##### 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 September 30, 2006
 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, 2006 to September 30, 2006
 Commission file number: 1-31949
 INX Inc.
  Delaware
    
    76-0515249(State of incorporation)
    
    (I.R.S. Employer Identification Number)
 6401 Southwest Freeway
Houston, Texas 77074
 (713) 795-2000
 þ o
  o o þ
 o þ




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##### 



INX Inc. and Subsidiaries
 FORM 10-Q for the Quarter Ended September 30, 2006
 INDEX
 Part I. Financial Information
    
    
    3Item 1. Financial Statements (Unaudited):
    
    
    3Condensed Consolidated Statements of Operations for the three months ended September 30, 2006 and 2005
    
    
    3Condensed Consolidated Statements of Operations for the nine months ended September 30, 2006 and 2005
    
    
    4Condensed Consolidated Balance Sheets at September 30, 2006 and December 31, 2005
    
    
    5Condensed Consolidated Statement of Stockholders Equity for the nine months ended September 30, 2006
    
    
    6Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005
    
    
    7Notes to Condensed Consolidated Financial Statements
    
    
    9Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25Part II. Other Information
    
    
    25Item 6. Exhibits
    
    
    25Signature
    
    
    26Rule 13a-14a/15d-14a Certification of PEORule 13a-14a/15d-14a Certification of PFOSection 1350 Certification of PEOSection 1350 Certification of PFO
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements (Unaudited):
  
    Three months endedSeptember 30,2006
    
    
    2005(As restated-Note 12)Revenue:Products
    
    $
    39,847
    
    
    $
    28,922Services
    
    
    5,397
    
    
    
    4,241Total revenue
    
    
    45,244
    
    
    
    33,163Cost of products and services:Products
    
    
    33,215
    
    
    
    24,816Services
    
    
    3,880
    
    
    
    2,892Total cost of products and services
    
    
    37,095
    
    
    
    27,708Gross profit
    
    
    8,149
    
    
    
    5,455Selling, general and administrative expenses
    
    
    7,432
    
    
    
    4,545Operating income
    
    
    717
    
    
    
    910Interest and other income (expense), net
    
    
    (112
    )
    
    
    (178
    )Income from continuing operations before income taxes
    
    
    605
    
    
    
    732Income tax expense
    
    
    43
    
    
    
    266Income from continuing operations
    
    
    562
    
    
    
    466Loss from discontinued operations, net of income taxes
    
    
    (291
    )
    
    
    (701
    )Net income (loss)
    
    $
    271
    
    
    $
    (235
    )Net income (loss) per share:Basic:Income from continuing operations
    
    $
    0.09
    
    
    $
    0.08Loss from discontinued operations, net of income taxes
    
    
    (0.05
    )
    
    
    (0.12
    )Net income (loss) per share
    
    $
    0.04
    
    
    $
    (0.04
    )Diluted:Income from continuing operations
    
    $
    0.08
    
    
    $
    0.08Loss from discontinued operations, net of income taxes
    
    
    (0.04
    )
    
    
    (0.12
    )Net income (loss) per share
    
    $
    0.04
    
    
    $
    (0.04
    )Shares used in computing net income (loss) per share:Basic
    
    
    6,419,501
    
    
    
    5,975,392Diluted
    
    
    7,284,261
    
    
    
    5,975,392
  3




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##### Table of Contents



Nine months endedSeptember 30,2006
    
    
    2005(As restatedNote 12)Revenue:Products
    
    $
    95,480
    
    
    $
    74,239Services
    
    
    14,718
    
    
    
    8,571Total revenue
    
    
    110,198
    
    
    
    82,810Cost of products and services:Products
    
    
    78,070
    
    
    
    63,316Services
    
    
    10,940
    
    
    
    5,922Total cost of products and services
    
    
    89,010
    
    
    
    69,238Gross profit
    
    
    21,188
    
    
    
    13,572Selling, general and administrative expenses
    
    
    20,278
    
    
    
    17,599Operating income (loss)
    
    
    910
    
    
    
    (4,027
    )Interest and other income (expense), net
    
    
    (215
    )
    
    
    (272
    )Income (loss) from continuing operations before income taxes
    
    
    695
    
    
    
    (4,299
    )Income tax expense
    
    
    44
    
    
    
    527Income (loss) from continuing operations
    
    
    651
    
    
    
    (4,826
    )Loss from discontinued operations, net of income taxes
    
    
    (152
    )
    
    
    (2,335
    )Net income (loss)
    
    $
    499
    
    
    $
    (7,161
    )Net income (loss) per share:Basic:Income (loss) from continuing operations
    
    $
    0.10
    
    
    $
    (0.86
    )Loss from discontinued operations, net of income taxes
    
    
    (0.02
    )
    
    
    (0.42
    )Net income (loss) per share
    
    $
    0.08
    
    
    $
    (1.28
    )Diluted:Income (loss) from continuing operations
    
    $
    0.09
    
    
    $
    (0.86
    )Loss from discontinued operations, net of income taxes
    
    
    (0.02
    )
    
    
    (0.42
    )Net income (loss) per share
    
    $
    0.07
    
    
    $
    (1.28
    )Shares used in computing net income (loss) per share:Basic
    
    
    6,233,674
    
    
    
    5,613,614Diluted
    
    
    7,191,431
    
    
    
    5,613,614
  4




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##### Table of Contents



September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    3,146
    
    
    $
    2,597Accounts receivable, net of allowance of $277 and $161
    
    
    38,127
    
    
    
    24,903Inventory
    
    
    2,105
    
    
    
    79Other current assets
    
    
    2,318
    
    
    
    881Current assets of discontinued operations
    
    
    282
    
    
    
    2,564Total current assets
    
    
    45,978
    
    
    
    31,024Property and equipment, net of accumulated depreciation of $2,119 and $2,344
    
    
    3,011
    
    
    
    2,050Goodwill
    
    
    10,889
    
    
    
    7,121Intangible and other assets, net of accumulated amortization of $1,215 and $1,007
    
    
    359
    
    
    
    393Noncurrent assets of discontinued operations
    
    
    106
    
    
    
    1,057Total assets
    
    $
    60,343
    
    
    $
    41,645LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Notes payable and current portion of long-term debt
    
    $
    4,716
    
    
    $
    2,707Accounts payable
    
    
    28,272
    
    
    
    13,825Accrued expenses
    
    
    4,555
    
    
    
    3,696Other current liabilities
    
    
    1,101
    
    
    
    468Current liabilities of discontinued operations
    
    
    329
    
    
    
    2,936Total current liabilities
    
    
    38,973
    
    
    
    23,632Long-term liabilities of discontinued operations
    
    
    
    
    
    
    7Other long-term liabilities
    
    
    142
    
    
    
    Commitments 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, 6,522,850 and
5,975,626 shares issued
    
    
    65
    
    
    
    60Additional paid-in capital
    
    
    30,264
    
    
    
    27,546Retained deficit
    
    
    (9,101
    )
    
    
    (9,600
    )Total stockholders equity
    
    
    21,228
    
    
    
    18,006Total liabilities and stockholders equity
    
    $
    60,343
    
    
    $
    41,645
  5




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##### Table of Contents



$.01 par value
    
    
    AdditionalCommon Stock
    
    
    Paid-In
    
    
    RetainedShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    TotalBalance at December 31, 2005
    
    
    5,975,626
    
    
    $
    60
    
    
    $
    27,546
    
    
    $
    (9,600
    )
    
    $
    18,006Exercise of common stock options and other
    
    
    252,639
    
    
    
    2
    
    
    
    480
    
    
    
    
    
    
    
    482Issuance of shares for Datatran acquisition
    
    
    73,108
    
    
    
    1
    
    
    
    514
    
    
    
    
    
    
    
    515Issuance of shares as additional purchase
price consideration for Network Architect,
Corp. acquisition
    
    
    97,413
    
    
    
    1
    
    
    
    570
    
    
    
    
    
    
    
    571Issuance of shares as additional purchase
price 
consideration for InfoGroup
Northwest, Inc. acquisition
    
    
    122,544
    
    
    
    1
    
    
    
    750
    
    
    
    
    
    
    
    751Share-based compensation expense related
to employee stock options
    
    
    
    
    
    
    
    
    
    
    264
    
    
    
    
    
    
    
    264Share-based compensation expense related
to restricted stock grant
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Common stock grant to employee
    
    
    1,520
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    10Issuance of warrants
    
    
    
    
    
    
    
    
    
    
    128
    
    
    
    
    
    
    
    128Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    499
    
    
    
    499Balance at September 30, 2006
    
    
    6,522,850
    
    
    $
    65
    
    
    $
    30,264
    
    
    $
    (9,101
    )
    
    $
    21,228
  6




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##### Table of Contents



Nine months endedSeptember 30,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    499
    
    
    $
    (7,161
    )Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Net loss from discontinued operations
    
    
    152
    
    
    
    2,866Tax benefit from discontinued operations
    
    
    
    
    
    
    (531
    )Minority interest
    
    
    
    
    
    
    23Depreciation and amortization
    
    
    854
    
    
    
    647Share-based compensation expense related to employee stock options and restricted stock grant
    
    
    261
    
    
    
    Loss on retirement of assets
    
    
    20
    
    
    
    31Bad debt expense
    
    
    3
    
    
    
    (30
    )Exchange of options in merger of subsidiary
    
    
    
    
    
    
    5,729Issuance of stock grant
    
    
    10
    
    
    
    57Changes in operating assets and liabilities:Accounts receivable
    
    
    (13,227
    )
    
    
    (8,786
    )Inventory (net of effect of acquisition)
    
    
    (2,001
    )
    
    
    15Accounts payable
    
    
    14,456
    
    
    
    5,427Other assets and liabilities
    
    
    62
    
    
    
    1,163Net cash provided by (used in) continuing operations
    
    
    1,089
    
    
    
    (550
    )Net operating activities of discontinued operations
    
    
    (516
    )
    
    
    739Net cash provided by operating activities
    
    
    573
    
    
    
    189CASH FLOWS FROM INVESTING ACTIVITIES:Acquisition of Datatran Network Systems
    
    
    (1,000
    )
    
    
    Acquisition of Network Architects, Corp.
    
    
    (394
    )
    
    
    (2,300
    )Acquisition of InfoGroup Northwest, Inc.
    
    
    (750
    )
    
    
    (1,900
    )Transaction costs paid for acquisitions
    
    
    (32
    )
    
    
    (368
    )Capital expenditures (net of effect of acquisitions)
    
    
    (1,589
    )
    
    
    (362
    )Net cash used in investing activities of continuing operations
    
    
    (3,765
    )
    
    
    (4,930
    )Net investing activities of discontinued operations:Proceeds from sale of Stratasoft stock, net of transaction costs
    
    
    1,251
    
    
    
    Capital expenditures
    
    
    
    
    
    
    (59
    )Net cash used in investing activities
    
    
    (2,514
    )
    
    
    (4,989
    )CASH FLOWS FROM FINANCING ACTIVITIES:Exercise of stock options
    
    
    482
    
    
    
    209Net borrowings of short-term interest bearing credit facilities
    
    
    2,086
    
    
    
    881Payments on notes payable
    
    
    (77
    )
    
    
    (18
    )Net cash provided by financing activities of continuing operations
    
    
    2,491
    
    
    
    1,072Net financing activities of discontinued operations
    
    
    (1
    )
    
    
    (70
    )Net cash provided by financing activities
    
    
    2,490
    
    
    
    1,002NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    549
    
    
    
    (3,798
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    2,597
    
    
    
    4,975CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    3,146
    
    
    $
    1,177
 7




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##### Table of Contents



Nine months endedSeptember 30,2006
    
    2005SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    150
    
    
    $
    274Cash paid for income taxes
    
    $
    8
    
    
    $
    33SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:Acquisition of INX minority interest:Issuance of common stock
    
    $
    
    
    
    $
    1,530Transaction costs accrued
    
    
    
    
    
    
    180Minority interest acquired
    
    
    
    
    
    
    (302
    )Acquisition of Network Architects, Corp.:Fair value of assets acquired
    
    
    965
    
    
    
    4,300Common stock issued
    
    
    (571
    )
    
    
    (2,000
    )Acquisition of InfoGroup Northwest, Inc.:Fair value of assets acquired
    
    
    1,501
    
    
    
    2,400Common stock issued
    
    
    (751
    )
    
    
    (500
    )Acquisition of Datatran Network Systems:Fair value of assets acquired
    
    
    1,515
    
    
    
    Common stock issued
    
    
    (515
    )
    
    
    Sale of Stratasoft  warrants issued
    
    
    128
    
    
    
    
  8




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##### Table of Contents



INX INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Dollar amounts in thousands, except share and per share amounts)
 1. Description of Business
  2. Basis of Presentation
   3. Revenue Recognition
  Products revenue
   9




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##### Table of Contents



Software
 Technical support services revenue,
 Revenue for fixed and flat fee services contracts
 Other service revenue
 Arrangements with multiple deliverables
  
    
    The customer is required to pay the product billing in its entirety independent of any
services performed.
    
    The product has value to the customer on a stand alone basis and pricing is comparable
whether sold with or without services.
    
    The product is standard equipment not significantly altered by installation.
    
    Installation of the product can be performed by many other companies.
    
    Although there is a general right of return relative to delivered product, delivery of
the undelivered items is considered probable and is substantially in the control of the
Company.
   10




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##### Table of Contents



4. Recent Accounting Pronouncements
     5. Share-Based Compensation
   11




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##### Table of Contents



Equity Compensation Plans
  1996 Incentive Stock Plan and the 1996 Non-Employee Director Stock Option Plan
 2000 Stock Incentive Plan
 Grant-Date Fair Value
  Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2006
    
    2005
    
    2006
    
    2005Expected volatility
    
    
    63.4
    %
    
    
    73.3
    %
    
    
    64.3
    %
    
    
    66.4
    %Expected term (in years)
    
    
    6.5
    
    
    
    8.0
    
    
    
    6.3
    
    
    
    8.0Risk-free interest rate
    
    
    5.0
    %
    
    
    4.1
    %
    
    
    5.0
    %
    
    
    3.8
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
  Share-Based Compensation Expense
  12




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##### Table of Contents



Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30, 2006
    
    
    September 30, 2006Cost of products and services  services
    
    $
    14
    
    
    $
    42Selling, general and administrative expenses
    
    
    63
    
    
    
    217Share-based compensation from continuing operations before income taxes
    
    
    77
    
    
    
    259Income tax benefit
    
    
    
    
    
    
    Share-based compensation from continuing operations
    
    
    77
    
    
    
    259Share-based compensation from discontinued operations
    
    
    1
    
    
    
    5Total share-based compensation
    
    $
    78
    
    
    $
    264Impact of total share-based compensation on net income per share:Basic
    
    $
    (0.01
    )
    
    $
    (0.04
    )Diluted
    
    $
    (0.01
    )
    
    $
    (0.04
    )
  Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005Basic and diluted:Net loss as reported
    
    $
    (235
    )
    
    $
    (7,161
    )Add: share-based employee compensation recognized, net of related income
tax effect
    
    
    
    
    
    
    5,786Deduct: share-based employee compensation, net of related income tax effect
    
    
    (67
    )
    
    
    (6,393
    )Pro forma net loss
    
    $
    (302
    )
    
    $
    (7,768
    )Net loss per share:Basic  as reported
    
    $
    (0.04
    )
    
    $
    (1.28
    )Basic  pro forma
    
    $
    (0.05
    )
    
    $
    (1.38
    )Diluted  as reported
    
    $
    (0.04
    )
    
    $
    (1.28
    )Diluted  pro forma
    
    $
    (0.05
    )
    
    $
    (1.38
    )
  Option Activity
  13




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##### Table of Contents



WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    IntrinsicShares
    
    Price
    
    Term (Years)
    
    ValueOptions outstanding at December 31, 2005
    
    
    1,944,610
    
    
    $
    2.66Granted
    
    
    118,367
    
    
    
    6.37
    
    
    
    
    
    
    $
    Exercised
    
    
    (247,639
    )
    
    
    1.95
    
    
    
    
    
    
    $
    1,213Canceled
    
    
    (17,790
    )
    
    
    5.53Options outstanding September 30, 2006
    
    
    1,797,548
    
    
    $
    2.98
    
    
    
    6.51
    
    
    $
    6,653Options exercisable at September 30, 2006
    
    
    1,459,168
    
    
    $
    2.26
    
    
    
    5.98
    
    
    $
    6,358Options vested and options expected to vest at September 30, 2006
    
    
    1,755,204
    
    
    $
    2.93
    
    
    
    6.60
    
    
    $
    6,580
   6. Acquisitions
  Datatran Network Systems
    14




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##### Table of Contents



Network Architects, Corp.
    InfoGroup Northwest, Inc.
    Datatran
    
    
    Network
    
    
    InfoGroupNetwork
    
    
    Architects,
    
    
    Northwest,Systems
    
    
    Corp.
    
    
    Inc.Allocated acquisition cost:Intangibles  customer relationships and noncompete agreements amortized over 3 years
    
    $
    168
    
    
    $
    241
    
    
    $
    134Inventory
    
    
    25
    
    
    
    
    
    
    
    Property and equipment
    
    
    38
    
    
    
    500
    
    
    
    297Security and customer deposits
    
    
    5
    
    
    
    4
    
    
    
    15Goodwill
    
    
    1,311
    
    
    
    4,584
    
    
    
    3,579Total acquisition cost
    
    $
    1,547
    
    
    $
    5,329
    
    
    $
    4,025
 15




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##### Table of Contents



Pro Forma Summary (Unaudited)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    $
    45,244
    
    
    $
    37,315
    
    
    $
    110,243
    
    
    $
    104,809Net income (loss) from continuing operations
    
    $
    562
    
    
    $
    814
    
    
    $
    532
    
    
    $
    (3,329
    )Net income (loss) per share from continuing operations:Basic
    
    $
    0.09
    
    
    $
    0.13
    
    
    $
    0.08
    
    
    $
    (0.56
    )Diluted
    
    $
    0.08
    
    
    $
    0.13
    
    
    $
    0.07
    
    
    $
    (0.56
    )Weighted average shares used in calculation:Basic
    
    
    6,419,501
    
    
    
    6,048,500
    
    
    
    6,260,597
    
    
    
    5,900,481Diluted
    
    
    7,284,261
    
    
    
    6,048,500
    
    
    
    7,218,354
    
    
    
    5,900,481
 7. Discontinued Operations
  
    
    All outstanding Stratasoft common stock was sold for a purchase price of $3,000, which
has been or is subject to reduction as follows:
 
    
    $800 placed in escrow, which is available to satisfy indemnified losses, if any, as
defined in the Agreement. Funds placed in escrow are excluded from the estimated gain
stated above. Approximately $448 in indemnified losses have been paid or presented for
payment as of October 31, 2006.
    
    $221 representing a preliminary net working capital adjustment, as defined. The
final working capital adjustment recorded during June 2006 resulted in the further
reduction of the sale proceeds of $40.
    
    The Company indemnified the buyer for potential losses as defined in the Agreement
to a maximum of $1,400, inclusive of amounts placed in escrow. Excess funds held in
escrow will be released on January 26, 2008 unless retained in escrow for potential
indemnified losses as allowed in the Agreement under certain circumstances.
 
    
    The Company may receive additional consideration in the form of 10% of the outstanding
Stratasoft common stock if revenue exceeds $10,000 for any consecutive twelve month period
within two years of closing.
    
    The Company may receive additional cash consideration if Stratasoft is sold by the buyer
to another party prior to January 26, 2008, for an amount in excess of $15,000.
   16




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##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Stratasoft
    
    $
    
    
    
    $
    860
    
    
    $
    268
    
    
    $
    4,244Valerent
    
    
    1,155
    
    
    
    1,830
    
    
    
    4,201
    
    
    
    5,106Total
    
    $
    1,155
    
    
    $
    2,690
    
    
    $
    4,469
    
    
    $
    9,350Loss from operations of discontinued subsidiaries:Stratasoft
    
    $
    
    
    
    $
    (892
    )
    
    $
    (260
    )
    
    $
    (2,190
    )Valerent
    
    
    (291
    )
    
    
    (40
    )
    
    
    (663
    )
    
    
    (168
    )Total
    
    
    (291
    )
    
    
    (932
    )
    
    
    (923
    )
    
    
    (2,358
    )Gain (loss) on disposal of discontinued operations:Stratasoft
    
    
    
    
    
    
    
    
    
    
    302
    
    
    
    Telecom and Computer Products Divisions
    
    
    
    
    
    
    (6
    )
    
    
    469
    
    
    
    58Cumulative effect of change in accounting method at
Stratasoft
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    566Income tax benefit
    
    
    
    
    
    
    (237
    )
    
    
    
    
    
    
    (531
    )Loss from discontinued operations, net of income
taxes
    
    $
    (291
    )
    
    $
    (701
    )
    
    $
    (152
    )
    
    $
    (2,335
    )
  September 30,
    
    
    December 31,2006
    
    
    2005Current assets of discontinued operations:Net receivables
    
    $
    270
    
    
    $
    1,706Inventory
    
    
    12
    
    
    
    592Costs and earnings in excess of billings
    
    
    
    
    
    
    266Total
    
    $
    282
    
    
    $
    2,564Noncurrent assets of discontinued operations:Property and equipment, net
    
    $
    106
    
    
    $
    392Patents, net
    
    
    
    
    
    
    653Other noncurrent assets
    
    
    
    
    
    
    12Total
    
    $
    106
    
    
    $
    1,057Current liabilities of discontinued operations:Accounts payable
    
    $
    163
    
    
    $
    620Billings in excess of costs and earnings
    
    
    
    
    
    
    201Accrued expenses
    
    
    149
    
    
    
    1,376Deferred revenue
    
    
    17
    
    
    
    644Current portion of long-term debt
    
    
    
    
    
    
    95Total
    
    $
    329
    
    
    $
    2,936Long-term liabilities of discontinued operations:Long-term debt
    
    $
    
    
    
    $
    7
 8. Earnings Per Share
   17




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator for basic and diluted earnings per share:Net income (loss) from continuing operations
    
    $
    562
    
    
    $
    466
    
    
    $
    651
    
    
    $
    (4,826
    )Loss from discontinued operations, net of income taxes
    
    
    (291
    )
    
    
    (701
    )
    
    
    (152
    )
    
    
    (2,335
    )Net income (loss)
    
    $
    271
    
    
    $
    (235
    )
    
    $
    499
    
    
    $
    (7,161
    )Denominator for basic earnings per share 
weighted-average shares outstanding
    
    
    6,419,501
    
    
    
    5,975,392
    
    
    
    6,233,674
    
    
    
    5,613,614Effect of dilutive securities  shares issuable from
assumed conversion of common stock options and
restricted stock
    
    
    864,760
    
    
    
    
    
    
    
    957,757
    
    
    
    Denominator for diluted earnings per share 
weighted-average shares outstanding
    
    
    7,284,261
    
    
    
    5,975,392
    
    
    
    7,191,431
    
    
    
    5,613,614
  9. Elimination of Minority Interest in InterNetwork Experts, Inc.
  10. Texas Margin Tax
  11. Commitments and Contingencies
 Litigation Inacom Corp v. I-Sector Corporation, f/k/a Allstar Systems, Inc.
  Leases
 
    
    A lease term of eighty-four months ending January 31, 2014.
    
    Base rent of $20 per month, gross. Under the current lease, occupancy expenses
such as electricity, gas, water, janitorial, and security averaging approximately $280 per
year are paid by the Company. Under the New Lease these costs are included in the base
rent.
    
    A buildout allowance of $31 to be used by the Company to partially offset the
costs of remodeling the leased premises and first floor common areas. The buildout
allowance was provided by reducing the monthly lease payment from $21 to $20.
 18




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##### Table of Contents




    
    A security deposit of $20 is required, which is a reduction from the $38
currently held by Allstar.
    
    The Company has the option to terminate the lease at the end of the sixtieth or
seventy-second month of the lease term. In order to exercise its option, the Company is
required to provide Allstar with a minimum of 180 days advance written notice of its intent
to terminate the lease. If 360 days of advance written notice is given by the Company, a
termination fee of one months base rent is immediately payable, and if 180 days of advance
written notice is given by the Company, a termination fee of two months base rent is
immediately payable.
    
    At any time during the term of the lease, Allstar has the right to pay the
Company in cash the amount of unamortized buildout allowance, after which the monthly basic
rent payable under the lease increases from $20 to $21 for the remaining term of the lease.
    
    The Company has the option to renew the lease for two additional terms of five
years each at the lesser of the then prevailing fair market rental rate or 105% of the base
rent under the New Lease.
  12. Restatement
  Total Cost ofTotal Revenue
    
    Products and Services
    
    Gross ProfitThree Months Ended September 30, 2005:As previously reported
    
    $
    36,469
    
    
    $
    31,014
    
    
    $
    5,455As restated
    
    $
    33,163
    
    
    $
    27,708
    
    
    $
    5,455Nine Months Ended September 30, 2005:As previously reported
    
    $
    91,947
    
    
    $
    78,375
    
    
    $
    13,572As restated
    
    $
    82,810
    
    
    $
    69,238
    
    
    $
    13,572
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Special notice regarding forward-looking statements
  19




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##### Table of Contents



General
   Results Of Operations
 Period Comparisons.
 Three Months Ended September 30, 2006 Compared To the Three Months Ended September 30, 2005
 Three Months Ended September 30,2006
    
    
    2005Amount
    
    
    %
    
    
    Amount
    
    
    %(As restatedNote 12)Revenue:Products
    
    $
    39,847
    
    
    
    88.1
    
    
    $
    28,922
    
    
    
    87.2Services
    
    
    5,397
    
    
    
    11.9
    
    
    
    4,241
    
    
    
    12.8Total revenue
    
    
    45,244
    
    
    
    100.0
    
    
    
    33,163
    
    
    
    100.0Gross profit:Products
    
    
    6,632
    
    
    
    16.6
    
    
    
    4,106
    
    
    
    14.2Services
    
    
    1,517
    
    
    
    28.1
    
    
    
    1,349
    
    
    
    31.8Total gross profit
    
    
    8,149
    
    
    
    18.0
    
    
    
    5,455
    
    
    
    16.4Selling, general and administrative expenses
    
    
    7,432
    
    
    
    16.5
    
    
    
    4,545
    
    
    
    13.7Operating income
    
    
    717
    
    
    
    1.5
    
    
    
    910
    
    
    
    2.7Interest and other income (expense), net
    
    
    (112
    )
    
    
    (0.2
    )
    
    
    (178
    )
    
    
    (0.5
    )Income tax expense
    
    
    43
    
    
    
    0.1
    
    
    
    266
    
    
    
    0.8Income from continuing operations
    
    
    562
    
    
    
    1.2
    
    
    
    466
    
    
    
    1.4Loss from discontinued operations, net of income taxes
    
    
    (291
    )
    
    
    (0.6
    )
    
    
    (701
    )
    
    
    (2.1
    )Net income (loss)
    
    $
    271
    
    
    
    0.6
    
    
    $
    (235
    )
    
    
    (0.7
    )
 Revenue
 20




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##### Table of Contents



Gross Profit
 Selling, General and Administrative Expenses
 Operating Income
 Interest and Other Income (Expense), Net
 Loss from discontinued operations, net of tax.
 Net income (loss)
 Tax Loss Carryforward.
 Nine Months Ended September 30, 2006 Compared To the Nine Months Ended September 30, 2005
 Nine Months Ended September 30,2006
    
    
    2005Amount
    
    
    %
    
    
    Amount
    
    
    %(As restated note 12)Revenue:Products
    
    $
    95,480
    
    
    
    86.6
    
    
    $
    74,239
    
    
    
    89.6Services
    
    
    14,718
    
    
    
    13.4
    
    
    
    8,571
    
    
    
    10.4Total revenue
    
    
    110,198
    
    
    
    100.0
    
    
    
    82,810
    
    
    
    100.0Gross profit:Products
    
    
    17,410
    
    
    
    18.2
    
    
    
    10,923
    
    
    
    14.7Services
    
    
    3,778
    
    
    
    25.7
    
    
    
    2,649
    
    
    
    30.9Total gross profit
    
    
    21,188
    
    
    
    19.2
    
    
    
    13,572
    
    
    
    16.4
 21




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##### Table of Contents



Nine Months Ended September 30,2006
    
    
    2005Amount
    
    
    %
    
    
    Amount
    
    
    %(As restated note 12)Selling, general and administrative expenses
    
    
    20,278
    
    
    
    18.4
    
    
    
    17,599
    
    
    
    21.3Operating income (loss)
    
    
    910
    
    
    
    0.8
    
    
    
    (4,027
    )
    
    
    (4.9
    )Interest and other income (expense), net
    
    
    (215
    )
    
    
    (0.2
    )
    
    
    (272
    )
    
    
    (0.3
    )Income tax expense
    
    
    44
    
    
    
    0.0
    
    
    
    527
    
    
    
    0.6Income (loss) from continuing operations
    
    
    651
    
    
    
    0.6
    
    
    
    (4,826
    )
    
    
    (5.8
    )Loss from discontinued operations, net of income taxes
    
    
    (152
    )
    
    
    (0.1
    )
    
    
    (2,335
    )
    
    
    (2.8
    )Net income (loss)
    
    $
    499
    
    
    
    0.5
    
    
    $
    (7,161
    )
    
    
    (8.6
    )
 Revenue
 Gross Profit
 Selling, General and Administrative Expenses
 Operating Income (Loss)
 Interest and Other Income (Expense), Net
 Loss from discontinued operations, net of tax.
 Net income (loss)
 Tax Loss Carryforward.
 22




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##### Table of Contents



Liquidity and Capital Resources
 Sources of Liquidity
  Accounts Receivable.
 Inventory.
 Contractual Obligations
   Credit Facility.
 
    
    The agreement provides a discretionary line of credit up to a maximum aggregate amount of
$40,000 to purchase inventory from CPC approved vendors.
    
    The agreement provides a working capital revolving line of credit under the above line of
credit with an aggregate outstanding sublimit of $10,000 within the overall $40,000 limit.
    
    The working capital revolving line of credit incurs interest payable monthly at the rate
of prime plus 0.5% per annum.
    
    The agreement contains customary covenants regarding maintenance of insurance coverage,
maintenance of and reporting collateral, and submission of financial statements. The
agreement also contains restrictive financial covenants measured as of the end of each
calendar quarter as detailed further below.
    
    The line of credit is collateralized by substantially all of our assets.
 23




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##### Table of Contents




    
    The line of credit is available until December 27, 2007, at which time it is renewable
for up to two years at the lenders discretion.
  Total Credit Facility
    
    $
    40,000Borrowing base limitation
    
    
    (10,590
    )Total borrowing capacity
    
    
    29,410Less interest-bearing borrowings
    
    
    (4,307
    )Less non-interest bearing advances included in accounts payable
    
    
    (25,034
    )Total unused availability
    
    $
    69
      Cash Flows.
 Operating Activities.
  Investing Activities.
 24




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##### Table of Contents



Financing Activities.
 Related Party Transactions
   
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
   
 Item 4. Controls and Procedures
   
 PART II. OTHER INFORMATION
 
 Item 6. Exhibits
  25




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##### Table of Contents



INX Inc.Date: November 2, 2006
    By:
    /s/ BRIAN FONTANABrian Fontana, Vice Presidentand Chief Financial Officer 26




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##### Table of Contents



Index to Exhibits
 ExhibitNo.
    
    Description
    
    Filed Herewith or Incorporated by Reference From: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.
 27