwill
                      
                      
                      784Liabilities
      assumed
                      
                      
                      (540
                      )Fair
      value of estimated additional purchase price
                      
                      
                      (477
                      )Net
      assets acquired
                      
                      $
                      125





Goodwill
represents the excess of the purchase price of an acquired business over the
fair value of the underlying net tangible and intangible assets and is
deductible for Federal income tax purposes. Among the factors that contributed
to a purchase price in excess of the fair value of the net tangible and
intangible assets were the expected benefits from increasing the Company’s
national footprint with a developed workforce dedicated to engineering
excellence.  Revenues and operating loss for the acquired operations
of AdvancedNetworX were $333 and $155, respectively, in the accompanying
condensed consolidated statements of operations for the three and nine month
periods ended September 30, 2009.





Access
Flow, Inc.





Under an
Asset Purchase Agreement dated June 6, 2008 (the “APA”), the Company
purchased the operations and certain assets, and assumed specified liabilities
of Access Flow, Inc. (“AccessFlow”). AccessFlow is a Sacramento,
California-based consulting organization focused on delivering VMware-based data
center virtualization solutions, with revenues for the twelve months ended
March 31, 2008 of approximately $10,500. The consideration paid at closing
pursuant to the APA was (a) $2,450 in cash and (b) 262,692 shares
of the Common Stock, of which 24,000 shares were placed in escrow under holdback
provisions defined in the agreement. During the quarter ended September 30,
2009, shares held in escrow were released to AccessFlow after a reduction of
3,359 shares representing $34 for costs reimbursable under the APA escrow
provisions.  The 3,359 shares returned from escrow were
retired.  Upon the release of the remaining shares in escrow to
AccessFlow, 1,032 shares in Company common stock representing $14 were issued to
the broker of the transaction. The two shareholders of AccessFlow entered
into five-year noncompete agreements at closing, which provide for payments to
each in the aggregate amount of $50 in equal monthly installments of
approximately $8 each per month over the six month period subsequent to
closing.





Additional
purchase price consideration valued at $377 was earned by AccessFlow for the
achievement of certain customer billing milestones during the twelve-month
period ending June 30, 2009.  The consideration consisted of a cash
payment of $182 and issuance of 29,435 shares of the Company’s common stock with
a value of $195.  The calculation of the number of shares of Company’s
common stock was determined by dividing $182 by $6.18, the average closing price
per share for the common stock as reported by Nasdaq for the five consecutive
trading days prior to September 23, 2009. Additionally, cash of $9 and 1,472
shares valued at $10 were paid to the broker of the transaction.  The
additional purchase price consideration and broker’s fee were recorded as
goodwill.





11


Additional
purchase consideration is payable to AccessFlow based on certain financial
performance during the one-year period ending June 30, 2010. The financial
performance upon which such additional purchase consideration is based includes
the following business components: (i) the acquired AccessFlow Sacramento,
California branch office revenue excluding its hosting business, (ii) the
acquired AccessFlow hosting business, and (iii) customer billings for
certain virtualization products and services specified in the APA generated by
the Company’s pre-existing fourteen branch office locations. The APA specifies
the computation of additional purchase consideration earned under each business
component, including a minimum and maximum amount payable. For each business
component the minimum annual additional consideration payable is zero and the
maximum annual additional consideration payable is (i) $405,
(ii) $405, and (iii) $540, respectively. At the Company’s option, 50%
of such additional consideration may be paid in the form of Common Stock.
Additional purchase consideration, if any, will be recorded as
goodwill.





NetTeks
Technology Consultants, Inc.





Under an
Asset Purchase Agreement dated November 14, 2008 (the “NetTeks APA”), the
Company purchased the operations and certain assets, and assumed specified
liabilities of NetTeks Technology Consultants, Inc. (“NetTeks”). NetTeks is a
Boston, Massachusetts-based network consulting organization with offices in
downtown Boston and Glastonbury, Connecticut, with revenues for the twelve
months ended September 30, 2008 of approximately $12,700. The Company
completed the acquisition simultaneously with the execution of the NetTeks APA.
Neither NetTeks nor any shareholder of NetTeks has any prior affiliation with
the Company. The NetTeks APA contains customary representations and warranties
and requires NetTeks and its shareholders to indemnify the Company for certain
liabilities arising under the NetTeks APA, subject to certain limitations and
conditions.





The
consideration paid at closing pursuant to the NetTeks APA was (a) $1,350 in
cash and (b) 30,770 shares of the Common Stock, of which 15,385 common
stock shares were held in escrow under holdback provisions defined in the
NetTeks APA.  Additional purchase consideration is payable based on
NetTeks’ branch office operating income contribution during the six month period
ending December 31, 2009 and the year ending December 31, 2010. The NetTeks
APA specifies the computation of additional purchase consideration earned
including a minimum of zero and a maximum of $1,500 for the period ending
December 31, 2009 and $1,700 for the period ending December 31, 2010.
At the Company’s option, 50% of such additional purchase price may be paid in
the form of Common Stock. Additional purchase consideration, if any, will be
recorded as goodwill.





VocalMash





Under an
Asset Purchase Agreement dated December 4, 2008 (“VocalMash APA”), the
Company purchased the operations of VocalMash, a business owned and operated by
INX’s Vice President of Sales. VocalMash is an application integration company
that utilizes Web 2.0 technologies to integrate unified communications systems
with other enterprise applications. The Company completed the acquisition
simultaneously with the execution of the VocalMash APA. The VocalMash APA
contains customary representations and warranties and requires VocalMash and its
owner to indemnify the Company for certain liabilities arising under the
VocalMash APA, subject to certain limitations and conditions.





The
consideration paid at closing pursuant to the VocalMash APA was
60,000 shares of the Company’s common stock. The common stock was valued at
$4.89 per share or $293. Additional purchase consideration of up to a
maximum of $380 may be payable under the VocalMash APA based on the achievement
of operating income contribution targets for 2009. Additional purchase
consideration, if any, will be recorded as goodwill.





Pro
Forma Summary





The
following pro forma consolidated amounts give effect to the Company’s
acquisition of AdvancedNetworX, AccessFlow, NetTeks, and VocalMash as if they
had occurred January 1, 2008 and January 1, 2009. The pro forma consolidated
amounts presented below are based on continuing operations. The pro forma
consolidated amounts are not necessarily indicative of the operating results
that would have been achieved had the transaction been in effect and should not
be construed as being representative of future operating results.





12





Three
      Months Ended
                  September
      30,
                
                
                Nine
      Months Ended
                  September
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008Revenues
                
                $
                57,989
                
                
                $
                75,907
                
                
                $
                174,457
                
                
                $
                210,863Net
      (loss) income from continuing operations
                
                $
                (359
                )
                
                $
                342
                
                
                $
                (888)
                
                
                $
                1,964Net
      (loss) income
                
                $
                (407
                )
                
                $
                514
                
                
                $
                (992)
                
                
                $
                2,495Net
      (loss) income per share from continuing operations:Basic
                
                $
                (0.04
                )
                
                $
                0.04
                
                
                $
                (0.10)
                
                
                $
                0.24Diluted
                
                $
                (0.04
                )
                
                $
                0.04
                
                
                $
                (0.10)
                
                
                $
                0.23Net
      (loss) income per share:Basic
                
                $
                (0.05
                )
                
                $
                0.06
                
                
                $
                (0.10)
                
                
                $
                0.31Diluted
                
                $
                (0.05
                )
                
                $
                0.05
                
                
                $
                (0.10)
                
                
                $
                0.29Weighted
      average shares used in calculation:Basic
                
                
                8,927,893
                
                
                
                8,839,461
                
                
                
                8,851,011
                
                
                
                8,051,736Diluted
                
                
                8,927,893
                
                
                
                9,431,123
                
                
                
                8,851,011
                
                
                
                8,672,038




Select,
Inc.





Under a
Stock Purchase Agreement dated August 31, 2007 (the “SPA”), the Company
purchased all issued and outstanding capital stock of Select, Inc. (“Select”).
Located in Boston, Massachusetts, Select is a Cisco-centric solutions provider
focused on delivering IP Telephony, IP Storage and network infrastructure
solutions throughout New England with approximately $40,000 in annual revenues.
Additional purchase consideration is payable if Select branch office revenue is
greater than $53,000 and operating profit contribution is greater than or equal
to $3,710 during the twelve-month period ending August 31,
2009.  The revenue and operating profit targets were not achieved and
no payments were due under the SPA.





Goodwill





The
changes in the carrying amount of goodwill for the nine months ended September
30, 2009 were as follows:


Goodwill
                
                
                Accumulated
      Impairment Losses
                
                
                TotalBalance
      as of December 31, 2008
                
                $
                22,147
                
                
                $
                (9,396
                )
                
                $
                12,751Goodwill
      acquired during the year
                
                
                1,203
                
                
                
                
                
                
                
                1,203Balance
      as of September 30, 2009
                
                $
                23,350
                
                
                $
                (9,396
                )
                
                $
                13,954





5. Earnings Per
Share





The
following table presents the calculation of basic and diluted earnings per
share:




Three
      Months Ended September 30,
                
                
                Nine
      Months Ended September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Numerator:Net
      income (loss) from continuing operations-basic and diluted
                
                $
                (327
                )
                
                $
                371
                
                
                $
                (454
                )
                
                $
                2,481(Loss)
      income on disposal of discontinued operations, net of  income
      taxes
                
                
                (48
                )
                
                
                9
                
                
                
                (104
                )
                
                
                23Net
      income (loss)
                
                $
                (375
                )
                
                $
                380
                
                
                $
                (558
                )
                
                $
                2,504Denominator:Weighted-average
      shares outstanding-basic
                
                
                8,927,549
                
                
                
                8,746,691
                
                
                
                8,818,793
                
                
                
                7,958,966Effect
      of dilutive securities — shares issuable from assumed conversion of common
      stock options, restricted stock, and warrants
                
                
                —
                
                
                
                591,662
                
                
                
                —
                
                
                
                620,301Weighted-average
      shares outstanding-diluted
                
                
                8,927,549
                
                
                
                9,338,353
                
                
                
                8,818,793
                
                
                
                8,579,268





13


The
following table presents the number of shares of common stock that were excluded
in the calculation of diluted earnings per share since their effect would have
been antidilutive.





Three
      Months Ended September 30,
                
                
                Nine
      Months Ended September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Warrants
                
                
                40,000
                
                
                
                575,000
                
                
                
                40,000
                
                
                
                619,955Options
                
                
                519,618
                
                
                
                214,100
                
                
                
                550,518
                
                
                
                189,100Restricted
      shares
                
                
                621,249
                
                
                
                —
                
                
                
                511,798
                
                
                
                —Employee
      Stock Purchase Plan
                
                
                8,972
                
                
                
                —
                
                
                
                2,991
                
                
                
                —Weighted-average
      shares considered antidilutive
                
                
                1,189,839
                
                
                
                789,100
                
                
                
                1,105,307
                
                
                
                809,055





For
current periods presented, the computation of diluted earnings (losses) per
share excludes warrants and outstanding stock options, restricted stock awards
and employee stock purchase plans shares because the Company reported losses
during the period, and including them would have had an anti-dilutive effect on
loss per share. For prior periods presented, the computation of diluted earnings
(losses) per share excludes outstanding stock options and warrants with exercise
prices greater than the average market price of the Company's common shares,
because the inclusion of such options and warrants would be anti-dilutive and
such options and warrants are not considered participating securities. In any
period during which the average market price of the Company's common shares
exceeds the exercise prices of these stock options and warrants, such stock
options and warrants will be included in our diluted earnings (losses) per share
computation using the if converted method of accounting.





6.
Share-Based Compensation





The
Company recognized employee share-based compensation expense for stock options,
restricted stock grants, and the employee stock purchase plan of $471 and $479
during the three months ended September 30, 2009 and 2008, respectively, and
$1,524 and $1,115 during the nine months ended September 30, 2009 and 2008,
respectively.  In addition, during the nine months ended September 30,
2009 and 2008, the Company issued 19,149 shares and 7,443 shares, respectively,
to its non-employee directors.  The issued shares vest immediately and
were valued at $90 and $90, respectively, determined by multiplying the number
of shares issued by the closing price per share for the common stock as reported
by NASDAQ on May 12, 2009 and May 13, 2008.  The unrecognized
compensation cost related to the Company's unvested stock options as of
September 30, 2009 and 2008 was $1,013 and $1,764, respectively and is expected
to be recognized over a weighted-average period of 1.5 years and 1.8 years,
respectively.  The unrecognized compensation cost related to the Company's
unvested restricted shares as of September 30, 2009 and 2008 was $3,494 and
$3,250, respectively and is expected to be recognized over a weighted-average
period of 2.2 years and 4.1 years, respectively.





7.
Senior Credit Facility





The
Company has a $60,000 maximum aggregate line of credit with Castle Pines
Capital LLC (“CPC”) under a senior credit facility. The CPC senior credit
facility is used primarily for inventory financing and working capital
requirements.  At September 30, 2009, $31,294 was outstanding under
the Facility and is presented as Accounts Payable - Floor Plan in the
accompanying condensed consolidated balance sheet, and the unused availability
was $2,959.  The carrying value of the balance outstanding
approximates its fair value given the short-term maturity of the
instruments.  Substantially all of our assets are pledged as
collateral under the senior credit facility. At September 30, 2009, the Company
was in compliance with the loan covenants of the senior credit
facility.





14





8.
Stockholders’ Equity





On
September 10, 2008, the Board of Directors authorized a common stock
repurchase plan of up to $2,000 of the Company’s common stock on or before
December 31, 2008. The purchases were required to be made in open market or
privately negotiated transactions in compliance with Rule 10b-18 under the
Securities Exchange Act of 1934, as amended, subject to market and business
conditions, applicable legal requirements and other factors. The plan also
required the purchased shares to be retired as soon as practicable following the
purchase. The plan did not obligate the Company to purchase any particular
amount of common stock and could be suspended at any time at the Company’s
discretion.  On December 3, 2008, the Board of Directors modified
the September 10, 2008 common stock repurchase plan, authorizing the
repurchase of $2,000 during the period January 1, 2009 to March 31,
2009.  During the three-month period ended March 31, 2009, 19,466
shares were purchased for $66 and retired. From inception of the repurchase plan
to March 31, 2009, 300,339 shares were purchased for $1,762, an
average purchase price of $5.87 per share. The repurchase plan expired on
March 31, 2009.





On May
12, 2009, the Board of Directors authorized a new common stock repurchase plan
of up to $2,000 of the Company’s common stock on or before October 31, 2009. The
purchases are required to be made in open market or privately negotiated
transactions in compliance with Rule 10b-18 under the Securities Exchange
Act of 1934, as amended, subject to market and business conditions, applicable
legal requirements and other factors. The plan also requires the purchased
shares to be retired as soon as practicable following the purchase. The plan
does not obligate the Company to purchase any particular amount of common stock
and could be suspended at any time at the Company’s discretion.  No
shares of common stock were repurchased under the plan during the period May 12,
2009 to September 30, 2009 or subsequent to September 30,
2009.  The plan expired on October 31, 2009.





9.
Commitments and Contingencies





Self-Insured
Medical Plan





Effective
January 1, 2009, the Company changed its employee medical insurance coverage to
self-insure for losses up to $100 per claim.  The Company maintains
stop loss coverage with a third party insurer to limit its total exposure with
an annual aggregate loss limit of $2,357 based on the current enrollment in the
plan. During the nine-month period ended September 30, 2009, medical claims and
administrative fees totaling $1,654 were incurred and a liability recorded of
$211 at September 30, 2009 as an estimate of the ultimate cost of claims
incurred as of the balance sheet date.  The Company’s liability is
based on an analysis of historical data and actuarial estimates and includes
known claims and an estimate of claims incurred but not yet
reported.  Management believes that it has adequately reserved for the
self-insurance liability; however, any significant variation in claims incurred
but not paid from historical trends could cause actual expense to differ
materially from the accrued liability.





Litigation





On
February 6, 2009, INX filed a lawsuit in the United States District Court
Eastern District of Texas styled InternetworkExperts, Inc.
(INX) v. InternationalBusiness Machines Corporationclaiming damages totaling $1,791 plus interest, attorney fees, and costs
of suit for breach of purchase orders in 2004 and 2006 under which payments were
due upon early termination of services. The amount that may ultimately be
recovered, if any, cannot be determined at this time, and such amount will be
recorded only upon settlement and payment by the defendant.





On August
3, 2009, INX filed a lawsuit in the 152nd
District Court of Harris County styled “INX, Inc. v. General Consulate of
Equatorial Guinea seeking damages plus interest, attorney fees, and costs of
suit for breach of contract in connection with the Company’s lease of its then
Houston, Texas location.  The amount that may ultimately be recovered,
if any, cannot be determined at this time, and such amount will be recorded only
upon settlement and payment by the defendant.





The
Company served as a subcontractor to Complete Communications Services, Inc.
(“CoCom”), a subcontractor on certain school district contracts during 2007. On
August 24, 2007, CoCom filed a Chapter 11 Petition in
U.S. Bankruptcy Court. As of December 31, 2008, the Company had no
outstanding accounts receivable from CoCom. The Company received payments of
$102 during the ninety day period preceding the bankruptcy filing which could
potentially be deemed preferential. The CoCom Bankruptcy Trustee filed suit on
August 21, 2009 to recover these payments.  The Company reached a
settlement agreement in October 2009 with the Bankruptcy Trustee which required
payment of $15 in satisfaction of all claims, which is included in selling,
general and administrative expense in the accompanying condensed consolidated
financial statements.





15


INX is
also party to other litigation and claims which management believes are normal
in the course of its operations. While the results of such litigation and claims
cannot be predicted with certainty, INX believes the final outcome of such
matters will not have a materially adverse effect on its results of operations,
financial position, or cash flows.





Contingencies





On
January 6, 2009, Lyondell Chemical Company (“Lyondell”) filed a
Chapter 11 Petition in U.S. Bankruptcy Court. As of December 31,
2008, the Company had an account receivable from Lyondell of $99, less an
allowance for doubtful accounts of $99. The Company received payments of $539
during the ninety day period preceding the bankruptcy filing which could
potentially be deemed preferential. INX cannot predict the final outcome of this
matter, including whether it could have a materially adverse effect on its
results of operations, financial position, or cash flows.





INX has
contracts with the federal government and its agencies and subcontracts with
various federal government contractors. INX is  subject to audit from
time to time for compliance with government regulations and contract provisions
including costs incurred.  An adverse finding under an audit could
result in the disallowance of our costs under a government contract, termination
of a government contract, forfeiture of profits, suspension of payments, fines
and suspension and prohibition from doing business with the federal government.
In the event that an audit results in disallowance of our costs under a
contract, INX has the right to appeal the findings of the audit under applicable
dispute resolution provisions.  Under a subcontract with Northrop
Grumman, the Federal Government made written claims totaling $131 which
were settled in September 2009 with the amount claimed recorded as a reduction
of outstanding accounts receivable.





10.
Restatement of Previously Issued Financial Statements





On August
12, 2009, management of the Company in consultation with the Audit Committee of
the Board of Directors, determined that the Company's financial statements
included in the Annual Report on Form 10-K for the fiscal year ended December
31, 2008 and Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 2009 required restatement.  The restated reports were filed on
September 2, 2009.  The restatement affected the condensed
consolidated financial statements as previously presented in the Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 2008 as
follows:





●
              The
      Company previously presented its floor plan financing balances as trade
      accounts payable because it believed that its principal vendor had a
      substantial investment in the floor plan financing
      company.  During the preparation of the Quarterly Report on Form
      10-Q for the quarter ended June 30, 2009, the Company became aware that
      the principal vendor had no ownership interest in its floor plan financing
      company.  Consequently, the Company corrected its presentation
      of the floor plan balances in its Balance Sheets from trade accounts
      payable to accounts payable - floor plan and the related amounts in its
      Statements of Cash Flows from operating activities to financing
      activities.  The correction of the error has no effect on the
      previously reported Statements of Operations.  There is no
      impact to the Company's current liabilities or total liabilities as a
      result of this correction as of September 30, 2008.●
              In
      addition to the aforementioned corrections, the Company recorded certain
      immaterial adjustments affecting the consolidated financial statements as
      of and for the three-month and nine-month periods ended September 30,
      2008, which increased selling general and administrative expense by
      $50 and reduced income tax expense by $4.  These adjustments
      relate to stock option
modifications.







The
following is a summary of the impact of the restatement as of and for the
three-month and nine-month periods ended September 30, 2008 on the unaudited
condensed consolidated financial statements.





16
 
  Condensed
Consolidated Statement of Operations for the three months ended September 30,
2008:





As
      Previously
                      Reported
                    
                    
                    Restatement
                      Adjustment
                    
                    
                    As
      RestatedRevenue:Products
                    
                    $
                    59,576
                    
                    
                    
                    
                    
                    $
                    59,576Services
                    
                    
                    12,366
                    
                    
                    
                    
                    
                    
                    
                    12,366Total
      revenue
                    
                    
                    71,942
                    
                    
                    
                    
                    
                    
                    
                    71,942Cost
      of products and services:Products
                    
                    
                    49,509
                    
                    
                    
                    
                    
                    
                    
                    49,509Services
                    
                    
                    9,107
                    
                    
                    
                    
                    
                    
                    
                    9,107Total
      cost of products and services
                    
                    
                    58,616
                    
                    
                    
                    
                    
                    
                    
                    58,616Gross
      profit
                    
                    
                    13,326
                    
                    
                    
                    
                    
                    
                    
                    13,326Selling,
      general and administrative expenses
                    
                    
                    12,545
                    
                    
                    $
                    50
                    
                    
                    
                    12,595Operating
      income
                    
                    
                    781
                    
                    
                    
                    (50
                    )
                    
                    
                    731Interest
      and other income, net
                    
                    
                    106
                    
                    
                    
                    
                    
                    
                    
                    106Income
      from continuing operations before income taxes
                    
                    
                    887
                    
                    
                    
                    (50
                    )
                    
                    
                    837Income
      tax expense
                    
                    
                    470
                    
                    
                    
                    (4
                    )
                    
                    
                    466Net
      income from continuing operations
                    
                    
                    417
                    
                    
                    
                    (46
                    )
                    
                    
                    371Income
      from discontinued operations, net of income taxes
                    
                    
                    9
                    
                    
                    
                    
                    
                    
                    
                    9Net
      income
                    
                    $
                    426
                    
                    
                    $
                    (46
                    )
                    
                    $
                    380Net
      income per share:Basic:Income
      from continuing operations
                    
                    $
                    0.05
                    
                    
                    $
                    (0.01
                    )
                    
                    $
                    0.04Income
      from discontinued operations, net of income taxes
                    
                    
                    —
                    
                    
                    
                    
                    
                    
                    
                    —Net
      income per share
                    
                    $
                    0.05
                    
                    
                    $
                    (0.01
                    )
                    
                    $
                    0.04Diluted:Income
      from continuing operations
                    
                    $
                    0.05
                    
                    
                    $
                    (0.01
                    )
                    
                    $
                    0.04Income
      from discontinued operations, net of income taxes
                    
                    
                    —
                    
                    
                    
                    
                    
                    
                    
                    —Net
      income per share
                    
                    $
                    0.05
                    
                    
                    $
                    (0.01
                    )
                    
                    $
                    0.04Shares
      used in computing net income per share:Basic
                    
                    
                    8,746,691
                    
                    
                    
                    
                    
                    
                    
                    8,746,691Diluted
                    
                    
                    9,338,353
                    
                    
                    
                    
                    
                    
                    
                    9,338,353




17




Condensed
Consolidated Statement of Operations for the nine months ended September 30,
2008:





As
      Previously
                  Reported
                
                
                Restatement
                  Adjustment
                
                
                As
      RestatedRevenue:Products
                
                $
                161,497
                
                
                
                
                
                $
                161,497Services
                
                
                34,079
                
                
                
                
                
                
                
                34,079Total
      revenue
                
                
                195,576
                
                
                
                
                
                
                
                195,576Cost
      of products and services:Products
                
                
                132,457
                
                
                
                
                
                
                
                132,457Services
                
                
                23,894
                
                
                
                
                
                
                
                23,894Total
      cost of products and services
                
                
                156,351
                
                
                
                
                
                
                
                156,351Gross
      profit
                
                
                39,225
                
                
                
                
                
                
                
                39,225Selling,
      general and administrative expenses
                
                
                34,800
                
                
                $
                50
                
                
                
                34,850Operating
      income
                
                
                4,425
                
                
                
                (50
                )
                
                
                4,375Interest
      and other income, net
                
                
                (65
                )
                
                
                
                
                
                
                (65
                )Income
      from continuing operations before income taxes
                
                
                4,360
                
                
                
                (50
                )
                
                
                4,310Income
      tax expense
                
                
                1,833
                
                
                
                (4
                )
                
                
                1,829Net
      income from continuing operations
                
                
                2,527
                
                
                
                (46
                )
                
                
                2,481Income
      from discontinued operations, net of income taxes
                
                
                23
                
                
                
                
                
                
                
                23Net
      income
                
                $
                2,550
                
                
                $
                (46
                )
                
                $
                2,504Net
      income per share:Basic:Income
      from continuing operations
                
                $
                0.32
                
                
                $
                (0.01
                )
                
                $
                0.31Income
      from discontinued operations, net of income taxes
                
                
                —
                
                
                
                
                
                
                
                —Net
      income per share
                
                $
                0.32
                
                
                $
                (0.01
                )
                
                $
                0.31Diluted:Income
      from continuing operations
                
                $
                0.30
                
                
                $
                (0.01
                )
                
                $
                0.29Income
      from discontinued operations, net of income taxes
                
                
                —
                
                
                
                
                
                
                
                —Net
      income per share
                
                $
                0.30
                
                
                $
                (0.01
                )
                
                $
                0.29Shares
      used in computing net income per share:Basic
                
                
                7,958,966
                
                
                
                
                
                
                
                7,958,966Diluted
                
                
                8,579,268
                
                
                
                
                
                
                
                8,579,268


18


Condensed
Consolidated Balance Sheet at September 30, 2008:





As
      Previously
                  Reported
                
                
                Restatement
                  Adjustment
                
                
                As
      RestatedCurrent
      Assets:Cash
      and cash equivalents
                
                $
                15,806
                
                
                
                
                
                $
                15,806Accounts
      receivable, net
                
                
                51,077
                
                
                
                
                
                
                
                51,077Inventory,
      net
                
                
                1,872
                
                
                
                
                
                
                
                1,872Deferred
      income taxes
                
                
                2,100
                
                
                
                
                
                
                
                2,100Other
      current assets
                
                
                1,101
                
                
                
                
                
                
                
                1,101Total
      current assets
                
                
                71,956
                
                
                
                
                
                
                
                71,956Property
      and equipment, net
                
                
                5,593
                
                
                
                
                
                
                
                5,593Goodwill
                
                
                21,438
                
                
                
                
                
                
                
                21,438Intangible
      and other assets, net
                
                
                4,146
                
                
                
                
                
                
                
                4,146Total
      assets
                
                $
                103,133
                
                
                $
                —
                
                
                $
                103,133Current
      Liabilities:Notes
      payable
                
                $
                36
                
                
                
                
                
                
                $
                36Current
      portion of capital lease obligations
                
                
                77
                
                
                
                
                
                
                
                77Accounts
      payable
                
                
                42,719
                
                
                $
                (38,285
                )
                
                
                4,434Accounts
      payable -floor plan
                
                
                —
                
                
                
                38,285
                
                
                
                38,285Accrued
      expenses
                
                
                8,409
                
                
                
                
                
                
                
                8,409Other
      current liabilities
                
                
                757
                
                
                
                (4
                )
                
                
                753Total
      current liabilities
                
                
                51,998
                
                
                
                (4
                )
                
                
                51,994Long-term
      Liabilities:Deferred
      income taxes
                
                
                1,565
                
                
                
                
                
                
                
                1,565Long-term
      portion of capital lease obligations
                
                
                176
                
                
                
                
                
                
                
                176Other
      long-term liabilities
                
                
                301
                
                
                
                
                
                
                
                301Total
      long-term liabilities
                
                
                2,042
                
                
                
                
                
                
                
                2,042Stockholders’
      Equity:Common
      stock
                
                
                87
                
                
                
                
                
                
                
                87Additional
      paid-in capital
                
                
                51,001
                
                
                
                50
                
                
                
                51,051Accumulated
      deficit
                
                
                (1,995
                )
                
                
                (46
                )
                
                
                (2,041
                )Total
      stockholders’ equity
                
                
                49,093
                
                
                
                4
                
                
                
                49,097Total
      liabilities and stockholders’ equity
                
                $
                103,133
                
                
                $
                —
                
                
                $
                103,133






19


Condensed
Consolidated Statement of Cash Flows for the nine months ended September 30,
2008:





As
      Previously
                  Reported
                
                
                Restatement
                  Adjustment
                
                
                As
      RestatedCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                2,550
                
                
                $
                (46
                )
                
                $
                2,504Adjustments
      to reconcile net income to net cash provided by operating
      activities:Net
      income from discontinued operations
                
                
                (23
                )
                
                
                
                
                
                
                (23
                )Tax
      expense from discontinued operations
                
                
                7
                
                
                
                
                
                
                
                7Depreciation
      and amortization
                
                
                1,766
                
                
                
                
                
                
                
                1,766Share-based
      compensation expense
                
                
                1,155
                
                
                
                50
                
                
                
                1,205Excess
      tax benefits from stock option exercises
                
                
                —
                
                
                
                (1,590
                )
                
                
                (1,590
                )Loss
      on retirement of assets
                
                
                27
                
                
                
                
                
                
                
                27Bad
      debt expense
                
                
                —
                
                
                
                
                
                
                
                —Changes
      in operating assets and liabilities, net of effect of
      acquisitions:Accounts
      receivable
                
                
                (5,949
                )
                
                
                
                
                
                
                (5,949
                )Inventory
                
                
                (428
                )
                
                
                
                
                
                
                (428
                )Accounts
      payable
                
                
                5,474
                
                
                
                (5,766
                )
                
                
                (292
                )Other
      assets and liabilities
                
                
                3,163
                
                
                
                1,539
                
                
                
                4,702Net
      cash provided by operating activities
                
                
                7,742
                
                
                
                (5,813
                )
                
                
                1,929CASH
      FLOWS FROM INVESTING ACTIVITIES:Acquisition
      of Access Flow, Inc.
                
                
                (2,500
                )
                
                
                
                
                
                
                (2,500
                )Acquisition
      of Select, Inc. purchase price adjustments
                
                
                10
                
                
                
                
                
                
                
                10Transaction
      costs paid for acquisitions
                
                
                (161
                )
                
                
                
                
                
                
                (161
                )Increase
      in restricted cash for lease deposit
                
                
                —
                
                
                
                
                
                
                
                —Capital
      expenditures
                
                
                (1,785
                )
                
                
                
                
                
                
                (1,785
                )Net
      cash used in investing activities
                
                
                (4,436
                )
                
                
                
                
                
                
                (4,436
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:(Payments)
      borrowings under floor plan financing, net
                
                
                —
                
                
                
                5,813
                
                
                
                5,813Proceeds
      from issuance of common stock under registered direct
    offering
                
                
                8,870
                
                
                
                
                
                
                
                8,870Proceeds
      from issuance of common stock under employee stock purchase
      plan
                
                
                164
                
                
                
                
                
                
                
                164Payment
      of short-term credit facility
                
                
                (6,000
                )
                
                
                
                
                
                
                (6,000
                )Exercise
      of stock options
                
                
                827
                
                
                
                
                
                
                
                827Excess
      tax benefits from stock option exercises
                
                
                1,590
                
                
                
                
                
                
                
                1,590Purchase
      of common stock
                
                
                (2,096
                )
                
                
                
                
                
                
                (2,096
                )Tax
      withholdings related to net share settlements of restricted stock
      awards
                
                
                (12
                )
                
                
                
                
                
                
                (12
                )Proceeds
      from other short-term borrowings
                
                
                251
                
                
                
                
                
                
                
                251Payments
      on notes payable and capital lease obligations
                
                
                (434
                )
                
                
                
                
                
                
                (434
                )Net
      cash provided by financing activities
                
                
                3,160
                
                
                
                5,813
                
                
                
                8,973NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                
                
                6,466
                
                
                
                —
                
                
                
                6,466CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
                
                
                9,340
                
                
                
                
                
                
                
                9,340CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
                
                $
                15,806
                
                
                $
                —
                
                
                $
                15,806







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





The
following discussion is qualified in its entirety by, and should be read in
conjunction with, our condensed consolidated financial statements, including the
notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our
Annual Report on Form 10-K/A for the fiscal year ended December 31, 2008, as
previously filed with the Securities and Exchange Commission. Amounts are
presented in thousands except for share, per share data, percentages, and
ratios.





20


Special
notice regarding forward-looking statements





This
quarterly report on Form 10-Q contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 relating to
future events or our future financial performance. Readers are cautioned that
any statement that is not a statement of historical fact including, but not
limited to, statements which may be identified by words including, but not
limited to, “anticipate,” “appear,” “believe,” “could,” “estimate,” “expect,”
“hope,” “indicate,” “intend,” “likely,” “may,” “might,” “plan,” “potential,”
“seek,” “should,” “will,” “would,” and other variations or negative expressions
thereof, are predictions or estimations and are subject to known and unknown
risks and uncertainties. Numerous factors, including factors that we have little
or no control over, may affect INX’s actual results and may cause actual results
to differ materially from those expressed in the forward-looking statements
contained herein. In evaluating such statements, readers should consider the
various factors identified in our Annual Report on Form 10-K/A for our fiscal
year ended December 31, 2008, as filed with the Securities and Exchange
Commission including the matters set forth in Item 1A. — “Risk Factors,” which
could cause actual events, performance or results to differ materially from
those indicated by such statements.





Restatement





On August
12, 2009, management of the Company in consultation with the Audit Committee of
the Board of Directors, determined that the Company's financial statements
included in the Annual Report on Form 10-K for the fiscal year ended December
31, 2008 and Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 2009 required restatement.  The restated reports were filed on
September 2, 2009.  The restatement affected the condensed
consolidated financial statements as previously presented in the Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 2008 as
follows:





●
            The
      Company previously presented its floor plan financing balances as trade
      accounts payable because it believed that its principal vendor had a
      substantial investment in the floor plan financing
      company.  During the preparation of the Quarterly Report on Form
      10-Q for the quarter ended June 30, 2009, the Company became aware that
      the principal vendor had no ownership interest in its floor plan financing
      company.  Consequently, the Company corrected its presentation
      of the floor plan balances in its Balance Sheets from trade accounts
      payable to accounts payable - floor plan and the related amounts in its
      Statements of Cash Flows from operating activities to financing
      activities.  The correction of the error has no effect on the
      previously reported Statements of Operations.  There is no
      impact to the Company's current liabilities or total liabilities as a
      result of this correction as of September 30,
  2008.





●
            In
      addition to the aforementioned corrections, the Company recorded certain
      immaterial adjustments affecting the consolidated financial statements as
      of and for the three-month and nine-month periods ended September 30,
      2008, which increased selling, general and administrative expense by
      $50 and reduced income tax expense by $4.  These adjustments
      relate to stock option
modifications.




The
effect of the aforementioned corrections on the condensed consolidated financial
statements as of and for the three month and nine month periods ended September
30, 2008 previously filed on the Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 2008 are more fully described in Note 10 of the
Notes to Condensed Consolidated Financial Statements.  The “Liquidity
and Capital Resources” section of this Item 2 has been restated to reflect the
impact of the aforementioned corrections.





Results
of Operations





Period Comparisons.The
following tables set forth, for the periods indicated, certain financial data
derived from our condensed consolidated statements of operations. Percentages
shown in the table below are percentages of total revenue, except for the
products and services components of gross profit, which are percentages of the
respective product and service revenue.





21




Three Months EndedSeptember30, 2009 Compared To the Three Months
EndedSeptember30,2008




Three
      Months Ended September 30,2009
                  
                  
                  2008Amount
                  
                  
                  %
                  
                  
                  Amount
                  
                  
                  %Revenue:
                  
                  
                  
                  
                  
                  
                  
                  (As
      Restated, Note 10)Products
                  
                  $
                  46,813
                  
                  
                  
                  80.9
                  
                  
                  $
                  59,576
                  
                  
                  
                  82.8Services
                  
                  
                  11,046
                  
                  
                  
                  19.1
                  
                  
                  
                  12,366
                  
                  
                  
                  17.2Total
      revenue
                  
                  
                  57,859
                  
                  
                  
                  100.0
                  
                  
                  
                  71,942
                  
                  
                  
                  100.0Gross
      profit:Products
                  
                  
                  10,193
                  
                  
                  
                  21.8
                  
                  
                  
                  10,067
                  
                  
                  
                  16.9Services
                  
                  
                  2,774
                  
                  
                  
                  25.1
                  
                  
                  
                  3,259
                  
                  
                  
                  26.4Total
      gross profit
                  
                  
                  12,967
                  
                  
                  
                  22.4
                  
                  
                  
                  13,326
                  
                  
                  
                  18.5Selling,
      general and administrative expenses
                  
                  
                  13,284
                  
                  
                  
                  22.9
                  
                  
                  
                  12,595
                  
                  
                  
                  17.5Operating
      (loss) income
                  
                  
                  (317
                  )
                  
                  
                  (0.5
                  )
                  
                  
                  731
                  
                  
                  
                  1.0Interest
      and other income, net
                  
                  
                  83
                  
                  
                  
                  0.1
                  
                  
                  
                  106
                  
                  
                  
                  0.1Income
      tax expense
                  
                  
                  93
                  
                  
                  
                  0.2
                  
                  
                  
                  466
                  
                  
                  
                  0.6Net
      (loss) income from continuing operations
                  
                  
                  (327
                  )
                  
                  
                  (0.6
                  )
                  
                  
                  371
                  
                  
                  
                  0.5(Loss
      ) income from discontinued operations, net of income taxes
                  
                  
                  (48
                  )
                  
                  
                  —
                  
                  
                  
                  9
                  
                  
                  
                  —Net
      (loss) income
                  
                  $
                  (375
                  )
                  
                  
                  (0.6
                  )
                  
                  $
                  380
                  
                  
                  
                  0.5





Revenue. Total revenue
decreased by $14,083, or 19.6%, to $57,859 from $71,942. Products revenue
decreased $12,763, or 21.4% to $46,813 from $59,576. The decrease in products
revenue was primarily due to unanticipated product availability issues from our
key manufacturer supplier, Cisco Systems, Inc., which led to an inability to
complete certain projects during the quarter.  We currently believe
the product availability issues will improve somewhat during the latter part of
the fourth quarter. Services revenue decreased $1,320 or 10.7% to $11,046 from
$12,366. Professional services revenue decreased significantly over the prior
year and managed services revenues were approximately the same as the prior
year.  Professional services revenue decreased in the Federal
Division, Gulf Coast Region, and Northwest Region, partially offset by increases
in the Central Texas and Southwest Regions and newly acquired locations in the
New England Region.





Gross Profit. Total gross
profit decreased by $359, or 2.7%, to $12,967 from $13,326. Gross profit as a
percentage of revenue increased to 22.4% from 18.5%, due to higher products
revenue margin partially offset by lower services revenue margin. Gross profit
on the products sales component increased $126 or 1.3%, to $10,193 from $10,067
and, as a percentage of sales, increased to 21.8% from 16.9%, due to
substantially higher vendor rebates on lower sales and reduced large project
sales at low margins.  Gross profit on services revenue decreased $485
or 14.9% to $2,774 from $3,259 and gross profit as a percent of services revenue
decreased to 25.1% from 26.4%. The services gross margin decreased in 2009 due
to reduced professional services revenues on a cost base which is primarily
fixed in nature and lower managed services gross margin due to the higher cost
base of an acquired location.





Selling, General and Administrative
Expenses. Selling, general and administrative expenses increased by $689,
or 5.5% to $13,284 from $12,595. As a percentage of total revenue, these
expenses increased to 22.9% in 2009 versus 17.5% in 2008. Increased 2009
expenses reflect selling, general and administrative expenses of the operations
acquired in the NetTeks, AdvancedNetworX, and VocalMash acquisitions,
higher professional fees of $368 primarily due to the restatement of prior
period financial statements and the start of the annual audit in the third
quarter of 2009 instead of the fourth quarter as in prior years, and higher bad
debt expense in 2009 of $249.  These increases were partially offset
by reduced commission expense due to lower sales and proportionately higher
sales to non-commissioned accounts.





Operating (Loss) Income.
Operating income decreased $1,048 to a loss of $317 from income of $731,
primarily due to lower sales and proportionately higher selling, general and
administrative expenses, partially offset by higher gross margins.





Interest and Other Income (Expense),
Net. Interest and other income (expense), net, changed by $23 to income
of $83 from income of $106, primarily due to payment discounts offered through
January 2010 by our senior credit facility lender and interest income on cash
balances.





Income Tax Expense. Income
tax expense decreased by $373 to $93 from $466, primarily due to lower 2009
pretax income.  An income tax benefit was not recognized for the 2009
loss due to the corresponding valuation allowance recorded as discussed further
under “Deferred Tax
Assets” below.





22


Net(Loss)Income. Net income decreased
$755 to a loss of $375 from income of $380, primarily due to lower sales and
proportionately higher selling, general and administrative expenses, partially
offset by higher gross margins, higher interest and other income, and lower
income tax expense.





NineMonths EndedSeptember30, 2009 Compared To theNineMonths EndedSeptember30,2008





Nine
      Months Ended September 30,2009
                  
                  
                  2008Amount
                  
                  
                  %
                  
                  
                  Amount
                  
                  
                  %Revenue:
                  
                  
                  
                  
                  
                  
                  
                  (As
      Restated, Note 10)Products
                  
                  $
                  137,834
                  
                  
                  
                  79.4
                  
                  
                  $
                  161,497
                  
                  
                  
                  82.6Services
                  
                  
                  35,706
                  
                  
                  
                  20.6
                  
                  
                  
                  34,079
                  
                  
                  
                  17.4Total
      revenue
                  
                  
                  173,540
                  
                  
                  
                  100.0
                  
                  
                  
                  195,576
                  
                  
                  
                  100.0Gross
      profit:Products
                  
                  
                  28,215
                  
                  
                  
                  20.5
                  
                  
                  
                  29,040
                  
                  
                  
                  18.0Services
                  
                  
                  9,780
                  
                  
                  
                  27.4
                  
                  
                  
                  10,185
                  
                  
                  
                  29.9Total
      gross profit
                  
                  
                  37,995
                  
                  
                  
                  21.9
                  
                  
                  
                  39,225
                  
                  
                  
                  20.1Selling,
      general and administrative expenses
                  
                  
                  38,337
                  
                  
                  
                  22.1
                  
                  
                  
                  34,850
                  
                  
                  
                  17.9Operating
      (loss) income
                  
                  
                  (342
                  )
                  
                  
                  (0.2
                  )
                  
                  
                  4,375
                  
                  
                  
                  2.2Interest
      and other income (expense), net
                  
                  
                  100
                  
                  
                  
                  0.1
                  
                  
                  
                  (65
                  )
                  
                  
                  —Income
      tax expense
                  
                  
                  212
                  
                  
                  
                  0.2
                  
                  
                  
                  1,829
                  
                  
                  
                  0.9Net
      (loss) income from continuing operations
                  
                  
                  (454
                  )
                  
                  
                  (0.3
                  )
                  
                  
                  2,481
                  
                  
                  
                  1.3(Loss
      ) income from discontinued operations, net of income taxes
                  
                  
                  (104
                  )
                  
                  
                  —
                  
                  
                  
                  23
                  
                  
                  
                  —Net
      (loss) income
                  
                  $
                  (558
                  )
                  
                  
                  (0.3
                  )
                  
                  $
                  2,504
                  
                  
                  
                  1.3





Revenue. Total revenue
decreased by $22,036, or 11.3%, to $173,540 from $195,576. Products revenue
decreased $23,663, or 14.7% to $137,834 from $161,497. The decrease in products
revenue was primarily due to the effect of the macroeconomic downturn in
the United States during the first and second quarter of 2009 and the
unanticipated product availability issues from our key manufacturer
supplier during the third quarter of 2009 referenced above.  
Services revenue increased $1,627 or 4.8% to $35,706 from $34,079. Professional
services and managed service revenue increased by approximately the same
amount.  Professional services revenue increased in the Central Texas
Region, Southwest Region, Southern California Region, and the newly acquired
location in the New England Region, partially offset by decreases in the Federal
Division, Gulf Coast Region, and Northwest Region.  Managed services
revenue increased in newly acquired New England and Northern California
locations and existing Southern California Region partially offset by decreased
revenue in the Gulf Coast Region.





Gross Profit. Total gross
profit decreased by $1,230, or 3.1%, to $37,995 from $39,225. Gross profit as a
percentage of revenue increased to 21.9% from 20.1%, due to higher products
revenue margins partially offset by lower services margins. Gross profit on the
products sales component decreased $825 or 2.8%, to $28,215 from $29,040
and, as a percentage of sales, increased to 20.5% from 18.0% due to
proportionately higher 2009 vendor rebates and increased 2009 revenues for third
party support contracts recorded on a net basis.  Gross profit on
services revenue decreased $405 or 4.0% to $9,780 from $10,185 and gross profit
as a percent of services revenue decreased to 27.4% from 29.9%. The services
gross margin decreased in 2009 due to reduced professional services revenues on
a cost base which is primarily fixed in nature and lower managed services gross
margin due to the higher cost base of an acquired location.





Selling, General and Administrative
Expenses. Selling, general and administrative expenses increased by
$3,487, or 10.0% to $38,337 from $34,850. As a percentage of total revenue,
these expenses increased to 22.1% in 2009 versus 17.9% in
2008.  Increased 2009 expenses reflect selling, general and
administrative expenses of the operations acquired in the NetTeks, AccessFlow,
AdvancedNetworX, and VocalMash acquisitions, higher professional fees of
$537 primarily due to the restatement of prior period financial statements and
the start of the annual audit in the third quarter of 2009 instead of the fourth
quarter as in prior years, and higher bad debt expense in 2009 of
$346.  These increases were partially offset by reduced commission
expense due to lower sales and proportionately higher sales to non-commissioned
accounts.





23


Operating (Loss) Income. Operating
income decreased $4,717 to a loss of $342 from income of $4,375, primarily due
to lower sales and proportionately higher selling, general and administrative
expenses partially offset by higher gross margins.





Interest and Other Income (Expense),
Net. Interest and other income (expense), net, changed by $165 to income
of $100 from expense of $65, primarily due to the elimination of borrowings
under our senior credit facility in June 2008.





Income Tax Expense. Income
tax expense decreased by $1,617 to $212 from $1,829, primarily due to lower 2009
pretax income.  An income tax benefit was not recognized for the 2009
loss due to the corresponding valuation allowance recorded as discussed further
under “Deferred Tax
Assets” below.





Net (Loss) Income. Net income
decreased $3,062 to a loss of $558 from income of $2,504, primarily due to lower
sales and proportionately higher selling, general and administrative expenses
partially offset by higher gross margins and lower income tax
expense.





Tax Loss Carryforward.Because of our operating losses in 2003, 2005, 2006 and 2008, and
exercises of stock options, we have accumulated a net operating loss
carryforward for federal income tax purposes that, at September 30, 2009, was
approximately $3,268. Since United States tax laws limit the time during which
an NOL may be applied against future taxable income and tax liabilities, we may
not be able to take full advantage of our NOL carryforward for federal income
tax purposes. The carryforward will expire during the period 2023 through 2026
if not otherwise used. A change in ownership, as defined by federal income tax
regulations, could significantly limit the Company’s ability to utilize its
carryforward.





We
recognize tax benefits associated with the exercise of stock options directly to
stockholders’ equity only when realized. Accordingly, deferred tax assets are
not recognized for net operating loss carryforwards resulting from windfall tax
benefits. A windfall tax benefit occurs when the actual tax benefit realized
upon an employee’s disposition of a share-based award exceeds the cumulative
book compensation charge associated with the award. At September 30, 2009, we
have windfall tax benefits of $3,268 included in NOL carryforward but not
reflected in deferred tax assets.





Deferred Tax Assets.In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which temporary
differences, generally become deductible. Management considers the reversal of
deferred tax liabilities, projected future income, and tax planning strategies
in making this assessment. Management’s evaluation of the realizability of
deferred tax assets must consider both positive and negative evidence. The
weight given to the potential effects of positive and negative evidence is based
on the extent to which it can be objectively verified. During the fourth quarter
of 2008 and through the nine months ended September 30, 2009, we recorded a
valuation allowance related to the net operating loss carryforwards and other
temporary items as we determined it is more likely than not that we will not be
able to use the assets to reduce future tax liabilities.  As of
September 30, 2009, the net deferred tax asset was $4,228 and was fully reserved
with a valuation allowance of the same amount.





Liquidity
and Capital Resources





Sources
of Liquidity





Our
principal sources of liquidity are collections from our accounts receivable and
our credit facility (the “Credit Facility”) with Castle Pines Capital LLC
(“CPC”), which we believe are sufficient to meet our short-term and long-term
liquidity requirements. We use the Credit Facility to finance the majority of
our purchases of inventory and to provide working capital when our cash flow
from operations is insufficient. Our working capital increased to $15,847 at
September 30, 2009 from $14,173 at December 31, 2008, primarily due to cash flow
generated by operations.





The total
Credit Facility is $60,000 with an additional $10 million credit facility
specifically for acquisitions (“Acquisition Facility”). Substantially all of our
assets are pledged as collateral under the Credit Facility. Advances under the
Acquisition Facility are specific to each acquisition and subject to approval by
CPC based on pre-established criteria. There were no borrowings under the
Acquisition Facility outstanding at September 30, 2009.





24


As of
September 30, 2009, borrowing capacity and availability were as
follows:





Total
      Credit Facility
                  
                  $
                  60,000Borrowing
      base limitation
                  
                  
                  (25,747
                  )Total
      borrowing capacity
                  
                  
                  34,253Less
      interest-bearing borrowings
                  
                  
                  —Less
      non-interest bearing advances
                  
                  
                  (31,294
                  )Total
      unused availability
                  
                  $
                  2,959





In
addition to unused borrowing availability, liquidity at September 30, 2009
included our cash balance of $12,116. The “unused availability” is the amount
not borrowed, but eligible to be borrowed. The borrowing base restrictions
generally restrict our borrowings under the Credit Facility to 85% of the
eligible receivables, 100% of our floorplanned inventory and 75% of Cisco vendor
rebates receivable.





We use
the Credit Facility to finance purchases of Cisco products from Cisco and from
certain wholesale distributors. Cisco provides 60-day terms, and other wholesale
distributors typically provide 30-day terms. Balances under the Credit Facility
that are within those respective 60-day and 30-day periods (the “Free Finance
Period”) do not accrue interest and are presented as “Accounts Payable - Floor
Plan” in our balance sheet. To the extent that we have credit availability under
the Credit Facility, we have the ability to extend the payment terms past the
Free Finance Period for up to 120 days after original invoice date. Amounts
extended past the Free Finance Period accrue interest and are presented as notes
payable on our balance sheet.  No such amounts related to this Credit
Facility were outstanding at September 30, 2009 or December 31,
2008.  The interest rate of the Credit Facility is the prime rate plus
0.5% (3.75% at September 30, 2009) and the interest rate of the Acquisition
Facility is the prime rate plus 2.0% (5.25% at September 30, 2009).





As
defined in the Credit Facility there are restrictive covenants measured at each
quarter and year-end regarding minimum tangible net worth, maximum debt to
tangible net worth ratio, minimum working capital and a minimum current ratio.
At September 30, 2009, we were in compliance with the loan covenants and we
anticipate that we will be able to comply with the loan covenants during the
next twelve months. If we violate any of the loan covenants, we would be
required to seek waivers from CPC for those non-compliance events. If CPC
refused to provide waivers, the amount due under the Credit Facility could be
accelerated and we could be required to seek other sources of
financing.





Cash Flows.During the nine
months ended September 30, 2009, our cash increased by $1,179. Operating
activities provided cash of $11,353, investing activities used $1,557 and
financing activities used $8,617.





Operating Activities.Operating activities provided $11,353 in the nine months ended September
30, 2009, as compared to providing cash of $1,929 in the comparable 2008 period.
During the nine months ended September 30, 2009, net income and noncash
adjustments to net income provided cash of $3,699 and changes in asset and
liability accounts provided cash of $7,654, primarily through the reduction of
account receivable from reduced sales and improved collections.





Investing Activities.Investing activities used $1,557 in the nine months ended September 30,
2009, compared to $4,436 used during the comparable period in 2008. Our 2009
investing activities primarily consisted of capital expenditures ($813),
acquisition of AdvancedNetworX ($465), and payment of earnout in connection with
the 2008 acquisition of AccessFlow ($209).  Our investing activities
in 2008 primarily consisted of the acquisition of Access Flow, Inc. ($2,661),
including transaction costs and capital expenditures ($1,785).  
Capital expenditures in both years were primarily related to purchases of
computer equipment and software, and to a lesser degree, leasehold improvements.
During the next twelve months, we do not expect to incur significant capital
expenditures requiring cash, except for acquisitions, for which we cannot
predict the certainty or magnitude.  As further described in Note 4 to
the condensed consolidated financial statements, the AccessFlow, NetTeks,
VocalMash, and AdvancedNetworX acquisition agreements contain contingent cash
payment provisions that may be earned in future periods.





Financing Activities.Financing activities used $8,617 in the nine months ended September 30,
2009, as compared to providing $8,973 in the comparable period in 2008. Funds
used in the nine months ended September 30, 2009 were primarily from net
payments under the floor plan financing ($8,708) and the issuance of stock under
the employee stock purchase plan ($326).  The financing activities
during the nine months ended September 30, 2008 generated cash primarily from
the issuance of common stock ($8,870, net of issuance costs), net borrowings
under the floor plan financing ($5,813), the exercise of stock options ($827),
and excess tax benefits from stock option exercises ($1,590), partially offset
by the repayment of the Acquisition Facility ($6,000) and common stock
repurchases ($2,096).





25


Item
4T. Controls and Procedures





Material
Weakness Previously Disclosed





As
discussed in Item 4T of our Quarterly Report on Form 10-Q/A for the period
ended March 31, 2009 and our Quarterly Report on Form 10-Q for the period ended
June 30, 2009, we identified material weaknesses in the design and operation of
our internal controls over (i) the review of the calculation of the services
revenue accrual, (ii) the validation of the significant facts and assumptions
underlying our conclusions of the appropriate accounting policies related to
non-standard financing contracts, and (iii) the controls over approval of
modified grants of stock options and restricted stock and the related
application, monitoring and reporting of the appropriate accounting
policies.  Although we have designed and implemented controls that we
believe will remediate the material weaknesses, we are unable to conclude the
material weaknesses has been remediated as of September 30, 2009 because
many of the remedial actions we have taken are recent and therefore an
insufficient amount of time has passed for us to verify that the additional
remediation measures are operating effectively.





Evaluation
of Disclosure Controls and Procedures





Under the
supervision and with the participation of certain members of our management,
including our Chief Executive Officer and Chief Financial Officer, we completed
an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) to the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)).  In
light of the material weaknesses discussed above, which have not been fully
remediated as of the end of the period covered by this Quarterly Report, our
Chief Executive Officer and Chief Financial Officer concluded, after the
evaluation described above, that our disclosure controls were not effective. As
a result of this conclusion, the financial statements for the period covered by
this report were prepared with particular attention to the material weaknesses
previously disclosed. Accordingly, management believes that the condensed
consolidated financial statements included in this Quarterly Report fairly
present, in all material respects, our financial condition, results of
operations and cash flows as of and for the periods presented.





Changes
in Internal Control over Financial Reporting





During
the third quarter of fiscal 2009, as part of our plan to address the
aforementioned material weaknesses, we implemented (i) enhanced review
procedures related to the calculation of our service revenue accrual, (ii)
review and documentation of significant facts and assumptions underlying our
accounting conclusions related to non-standard financing contracts, and (iii)
controls over approval of modified grants of stock options and restricted stock
and the related application, monitoring and reporting of the appropriate
accounting policies. These actions are reasonably likely to materially affect
our internal control over financial reporting, as defined in
Rule 13a-15(f) under the Exchange Act.  There have not been any other
changes in our internal control over financial reporting during the quarter
ended September 30, 2009 that materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.





PART
II. OTHER INFORMATION





Item
1. Legal Proceedings





See Note
9 to condensed consolidated financial statements in Part I, Item 1, which is
incorporated herein by reference.





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





Issuer
Purchases of Equity Securities





On May
12, 2009, the Board of Directors authorized a new common stock repurchase plan
of up to $2,000 of the Company’s common stock on or before October 31, 2009. The
purchases are required to be made in open market or privately negotiated
transactions in compliance with Rule 10b-18 under the Securities Exchange
Act of 1934, as amended, subject to market and business conditions, applicable
legal requirements and other factors. The plan also requires the purchased
shares to be retired as soon as practicable following the purchase. The plan
does not obligate the Company to purchase any particular amount of common stock
and could be suspended at any time at the Company’s discretion.  No
shares of common stock were repurchased during the period May 12, 2009 to
September 30, 2009 or subsequent to September 30, 2009.  The plan
expired on October 31, 2009.





26


Item
6. Exhibits





See
exhibit list in the Index to Exhibits, which is incorporated herein by reference
as the list of exhibits required as part of this report.



















SIGNATURE





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




INX
      Inc.Date:
      November 12, 2009
            By:
            /s/ Brian
      Fontana,Brian
      Fontana, Vice President
              and
      Chief Financial Officer








27





Index
to Exhibits





Exhibit
                  No.
                
                Description
                
                Filed
      Herewith or
                  Incorporated
      byReference
      From:10.1
                
                Asset
      Purchase Agreement by and among INX Inc., AdvancedNetworX, Inc., Mark
      Alexander, Robert Roesch, Gary Clevenger, Deborah Shaw, Sherri McEvoy,
      Kevin Jones, Robert Timm, and Larry Blackwood dated July 17,
      2009
                
                Exhibit
      10.1 to Form 8-K filed July 20, 2009.10.2
                
                Office
      Lease by and between Equastone Kirkwood, LP and INX Inc.
                
                Filed
      herewith.31.1
                
                Rule
      13a-14(a)/15d-14(a) Certification of Principal Executive
      Officer
                
                Filed
      herewith.31.2
                
                Rule
      13a-14(a)/15d-14(a) Certification of Principal Financial
      Officer
                
                Filed
      herewith.32.1
                
                Section
      1350 Certification of Principal Executive Officer
                
                Filed
      herewith.32.2
                
                Section
      1350 Certification of Principal Financial Officer
                
                Filed
      herewith.
















28