##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from January 1, 2008 to March 31, 2008
 Commission file number: 1-31949
 INX Inc.
  Delaware
(State of incorporation)
    
    76-0515249
(I.R.S. Employer Identification Number)
 6401 Southwest Freeway
Houston, Texas 77074
 (713) 795-2000
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### 



INX Inc. and Subsidiaries
FORM 10-Q for the Quarter Ended March 31, 2008
 INDEX
 Part I. Financial Information
    
    
    1Item 1. Financial Statements (Unaudited):
    
    
    1Condensed Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007
    
    
    1Condensed Consolidated Balance Sheets at March 31, 2008 and December 31, 2007
    
    
    2Condensed Consolidated Statement of Stockholders Equity for the three months ended March 31, 2008
    
    
    3Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 4T. Controls and Procedures
    
    
    15Part II. Other Information
    
    
    15Item 1. Legal Proceedings
    
    
    15Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    15Item 5. Other Information
    
    
    16Item 6. Exhibits
    
    
    16Signature
    
    
    16Certification of PEO Pursuant to Rule 13a-14(a)/15d-14(a)Certification of PFO Pursuant to Rule 13a-14(a)/15d-14(a)Certification of PEO Pursuant to Section 1350Certification of PFO Pursuant to Section 1350




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##### Table of Contents



PART 1. FINANCIAL INFORMATION
 
 Item 1. Financial Statements (Unaudited):
 
 
 Three MonthsEnded March 31,2008
    
    
    2007Revenue:Products
    
    $
    50,491
    
    
    $
    39,550Services
    
    
    9,152
    
    
    
    6,093Total revenue
    
    
    59,643
    
    
    
    45,643Cost of products and services:Products
    
    
    41,284
    
    
    
    32,332Services
    
    
    6,212
    
    
    
    4,804Total cost of products and services
    
    
    47,496
    
    
    
    37,136Gross profit
    
    
    12,147
    
    
    
    8,507Selling, general and administrative expenses
    
    
    10,384
    
    
    
    8,172Operating income
    
    
    1,763
    
    
    
    335Interest and other income (expense), net
    
    
    (73
    )
    
    
    (24
    )Income from continuing operations before income taxes
    
    
    1,690
    
    
    
    311Income tax expense
    
    
    683
    
    
    
    7Net income from continuing operations
    
    
    1,007
    
    
    
    304Income from discontinued operations, net of income taxes
    
    
    4
    
    
    
    62Net income
    
    $
    1,011
    
    
    $
    366Net income per share:Basic:Income from continuing operations
    
    $
    0.13
    
    
    $
    0.04Income from discontinued operations, net of income taxes
    
    
    
    
    
    
    0.01Net income per share
    
    $
    0.13
    
    
    $
    0.05Diluted:Income from continuing operations
    
    $
    0.12
    
    
    $
    0.04Income from discontinued operations, net of income taxes
    
    
    
    
    
    
    0.01Net income per share
    
    $
    0.12
    
    
    $
    0.05Shares used in computing net income per share:Basic
    
    
    7,550,904
    
    
    
    6,662,839Diluted
    
    
    8,242,191
    
    
    
    7,729,681
  1




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##### Table of Contents



March 31,
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    8,236
    
    
    $
    9,340Accounts receivable, net of allowance of $498 and $470
    
    
    45,292
    
    
    
    45,128Inventory, net
    
    
    1,606
    
    
    
    1,439Deferred income taxes
    
    
    2,100
    
    
    
    2,100Other current assets
    
    
    2,355
    
    
    
    2,062Total current assets
    
    
    59,589
    
    
    
    60,069Property and equipment, net of accumulated depreciation of $3,995 and $3,728
    
    
    4,586
    
    
    
    4,421Goodwill
    
    
    16,663
    
    
    
    16,603Intangible and other assets, net of accumulated amortization of $1,729 and $1,592
    
    
    3,011
    
    
    
    3,148Total assets
    
    $
    83,849
    
    
    $
    84,241LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Notes payable
    
    $
    6,327
    
    
    $
    6,200Accounts payable
    
    
    35,487
    
    
    
    37,233Accrued expenses
    
    
    6,129
    
    
    
    5,363Other current liabilities
    
    
    1,188
    
    
    
    1,440Total current liabilities
    
    
    49,131
    
    
    
    50,236Long-term Liabilities:Deferred income taxes
    
    
    1,565
    
    
    
    1,565Other long-term liabilities
    
    
    332
    
    
    
    413Total long-term liabilities
    
    
    1,897
    
    
    
    1,978Commitments and contingenciesStockholders Equity:Preferred stock, $.01 par value, 5,000,000 shares authorized, no shares issued
    
    
    
    
    
    
    Common stock, $.01 par value, 15,000,000 shares authorized, 7,422,840 and
7,548,892 shares issued
    
    
    74
    
    
    
    75Additional paid-in capital
    
    
    36,281
    
    
    
    36,497Accumulated deficit
    
    
    (3,534
    )
    
    
    (4,545
    )Total stockholders equity
    
    
    32,821
    
    
    
    32,027Total liabilities and stockholders equity
    
    $
    83,849
    
    
    $
    84,241
  2




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##### Table of Contents



$.01 par value
    
    
    AdditionalCommon Stock
    
    
    Paid-In
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    TotalBalance at December 31, 2007
    
    
    7,548,892
    
    
    $
    75
    
    
    $
    36,497
    
    
    $
    (4,545
    )
    
    $
    32,027Exercise of common stock options
    
    
    58,144
    
    
    
    1
    
    
    
    402
    
    
    
    
    
    
    
    403Issuance of vested restricted common stock
    
    
    789
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Share-based compensation expense related to
employee stock options
    
    
    
    
    
    
    
    
    
    
    168
    
    
    
    
    
    
    
    168Share-based compensation expense related to
employee restricted stock grants
    
    
    
    
    
    
    
    
    
    
    144
    
    
    
    
    
    
    
    144Excess tax benefit from stock option exercises
    
    
    
    
    
    
    
    
    
    
    601
    
    
    
    
    
    
    
    601Purchase and retirement of treasury stock
resulting from grantee election to fund
payroll taxes out of restricted stock grant
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )Purchase and retirement of common stock
    
    
    (184,985
    )
    
    
    (2
    )
    
    
    (1,534
    )
    
    
    
    
    
    
    (1,536
    )Other
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    6Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,011
    
    
    
    1,011Balance at March 31, 2008
    
    
    7,422,840
    
    
    $
    74
    
    
    $
    36,281
    
    
    $
    (3,534
    )
    
    $
    32,821
  3




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##### Table of Contents



Three MonthsEnded March 31,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    1,011
    
    
    $
    366Adjustments to reconcile net income to net cash (used in) provided by operating activities:Net (income) from discontinued operations
    
    
    (4
    )
    
    
    (62
    )Depreciation and amortization
    
    
    520
    
    
    
    370Share-based compensation expense for stock options and stock grants
    
    
    312
    
    
    
    125Issuance of warrants
    
    
    
    
    
    
    40Loss on retirement of assets
    
    
    15
    
    
    
    5Bad debt expense
    
    
    (45
    )
    
    
    (10
    )Changes in operating assets and liabilities, net of effect of acquisitions:Accounts receivable
    
    
    (119
    )
    
    
    3,186Inventory
    
    
    (167
    )
    
    
    (832
    )Accounts payable
    
    
    (1,746
    )
    
    
    1,395Other assets and liabilities
    
    
    140
    
    
    
    (612
    )Net cash (used in) provided by continuing operations
    
    
    (83
    )
    
    
    3,971Net operating activities of discontinued operations
    
    
    4
    
    
    
    62Net cash (used in) provided by operating activities
    
    
    (79
    )
    
    
    4,033CASH FLOWS FROM INVESTING ACTIVITIES:Acquisition of Select, Inc. purchase price adjustments
    
    
    (54
    )
    
    
    Capital expenditures
    
    
    (563
    )
    
    
    (579
    )Net cash used in investing activities of continuing operations
    
    
    (617
    )
    
    
    (579
    )Net investing activities of discontinued operations
    
    
    
    
    
    
    9Net cash used in investing activities
    
    
    (617
    )
    
    
    (570
    )CASH FLOWS FROM FINANCING ACTIVITIES:Exercise of stock options
    
    
    403
    
    
    
    253Excess tax benefits from stock option exercises
    
    
    601
    
    
    
    Purchase of common stock
    
    
    (1,536
    )
    
    
    Purchase of treasury stock resulting from grantee election
    
    
    (3
    )
    
    
    Net payments of short-term interest bearing credit facilities
    
    
    
    
    
    
    (3,485
    )Proceeds from other short-term borrowings
    
    
    251
    
    
    
    Payments on notes payable
    
    
    (124
    )
    
    
    (111
    )Net cash used in financing activities of continuing operations
    
    
    (408
    )
    
    
    (3,343
    )NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (1,104
    )
    
    
    120CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    9,340
    
    
    
    1,795CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    8,236
    
    
    $
    1,915
  4




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##### Table of Contents



Three MonthsEnded March 31,2008
    
    2007SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:Acquisition of Datatran Network Systems:Fair value of assets acquired
    
    $
    
    
    
    $
    525Additional purchase price payable
    
    
    
    
    
    
    (250
    )Transaction costs accrued
    
    
    
    
    
    
    (12
    )Common stock issuable
    
    
    
    
    
    
    (263
    )
  5




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##### Table of Contents



INX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
 1. Description of Business
   2. Basis of Presentation
    3. Recent Accounting Pronouncements
  Business Combinations
 6




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##### Table of Contents



Noncontrolling Interests in Consolidated Financial
Statements  an amendment of ARB No. 51
 The Fair
Value Option for Financial Assets and Financial Liabilities: Including an Amendment of FASB
Statement No. 115
 Fair Value
Measurements Accounting for
Leases
 4. Acquisitions
 Select, Inc.
    7




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##### Table of Contents



Pro Forma Summary
  Three Months EndedMarch 31,2008
    
    
    2007Revenues
    
    $
    59,643
    
    
    $
    54,474Net income from continuing operations
    
    $
    1,007
    
    
    $
    299Net income per share from continuing operations:Basic
    
    $
    0.13
    
    
    $
    0.04Diluted
    
    $
    0.12
    
    
    $
    0.04Weighted average shares used in calculation:Basic
    
    
    7,550,904
    
    
    
    6,825,839Diluted
    
    
    8,242,191
    
    
    
    7,892,681
 Network Architects, Corp.
  5. Earnings Per Share
   Three Months Ended March 31,2008
    
    
    2007Numerator for basic and diluted earnings per share:Net income from continuing operations
    
    $
    1,007
    
    
    $
    304Income on disposal of discontinued operations, net of income taxes
    
    
    4
    
    
    
    62Net income
    
    $
    1,011
    
    
    $
    366Denominator for basic earnings per share  weighted-average shares outstanding
    
    
    7,550,904
    
    
    
    6,662,839Effect of dilutive securities  shares issuable from assumed conversion of
common stock options, restricted stock, and warrants
    
    
    691,287
    
    
    
    1,066,842Denominator for diluted earnings per share  weighted-average shares outstanding
    
    
    8,242,191
    
    
    
    7,729,681
 8




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##### Table of Contents



6. Share-Based Compensation
  Three Months Ended March 31,2008
    
    2007Expected volatility
    
    
    N/A
    
    
    
    61.3
    %Expected term (in years)
    
    
    N/A
    
    
    
    6.5Risk-free interest rate
    
    
    N/A
    
    
    
    4.5
    %Expected dividend yield
    
    
    N/A
    
    
    
    0
    %
    Three Months Ended March 31,2008
    
    
    2007Cost of products and services  services
    
    $
    49
    
    
    $
    12Selling, general and administrative expenses
    
    
    263
    
    
    
    113Share-based compensation from continuing operations before income taxes
    
    
    312
    
    
    
    125Income tax benefit
    
    
    
    
    
    
    Share-based compensation from continuing operations
    
    
    312
    
    
    
    125Share-based compensation from discontinued operations
    
    
    
    
    
    
    (8
    )Total share-based compensation
    
    $
    312
    
    
    $
    117
  9




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##### Table of Contents



WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    IntrinsicShares
    
    Price
    
    Term (Years)
    
    ValueOptions outstanding at December 31, 2007
    
    
    1,480,736
    
    
    $
    4.83Granted
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Exercised
    
    
    (58,144
    )
    
    $
    6.89
    
    
    
    
    
    
    $
    110Canceled
    
    
    (13,900
    )
    
    $
    9.97
    
    
    
    
    
    
    $
    (11
    )Options outstanding March 31, 2008
    
    
    1,408,692
    
    
    $
    4.70
    
    
    
    6.23
    
    
    $
    5,004Options exercisable at March 31, 2008
    
    
    941,926
    
    
    $
    2.82
    
    
    
    5.03
    
    
    $
    4,752Options vested and options expected to vest at
March 31, 2008
    
    
    1,304,820
    
    
    $
    4.49
    
    
    
    6.52
    
    
    $
    4,875
   WeightedAverageGrant DateNonvested Shares
    
    Shares
    
    Fair ValueNonvested at December 31, 2007
    
    
    195,509
    
    
    $
    11.30Granted
    
    
    7,500
    
    
    $
    10.61Vested
    
    
    (1,118
    )
    
    $
    7.49Forfeited
    
    
    (17,500
    )
    
    $
    10.51Nonvested at March 31, 2008
    
    
    184,391
    
    
    $
    11.37
  7. Stockholders Equity
 Common Stock Repurchase Plan
  10




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##### Table of Contents



Employee Stock Purchase Plan
  8. Commitments and Contingencies
   Schneider Rucinski
Enterprises v. Touch Asia Outsourcing Solutions, Stratasoft, Inc., INX Inc., et al
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  11




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##### Table of Contents



Special notice regarding forward-looking statements
  Results Of Operations
 Period Comparisons.
 Three Months Ended March 31, 2008 Compared To the Three Months Ended March 31, 2007
 Three Months Ended March 31,2008
    
    
    2007Amount
    
    
    %
    
    
    Amount
    
    
    %Revenue:Products
    
    $
    50,491
    
    
    
    84.7
    
    
    $
    39,550
    
    
    
    86.7Services
    
    
    9,152
    
    
    
    15.3
    
    
    
    6,093
    
    
    
    13.3Total revenue
    
    
    59,643
    
    
    
    100.0
    
    
    
    45,643
    
    
    
    100.0Gross profit:Products
    
    
    9,207
    
    
    
    18.2
    
    
    
    7,218
    
    
    
    18.2Services
    
    
    2,940
    
    
    
    32.1
    
    
    
    1,289
    
    
    
    21.2Total gross profit
    
    
    12,147
    
    
    
    20.4
    
    
    
    8,507
    
    
    
    18.6Selling, general and administrative expenses
    
    
    10,384
    
    
    
    17.4
    
    
    
    8,172
    
    
    
    17.9Operating income
    
    
    1,763
    
    
    
    3.0
    
    
    
    335
    
    
    
    0.7Interest and other income (expense), net
    
    
    (73
    )
    
    
    (0.2
    )
    
    
    (24
    )
    
    
    Income tax expense
    
    
    683
    
    
    
    1.1
    
    
    
    7
    
    
    
    Net income from continuing operations
    
    
    1,007
    
    
    
    1.7
    
    
    
    304
    
    
    
    0.7Income from discontinued operations, net of income taxes
    
    
    4
    
    
    
    
    
    
    
    62
    
    
    
    0.1Net income
    
    $
    1,011
    
    
    
    1.7
    
    
    $
    366
    
    
    
    0.8
 Revenue
 Gross Profit
 12




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##### Table of Contents



Selling, General and Administrative Expenses
 Operating Income
 Interest and Other Income (Expense), Net
 Income Tax Expense
 Net Income
 Tax Loss Carryforward.
  Deferred Tax Assets.
 Liquidity and Capital Resources
 Sources of Liquidity
   13




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##### Table of Contents



Total Credit Facility
    
    $
    50,000Borrowing base limitation
    
    
    (14,712
    )Total borrowing capacity
    
    
    35,288Less interest-bearing borrowings
    
    
    Less non-interest bearing advances
    
    
    (30,693
    )Total unused availability
    
    $
    4,595
    Cash Flows.
 Operating Activities.
 Investing Activities.
 Financing Activities.
 Related Party Transactions
  14




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##### Table of Contents




    
    INX has the sole option to terminate its lease with 120 days notice for reasons specified
in the Amendment. INX is not required to pay rent during the 120 day notice period.
    
    INX has the right of first refusal on additional space on the second floor of the
building.
  
 Item 4T. Controls and Procedures
   
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Issuer Purchases of Equity Securities
  Total Number of
    
    
    Approximate DollarShares Purchased
    
    
    Amount of SharesTotal Number
    
    
    Average
    
    
    as Part of Publicly
    
    
    That May yet beof Shares
    
    
    Price Paid
    
    
    Announced Plans
    
    
    Purchased Under thePeriod
    
    Purchased
    
    
    per Share
    
    
    or Programs
    
    
    Plans or ProgramsJanuary 1 to January 31, 2008
    
    
    48,485
    
    
    $
    9.01
    
    
    
    48,485
    
    
    NoneFebruary 1 to February 29, 2008
    
    
    73,500
    
    
    $
    7.87
    
    
    
    73,500
    
    
    NoneMarch 1 to March 31, 2008
    
    
    59,200
    
    
    $
    8.00
    
    
    
    59,200
    
    
    NoneTotal
    
    
    181,185
    
    
    $
    8.22
    
    
    
    181,185
  15




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##### Table of Contents



Item 5. Other Information
  
 Item 6. Exhibits
  
   INX Inc.Date: May 5, 2008
    By:
    /s/ BRIAN FONTANABrian Fontana, Vice Presidentand Chief Financial Officer 16




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##### Table of Contents



Index to Exhibits
 Filed Herewith orExhibit
    
    
    
    Incorporated byNo.
    
    Description
    
    Reference From:10.1
    
    First Amendment to INX Inc. Lease Agreement by and between Allstar
Equities, Inc., INX Inc. and General Consulate of Equatorial Guinea
dated January 22, 2008
    
    Exhibit 10.1 to
Form 8-K filed
January 28, 200831.1
    
    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.