UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K


(Mark One)


R ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2010





£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





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 No.)1955 Lakeway Drive, Lewisville, TX

75057(Address of principal executive offices)

(Zip code)





Registrant’s telephone number:(469) 549-3800





Securities registered pursuant to Section 12(b) of the Act:





Title of Each Class

Name of Each Exchange on Which RegisteredCommon stock, par value $0.01

OTC Bulletin Board





Securities registered pursuant to Section 12(g) of the Act:  None





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes £     No R





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes £     No R





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, and (2) has been subject to such filing requirements for the past 90 days.  Yes £     No R





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).  Yes £     No £





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  Yes £     No R





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 £

(Do not check if a smaller reporting company)
Smaller reporting company R





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 aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of the common stock on June 30, 2010, as reported on the NASDAQ Global Market, was approximately $37,053,581.





The number of shares of common stock, $0.01 par value, outstanding as of May 16, 2011 was 9,669,872.





DOCUMENTS INCORPORATED BY REFERENCE: None




1





INX Inc. and Subsidiaries





FORM 10-K


For the Year Ended December 31, 2010





TABLE OF CONTENTS





PageExplanatory Note
3PART IItem 1
Business
5Item 1A
Risk Factors
13Item 1B
Not applicable
18Item 2
Properties
19Item 3
Legal Proceedings
19Item 4
(Removed and reserved)
19PART IIItem 5
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
20Item 6
Not applicable
21Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
21Item 7A
Quantitative and Qualitative Disclosures About Market Risk
43Item 8
Financial Statements and Supplementary Data
44Item 9
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
81Item 9A
Controls and Procedures
82Item 9B
Other Information
85PART IIIItem 10
Directors, Executive Officers, and Corporate Governance
86Item 11
Executive Compensation
90Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
93Item 13
Certain Relationships and Related Transactions, and Director Independence
94Item 14
Principal Accountant Fees and Services
94PART IVItem 15
Exhibits and Financial Statement Schedules
94SIGNATURES
95EXHIBIT INDEX
96





2




Explanatory Note





Overview of Restatement





In this Annual Report on Form 10-K, INX Inc. (the “Company” or “INX”):





1.
Restates its Consolidated Balance Sheet as of December 31, 2008, and the related Consolidated Statements of Operations, Stockholders’ Equity and Cash Flows for the year ended December 31, 2008, and the related disclosures in Notes to Consolidated Financial Statements;2.
Restates its Unaudited Quarterly Financial Data for the first three quarters in the year ended December 31, 2008; and


3.
Amends its Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) as it relates to the year to date quarterly information previously provided in Form 10-Q for each quarter in the year ended December 31, 2009;





Contemporaneously with the filing of this Annual Report, the Company is also restating the Condensed Consolidated Financial Statements for the quarters ended March 31, 2009, June 30, 2009 and September 30, 2009 as presented in the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2010,  June 30, 2010 and September 30, 2010.





[Amounts are presented in thousands except share, per share, par value and percentages in all parts of this Annual Report on Form 10-K, except in Part III, the exhibits and unless otherwise stated.]





Background on the Restatement





As previously disclosed in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on March 26, 2010, the Company announced that it was delaying its fourth quarter earnings release (for the year ended December 31, 2009) and that it would not file its Annual Report on Form 10-K for the fiscal year 2009 by its due date in order to allow the Company additional time for the reexamination of its revenue recognition under Accounting Standards Codification (ASC) 605-25, Revenue Recognition, Multiple-Element Arrangements, previously referred to as Emerging Issues Task Force No. 00-21 (“EITF 00-21”), “Revenue Arrangements with Multiple Deliverables”.





In the Company’s Current Report on Form 8-K filed with the SEC on June 21, 2010, the Company announced that the Audit Committee of its Board of Directors, upon the recommendation of management, had determined that its previously issued financial statements included in its Annual Report on Form 10-K/A for the fiscal year ended December 31, 2008, its Quarterly Report for the quarter ended March 31, 2009 on Form 10-Q/A and for the quarters ended June 30, 2009 and September 30, 2009 on Form 10-Q, should no longer be relied upon as a result of certain errors affecting the timing of recognition of revenues and costs of revenues.





The restated financial statements correct the following errors in the recognition of revenue associated with the proper:





1.
Application of EITF 00-21, affecting the timing and presentation of revenue recognized (“00-21 Adjustments”) for the:a.
Proper determination of contracts to which EITF 00-21 was applicable and the related units of accounting for such contracts,b.
Proper determination of linkage between contracts, reflecting aggregation of single contracts into multiple element arrangements since they were negotiated as a package, andc.
Proper assessment of whether or not the Company had vendor specific objective evidence (“VSOE”) of the fair value of the various deliverables within arrangements containing multiple deliverables, as well as (i) the timing of revenue recognition based upon the relative fair value of the deliverables within the arrangement for deliverables for which we are able to establish the fair value. (ii) the allocation of the total arrangement consideration between the various elements of the arrangement based upon the relative fair value of the deliverables within the arrangement for multi-element arrangements, and, (iii) the deferral of revenue for the entire arrangement in situations where the arrangement contained remaining undelivered deliverables for which we are not able to establish the fair value.


2.
Identification of customer contracts with special customer acceptance terms which require deferral of revenues and related costs of revenues and commissions until customer acceptance was obtained (“Special Acceptance Terms”),3.
Identification of contract shipping terms resulting in the incorrect timing of recognition of revenues and related costs of sales and commissions (“Shipping Terms”), and


4.
Identification of products that are maintenance, support, and installation services provided by third parties as the primary obligor of the service, which requires presentation of the revenue reported by the Company net of the cost of the services provided by the third party (“Net Presentation”).




3


In addition, the Company also determined that an error was made in the accounting for contingent consideration (“earn-out”) paid in August 2006 in connection with the acquisition of substantially all of the assets of InfoGroup Northwest, Inc. (“InfoGroup”).  The InfoGroup assets were acquired under an asset purchase agreement in June 2005 and most InfoGroup employees became employees of the Company.  As part of the earn-out provision, cash and common stock were paid by the Company to the InfoGroup shareholder based upon the InfoGroup branch offices achieving specific financial performance targets, which were recorded as goodwill.  The selling shareholder decided to give a portion of the earn-out to former employees of InfoGroup who had become employees of the Company as a result of the acquisition (“Employee Payments”).  Under GAAP, including guidance promulgated by the SEC, actions of economic interest holders in a company may be imputed to the company itself. When a selling shareholder gives acquisition-related payments to Company employees who were not selling shareholders, these payments are viewed as resulting from services that are assumed to have benefited the Company and therefore must be further recorded as a non-cash charge to compensation expense.  In effect, the Employee Payments are in substance a separate transaction from the Company’s acquisition of the InfoGroup assets, which should have been recorded as a separate non-cash charge to compensation expense. The Employee Payments were therefore required to be reflected in the consolidated financial statements for the year ended December 31, 2006 as non-cash compensation expense in the amount of $672, and the selling shareholder was deemed to have made a corresponding capital contribution to the Company.  The compensation expense is a non-cash charge because the payments were made directly by the selling shareholder from the acquisition proceeds received from the Company.  The Company did not expend additional cash with respect to the compensation charge.  The correction had no effect on total stockholders’ equity at December 31, 2006.





The adjustments made as a result of the restatement are more fully discussed in Note 2, Restatement of Previously Issued Financial Statements, of the Notes to Consolidated Financial Statements in Part II, Item 8 and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of this Annual Report. For a description of the control deficiencies identified by management as a result of our internal reviews, and management’s plan to remediate those deficiencies, see Part II, Item 9A, Controls and Procedures.





Previously filed Annual Reports on Form 10-K and quarterly reports on Form 10-Q for the periods affected by the restatement have not been amended. Accordingly, investors should no longer rely upon the Company’s previously released financial statements for these periods and any earnings releases or other communications relating to these periods.





4





PART I





Item 1.  Business.





Special Notice Regarding Forward-Looking Statements





This report 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 including, but not limited to, statements contained in “Part I, Item 1. Business” and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 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. These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.





Important factors that may affect these projections or expectations include, but are not limited to: the behavior of financial markets including fluctuations in interest or exchange rates; continued volatility and further deterioration of the capital markets; the impact of regulation and regulatory, investigative, and legal actions; strategic actions, including acquisitions and dispositions; future integration of acquired businesses; future financial performance of major industries which we serve; the loss of a significant client or significant business from a client; difficulties in completing a contract or implementing its provisions; and numerous other matters of national, regional, and global scale including those of the political, economic, business, and competitive nature. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. The “Risk Factors” set forth in Part I, Item 1A of this report could also cause actual results to differ materially from the forward-looking statements.





General





We are a technology solutions provider focused on delivering three broad categories of technology infrastructure to enterprise customers. Our solutions architectures consist of three broad categories of technology infrastructure: network infrastructure, unified communications and collaboration (“UC&C”) and data center.  Our value-added proposition is delivered in the form of combining our professional services with select manufacturer’s products to address our customers’ needs.  Our professional services include consulting, planning and design engineering, implementation engineering and system integration.  We provide technology infrastructure solutions for enterprise-class organizations such as corporations, healthcare organizations, educational institutions, and Federal, state and local governmental agencies.





Network infrastructure is typically the foundation for the other two categories and usually includes data transport such as basic network routing and switching, wireless networking, WAN optimization and acceleration, and network security solutions. UC&C solutions consist of Internet Protocol (“IP”) network-based voice and video communication solutions as well as integrated software productivity applications such as “presence”, instant messaging, contact center applications, portals and middleware.  Data center solutions consist of 10 Gigabit Ethernet (“10GbE”) data center network infrastructure, virtualized server infrastructure solutions including data center servers and data center server virtualization software, network based storage solutions such as network attached storage (“NAS”) and storage area networks (“SAN”) as well as systems management and administration software solutions.





Our network infrastructure and UC&C solutions are primarily based on Cisco Systems, Inc. (“Cisco”) technology.  Cisco is a market leader for UC&C systems for enterprise-class organizations.  Our network storage solutions are primarily based on NetApp, Inc. (“NetApp”) and EMC Inc. (“EMC”) network based storage technology. Our data center networking solutions are primarily based on Cisco’s Nexus technology.  Our data center server solutions are primarily based on Cisco’s Unified Computing technology.  Our virtualization solutions are based primarily on VMware, Inc. (“VMware”) technology. While our solutions also include products from other manufacturers or software vendors, products from these four manufacturers make up over 90% of our total product revenue.





Our specialization and expertise enables us to effectively compete in the marketplace.  Our skills and abilities are examined and evaluated extensively and routinely by these four key vendors through specialized training, certification and representational authorization.  Additionally, we have significant experience planning, designing, integrating, implementing and supporting these enterprise technology solutions, all of which is the basis for our ability to deliver superior solutions to our customers.





We utilize a comprehensive customer engagement methodology, which we refer to as our Strategic Delivery Framework (“SDF”), which is a framework for managing the evaluation of the customer’s needs, and planning and implementing a project.  We believe this framework is a competitive advantage since it ensures a very thorough, consistent and efficient process of planning, design and implementation of our solutions.  The result is a solution which addresses the customer’s business needs more completely and minimizes the risk of a failed solution design since the planning process is so thorough.  This in the end provides our customers solutions that provide better business value at lower risk.




5





Industry Overview





We are involved in providing our customers with technology infrastructure solutions in three broad categories of technology infrastructure: network infrastructure, UC&C, and data center.





Network Infrastructure





IP is the network data communications protocol deployed in modern enterprise organization networks and includes both local area network (“LAN”) and wide area network (“WAN”) Ethernet network technology.  The IP network has become the platform for virtually all enterprise communications, including data communications between systems within an organization, between the organization and the internet, email communications, voice communications, and, increasingly, video communications. The convergence of data, voice, and video into a single seamless IP communications infrastructure provides improved productivity and cost savings. The foundation of a converged communications platform is a robust, secure, high-performance, high-availability IP network infrastructure.





In addition, there is a trend towards connecting NAS and SAN data storage within data centers using 10GbE IP networking using iSCSI and Fibre Channel over Ethernet (“FCoE) technology.  FCoE allows IP network and SAN data traffic to be consolidated using a single high throughput, low latency network switch, reducing a variety of hardware, software, utility and maintenance costs.  The use of iSCSI and FCoE technology to consolidate data center networks onto a single IP network, together with server virtualization technology, are key factors driving how data centers are designed and operated.





The increasing complexity of the IP network and network attribute requirements is creating demand for expertise in the design and support of network infrastructure for all enterprise organizations.  Organizations need to optimize their network architecture to achieve the required performance levels for their various network applications, data flows, and number of users.





The network security market includes firewall, unified threat management, intrusion detection and prevention, and virtual private network solutions. Network security is a central component of information and communications technology architecture. Traditionally, much of the focus has been on securing the network edge through firewalls on Internet and Extranet connections. Now the expectation is for security to be applied pervasively throughout the entire network infrastructure. Among the security issues facing enterprise organizations today are the following:





·
Virtualization of the data center is both improving security and introducing new security risks.·
Attacks can be initiated through freely available tools from inside the network or the internet and mobile devices can become infected while outside the controls of the network and reconnect behind the firewall.


·
Wireless solutions and unused network ports that are not properly secured create network access points that can be compromised.·
Many organizations have policies driven by regulatory and compliance requirements (such as HIPPA and Sarbanes-Oxley) that dictate enhanced security stances.





As security needs increase, the complexity and design requirements for security solutions also increase.  Well designed enterprise-class security solutions address the enterprise organizations’ needs by weaving security throughout the information and communications technology infrastructure going much farther than simply securing the network edge.





IP network infrastructure has become a technology environment in which there is a dependency between the component parts of the network that maintain relationships through time and change; a more fully cooperating system that is flexible, stable, predictable and more easily managed. This has caused IP network infrastructure to evolve from route-specific performance to endpoint-to-endpoint performance, from route-level resiliency to service-level resiliency and from box-level management to system-wide management.





As the network evolves to perform higher-level functions, the complexity of the IP network infrastructure and its architecture, by necessity, is increasing. As the network becomes more complex, the role of network architecture design, business process-mapping, policy decision making, implementation and ongoing service and support of the network play increasingly important roles.





Enterprise organizations are becoming more reliant on the IP network as a mission-critical component of their operations.  It is becoming more important and commonplace to have all network devices remotely monitored and managed so that issues can be identified and resolved before they become problems, and problems in turn become network failures. Research firm IDC expects monitoring technologies to continue advancing rapidly to address security and interference disruptions.




6





International Data Corporation (“IDC”)  reports that network infrastructure upgrades ranked as the number two priority as far as enterprise IT equipment spending in 2010, followed by virtualization.  The total worldwide market for enterprise Ethernet network switches and routers, which together make up the majority of the total market as measured by IDC, was approximately $29.7 billion in 2010 according to IDC, with approximately 41% of the total market consisting of the North American market.  IDC expects the North American market for enterprise network infrastructure to grow at a compound annual growth rate (“CAGR”) of 7.9% between 2009 and 2015.




Unified Communications and Collaboration





IP telephony and Voice-over-IP (“VoIP”) are terms for technology that uses an organization’s IP network to perform voice communications that have traditionally been conducted by conventional private branch exchange (“PBX”) telephone systems used by enterprises and by the public switched telephone network (the “PSTN”). IP telephony uses IP network infrastructure and software running on a server to handle the call processing (telephone call set-up and tear-down), commonly referred to as a “soft switch” to replace the telephony functions performed by an organization’s PBX telephone system.  VoIP is the process of utilizing the IP network to perform voice communications.  UC&C is a unified environment for e-mail, voicemail, instant messaging, voice and video communications functionality on a single, unified platform or system.  A converged communications model enables data, voice and video communications to be conducted on a single IP network infrastructure.





Implementation of UC&C on the IP network can result in both significant long-term cost savings and increased productivity to enterprises. Some of the potential long-term savings that an enterprise might experience include:





·
Elimination of redundant traditional telephone line circuits and cabling systems;·
Reduced cost resulting from circuit consolidation to few or only on point of interface to the PSTN;·
More efficient support of telephone and data functions by a single support organization rather than multiple service providers and in-house support departments;


·
Simplified administration and lower costs for moves, adds and changes because an IP telephony handset can be moved or changed within an enterprise without rewiring the PBX or re-programming the telephone number; and


·
Elimination or reduction of long distance toll charges as internal voice communications are moved to a fixed-cost data network that often already exists between the enterprise’s remote facilities.




IP telephony systems, including management systems, voice gateways, and messaging systems, are easier to set up than traditional PBX telephone systems and they save time and boost productivity. Implementation of IP telephony is commonly an enterprise organization’s first move toward a converged communications solution.





Unified messaging solutions allow a user to decide how and when they will receive messages. Unified messaging allows for retrieval of any communication form by any method, such as accessing voice messages from a computer or text e-mail, converted to speech, over the phone. This provides a greater level of control over communications, improving organizational productivity. Unified messaging is typically an enterprise organization’s second move toward a more completely converged communications solution.





Video communications that are seamlessly integrated into voice communications are available, but are not yet popular, in part because video communications require more expensive “endpoints” used on the office desktop and use substantial network bandwidth. Over time, as network bandwidth improves (which requires network upgrades), video compression technology is further improved, and as high quality touch screen video endpoints become less expensive, integrated voice and video communications will become more popular.





IP telephony as implemented by most enterprises often requires upgraded or new IP network infrastructure. Older networks designed solely for data communications are inadequate to accommodate an appropriate “quality of service” for IP telephony. To meet the demands of voice communications delivered across an IP network, the network infrastructure must be able to distinguish between data communication packets and voice communication packets. It must be set up to be capable of prioritizing and allocating the use of system resources between voice and data while maintaining an appropriate quality of service.  As video becomes an increasingly popular component of business communications, network load will increase substantially due to the substantial network bandwidth required for video communications, driving more network routing and switching upgrades.





IDC measures and reports on various components of the overall UC&C market.  IDC believes the total worldwide market for enterprise “IP PBX” (IP telephony voice systems) and related phones (telephone handsets) was approximately $6.9 billion in 2010 and they expect a CAGR of approximately 9.4% between 2009 and 2014.  IDC believes the total worldwide market for videoconferencing, including both standard video conferencing rooms and desktop videoconferencing, as well as telepresence systems, was approximately $3.0 billion in 2010 and they expect a CAGR of approximately 18.4% between 2010 and 2015.  They believe the total worldwide market for enterprise telepresence systems was approximately $842 million in 2010 and expects that market to grow at a CAGR of 29.2% between 2010 and 2015.





Data Center





Enterprises are increasingly adopting an IT infrastructure environment in which a combination of software application functionality is delivered to end users through a virtualized, hosted methodology where their IP network and the Internet are used as the means of connectivity to the application (“Cloud Computing”) and using remotely replicated servers and storage for seamless disaster recovery.




7





The data center is being transformed by the virtualization of server and desktop computing resources. VMware is the primary software vendor in the virtualization market. Virtual server software made by VMware, the product we use for our virtualization solutions, provides a hardware emulation layer between the physical server and the operating system and related stacks of applications.  Computing resources are allocated to each virtual computer based on rules established through the virtualization software to satisfy the needs of each server operating environment.  Therefore, operating system software and applications that were previously incompatible can share the same physical server.





Virtualization of the physical servers allows the physical servers to be used by any number of VMware virtual servers.  Similarly, network based storage allows the virtual servers to access storage that is not part of a physical server.  Data center virtualization creates demands on the data center network used to communicate between the various server, storage, security and other devices in the virtualized data center.  The use of iSCSI and FCoE for data center connectivity is driving demand for upgrades of data center network infrastructure using 10GbE networking technology.





Virtualization technology is reducing server sprawl by ending the prior practice of running a single application on a single particular physical server.  As a consequence, virtualization is also solving the substantial underutilization that occurred in the prior one-server-for-one-application environment.  Furthermore, virtualization software management tools enable enterprises to add, change or remove physical servers without any application downtime since the organization can move virtual servers from one physical server to another physical server while an application is running. Migrating to a virtualized data center environment enhances reliability and redundancy of the data center while improving new application turn up time.  Since a physical server is no longer required to run a new application, turning up a new application can be done using a virtual server, which can be created in minutes.  Virtualization is contributing to substantially increased data center network loads due to the requirement to send data across the network between the various physical servers that are processing data in the virtualized server environment and the shared NAS and SAN devices where data is stored in a virtualized data center environment.





Storage in a virtualized data center is typically not part of any particular physical server since the applications that need to access the data might be actually running on any one of a number of different physical servers that are being utilized by the virtual server upon which the application is running. Shared network storage also allows enterprises to more efficiently consolidate data and manage, replicate, and mirror information in order to eliminate points of failure that occur during downtime or loss of information, and to provide seamless failover capability. The need for improved productivity as well as regulatory requirements have also accelerated the need for enterprise organizations to protect data, rapidly recover applications, and maintain uninterruptible access to information. Networked storage improves availability and scalability, facilitates a tiered-storage approach, and reduces storage management complexity and cost.





Information, or data, can be classified by criticality, age, and the level of accessibility required. Such a lifecycle-oriented management approach allows an organization to prioritize and make intelligent decisions about the logistics and economics of how to manage different data types. The use of remote data duplication and replication for the purpose of data backup and automated and transparent failover capability, which is a huge improvement over typical “backup” operations, requires transporting huge volumes of data outside of the data center, across the LAN and WAN network fabric of an organization in order to transport the data to another physical data center location.   This is another source of rapidly increasing network load, and data replication is a driver of increased demand for NAS and SAN capacity.





These trends are creating substantial change in the market for data center solutions, which are reflected in the forecasted markets for data center networking technologies, NAS and SAN storage systems and server.  IDC estimates the total North American market for datacenter networking technologies, including datacenter Ethernet switching, Fibre Channel switching, InfiniBand switching, datacenter Layer 4-7 switching and WAN application delivery, was approximately $3.7 billion in 2010 and estimated growth at a CAGR of 5.7% between 2009 and 2014.  While the overall total market is estimated to grow, the market for some technologies within the overall market is expected to decrease in size, while others are expected to grow rapidly, in part due to replacing technologies that are becoming less popular.  For instance, as 10GbE continues to gain in popularity over Fibre Channel for connectivity of NAS and SAN storage devices, the total worldwide market for Fibre Channel switches used in NAS and SAN storage device connectivity is estimated to experience a CAGR of negative 2.2% between 2010 and 2015, according to IDC, while the market for Layer 2-3 Ethernet switches used in data center networking is estimated to grow 9.2% over the same period.  Similarly, the market for Fibre Channel Host Bus Adaptors used to connect servers to Fibre Channel networks is estimated to experience negative growth of 1.5% while the market for 10GbE Converged Network Adaptors used to connect servers to 10GbE is estimated to grow 66.0% over the same period.





IDC estimates the worldwide market for NAS and SAN enterprise storage systems (the total market excluding direct attached storage and mainframe computing storage) was approximately $18.5 billion in 2010 and they expect growth of approximately 10.6% between 2009 and 2014. However, the portion of this market excluding Fibre Channel SAN systems, which, according to IDC, made up approximately 54.8% of the total market in 2010, is expected to experience growth of approximately 19.0% between 2009 and 2014 according to IDC.




8





IDC estimates that the Americas total market for servers running the Windows server operating system, which is the segment of the total server market measured by geographic region and operating system that we believe most closely approximates our target market, was $9.4 billion in 2010, and estimates growth at a CAGR of 5.1% between 2009 and 2014.  However, IDC estimates that the Americas market for servers priced between $100,000 and $250,000, which we believe more closely approximates the target market for larger, more powerful servers used in virtualized data centers within the enterprise market that we target, will grow at a rate of 19.1%.





Our Business





We serve enterprise-class organizations through expert technology consulting that intelligently architects, deploys and supports UC&C solutions, virtualized data center solutions and the underlying network infrastructure solutions.  Our solution offerings facilitate the complete life-cycle of our customer’s technology infrastructure investment in an effort to maximize their return on investment.  We accomplish this by learning about our clients’ unique business requirements, consulting with them around specific value propositions that can enhance their business processes and then deploying these technology solutions.  In addition we are tightly aligned with our industry leading vendor partners in order to optimize our ability to represent their offerings to our clients.  We manage four strategic vendor relationships:





Cisco Systems. We are a national provider of Cisco based solutions. We use Cisco’s products in our network infrastructure solutions including wireless and network security, unified communications including video and data center solutions including their unified computing server products.  Cisco is our main vendor, representing about 80% of our product sales.  We employ numerous Cisco certified engineers and have been awarded numerous top partner designations from Cisco.





We are a Cisco Gold Certified Partner and we have the following Cisco Master Specialization designations:·
Master Security·
Master UC


·
Master Managed Services





We have the following Advanced Specialization designations from Cisco:·
Advanced Data Center Networking Infrastructure·
Advanced Routing and Switching


·
Advanced Unified Communications·
Advanced Security


·
Advanced Wireless LAN




Wehave the following Advanced Technology Partner designations with Cisco:·
Cisco Telepresence·
Customer Voice Portal


·
Data Center Unified Computing·
Unified Contact Center Enterprise


·
Video Surveillance





Our Cisco-based UC&C solutions consist of IP network-based voice and video communication solutions as well as integrated software productivity applications such as presence, instant messaging, contact center applications, portals and middleware.  Our Cisco based virtual data center solutions consist of unified computing systems servers, and Nexus based data center network switching and routing. These combine with other vendor solutions to create our data center solutions architectures.  Our Cisco network infrastructure solutions consist of network routing and switching, wireless networking, WAN/application optimization and acceleration and IT security.





VMware.  We are one of VMware’s National Premier Partners, their highest level of certification. Our VMware practice areas encompass key VMware competencies such as Infrastructure Virtualization (server virtualization), Business Continuity and Desktop Virtualization. VMware software is the foundation for the virtualization layer of most of our data center solutions offerings.





NetApp.  We are a national provider of NetApp, solutions. Our Netapp based network storage solutions consist of storage systems and data management software from NetApp.  We also use NetApp products to create tightly integrated and tested virtualized data center infrastructure solutions.   The NetApp “Flexpod” stackable reference architecture featuring NetApp storage systems and software plus NetApp V-series storage controllers, Cisco Nexus Switches, Cisco UCS Servers and VMW v-Sphere Server Virtualization software reduces risk for our customers that are implementing a virtualized data center infrastructure.




9











Awards presented by our key vendor partners show the strength of our relationships with our key vendor partners as well as the level of experience and expertise that we believe gives us a competitive advantage.  Recent important National- and Global-level awards include:





·
VMware Global Desktop Competency Partner of the Year  -  February 2011·
Cisco Global Services Partner of the Year  -  May 2010


·
Cisco US/Canada Services Partner of the Year  -  May 2010·
Cisco US/Canada Technology Excellence Partner of the Year  -  May 2010


·
VMware Americas Solution Provider of the Year  -  February 2010·
Cisco Customer Satisfaction Excellence Award  -  2010, 2009 and 2008





As the advanced technology infrastructure solutions and architectures we offered continued to increase in capability their ability to positively impact the enterprises productivity has increased. We determined that having a more systematic and consistent approach to our customer engagement methodology is critical to ensuring that our customers received the most business value while minimizing the risks in adopting these new complex technology infrastructure solutions.  In 2008 we implemented a comprehensive customer engagement methodology, which we refer to as our “Strategic Delivery Framework” or “SDF”, which was initially piloted in one of our regions.  We believe this framework is a competitive advantage since it ensures a very thorough and consistent process of planning, design and implementation of our solutions that is consistent across all our regions.  Through detailed planning, SDF ensures that the solutions design focuses on the customers business needs while minimizing the risk of a failed solution design.  The result we believe are solutions that provide better business value at lower risk.





We believe that by focusing on a few critically important technology practice areas as well as a few top vendors we can provide the best value to our customers. Network infrastructure continues to be the framework on which all technology infrastructure solutions are built.  UC&C solutions have broadened to include video.  This will add more capabilities and more business value to these solutions but will also increase the complexity of these solutions. In our data center practice area, customers now desire a hybrid virtualized environment.  This is a data center that allows the customer to seamlessly use both internal data center resources as well as external data center resources when they are needed.  They would like to be able to dynamically move virtual servers between their own internal data center and an external data center provider.  This would allow them to have extra capacity in case of peak load limitations or emergencies.  These new hybrid cloud data center configurations will add more capabilities to our data center solutions but will also increase their complexity.





Products





We generate revenue from the sale of products. The network infrastructure and UC&C products we sell consist principally of Cisco products. The data center products we sell consist primarily of NAS and SAN products manufactured by NetApp, and EMC, and server virtualization software from VMware.  Products from these four manufacturers account for more than 90% of our total product sales.  We also sell various other products that are best-of-class in certain areas of the solutions that we provide.  We attempt to ship products directly from our supplier to our customer and we therefore keep very little product inventory on hand.





Gross margin on product sales was 21.2%, 21.2% and 17.9% for 2010, 2009 and 2008, respectively. Product sales revenue grew 47.8% and decreased 12.4% in 2010 and 2009, respectively, and made up 87.2%, 81.1% and 82.0% of total revenue in 2010, 2009 and 2008, respectively.





Services





We generate services revenue by providing services to our customers. We provide two basic categories of services, the first are professional services related to the planning, design and implementation and the second are managed services related to  post-sale support services as well as managed services related to providing hosted solution offerings.  Gross margin on services revenue was 21.1%, 25.7% and 29.0% for 2010, 2009 and 2008, respectively. Services revenue decreased 6.8% and 7.0% in 2010 and 2009, respectively, and made up 12.8%, 18.9% and 18.0% of total revenue in 2010, 2009 and 2008, respectively.





Professional Services





We perform professional services related to the business consulting, technology planning, design, systems engineering, implementation and support of the solutions we provide. To provide these services, we employ certified, highly trained and experienced engineering staff. We have developed not only substantial expertise in the various areas of technology that we provide, but also methodologies for designing and implementing the solutions that we provide.




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Gross margin on our professional services revenue was 16.0%, 21.5% and 24.6% for 2010, 2009 and 2008, respectively. Professional services revenue decreased 9.9% and 10.2% in 2010 and 2009, respectively, and represented 10.2%, 15.6% and 15.4% of total revenue in 2010, 2009 and 2008, respectively.





Managed Services





We provide managed services, including remote monitoring, diagnostics and management of a customers’ network infrastructure, data center, wireless network and security technology, as well as virtual or private cloud based hosted solutions offerings.  These managed services are performed using specialized toolsets and a network support center with technical staff that are specifically trained and experienced, both generally in terms of the technology we support as well as the toolsets that we use to provide the support. Customers are notified of system issues either real time or through reporting, and we solve detected problems either remotely or onsite.  Through our managed services offering we believe we are well positioned to provide service offerings that enterprise-class organizations desire and require.





Gross margin on our managed support services revenue was 41.4%, 46.1% and 55.4% for 2010, 2009 and 2008, respectively. Managed support services revenue grew 8.1% and 11.5% in 2010 and 2009, respectively, reflecting 2.6%, 3.3% and 2.6% of total revenue in 2010, 2009 and 2008, respectively.





Competition





Competition for the solutions we provide is fragmented, and we compete with numerous large and small competitors.  For network infrastructure solutions we compete with various small and large technology infrastructure oriented systems integrators and VARs, such as IBM Global Services, and telephone and data circuit service providers such as AT&T and Verizon.  For UC&C solutions we compete with other Cisco partners that are specialized in providing UC&C.  We also compete against other manufacturers and their VAR partners, including Avaya, Polycom, Shortel, and Mitel among others.  For data center solutions we compete with other technology infrastructure solution providers and system integrators, and technology VARs that focus on providing data center solutions.  The competitors are primarily either resellers that provide solutions using many of the same manufacturers products that we represent such as EMC, NetApp, Cisco, Dell, VMware or they also may provide solutions using other competing manufacturer’s products such as Hitachi storage, IBM, HP and others.  We also may compete directly against some of these manufacturers when they are involved in selling to the customer directly.





We believe that the principal competitive factor when marketing our solutions is our overall business architectural approach combined with our solution delivery methods. Other important factors include total cost, technical competence, the strength of the relationship with the customer, the quality of our support services, the perception of the customer regarding our financial and operational ability to manage a project and to provide high quality service, and the quality of our relationship with the manufacturer of the major products being supplied as a part of the solution.  We compete against smaller firms based on our growing national presence and our specialization and expertise.  We compete against larger firms based on our narrow focus and expertise compared to their appearance as an unfocused generalist.





The Geographic Markets We Currently Serve





A majority of our customers are located in, or make significant decisions concerning their technology infrastructure in the markets in which we maintain branch offices. We believe it is important to have local management, sales and engineering staff in a metropolitan market in order to be a leading competitor in the market. Our corporate offices are located in Dallas, Texas. As of March 31, 2011 we maintained sixteen branch offices in the following markets:





•Los Angeles, California
•Oklahoma City, Oklahoma
•El Paso, Texas•Sacramento, California
•Eugene, Oregon
•Houston, Texas•Boise, Idaho
•Portland, Oregon
•San Antonio, Texas•Boston, Massachusetts
•Austin, Texas
•Seattle, Washington•Albuquerque, New Mexico
•Dallas, Texas
•Washington, D.C.•Raleigh, North Carolina





Our Washington, DC branch office markets primarily to the Federal government.





We plan to continue expanding into new geographic markets through either acquisition or on a de novo basis.  Expanding to new markets creates a two-fold opportunity for us. First, adding new geographic markets provides us with new customer opportunities in those new markets. Second, with each new market served we enhance our ability to grow and develop our brand recognition factor and increase our ability to win customer opportunities in many of our other markets because of the increased national presence provided by the additional market.




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Customers





Our customers include private enterprises in numerous industries including healthcare, legal, energy, utilities, hospitality, transportation, manufacturing, finance and entertainment, as well as Federal, state and local governmental agencies and private and public educational organizations. We currently focus on mid-tier enterprise organizations with 200 to 50,000 users of telephone and/or networked computer technology.  As we continue to expand to new geographic markets we will pursue even larger customers. A majority of our customers are located in, or make significant decisions concerning their network infrastructure, voice and video communications, and data center technology infrastructure, in the markets in which we maintain branch offices. In addition to our direct sales model to enterprise customers, we also provide technical consulting and project management services as a sub-contractor for other systems integrators as well as manufacturers that are involved directly with a customer. Based on billing activity during 2010 we conducted business with approximately 1,747 customers of which 68% were customers that had conducted business with us during the previous two years.  No single customer represented 10% or more of our revenue for the years ended December 31, 2010, 2009 and 2008.





Sales and Marketing





We market our products and services primarily through our sales organization comprised of account managers, presales architects and customer service representatives. These sales personnel are compensated in part based on productivity, specifically the profitability of sales that they participate in developing. We also promote our services through general and trade advertising, and participation in trade shows. Our sales organization works closely with our vendor partners sales organizations to identify opportunities.





Supply and Distribution





We purchase products for the technology solutions we provide to our customers. The majority of our product purchases are made directly from our four strategic vendors.  We also purchase products through various distribution channels either based on the manufacturers’ decision regarding distribution or when a product is not available directly from a manufacturer.  We attempt to keep minimal inventory on hand and attempt to purchase inventory only as needed to fulfill orders. The substantial majority of the product that we purchase is shipped directly from our suppliers to our customers in order to shorten the business cycle and avoid handling the product in our facilities.





Employees





At April 30, 2011, we employed approximately 470 people. Of these, approximately 150 were employed in sales, marketing and customer service, 185 were employed in engineering and technical positions and 135 were employed in administration, finance and management information systems. We believe our ability to recruit and retain highly skilled and experienced technical, sales and management personnel has been, and will continue to be, critical to our ability to execute our business plans. None of our employees are represented by a labor union nor are any subject to a collective bargaining agreement. We believe our relations with our employees are good.





NASDAQ Delisting Determination





On April 12, 2011, the NASDAQ Listings Qualification Panel (the “Panel”) of The NASDAQ Stock Market (“NASDAQ”) notified us that it had determined to delist our common shares from the NASDAQ Global Select Market and to suspend trading in our common shares effective at the open of market on April 14, 2011. The Panel’s determination was made in connection with our non-compliance with the filing requirements set forth in Listing Rule 5250(c)(1) due to not having filed certain of our periodic reports. The Panel’s decision represents the final decision of NASDAQ. In accordance with Listing Rule 5830 and Rule 12d2-2 under the Securities Exchange Act of 1934, NASDAQ filed an application on Form 25 with the SEC to delist our securities from NASDAQ.





Our common shares are currently quoted on the OTC Markets Group Inc. and trade under the symbol “INXI”. We have already filed a listing application to facilitate a resumption of trading on NASDAQ as soon as possible.  In that regard, we believe that upon making the necessary filings with the SEC we will satisfy all applicable requirements for listing on the NASDAQ.  We anticipate that NASDAQ will be able to complete the review of the listing application on an expedited basis but, there can be no assurance of when or if our common shares will be re-listed. See “Item 1A. Risk Factors”.





General Information





Our corporate headquarters is located at 1955 Lakeway Drive, Lewisville, Texas 75057 (Dallas) and our telephone number is (469-549-3800). Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available without charge from us on our website at http://www.INXI.com, as soon as reasonably practicable following the time they are filed with or furnished to the SEC. Reports filed with the SEC may also be viewed at www.sec.gov or obtained at the SEC Public Reference Room in Washington, D.C. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.




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Item 1A.  Risk Factors.





There are many risk factors that affect our business and results of operations, some of which are beyond our control. You should carefully consider the risks below before making an investment decision.  Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.





Global market and economic conditions may adversely affect our business and results of operations.





Current economic conditions remain uncertain.  Challenging economic times make it extremely difficult for our customers and us to accurately forecast and plan future business activities, and they could cause our customers to slow spending on our products and services, which could delay and lengthen sales cycles. Continued concerns about the possible systemic impact of inflation or deflation, volatility in energy costs, geopolitical issues, and added concerns fueled by the Federal government deficits and interventions in the U.S. financial and credit markets have contributed to instability and diminished long-term expectations for the U.S. and global economy.  If the conditions in the general economy and the markets in which we operate worsen from present levels, our business, financial condition and results of operations could be materially and adversely affected.





We have a number of customers that are Federal, state and local governmental agencies and private and public educational organizations. These agencies and organizations are experiencing revenue shortfalls and spending cutbacks that may cause significant reductions in their capital expenditures in general or by specifically reducing their spending on information technology.





A significant portion of our customers are based in Texas.





Until mid-2005 we were primarily a Texas-based organization and the majority of our customers were in Texas. While we are less dependent upon Texas customers now than we were a few years ago, a significant portion of our customers are still based in Texas. Therefore, our revenue and hence our profitability would be materially affected by a downturn in economic conditions in Texas, in addition to any general economic downturn in the United States. If demand for the products and services we provide to customers in Texas decreases, our business, financial condition and results of operations could be significantly harmed.





We have a history of losses and may continue to incur losses.





During 2009 we incurred a net loss from continuing operations of $4,295, including a $2,380 non-cash charge for impairment of goodwill. During 2008, we incurred a net loss from continuing operations of $12,785, including a total non-cash charge of $13,071 noncash charge for goodwill, intangible asset, and property and equipment impairments. Although profitable in 2010, we cannot assure you that we remain profitable in upcoming quarters or years. In order to maintain profitability, we will have to maintain or increase our operating margin, and we cannot provide any assurance that we will be able to do so. If we are unable to increase revenue, if our gross margins decrease, or if we are unable to control our operating expenses, our business could produce losses. Whether we are able to remain profitable in the future will depend on many factors, but primarily upon the commercial acceptance of the technologies and product lines that we promote the use of, including products developed and marketed by Cisco.





Our goodwill and intangible assets may become impaired.





As of December 31, 2010, we had $13,532 of goodwill and $1,015 of intangible assets after recognizing impairment charges of $2,560, $2,380, and $13,071 in 2010, 2009 and 2008, respectively. Goodwill and intangible assets represent approximately 13% of our total assets as of December 31, 2010.  Generally accepted accounting principles in the United States of America require that we review the value of goodwill on at least an annual basis or when indicators of impairment arise to determine whether the recorded value has been impaired and should be reduced. In the event that our goodwill or long-lived assets are further impaired in the future, any impairment charge could have a material impact on our financial position and results of operations, and could harm the trading price of our common stock.





Our success depends on maintaining our relationship with Cisco and other key vendors.





The majority of our revenue for the years ended December 31, 2010, 2009 and 2008 was derived from or dependent upon the sale of Cisco products and related services. We anticipate that these products and related services will continue to account for a substantial portion of our revenue for the foreseeable future. We have a contract with Cisco to purchase the products that we resell, and we purchase substantially all of our Cisco products directly from Cisco. Cisco can terminate this agreement on relatively short notice. Cisco has designated us an authorized reseller and we receive certain benefits from this designation, including special pricing and payment terms. We have in the past, and may in the future, purchase Cisco-centric products from other sources. When we purchase Cisco-centric products from sources other than Cisco, the prices are typically higher and the payment terms are not as favorable. Accordingly, if we are unable to purchase directly from Cisco and maintain our status as an authorized reseller of Cisco network products, our business could be significantly harmed. In addition, we are also dependent upon maintaining our relationship with a number of other key vendors, including NetApp and VMware. If we are unable to purchase products from any of our key vendors, including Cisco, NetApp and VMware, or from other sources on terms that are comparable to the terms we currently receive, our business would be harmed and our operating results and financial condition would be materially and adversely affected.




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Our success depends on a broad market acceptance of Cisco-centric IP telephony and network infrastructureproducts.





In the area of IP telephony solutions we offer only Cisco-centric solutions.  Cisco is our main vendor and represents about 80% of our product sales. We believe that Cisco is a substantial player in the IP telephony marketplace and will continue to offer competitive, state-of-the-art technology.  However, we cannot assure you that the Cisco-centric IP telephony products we offer will continue to obtain broad market acceptance. Competition, technological advances and other factors could reduce demand for, or market acceptance of, the Cisco-centric IP telephony products and services we offer. In addition, new products, applications or services may be developed that are better adapted to changing technology or customer demands and thus could render our Cisco-centric products and services unmarketable or obsolete. To compete successfully, the Cisco-centric IP telephony products we offer must achieve broad market acceptance and we must continually enhance our related software and customer services in a timely and cost- effective manner. If the Cisco-centric IP telephony products we offer fail to achieve broad market acceptance, or if we do not adapt our existing services to customer demands or evolving industry standards, our business, financial condition and results of operation could be significantly harmed.





Our profitability depends on Cisco product pricing and incentive programs.





Our annual and quarterly gross profits and gross margins on product sales are materially affected by Cisco product pricing and incentive programs.  These incentive programs currently enable us to qualify for cash rebates or product pricing discounts and are generally earned based on sales volumes of particular Cisco products and customer satisfaction levels. We recognized vendor incentives as a reduction of cost of sales amounting to $18,169, $13,345, and $10,118 representing 5.8%, 5.9%, and 3.9% of total revenues in 2010, 2009 and 2008, respectively.  From time to time Cisco changes the criteria upon which qualification for these incentives is based, and there is no assurance that we will continue to meet the program qualifications. Cisco is under no obligation to continue these incentive programs. In addition, we expect our future profitability to be impacted not only by pricing and incentive programs of Cisco, but also by the pricing and incentive programs of NetApp, VMware and other key vendors.





Our success depends on broad market acceptance of virtualization technology, and in particular the virtualization technology of VMware.





The market for virtualization software is characterized by rapid technological change, evolving industry standards and strong customer demand for new products, applications and services. As is typical of a new and rapidly evolving industry, the demand for, and market acceptance of virtualization technology is highly uncertain. We cannot assure you that the use of virtualization technology will be widespread.





Our business depends on the level of capital spending by enterprises for the technology infrastructure products and services we offer.





As a supplier of technology infrastructure solutions, our business depends on the level of capital spending for such solutions by enterprise organizations in our markets. We believe that an enterprise’s investment in technology infrastructure and related services depends largely on general economic conditions that can vary significantly as a result of changing conditions in the economy as a whole. The market for the solutions we provide may continue to grow at a modest rate or not at all, or may decrease. If our customers decrease their level of spending, our revenue and operating results would likely be adversely affected. To the extent that customers continue to delay moving forward with projects because of actual or perceived economic uncertainty and reduced credit availability, our revenue and profitability will be negatively impacted.





Our strategy contemplates geographic expansion, which we may be unable to achieve and which is subject to numerous uncertainties.





A component of our strategy is to become one of the leading national providers of the technology infrastructure solutions we provide. To achieve this objective, we must either acquire existing businesses or hire qualified staff in other locations throughout the country and open new offices. Identifying and acquiring existing businesses is a time-consuming process and is subject to numerous risks. Qualified personnel are in demand, and we expect the demand to increase as the market for the technology infrastructure solutions that we provide grows. We will also likely face competition from our competitors and from local and regional competitors in the markets we attempt to enter. A rapid expansion in the size and geographical scope of our business is likely to introduce management challenges that may be difficult to overcome. We cannot assure you that we will be successful in expanding our operations or achieving our goal of becoming a national provider of technology infrastructure solutions. An unsuccessful expansion effort would consume capital and human resources without achieving the desired benefit and would have an adverse effect on our business, financial condition and results of operations.




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We may require financing to achieve expansion of our business operations, and failure to obtain financing may prevent us from carrying out our expansion plans.





We may need additional capital to grow our business. Our business plan calls for the expansion of sales of our technology infrastructure solutions to enterprises in geographical markets where we currently do not operate, including expansion through acquisitions. If we do not have adequate capital or are not able to raise the capital to fund our business objectives, we may have to delay the implementation of our business plan. We can provide no assurance that we will be able to obtain financing if required, or, if financing is available, there is no assurance that the terms would be favorable to existing stockholders. Our ability to obtain financing is subject to a number of factors, including general market conditions, investor acceptance of our business plan, our operating performance and financial condition, and investor sentiment. These factors may affect the timing, amount, terms or conditions of additional financing available to us.





We require access to significant working capital and vendor credit to fund our day-to-day operations. Our failure to comply with the financial and other covenants under our working capital facility could lead to a termination of the agreement and an acceleration of our outstanding debt.





We require access to significant working capital and vendor credit to fund our day-to-day operations. Our credit facility with Castle Pines contains a number of financial and other covenants. We have had to obtain several covenant waivers over the past year related to our failure to timely file reports under the Securities Exchange Act of 1934.  A breach of these financial or other covenants, unless waived, would be a default under the credit facility. Upon an event of default, Castle Pines may terminate the credit facility and/or declare all amounts outstanding under the credit facility immediately due and payable. The acceleration of our debt could have a material adverse effect on our financial condition and liquidity. Additionally, the amount of working capital available to us under the credit facility is dependent upon the amount and quality of our accounts receivable. A significant default or payment delays of our accounts receivable could materially adversely affect our borrowing base and our access to sufficient working capital, which would have an adverse effect on our business, financial condition and results of operations. In addition, there is a risk that Castle Pines Capital may be unable to continue the financing relationship with us due to unforeseen future credit market problems or changes in their credit granting criteria.





We may be unable to manage our growth effectively, which may harm our business.





The ability to operate our business in a rapidly evolving market requires effective planning and management. Our efforts to grow including by acquisition, have placed, and are expected to continue to place, a significant strain on our personnel, management systems, infrastructure and other resources. We have had mixed results regarding our ability to efficiently and cost effectively manage our growth and demonstrate leverage in our business model.  Our ability to manage future growth effectively will require us to improve our business and financial processes.  If we are unable to adequately manage our growth  our operations could be adversely affected and our growth could be impaired.





Our operating results have historically been volatile, and may continue to be volatile, particularly from quarter to quarter.





We sell products and services that may be bundled together as one or more solutions.  Revenue recognition requirements for our offerings are complex and may require deferral of revenue recognition until all of our delivery commitments have been completed. During quarterly periods in which we realize lower levels of revenue, our profitability may be negatively impacted. Our quarterly operating results have historically depended on, and may fluctuate in the future as a result of, many factors including:





·
Volume and timing of orders received during the quarter;·
Timing of revenue recognition due to contract terms;


·
Gross margin fluctuations associated with the mix of products sold;·
Patterns of capital spending by enterprises;


·
The timing of new product announcements and releases;·
The cost and effect of acquisitions;·
The amount and timing of sales incentives from our key vendors we may receive in any particular quarter, particularly Cisco, which can vary substantially;


·
The availability and cost of products and components from our suppliers; and


·
Credit availability.





As a result of these and other factors, we have historically experienced, and may continue to experience, fluctuations in sales and operating results.




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We have many competitors and expect new competitors to enter our market, which could increase price competition and may affect the amount of business available to us and the prices that we can charge for our products and services.





The markets for all of the products and services we offer are extremely competitive and subject to rapid change. Growth in demand for many of the technology infrastructure products we provide has been predicted by various industry analysts, and we therefore expect competition to increase as existing competitors enhance and expand their products and services and as new participants enter the market. A rapid increase in competition could negatively affect the amount of business that we obtain and the prices that we are able to charge.




Additionally, many of our competitors and potential competitors have substantially greater financial resources, customer support, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships than we do. We cannot be sure that we will have the resources or expertise to compete successfully. Compared to us, our competitors may be able to:





·
Develop and expand their products and services more quickly;·
Adapt faster to new or emerging technologies and changing customer needs;


·
Take advantage of acquisitions and other opportunities more readily;·
Negotiate more favorable agreements with vendors;


·
Devote greater resources to marketing and selling their products; and·
Address customer service issues more effectively.





Some of our competitors may also be able to increase their market share by providing customers with additional benefits or by reducing their prices. We cannot be sure that we will be able to match price reductions by our competitors. In addition, our competitors may form strategic relationships with each other to better compete with us. These relationships may take the form of strategic investments, joint-marketing agreements, licenses or other contractual arrangements that could increase our competitors’ ability to serve customers. A material and/or rapid increase in competition would likely have an adverse affect on our business, financial condition and results of operations.





Business acquisitions, dispositions or joint ventures entail numerous risks and may disrupt our business, dilute stockholder value or distract management attention.





As part of our business strategy, we have completed acquisitions and plan to continue to consider acquisitions of, or significant investments in, businesses that offer products, services and technologies complementary to ours. Any acquisition could materially adversely affect our operating results and/or the price of our securities. Acquisitions involve numerous risks, some of which we have experienced and may continue to experience, including:


·
Unanticipated costs and liabilities·
Difficulty of integrating the operations, products and personnel of the acquired business;
 ·
Difficulty retaining key personnel of the acquired business;·
Difficulty retaining customers of the acquired businesses;
 ·
Difficulties in managing the financial and strategic position of acquired or developed products, services and technologies;·
Difficulties in maintaining customer relationships, in particular where a substantial portion of the target’s sales were derived from products that compete with products that we currently offer;
 ·
The diversion of management’s attention from the core business;·
Inability to maintain uniform standards, controls, policies and procedures; and
 ·
Damage to relationships with acquired employees and customers as a result of integration of the acquired business.


To the extent that shares of our common stock or rights to purchase common stock are issued in connection with any future acquisitions, dilution to our existing stockholders will result and our earnings per share may suffer. Any future acquisitions may not generate the anticipated level of revenue and earnings or provide any benefit to our business, and we may not achieve a satisfactory return on our investment in any acquired businesses.





We may not be able to hire and retain highly skilled technical employees, which could affect our ability to compete effectively and could adversely affect our operating results.





We depend on highly skilled technical personnel to provide the services we sell to our customers. To succeed, we must hire and retain employees who are highly skilled in rapidly changing communications and data center technologies. In particular, as we implement our strategy of focusing on technology infrastructure solutions, we will need to:





·
Hire more employees with experience providing technology infrastructure solutions; and·
Retrain our current personnel to sell and support the technology infrastructure solutions we currently sell and that we intend to market in the future.





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Individuals who can perform the services we need to provide our products and services are scarce. Because the competition for qualified employees in our industry is intense, hiring and retaining qualified employees is both time-consuming and expensive. We may not be able to hire enough qualified personnel to meet our needs as our business grows or to retain the employees we currently have. Our inability to hire and retain the individuals we need could hinder our ability to sell our existing products, systems, software or services or to develop and sell new ones. If we are not able to attract and retain qualified employees, we will not be able to successfully implement our business plan and our business will be harmed.





We rely extensively on computer systems to process transactions, summarize results and manage our business. Disruptions in both our primary and secondary (back-up) systems could harm our ability to operate our business.





Although we have independent, redundant, and primary and secondary computer systems, given the number of individual transactions we have each year, it is critical that we maintain uninterrupted operation of our business-critical computer systems. Our computer systems, including our back-up systems, are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, internal or external security breaches, catastrophic events such as fires, earthquakes, tornadoes and hurricanes, and/or errors by our employees. If our computer systems and our back-up systems are damaged or cease to function properly, we may have to make significant investment to fix or replace them, and we may suffer interruptions in our operations in the interim. Any material interruption in both of our computer systems and back-up systems may have a material adverse effect on our business or results of operations.





Almost 20% of our stock is controlled by our executive chairman, who has the ability to substantially influence the election of directors and other matters submitted to stockholders.





James H. Long beneficially owns 1,896,356 shares of our common stock, which represent approximately 17.1% of our shares outstanding and beneficially owned shares as of May 16, 2011. As a result, he has and is expected to continue to have the ability to significantly influence the nomination and the election of our board of directors and the outcome of all other issues submitted to our stockholders. The interests of this principal stockholder may not always coincide with our interests or the interests of other stockholders, and he may act in a manner that advances his best interests and not those of other stockholders. One consequence to this substantial influence or control is that it may be difficult for investors to add or remove management of the company and to stop the addition or removal of management of the Company. It could also deter unsolicited takeovers, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices.





Nasdaq has recently delisted our common shares from quotation on its exchange.





The Nasdaq Stock Market (the “NASDAQ”) has recently delisted our common shares from quotation on its exchange for failure to continue to meet its continued listing requirements. The delisting of our common shares from NASDAQ could have material adverse effects by, among other things:




·
reducing the liquidity and market price of our common shares;·
reducing the number of investors willing to hold or acquire our common shares, thereby further restricting our ability to obtain equity financing;
 ·
reducing the amount of news and analyst coverage of the Company; and·
reducing our ability to retain, attract and motivate our directors, officers and employees.


Our stock price may be subject to substantial volatility, and the value of your investment may decline.





Our common stock is traded on OTC Bulletin Board, and trading volume may be limited or sporadic. The market price of our common stock has experienced, and may continue to experience, substantial volatility. During 2010, our common stock traded between $4.25 and $6.78 per share, on volume ranging from approximately 0 to 262,600 shares per day. As a result of the relatively low and inconsistent volume of trading and the trading price volatility, the current price for our common stock is not necessarily a reliable indicator of our fair market value. The price at which our common stock will trade may fluctuate as a result of a number of factors, including the number of shares available for sale in the market, quarterly variations in our operating results, new products or services by us or competitors, regulatory investigations or determinations, acquisitions or strategic alliances by us or our competitors, recruitment or departures of key personnel, the gain or loss of significant customers, changes in the estimates of our operating performance, actual or threatened litigation, market conditions in our industry and the economy as a whole. Volatility in the price of our common stock may depress the trading price of the common stock our common stock. The risk of volatility and depressed prices of our common stock also applies to warrant holders who receive shares of common stock upon conversion.





Numerous factors, including many over which we have no control, may have a significant impact on the market price of our common stock, including:




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·
Announcements of new products or services by us or our competitors;·
Current events affecting the political, economic and social situation in the United States and other countries where we operate;·
Trends in our industry and the markets in which we operate;·
Changes in financial estimates and recommendations by securities analysts;
 ·
Acquisitions and financings by us or our competitors;·
The gain or loss of a significant customer;·
Quarterly variations in operating results;·
The operating and stock price performance of other companies that investors may consider to be comparable; and
 ·
Purchases or sales of blocks of our securities.


Furthermore, stockholders may initiate securities class action lawsuits if the market price of our stock drops significantly, which may cause us to incur substantial costs and could divert the time and attention of our management.





Limitations and constraints associated with buying and selling our stock.





The trading of our Common Stock on the OTC Bulletin Board rather than on NASDAQ may reduce the price of our Common Stock and the levels of liquidity available to our stockholders. Furthermore, because of the limited market and generally low volume of trading in our Common Stock, our Common Stock is more likely to be affected by broad market fluctuations, general market conditions, fluctuations in our operating results, changes in the market’s perception of our business, and announcements made by us, our competitors or parties with whom we have business relationships. Additionally, because of state securities or “blue sky” laws, we cannot avail our self of federal preemption (which adds substantial compliance costs to securities issuances, including pursuant to employee option plans, stock purchase plans and private or public offerings of securities), and purchasers of shares of our Common Stock may find it difficult to resell their shares at prices quoted in the market or at all. Our ability to issue additional securities for financing or other purposes, or to otherwise arrange for any financing we may need in the future, may also be materially and adversely affected by the fact that our securities will not be traded on NASDAQ. The fact that our Common Stock will not be traded on NASDAQ could also have other adverse effects on us in addition to the foregoing, including, without limitation, the loss of confidence in us by current and prospective suppliers, customers, employees and others with whom we have or may seek to initiate business relationships.





Future issuances of common stock and hedging activities may depress the trading price of our common stock.





Any future issuance of equity securities, including the issuance of shares upon exercise of outstanding warrants, could dilute the interests of our existing stockholders, and could substantially decrease the trading price of our common stock. As of April 30, 2011, we had outstanding approximately 1.2 million options and warrants to acquire our common stock at prices between $0.82 and $12.63 per share. We may issue equity securities in the future for a number of reasons, including to finance our operations and business strategy, in connection with acquisitions, to adjust our ratio of debt to equity, to satisfy our obligations upon the exercise of outstanding warrants or options or for other reasons. The market price of our common stock could decline significantly if we or our existing stockholders sell a large number of shares, if we issue a large number of shares of stock in connection with future financing activities, acquisitions or otherwise, or due to the perception that such sales could occur. These factors also could make it more difficult to raise funds through future offerings of common stock.





Provisions in our certificate of incorporation, bylaws, charter documents and Delaware law could discourage a change in control, or an acquisition of us by a third party, even if the acquisition would be favorable to you, thereby and adversely affect existing stockholders





Our certificate of incorporation and the Delaware General Corporation Law contain provisions that may have the effect of making more difficult or delaying attempts by others to obtain control of our company, even when these attempts may be in the best interests of stockholders. For example, our certificate of incorporation also authorizes our board of directors, without stockholder approval, to issue one or more series of preferred stock, which could have voting and conversion rights that adversely affect or dilute the voting power of the holders of common stock. Delaware law also imposes conditions on certain business combination transactions with “interested stockholders.”





These provisions and others that could be adopted in the future could deter unsolicited takeovers or delay or prevent changes in our control or management, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices. These provisions may also limit the ability of stockholders to approve transactions that they may deem to be in their best interests.





Item 1B.  Not applicable.




18




Item 2.  Properties.





We conduct operations at the following leased sites:





•Los Angeles, California
•Oklahoma City, Oklahoma
•El Paso, Texas•Sacramento, California
•Eugene, Oregon
•Houston, Texas•Boise, Idaho
•Portland, Oregon
•San Antonio, Texas•Boston, Massachusetts
•Austin, Texas
•Seattle, Washington•Albuquerque, New Mexico
•Dallas, Texas
•Washington, D.C.•Raleigh, North Carolina





We lease 34,656 square feet in Lewisville, Texas (Dallas) for our corporate offices and Dallas regional office and 19,830 square feet in Houston, Texas for our accounting offices and Houston regional office. The Dallas corporate offices and regional office lease expires in 2015 and is renewable for one additional five year term.  The remainder of the locations range in size from approximately 1,000 to 10,000 square feet and lease terms range from one to five years. Some office leases contain scheduled base rent increases over the term of the lease and may include periodic rent adjustments for real estate taxes, insurance and other operation expenses applicable to the property.  We believe our existing leased properties are in good condition and suitable for the conduct of our business.





Item 3.  Legal Proceedings





On February 6, 2009, we filed a lawsuit in the United States District Court Eastern District of Texas styled InternetworkExperts, Inc. v. International Business Machines Corporation(“IBM”)claiming 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. On January 29, 2010, a settlement agreement was executed covering all outstanding litigation between the parties, resulting in IBM paying INX the amount of $310 less legal fees of $112.





On August 3, 2009, we 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 lease of our then Houston, Texas location.  On August 13, 2010, we received payment of $140 in settlement of the litigation.





On July 15, 2010, we filed a lawsuit in the United States District Court for the District of New Mexico (“US District Court”) styled INX, Inc. v. Azulstar, Inc.(“Azulstar”) seeking compensatory and punitive damages plus interest, attorneys’ fees, and costs of suit for breach of contract, tortious interference with business relations and existing contractual relations, and other claims.  Azulstar provided professional services as a subcontractor to us in connection with the State of New Mexico, Department of Transportation RailRunner Wireless System Project (“RailRunner Project”).  Azulstar hired subcontractors to assist it and is alleged by us not to have paid at least one subcontractor for work performed.  In addition to paying Azulstar directly for all work performed except $23 withheld, we paid an Azulstar subcontractor $146 directly.  The duplicate costs were charged to professional services cost of sales in the quarter ended December 31, 2009.  On September 10, 2010, Azulstar filed a motion to dismiss our claim for failure to join a party under Rule 19 of the Federal Rules of Civil Procedure (“Motion to Dismiss”).  The US District Court has not yet ruled on the motion.  The amount of damages and costs that may ultimately be recovered by us, if any, cannot be determined at this time.  The Motion to Dismiss includes statements that Azulstar intends to file breach of contract claims against us.  The nature and extent of Azulstar’s allegations cannot be determined and the final outcome of any lawsuit that may be filed by Azulstar on this matter cannot be predicted, including whether such threatened lawsuit could have a material adverse effect on our results of operations or financial position.





We are 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, we believe the final outcome of such matters will not have a materially adverse effect on our results of operations, financial position, or cash flows.





Item 4.  (Removed and reserved)




19




PART II





Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities





NASDAQ Listing Requirements





As described earlier in this Annual Report on Form 10-K, NASDAQ suspended trading in our common shares effective at the open of market on April 14, 2011 due to our non-compliance with the filing requirements set forth in Listing Rule 5250(c)(1) due to the delayed filing of certain of our periodic reports. In accordance with Listing Rule 5830 and Rule 12d2-2 under the Securities Exchange Act of 1934, NASDAQ filed an application on Form 25 with the SEC to delist our securities from NASDAQ. Our common shares, par value $0.01, are currently quoted on the OTC Markets Group Inc. under the trading symbol “INXI”.





Market Information





Our common stock is included in the OTC Bulletin Board under the symbol “INXI”.  From September 21, 2007 to April 13, 2011, our common stock traded on the NASDAQ Global Market.  Trading of our warrants on the NASDAQ Global Market ceased on May 7, 2009.  From April 24, 2006 to September 20, 2007, our common stock and warrants traded on the NASDAQ Capital Market.





Common Stock





The following table sets forth the per share price range of our common stock.





High


Low2009First Quarter

$
5.25


$
2.19Second Quarter


5.65



2.36Third Quarter


6.85



4.62Fourth Quarter


7.03



5.372010First Quarter

$
5.75


$
4.54Second Quarter


5.20



4.55Third Quarter


5.20



4.25Fourth Quarter


6.78



5.15





Warrants





The following table sets forth the per share price range of our warrants.





High


Low2009First Quarter

$
0.25


$
0.02Second Quarter


0.19



0.01Third Quarter


—



—Fourth Quarter


—



—2010First Quarter

$
—


$
—Second Quarter


—



—Third Quarter


—



—Fourth Quarter


—



—





As of May 16, 2011, there were 147 stockholders of record of our common stock. On May 16, 2011, the closing sales price of our common stock as reported by the OTC Bulletin Board was $5.50 per share.





Dividend Policy





We have not declared or paid any cash dividends and do not anticipate declaring dividends on our common stock in the foreseeable future.  Our current intention is to retain earnings, if any, to support the future growth of our business.




20





Equity Compensation Plan Information





The following table sets forth:





•
the number of shares of our common stock issuable upon exercise of outstanding options, warrants and rights, separately identified by those granted under equity incentive plans approved by our shareholders and those granted under plans, including individual compensation contracts, not approved by our shareholders (column A),





•
the weighted average exercise price of such options, warrants and rights, also as separately identified (column B), and the number of shares remaining available for future issuance under such plans, other than those shares issuable upon exercise of outstanding options, warrants and rights (column C).





Column A

Column B

Column CNumber of Shares to be Issued Upon Exercise of Outstanding Options, Warrants and Rights

Weighted Average Exercise Price of Outstanding Options, Warrants and Rights

Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Shares Reflected in Column A)As of December 31, 2009:Equity incentive plans approved by shareholders
1,833,753

$5.11

193,923Equity incentive plans not approved by shareholders
—

—

—Totals
1,833,753

$5.11

193,923As of December 31, 2010:Equity incentive plans approved by shareholders
1,530,655

$4.61

225,848Equity incentive plans not approved by shareholders
140,000

—

—Totals
1,670,655

$4.61

225,848





Equity incentive plans are further discussed in Note 8 to consolidated financial statements in Part II, Item 8.





Unregistered Sales of Equity Securities and Use of Proceeds





In December 2008, we issued 6,000 shares of unregistered common stock to an investor relations firm under a services agreement.  The issued shares were valued at $26 as determined by multiplying the shares issued by the closing price per share on December 31, 2008.





On January 5, 2010, we entered into a service agreement with an investor relations firm and per the terms of the agreement issued to them 5,000 unregistered shares valued at $28 on February 1, 2010 and an additional 5,000 unregistered shares valued at $25 on July 1, 2010.  The issued shares were valued by multiplying the shares issued by the closing price per share on each respective date.





Item 6.  Not Applicable




Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations





We begin Management’s Discussion and Analysis of Financial Condition and Results of Operations with a discussion of the Financial Restatement as provided in this Form 10-K and the Form 10-Qs being filed contemporaneously for the 2010 quarterly periods and containing the 2009 quarterly restatements.  We then present a business and financial overview including discussion of recent business combinations, followed by a discussion of our annual results of operations.  This is followed by an analysis of our liquidity and capital resources, a discussion of our critical accounting policies, and a discussion on recent accounting pronouncements.  Lastly, we provide the restated year to date operating results for the first three quarters of 2008 and then a discussion of our results of operations for the 2009 year to date quarterly periods as compared to our results in the corresponding 2008 periods, both as restated. In addition, we have provided the eight quarterly balance sheets for the 2008 and 2009 periods.




21





The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those statements included elsewhere in this report. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under “Item 1A. Risk Factors” and elsewhere in this report.





Financial Restatement





In this Annual Report on Form 10-K, the Company:





1.
Restates its Consolidated Balance Sheet as of December 31, 2008, and the related Consolidated Statements of Operations, Stockholders’ Equity and Cash Flows for the year ended December 31, 2008, and the related disclosures in Notes to Consolidated Financial Statements;2.
Restates its Unaudited Quarterly Financial Data for the first three quarters in the year ended December 31, 2008; and


3.
Amends its Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) as it relates to the year to date quarterly information previously provided in Form 10-Q for each quarter in the year ended December 31, 2009;





Contemporaneously with the filing of this Annual Report, the Company is also restating the Condensed Consolidated Financial Statements for the quarters ended March 31, 2009, June 30, 2009 and September 30, 2009 as presented in the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2010, June 30, 2010 and September 30, 2010.





As previously disclosed in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on March 26, 2010, the Company announced that it was delaying its fourth quarter earnings release (for the year ended December 31, 2009) and that it would not file its Annual Report on Form 10-K for the fiscal year 2009 by its due date in order to allow the Company additional time for the reexamination of its revenue recognition under Accounting Standards Codification (ASC) 605-25, Revenue Recognition, Multiple-Element Arrangement, previously referred to as Emerging Issues Task Force No. 00-21 (“EITF 00-21”), “Revenue Arrangements with Multiple Deliverables”.





In the Company’s Current Report on Form 8-K filed with the SEC on June 21, 2010, the Company announced that the Audit Committee of its Board of Directors, upon the recommendation of management, had determined that its previously issued financial statements included in its Annual Report on Form 10-K/A for the fiscal year ended December 31, 2008, its Quarterly Report for the quarter ended March 31, 2009 on Form 10-Q/A and for the quarters ended June 30, 2009 and September 30, 2009 on Form 10-Q, should no longer be relied upon as a result of certain errors affecting the timing of recognition of revenues and costs of revenues.





The restated financial statements correct the following errors in the recognition of revenue associated with the proper:





1.
Application of EITF 00-21, affecting the timing and presentation of revenue recognized (“00-21 Adjustments”) for the:a.
Proper determination of contracts to which EITF 00-21 was applicable and the related units of accounting for such contracts,


b.
Proper determination of linkage between contracts, reflecting aggregation of single contracts into multiple element arrangements since they were negotiated as a package, andc.
Proper assessment of whether or not we had vendor specific objective evidence (“VSOE”) of the fair value of the various deliverables within arrangements containing multiple deliverables, as well as (i) the timing of revenue recognition based upon the relative fair value of the deliverables within the arrangement for deliverables for which we are able to establish the fair value. (ii) the allocation of the total arrangement consideration between the various elements of the arrangement based upon the relative fair value of the deliverables within the arrangement for multi-element arrangements, and, (iii) the deferral of revenue for the entire arrangement in situations where the arrangement contained remaining undelivered deliverables for which we are not able to establish the fair value.


2.
Identification of customer contracts with special customer acceptance terms which require deferral of revenues and related costs of revenues and commissions until customer acceptance was obtained (“Special Acceptance Terms”),3.
Identification of contract shipping terms resulting in the incorrect timing of recognition of revenues and related costs of sales and commissions (“Shipping Terms”), and


4.
Identification of products that are maintenance, support, and installation services provided by third parties as the primary obligor of the service, which requires presentation of the revenue reported by the Company net of the cost of the services provided by the third party (“Net Presentation”).





22





In addition, the Company also determined that an error was made in the accounting for contingent consideration (“earn-out”) paid in August 2006 in connection with the acquisition of substantially all of the assets of InfoGroup Northwest, Inc. (“InfoGroup”).  The InfoGroup assets were acquired under an asset purchase agreement in June 2005 and most InfoGroup employees became employees of the Company.  As part of the earn-out provision, cash and common stock were paid by the Company to the InfoGroup shareholder based upon the InfoGroup branch offices achieving specific financial performance targets, which were recorded as goodwill.  The selling shareholder decided to give a portion of the earn-out to former employees of InfoGroup who had become employees of the Company as a result of the acquisition (“Employee Payments”).  Under GAAP, including guidance promulgated by the SEC, actions of economic interest holders in a company may be imputed to the company itself. When a selling shareholder gives acquisition-related payments to Company employees who were not selling shareholders, these payments are viewed as resulting from services that are assumed to have benefited the Company and therefore must be further recorded as a non-cash charge to compensation expense.  In effect, the Employee Payments are in substance a separate transaction from the Company’s acquisition of the InfoGroup assets, which should have been recorded as a separate non-cash charge to compensation expense. The Employee Payments were therefore required to be reflected in the consolidated financial statements for the year ended December 31, 2006 as non-cash compensation expense in the amount of $672, and the selling shareholder was deemed to have made a corresponding capital contribution to the Company.  The compensation expense is a non-cash charge because the payments were made directly by the selling shareholder from the acquisition proceeds received from the Company.  The Company did not expend additional cash with respect to the compensation charge.  The correction had no effect on total stockholders’ equity at December 31, 2006.





The adjustments made as a result of the restatement are more fully discussed in Note 2, Restatement of Previously Issued Financial Statements, of the Notes to Consolidated Financial Statements in Part II, Item 8 and Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of this Annual Report. For a description of the control deficiencies identified by management as a result of our internal reviews, and management’s plan to remediate those deficiencies, see Part II, Item 9A, Controls and Procedures.





Previously filed Annual Reports on Form 10-K and quarterly reports on Form 10-Q for the periods affected by the restatement have not been amended. Accordingly, investors should no longer rely upon the Company’s previously released financial statements for these periods and any earnings releases or other communications relating to these periods.





Business and Financial Overview





We are a technology solutions provider, focused on delivering three broad categories of technology infrastructure to enterprise customers.  Our solutions architectures consist of three broad categories of technology infrastructure: network infrastructure, unified communications and collaboration (“UC&C”) and data center.  Our value-added proposition is delivered in the form of combining our professional services with select manufacturer’s products to address our customers’ needs.  Our professional services include consulting, planning and design engineering, implementation engineering and system integration.  We provide technology infrastructure solutions for enterprise-class organizations such as corporations, healthcare organizations, educational institutions, and Federal, state and local governmental agencies.





The market for the technology infrastructure solutions we provide is characterized by rapidly evolving and competing technologies. We compete with larger and better financed entities. We currently have sixteen physical offices in sixteen markets, which are located in Texas, California, Connecticut, Idaho, Massachusetts, New Mexico, North Carolina, Oklahoma, Oregon, Utah, Washington and Washington DC. We market to mid-tier enterprise-class organizations headquartered in, or making purchasing decisions from markets that we serve with branch offices. We plan to continue to expand by establishing additional branch offices in other markets, either by opening new offices or through acquisition.





The normal sales cycle for corporate customers typically ranges from three to six months depending on the nature, scope and size of the project. Our experience with governmental and educational organizations indicates that the sales cycle for these projects is generally about six to twelve months or longer.





We derive revenue from sales of both products and services.  In 2010, 2009 and 2008, sales of products made up 87.2%, 81.1% and 82.0% of total revenue and services revenues made up 12.8%, 18.9% and 18.0% of total revenue, respectively.





Our gross profit margin on product sales is typically lower than our gross margin on service revenues. Our gross margin on product sales was 21.2%, 21.2% and 17.9% for 2010, 2009 and 2008, respectively, and our gross margin on service revenue was 21.1%, 25.7% and 29.0%, respectively, for those same periods. The market for the products we sell is competitive, and we compete with other resellers for our customers’ business.





The principal factors that determine gross margin on product sales include: (a) the mix of deal sizes as large transactions are more competitively bid and therefore have lower margins, (b) the mix of products and their life cycle status as new products and technologies have higher margins, and (c) the status of the customer relationship as newer client relationships may be more competitively bid.





Our annual and quarterly gross margins on product sales are materially affected by vendor incentives, most of which are Cisco incentive programs. The incentive programs sponsored by Cisco currently enable us to qualify for cash rebates or product pricing discounts. The most significant incentive is a Cisco incentive that is generally earned based on sales volumes of particular Cisco products and customer satisfaction levels. The amounts earned and costs incurred under these programs are a reduction to cost of goods sold but also increase our selling, general and administrative expenses related to additional sales commissions. We recognized vendor incentives of $18,169, $13,345 and $10,118 in 2010, 2009 and 2008, respectively.  Our product cost and resulting gross margin can vary significantly from quarter to quarter depending on vendor incentive criteria.




23





The principal factors that determine gross margin on service revenue include: (a) our ability to effectively manage utilization of our technical engineering resources, (b) the mix of different types of service engagements including the mix of fixed price and rate per hour arrangements, and (c) the amount of managed support and hosting services revenues we earned compared with the largely fixed costs to operate or support and hosting center operations.





Our selling, general and administrative expenses include both fixed and variable expenses.  The fixed expenses include facility costs, administrative personnel costs, and some outside professional fees.  The variable expenses are particularly in the form of commissions and travel related costs.  Certain other expenses can rise and fall based on other less predictable factors, including legal fees and bad debt expense, among others.





Our business has grown through acquisition and as a consequence we have, over the course of time, had a variety of goodwill and other intangible assets.  These assets are annually assessed for impairment and in 2010, 2009 and 2008 we incurred substantial impairment charges.  In addition, we routinely structure our business combinations to include a significant portion of contingent consideration.  Based on new accounting guidance effective after December 31, 2008, the estimated value of contingent consideration is recognized when the acquisition is consummated.  Subsequent changes based on actual results or more current estimates are reflected in the Statement of Operations.  Refer to Note 4 for additional information.





Due to our tax operating losses in 2005, 2006, 2007, and 2009 and the income tax benefit from the exercise of stock options, we had accumulated a net operating loss as of December 31, 2009 of approximately $3,510.  At December 31, 2010 all available loss carry-forwards have been utilized as the Company has generated positive taxable income.





Due to our substantial operating losses, at December 31, 2008 and 2009 we maintained a full valuation allowance against our net deferred tax assets.  At June 30, 2010, we released the valuation allowance based on our current expectation that our net deferred tax assets were now realizable.





Acquisitions





Marketware Inc.





On December 31, 2009, we purchased the operations and certain assets, and assumed specified liabilities of Marketware Inc. (“Marketware”).  Marketware, a Sacramento-based provider of Cisco IP-network-based physical security and networking solutions founded in 1982, generated revenue of approximately $5,400 for the 12 months ended December 31, 2009. The acquisition initially added ten employees as part of an expanded Northern California region.





Consideration paid at closing consisted of $350 in cash, of which $35 was initially retained by us under defined holdback provisions and was subsequently paid.  We incurred transaction costs of $21.  First year contingent consideration based on branch office operating income for the year ending December 31, 2010 was $0.  Second year contingent consideration for the year ending December 31, 2011, is a maximum of $1,313, of which up to 50% may be paid in the form of common stock, at our option.





AdvancedNetworX, Inc.





On July 17, 2009, we purchased the operations and certain assets, and assumed specified liabilities of AdvancedNetworX, Inc. (“ANX”).  ANX, 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 created a presence for INX in the Mid Atlantic region.





Consideration at closing totaled $665, consisting of: (a) $465 in cash, (b) $156 in assumed liabilities under customer contracts, (c) $34 in capital lease obligations assumed and (d) 2,000 shares of our common shares valued at $5.08 per share for a total of $10.  The shares were initially held in escrow under holdback provisions as defined in the acquisition agreement and were subsequently issued.  We incurred transaction costs of $16.





First year contingent consideration for the year ending July 31, 2010, based on branch office operating income was $0.  Second and third year contingent consideration based on branch office operating income for the years ending July 31, 2011 and 2012 is a maximum of $700 per year.  Up to 60% of such additional purchase price may be paid in the form of common stock, at our option.





NetTeks Technology Consultants, Inc.





On November 14, 2008, we 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 acquisition created a northeast presence for INX.




24





Consideration paid at closing consisted of $1,350 in cash and 30,770 shares of our common stock, of which 15,385 shares were held in escrow under holdback provisions as defined in the acquisition agreement.  Additional purchase price consideration of $1,500 was paid in cash to NetTeks for exceeding the New England region operating income contribution target for the six month period ending December 31, 2009.  Additional purchase price consideration of $1,700 was earned by NetTeks for exceeding the New England region operating income contribution target for the year ending December 31, 2010. The additional consideration was paid in April 2011, consisting of a cash payment of $850 and the issuance of 113,182 shares of the Company’s common stock with a value of $850.  There is no further contingent consideration.





VocalMash





On December 4, 2008, we purchased the operations of VocalMash, a business owned and operated by our 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.





Consideration paid at closing consisted of 60,000 shares of our common stock valued at $4.89 per share for a total of $293.  The contingent consideration based on 2009 operating income was $0.





Access Flow, Inc.





On June 6, 2008, we purchased the operations and certain assets, and assumed specified liabilities of Access Flow, Inc. (“AF”). AF 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 acquisition increased our northern California presence and enhanced our VMware expertise.





Consideration paid at closing consisted of $2,450 in cash and 262,692 shares of our common stock, of which 24,000 shares were placed in escrow under holdback provisions as defined in the acquisition agreement. During the quarter ended September 30, 2009, shares held in escrow were released to AF after a reduction of 3,359 shares representing $34 for costs reimbursable under the AF asset purchase agreement escrow provisions.  The 3,359 shares returned from escrow were retired.  Upon the release of the remaining shares in escrow to AF, 1,032 shares in common stock representing $14 were issued to the broker of the transaction. The two shareholders of AF entered into five-year non-compete 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 $497 and $377 was earned by AF for the achievement of certain customer billing milestones during the twelve-month periods ending June 30, 2010 and 2009, respectively.  The 2010 consideration consisted of a cash payment of $248 and the issuance of 50,525 shares of our common stock with a value of $249.  In addition, cash of $25 was paid to the broker of the transaction.





The 2009 consideration consisted of a cash payment of $182 and issuance of 29,435 shares of our common stock with a value of $195.  In addition, cash of $9 and 1,472 shares valued at $10 were paid to the broker of the transaction.





Results of Operations, Annual





Period Comparisons.  The following table sets forth, for the periods indicated, certain financial data derived from our consolidated statements of operations. Percentages shown in the table below are percentages of total revenue, except for the product and service components of cost of goods sold and gross profit, which are percentages of product and service revenue, respectively.   As previously noted, the financial results for 2008 have been restated.  See Note 2 to the consolidated financial statements in Part II, Item 8.  The 2008 financial results, as previously reported, are provide for informational purposes.




25





Year Ended December 31,2010


2009


2008

(As Restated)


2008

(As Previously Reported)Amount


%


Amount


%


Amount


%


Amount


%Revenue:Products

$
271,942



87.2


$
184,004



81.1


$
210,137



82.0


$
213,125



82.2Services


40,035



12.8



42,943



18.9



46,183



18.0



46,032



17.8Total revenue


311,977



100.0



226,947



100.0



256,320



100.0



259,157



100.0Gross profit:Products


57,537



21.2



39,091



21.2



37,594



17.9



37,881



17.8Services


8,448



21.1



11,050



25.7



13,409



29.0



13,250



28.8Total gross profit


65,985



21.2



50,141



22.1



51,003



19.9



51,131



19.7Selling, general and administrative expenses


63,341



20.4



51,811



22.8



48,740



19.0



48,784



18.8Goodwill impairment charge


2,560



0.8



2,380



1.0



9,265



3.6



9,396



3.6Other long-lived assets impairment charge


—



—



—



—



3,806



1.5



3,675



1.4Adjustment of estimated contingent purchase consideration


(1,278
)


(0.4
)


109



—



—



—



—



—Operating income (loss)


1,362



0.4



(4,159
)


(1.8
)


(10,808
)


(4.2
)


(10,724
)


(4.1
)Interest and other (income) expense, net


(78
)


—



(209
)


(0.1
)


16



—



16



—Income tax (benefit) expense


(3,913
)


(1.3
)


345



0.2



1,961



0.8



2,011



0.8Net income (loss) from continuing operations


5,353



1.7



(4,295
)


(1.9
)


(12,785
)


(5.0
)


(12,751
)


(4.9
)(Loss) income from discontinued operations, net of taxes


—



—



(90
)


—



37



—



37



—Net income (loss)

$
5,353



1.7


$
(4,385
)


(1.9
)

$
(12,748
)


(5.0
)

$
(12,714
)


(4.9
)





Year Ended December 31, 2010 Compared to Year Ended December 31, 2009





Total Revenue.  Total revenue increased by $85,030, or 37.5%, to $311,977 from $226,947. Products revenue increased by $87,938 or 47.8%, to $271,942 from $184,004. The increase in products revenue is primarily due to a substantial increase in revenues in the Gulf Coast Region ($31,532), Northwest Region ($16,306), Southern California Region ($10,444), Northern Texas ($8,590), and New England Region ($7,614) as a result of the improving economy and the elimination of the 2009 manufacturing backlog at Cisco.  Services revenue decreased by $2,908 or 6.8% to $40,035 from $42,943. The decrease in services revenue is primarily due to lower revenue in our Federal Division ($6,628) related to a large subcontract, partially offset by increases in other regions, the largest increase of which was in the Northwest Region ($2,334).





Gross Profit.  Total gross profit increased by $15,844, or 31.6%, to $65,985 from $50,141. Total gross profit as a percentage of sales decreased to 21.2% from 22.1%. Gross profit on product sales increased $18,446, or 47.2%, to $57,537 from $39,091 as a result of increased sales and, as a percentage of product sales, was unchanged at 21.2%.  Gross profit on services revenue decreased $2,602 or 23.5% to $8,448 from $11,050 as a result of the lower Federal Division sales, and gross profit as a percent of services revenue decreased to 21.1% from 25.7% reflecting lower utilization.





Selling, General and Administrative Expenses.  Selling, general and administrative expenses increased by $11,530, or 22.3% to $63,341 from $51,811. As a percentage of total revenue, these expenses decreased to 20.4% from 22.8% largely due to the large overall sales increase. The increase in the amount of selling, general and administrative expenses reflected restatement costs ($4,129), higher sales commissions consistent with increased sales ($3,632), and higher personnel costs due to increased headcount and improved operating results ($3,568).





Goodwill and Other Long-Lived Assets Impairment Charges.  The total impairment charge was $2,560 in 2010 compared to $2,380 in 2009. We performed our annual goodwill impairment tests during the fourth quarter of 2010 and 2009.  In 2010, we determined that goodwill in the New England and Federal reporting units was impaired, primarily related to the additional goodwill incurred for 2010 earnouts payable on the NetTeks and AF acquisitions.  During the first two quarters of 2010, the Northern California reporting unit generated substantial operating losses compared to the operating income forecast in connection with the 2009 annual goodwill impairment test.  This triggered the requirement to perform an interim impairment test of both goodwill and long lived assets, resulting in the goodwill impairment charge recorded in the second quarter of 2010.  In 2009, we determined that the goodwill of our New England, North Carolina, Federal, and VocalMash reporting units was impaired as result of the ongoing depressed operating results in the aftermath of the global financial crisis.




26





Adjustment of Estimated Contingent Purchase Consideration. The adjustment of estimated contingent purchase consideration was a reduction of expense of $1,278 in 2010 compared to expense of $109 in 2009. These adjustments were the result of the requirement beginning with acquisitions entered into after December 31, 2008 to measure and recognize contingent consideration at the time of the acquisition as part of the purchase price.  The estimated contingent consideration is remeasured to fair value at each subsequent reporting date until settled.





Operating Income (Loss).  Operating income increased $5,521 to income of $1,362 from a loss of $4,159, primarily due to substantially increased sales in 2010 compared to 2009, partially offset by restatement costs of $4,129.





Interest and Other (Income) Expense, net.  Interest and other (income) expense, net, decreased $131 to $78 income from $209 income primarily due to the lower interest rates earned on invested available cash.





Income Tax (Benefit) Expense.  Income tax (benefit) expense increased by $4,258 to a benefit of $3,913 from expense of $345.  In 2009 we maintained a full valuation allowance against our net deferred tax assets.  In 2010 we released the $5,492 valuation allowance as income tax benefit based on our current expectation that our net deferred tax assets were now realizable.





Loss from Discontinued Operations, net of tax.  The loss from discontinued operations decreased by $90 due to lower legal costs on claims indemnified related to the Stratasoft operations sold in 2006.





Net Income (Loss).  Net income increased $9,738 to net income of $5,353 from a net loss of $4,385 due to the substantial increase in sales in 2010 compared to 2009 and the 2010 income tax benefit of $3,913, partially offset by restatement costs of $4,129.





Year Ended December 31, 2009 Compared to Year Ended December 31, 2008





Total Revenue.  Total revenue decreased by $29,373, or 11.5%, to $226,947 from $256,320. Products revenue decreased by $26,133 or 12.4%, to $184,004 from $210,137. The decrease in products revenue reflects lower revenues in the Gulf Coast Region ($13,686), Northwest Region ($9,566), New England Region ($9,483) and several other regions, partially offset by higher sales in Northern Texas ($8,466) and Central Texas Region ($4,661), primarily due to depressed 2009 sales in the aftermath of the global financial crisis and a manufacturing backlog at Cisco which was not fully resolved until the middle of 2010.  Services revenue decreased by $3,240 or 7.0% to $42,943 from $46,183. The decrease in services revenue is largely due to lower revenues in our Federal Division ($4,416) and Gulf Coast Region ($3,858), partially offset by increases in the New England Region ($3,125) resulting from the NetTeks acquisition and Central Texas Region ($2,309).





Gross Profit.  Total gross profit decreased by $862, or 1.7%, to $50,141 from $51,003. Overall gross profit as a percentage of sales increased to 22.1% from 19.9%. Gross profit on product sales increased $1,497, or 4.0%, to $39,091 from $37,594 and, as a percentage of product sales, increased to 21.2% from 17.9% due to higher vendor rebates. Gross profit on services revenue decreased $2,359 or 17.6% to $11,050 from $13,409 as a result of lower sales and gross profit as a percent of services revenue decreased to 25.7% from 29.0% primarily due to the proportionately greater decrease in sales compared to the level of decrease in costs.  Service costs which include engineer salaries are less variable than product costs.





Selling, General and Administrative Expenses.  Selling, general and administrative expenses increased by $3,071, or 6.3% to $51,811 from $48,740.  As a percentage of total revenue, these expenses increased to 22.8% from 19.0%. Higher selling, general and administrative expenses as a percentage of sales was due to increased headcount and higher depreciation and amortization costs resulting from a full year of expenses from the AF, NetTeks, and VocalMash acquisitions.





Goodwill and Other Long-Lived Assets Impairment Charges.  The total impairment charges for goodwill and other long-lived assets was $2,380 in 2009 compared to $13,071 in 2008. We performed our annual goodwill impairment test during the fourth quarter of 2009 and 2008.  In 2009, we determined that the goodwill of our New England, North Carolina, Federal, and VocalMash reporting units was impaired as result of the continued depressed operating results in the aftermath of the global financial crisis.  In connection with this triggering event, we tested the recoverability of the long-lived assets for each reporting unit that failed step 1 of the goodwill impairment test and concluded their carrying values did not exceed fair value.  In 2008, we performed our annual goodwill impairment test and concluded that the goodwill of our New England, Northern California, Southwest, Northwest and Southern California reporting units were impaired and recognized an impairment charge of $9,265.  In connection with this triggering event, we tested the recoverability of the long-lived assets for each reporting unit that failed step 1 of the goodwill impairment test and concluded the carrying values of intangible assets and property and equipment from the New England and Northern California reporting units were no longer recoverable. Consequently, during the fourth quarter of 2008, we incurred an impairment charge of $3,806 to reduce the intangible assets and property and equipment down to their estimated fair values.




27





Adjustment of Estimated Contingent Purchase Consideration. The total adjustment of estimated contingent purchase consideration was expense of $109 in 2009 and $0 in 2008. This adjustment resulted from the re-measurement of contingent consideration as first estimated and recognized at the time of acquisition, as required for acquisitions entered into after December 31, 2008.  The estimated contingent consideration is remeasured to fair value at each subsequent reporting date until settled with the seller with changes in fair value recognized in the results of operations.





Operating Loss.  Operating loss decreased $6,649 to a loss of $4,159 in 2009 from a loss of $10,808, primarily due to the decrease in impairment charges partially offset by higher selling, general and administrative expenses.





Interest and Other (Income) Expense, net.  Interest and other (income) expense, net, changed by $225 to income of $209 from expense of $16 substantially due to the elimination of borrowings under our senior credit facility in June 2008.





Income Tax Expense.  Income tax expense decreased by $1,616 to $345 from $1,961. The 2009 income tax expense primarily represents state margin tax.  The 2008 income tax expense resulted primarily from the recording of the valuation allowance against deferred tax assets which was necessary due to the 2008 operating loss.





(Loss) Income from Discontinued Operations, net of tax.  The loss from discontinued operations increased by $127 due to 2009 legal costs of $90, net of tax, on claims indemnified related to the Stratasoft operations sold in 2006 compared to the gain on sale of Valerent of $37, net of tax, recognized in 2008.





Net Loss.  Net loss decreased by $8,363 to a net loss of $4,385 from a net loss of $12,748, primarily due to the lower 2009 impairment charge and income tax expense, partially offset by higher 2009 selling, general and administrative expenses.





Off-Balance Sheet Arrangements





We do not have any off-balance sheet arrangements.





Liquidity and Capital Resources





Sources of Liquidity





Our principal sources of liquidity are collections on accounts receivable and borrowings on our credit facility with Castle Pines Capital (the “Credit Facility”), as well as historically raised capital from the sale of equity, all of 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.  In 2008, we eliminated borrowings under the interest-bearing portion of our Credit Facility. Our working capital increased to $20,329 at December 31, 2010 from $13,010 at December 31, 2009 and $14,053 at December 31, 2008 as a result of improved operating results.





In June, 2008, we sold 900,000 shares of common stock through a registered direct offering to certain institutional investors at a price of $11.00 per share. The net cash proceeds, after deducting the placement agent’s fee and other offering expenses of $1,149, were approximately $8,751. The net cash proceeds were partially used to repay the $6,000 outstanding balance under the Acquisition Facility, with the remainder to be used for general corporate purposes including possible future acquisitions.  Due to the delays in our filings of SEC annual and quarterly reports due in 2010 and 2009, the shelf registration statement filed in 2008 on Form S-3 for primary offerings of securities is no longer available.





Accounts Receivable.  The timing of our collection of accounts receivable is a significant influence on our cash flow from operations. We typically sell our products and services on short-term credit terms. We minimize our credit risk by performing credit checks, obtaining letters of credit in certain instances, and conducting our own collection efforts. Our accounts receivable, net of allowance for doubtful accounts, were $64,493, $52,269 and $51,694 at December 31, 2010, 2009 and 2008, respectively. The increase in accounts receivable was attributable to significantly higher sales in 2010 compared to 2009 and 2008.





Accounts Payable and Floor Plan Financing.  We rely on our Credit Facility to finance a substantial portion of our inventory purchases under terms ranging from 30 to 60 days. Credit Facility balances within terms, as defined, are non-interest bearing and classified as accounts payable floor plan in our balance sheet. Credit Facility balances outstanding in excess of terms are interest bearing and classified as notes payable in our balance sheet, of which there was no balance outstanding at December 31, 2010, 2009 or 2008.  The total of accounts payable and accounts payable floor plan were $50,552, $50,243 and $45,172 at December 31, 2010, 2009 and 2008, respectively. The 2010 increase was attributable to significantly increased purchases directly related to increased 2010 sales and the 2009 increase was primarily due to product received in 2009 that was shipped to the customer in the first quarter of 2010.




28





Credit Facility. On December 16, 2009, we amended our senior Credit Facility agreement (“Agreement”) with Castle Pines Capital LLC (“CPC”) which provides inventory financing and working capital funding.  The Agreement provides a discretionary line of credit up to a maximum aggregate amount of $70,000 to purchase inventory from CPC approved vendors.  The Credit Facility is collateralized by substantially all of our assets and is for a one year period with automatic one year renewals, except as otherwise provided.  The Agreement contains quarterly financial covenants concerning our current ratio, tangible net worth, and total liabilities to tangible net worth.  The Agreement also contains other customary covenants.  Termination date of the senior credit facility was extended to December 31, 2011, subject to automatic annual renewal as defined in the Amendment.  We expect the Agreement to be extended under substantially similar terms.





The Agreement provides a working capital revolving line of credit under the above line of credit with an aggregate outstanding sublimit of $10,000 with interest payable monthly at the rate of prime plus 0.5%.  The Agreement also provides an additional $10,000 credit facility specifically for acquisitions with interest payable at the rate of prime plus 2% and an acquisition commitment fee of 7/8 of 1% of advance amounts.





As of December 31, 2010, we were in compliance with the financial covenants contained in the Credit Facility, and we anticipate that we will be able to comply with these covenants during the next twelve months. In May 2011, CPC waived our events of default under the Agreement loan covenants regarding timely provision of GAAP financial statements.  In the future, 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.





To the extent we were unable to maintain our relationship with CPC on the same general terms and conditions as described above, we would endeavor to execute a similar relationship with another Cisco based floor plan financier.





See Part II, Item 8, Note 6, Accounts Payable Floor Plan, for additional details regarding the Credit Facility.





Cash Flows.  Our cash decreased by $1,158, increased by $2,310, and increased by $1,597 in 2010, 2009 and 2008, respectively.





Operating Activities.  Operating activities provided $4,555 in 2010 as compared to using $578 in 2009 and using $1,187 in 2008. Adjustments for non-cash-related items in 2010 used $73 and primarily include the $5,492 release of the valuation allowance on deferred income taxes partially offset by $2,560 from impairment charges, $2,847 from depreciation and amortization and $2,224 from share-based compensation.  Changes in asset and liability accounts used $725, with accounts receivable using $12,681 due to increased sales, primarily offset by funds provided by inventory ($4,288), accounts payable ($3,741), and other assets and liabilities ($2,575).  Adjustments for non-cash-related items in 2009 of $8,068 primarily include $2,380 from impairment charges, $3,119 from depreciation and amortization and $2,093 from share-based compensation.  Changes in asset and liability accounts used $4,261, of which inventory represented $3,908 due to product received in the fourth quarter of 2009 for delivery to a customer in the first quarter of 2010.  Adjustments for non-cash-related items in 2008 of $17,438 included $13,071 of impairment charges, $2,667 from depreciation and amortization and $1,731 from share-based compensation, partially offset by excess tax benefits from stock option exercises of $1,085. Changes in asset and liability accounts used $5,877, of which the most significant use was accounts receivable which used $7,390 due to increased sales.





Investing Activities.  Investing activities used $3,340 in 2010 compared to using $2,020 in 2009 and $6,321 in 2008. Investing activities related to cash paid for acquisitions were $1,773 in 2010, $1,110 in 2009, and $4,062 in 2008. Our investing activities related to capital expenditures in all three years were primarily related to purchases of computer equipment and software, and to a lesser degree, leasehold improvements.





Financing Activities.  Financing activities used $2,373 in 2010 compared to providing $4,908 in 2009 and providing $9,105 in 2008.  Financing activities in 2010 and 2009 primarily consisted of net payments ($3,432) and net borrowings ($4,559) under the non-interest bearing floor plan financing facility, respectively.   Financing activities in 2008 primarily include common stock issued through a registered direct offering ($8,751), the proceeds of which were partially used to repay the 2007 borrowings for the Select, Inc. acquisition ($6,000).   Net borrowings under the floor plan financing provided cash of $7,530 in 2008.





Critical Accounting Policies





Revenue Recognition





Our products revenue consists of hardware and software purchased from other parties and resold to a customer.  Products revenue also includes revenue from hardware maintenance contracts, hardware installation, support and training services that are provided solely by third parties who are the primary obligor of these services under the customer contract.





Our services revenue consists of professional services and managed services.  Professional services include the planning, design, and implementation of the products and solutions that we provide.  Managed services include remote monitoring and management of enterprise organizations’ network infrastructure, data center, wireless network and security technology, and remote disaster recovery hosting.  Services revenue also includes hardware maintenance contracts for which we are the primary obligor.




29





We recognize revenue when persuasive evidence of a sale arrangement exists, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectability is reasonably assured. The majority of our sales relate to physical products that are recognized when title and risk of loss to the products sold passes to the customer. Based on our standard shipping terms, title generally passes upon shipment of the product either by a vendor directly to the customer or by us to the customer.  If the customer’s contract states the title passes upon receipt by the customer, revenue is not recognized until we receive confirmation of delivery.  Products revenue from services provided to customers by third parties are recorded on a net basis and recognized as revenue upon contracting with the third party service provider.





We resell certain third party software which does not require significant production, modification or customization.  Such software is recognized when persuasive evidence of a sale arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured.





Revenue for fixed and flat fee services contracts related to customized network and IP telephony solutions are generally recognized under a proportional performance model utilizing an input based approach (labor hours). Other service revenue is earned from providing stand-alone services such as billings for engineering and technician time, installation and programming services, which are provided on an hourly basis. Other service revenues are recognized when the service is performed and when collection is reasonably assured.





Managed services revenue includes remote monitoring and management of enterprise organizations’ network infrastructure, data center, wireless network and security technology, remote disaster recovery hosting, and hardware maintenance contracts for which we are the primary obligor.  Contracts under this revenue category are recognized ratably over the term of the underlying customer contract. Commission costs and third party support contracts paid in advance are deferred and recognized ratably over the term of the underlying customer contract.





When an arrangement contains multiple deliverables, such as more than one product item or a combination of products and one or more types of services, we determine whether the delivered items can be considered separate units of accounting as prescribed under multiple-element arrangement accounting guidance. Such guidance states that delivered items should be considered separate units of accounting if delivered items have value to the customer on a standalone basis, there is objective and reliable evidence of the fair value of undelivered items, and if delivery of undelivered items is probable and substantially in our control. Contracts entered into with customers, whether containing only product, only services, or a combination of products and services, are considered a single arrangement as are multiple contracts which were entered into separately but which were negotiated as a package.





If objective and reliable evidence exists for the fair value of all items in a multiple element arrangement, we recognize revenue based on the relative fair value of the separate elements. When there is objective and reliable evidence for the fair values of undelivered items but no such evidence exists for the items already delivered, the amount of revenue allocated to the delivered items is computed using the residual method.  We have vendor-specific objective evidence (“VSOE”) of fair value for our product and professional service deliverables and we do not have VSOE of fair value for our managed services deliverables.  Because we do not have the ability to establish the fair value of our managed services deliverables, multiple element arrangements that contain managed services are recognized ratably over the initial term of the managed services contract that is part of the arrangement because our managed services are always the last element to be delivered in the arrangement.  The costs of products and services and commission costs directly related to multiple element arrangements containing managed services are deferred and recognized ratably over the initial term of the managed services contract.





Contracts and customer purchase orders are generally used to determine the existence of an arrangement. Shipping documents and customer acceptance, when applicable, are used to verify delivery. If a customer contract contains unusual technical objective performance criteria to be met prior to customer acceptance that we cannot be certain of achieving, then revenue recognition is deferred until acceptance is obtained. Determination that the fee is fixed or determinable is based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. Accruals for estimated sales returns and other allowances and deferrals are recorded as a reduction of revenue at the time of revenue recognition. These provisions are based on contract terms and prior claims experience and involve significant estimates. If these estimates are significantly different from actual results, our revenue could be impacted.





Credit and collections policy is the basis for the determination of the collectability of amounts due from our customers, which requires us to use estimates and exercise judgment. We routinely monitor our customer’s payment history and current credit worthiness to determine that collectability is reasonably assured and then, in some instances, require letters of credit in support of contracted amounts.  This requires us to make frequent judgments and estimates in order to determine the appropriate period to recognize a sale to a customer and the amount of valuation allowances required for doubtful accounts. We record provisions for doubtful accounts when it becomes evident that the customer will not be able to make the required payments either at contractual due dates or in the future. Changes in the financial condition of our customers, either adverse or positive, could impact the amount and timing of any additional provision for doubtful accounts that may be required.




30





Vendor Incentive Recognition





We participate in vendor incentive programs, including a significant vendor incentive program with our primary vendor, Cisco. These incentives are generally earned based on sales volume and customer satisfaction levels. The amounts earned under these programs are accrued when they are deemed probable and can be reasonably measured; otherwise, they are recorded when they are declared by the vendor or the cash is received, whichever is earlier. We estimate vendor incentives based on total sales volume, sales of particular products or product classes, and anticipated customer satisfaction results.  As a result of these estimates, the amount of rebates declared by the vendor, or the amount of rebates received in cash, the effect of vendor incentives on cost of goods can vary significantly between quarterly and annual reporting periods. Failure to achieve the requirements set by the vendor to earn a particular incentive could result in us not receiving a vendor incentive and result in lower gross margin on our product sales revenue. The incentives are recorded as a reduction of cost of goods.





Share-Based Compensation Expense





We account for share-based compensation in accordance with Accounting Standards Codification Section 718 (“ASC 718”), including  the use of the “simplified method” as provided under SEC Staff Accounting Bulletin No. 110 (“SAB 110”), which requires the measurement and recognition of compensation expense based on estimated fair values for share-based payment awards.





We use the Black-Scholes option pricing model to calculate the grant-date fair value of an award. The fair value of options granted during the 2010, 2009 and 2008 periods were calculated using the following estimated weighted average assumptions:





2010

2009

2008Expected volatility


65
%


75
%


61
%Expected term (in years)


6.1



6.9



6.5Risk-free interest rate


1.8
%


3.0
%


2.8
%Expected dividend yield


0
%


0
%


0
%





Expected volatility is based on historical volatility over the period our current operations represented our primary line of business. We use the simplified method outlined in SAB 110 to estimate expected lives for options granted during the period. The risk-free interest rate is based on the yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected term. We have not historically issued any dividends and do not expect to in the future.





We use the straight-line attribution method to recognize expense for unvested options. The amount of share-based compensation recognized during a period is based on the value of the awards that are ultimately expected to vest. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We will re-evaluate the forfeiture rate annually and adjust it as necessary, and the adjustments could be material.





Goodwill





We test our recorded goodwill annually for impairment as of the end of our fiscal year as well as whenever events or changes in circumstances indicate that the carrying value may not be recoverable, in accordance with Accounting Standards Codification Section 350 (“ASC 350”). Circumstances that could trigger an interim impairment test include but are not limited to: a significant adverse change in the business climate or legal factors; an adverse action or assessment by a regulator; unanticipated competition; loss of key personnel; the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise disposed; or results of testing for recoverability of a significant asset group within a reporting unit.





The goodwill impairment test consists of a two-step process.  Step 1 of the impairment test involves comparing the fair values of the applicable reporting units with their carrying values, including goodwill. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform Step 2 of the goodwill impairment test to determine the amount of impairment loss. Step 2 of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill against the carrying value of that goodwill.  In performing the first step of the impairment test, we reconcile the aggregate estimated fair value of our reporting units to our market capitalization (together with an implied control premium).





ASC 350 requires the testing of goodwill for impairment be performed at a level referred to as a reporting unit. We currently have eleven reporting units based primarily on our geographical regions, all of which have goodwill assigned.  Goodwill is assigned based on (1) goodwill incurred in the purchase of the reporting unit, (2) goodwill allocated to reporting units existing at the time of an acquisition and directly benefiting from the business combination, and (3) goodwill allocated to reporting units based upon the relative amount of contingent consideration generated by a reporting unit’s customer billings attributable to criteria specified in the purchase agreement provisions.  After reductions for impairment charges in 2010, 2009, and 2008, nine reporting units have goodwill carrying value which will be subject to future impairment tests.




31





To estimate the fair value of our reporting units, we use the income approach and the market approach.  Once the fair value of each reporting unit is determined under each valuation method, we apply a weighting of 90% to the income approach and 10% to the market approach. We place greater reliance on the income approach because we believe the discounted cash flow projections are a more reliable methodology.





The income approach is based on a discounted cash flow analysis (“DCF”) and calculates the fair value by estimating the after-tax cash flows attributable to a reporting unit and then discounting the after-tax cash flows to a present value using a risk-adjusted discount rate. Assumptions used in the DCF require the exercise of significant judgment, including judgment about appropriate discount rates and terminal values, growth rates, and the amount and timing of expected future cash flows. The forecasted cash flows are based on our most recent budget and for years beyond the budget, the estimates are based on assumed growth rates. We believe the assumptions are consistent with the plans and estimates used to manage the underlying businesses. The discount rates, which are intended to reflect the risks inherent in future cash flow projections, used in the DCF are based on estimates of the weighted-average cost of capital of a market participant relative to each respective reporting unit.  Such estimates are derived from our analysis of peer companies and considered the industry weighted average return on debt and equity from a market participant perspective for its reporting units.





Specific assumptions used were as follows:





December 31, 2010

December 31, 2009

December 31, 2008Discount rate methodology used
Weighted-Average

Cost of Capital

Weighted-Average

Cost of Capital

Weighted-Average

Cost of CapitalDiscount rate range by reporting units
19.3 – 27.3%

30.9 – 36.0%

28.4 - 28.7%Five year compound annual revenue growth rate
4.1 – 28.8%

7.2 – 68.0%

(9.9) - 32.7%Terminal year stable growth rate
3.7%

3.7%

3.5  –  4.0%





The market approach considers comparable market data based on multiples of revenue, gross profit, and earnings before taxes, depreciation and amortization (“EBITDA”), and net income. We believe the assumptions used to determine the fair value of our respective reporting units are reasonable. If different assumptions were used, particularly with respect to forecasted cash flows, WACCs, or market multiples, different estimates of fair value may result and there could be the potential that an impairment charge could result. Actual operating results and the related cash flows of the reporting units could differ from the estimated operating results and related cash flows. The valuation multiples calculated were as follows, where EV represents enterprise value (market capitalization plus interest bearing debt less cash and equivalents) and MVIC represents the market value of invested capital (market capitalization plus interest bearing debt):





December 31, 2010

December 31, 2009

December 31, 2008EV/Revenues
0.058x – 0.241x

—

—MVIC/Revenues


0.10x – 0.35x

0.17xMVIC/Gross profit
—

—

0.83xMVIC/EBITDA
—

—

4.75xMarket cap/Net income
—

—

10.23x





As of December 31, 2010, the Northwest, Southern California, Gulf Coast, North Texas, and North Carolina reporting units with goodwill totaling $5,034, had estimated fair values exceeding their carrying values by a minimum of 61%. The Southwest and Central Texas reporting units with goodwill totaling $4,475 had estimated fair values exceeding their carrying values by 19% to 30%.  The Northern California and New England reporting units with goodwill totaling $4,023 had estimated fair values which approximated their carrying values as a result of the impairment charge recorded at December 31, 2010, 2009 and 2008.  During 2009 the National reporting unit was merged into the Gulf Coast reporting unit and the NetTeks reporting unit was merged into the New England reporting unit.





With the exception of potential regional economic differences, the fair value of our reporting units is primarily affected by the forecasted demand and spending on technology products in our principal markets which are:  network infrastructure, unified communications and data center products and services.  Some of the inherent assumptions and estimates used in determining the estimated fair value of these reporting units are outside the control of management, including interest rates, cost of capital, and tax rates.  It is possible that changes in circumstances, existing at the measurement date or at other times in the future, or in the numerous estimates associated with management’s judgments, assumptions and estimates made in assessing the fair value of our goodwill, may result in an impairment charge of a portion or all of the goodwill amounts previously noted.  If we record an impairment charge, our financial position and results of operations could be adversely affected.





For illustrative purposes, had the December 31, 2010 fair values of each reporting unit been lower by 10%, there would have been a $699 increase in the goodwill impairment charge recorded. Our goodwill balance was $13,532, $13,870 and $12,882 as of December 31, 2010, 2009 and 2008, respectively.




32





Impairment of Long-Lived Assets





We record impairment losses on long-lived assets, such as amortizable intangible assets and property and equipment, when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets.  Evaluation of long-lived assets for impairment is performed at the asset group level, which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities.  Our asset group level corresponds to the same level as the reporting units used in our goodwill impairment testing.





Income Taxes





Income taxes are accounted for under the asset and liability method.  Under the asset and liability method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.  This method also requires the recognition of future tax benefits for net operating loss (“NOL”) carry-forwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date.  A valuation allowance is provided against deferred tax assets to the extent their realization is not more likely than not.  The tax provision allocated to discontinued operations is based on the incremental tax effect after computing the tax provision on continuing operations. Uncertain tax positions and the related interest and penalties are provided for based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities





Recent Accounting Pronouncements





In December 2010, the Financial Accounting Standards Board (“FASB”) clarified required disclosures regarding pro forma revenue and earnings in a business combination.  If comparative financial statements of an acquired business are presented, the revenue and earnings of the combined entity should be presented as though the business combination had occurred at the beginning of the prior reporting period only.  In addition, the supplemental disclosures should include a description of the amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the pro forma revenue and earnings.  The clarification is required to be applied to any business combination that closes after 2010 and early adoption is permitted.  We will adopt the requirement for any business combination that closes after December 31, 2010.





In December 2010, the FASB clarified certain aspects of “carrying value” in applying step 1 of the goodwill impairment test to a reporting unit.  The revised guidance does not prescribe a specific method of calculating the carrying value of a reporting unit, but it does require reporting units with negative or zero carrying value to be assessed for impairment using qualitative factors.  If the qualitative factors indicate that it is more likely than not that impairment of goodwill exists, then step 2 of the goodwill impairment test must be performed.  The new requirement is effective for years beginning after December 15, 2010 and early adoption is not permitted.  Companies affected by this new standard are required to record a cumulative effect adjustment to beginning retained earnings in the period of adoption.  The new standard is not expected to have a material effect because none of our reporting units with goodwill balances at December 31, 2010, have a negative or zero carrying value.





In July 2010, the FASB adopted enhanced disclosure requirements regarding financing receivables and allowance for credit losses, excluding short-term trade receivables or receivables measured at fair value or lower of cost or fair value.  The enhanced disclosure requirements include information about the nature and credit risk inherent in the entity’s financing receivables, our methods of analyzing and assessing credit risk in determining the allowance for credit losses and the changes and reasons for changes in the allowance for credit losses.  The enhanced disclosure requirements are required to be adopted in our financial statements for the year ended December 31, 2010.  Our financing receivables are currently short-term trade receivables which are excluded from such disclosures.   The additional disclosure requirements will not have an impact on our results of operations or financial position.





In January 2010, the FASB enhanced existing requirements and added new requirements for disclosures of fair value measurements.  Previous guidance required companies to disclose information about how management determined fair value for those assets and liabilities measured at fair value by categorizing such assets and liabilities in one of three categories: Level 1, Level 2 or Level 3.  The new requirements enhance and amend these disclosures.  Some of the new  disclosures were required to be adopted,  and were adopted in the first quarter ended March 31, 2010, with the remaining disclosures  required to be adopted in the first quarter ended March 31, 2011.  The additional disclosure requirements will not have an impact on our results of operations or financial position.





In October 2009, the 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. We will adopt this guidance prospectively on January 1, 2011 and are currently evaluating the financial statement impact, although we do not expect the implementation of this standard to have a material impact on our results of operations or financial position.




33





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. We will adopt this guidance prospectively on January 1, 2011 and are currently evaluating the financial statement impact, although we do not expect the implementation of this standard to have a material impact on our results of operations or financial position.





Restated Quarterly Financial Information





Presented below are the Restated Condensed Consolidated Statements of Operations for the three months ended March 31, 2008, the six months ended June 30, 2008, and the nine months ended September 30, 2008.  Also, presented below are the Restated Condensed Consolidated Balance Sheets for the seven quarterly periods ended September 30, 2009.  The restatement adjustments are described in detail in Note 2 to the Consolidated Financial Statements in Part II, Item 8.  In addition, the “00-21 Adjustments” column includes the correction of a “Selling, general and administrative expenses” error not directly related to the revenue accounting errors.  This expense correction is an increase to selling, general and administrative expenses of $69 and $186 for the three months ended March 31, 2008, and the six months ended June 30, 2008, respectively, and is a reduction to expense of $186 for the nine months ended September 30, 2008, when the error was previously corrected on a cumulative basis.  We do not consider this error and the subsequent correction as presented here to be material to our results of operations and financial position for the periods involved.





The reconciliation of the restated quarterly financial data for the quarters ended March 31, 2009, June 30, 2009 and September 30, 2009 to amounts previously reported is provided in the Form 10-Q for each of the quarters ended March 31, 2010, June 30, 2010 and September 30, 2010, which are filed contemporaneously with this Annual Report on Form 10-K.




34




Restated Condensed Consolidated Statement of Operations for the Three Months Ended March 31, 2008As

Previously


00-21


Shipping


Net


AsReported


Adjustments


Terms


Presentation


RestatedRevenue:Products

$
50,491


$
115


$
(500
)

$
(673
)

$
49,433Services


9,152



(88
)


—



—



9,064Total revenue


59,643



27



(500
)


(673
)


58,497Cost of Sales:Products


41,284



63



(510
)


(673
)


40,164Services


6,212



(22
)


35



—



6,225Total cost of products and services


47,496



41



(475
)


(673
)


46,389Gross profit


12,147



(14
)


(25
)


—



12,108Selling, general and administrative expenses


10,384



55



(16
)


—



10,423Operating income (loss)


1,763



(69
)


(9
)


—



1,685Other income (expense), net


(73
)


—



—



—



(73
)Income (loss) before income taxes


1,690



(69
)


(9
)


—



1,612Income tax expense (benefit)


683



(27
)


(3
)


—



653Net income (loss) from continuing operations


1,007



(42
)


(6
)


—



959Income from discontinued operations, net of taxes


4



—



—







4Net income (loss)

$
1,011


$
(42
)

$
(6
)

$
-


$
963Basic net income per share:Net income from continuing operations

$
0.13














$
0.13Income from discontinued operations, net of taxes


—















—Net income - basic

$
0.13














$
0.13Diluted net income per share:Net income from continuing operations

$
0.12














$
0.12Income from discontinued operations, net of taxes


—















—Net income - diluted

$
0.12














$
0.12Weighted average shares - basic


7,550,904















7,550,904Weighted average shares - diluted


8,242,191















8,242,191





35




Restated Condensed Consolidated Statement of Operations for the Six Months Ended June 30, 2008As

Previously


00-21


Shipping


Net


AsReported


Adjustments


Terms


Presentation


RestatedRevenue:Products

$
101,921


$
167


$
(388
)

$
(1,052
)

$
100,648Services


21,713



95



—



—



21,808Total revenue


123,634



262



(388
)


(1,052
)


122,456Cost of Sales:Products


82,948



160



(383
)


(1,052
)


81,673Services


14,787



(25
)


12



—



14,774Total cost of products and services


97,735



135



(371
)


(1,052
)


96,447Gross profit


25,899



127



(17
)


—



26,009Selling, general and administrative expenses


22,255



204



(24
)


—



22,435Operating income (loss)


3,644



(77
)


7



—



3,574Other income (expense), net


(171
)


—



—



—



(171
)Income (loss) before income taxes


3,473



(77
)


7



—



3,403Income tax expense (benefit)


1,363



(35
)


13



—



1,341Net income (loss) from continuing operations


2,110



(42
)


(6
)


—



2,062Income from discontinued operations, net of taxes


14



—



—



—



14Net income (loss)

$
2,124


$
(42
)

$
(6
)

$
-


$
2,076Basic net income per share:Net income from continuing operations

$
0.28














$
0.27Income from discontinued operations, net of taxes


—















—Net income - basic

$
0.28














$
0.27Diluted net income per share:Net income from continuing operations

$
0.26














$
0.25Income from discontinued operations, net of taxes


—















—Net income - diluted

$
0.26














$
0.25Weighted average shares – basic


7,565,104















7,565,104Weighted average shares – diluted


8,199,449















8,199,449




36




Restated Condensed Consolidated Statement of Operations for the Nine Months Ended September 30, 2008As Previously


00-21


Shipping


Net


AsReported


Adjustments


Terms


Presentation


RestatedRevenue:Products

$
161,497


$
149


$
158


$
(1,805
)

$
159,999Services


34,079



88



—



—



34,167Total revenue


195,576



237



158



(1,805
)


194,166Cost of Sales:Products


132,457



160



74



(1,805
)


130,886Services


23,894



(25
)


12



—



23,881Total cost of products and services


156,351



135



86



(1,805
)


154,767Gross profit


39,225



102



72



—



39,399Selling, general and administrative expenses


34,850



(3
)


1



—



34,848Operating income (loss)


4,375



105



71



—



4,551Other income (expense), net


(65
)


—



—



—



(65
)Income (loss) before income taxes


4,310



105



71



—



4,486Income tax expense (benefit)


1,829



11



28



—



1,868Net income (loss) from continuing operations


2,481



94



43



—



2,618Income from discontinued operations, net of taxes


23



—



—



—



23Net income (loss)

$
2,504


$
94


$
43


$
—


$
2,641Basic net income per share:Net income from continuing operations

$
0.31














$
0.33Income from discontinued operations, net of taxes


—















—Net income - basic

$
0.31














$
0.33Diluted net income per share:Net income from continuing operations

$
0.29














$
0.31Income from discontinued operations, net of taxes


—















—Net income - diluted

$
0.29














$
0.31Weighted average shares - basic


7,958,966















7,958,966Weighted average shares - diluted


8,579,268















8,579,268




37


Results of Operations, Year to Date QuarterlyAs restated, three Months Ended March 31, 2009 Compared to as restated March 31, 20082009


2008As





AsPreviously


As


Previously


AsReported


Restated


Reported


RestatedRevenue:Products

$
44,566


$
43,332


$
50,491


$
49,433Services


12,767



12,605



9,152



9,064Total revenue


57,333



55,937



59,643



58,497Cost of products and services:Products


36,122



35,258



41,284



40,164Services


8,908



8,752



6,212



6,225Total cost of products and services


45,030



44,010



47,496



46,389Gross profit


12,303



11,927



12,147



12,108Selling, general and administrative expenses


12,728



12,702



10,384



10,423Operating (loss) income


(425
)


(775
)


1,763



1,685Interest and other income (expense), net


12



12



(73
)


(73
)(Loss) income from continuing operations before income taxes


(413
)


(763
)


1,690



1,612Income tax expense


50



—



683



653Net (loss) income from continuing operations


(463
)


(763
)


1,007



959(Loss) income from discontinued operations, net of income taxes


(39
)


(39
)


4



4Net (loss) income

$
(502
)

$
(802
)

$
1,011


$
963





Revenue. Total revenue decreased by $2,560, or 4.4%, to $55,937 from $58,497. Products revenue decreased $6,101, or 12.3% to $43,332 from $49,433. The decrease in products revenue was primarily due to our markets becoming increasingly affected by the continuing macroeconomic downturn in the United States.  We experienced lower revenue in the Northwest Region, National Division, Southwest Region, and Gulf Coast Region, partially offset by revenue from newly acquired locations in the New England Region and Northern California Region and increased products revenue from large projects in the Southern California and North Texas Regions. Services revenue increased $3,541 or 39.1% to $12,605 from $9,064. Services revenue increased in the majority of our Regions, led by increases in the Federal Division, Central Texas Region, Southwest Region, and Southern California Region, and the newly acquired locations in the New England Region and Northern California Region.





Gross Profit. Total gross profit decreased by $181, or 1.5%, to $11,927 from $12,108. Gross profit as a percentage of revenue increased to 21.3% from 20.7%, largely due to substantially higher 2009 services revenues relative to total revenues. Gross profit on products sales decreased $1,195 or 12.9%, to $8,074 from $9,269 and, as a percentage of sales, decreased to 18.6% from 18.8%.  Gross profit on services revenue increased $1,014 or 35.7% to $3,853 from $2,839 and gross profit as a percent of services revenue decreased to 30.6% from 31.3%.





Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $2,279, or 21.9% to $12,702 from $10,423. As a percentage of total revenue, these expenses increased to 22.7% in 2009 versus 17.8% in 2008. Increased 2009 expenses reflect selling, general and administrative expenses of the operations acquired in the NetTeks, AF, and VocalMash acquisitions, additional sales and administrative personnel costs from headcount increases, and substantially higher audit and tax costs.





Operating (Loss) Income. Operating income decreased $2,460 to a loss of $775 from income of $1,685, primarily due higher selling, general and administrative expenses. Although total revenue decreased, total gross profit was essentially unchanged due to the much higher gross profit margin on our services revenue.





Interest and Other Income (Expense), Net. Interest and other income (expense), net, changed by $85 to income of $12 from expense of $73, primarily due to the elimination of borrowings under our senior credit facility in June 2008.





Income Tax Expense (Benefit). Income tax expense (benefit) decreased by $653 to $0 from expense of $653, reflecting: (a) a pretax loss in 2009 and (b) a full valuation allowance against our deferred tax assets in 2009, as discussed further under “Deferred Tax Assets” below.




38





Net (Loss) Income. Net income decreased $1,765 to a loss of $802 from income of $963, primarily due to higher selling, general and administrative expenses and the absence of a tax benefit against our losses in 2009.





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 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 in the first quarter of 2009, we recorded a valuation allowance related to the net operating loss carry forwards 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 restated, six Months Ended June 30, 2009 Compared to as restated June 30, 20082009


2008As





AsPreviously


As


Previously


AsReported


Restated


Reported


RestatedRevenue:Products

$
91,021


$
88,051


$
101,921


$
100,648Services


24,660



24,065



21,713



21,808Total revenue


115,681



112,116



123,634



122,456Cost of products and services:Products


72,999



70,588



82,948



81,673Services


17,654



17,113



14,787



14,774Total cost of products and services


90,653



87,701



97,735



96,447Gross profit


25,028



24,415



25,899



26,009Selling, general and administrative expenses


25,053



24,985



22,255



22,435Operating (loss) income


(25
)


(570
)


3,644



3,574Interest and other income (expense), net


17



17



(171
)


(171
)(Loss) income from continuing operations before income taxes


(8
)


(553
)


3,473



3,403Income tax expense (benefit)


119



—



1,363



1,341Net (loss) income from continuing operations


(127
)


(553
)


2,110



2,062(Loss) income from discontinued operations, net of income taxes


(56
)


(56
)


14



14Net (loss) income

$
(183
)

$
(609
)

$
2,124


$
2,076





Revenue. Total revenue decreased by $10,340, or 8.4%, to $112,116 from $122,456.  Products revenue decreased $12,597, or 12.5% to $88,051 from $100,648. The decrease in products revenue was primarily due to the effect of the  macroeconomic downturn in the United States.  We experienced lower revenue in the Northwest Region, National Division, Central Texas Region, New England Region, Southwest Region, and Gulf Coast Region, partially offset by revenue from newly acquired locations in the New England Region and Northern California Region and increased products revenue in the North Texas and Southern California Regions. Services revenue increased $2,257 or 10.3% to $24,065 from $21,808. Services revenue increased in the majority of our Regions, led by increases in the Federal Division, Central Texas Region, Southwest Region, and Southern California Region, and the newly acquired locations in the New England Region and Northern California Region.





Gross Profit. Total gross profit decreased by $1,594, or 6.1%, to $24,415 from $26,009. Gross profit as a percentage of revenue increased to 21.8% from 21.2%.  Gross profit on products decreased $1,512 or 8.0%, to $17,463 from $18,975 and, as a percentage of sales, increased to 19.8% from 18.9% due to proportionately higher vendor rebates in 2009.  Gross profit on services revenue decreased $82 or 1.2% to $6,952 from $7,034 and gross profit as a percent of services revenue decreased to 28.9% from 32.3%. The services gross margin decreased in 2009 due to a higher proportion of projects with significant outside contractor costs which services typically have a lower gross profit and lower managed services gross profit associated with a higher cost base due to a new acquired location.





Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $2,550, or 11.4% to $24,985 from $22,435. As a percentage of total revenue, these expenses increased to 22.3% in 2009 versus 18.3% in 2008.  Increased 2009 expenses reflect selling, general and administrative expenses of the operations acquired in the NetTeks, AF, and VocalMash acquisitions and additional sales and administrative personnel costs from headcount increases, partially offset by reduced commission expense due to lower gross profit and proportionately higher sales to non-commissioned accounts.




39





Operating (Loss) Income. Operating income decreased $4,144 to a loss of $570 from income of $3,574, primarily due to lower sales and proportionately higher selling, general and administrative expenses.





Interest and Other Income (Expense), Net. Interest and other income (expense), net, changed by $188 to income of $17 from expense of $171, due to the elimination of borrowings under our senior credit facility in June 2008.





Income Tax Expense. Income tax expense decreased by $1,341 to $0 from $1,341, reflecting: (a) a pretax loss in 2009 and (b) a full valuation allowance against our deferred tax assets in 2009, as discussed further under “Deferred Tax Assets” below.





Net (Loss) Income. Net income decreased $2,685 to a loss of $609 from income of $2,076, primarily due to lower sales, lower gross profit,  proportionately higher selling, general and administrative expenses, and the absence of a tax benefit against over 2009 losses.





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 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 in the first and second quarters of 2009, we recorded a valuation allowance related to the net operating loss carry forwards 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 restated nine Months Ended September 30, 2009 Compared to as restated September 30, 20082009


2008As





AsPreviously


As


Previously


AsReported


Restated


Reported


RestatedRevenue:Products

$
137,834


$
134,628


$
161,497


$
159,999Services


35,706



35,231



34,079



34,167Total revenue


173,540



169,859



195,576



194,166Cost of products and services:Products


109,619



106,982



132,457



130,886Services


25,926



25,431



23,894



23,881Total cost of products and services


135,545



132,413



156,351



154,767Gross profit


37,995



37,446



39,225



39,399Selling, general and administrative expenses


38,337



38,234



34,850



34,848Operating (loss) income


(342
)


(788
)


4,375



4,551Interest and other income (expense), net


100



100



(65
)


(65
)(Loss) income from continuing operations before income taxes


(242
)


(688
)


4,310



4,486Income tax expense


212



66



1,829



1,868Net (loss) income from continuing operations


(454
)


(754
)


2,481



2,618(Loss) income from discontinued operations, net of income taxes


(104
)


(104
)


23



23Net (loss) income

$
(558
)

$
(858
)

$
2,504


$
2,641





Revenue. Total revenue decreased by $24,307, or 12.5%, to $169,859 from $194,166. Products revenue decreased $25,371, or 15.9% to $134,628 from $159,999. 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 unanticipated product availability issues from our key vendor during the third quarter of 2009.   Services revenue increased $1,064 or 3.1% to $35,231 from $34,167. 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 $1,953, or 5.0%, to $37,446 from $39,399. Gross profit as a percentage of revenue increased to 22.0% from 20.3%, due to higher products revenue margins partially offset by lower services margins. Gross profit on products decreased $1,467 or 5.0%, to $27,646 from $29,113 and, as a percentage of sales, increased to 20.5% from 18.2% 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 $486 or 4.7% to $9,800 from $10,286 and gross profit as a percent of services revenue decreased to 27.8% from 30.1%. The services gross profit decreased in 2009 due to lower utilization of professional services on a cost base which is primarily fixed in nature and lower managed services gross profit resulting from a higher cost base due to a new acquired location.




40





Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $3,386, or 9.7% to $38,234 from $34,848. As a percentage of total revenue, these expenses increased to 22.5% in 2009 versus 18.0% in 2008.  Increased 2009 expenses reflect selling, general and administrative expenses of the operations acquired in the NetTeks, AF, ANX, and VocalMash acquisitions, higher professional fees of $506 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.  These increases were partially offset by lower bad debt expense and reduced commission expense due to lower sales and proportionately higher sales to non-commissioned accounts.





Operating (Loss) Income. Operating income decreased $5,339 to a loss of $788 from income of $4,551, primarily due to lower sales  and proportionately higher selling, general and administrative expenses, slightly offset by higher gross margin.





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





Income Tax Expense. Income tax expense decreased by $1,802 to $66 from $1,868, reflecting: (a) a pretax loss in 2009 and (b) a full valuation allowance against our deferred tax assets in 2009, as discussed further under “Deferred Tax Assets” below.





Net (Loss) Income. Net income decreased $3,499 to a loss of $858 from income of $2,641, primarily due to lower sales and proportionately higher selling, general and administrative expenses partially offset by higher gross margins and lower income tax expense.





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 carry forwards 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.




41





Condensed Consolidated Balance Sheet as of December 31, 2009 and Restated Condensed Consolidated Balance Sheets for the Seven Quarterly Periods Ended September 30, 2009:





2009


2008Fourth

Quarter


Third

Quarter


Second

Quarter


First

Quarter


Fourth

Quarter


Third

Quarter


Second

Quarter


First

Quarter(As Restated)


(As Restated)


(As Restated)


(As Restated)


(As Restated)


(As Restated)


(As Restated)ASSETSCurrent assets:Cash and cash equivalents
$
13,247


$
12,116


$
13,181


$
8,681


$
10,937


$
15,806


$
12,604


$
8,236Accounts receivable, net

52,269



45,511



50,306



46,071



51,694



51,080



51,293



44,488Inventory, net

7,527



1,963



1,504



3,156



3,610



2,159



1,852



2,433Deferred costs

1,497



1,073



1,466



1,349



352



354



808



1,090Deferred income taxes

—



—



—



—



—



2,072



2,072



2,072Other current assets

1,106



1,063



1,241



1,229



1,059



883



969



1,486Total current assets

75,646



61,726



67,698



60,486



67,652



72,354



69,598



59,805Property and equipment, net

4,833



4,576



4,569



4,998



5,207



5,593



5,019



4,586Goodwill

13,870



14,085



13,256



12,882



12,882



21,438



21,010



16,663Intangible assets, net

1,760



1,423



1,349



1,536



1,721



4,146



4,758



3,011Other assets

257



53



53



—



—



—



—



—Total assets
$
96,366


$
81,863


$
86,925


$
79,902


$
87,462


$
103,531


$
100,385


$
84,065LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities:Current portion of capitallease obligations
$
192


$
198


$
189


$
191


$
77


$
77


$
—


$
—Accounts payable floor plan

44,561



31,294



35,936



31,512



40,002



38,285



35,536



30,693Accounts payable

5,682



5,721



6,097



5,108



5,170



4,434



6,068



4,794Accrued payroll and   related costs

4,679



5,077



4,793



4,764



4,266



5,341



5,094



4,412Accrued expenses

4,838



1,796



2,939



2,082



2,641



3,114



2,525



1,796Deferred revenue

2,402



2,080



2,205



2,081



1,024



671



973



1,174Other current liabilities

282



133



128



219



419



376



317



6,617Total current liabilities

62,636



46,299



52,287



45,957



53,599



52,298



50,513



49,486Non-current liabilities:Non-current portion of capital lease obligations

216



267



290



308



163



176



—



—Deferred income taxes

—



—



—



—



—



1,565



1,565



1,565Other liabilities

1,535



608



285



317



250



301



251



332Total liabilities

64,387



47,174



52,862



46,582



54,012



54,340



52,329



51,383Commitments and contingenciesStockholders’ equity:Preferred stock

—



—



—



—



—



—



—



—Common stock

91



89



88



88



87



87



87



74Additional paid-in capital

54,269



53,454



52,580



52,030



51,359



51,711



50,401



36,893Common stock issuable

—



—



—



—



—



—



740



—Accumulated deficit

(22,381
)


(18,854
)


(18,605
)


(18,798
)


(17,996
)


(2,607
)


(3,172
)


(4,285
)Total stockholders’ equity

31,979



34,689



34,063



33,320



33,450



49,191



48,056



32,682Total liabilities andstockholders’ equity
$
96,366


$
81,863


$
86,925


$
79,902


$
87,462


$
103,531


$
100,385


$
84,065




42




Item 7A.Quantitative and Qualitative Disclosures About Market Risk





Interest Rate Risk





We attempt to manage our borrowings under our senior credit facility (“Senior Facility”) and under our acquisition facility (“Acquisition Facility”) with Castle Pines Capital LLC to minimize interest expense. The interest rate of the Senior Facility is the prime rate plus 0.5% and the interest rate of the Acquisition Facility is the prime rate plus 2.0% (see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources”). During the years ended December 31, 2010 and 2009, there were no borrowings under the Senior Facility or the Acquisition Facility.   During the year ended December 31, 2008, there were no borrowings under the Senior Facility and there was $6,000 outstanding under the Acquisition Facility until June, 2008, when it was repaid with the cash proceeds of common stock sold through a registered direct offering.  The interest rates of borrowings under the Acquisition Facility during 2008 ranged from 5.5% to 7.75%. A one percent change in variable interest rates would not have a material impact on our results of operations or cash flows.






























43




Item 8.  Financial Statements and Supplementary Data





INX INC. AND SUBSIDIARIES





INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS


AND FINANCIAL STATEMENT SCHEDULE





PageReport of Independent Registered Public Accounting Firm
45Consolidated Balance Sheets at December 31, 2010, 2009 and 2008
46Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008
47Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2010,  2009 and 2008
48Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008
50Notes to Consolidated Financial Statements
51Schedule II Valuation and Qualifying Accounts
81




44




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








Board of Directors and Shareholders


INX Inc.





We have audited the accompanying consolidated balance sheets of INX Inc. (a Delaware corporation) and subsidiaries as of December 31, 2010, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(2).  These finan­cial statements and financial statement schedule are the responsibility of the Company’s man­agement.  Our responsibil­ity is to express an opinion on these financial statements and financial statement schedule based on our audits.





We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting.Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.Accordingly, we express no such opinion.An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of INX Inc. and subsidiaries as of December 31, 2010, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when con­sidered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.





As discussed in Note 2, the 2008 financial statements have been restated to correct misstatements related to revenue recognition and presentation and employee compensation related to contingent acquisition consideration.








/s/ GRANT THORNTON LLP








Chicago, Illinois


June 3, 2011




45




INX INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


(In thousands, except share and par value amounts)





December 31,2010

2009


2008(As Restated Note 2)ASSETSCurrent assets:Cash and cash equivalents

$
12,089


$
13,247


$
10,937Accounts receivable, net of allowance of $651, $295, and $735, respectively


64,493



52,269



51,694Inventory, net


3,239



7,527



3,610Deferred costs


2,767



1,497



352Deferred income taxes


4,146



—



—Other current assets


960



1,106



1,059Total current assets


87,694



75,646



67,652Property and equipment, net


4,793



4,833



5,207Goodwill


13,532



13,870



12,882Intangible assets, net


1,015



1,760



1,721Deferred income taxes


2,029



—



—Other assets


75



257



—Total assets

$
109,138


$
96,366


$
87,462LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities:Current portion of capital lease obligations

$
178


$
192


$
77Accounts payable floor plan


41,129



44,561



40,002Accounts payable


9,423



5,682



5,170Accrued payroll and related costs


7,145



4,679



4,266Accrued expenses


3,974



4,838



2,641Deferred revenue


4,055



2,402



1,024Other current liabilities


1,461



282



419Total current liabilities


67,365



62,636



53,599Non-current liabilities:Non-current portion of capital lease obligations


55



216



163Other liabilities


874



1,535



250Total liabilities


68,294



64,387



54,012Commitments 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, 9,514,542, 9,103,253 and  8,709,304 issued and outstanding, respectively


95



91



87Additional paid-in capital


57,777



54,269



51,359Accumulated deficit


(17,028
)


(22,381
)


(17,996
)Total stockholders’ equity


40,844



31,979



33,450Total liabilities and stockholders’ equity

$
109,138


$
96,366


$
87,462





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




46




INX INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


(In thousands, except share and per share amounts)





Year Ended December 31,2010


2009


2008(As Restated,

Note 2)Revenue:Products

$
271,942


$
184,004


$
210,137Services


40,035



42,943



46,183Total revenue


311,977



226,947



256,320Cost of products and services:Products


214,405



144,913



172,543Services


31,587



31,893



32,774Total cost of products and services


245,992



176,806



205,317Gross profit


65,985



50,141



51,003Selling, general and administrative expenses


63,341



51,811



48,740Goodwill impairment charges


2,560



2,380



9,265Other long-lived assets impairment charges


—



—



3,806Adjustments to estimated contingent purchase consideration


(1,278
)


109



—Operating income (loss)


1,362



(4,159
)


(10,808
)Interest expense


(29
)


(64
)


(330
)Interest income


10



40



357Other income (expense), net


97



233



(43
)Income (loss) before income taxes


1,440



(3,950
)


(10,824
)Income tax (benefit) expense


(3,913
)


345



1,961Net income (loss) from continuing operations


5,353



(4,295
)


(12,785
)Income (loss) from discontinued operations, net of taxes


—



(90
)


37Net income (loss)

$
5,353


$
(4,385
)

$
(12,748
)Basic net income (loss) per share:Net income (loss) from continuing operations

$
0.58


$
(0.49
)

$
(1.57
)Income (loss) from discontinued operations, net of taxes


—



(0.01
)


—Net income (loss) per share - Basic

$
0.58


$
(0.50
)

$
(1.57
)Diluted net income (loss) per share:Net income (loss) from continuing operations

$
0.54


$
(0.49
)

$
(1.57
)Income (loss) from discontinued operations, net of taxes


—



(0.01
)


—Net income (loss) per share - Diluted

$
0.54


$
(0.50
)

$
(1.57
)Weighted average shares - Basic


9,263,841



8,830,228



8,133,165Weighted average shares - Diluted


9,901,223



8,830,228



8,133,165





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




47





INX INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


(In thousands, except share and per share amounts)





$.01 Par Value


AdditionalCommon Stock


Paid-In


AccumulatedShares


Amount


Capital


Deficit


TotalBalance at December 31, 2007, as previously reported


7,548,892


$
75


$
36,497


$
(4,545
)

$
32,027Cumulative effect of correction of accounting for  revenue recognition


—



—



(33
)


(31
)


(64
)Cumulative effect of correction of accounting for contingent acquisition purchase consideration


—



—



672



(672
)


—Balance at January 1, 2008, as restated (Note 2)


7,548,892



75



37,136



(5,248
)


31,963Issuance of common stock, net of issuance costs of $1,149


900,000



9



8,742



—



8,751Exercise of common stock options


151,624



2



829



—



831Issuance of vested restricted common stock


50,265



—



—



—



—Issuance of shares as additional purchase price consideration for Network Architects, Corp. acquisition


75,000



1



740



—



741Issuance of shares as purchase price consideration and broker fees for Access Flow, Inc. acquisition


274,627



3



3,583



—



3,586Issuance of shares as purchase price consideration for NetTeks Technology Consultants, Inc. acquisition


30,770



—



163



—



163Issuance of shares as purchase price consideration for VocalMash acquisition


60,000



1



292



—



293Share-based compensation expense related to employee stock options and employee restricted stock grants


—



—



1,422



—



1,422Share-based compensation expense related to directors’ stock grants


7,443



—



90



—



90Share-based compensation expense related to Employee Stock Purchase Plan


—



—



193



—



193Issuance of common stock under the Employee Stock Purchase Plan


77,600



1



343



—



344Excess tax benefit from stock option exercises


—



—



1,085



—



1,085Issuance of common stock grant


6,000



—



26



—



26Exercise of warrants


3,155



—



—



—



—Purchase and retirement of stock resulting from grantee election to fund payroll taxes out of restricted stock grant


(9,868
)


—



(56
)


—



(56
)Repurchase and retirement of common stock


(466,204
)


(5
)


(3,229
)


—



(3,234
)Net loss, as restated (Note 2)


—



—



—



(12,748
)


(12,748
)Balance at December 31, 2008, as restated (Note 2)


8,709,304



87



51,359



(17,996
)


33,450Exercise of common stock options


12,447



—



48



—



48Issuance of vested restricted common stock


140,329



1



(1
)


—



—Issuance of shares as additional purchase price consideration and broker fees for Access Flow, Inc. acquisition


28,580



—



185



—



185Issuance of shares as purchase price consideration for AdvancedNetworX, Inc. acquisition


2,000



—



10



—



10




48




INX INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY, continued


(In thousands, except share and per share amounts)





$.01 Par Value

Common Stock


Additional

Paid-In


AccumulatedShares


Amount


Capital


Deficit


TotalIssuance of common stock options to sole stockholderof Marketware Inc. in connection with acquisition


—



—



23



—



23Share-based compensation expense related to employeestock options and employee restricted stock grants


—



—



1,656



—



1,656Share-based compensation expense related to directors’stock grants


19,149



—



90



—



90Share-based compensation expense related to EmployeeStock Purchase Plan


—



—



347



—



347Issuance of common stock under the Employee StockPurchase Plan


238,919



3



689



—



692Excess tax benefit from stock option exercises


—



—



67



—



67Purchase and retirement of stock resulting from granteeelection to fund payroll taxes out of restricted stockgrant


(28,009
)


—



(138
)


—



(138
)Repurchase and retirement of common stock


(19,466
)


—



(66
)


—



(66
)Net loss


—



—



—



(4,385
)


(4,385
)Balance at December 31, 2009


9,103,253



91



54,269



(22,381
)


31,979Exercise of common stock options


18,890



—



28



—



28Issuance of vested restricted common stock


202,730



2



(2
)


—



—Issuance of shares as purchase price consideration andbroker fees for Access Flow, Inc. acquisition


50,525



1



248



—



249Share-based compensation expense related to employeestock options and employee restricted stock grants


—



—



1,699



—



1,699Share-based compensation expense related to EmployeeStock Purchase Plan


—



—



276



—



276Issuance of common stock under the Employee StockPurchase Plan


183,478



1



769



—



770Excess tax benefit from stock option exercises


—



—



715



—



715Issuance of common stock grant


10,000



—



53



—



53Purchase and retirement of stock resulting from granteeelection to fund payroll taxes out of restricted stockgrant


(54,334
)






(278
)


—



(278
)Net income


—



—



—



5,353



5,353Balance at December 31, 2010


9,514,542


$
95


$
57,777


$
(17,028
)

$
40,844




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




49




INX INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


(In thousands)





Year Ended December 31,2010


2009


2008(As Restated,

Note 2)Cash flows from operating activities:Net income (loss)

$
5,353


$
(4,385
)

$
(12,748
)Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:(Income) loss from discontinued operations, net of tax


—



90



(37
)Depreciation and amortization


2,847



3,119



2,667Share-based compensation expense


2,224



2,093



1,731Impairment charges


2,560



2,380



13,071Adjustment to estimated acquisition contingent consideration


(1,278
)


109



—Excess tax benefits from stock option exercises


(715
)


(67
)


(1,085
)Provision for doubtful accounts


457



294



541Deferred income tax


(6,175
)


—



507Loss on disposal of property and equipment


7



50



43Changes in assets and liabilities:Accounts receivable, net


(12,681
)


(869
)


(7,390
)Inventory


4,288



(3,908
)


(1,796
)Accounts payable


3,741



512



456Accrued expenses


1,352



352



1,413Other assets and liabilities


2,575



(348
)


1,440Net cash provided by (used in) operating activities


4,555



(578
)


(1,187
)Cash flows from investing activities:Purchases of property and equipment


(1,573
)


(918
)


(2,260
)Acquisition of NetTeks Technology Consultants, Inc.


(1,500
)


—



(1,440
)Acquisition of Access Flow, Inc.


(273
)


(209
)


(2,550
)Acquisition of AdvancedNetworX, Inc.


—



(465
)


—Acquisition of Marketware Inc.


—



(411
)


—Acquisition of Select, Inc.


—



(25
)


153Proceeds from sale of property and equipment


6



8



1Transaction costs paid for acquisitions


—



—



(225
)Net cash used in investing activities


(3,340
)


(2,020
)


(6,321
)Cash flows from financing activities:(Payments) borrowings under non-interest bearing floor plan financing, net


(3,432
)


4,559



7,530Excess tax benefits from stock option exercises


715



67



1,085Proceeds from shares issued under Employee Stock Purchase Plan


770



692



344Payments on other borrowings


(176
)


(254
)


(601
)Purchase of stock resulting from grantee election


(278
)


(138
)


(61
)Proceeds from exercise of stock options


28



48



831Proceeds from issuance of common stock


—



—



8,751Payments on borrowings under acquisition credit facility


—



—



(6,000
)Purchase of common stock


—



(66
)


(3,234
)Proceeds from other borrowings


—



—



460Net cash (used in) provided by financing activities


(2,373
)


4,908



9,105Net increase (decrease) in cash and cash equivalents


(1,158
)


2,310



1,597Cash and cash equivalents at beginning of period


13,247



10,937



9,340Cash and cash equivalents at end of period

$
12,089


$
13,247


$
10,937Supplemental disclosures of cash flow information:Cash paid for interest

$
25


$
67


$
256Cash paid for income taxes

$
297


$
294


$
156Supplemental disclosure of non-cash finance and investing activities:Capital lease obligations

$
14


$
297


$
—Purchase of software for debt

$
—


$
672


$
—Issuance of vested restricted common stock

$
1,333


$
1,090


$
591





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




50





INX INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


For the Years Ended December 31, 2010, 2009 and 2008


(In thousands, except share and per share amounts)





1.  Summary of Significant Accounting Policies





(a)  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 collaboration and virtualized data center.  The accompanying consolidated financial statements include the accounts of INX 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 on December 31, 2008.





(b) Basis of Presentation





During 2006, the Company sold the Stratasoft subsidiary and Valerent operations as further discussed in Note 12. The Stratasoft and Valerent results of operations are classified as discontinued operations for all periods presented.  The Company has concluded that its continuing operations comprise one reportable segment. In making this determination, the Company considered that each reporting unit has similar characteristics and long-term prospects, sells similar products, performs similar services, has similar types of customers and is subject to the same regulatory environment.





Certain prior period amounts in the balance sheets, statements of operations, and statements of cash flows presented herein have been reclassified to conform to the current period presentation.





(c)  Principles of Consolidation





The accompanying consolidated financial statements include the accounts of INX Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated.





(d)  Use of Estimates





The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expense during the reporting period. Actual results could differ from those estimates.





(e)  Cash and Cash Equivalents





Cash equivalents consist of highly liquid investments with original maturity of three months or less when purchased. The Company maintains its cash in bank deposit accounts.  At December 31, 2010, interest bearing accounts are insured up to $250 and are fully insured for non-interest bearing accounts due to the passage of the Dodd-Frank Act in December 2010. The Company has not experienced any losses in interest bearing accounts.





(f)  Accounts Receivable





Trade accounts receivable are recorded at the invoiced amount, are non-interest bearing and are recorded net of reserves for sales returns and allowances and an allowance for doubtful accounts. The Company extends credit to its customers in the normal course of business and generally does not require collateral or other security. The Company performs ongoing credit evaluations of its customers’ financial condition and, in some instances, requires letters of credit or additional guarantees in support of contracted amounts. Earnings are charged with a provision for doubtful accounts based on a current review of the collectability of the accounts and using a systematic approach based on historical collections and age of the amounts due. Accounts deemed uncollectible are applied against the allowance for doubtful accounts. Accruals for estimated sales returns and other allowances and deferrals are recorded as a reduction of revenue at the time of revenue recognition. These provisions are based on contract terms and prior claims experience and involve significant estimates.




51





(g)  Inventory





Inventory consists primarily of network equipment, computer equipment and components and is valued at the lower of cost or market with cost determined on the first-in first-out method. Substantially all inventory is finished goods. The Company reviews its inventory for slow moving and obsolete products each reporting period.  Products that have not sold within one year are considered to be slow moving.  The potential for sale of slow moving and obsolete inventories is considered through market research of technology advances, analysis of customers’ current needs, and assumptions about future demand and market conditions.  If the inventory is deemed to be slow moving or obsolete, then the value is reduced to the lower of cost or market value based on current market pricing for similar products.





(h)  Property and Equipment





Property and equipment are stated at cost less accumulated depreciation and amortization.  Depreciation and amortization are recognized using the straight-line method over the estimated useful lives of the related assets.  Repairs and maintenance are charged to expense when incurred. Disposals are removed at cost less accumulated depreciation with the resulting gain or loss recognized in the year of disposal.





(i)  Goodwill





Goodwill is the excess of the purchase price over the fair values assigned to the assets and liabilities acquired in business combinations. Goodwill is not amortized, but is subject to periodic testing for impairment. Goodwill is tested for impairment on an annual basis during the fourth quarter and more frequently if facts and circumstances indicate goodwill carrying values exceed estimated reporting unit fair values.  The annual goodwill impairment test consists of a two-step process as follows:





Step 1.  The Company compares the fair value of each reporting unit to its carrying amount, including the existing goodwill. The fair value of each reporting unit is determined using a discounted cash flow valuation analysis. The carrying value of each reporting unit is determined by specifically identifying and allocating the assets and liabilities to each reporting unit. If the carrying amount of a reporting unit exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired and the Company then performs the second step of the impairment test. If the fair value of a reporting unit exceeds its carrying amount, no further analysis is required.





Step 2.  The Company compares the implied fair value of the reporting unit’s goodwill, determined by allocating the reporting unit’s fair value to all of its assets and its liabilities in a manner similar to a purchase price allocation, to its carrying amount. If the carrying amount of the reporting unit’s goodwill exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess.





Based on the impairment tests performed, the Company determined there were impairments of goodwill in 2010, 2009 and 2008 resulting in impairment charges as further discussed in Note 4.





(j)  Intangible Assets





Intangible assets are amortized over their estimated useful lives of two to five years.





(k)  Impairment of Long-Lived Assets





Impairment charges are incurred for long-lived assets used in operations other than goodwill when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. Testing for impairment is performed at the reporting unit level, which is based primarily on our geographical regions, consistent with the reporting units used in testing for goodwill impairment.  Based on the impairment tests performed, the Company determined there were impairments of long-lived assets in 2008 resulting in impairment charges as further discussed in Note 4. There was no impairment of long-lived assets in 2010 and 2009.





(l)  Income Taxes





Income taxes are accounted for under the asset and liability method.  Under the asset and liability method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.  This method also requires the recognition of future tax benefits for net operating loss (“NOL”) carry-forwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date.  A valuation allowance is provided against deferred tax assets to the extent their realization is not more likely than not.  The tax provision allocated to discontinued operations is based on the incremental tax effect after computing the tax provision on continuing operations. Uncertain tax positions and the related interest and penalties are provided for based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities.




52





(m)  Revenue Recognition





Products revenue consists of hardware and software purchased from other parties and resold to a customer.  Products revenue also includes revenue from hardware maintenance contracts, hardware installation, support and training services that are provided solely by third parties who are the primary obligor of these services under the customer contract.





Services revenue consists of professional services and managed services.  Professional services include the planning, design, and implementation of the products and solutions that we provide.  Managed services include remote monitoring and management of enterprise organizations’ network infrastructure, data center, wireless network and security technology, and remote disaster recovery hosting.  Services revenue also includes hardware maintenance contracts for which the Company is the primary obligor.





The Company recognizes revenue when persuasive evidence of a sale arrangement exists, delivery has occurred or services have been rendered, the sales price is fixed or determinable, and collectability is reasonably assured. The majority of its sales relate to physical products that are recognized when title and risk of loss to the products sold passes to the customer. Based on our standard shipping terms, title generally passes upon shipment of the product either by a vendor directly to the customer or by the Company to the customer.  If the customer’s contract states the title passes upon receipt by the customer, revenue is not recognized until confirmation of delivery is received.  Products revenue from services provided to customers by third parties are recorded on a net basis and recognized as revenue upon contracting with the third party service provider. Amounts billed to customers for shipping and handling are classified as revenue.





The Company resells certain third party software which does not require significant production, modification or customization.  Such software is recognized when persuasive evidence of a sale arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured.





Revenue for fixed and flat fee services contracts related to customized network and IP telephony solutions are generally recognized under a proportional performance model utilizing an input based approach (labor hours). Other service revenue is earned from providing stand-alone services such as billings for engineering and technician time, installation and programming services, which are provided on an hourly basis. Other service revenues are recognized when the service is performed and when collection is reasonably assured.





Managed services revenue includes remote monitoring and management of enterprise organizations’ network infrastructure, data center, wireless network and security technology, remote disaster recovery hosting, and hardware maintenance contracts for which the Company is the primary obligor.  Contracts under this revenue category are recognized ratably over the term of the underlying customer contract. Commission costs and third party support contracts paid in advance are deferred and recognized ratably over the term of the underlying customer contract.





When an arrangement contains multiple deliverables, such as more than one product item or a combination of products and one or more types of services, the Company determines whether the delivered items can be considered separate units of accounting as prescribed under multiple-element arrangement accounting guidance. Such guidance states that delivered items should be considered separate units of accounting if delivered items have value to the customer on a standalone basis, there is objective and reliable evidence of the fair value of undelivered items, and if delivery of undelivered items is probable and substantially in the Company’s control. Contracts entered into with customers, whether containing only product, only services, or a combination of products and services, are considered a single arrangement as are multiple contracts which were entered into separately but which were negotiated as a package.





If objective and reliable evidence exists for the fair value of all items in a multiple element arrangement, revenue is recognized based on the relative fair value of the separate elements. When there is objective and reliable evidence for the fair values of undelivered items but no such evidence exists for the items already delivered, the amount of revenue allocated to the delivered items is computed using the residual method.  The Company has vendor-specific objective evidence (“VSOE”) of fair value for product and professional service deliverables and it does not have VSOE of fair value for managed services deliverables.  Because the Company does not have the ability to establish the fair value of managed services deliverables, multiple element arrangements that contain managed services are recognized ratably over the initial term of the managed services contract that is part of the arrangement because managed services are always the last element to be delivered in the arrangement.  The costs of products and services and commission costs directly related to multiple element arrangements containing managed services are deferred and recognized ratably over the initial term of the managed services contract.





Contracts and customer purchase orders are generally used to determine the existence of an arrangement. Shipping documents and customer acceptance, when applicable, are used to verify delivery. If a customer contract contains unusual technical objective performance criteria to be met prior to customer acceptance that the Company cannot be certain of achieving, then revenue recognition is deferred until acceptance is obtained. Determination that the fee is fixed or determinable is based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. Accruals for estimated sales returns and other allowances and deferrals are recorded as a reduction of revenue at the time of revenue recognition. These provisions are based on contract terms and prior claims experience and involve significant estimates. If these estimates are significantly different from actual results, the Company’s revenue could be impacted.  The Company collects and remits sales and property taxes on products and services that it purchases and sells under its contracts with customers, and reports such amounts under the net method in its consolidated statements of operations.




On an arrangement basis, the Company recognizes deferred revenue to the extent cash is received in excess of revenue recognized, The Company does not recognize accounts receivable for amounts invoiced to customers in excess of revenue recognized to-date. As of December 31, 2010, 2009, and 2008, the Company invoiced customers $701, $429 and $342 in excess of the revenue recognized, respectively. These amounts are not reflected in accounts receivable and deferred revenue as of December 31, 2010, 2009 and 2008.




53





Credit and collections policy is the basis for the determination of the collectability of amounts due from customers, which requires the Company to use estimates and exercise judgment. It routinely monitors the customer’s payment history and current credit worthiness to determine that collectability is reasonably assured and then, in some instances, require letters of credit in support of contracted amounts.  This requires the Company to make frequent judgments and estimates in order to determine the appropriate period to recognize a sale to a customer and the amount of valuation allowances required for doubtful accounts. Provisions for doubtful accounts are recorded when it becomes evident that the customer will not be able to make the required payments either at contractual due dates or in the future. Changes in the financial condition of customers, either adverse or positive, could impact the amount and timing of any additional provision for doubtful accounts that may be required.





In February 2009, the Company entered into a $2,400 contract with a state department of transportation to provide broadband wireless services to passengers on a local train system.  The contract provided for the Company to be paid upon completion of specified milestones and included a twenty percent retainage provision.  One half of the retainage is payable upon determination by the customer that the broadband wireless services are fully operational and the remaining one half of the retainage is payable upon acceptance of the system by the customer.  In accordance with the contract terms, acceptance of the system will be based on demonstration of system performance requirements as set forth in the contract during a three month system acceptance test period to start once the system is available for use covering the entire travel route.  Due to the unique contract requirements and the acceptance criteria, the Company accounts for this contract using the completed contract method.  All revenue earned and related costs will be recognized upon final acceptance of the system, currently expected to occur in 2011.  The contract amount less the final retainage payment of approximately $240 has been received.  The Company expects to incur a loss of $127 on this contract, which was accrued as of December 31, 2009.





Reported under the caption deferred revenue in the respective balance sheets are the following amounts of billings in excess of costs incurred:





December 31,

2010

December 31,

2009Billings to-date

$
2,373


$
2,325Less costs incurred to-date


(2,373
)


(2,187
)Billings in excess of costs incurred

$
—


$
138





(n)  Vendor Incentives





The Company participates in vendor incentive programs under which incentives are principally earned by sales volume, sales growth and customer satisfaction levels. The amounts earned under these programs are accrued when they are deemed probable and can be reasonably measured; otherwise, they are recorded at the earlier of when they are declared by the vendor or the cash is received.   As a result of these estimates, the amount of rebates declared by the vendor, or the amount of rebates received in cash, the effect of vendor incentives on cost of goods can vary significantly between quarterly and annual reporting periods. The incentives are recorded as a reduction of cost of goods and services. The Company recognized vendor incentives of $18,169, $13,345 and $10,118 in 2010, 2009 and 2008, respectively. Accounts receivable from vendors of $6,068, $4,820 and $3,186 at December 31, 2010, 2009 and 2008, respectively, are reported under “Accounts receivable” on the consolidated balance sheets.





(o)  Advertising Costs





Advertising costs generally consist of print advertising and trade show materials and are expensed as incurred.  Advertising expense was $80, $64, and $20 in 2010, 2009, and 2008, respectively.





(p)  Research and Development Costs





Research and development expenditures are charged to operations as incurred and consist primarily of outside software development services. The Company incurred research and development expenditures of $70, $26, and $11 in 2010, 2009 and 2008, respectively.




54





(q)  Share-Based Compensation





Stock-based compensation expense is measured at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the award’s vesting period. The Company uses the Black-Scholes-Merton option-pricing model to estimate the fair value of these awards. The model requires the Company to make significant judgments regarding the assumptions used within the model, the most significant of which are the stock price volatility assumption, the expected life of the award, the risk-free rate of return and dividends during the expected term. The Company estimates expected forfeitures of stock-based awards at the grant date and recognizes compensation cost only for those awards expected to vest. The forfeiture assumption is ultimately adjusted to the actual forfeiture rate. Therefore, changes in the forfeiture assumptions may affect the timing of the total amount of expense recognized over the vesting period. Estimated forfeitures are reassessed in each reporting period and may change based on new facts and circumstances.





(r)  Earnings Per Share





Basic EPS is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted EPS is calculated using the weighted-average number of shares outstanding for the period and dilutive common share equivalents (using the treasury stock method) outstanding during the period. The following table reconciles the basic to diluted weighted average shares outstanding:





Year Ended December 31,2010


2009


2008, As restatedNet income (loss) from continuing operations

$
5,353


$
(4,295
)

$
(12,785
)Income (loss) from discontinued operations


—



(90
)


37Net income (loss)

$
5,353


$
(4,385
)

$
(12,748
)Weighted-average shares outstanding- basic


9,263,841



8,830,228



8,133,165Dilutive effect of common share equivalents


637,382



—



—Weighted-average shares outstanding- diluted


9,901,223



8,830,228



8,133,165





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 anti-dilutive.





Year Ended December 31,2010


2009


2008Warrants


40,000



40,000



11,896Stock options


530,888



561,818



558,347Contingent shares


—



94,173



—Restricted stock


—



478,897



—Weighted-average shares considered anti-dilutive


570,888



1,174,888



570,243





(s)  Fair Value of Financial Instruments





The Company’s financial instruments consist of cash and cash equivalents, accounts receivable and accounts payable for which the carrying values approximate fair values given the short-term maturity of the instruments. The carrying value of the Company’s debt instruments approximate their fair value based on estimates of rates offered to the Company for instruments with the same maturity dates and security structures.





(t)  Recent Accounting Pronouncements





In December 2010, the Financial Accounting Standards Board (“FASB”) clarified required disclosures regarding pro forma revenue and earnings in a business combination.  If comparative financial statements of an acquired business are presented, the revenue and earnings of the combined entity should be presented as though the business combination had occurred at the beginning of the prior reporting period only.  In addition, the supplemental disclosures should include a description of the amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the pro forma revenue and earnings.  The clarification is required to be applied to any business combination of the Company that closes after 2010 and early adoption is permitted.  The Company will adopt the requirement for any business combination that closes after December 31, 2010.





In December 2010, the FASB clarified certain aspects of “carrying value” in applying step 1 of the goodwill impairment test to a reporting unit.  The revised guidance does not prescribe a specific method of calculating the carrying value of a reporting unit, but it does require reporting units with negative or zero carrying value to be assessed for impairment using qualitative factors.  If the qualitative factors indicate that it is more likely than not that impairment of goodwill exists, then step 2 of the goodwill impairment test must be performed.  The new requirement is effective for years beginning after December 15, 2010 and early adoption is not permitted.  Companies affected by this new standard are required to record a cumulative effect adjustment to beginning retained earnings in the period of adoption.  The new standard is not expected to have a material effect on the Company because none of the Company’s reporting units with goodwill balances at December 31, 2010, have a negative or zero carrying value.




55





In July 2010, the FASB adopted enhanced disclosure requirements regarding financing receivables and allowance for credit losses, excluding short-term trade receivables or receivables measured at fair value or lower of cost or fair value.  The enhanced disclosure requirements include information about the nature and credit risk inherent in the entity’s financing receivables, the Company’s methods of analyzing and assessing credit risk in determining the allowance for credit losses and the changes and reasons for changes in the allowance for credit losses.  The enhanced disclosure requirements are required to be adopted by the Company in its annual report for the year ended December 31, 2010.  The Company’s financing receivables are currently short-term trade receivables which are excluded from such disclosures.   The additional disclosure requirements will not have an impact on the Company’s results of operations or financial position.





In January 2010, the FASB enhanced existing requirements and added new requirements for disclosures of fair value measurements.  Previous guidance required companies to disclose information about how management determined fair value for those assets and liabilities measured at fair value by categorizing such assets and liabilities in one of three categories: Level 1, Level 2 or Level 3.  The new requirements enhance and amend these disclosures.  Some of the new  disclosures were required to be adopted,  and were adopted by the Company in the first quarter ended March 31, 2010, with the remaining disclosures  required to be adopted by the Company in the first quarter ended March 31, 2011.  The additional disclosure requirements will not have an impact on the Company’s results of operations or financial position.





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 will adopt this guidance prospectively on January 1, 2011, and is currently evaluating the financial statement impact, although it does not expect the implementation of this standard to have a material impact on the results of operations or financial position.





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 will adopt this guidance prospectively on January 1, 2011, and is currently evaluating the financial statement impact, although it does not expect the implementation of this standard to have a material impact on the results of operations or financial position.





2.   Restatement of Previously Issued Financial Statements





As previously disclosed in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on March 26, 2010, the Company announced that it was delaying its fourth quarter earnings release (for the year ended December 31, 2009) and that it would not file its Annual Report on Form 10-K for the fiscal year 2009 by its due date in order to allow the Company additional time for the reexamination of its revenue recognition under Accounting Standards Codification (ASC) 605-25, Revenue Recognition, Multiple-Element Arrangement, previously referred to as Emerging Issues Task Force No. 00-21 (“EITF 00-21”), “Revenue Arrangements with Multiple Deliverables”.





In the Company’s Current Report on Form 8-K filed with the SEC on June 21, 2010, the Company announced that the Audit Committee of its Board of Directors, upon the recommendation of management, had determined that its previously issued financial statements included in its Annual Report on Form 10-K/A for the fiscal year ended December 31, 2008, its Quarterly Report for the quarter ended March 31, 2009 on Form 10-Q/A and for the quarters ended June 30, 2009 and September 30, 2009 on Form 10-Q, should no longer be relied upon as a result of certain errors affecting the timing of recognition of revenues and costs of revenues.




56





The restated financial statements correct the following errors in the recognition of revenue associated with the proper:





1.
Application of EITF 00-21, affecting the timing and presentation of revenue recognized (“00-21 Adjustments”) for the:a.
Proper determination of contracts to which EITF 00-21 was applicable and the related units of accounting for such contracts,


b.
Proper determination of linkage between contracts, reflecting aggregation of single contracts into multiple element arrangements since they were negotiated as a package, andc.
Proper assessment of whether or not the Company had vendor specific objective evidence (“VSOE”) of the fair value of the various deliverables within arrangements containing multiple deliverables, as well as (i) the timing of revenue recognition based upon the relative fair value of the deliverables within the arrangement for deliverables for which the Company is able to establish the fair value. (ii) the allocation of the total arrangement consideration between the various elements of the arrangement based upon the relative fair value of the deliverables within the arrangement for multi-element arrangements, and, (iii) the deferral of revenue for the entire arrangement in situations where the arrangement contained remaining undelivered deliverables for which the Company is not able to establish the fair value.


2.
Identification of customer contracts with special customer acceptance terms which require deferral of revenues and related costs of revenues and commissions until customer acceptance was obtained (“Special Acceptance Terms”),3.
Identification of contract shipping terms resulting in the incorrect timing of recognition of revenues and related costs of sales and commissions (“Shipping Terms”), and


4.
Identification of products that are maintenance, support, and installation services provided by third parties as the primary obligor of the service, which requires presentation of the revenue reported by the Company net of the cost of the services provided by the third party (“Net Presentation”).





In addition, the Company also determined that an error was made in the accounting for contingent consideration (“earn-out”) paid in August 2006 in connection with the acquisition of substantially all of the assets of InfoGroup Northwest, Inc. (“InfoGroup”).  The InfoGroup assets were acquired under an asset purchase agreement in June 2005 and most InfoGroup employees became employees of the Company.  As part of the earn-out provision, cash and common stock were paid by the Company to the InfoGroup shareholder based upon the InfoGroup branch offices achieving specific financial performance targets, which were recorded as goodwill.  The selling shareholder decided to give a portion of the earn-out to former employees of InfoGroup who had become employees of the Company as a result of the acquisition (“Employee Payments”).  Under GAAP, including guidance promulgated by the SEC, actions of economic interest holders in a company may be imputed to the company itself. When a selling shareholder gives acquisition-related payments to Company employees who were not selling shareholders, these payments are viewed as resulting from services that are assumed to have benefited the Company and therefore must be further recorded as a non-cash charge to compensation expense.  In effect, the Employee Payments are in substance a separate transaction from the Company’s acquisition of the InfoGroup assets, which should have been recorded as a separate non-cash charge to compensation expense. The Employee Payments were therefore required to be reflected in the consolidated financial statements for the year ended December 31, 2006 as non-cash compensation expense in the amount of $672, and the selling shareholder was deemed to have made a corresponding capital contribution to the Company.  The compensation expense is a non-cash charge because the payments were made directly by the selling shareholder from the acquisition proceeds received from the Company.  The Company did not expend additional cash with respect to the compensation charge.  The correction had no effect on total stockholders’ equity at December 31, 2006.





The Restated Stockholders' Equity section of the Consolidated Balance Sheet as of December 31, 2007 presenting the cumulative effect of the revenue corrections and error in accounting for contingent consideration, is as follows:





As

Previously

Reported


Total

Revenue

Corrections


Goodwill

Correction


As

RestatedStockholders’ equity:Common stock

$
75


$
—


$
—


$
75Additional paid-in capital


36,497



(33
)


672



37,136Accumulated deficit


(4,545
)


(31
)


(672
)


(5,248
)Total stockholders’ equity

$
32,027


$
(64
)

$
—


$
31,963





57





The Restated Consolidated Balance Sheet as of December 31, 2008, is as follows:





As

Previously

Reported


Total

Revenue

Corrections


Goodwill

Correction


As

RestatedCurrent assets:Cash and cash equivalents

$
10,937


$
—


$
—


$
10,937Accounts receivable, net


52,866



(1,172
)


—



51,694Inventory, net


2,406



1,204



—



3,610Deferred costs


216



136



—



352Other current assets


1,059



—



—



1,059Total current assets


67,484



168



—



67,652Property and equipment, net


5,207



—



—



5,207Goodwill


12,882



—



—



12,882Intangible and other assets, net


1,721



—



—



1,721Total assets

$
87,294


$
168


$
—


$
87,462Current liabilities:Current portion of capital lease obligations

$
77


$
—


$
—


$
77Accounts payable floor plan


40,002



—



—



40,002Accounts payable


5,170



—



—



5,170Accrued payroll and related costs


4,258



8







4,266Accrued expenses


2,641



—



—



2,641Deferred revenue


744



280



—



1,024Other current liabilities


419



—



—



419Total current liabilities


53,311



288



—



53,599Non-current liabilities:Non-current portion of capital lease obligations


163



—



—



163Other liabilities


250



—



—



250Total liabilities


53,724



288



—



54,012Stockholders’ equity:Common stock


87



—



—



87Additional paid-in capital


50,742



(55
)


672



51,359Accumulated deficit


(17,259
)


(65
)


(672
)


(17,996
)Total stockholders’ equity


33,570



(120
)


—



33,450Total liabilities and stockholders’ equity

$
87,294


$
168


$
—


$
87,462





58





The Restated Consolidated Statement of Operations for the year ended December 31, 2008, is as follows:





As

Previously

Reported


Total Revenue

Corrections


As

RestatedRevenue:Products

$
213,125


$
(2,988
)

$
210,137Services


46,032



151



46,183Total revenue


259,157



(2,837
)


256,320Cost of products and services:Products


175,244



(2,701
)


172,543Services


32,782



(8
)


32,774Total cost of products and services


208,026



(2,709
)


205,317Gross profit


51,131



(128
)


51,003Selling, general and administrative expenses


48,784



(44
)


48,740Impairment charge


13,071



—



13,071Operating loss


(10,724
)


(84
)


(10,808
)Interest expense


(330
)


—



(330
)Interest income


357



—



357Other expense, net


(43
)


—



(43
)Loss from continuing operations before income taxes


(10,740
)


(84
)


(10,824
)Income tax expense (benefit)


2,011



(50
)


1,961Net loss from continuing operations


(12,751
)


(34
)


(12,785
)Income from discontinued operations, net of taxes


37



—



37Net loss

$
(12,714
)

$
(34
)

$
(12,748
)Net loss per share:Net loss per share, basic:Net loss from continuing operations

$
(1.56
)





$
(1.57)Income from discontinued operations, net of taxes


—







—Net loss per share

$
(1.56
)





$
(1.57)Net loss per share, diluted:Net loss from continuing operations

$
(1.56
)





$
(1.57)Income from discontinued operations, net of taxes


—







—Net loss per share

$
(1.56
)





$
(1.57)Weighted average shares – basic


8,133,165







8,133,165Weighted average shares - diluted


8,133,165







8,133,165





59




A summary of the effect of the revenue errors by type of revenue error on the Consolidated Statement of Operations for the year ended December 31, 2008, is as follows:





00-21

Adjustments


Special

Acceptance

Terms


Shipping

Terms


Net

Presentation


Total

Revenue

CorrectionsRevenue:Products

$
(80
)

$
—


$
(770
)

$
(2,138
)

$
(2,988
)Services


151



—



—



—



151Total revenue


71



—



(770
)


(2,138
)


(2,837
)Cost of products and services:Products


160



—



(723
)


(2,138
)


(2,701
)Services


(25
)


—



17



—



(8
)Total cost of products and services


135



—



(706
)


(2,138
)


(2,709
)Gross Profit:Products


(240
)


—



(47
)


—



(287
)Services


176



—



(17
)


—



159Total gross profit (loss)


(64
)


—



(64
)


—



(128
)Selling, general and

administrative expenses


(36
)


—



(8
)


—



(44
)Operating income (loss)


(28
)


—



(56
)


—



(84
)Income tax expense (benefit)


(35
)


—



(15
)


—



(50
)Net income (loss) from continuing operations

$
7


$
—


$
(41
)

$
—


$
(34
)





60




The Restated Consolidated Statement of Cash Flows for the year ended December 31, 2008, is as follows:





As Previously


Total RevenueReported


Corrections


As RestatedCash flows from operating activities:Net income (loss)

$
(12,714
)

$
(34
)

$
(12,748
)Adjustments to reconcile net income (loss) to net cash providedby (used in) operating activities:(Income) loss from discontinued operations, net of tax


(37
)


-



(37
)Depreciation and amortization


2,667



-



2,667Share-based compensation expense


1,731



-



1,731Impairment charges


13,071



-



13,071Adjustment to estimated acquisition contingent consideration


-



-



-Excess tax benefits from stock option exercises


(1,107
)


22



(1,085
)Provision for doubtful accounts


541



-



541Deferred income tax


535



(28
)


507Loss on disposal of property and equipment


43



-



43Changes in assets and liabilities:






-Accounts receivable, net


(8,279
)


889



(7,390
)Inventory


(953
)


(843
)


(1,796
)Accounts payable


456



-



456Accrued expenses


1,437



(24
)


1,413Other assets and liabilities


1,400



40



1,440Net cash (used in) provided by operating activities


(1,209
)


22



(1,187
)Cash flows from investing activities:Purchases of property and equipment


(2,260
)


-



(2,260
)Acquisition of NetTeks Technology Consultants, Inc.


(1,440
)


-



(1,440
)Acquisition of Access Flow, Inc.


(2,550
)


-



(2,550
)Acquisition of AdvancedNetworX, Inc.


-



-



-Acquisition of Marketware Inc.


-



-



-Acquisition of Select, Inc.


153



-



153Proceeds from sale of property and equipment


1



-



1Transaction costs paid for acquisitions


(225
)


-



(225
)Net cash used in investing activities


(6,321
)


-



(6,321
)Cash flows from financing activities:Borrowings under non-interest bearing floor plan financing, net


7,530



-



7,530Excess tax benefits from stock option exercises


1,107



(22
)


1,085Proceeds from shares issued under Employee Stock Purchase Plan


344



-



344Payments on other borrowings


(601
)


-



(601
)Purchase of stock resulting from grantee election


(61
)


-



(61
)Proceeds from exercise of stock options


831



-



831Proceeds from issuance of common stock


8,751



-



8,751Payments on borrowings under acquisition credit facility


(6,000
)


-



(6,000
)Purchase of common stock


(3,234
)


-



(3,234
)Proceeds from other borrowings


460



-



460Net cash provided by financing activities


9,127



(22
)


9,105Net increase in cash and cash equivalents


1,597



-



1,597Cash and cash equivalents at beginning of period


9,340



-



9,340Cash and cash equivalents at end of period

$
10,937


$
-


$
10,937





61




3.  Acquisitions





The Company completed two acquisitions in 2009 and three acquisitions in 2008. The acquisitions were undertaken to improve the Company’s geographic presence and enhance its technical capabilities.  The 2009 acquisitions were accounted in accordance with the provisions of ASC 805 Business Combinations, which provides among other things, that contingent consideration be estimated and recognized at the time of acquisition.





(a)   Marketware Inc.





On December 31, 2009, the Company purchased the operations and certain assets, and assumed specified liabilities of Marketware Inc. (“Marketware”).  Marketware, a Sacramento-based provider of Cisco IP-network-based physical security and networking solutions founded in 1982, generated revenue of approximately $5,400 for the 12 months ended December 31, 2009. The acquisition initially added ten employees as part of an expanded Northern California region.





Consideration paid at closing consisted of (a) $350 in cash, (b) reimbursed inventory commitments of $60, (c) liabilities assumed of $28, (d) stock options granted to the seller valued at $23, (e) state sales taxes incurred in the transaction of $7, and (f) a noncompete agreement payment to the seller of $1.  Cash of $35 was initially retained by the Company under defined holdback provisions and was subsequently paid.  Transaction costs of $21 were charged as incurred to selling, general and administrative expenses.   Additional purchase consideration may be payable based on the Northern California region’s operating income contribution during the two years subsequent to the acquisition date. For the one year period ending December 31, 2010, the operating profit contribution did not meet the minimum requirement resulting in no additional purchase consideration due. For the twelve-month period ending December 31, 2011, a minimum of zero and a maximum of $1,313 additional purchase price consideration can be earned, of which up to 50% may be paid in the form of common stock, at the Company’s option.





Estimated additional purchase consideration payable was recorded at fair value on the acquisition date in the amount of $825 and classified as other non-current liabilities as of December 31, 2009.  As of December 31, 2010, the estimated additional purchase consideration for both one-year periods ending December 31, 2011 and December 31, 2010 was revised to $0, resulting in a reduction in selling, general and administrative expenses of $825.  The estimated additional consideration will be remeasured to fair value at each reporting date until settled.





(b)  AdvancedNetworX, Inc.





On July 17, 2009, the Company purchased the operations and certain assets, and assumed specified liabilities of AdvancedNetworX, Inc. (“ANX”).  ANX, 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.





Consideration at closing totaled $665, consisting of: (a) $465 in cash, (b) $156 in assumed liabilities under customer contracts, (c) $34 in capital lease obligations assumed and (d) 2,000 shares of the Company’s common shares valued at $5.08 per share for a total of $10.  The shares were initially held in escrow under holdback provisions as defined in the acquisition agreement and were subsequently issued.  Transaction costs of $16 were charged as incurred to selling, general and administrative expenses.





Additional purchase consideration of between zero and $700 per year is payable based on ANX’s branch office operating income contribution during each of the one-year periods ending July 31, 2010, 2011 and 2012.  Up to 60% of such additional purchase price may be paid in the form of Common Stock, at the Company’s option.  For the one year period ending July 31, 2010, the operating profit contribution was less than the minimum required resulting in no additional purchase consideration due.





Estimated additional purchase consideration payable was recorded at fair value on the acquisition date in the amount of $477.  The estimated additional consideration was remeasured as of December 31, 2010 and 2009 based on revised operating income forecasts, resulting in reduced selling, general, and administrative expense of $453 in 2010 and increased selling, general, and administrative expense of $109 in 2009.  The estimated additional purchase consideration payable of $11 and $254 are classified as accrued expenses and $122 and $332 are classified as other non-current liabilities as of December 31, 2010 and 2009, respectively, based on when the amounts are expected to be earned.  The estimated additional consideration will be remeasured to fair value at each reporting date until settled.





(c)  NetTeks Technology Consultants, Inc.





On November 14, 2008, 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.




62





Consideration paid at closing consisted of $1,350 in cash and 30,770 shares of the Company’s common stock, of which 15,385 shares were held in escrow under holdback provisions as defined in the acquisition agreement.  Additional purchase price consideration of $1,500 was paid in cash to NetTeks for exceeding the New England region operating income contribution target for the six month period ending December 31, 2009.  Additional purchase price consideration of $1,700 was earned by NetTeks for exceeding the New England region operating income contribution target for the year ending December 31, 2010. The additional consideration was paid in April 2011, consisting of a cash payment of $850 and the issuance of 113,182 shares of the Company’s common stock with a value of $850.  The additional purchase price consideration was accounted for as goodwill.





(d)  VocalMash





On December 4, 2008, the Company purchased the operations of VocalMash, a business owned and operated by the Company’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.





Consideration paid at closing consisted of 60,000 shares of the Company’s common stock valued at $4.89 per share for a total of $293. Additional purchase consideration of up to a maximum of $380 was payable if certain operating income contribution targets were achieved for 2009. Such targets were not achieved and no additional purchase consideration is due.





(e)  Access Flow, Inc.





On June 6, 2008, the Company purchased the operations and certain assets, and assumed specified liabilities of Access Flow, Inc. (“AF”). AF 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. Consideration paid at closing consisted of $2,450 in cash and 262,692 shares of the Company’s common stock, of which 24,000 shares were placed in escrow under holdback provisions as defined in the acquisition agreement. During the quarter ended September 30, 2009, these shares were released to AF less 3,359 shares representing $34 for costs reimbursable to the company under the escrow provisions.  The 3,359 shares returned from escrow were retired.  Upon the release of the remaining shares in escrow to AF, 1,032 shares in Company common stock representing $14 were issued to the broker of the transaction. The two shareholders of AF entered into five-year non-compete 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 $497 and $377 was earned by AF for the achievement of certain customer billing milestones during the twelve-month periods ending June 30, 2010 and 2009, respectively.  The 2010 consideration consisted of a cash payment of $248 and the issuance of 50,525 shares of the Company’s common stock with a value of $249.  In addition, cash of $25 was paid to the broker of the transaction.





The 2009 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.  In addition, cash of $9 and 1,472 shares valued at $10 were paid to the broker of the transaction.  The Company recognized goodwill for the additional purchase price consideration and broker’s fee.





(f)  Network Architects, Corp.





Effective May 26, 2005, the Company acquired the operations and certain assets of Network Architects, Corp. (“Network Architects”), a data network and IP telephony systems design, installation and support business with branches in Albuquerque, New Mexico, and El Paso, Texas. Additional purchase price consideration consisting of 75,000 shares of the Company’s common stock was issued to Network Architects in July 2008 for achievement of certain operating profit milestones during the twelve-month period ending May 31, 2008. The additional purchase price consideration was valued at $741 and was recorded as additional goodwill.





(g)  Acquisitions Summary





The following table summarizes the estimated fair values, including professional fees and other related acquisition costs, at the closing date for 2009 and 2008 acquisitions, including additional purchase price consideration subsequently paid.  There were no acquisitions in 2010.




63





Marketware


ANX


VocalMash


NetTeks


AFAllocated acquisition cost:Intangible assets

$
491


$
299


$
7


$
1,296


$
1,483Inventory


9



—



—



9



5Property and equipment


79



59



—



134



696Other assets


50



—



—



—



—Goodwill


665



784



286



3,418



5,363Current portion of capital lease obligations


—



(15
)


—



—



(96
)Accrued expenses


(7
)


—



—



(1,703
)


(49
)Deferred revenue


(5
)


(156
)


—



—



—Other current liabilities


(17
)


—



—



—



—Long-term portion of capital lease obligations


—



(19
)


—



—



(176
)Other long-term liabilities


(831
)


(477
)


—



—



—Net assets acquired

$
434


$
475


$
293


$
3,154


$
7,226Amount of goodwill deductible for U.S.

Federal income tax purposes

$
—


$
39


$
286


$
3,418


$
5,363





Certain amounts of the goodwill, acquired intangible assets, and property and equipment were determined to be impaired during the fourth quarters of 2010, 2009 and 2008 as discussed in Note 4.





(h)  Pro Forma Summary (Unaudited)





The following pro forma consolidated amounts give effect to the Company’s 2009 acquisition of ANX and Marketware as if they had occurred January 1, 2008. 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.





Year Ended December 31,2009


2008, As RestatedRevenues

$
234,022


$
285,260Net loss

$
(5,089
)

$
(13,823
)Net loss per share:Basic

$
(0.58
)

$
(1.68
)Diluted

$
(0.58
)

$
(1.68
)Weighted average shares used in calculation:Basic


8,830,228



8,217,756Diluted


8,830,228



8,217,756





The following pro forma consolidated amounts give effect to the Company’s 2008 acquisition of AF, NetTeks, and VocalMash as if they had occurred January 1, 2008. 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.





Year Ended

December 31, 2008,

As RestatedRevenues

$
272,421Net loss

$
(12,209
)Net loss per share - Basic

$
(1.49
)Net loss per share - Diluted

$
(1.49
)Weighted average shares - Basic


8,215,756Weighted average shares - Diluted


8,215,756





64





(i)  Noncash Investing and Financing Activities Relating to Acquisitions





The Company’s noncash investing and financing activities relating to acquisitions are as follows:





2010



2009



2008Acquisition of Access Flow, Inc.:Fair value of assets acquired

$
522


$
394


$
6,631Common stock issued


(249
)


(185
)


(3,586
)Capital lease obligation assumed


—



—



(272
)Transaction costs accrued


—



—



(16
)Acquisition of NetTeks Technology Consultants, Inc.:Fair value of assets acquired


1,700



1,500



1,654Common stock issued


—



—



(163
)Estimated contingent consideration accrued


(1,700
)


(1,500
)


—Acquisition of AdvancedNetworX, Inc.:Fair value of assets acquired


—



1,142



—Common stock issued


—



(10
)


—Liabilities assumed


—



(190
)


—Estimated contingent consideration accrued


—



(477
)


—Acquisition of Marketware Inc.:Fair value of assets acquired


—



1,294



—Common stock options granted


—



(23
)


—Liabilities assumed


—



(35
)


—Estimated contingent consideration accrued


—



(825
)


—Acquisition of Network Architects, Corp.:Fair value of assets acquired


—



—



741Common stock issued


—



—



(741
)Acquisition of VocalMash:Fair value of assets acquired


—



—



293Common stock issued


—



—



(293
)





(j)  Post Acquisition Revenues and Earnings





Revenues and operating income (loss) for acquired businesses during the period from the acquisition closing date to the end of the year in which it was acquired, were as follows:





Year

Acquired

Acquisition

Closing Date

Total

Revenues

Operating

Income

(Loss)Marketware
2009

December 31, 2009

$
—

$
—ANX
2009

July 17, 2009


1,443


(282
)VocalMash
2008

December 4, 2008


—


(3
)NetTeks
2008

November 14, 2008


850


80AF
2008

June 6, 2008


3,631


(2,025
)





65




4.  Goodwill, Purchased Intangibles, and Impairment Charges





(a)  Goodwill





The changes in the carrying value of goodwill during 2010, 2009 and 2008 consisted of the following:





Gross


Impairment

Losses


NetBalance, January 1, 2008

$
16,603


$
—


$
16,603Acquisitions


4,951



—



4,951Additional purchase price earned under

acquisition agreements


753



—



753Purchase price adjustments


(160
)


—



(160
)Impairment charge


—



(9,265
)


(9,265
)Balance, December 31, 2008


22,147



(9,265
)


12,882Acquisitions


1,449



—



1,449Additional purchase price earned underacquisition agreements


1,894



—



1,894Purchase price adjustments


25



—



25Impairment charge


—



(2,380
)


(2,380
)Balance, December 31, 2009


25,515



(11,645
)


13,870Additional purchase price earned under acquisitionagreements entered into prior to 2009


2,222



—



2,222Impairment charge


—



(2,560
)


(2,560
)Balance, December 31, 2010

$
27,737


$
(14,205
)

$
13,532





(b)  Purchased Intangibles





December 31, 2010


December 31, 2009


December 31, 2008


Weighted


WeightedGross Carrying

Amount


Accumulated

Amortization


Gross Carrying

Amount


Accumulated Amortization


Gross Carrying

Amount


Accumulated

Amortization


Average

Amortization

Period


Average

Remaining

LifeCustomer and strategic relationships

$
1,335


$
1,033


$
1,335


$
715


$
2,237


$
1,368



3.00



1.06Non-compete agreements


1,313



712



1,313



406



915



468



4.05



3.07Trademarks


313



201



313



80



915



510



2.68



0.93Total

$
2,961


$
1,946


$
2,961


$
1,201


$
4,067


$
2,346



3.43



2.24





All intangible assets are amortized to zero and do not have residual values.  Amortization expense totaled $745, $751 and $754 for 2010, 2009 and 2008, respectively.  During the fourth quarter of 2008, a $3,459 impairment charge for intangible assets was recorded as discussed further below.





The estimated aggregate amortization expense for future years is as follows:





2011

$
6362012


1652013


1392014


75Total

$
1,015




66




The following tables present details of the intangible assets acquired through business combinations during 2009 and 2008.  There were no business combinations in 2010.





Customer

And

Strategic

Relationships


Non-compete

Agreements


Trademarks

and

Other

Intangibles


TotalWeighted

Average Useful

Life

(in Years)


Amount


Weighted

Average

Useful

Life

(in Years)


Amount


Weighted-

Average Useful

Life

(in Years)


Amount


Weighted-Average

Useful

Life

(in Years)


Amount2009:AdvancedNetworX, Inc.


2.00


$
30



2.00


$
269



—


$
—



2.00


$
299Marketware Inc.


4.00



25



5.00



367



2.00



99



4.34



491Total


2.92


$
55



3.73


$
636



2.00


$
99



3.46


$
7902008:Access Flow, Inc.


3.36


$
477



5.00


$
556



3.29


$
450



3.95


$
1,483NetTeks Technology

Consultants, Inc.


3.00



513



5.00



340



1.97



443



3.17



1,296VocalMash


—



—



2.00



7



—



—



2.00



7Total


3.17


$
990



4.98


$
903



3.17


$
893



3.50


$
2,786





(c)  Impairment Charges





Impairment charges recorded by reporting unit during the three years ended December 31, 2010 were as follows:





2010


2009


2008Reporting Unit:

Goodwill


Goodwill


Goodwill


Intangibles


Equipment


TotalNew England

$
1,854


$
1,146


$
2,354


$
2,404


$
63


$
4,821Northern California


594



—



852



1,055



284



2,191North Carolina


—



723



—



—



—



—VocalMash


—



286



—



—



—



—Federal


112



225



—



—



—



—Southwest


—



—



3,224



—



—



3,224Southern California


—



—



1,521



—



—



1,521Northwest


—



—



1,314



—



—



1,314Total impairment charge

$
2,560


$
2,380


$
9,265


$
3,459


$
347


$
13,071





Goodwill impairment tests are performed at least annually or more frequently when events or circumstances indicate that the carrying value may not be recoverable.  If a reporting unit fails step 1 of the goodwill impairment test, an impairment test of long-lived assets is triggered.  Step 2 of the impairment tests compare the estimated fair value of the affected reporting unit’s goodwill or long-lived asset against the carrying value of that asset.  The impairment charges summarized in the table above were recorded in the fourth quarter of the year indicated.  Goodwill impairment charges represent a Level 3 assessment under fair value accounting standards.





2010





Goodwill was recorded in 2010 for additional purchase consideration earned under the NetTeks and AF asset purchase agreements.  The additional purchase consideration recorded under the AF asset purchase agreement was allocated to the various reporting units responsible for achieving the billings target on which the additional purchase consideration was based, including the New England and Federal reporting units.  The NetTeks acquisition is accounted for under the New England reporting unit.  The New England and Federal reporting units were adjusted to their fair value as a result of the 2009 annual goodwill impairment test.  Based on an updated fair value assessment, substantially all of the 2010 additional purchase consideration accounted for under the New England and Federal reporting units was determined to be in excess of fair value and was recorded as an impairment charge during the fourth quarter in the amount of $2,560.  In connection with this triggering event, the Company tested the recoverability of its long-lived assets and concluded the carrying values did not exceed fair value.  During the first two quarters of 2010, the Northern California reporting unit generated substantial operating losses compared to the operating income forecast in connection with the 2009 annual goodwill impairment test.  This triggered the requirement to perform an interim impairment test of both goodwill and long lived assets, resulting in the goodwill impairment charge of $594 recorded in the second quarter of 2010.




67





2009





Based on an updated fair value assessment the Company concluded that the goodwill of its New England, North Carolina, Northern California, and Federal reporting units was impaired and recorded an impairment charge of $2,380 in the fourth quarter of 2009.  The impairment was a result of the continued depressed operating results in the aftermath of the international financial crisis.  In connection with this triggering event, the Company tested the recoverability of its long-lived assets and concluded the carrying values did not exceed fair value.





2008





Based on an updated fair value assessment the Company concluded that the goodwill of its New England, Northern California, Southern California, Northwest, and Southwest reporting units was impaired and recorded an impairment charge of $9,265 in the fourth quarter of 2008.  The impairment was a result of the sharp decline in the Company’s market capitalization beginning in November 2008 and the rapidly deteriorating macroeconomic environment in the fourth quarter of 2008 during the international financial crisis.  In connection with these triggering events, the Company tested the recoverability of its long-lived assets and concluded the carrying values of intangible assets and property and equipment in the Northern California and New England reporting units were no longer recoverable. Consequently, during the fourth quarter of 2008, the Company recorded an impairment charge of $3,459 and $347 to write the intangibles assets and property and equipment, respectively, down to their estimated fair values.  The fair value of intangible assets is estimated primarily using the income approach.  The income approach is based on a discounted cash flow analysis (“DCF”) and calculates the fair value by estimating the after-tax cash flows attributable to a reporting unit and then discounting the after-tax cash flows to a present value using a risk-adjusted discount rate. Assumptions used in the DCF include judgments about the appropriate discount rates and terminal values, growth rates, and the amount and timing of expected future cash flows.





5.  Property and Equipment





Property and equipment consisted of the following:

December 31,2010


2009


2008Computer equipment

$
6,526


$
5,776


$
5,136Computer software


2,774



2,543



3,015Computer equipment under capital lease obligations


537



537



229Furniture and fixtures


1,331



1,072



1,047Leasehold improvements


937



730



1,209Total property and equipment


12,105



10,658



10,636Accumulated depreciation and amortization


(7,312
)


(5,825
)


(5,429
)Total property and equipment, net

$
4,793


$
4,833


$
5,207




Property and equipment are depreciated over their estimated useful lives ranging from three to seven years using the straight-line method.  Accumulated depreciation and amortization includes accumulated amortization of computer equipment under capital lease obligations of $358, $203 and $78 at December 31, 2010, 2009 and 2008, respectively. Depreciation expense includes capital lease amortization expense and is recorded in the following categories in the statements of operations:





Year Ended December 31,2010


2009


2008Cost of sales

$
438


$
452


$
423Selling, general and administrative expenses


1,664



1,916



1,490Total depreciation and amortization expense

$
2,102


$
2,368


$
1,913





6.  Accounts Payable Floor Plan





On December 16, 2009, the Company amended its senior credit facility agreement (“Agreement”) with Castle Pines Capital LLC (“CPC”) which provides inventory financing and working capital funding.  The Agreement provides a discretionary line of credit up to a maximum aggregate amount of $70,000 to purchase inventory from CPC approved vendors.  The credit facility is collateralized by substantially all of the assets of the Company and is for a one year period with automatic one year renewals, except as otherwise provided.  The Agreement contains quarterly financial covenants concerning the Company’s current ratio, tangible net worth, and total liabilities to tangible net worth.  The Agreement also contains other customary covenants.




68





The Agreement provides a working capital revolving line of credit under the above line of credit with an aggregate outstanding sublimit of $10,000 with interest payable monthly at the rate of prime plus 0.5%.





The senior credit facility also provides an additional $10,000 credit facility specifically for acquisitions (“Acquisition Facility”). Advances under the Acquisition Facility are not to exceed 80% of purchase price (purchase price not to exceed six times adjusted EBITDA, as defined).  Interest is payable at the rate of prime plus 2% and the Agreement specifies an acquisition commitment fee of 7/8 of 1% of the advance amount.  Repayment of each advance under the Acquisition Facility is interest only for first year then amortizing for 36 to 48 months, with no penalty to prepay any principal balance. The loan will also be reduced annually by an amount equal to 25% of excess cash flow, as defined.  CPC may negotiate with the Company to revise existing financial covenants in conjunction with each advance as required.





Termination date of the senior credit facility was extended to December 31, 2011, subject to automatic annual renewal as defined in the Amendment.  The Company expects that the Agreement will be extended under substantially similar terms.





As of December 31 borrowing capacity and availability under the Credit Facility was as follows:





Year Ended December 31,2010


2009


2008Total Credit Facility

$
70,000


$
70,000


$
60,000Borrowing base limitation


(21,685
)


(23,877
)


(16,873
)Total borrowing capacity


48,315



46,123



43,127Less interest-bearing borrowings


—



—



—Less non-interest bearing advances


(41,129
)


(44,561
)


(40,002
)Total unused availability

$
7,186


$
1,562


$
3,125





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 Floor planned inventory and 75% of Cisco vendor rebates receivable.





The Company uses 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 classified as floor plan financing in our balance sheet.





To the extent that we have credit availability under the Credit Facility, it gives us the ability to extend the payment terms past the Free Finance Period. Amounts extended past the Free Finance Period accrue interest and are classified as notes payable on our balance sheet, for which there was no balance outstanding at December 31, 2010, or 2009. These extended payment balances under the Credit Facility accrue interest at the prime rate (3.25% at December 31, 2010) plus 0.5%.





As of December 31, 2010, the Company was in compliance with the Agreement’s financial covenants, and anticipates it will be able to comply with these covenants during the next twelve months. In May 2011, CPC waived the Company’s events of default under the Agreement loan covenants regarding timely provision of GAAP financial statements.  In the future, if any of the loan covenants were violated, the Company would be required to seek waivers from CPC for those non-compliance events. If CPC refused to provide waivers, the amount due under the Agreement could be accelerated and the Company could be required to seek other sources of financing.





The weighted-average interest rate for borrowings under all credit line arrangements in effect during 2010, 2009 and 2008 was 0.0%, 0.0% and 7.5%, respectively.  The average amount of borrowings under all credit line arrangements in effect during 2010, 2009 and 2008 were zero, zero and $3,000, respectively.





To the extent we were unable to maintain our relationship with CPC on the same general terms and conditions as described above, we would endeavor to execute a similar relationship with another Cisco based floor plan financier.





7.  Income Taxes





The provision for income taxes consisted of the following:





Year Ended December 31,2010


2009


2008, As

RestatedCurrent provision:Federal

$
1,796


$
—


$
63State


439



232



221Total current provision


2,235



232



284Deferred expense (benefit)


(6,148
)


113



1,677Total expense (benefit) from continuing operations


(3,913
)


345



1,961Total expense (benefit) from discontinued operations


—



(47
)


19Total expense

$
(3,913
)

$
298


$
1,980





69


The total provision for income taxes for continuing operations during the years ended December 31, 2010, 2009 and 2008 varied from the U.S. Federal statutory rate due to the following:





Year Ended December 31,2010


2009


2008, As

RestatedFederal income tax at statutory rate

$
490


$
(1,327
)

$
(3,679
)Impairment of non-deductible goodwill and intangible assets


487



370



800Meals and entertainment expenses


147



100



101State taxes, net of Federal tax benefit


237



92



(6
)Equity compensation


137



336



183Deferred tax rate and other


81



(31
)


(125
)Valuation allowance


(5,492
)


805



4,687Total (benefit) expense  from continuing operations

$
(3,913
)

$
345


$
1,961





Net deferred tax assets computed at the statutory rate related to temporary differences were as follows:





Year Ended December 31,2010


2009


2008, As

RestatedDeferred tax assets:Accounts and notes receivable

$
811


$
738


$
791Closing and severance costs


77



29



85Deferred revenue


1,489



805



329Share-based compensation


387



272



155Accrued liabilities


2,770



1,704



1,412Depreciation


—



—



45Intangible assets


2,175



2,583



2,234Other


28



60



23Net operating loss carry forward /tax credit carry forward


—



437



64Total deferred tax assets


7,737



6,628



5,138Less: Valuation allowance


—



(5,492
)


(4,687
)Net deferred tax asset


7,737



1,136



451Deferred tax liabilities:Inventory reserves


(118
)


(349
)


(402
)Depreciation and gain / loss on disposal


(533
)


(151
)


—Deferred costs


(901
)


(636
)


(49
)Total deferred tax liabilities


(1,562
)


(1,136
)


(451
)Net deferred tax asset (liability)

$
6,175


$
—


$
—





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 become deductible.  Management considers the reversal of deferred tax liabilities, projected future taxable 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.




70





During the fourth quarter of 2008, after giving consideration to a variety of factors such as the cumulative three year net operating loss and the current year impairment charges, the Company established a full valuation allowance against its net deferred tax asset totaling $4,687 having determined that it was more likely than not that the deferred tax assets would not be realized.  As of December 31, 2009, the Company continued to maintain a full valuation allowance against net deferred tax assets totaling $5,492.  At June 30, 2010, the Company released the valuation allowance in full and recognized an income tax benefit of $5,492.  The Company reached this determination after giving consideration to a variety of factors including but not limited to:  (a) the current period realization of all net operating loss (NOL) carry forwards totaling $3,510, (b) the current period taxable income and (c) the expectation of future earnings, thus concluding that it is more likely than not that the Company’s deferred tax assets will be realized.





The Company recognizes tax benefits associated with the exercise of stock options directly to stockholders’ equity only when realized.  Accordingly, deferred tax assets are not recognized for NOL carry forwards 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.  As of December 31, 2009, windfall tax benefits included in NOL carry forwards but not reflected in deferred tax assets were $2,413.  As of December 31, 2010, the Company expects to utilize windfall tax benefits included in NOL carry forwards but not reflected in deferred tax assets of $2,413 with the related tax benefit reflected in additional paid-in capital.





The Company is subject to U.S. Federal income tax as well as income taxes in multiple state and local jurisdictions.  With few exceptions, the Company is no longer subject to U.S. Federal or state and local income tax examinations by tax authorities for years before 2005.  The Internal Revenue Service is currently reviewing the 2008 and 2009 Federal tax returns and the examination is estimated to close August of 2011.  In addition, the state of Texas Comptroller’s Office is performing a desk review of the franchise tax returns for the years 2008 and 2009.  Presently, no adjustments have been proposed. Management has made no provision for potential adjustments.





The Company recognizes the financial statement benefit of a tax position only after determining that they are more likely than not to sustain the position following an audit.  The Company believes that its income tax positions and deductions will be sustained on audit and therefore no reserves for uncertain tax positions have been established.  Accordingly, no interest or penalties have been accrued as of December 31, 2010, 2009 and 2008.  The Company’s policy is to include interest and penalty related to unrecognized tax benefits as a component of income tax expense.





8.  Stockholders’ Equity





(a)  Registered Direct Offering





In June, 2008, the Company sold 900,000 shares of common stock through a registered direct offering to certain institutional investors at a price of $11.00 per share. The net cash proceeds, after deducting the placement agent’s fee and other offering expenses of $1,149, were approximately $8,751. The net cash proceeds were partially used to repay the then $6,000 outstanding balance under the Acquisition Facility, with the remainder to be used for general corporate purposes including possible future acquisitions.





(b)  Equity Compensation Plans





The Company currently grants stock awards under the following equity compensation plans:





1996 Incentive Stock Plan and the 1996 Non-Employee Director Stock Option Plan — The 1996 Incentive Stock Plan (the “1996 Incentive Plan”) and the 1996 Non-Employee Director Stock Option Plan (the “Director Plan”) were approved by the shareholders and no further shares may be granted under either plan. The 1996 Incentive Plan provided for the granting of incentive awards in the form of stock options, restricted stock, phantom stock, stock bonuses and cash bonuses in accordance with the provisions of the plan. The Director Plan provided for a one-time option by newly elected directors to purchase up to 5,000 common shares, after which each director was entitled to receive an option to purchase up to 5,000 common shares upon each date of re-election to the Company’s Board of Directors. Options granted under the Director Plan and the 1996 Incentive Plan have an exercise price equal to the fair market value on the date of grant, are fully vested at December 31, 2007, and generally expire ten years after the grant date.





2000 Stock Incentive Plan — the Company adopted the 2000 Stock Incentive Plan (the “2000 Incentive Plan”) as approved at the May 2000 annual shareholder’s meeting. At the May 12, 2009 shareholder’s meeting the 2000 Incentive Plan was amended to increase the number of shares of common stock available for stock option grants to 3,423,103. The 2000 Incentive Plan provides for the granting of incentive awards in the form of stock-based awards and cash bonuses in accordance with the provisions of the plan. All employees, including officers, and consultants and non-employee directors are eligible to participate in the 2000 Incentive Plan. Generally, the Compensation Committee has the discretion to determine the exercise price of each stock option under the 2000 Incentive Plan, and they expire within ten years of the grant date, except those classified as Incentive Stock Option (“ISO”) grants to a 10% or greater stockholder. ISO grants to a 10% or greater stockholder expire within five years of the grant date. Awards granted under the 2000 Incentive Plan are subject to either cliff or graded vesting, generally ranging from three to five years. At December 31, 2010 and 2009, 225,848 shares and 193,923 shares, respectively, were available for future awards under the 2000 Incentive Plan.




71





(c)  Grant-Date Fair Value





The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of an award. The fair value of options granted during the 2010, 2009 and 2008 periods were calculated using the following estimated weighted average assumptions:





2010

2009

2008Expected volatility
65%

75%

61%Expected term (in years)
6.1

6.9

6.5Risk-free interest rate
1.8%

3.0%

2.8%Expected dividend yield
0%

0%

0%





The Company uses the simplified method to estimate expected lives for options granted during the period. The expected volatility is based on the historical volatility of our stock price.  The risk-free interest rate is based on the yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected term assumption. The Company has not historically issued any dividends and does not expect to in the future.





(d)  Share-Based Compensation Expense





The Company uses the straight-line attribution method to recognize expense for unvested awards. The amount of share-based compensation recognized during a period is based on the value of the awards that are ultimately expected to vest. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company updates its forfeiture rate annually.





Share-based compensation expense for employee stock purchases, restricted stock awards and stock options recognized for the years ended December 31, 2010, 2009 and 2008 was as follows:





Year Ended December 31,2010


2009


2008Cost of products and services — services

$
238


$
267


$
265Selling, general and administrative expenses


1,933



1,826



1,440Share-based compensation from continuing operations before income taxes


2,171



2,093



1,705Income tax benefit


—



—



—Total share-based compensation from continuing operations

$
2,171


$
2,093


$
1,705Impact of total share-based compensation on net income per share:Basic

$
(0.23
)

$
(0.24
)

$
(0.21
)Diluted

$
(0.23
)

$
(0.24
)

$
(0.21
)





There was no share-based compensation from discontinued operations for all periods presented.  Tax benefits recorded in the consolidated statements of operations for share-based payment awards were $715, $67 and $1,085 in the years ended December 31, 2010, 2009 and 2008.





(e)  Option Activity





A summary of the stock option activity under the Company’s stock plans for the year ended December 31, 2010, 2009 and 2008 is presented below:




72





Shares


Weighted

Average

Exercise

Price


Weighted

Average

Remaining

Contractual

Term

(Years)


Aggregate

Intrinsic

ValueOptions outstanding at December 31, 2007


1,480,736


$
4.83Granted


20,000



7.59





$
—Exercised


(151,624
)


5.48





$
688Forfeited


(51,600
)


9.83





$
—Expired


(11,930
)


1.51





$
—Options outstanding December 31, 2008


1,285,582


$
4.63


5.51


$
1,768Options exercisable at December 31, 2008


948,782


$
3.23


4.62


$
1,768Options vested and options expected to vest at December 31, 2008


1,173,424


$
4.37


5.84


$
1,767





Shares


Weighted

Average

Exercise

Price


Weighted

Average

Remaining

Contractual

Term

(Years)


Aggregate

Intrinsic

ValueOptions outstanding at December 31, 2008


1,285,582


$
4.63Granted


47,400



6.56





$
33Exercised


(12,447
)


3.84





$
33Forfeited


(51,707
)


8.63





$
—Expired


(5,390
)


1.44





$
16Options outstanding December 31, 2009


1,263,438


$
4.56


4.60


$
2,925Options exercisable at December 31, 2009


1,011,138


$
3.65


3.89


$
2,904Options vested and options expected to vest at December 31, 2009


1,259,438


$
4.56


4.58


$
2,924








Shares


Weighted

Average

Exercise

Price


Weighted

Average

Remaining

Contractual

Term

(Years)


Aggregate

Intrinsic

ValueOptions outstanding at December 31, 2009


1,263,438


$
4.56Granted


28,000



7.46





$
31Exercised


(20,468
)


1.76





$
73Forfeited


(40,030
)


7.36





$
—Expired


(13,300
)


1.78





$
44Options outstanding December 31, 2010


1,217,640


$
4.61



3.66


$
3,130Options exercisable at December 31, 2010


1,105,100


$
4.22



3.32


$
3,102Options vested and options expected to vest at December 31, 2010


1,214,718


$
4.61



3.65


$
3,129





The total intrinsic value of options exercised during the year ended December 31, 2010, 2009 and 2008 was $73, $33 and $688, respectively. The total grant-date fair value of stock options that became fully vested during the year ended December 31, 2010, 2009 and 2008 was approximately $551, $478, and $677, respectively. The weighted average grant-date fair value of options granted during the year ended December 31, 2010, 2009 and 2008 was $2.74, $3.44, and $5.28, respectively. As of December 31, 2010 and 2009, there was $449 and $963 of total unrecognized compensation cost, net of estimated forfeitures, related to unvested share-based option awards, which is expected to be recognized over a weighted-average period of 1.14 and 1.5 years.  Stock options expiring during 2010, 2009 and 2008 were 13,300, 5,390 and 11,930, respectively.




73





(f)  Restricted Stock Activity





A summary of the status of non-vested shares and changes during the year ended December 31, 2010, 2009 and 2008 is presented below:





Non-vested Shares

Shares


Weighted

Average

Grant Date

Fair ValueNon-vested at December 31, 2007


195,509


$
—Granted


332,443


$
8.18Vested


(57,708
)

$
11.17Forfeited


(33,250
)

$
10.00Non-vested at December 31, 2008


436,994


$
9.03Granted


342,574


$
3.66Vested


(159,479
)

$
7.08Forfeited


(49,774
)

$
9.33Non-vested at December 31, 2009


570,315


$
6.33Granted


209,000


$
5.73Vested


(230,730
)

$
6.51Forfeited


(95,570
)

$
5.98Non-vested at December 31, 2010


453,015


$
6.03





Share-based compensation expense related to restricted stock awards was $1,477, $1,176, and $771 for the years ended December 31, 2010, 2009 and 2008, respectively. As of December 31, 2010 and 2009, there was $2,339 and $3,126 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan, which is expected to be recognized over the weighted-average period of 1.8 and 2.1 years.





Upon re-election to the Board of Directors in May 2009 and 2008, INX issued 19,149 and 7,443 shares, respectively to its non-employee directors. The issued shares were valued at $90 as determined by multiplying the shares issued by the closing price per share on May 12, 2009 and May 13, 2008.





(g)  Employee Stock Purchase Plan





On April 3, 2008, the Company’s Board of Directors approved the INX Inc. 2008 Employee Stock Purchase Plan (the “Purchase Plan”) which was approved by Company stockholders at the Annual Meeting on May 13, 2008. The purpose of the Purchase Plan is to provide employees of the Company and its designated subsidiaries with an opportunity to purchase common stock of the Company. The aggregate number of shares of the Company’s common stock that will be available for issuance under the Purchase Plan is 500,000 shares, which shares may be authorized, but unissued shares or treasury shares. Eligible employees may elect to participate in each offering period by electing to contribute between 1% and 6% of such employee’s compensation to the Purchase Plan on each payroll date during the offering period. The Purchase Plan provides for a $6 limit on the amount of contributions that may be made to the Purchase Plan during any offering period. The purchase price per share is equal to 85% of the fair market value on the first trading day of the offering period or, if less, 85% of the fair market value on the last trading day of the purchase period. Under the Purchase Plan, during 2010, 2009 and 2008, the company issued 183,478, 238,919 and 77,600 shares, respectively and recognized share based compensation expense of $276, $347 and $193, respectively.





(h)  Capital Stock





Holders of the Company’s common stock are entitled to one vote per share on all matters to be voted on by shareholders and are entitled to receive dividends, if any, as may be declared from time to time by the Board of Directors of the Company. Upon any liquidation or dissolution of the Company, the holders of common stock are entitled, subject to any preferential rights of the holders of preferred stock, to receive a pro rata share of all of the assets remaining available for distribution to shareholders after payment of all liabilities. There are no shares of preferred stock issued or outstanding.





(i)  Common Stock Repurchase Plan





Effective December 4, 2007, the Board of Directors authorized the purchase of up to $2,000 of the Company’s common stock on or before March 31, 2008. These 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. During the three-month period ended March 31, 2008, 184,985 shares were purchased for $1,536, of which 3,800 shares were purchased in 2007 and settled and recorded in 2008. From inception of the repurchase plan to March 31, 2008, 186,785 shares were purchased for $1,554, an average purchase price of $8.27 per share. The December 4, 2007 repurchase plan expired on March 31, 2008.




74





On May 2, 2008, the Board of Directors authorized a repurchase plan of up to $2,000 of the Company’s common stock on or before July 31, 2008 under similar terms as the plan authorized on December 4, 2007. During July, 2008, 346 shares were purchased under the plan for $3, an average purchase price of $8.15 per share. The May 2, 2008 repurchase plan expired on July 31, 2008.





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.  During September 2008, 78,940 shares were purchased under the plan for $557, an average purchase price of $7.03 per share.  During the three month period ended December 31, 2008, 201,933 shares were purchased under the plan for $1,138, an average purchase price of $5.61 per share.  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 $5.84 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 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.  No shares of common stock were repurchased under the plan.  The plan expired on October 31, 2009.





(j)  Issuance of Restricted Common Stock





In December 2008, the Company issued 6,000 shares of restricted common stock to an investor relations firm under a services agreement.  The issued shares were valued at and the Company recognized the resultant expense $26 as determined by multiplying the shares issued by the closing price per share on December 31, 2008.





On January 5, 2010, the Company entered into a service agreement with an investor relations firm and per the terms of the agreement issued to them 5,000 shares valued at $28 on February 1, 2010 and an additional 5,000 shares valued at $25 on July 1, 2010.  The issued shares were valued and the Company recognized the resultant expense by multiplying the shares issued by the closing price per share on each respective date.





(k)  Warrants





On May 7, 2004, 575,000 warrants were issued to purchase common stock at an exercise price of $12.45 per share. These warrants were exercisable through May 7, 2009 and were subject to redemption by the Company at a price of $0.25 per warrant upon 30 days notice to the holders; however, the Company could only redeem the warrants if the closing price for its common stock for any five consecutive days has equaled or exceeded $16.60.  All 575,000 warrants expired unexercised.  Included in the units issued on May 7, 2004 were warrants issued to the underwriters to purchase up to 50,000 units at an exercise price equal to $19.92 per unit. Warrants representing 5,045 units were exercised with the remaining units expiring unexercised on May 7, 2009.





In January 2006, the Company issued warrants to the investment banker of the Stratasoft sale to purchase up to 40,000 shares of common stock at an exercise price equal to $6 per share expiring January 27, 2011.  The warrants were exercised in full on January 26, 2011.





In January 2007, the Company issued warrants to an investor relations firm under a services agreement to purchase up to 50,000 shares of common stock at an exercise price equal to $8.00 per share expiring January 1, 2009.  The warrants expired unexercised.





9.  Major Customers, Major Vendor and Geographic Concentrations





No single customer represented more than 10% of 2010, 2009 or 2008 consolidated revenues.  Cisco, the Company’s main vendor, represented about 80% of product sales.  International sales were approximately 1.3%, 3.7% and 4.1% of consolidated revenues for 2010, 2009 and 2008, respectively, based on the country in which the products were delivered or services provided.




75





10.  Commitments and Contingencies





(a)
Self-Insured Medical Plan





Effective January 1, 2009, the Company implemented a self-insured employee medical benefit plan.  The Company maintains stop loss coverage with a third party insurer at $100 per claim and an annual aggregate loss limit of $3,215 based on the current enrollment in the plan. During the years ended December 31, 2010 and 2009, medical claims totaling $1,977 and $1,761 were incurred. At December 31, 2010 and 2009, the Company recognized a liability for $192 and $190, respectively, representing an estimate of the remaining 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.





(b)
Litigation





On February 6, 2009, the Company filed a lawsuit in the United States District Court Eastern District of Texas styled InternetworkExperts, Inc. v. International Business Machines Corporation(“IBM”)claiming 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. On January 29, 2010, a settlement agreement was executed covering all outstanding litigation between the parties, resulting in IBM paying INX the amount of $310 less legal fees of $112.  The net settlement was reflected as a reduction of selling, general and administrative expenses in the first quarter of 2010.





On August 3, 2009, the Company 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.  On August 13, 2010, the Company received payment of $140 in settlement of the litigation, which was recognized as a reduction of selling, general and administrative expenses in the third quarter of 2010.





On July 15, 2010, the Company filed a lawsuit in the United States District Court for the District of New Mexico (“US District Court”) styled INX, Inc. v. Azulstar, Inc. (“Azulstar”) seeking compensatory and punitive damages plus interest, attorneys’ fees, and costs of suit for breach of contract, tortious interference with business relations and existing contractual relations, and other claims.  Azulstar provided professional services as a subcontractor to the Company in connection with the State of New Mexico, Department of Transportation RailRunner Wireless System Project (“RailRunner Project”).  Azulstar hired subcontractors to assist it and is alleged by the Company not to have paid at least one subcontractor for work performed.  In addition to paying Azulstar directly for all work performed except $23 withheld, the Company paid an Azulstar subcontractor $146 directly.  The Company charged the duplicate costs to professional services cost of sales in the quarter ended December 31, 2009.  On September 10, 2010, Azulstar filed a motion to dismiss the Company’s claim for failure to join a party under Rule 19 of the Federal Rules of Civil Procedure (“Motion to Dismiss”).  The US District Court has not yet ruled on the motion.  The amount of damages and costs that may ultimately be recovered by the Company, if any, cannot be determined at this time.  The Motion to Dismiss includes statements that Azulstar intends to file breach of contract claims against the Company.  The nature and extent of Azulstar’s allegations cannot be determined and the final outcome of any lawsuit that may be filed by Azulstar on this matter cannot be predicted, including whether such threatened lawsuit could have a material adverse effect on INX’s results of operations or financial position.





The Company 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, the Company believes the final outcome of such matters will not have a materially adverse effect on its results of operations, financial position, or cash flows.





(c)
Contingencies





The Company has contracts with the Federal government and its agencies and subcontracts with various Federal government contractors. The Company 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, the Company has the right to appeal the findings of the audit under applicable dispute resolution provisions.




76





(d)
Lease Commitments





The Company leases office space and certain equipment under non-cancelable operating and capital leases expiring on various dates through 2015 with various renewal options.  The Dallas corporate offices and regional office lease expires in 2015 and is renewable for one additional five year term.  Other office leases include leases for the Company’s accounting and sales offices in Houston, Texas and office leases for various regional sales offices.  Some office leases contain scheduled base rent increases over the term of the lease and may include periodic rent adjustments for real estate taxes, insurance and other operation expenses applicable to the property.  For leases with scheduled rent increases, the Company recognizes rent expense ratably over the lease term. Additionally, some office lease agreements provide for the cost of leasehold improvements to be paid or subsidized by the landlord.  We recognize landlord payments for leasehold improvements as additions to leasehold improvements and deferred rent expense.  Deferred rent expense is amortized ratably over the lease term.  During the years ended December 31, 2010, 2009 and 2008, we recognized $488, $136, and $0, in landlord paid leasehold improvements.





(e)
Operating Leases





Rent expense for the years ended December 31, 2010, 2009 and 2008 totaled $2,640, $2,301 and $1,940, respectively. During the fourth quarter of 2009, future minimum lease payments for a vacated location were accrued totaling $145, less a lump sum sublease payment of $46 received in 2010.  Future minimum rental commitments on non-cancellable operating leases with initial or remaining terms in excess of one year are $1,684 in 2011, $1,140 in 2012, $729 in 2013, $770 in 2014, and $599 in 2015.





(f)
Capital Leases





Future minimum lease payments on capital leases are $186 in 2011 and $55 in 2012, and include total imputed interest of $9.





(g)
401(k) Plan





The Company maintains a 401(k) savings plan wherein it matches a portion of the employee contribution. Effective March 1, 2008, the Company match was increased to 50 percent of the employee’s contribution to a maximum of three percent of compensation. Previously the Company match was $10 per pay period plus three percent of the employee’s contribution. In addition, there is a discretionary matching fund based on the Company’s profitability.  All full-time employees who have completed 90 days of service with the Company are eligible to participate in the plan. Declaration of the discretionary portion of the matching fund is at the discretion of the Board. The Company has made no additional contributions to the plan for the three years ended December 31, 2010. Under the standard plan matching program, the Company’s expense was $510, $525 and $557 for the years ended December 31, 2010, 2009 and 2008, respectively.





11.  Fair Value Measurements





Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. When an asset or liability is required to be measured at fair value, an entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs using a fair value hierarchy as follows:





Level 1:
Observable inputs such as quoted prices for identical assets or liabilities in active markets.Level 2:
Observable inputs other than quoted prices that are directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets; quoted prices for similar or identical assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.


Level 3:
Unobservable inputs that reflect the reporting entity’s own assumptions.





The carrying amount of cash and cash equivalents, receivables, inventory, deferred costs, prepaid expenses, accounts payable, accounts payable floor plan, accrued expenses, deferred revenue and other current assets and liabilities are a reasonable estimate of their fair values due to their short duration.  The Company’s financial instruments measured at fair value on a recurring basis that are subject to the hierarchy disclosure requirements are as follows:




77




Quoted

Prices in

Active

Markets for

Identical

Assets


Significant

Other

Observable

Inputs


Significant

Unobservable

Inputs


Total(Level 1)


(Level 2)


(Level 3)


Fair ValueEstimated Contingent Consideration:Balance at December 31, 2007

$
—


$
—


$
—


$
—Additions


—



—



—



—Adjustment of estimate


—



—



—



—Balance at December 31, 2008


—



—



—



—Additions


—



—



1,302



1,302Adjustment of estimate


—



—



109



109Balance at December 31, 2009


—



—



1,411



1,411Adjustment of estimate


—



—



(1,278
)


(1,278
)Balance at December 31, 2010

$
—


$
—


$
133


$
133





The Company's other non-financial assets include goodwill, intangible assets and property and equipment, which are classified as Level 3 assets. These assets are measured at fair value on a non-recurring basis as part of the Company's impairment assessments and as circumstances require.





Fair Value Measurements UsingYear Ended

December


Quoted Prices

in Active

Markets for

Identical Assets


Significant

Other

Observable

Inputs


Significant Unobservable

Inputs


Total

GainsDescription

31, 2010


(Level 1)


(Level 2)


(Level 3)


(Losses)Goodwill

$
13,532


$
—


$
—


$
13,532


$
(2,560
)Intangible assets, net


1,015



—



—



1,015



—Property and equipment, net


4,793



—



—



4,793



—Total

















$
(2,560
)





Fair Value Measurements UsingYear Ended

December


Quoted Prices

in Active

Markets for

Identical Assets


Significant

Other

Observable

Inputs


Significant Unobservable

Inputs


Total

GainsDescription

31, 2009


(Level 1)


(Level 2)


(Level 3)


(Losses)Goodwill

$
13,870


$
—


$
—


$
13,870


$
(2,380
)Intangible assets, net


1,760



—



—



1,760



—Property and equipment, net


4,833



—



—



4,833



—Total

















$
(2,380
)




78




Fair Value Measurements UsingYear Ended

December


QuotedPrices

inActive

Markets for

Identical

Assets


Significant

Other

Observable

Inputs


Significant Unobservable

Inputs


Total

GainsDescription

31, 2008


(Level 1)


(Level 2)


(Level 3)


(Losses)Goodwill

$
12,882


$
—


$
—


$
12,882


$
(9,265
)Intangible assets, net


1,721



—



—



1,721



(3,459
)Property and equipment, net


5,207



—



—



5,207



(347
)Total

















$
(13,071
)





12.  Discontinued Operations





In November, 2005, the Company’s Board of Directors approved a plan to sell its Stratasoft subsidiary and Valerent operations.  Under a Stock Purchase Agreement (“SPA”) dated January 26, 2006, INX sold all outstanding shares of Stratasoft’s common stock.  The Company indemnified the buyer for potential losses as defined in the SPA to a maximum of $1,400, inclusive of amounts placed in escrow of $800.  The amount placed in escrow was fully expended in 2009 and the Company incurred an additional $137 of legal and other costs which was recorded as a loss on disposal of discontinued operations.  The period for presenting claims under the SPA has expired and there are currently no matters subject to pending or threatened litigation.





In October 2006, the Company sold its Valerent operations for cash and a promissory note in two separate transactions. One of the transactions included an earn-out provision that required additional consideration to be paid to the Company over a two year period based on sales levels achieved by the Valerent’s consulting operations.  The promissory note had a face value of $70 and was payable in twenty-four monthly installments of $3 plus interest of 10%. Due to the uncertainty associated with the collection of the promissory note, the gain on the sale of Valerent was deferred and recognized as payments were received.  All installments of the promissory note were paid as scheduled.  During the year ended December 31, 2008, the Company received $30 in note payments and earn-out payments of $26 which were recorded as gain on disposal of discontinued operations.  All promissory note payments and payments due under the earn-out provisions were fully paid in 2008.





The gain (loss) on disposal of discontinued operations are as follows:





Year Ended December 31,2009


2008Gain (loss) on sale  of discontinued operations:Stratasoft

$
(137
)

$
—Valerent


—



56Income tax (expense) benefit


47



(19
)Income (loss) from discontinued operations, net of income taxes

$
(90
)

$
37





The components of liabilities of discontinued operations in the accompanying balance sheets are as follows:





December 31,2009


2008Other current liabilities:  Accrued expenses

$
67


$
44





There were no results of operations or balance sheet components of discontinued operations for the year ended December 31, 2010.





13.  Unaudited Quarterly Financial Data





The following table sets forth certain unaudited quarterly financial information for each quarter in 2010, 2009 and 2008:




79




2010


2009Fourth

Quarter


Third

Quarter


Second

Quarter


First

Quarter


Fourth

Quarter


Third

Quarter


Second

Quarter


First

Quarter(As Restated)


(As Restated)


(As Restated)Total revenue

$
72,961


$
84,913


$
84,055


$
70,048


$
57,088


$
57,743


$
56,179


$
55,937Total gross profit

$
17,233


$
19,151


$
17,068


$
12,533


$
12,695


$
13,031


$
12,488


$
11,927Net income (loss) from

continuing operations

$
(1,400
)

$
927


$
6,373


$
(547
)

$
(3,541
)

$
(201
)

$
210


$
(763
)Income (loss) from discontinued operations, net of taxes

$
—


$
—


$
—


$
—


$
14


$
(48
)

$
(17
)

$
(39
)Net income (loss)

$
(1,400
)

$
927


$
6,373


$
(547
)

$
(3,527
)

$
(249
)

$
193


$
(802
)Net income (loss) per share:Basic

$
(0.15
)

$
0.10


$
0.69


$
(0.06
)

$
(0.39
)

$
(0.03
)

$
0.02


$
(0.09
)Diluted

$
(0.15
)

$
0.09


$
0.65


$
(0.06
)

$
(0.39
)

$
(0.03
)

$
0.02


$
(0.09
)Weighted average shares:Basic


9,449,780



9,294,873



9,200,788



9,109,924



9,038,777



8,927,549



8,822,621



8,706,210Diluted


9,449,780



9,880,852



9,753,846



9,109,924



9,038,777



8,927,549



9,319,280



8,706,210





2008Fourth

Quarter


Third

Quarter


Second

Quarter


First

Quarter(As Restated)


(As Restated)


(As Restated)


(As Restated)Total revenue

$
62,154


$
71,942


$
63,959


$
58,497Total gross profit

$
11,604


$
13,390


$
13,901


$
12,108Net income (loss) fromcontinuing operations

$
(15,403
)

$
556


$
1,103


$
959Income (loss) from discontinued operations, net of taxes

$
14


$
9


$
10


$
4Net income (loss)

$
(15,389
)

$
565


$
1,113


$
963Net income (loss) per share:Basic

$
(1.78
)

$
0.06


$
0.15


$
0.13Diluted

$
(1.78
)

$
0.06


$
0.13


$
0.12Weighted average shares:Basic


8,655,761



8,746,691



7,579,303



7,550,904Diluted


8,655,761



9,338,353



8,281,715



8,242,191





80





Schedule II


Valuation and Qualifying Accounts


For Each of the Three Years Ended December 31, 2010


(Amounts in Thousands)





Balance at

Beginning

Of Year


Charges to

Costs

and

Expenses


Write-offs


Recoveries


Other

Changes


Balance

at

End of

YearAllowance for doubtful accounts:2008

$
470


$
541


$
276


$
—


$
—


$
7352009


735



294



761



10



17



2952010


295



457



119



13



5



651Allowance for sales returns:2008


347



84



—



—



—



4312009


431



(116
)


—



—



—



3152010


315



51



—



—



—



366Reserve for inventory obsolescence:2008


94



(59
)


—



—



—



352009


35



16



—



—



—



512010


51



(44
)


—



—



—



7Valuation allowance for deferred tax assets :2008


—



4,687



—



—



—



4,6872009


4,687



805



—



—



—



5,4922010


5,492



253



—



—



(5,745)



—





Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure





None.




81




Item 9A.Controls and Procedures





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) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)).  Based on this evaluation and as further set forth below, we believe our disclosure controls and procedures were not effective as of December 31, 2010.





Management’s Assessment of Disclosure Controls and Procedures





As a result of the material weaknesses in our internal control over financial reporting discussed below, we have concluded that our disclosure controls and procedures at December 31, 2010 were not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.





In addition to our material weaknesses in internal control over financial reporting as set forth in our management report below, we also determined that our disclosure controls and procedures had not been designed to ensure that information required to be disclosed by us in these reports was accumulated and communicated to our management, as appropriate, to allow timely decisions regarding required disclosures.  We determined that our disclosure controls were not effective, as follows:





1.
We have been over reliant on a few select employees, and have not developed and implemented sufficient management training programs to educate our key managers on matters related to the Exchange Act reporting and disclosure requirements.





2.
We did not have in place information and communication structures that were sufficient to ensure that reportable events regarding our business operations were communicated completely, accurately and timely as required by the Exchange Act.





Disclosure Controls and Procedures Remediation Initiatives





With respect to our training of management personnel, our remediation efforts will include, but not be limited to, the implementation of training programs for the appropriate key managers who are integral to our disclosure controls.  This training will include initial management training as well as on-going education on the reporting requirements of the Exchange Act.





With respect to improving our disclosure reporting structure and internal communication, our remediation efforts will include, but will not be limited to, designing, documenting and implementing processes to internally report, both on a periodic and routine on-going basis, items that could impact disclosure and reporting requirements that will keep management apprised of key events that may impact our reporting under the Exchange Act.





In light of the ineffectiveness of our disclosure controls and procedures described above, we performed additional procedures to ensure that our disclosures are presented in accordance with the requirements of the Exchange Act.  Accordingly, we believe that the information included in this report meets the requirements set forth in the Exchange Act.





Management’s Report on Internal Control Over Financial Reporting





Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2010.





In conducting the evaluation, our management used the criteria based on the framework of Internal Control over Financial Reporting —Guidance for Smaller Public Companies issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).  Based on our evaluation, we believe that, as of December 31, 2010, our internal control over financial reporting was not effective based on those criteria.





We have identified the following material weaknesses in our system of internal controls over financial reporting.  A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected in a timely basis.




82





Overview
 
 Like many other smaller reporting companies, our business was founded on an entrepreneurial spirit focused on seizing a business opportunity and driving revenue.  We have grown in size to where today we have over $300 million in revenue and are quickly approaching 500 employees.  Over the course of time, we modified our business strategy and acquired other businesses.  Compared to only a few years ago, we are now operating a more complex business model placing an even greater requirement on the efficient and effective execution of our business processes, financial processes and systems.
 
 As we grew we endeavored to have our business processes, financial processes and systems keep pace with the developing complexity of our business.  Nonetheless, we did not adequately invest in maintaining and developing the appropriate processes, technology and human resources to execute our business model efficiently and effectively from a business and financial reporting perspective which adversely impacts our internal controls over financial reporting.  We are currently undertaking efforts to assess and improve our policies and procedures.  We are reviewing our human capital requirements with a focus on the appropriate qualifications, supervision, lines of reporting and communication, and the related assignment of authority and responsibility.





Revenue Accounting





As previously disclosed in our Current Report on Form 8-K filed with the SEC on March 26, 2010, we announced that we were delaying our fourth quarter earnings release (for the year ended December 31, 2009) and would not file our Annual Report on Form 10-K for the fiscal year 2009 by the due date in order to allow us additional time for the reexamination of our revenue recognition under Accounting Standards Codification (ASC) 605-25, Revenue Recognition, Multiple-Element Arrangements, previously referred to as Emerging Issues Task Force No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”).





In our Current Report on Form 8-K filed with the SEC on June 21, 2010, we announced that the Audit Committee of our Board of Directors, upon the recommendation of management, had determined that our previously issued financial statements included in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2008, our Quarterly Report for the quarter ended March 31, 2009 on Form 10-Q/A and for the quarters ended June 30, 2009 and September 30, 2009 on Form 10-Q, should no longer be relied upon as a result of certain errors affecting the timing of recognition of revenues and costs of revenues.





In this Form 10-K filing and in the contemporaneously filed Form 10-Qs for the first three quarters of 2010, we restate our financial statements for the 2008 quarterly and annual periods and the first three quarters of 2009.





We identified the following material weaknesses with respect to our legacy revenue accounting:





1.
We did not employ sufficiently qualified staff, and did not design sufficient documentation and review procedures to appropriately apply EITF 00-21, Revenue Arrangements with Multiple Deliverables, now referred to as ASC 605-25 Revenue Recognition, Multiple-Element Arrangements.





2.
We did not have sufficient procedures with respect to contract reviews to appropriately assess the impact of customer acceptance provisions when determining if delivery had occurred in order to recognize revenue.





3.
We did not have sufficient procedures to identify and assess product sales that should be accounted for on a net presentation basis in accordance with EITF 99-19, now ASC 605-45.  In addition, we lacked sufficient controls over our products database to monitor the appropriateness of any changes related to net/gross presentation.





4.
We did not have sufficient policies, procedures, training, or staffing criteria, with respect to our sales order entry process to correctly capture the applicable shipping terms for our sales transactions.





5.
We did not have sufficient policies and procedures, training, or staffing criteria, with respect to linking customer orders into arrangements when negotiated as a package and requiring, collecting and maintaining sufficient written documentation when consummating a customer order and proceeding with the sales order entry process.





6.
We did not effectively operate our control associated with the review of the service revenue accrual, resulting in computational errors.





With respect to the efforts we undertook to perform the revenue restatement we identified the following material weaknesses:





1.
We did not have sufficient procedures to test the software code developed to perform certain revenue recognition calculations.


2.
We did not have sufficient procedures to control the accuracy and completeness of data uploaded into our database for revenue recognition calculation purposes.
 
 3.
We did not sufficiently assess and apply certain aspects of ASC 605-25 Revenue Recognition, Multiple-Element Arrangements to the particular facts and circumstances of our revenue arrangements.


Technical Accounting and Other





We identified the following additional material weaknesses.





Contingent Consideration Related to Business Acquisitions





We did not maintain effective internal controls to ensure the appropriate recording and reporting of certain business acquisition related payments. Specifically, our controls were not designed to ensure that the redistribution of such contingent acquisition-related payments from the selling shareholders to certain of our employees was correctly accounted for in accordance with GAAP.  In addition we did not adequately assess this GAAP accounting requirement. As a consequence we did not correctly recognize non-cash expense for certain redistributed contingent acquisition-related payments which had already been correctly recognized as additional goodwill at the time of the payments.





Income Tax Valuation Allowance





We did not have sufficiently qualified staff to properly assess releasing the income tax valuation allowance.  We originally determined to maintain a full income tax valuation allowance against our net deferred tax assets based on our three year cumulative losses before taxes.  We did not adequately assess the other stronger evidence which when considered with the positive evidence  indicated a release of the valuation allowance was appropriate, including: (a) the realization of all net operating loss carry forwards, (b) the current period taxable income and (c) our expectations of future earnings.




83





Goodwill and Other Long-Lived Asset Valuations





We did not sufficiently design our internal controls to ensure that our goodwill and other long-lived asset valuation calculations were correct, as follows:





1.
We did not adequately document the assumptions used for our internal projections.





2.
Our internal financial model was not reviewed in detail by someone other than the preparer.





3.
We did not establish review procedures to adequately supervise and review the work of the outside valuation firm we hired to prepare the valuations.





4.
We did not establish a procedure to determine if the outside valuation firm retained by us had adequate controls and review procedures to assess the quality and accuracy of their own work prior to delivering their reports to us.





Management’s Internal Control Over Financial Reporting Remediation Initiatives





Revenue Accounting





To address the material weaknesses related to our revenue accounting, our remediation efforts will include, but will not be limited to, the following.





Our efforts to remediate our revenue accounting material weaknesses will involve a holistic restructuring of our entire revenue accounting process beginning with sales order entry through cash collection.  We will develop policies and procedures including documentation requirements, for the entire revenue process, addressing both technical accounting matters and the related business processes.  We will hire appropriate staff, develop and implement training, and conduct routine assessments of compliance with our new procedures.





We intend to implement a solution that leverages the use of our technology resources, beginning with the tracking of sales opportunities and will include a database system that facilitates the contract review process, enables linkage of multiple customer orders into arrangements when negotiated as a package and documents delivery of orders.





With respect to the service revenue accrual material weakness, we will implement an additional follow-up procedure to confirm the control as designed was performed, and we will modify access to underlying project reports to implement a cut-off control and prevent data changes.





Technical Accounting and Other





Contingent Consideration Related to Business Acquisitions





To address the material weaknesses in our accounting for contingent consideration related to our business acquisitions, our remediation efforts will include, but will not be limited to, the following:





1.
We will include a provision in our future business combination agreements requiring selling shareholders to timely inform us if any contingent consideration is redistributed to our employees, including a certification document to be executed at the time contingent consideration is disbursed.





2.
We will enhance our accounting capabilities and knowledge with respect to accounting for contingent consideration as required by GAAP.





3.
In future employment agreements with individuals that become employees as a result of business acquisitions, we will include a provision requiring disclosure to us with respect to their receipt of any redistributed acquisition related payments.





Income Tax Valuation Allowance





To address our material weakness with respect to the accounting for our income tax valuation allowance we will enhance the accounting capabilities and knowledge of our staff and implement a review procedure to be performed by someone with the necessary knowledge and experience to correctly conclude on the assessment of the need for a valuation allowance.




84





Goodwill and Other Long-Lived Asset Valuations





To address our material weaknesses in our goodwill and other long-lived asset valuation calculations our remediation efforts will include, but not be limited to, the following:





1.
We will develop and implement a comprehensive set of documentation requirements regarding our forecast assumptions.





2.
We will develop and implement a detailed financial model review and approval process.





3.
We will develop and implement a detailed set of review procedures to assess the work product provided by our external valuation services firm.





4.
We will develop and implement procedures to assess the quality and completeness of the internal controls performed by our external valuation services firm prior to their delivery of work product to us.





We anticipate these actions will improve our internal control over financial reporting and will address the related material weaknesses identified above.  We are currently planning and initiating efforts to implement these improvements in our internal control over financial reporting.  However, because the institutionalization of the internal control process requires repeatable process execution, the successful execution of these controls, for at least several periods, may be required prior to management being able to definitively conclude that the material weaknesses have been fully remediated.





In light of the material weaknesses described above related to our internal control over financial reporting, we performed significant additional analysis and other post-closing procedures to ensure that our financial statements were prepared in accordance with generally accepted accounting principles.  Accordingly, we believe that the financial statements included in this report fairly present in all material respects, our financial condition, results of operations, changes in shareholders' equity and cash flows for the periods presented.





Changes in Internal Control over Financial Reporting





During the fourth quarter of 2010, there have been no changes in our internal controls over financial reporting that has materially affected, or is reasonably likely to affect, our internal control over financial reporting.





The certifications of INX's Principal Executive Officer and Principal Financial Officer attached as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K include, in paragraph 4 of such certifications, information concerning INX's disclosure controls and procedures and internal controls over financial reporting. Such certifications should be read in conjunction with the information contained in this Item 9A for a more complete understanding of the matters covered by such certifications.





Item 9B.Other Information.





On May 31, 2011, the Company received a waiver of events of default under the Agreement loan covenants through June 3, 2011, regarding: (a) non-timely provision of GAAP financial statements for the year ended 2009 and the three quarterly periods in 2010 and (b) non-timely provision of GAAP financial statements for the year ended 2010 and a waiver of events of default under the Agreement loan covenants through June 30, 2011 regarding non-timely provision of GAAP financial statements for the quarterly period ended March 31, 2011.




85




PART III





Item 10.Directors, Executive Officers, and Corporate Governance





Name

Age

Position with the CompanyJames H. Long

52

Executive Chairman and Chairman of the BoardDonald R. Chadwick

67

Director, Nominating Committee ChairmanJohn B. Cartwright

64

Director, Compensation Committee ChairmanCary Grossman

57

Director, Audit Committee ChairmanMark T. Hilz

52

Director Nominee, President and Chief Executive OfficerTilman J. Falgout, III

61

Director NomineeRobert D. Repass

50

Director NomineeWilliam M. Sams

73

Director NomineePhilip Rydzewski

48

Chief Financial Officer





Board of Directors





Set forth below is certain information regarding the current directors and nominees for election to the Board of Directors:





James H. Long, age 52, is the Company’s founder and served as the Chairman of the Board and Chief Executive Officer since its inception in 1983.  In October of 2010, Mr. Long resigned as Chief Executive Officer and became the Company’s Executive Chairman.  Mr. Long also served as the Company’s President through December 2003.  Prior to founding the Company, Mr. Long served with the United States Navy in a technical position and was then employed by IBM in a technical position.





Mr. Long’s day-to-day leadership and involvement with the Company, and his knowledge of, and many years of experience with, the Company’s operations and financial position, as well as his many years of relevant technology industry experience, make him well qualified to serve on our Board of Directors.





Donald R. Chadwick,age 67, has served as a member of the Board of Directors since September 1996 and currently serves as the chair of the Nominating Committee of the Board of Directors.  He served as Secretary from February 1992 to August 2002 and served as Chief Financial Officer of the Company from February 1992 until December 1999.  As Chief Financial Officer, his duties included supervision of finance, accounting and controller functions.  Mr. Chadwick is also a Certified Public Accountant.





Mr. Chadwick’s background in finance and accounting, complemented by his knowledge of the Company, its financial position and its industry, which he developed in part through his service as the Company’s Chief Financial Officer and Secretary, makes him well qualified to serve on our Board of Directors.





John B. Cartwright,age 64, has served as a member of the Board of Directors since August 2001 and currently serves as the chair of the Compensation Committee of the Board of Directors.  He has been the owner of John B. Cartwright & Associates, a Certified Public Accounting firm, since 1990.  From 1973 to 1990, Mr. Cartwright was the managing partner or managing stockholder of Cartwright, Matthews, Gonsoulin & Bradley, PC, Cartwright, Matthews & Gonsoulin, a Partnership and Cartwright & Matthews, a Partnership.  From 1969 to 1973, Mr. Cartwright was an Audit Supervisor of Touche Ross & Co. (now Deloitte & Touche LLP) in Houston.  Mr. Cartwright is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants, Texas Society of Certified Public Accountants, Houston Chapter of the Texas Society of Certified Public Accountants, and the past President of the Houston Chapter of the Community Associations Institute.





Mr. Cartwright brings to the Board of Directors an accounting and financial reporting background as well as leadership and management experience.





Cary Grossman,age 57, has served as a member of the Board of Directors and chair of the Audit Committee since December 2004.  He is the founder and President of Shoreline Capital Advisors, Inc., an investment and merchant banking firm he founded in 2010.   He was the Chief Financial Officer of Blaze Recycling & Metal, LLC from July 2007 through November 2009.  Mr. Grossman was the Executive Vice President of Gentium, S.P.A, an Italy-based biopharmaceutical company, from August 2004 until February 2007.  During that period he served as Chief Financial Officer, and later as its Chief Operating Officer.  Mr. Grossman was also a co-founder and officer of two special purpose acquisition companies during 2004-2006; Coastal Bancshares Acquisition Corp. and St. Bernard Software, Inc.  From April 2004 to January 10, 2005, he was also its Chief Financial Officer.  From 2002 until 2003 he served as Chief Financial Officer at U.S. Liquids, Inc., at the time an AMEX-listed environmental services company.  Mr. Grossman left U.S. Liquids, Inc. in 2003 as a result of the acquisition of three of its businesses and was President and Chief Executive Officer of the acquiring company, ERP Environmental Services, until November 2003.  From 1997 until 2002, Mr. Grossman served Pentacon, Inc., at the time a NYSE-listed company, as a board member and as Chairman of the Board of Directors.  From 1991 until 2002, Mr. Grossman was the Chief Executive Officer of McFarland, Grossman & Company, Inc., an investment banking and financial advisory firm.  Mr. Grossman practiced public accounting from 1977-1991.  He is a Certified Public Accountant and earned a BBA in accounting from The University of Texas.




86





Mr. Grossman brings to the Board of Directors accounting and financial reporting expertise as well as leadership experience having served as the Chief Financial Officer and other executive positions for various companies and having worked for more than a decade in public accounting.





Tilman J. Falgout, III, age 61, is currently the Chairman of the board of directors of America’s Car-Mart, a position he has held since 2004, and has been a director of that company since 1992.  He served as the CEO of America’s Car-Mart from 2002 until 2007 after serving in various capacities, Executive Vice President and General Counsel since 1995.  Prior to joining America’s Car-Mart, Mr. Falgout practiced corporate and securities law at Stumpf & Falgout, where he was a founder and managing partner of the firm.





Mr. Falgout’s qualifications to serve on the Board of Directors include his corporate governance and operational management experience, as well as his legal expertise. Mr. Falgout also brings a background in organizational leadership and experience serving as the Chairman and CEO of a public company.





Mark T. Hilz, age 52, is the Company’s President and Chief Executive Officer and has served in those roles since 2005. In addition, Mr. Hilz was named as the Company’s Chief Operating Officer in November.  Prior to serving in these executive officer roles with the Company, Mr. Hilz served since 2000 as the President and CEO of Internetwork Experts, Inc., the Company’s subsidiary that was merged into and with the Company in 2005. He has also served as President and CEO of PC Service Source, a technology service logistics company.





Mr. Hilz’s day-to-day leadership and involvement with the Company, and his knowledge of, and many years of experience with, the Company’s operations and financial position, as well as his many years of relevant technology industry experience, make him well qualified to serve on our Board of Directors.





Robert D. Repass, age 50, is currently a partner with Maxwell, Locke & Ritter, a privately held business services consulting and professional services firm.  Mr. Repass began his career in public accounting with Price Waterhouse (now PricewaterhouseCoopers) in 1982, and served as the managing partner of the Austin, Texas office from 1997 to 2000.  He was a partner with TL Ventures in 2000 and 2001 and served as Chief Financial Officer for Motion Computing, Inc. from 2002 until 2009.  He has served as a director and as the audit committee chair for numerous private companies, as well as non-profit organizations.  He formerly served as the chair of the audit committee of Bindview Development from 2003 to 2006 when it was acquired by Symantec Corporation.  He currently serves as the audit committee chair for Multimedia Games, Inc., a software and systems company.  He has also served on the boards of numerous civic organizations.





Mr. Repass’ qualifications to serve on the Board of Directors include his experience and expertise in accounting, corporate governance, venture capital and finance and within the technology industry.





William M. Sams, age 73, currently is a Managing Partner and Principal of the Marlin Sams Fund, LP.  From 1981 until 2000, Mr. Sams was the President and Chief Investment Officer of FPA Paramount Fund, Inc., as well as Executive Vice President to both First Pacific Advisors, Inc. and FPA Perennial Fund, Inc.  From 1966 to 1981 Mr. Sams was portfolio manager of various mutual funds.  He presently serves on the board of directors of Unifi, Inc. and America’s Car-Mart, Inc.





Mr. Sams’ qualifications to serve on the Board of Directors include his finance and investment experience and expertise as well as his experience serving as a director for two public companies.





Executive Officers





The Company’s executive officers serve until resignation or removal by the Board of Directors.  Set forth below is certain information about the Company’s executive officers.





James H. Long – See Nominees for Director.





Mark T. Hilz– See Nominees for Director.





Brian Fontana, age 53, served as our Chief Financial Officer from January 2005 to August 2010.  Mr. Fontana has an extensive financial management background that includes the management of the accounting, finance, investor relations, internal information systems and legal functions for large, complex organizations, including organizations that were executing strategies for rapid expansion through acquisitions.




87





Philip Rydzewski, age 48, has served as the Company’s Chief Financial Officer since December 2010.  Previously, from 2007 to 2008 Mr. Rydzewski was the Chief Accounting Officer for HealthMarkets, Inc., a health and life insurance underwriter that maintained its status as an SEC registrant although majority owned by private equity firms.  From 2004 to 2007 he was the Vice President of Finance for Catalyst Health Solutions, Inc., a NASDAQ listed pharmacy benefit management company.  From 2001 to 2004 he was Chief Financial Officer, Treasurer and Secretary for HMS Holdings Corp., a healthcare technology company.  Most recently in 2009 and 2010, Mr. Rydzewski provided a variety of CFO services to public and private companies on a consulting basis.  Previously, from 1990 until 1998, he was Vice President Finance and Corporate Controller for PHP Healthcare Corporation, a NYSE listed diversified healthcare services provider. From 1985 to 1990, Mr. Rydzewski was in the auditing and accounting services practice with KPMG LLP.   Mr. Rydzewski holds an inactive CPA license and earned an undergraduate degree in Accounting from Georgetown University.





Family Relationships





There are no family relationships among any of our directors and executive officers.





Section 16(a) Beneficial Ownership Reporting Compliance





Pursuant to Section 16(a) of the Exchange Act, the Company’s directors, executive officers, and stockholders who own 10% or more of the Common Stock (the “Reporting Persons”) are required to file reports of stock ownership and changes in ownership of Common Stock with the SEC and to furnish the Company with copies of all such reports they file.  The Company believes that, for fiscal year 2010, all the Reporting Persons complied with all applicable filing requirements except for the following:





●
Mr.Rydzewski did not file a Form 3 upon his appointment as the Company’s Chief Financial Officer. Rather, he filed his Form 3 once he was awarded shares of the Company’s Common Stock.





●
Mr. Fontana did not file a Form 4 to report the withholding of restricted stock to satisfy his tax withholding obligation upon the vesting of his restricted stock on March 27, April 16 and May 12, 2010, and did not file a Form 4 to report his disposition of his Common Stock on August 27, 2010.





●
Mr. Hilz filed a Form 4 late to report the withholding of restricted stock to satisfy his tax withholding obligation upon the vesting of his restricted stock on March 27, April 16 and May 12, 2010.





●
Mr. Klotz  filed a Form 4 late to report the withholding of restricted stock to satisfy his tax withholding obligation upon the vesting of his restricted stock on May 12, 2010.





●
Mr. Lawhorn filed a Form 4 late to report the withholding of restricted stock to satisfy his tax withholding obligation upon the vesting of his restricted stock on May 12, 2010.





●
Mr. Long filed a Form 4 late to report the withholding of restricted stock to satisfy his tax withholding obligation upon the vesting of his restricted stock on March 27, April 16 and May 12, 2010.





Code of Ethics





We have adopted a code of ethics that applies to the Chief Executive Officer, Chief Financial Officer, Controller and persons performing similar functions. We have also adopted a code of ethics applicable to all employees. We have posted the codes of ethics on our Internet website at Internet address: http://www.inxi.com. Copies of the codes may be obtained free of charge from the Company’s website at the above Internet address. We intend to disclose any amendments to or waivers from a provision of the code of ethics that applies to the Chief Executive Officer, Chief Financial Officer or Controller by posting such information on our website at the above address.





Committees of Our Board of Directors





The Board of Directors has three (3) standing committees: an audit committee (the “Audit Committee”), a compensation committee (the “Compensation Committee”), and a nominating committee (the “Nominating Committee”).





Audit Committee





The Audit Committee, which has been established in accordance with the Securities Exchange Act of 1934, as amended, consists of Messrs. Cartwright, Chadwick and Grossman, each of whom is “independent” as such term is defined for audit committee members by the listing standards of The Nasdaq Stock Market, Inc. (the “Manual”).  The Board of Directors has determined that Mr. Grossman is an “audit committee financial expert” as defined in the rules promulgated by the SEC.




88





The responsibilities of the Audit Committee are set forth in the federal securities laws, the Manual, and the written charter adopted by the Board of Directors and include, but are not limited to:





●
reviewing the financial reports and other financial and related information provided by the Company to any governmental body or the public;





●
reviewing the Company’s systems of internal controls regarding finance, accounting, legal compliance and ethics that management and the Board have established;





●
reviewing the Company’s auditing, accounting and financial reporting processes generally;





●
appointing, compensating and overseeing the work of any registered public accounting firm employed by the Company, including resolution of disagreements between management and the auditor regarding financial reporting, for the purpose of preparing or issuing an audit report; and





●
approving audit services and most non-audit services provided by the Company’s independent auditors.





The Audit Committee has held discussions with management and Grant Thornton, LLP (“Grant Thornton”), the Company’s independent auditors, regarding the audited financial statements for the year ended December 31, 2010.  The Audit Committee reviewed with the independent auditors who are responsible for expressing an opinion on the conformity of the audited financial statements with generally accepted accounting principles, their judgments as to quality, not just the acceptability, of the Company’s accounting functions and such other matters as are required to be discussed with the Audit Committee under generally accepted auditing standards.  The Audit Committee has also discussed with Grant Thornton the matters required to be discussed by the Statement of Auditing Standards No. 61 (Communication with Audit Committees), as amended, and by the Statement of Auditing Standards No. 90 (Audit Committee Communications).





In addition, the Audit Committee has received a written statement from Grant Thornton describing all relationships between the independent auditors and the Company that may impact their objectivity and independence as required by Public Company Accounting Oversight Board Rule 3526 (Communication with Audit Committees Concerning Independence) and has discussed with Grant Thornton matters relating to its independence, including review of audit and non- audit fees and any relationships that may impair its independence and satisfied itself as to their independence.





Based on the foregoing, the Audit Committee of the Company has recommended to the Board of Directors that the audited financial statements of the Company be included in the Company’s 2010 Annual Report for filing with the Securities and Exchange Commission.





Compensation Committee





The Compensation Committee consists of Messrs. Cartwright, Chadwick and Grossman, all of whom are non-employee directors, and each of whom is “independent” as such term is defined by the Manual.  The functions of the Compensation Committee include reviewing and approving the goals and objectives relevant to compensation of our executive officers, evaluating our executive officers’ performance in light of those goals and objectives and determining and approving our executive officers’ compensation levels and compensation plan structures based on this evaluation.  The responsibilities of the Compensation Committee are set forth in further detail in a written charter adopted by the Board of Directors.  During 2010, no director or executive officer of the Company served on the compensation committee or the board of directors of any company for which Messrs. Cartwright, Chadwick and Grossman served as executive officers or directors.





Nominating Committee





The Nominating Committee consists of Messrs. Cartwright, Chadwick and Grossman, all of whom are non-employee directors, each of whom is “independent” as such term is defined by the Manual.  The responsibilities of the Nominating Committee are set forth in the written charter adopted by the Board of Directors and include, but are not limited to:





●
establishing criteria for determining director independence, which, at a minimum, shall (i) comply with the definition of an "independent director" in the listing standards of the Manual, (ii) qualify as an "outside director" under Section 162(m) of the Internal Revenue Code, as amended, and (iii) meet the requirements of a "nonemployee director" for purposes of Section 16 of the Securities Exchange Act of 1934, as amended;





●
evaluating the qualifications and performance of the incumbent directors that desire to continue their service on the Board of Directors;




●
identifying and evaluating new candidates for election to the Board of Directors where there is no qualified and available incumbent director;





●
recommending to the Board of Directors candidates to fill vacancies on the Board of Directors; and





●
seeking out and evaluating candidates to serve as Board members, and considering candidates submitted by stockholders of the Company in accordance with the notice provisions and procedures set forth in the by-laws of the Company.





89





Item 11.Executive Compensation





Summary Compensation Table





The following table sets forth information about compensation we paid or awarded for services rendered during the fiscal year ended December 31, 2010 to our Executive Chairman, our Chief Executive Officer and President and our former Chief Financial Officer (the “Named Executive Officers”).





Name and Principal Position
Year

Salary

($)


Bonus

($)


Stock

Awards

($)(1)


Option

Awards

($)(1)


Non-Equity Incentive Plan Compensation

($)


Non-Qualified Deferred Compensation

Earnings

($)(2)


All Other Compensation

($)(3)


Total

($)James H. Long
2010

$
300,000


$
130,911


$
480,000


$
—


$
—


$
—


$
—


$
910,911Executive Chairman
2009


253,000



43,170



148,360



—



—



—



—



444,530Mark T. Hilz
2010


300,000



130,911



360,000



—



—



—



—



790,911Chief Executive Officer
2009


253,000



43,170



208,282



—



—



—



—



504,452and PresidentBrian Fontana
2010


242,000



12,500



222,560



69,380



—



—



287,189
(4)


833,629Former Vice President
2009


242,000



52,945



151,358



—



—



—



—



466,303and Chief Financial Officer





(1)
Dollar amounts in the Stock Awards and Option Awards columns represent the grant date fair value of the award computed in accordance with FASB ASC Topic 718, assuming all conditions are met.   For a discussion of valuation assumptions, see Note 8 to our consolidated financial statements included in Part II, Item 8.





(2)
The Company’s Named Executive Officers do not participate in any defined benefit, actuarial pension plan or any other post-retirement supplementary compensation plans.





(3)
Amounts exclude the value of perquisites and personal benefits which are less than $10,000.  The cost of employee benefits under plans available to all Company employees are excluded.  Refer to the All Other Compensation Table below for details of amounts paid or incurred as disclosed in the Summary Compensation Table.





(4)
In connection with his resignation, Mr. Fontana was paid $277,000 as severance and $10,189 for paid time off.





Narrative Disclosure to Summary Compensation Table





During the 2010 fiscal year in accordance with our compensation objectives and policies, our Named Executive Officers received compensation comprised of a base salary, a quarterly or annual bonus award and a grant of restricted stock and/or restricted stock units.





Under the terms of their respective employment agreements (collectively, the “Executive Employment Agreements”), Messrs. Long and Hilz were entitled to an annual base salary for 2010 of $300,000 each, plus other bonuses, the amounts and payment of which are within the discretion of the Compensation Committee.  The agreements with Messrs. Long and Hilz also include special bonus plan provisions that may be changed or eliminated at the Company’s sole discretion.  The Executive Employment Agreements generally provide that the executive officer will not, for the term of his employment and for a period of either twelve or eighteen months, whichever the case may be, following the end of such executive officer’s employment with the Company, compete with the Company, disclose any of the Company’s confidential information, solicit any of the Company’s employees or customers or otherwise interfere with the Company’s business relations.




90





Mr. Fontana voluntarily resigned as the Vice President and Chief Financial Officer of the Company effective as of August 27, 2010.  In connection with Mr. Fontana’s departure, the Company and Mr. Fontana entered into a Separation Agreement and General Release, dated August 27, 2010 (the “Separation Agreement”).  Pursuant to the terms of the Separation Agreement, Mr. Fontana received a lump sum payment of $277,000 and all accrued salary. Further, the Company agreed that the vesting dates of all of Mr. Fontana’s shares of restricted stock awarded under his Restricted Stock Award Agreements were to be accelerated so that all 42,800 unvested shares fully vested on August 27, 2010, and that the vesting dates of all of Mr. Fontana’s stock options granted under his Incentive Stock Option Agreements were to be accelerated so that all 26,000 unvested options fully vested on August 27, 2010.





Outstanding Equity Awards at Fiscal Year-End





The following table details outstanding stock options awards classified as exercisable and unexercisable as of December 31, 2010 for each Named Executive Officer.





Option Awards

Stock AwardsName

Number of Securities Underlying Unexercised

Options (#) Exercisable

Equity Incentive Plan: Number of Securities Underlying Unexercised Options (#) Unexercisable

Equity Incentive Plan: Number of Securities Underlying Unexercised Unearned Options (#)

Option

Exercise

Price($)

Option Expiration

Date

Number of Shares of Stock that have not Vested (#)

Market

Value of Shares of Stock that havenot

Vested ($)


Equity Incentive Plan: Number of Unearned Shares that have not Vested (#)

Equity Incentive Plan: Market Value of Unearned Shares that have not Vested ($)James H. Long

—

—

—

$
—

—

12,600

$
90,846
(1)

—

—30,400


73,568
(2)

—

—9,600


45,120
(3)

—

—64,000


384,000
(4)

—

—Mark T. Hilz

387,582

—

—


1.10

3/1/2012

12,600


90,846
(1)

—

—40,816

—

—


1.84

9/1/2013

36,480


88,282
(5)

—

—3,537

—

—


4.14

10/2/2013

11,250


54,144
(6)

—

—48,000


288,000
(7)

—

—Brian Fontana

45,000

—

—


7.65

1/2/2015

—


—


—

—4,000

—

—


4.50

11/2/2015

—


—


—

—40,000

—

—


6.58

5/2/2016

—


—


—

—35,000

—

—


9.58

3/6/2017

—


—


—

—





(1)
The stock awards were granted on April 16, 2008 and vest in 4,200 share increments April 16, 2011; April 16, 2012; April 16, 2013.(2)
The stock awards were granted on March 27, 2009 and vest in 7,600 share increments on March 27, 2011;  March 27, 2012;  March 27, 2013; March 27,  2014.





(3)
The stock awards were granted on May 12, 2009 and vest in 2,400 share increments on May 12, 2011; May 12, 2012; May 12, 2013; May 12, 2014.





(4)
The restricted stock units were granted on November 3, 2010 and vest in 16,000 share increments on November 3, 2011; November 3, 2012; November 3, 2013; November 3. 2014.





(5)
The stock awards were granted on March 27, 2009 and vest in 9,120 share increments on March 27, 2011;  March 27, 2012;  March 27, 2013; March 27,  2014.





(6)
The stock awards were granted on May 12, 2009 and vest in 2,880 share increments on May 12, 2011; May 12, 2012; May 12, 2013; May 12, 2014.





(7)
The restricted stock units were granted on November 3, 2010 and vest in 12,000 share increments on November 3, 2011; November 3, 2012; November 3, 2013; November 3, 2014.





91





Director Compensation





The quarterly retainer received by each non-employee director is $5,000.  Each non-employee director receives a $1,000 fee for each Board and Committee meeting including the Audit, Compensation, and Nominating Committee meetings they attend in person as well as reasonable out-of-pocket expenses incurred to attend the meetings.  For telephonic board meetings each non-employee board member in attendance receives a $500 fee.  In addition, the chairperson of the Audit Committee receives an additional $4,000 quarterly retainer.  An additional $1,000 fee per special committee meeting is paid to any non-employee director that is serving as the chairperson of such special committee.  In addition to the foregoing, Mr. Grossman was paid $67,500 as special compensation for his additional work due to the Company’s restatement of its financial statements and the Company’s search for a new Chief Financial Officer.





Non-employee directors receive a fully vested Common Stock grant based on the number of shares equal to $30,000 upon re-election to the Board, valued as of the date of re-election.  In 2010, the Company was not able to issue Common Stock to its non-employee directors so it paid to such directors $30,000 in cash.





The following table provides the compensation of our non-employee directors for the fiscal year ended December 31, 2010:





Name

Fees

Earned

or Paid

in Cash

($)

Stock

Awards

($)(1)

Option

Awards

($)(1)

Non-Equity Incentive Plan Compensation

($)

Change in

Pension Value

and Non-

Qualified

Deferred Compensation Earnings

($)(2)

All Other Compensation

($)(3)

Total (5)John B. Cartwright

$
69,000

$
—

$
—

$
—

$
—

$
—

$
69,000Donald R. Chadwick


63,000


—


—


—


—


—


63,000Cary M. Grossman


144,500


—


—


—


—


—


144,500








(1)
Dollar amounts in the Stock Awards and Option Awards columns represent the grant date fair value of the award computed in accordance with FASB ASC Topic 718, assuming all conditions are met. For a discussion of valuation assumptions, see Note 8 to our consolidated financial statements included in Part II, Item 8.





(2)
The Company’s directors do not participate in any defined benefit, actuarial pension plan or any other post-retirement supplementary compensation plans.





(3)
Amounts exclude the value of perquisites and personal benefits which are less than $10,000.





92





Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters





The following table sets forth information regarding the beneficial ownership of the Common Stock as of April 30, 2011 by:





●
each person, or group of affiliated persons, known by the Company to be the beneficial owner of more than 5% of its outstanding Common Stock;●
each of the nominees and directors;


●
each executive officer named in the summary compensation table under “EXECUTIVE COMPENSATION” below; and●
all of the Company’s directors and executive officers as a group.





Name of Beneficial Owner

Amount and

Nature of

Beneficial

Ownership (1)

Percent

of ClassJames H. Long


1,903,417
(2)


17.1
%John B. Cartwright


37,088
(3)


*Donald R. Chadwick


55,396
(4)


*Cary M. Grossman


21,383
(5)


*Brian Fontana


124,086
(6)


1.1
%Mark T. Hilz


511,584
(7)


4.6
%Tilman J. Falgout, III


20,000



*Robert D. Repass


—



—William M. Sams


830,000



7.5
%All executive officers and directors


3,502,954
(8)


31.5
%








*
Less than 1%(1)
Beneficially owned shares include shares over which the named person exercises either sole or shared voting power or sole or shared investment power.  It also includes shares the named person has the right to acquire within 60 days by the exercise of any right or option.  Unless otherwise noted, all shares are owned of record and beneficially by the named person.(2)
Includes 2,800 shares held in a custodial account and 3,150 shares in a closely held limited liability company.

Includes 8,400 non-vested Restricted Stock shares that were granted on April 16, 2008, which vests in 4,200 share increments on April 16, 2012;  April 16, 2013.

Includes 22,800 non-vested Restricted Stock shares that were granted on March 27, 2009, which vests in 7,600 share increments on March 27, 2011; March 27, 2012; March 27, 2013; March 27, 2014.

Includes 9,600 non-vested Restricted Stock shares that were granted on May12, 2009, which vests in 2,400 share increments on May 12, 2011; May 12, 2012; May 12, 2013; May 12, 2014.(3)
Includes 25,000 shares that may be acquired upon exercise of currently exercisable options.(4)
Includes 22,686 shares that may be acquired upon exercise of currently exercisable options.(5)
Includes 15,000 shares that may be acquired upon exercise of currently exercisable options.(6)
Includes 124,000 shares that may be acquired upon exercise of currently exercisable options.(7)
Includes 431,935 shares that may be acquired upon exercise of currently exercisable options.Includes 8,400 non-vested Restricted Stock shares that were granted on April 16, 2008, which vests in 4,200 share increments on April 16, 2012;  April 16, 2013.

Includes 27,360 non-vested Restricted Stock shares that were granted on March 27, 2009, which vests in 9,120 share increments on March 27, 2011; March 27, 2012; March 27, 2013; March 27, 2014.

Includes 11,520  non-vested Restricted Stock shares that were granted on May12, 2009, which vests in 2,880 share increments on May 12, 2011; May 12, 2012; May 12, 2013; May 12, 2014.





93





Item 13.Certain Relationships and Related Transactions, and Director Independence





Pursuant to Rule 5630(a) of the Manual, the Audit Committee approves all transactions with related parties required to be disclosed under SEC Regulation S-K, Item 404.  Related parties include the Company’s directors, executive officers, and stockholders known by us to be the beneficial owner of more than 5% of our Common Stock, and their respective immediate family members.  To help identify related party transactions, we require our directors and executive officers to complete a director and officer questionnaire identifying any transaction with us in which the director or officer or their immediate family member has an interest.  There were no related party transactions in 2009 and 2010 requiring Audit Committee approval under Rule 5630(a).





The Company has no parent company as discussed in Item 404(d)3.





Item 14.Principal Accountant Fees and Services





On June 4, 2009, the Company dismissed Grant Thornton LLP (“Grant Thornton”) as the Company’s independent registered public accounting firm. The decision to dismiss Grant Thornton was approved by the Audit Committee.  On June 4, 2009, the Company engaged PricewaterhouseCoopers LLP (“PricewaterhouseCoopers”) to serve as its new independent registered public accounting firm for the fiscal year ended December 31, 2009. The decision to engage PricewaterhouseCoopers was approved by the Audit Committee.  On August 24, 2010, the Audit Committee dismissed PricewaterhouseCoopers as the Company’s independent registered public accounting firm. PricewaterhouseCoopers did not render any audit reports on the Company’s consolidated financial statements during the period from June 4, 2009 through August 24, 2010.  On August 24, 2010, the Audit Committee engaged Grant Thornton to serve as its independent registered public accounting firm for the fiscal year ended December 31, 2009.





The following information sets forth the aggregate fees billed or to be billed by Grant Thornton and PricewaterhouseCoopers for services performed for the fiscal years 2009 and 2010.  The Audit Committee has reviewed the audit and non-audit fees that we paid to the independent accountants for purposes of considering whether such fees are compatible with maintaining the auditor’s independence.





Audit Fees.  Estimated fees billed for services rendered by Grant Thornton for the 2008 restatement and 2009 and 2010 audits of our financial statements included in this annual report on Form 10-K and reviews by Grant Thornton of financial statements included in this Form 10-K and in our 2010 quarterly reports on Form 10-Q were $4,491,848. All of the aforementioned services performed by Grant Thornton were performed concurrently during 2010 through the filing date of this Form 10-K. Estimated fees billed for services rendered by PricewaterhouseCoopers for the 2009 audit and reviews of our 2009 second and third quarter financial statements were $1,476,571.





Audit-Related Fees.We did not retain Grant Thornton or PricewaterhouseCoopers for any audit related services in 2009 and 2010, and there were no fees for audit-related services during those years.





Tax Fees.We did not retain Grant Thornton for any tax related services in 2009 and 2010, and there were no fees for tax-related services during those years.  We retained PricewaterhouseCoopers for tax related services with fees totaling $147,525 and $109,760 in 2009 and 2010, respectively.





All Other Fees.There were no fees rendered by Grant Thornton under the all other services category in 2009 and 2010.  Fees were rendered by PricewaterhouseCoopers in connection with the subscription to Comperio, a technical accounting software service, of $1,500 and $1,800 in 2009 and 2010, respectively.





Our Audit Committee must pre-approve all audit and non-audit services that we receive from our independent accountants.  This pre-approval authority may be delegated to a single member of the Audit Committee and then reviewed by the entire Audit Committee at the committee’s next meeting.  Approvals of non-audit services will be publicly disclosed in our periodic reports filed with the SEC.  For 2010, the Audit Committee pre-approved 100% of the 2010 audit and non-audit services we received from our independent accountants.








PART IV





Item 15.Exhibits and Financial Statement Schedules





(a)1. Financial Statements





The Index to Financial Statements and Financial Statement Schedule on page 43 is incorporated herein by reference as the list of financial statements required as part of this report.





2. Financial Statement Schedule





The Index to Financial Statements and Financial Statement Schedule on page 43 is incorporated herein by reference as the list of financial statement schedules required as part of this report.





3. Exhibits





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





94





SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) 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, June 3, 2011 .





INX INC.(Registrant)By:
/s/ MARK T. HILZMark T. HilzChief Executive Officer





Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.





Signature

Capacity

Date/s/  JAMES H. LONG

Executive Chairman and Chairman of the Board of Directors

June 3, 2011James H. Long/s/  MARK T. HILZ

President and Chief Executive Officer

June 3, 2011Mark T. Hilz/s/  PHILIP RYDZEWSKI

Chief Financial Officer

June 3, 2011Philip Rydzewski/s/  LARRY LAWHORN

Controller and Chief Accounting Officer

June 3, 2011Larry Lawhorn/s/  DONALD R. CHADWICK

Director

June 3, 2011Donald R. Chadwick/s/  CARY GROSSMAN

Director

June 3, 2011Cary Grossman/s/  JOHN B. CARTWRIGHT

Director

June 3, 2011John B. Cartwright




95





EXHIBIT INDEX





Exhibit No.

Description

Filed Herewith or Incorporated by Reference From:3.1

Amended and Restated Bylaws of the Company

Filed herewith3.2

Certificate of Incorporation of the Company

Exhibit 3.2 to Amendment 1 to Form S-1, Registration No. 333-09789, filed September 19, 19963.3

Certificate of Amendment to Certificate of Incorporation of Allstar Systems, Inc., dated June 24, 1997

Exhibit 3.4 to Amendment 5 to Form S-1, Registration No. 333-09789, filed June 26, 19973.4

Certificate of Amendment to Certificate of Incorporation of Allstar Systems, Inc., dated March 5, 1999

Exhibit 3.3 to Form 8-A, Registration No. 001-31949, filed December 29, 20033.5

Certificate of Amendment to Certificate of Incorporation of Allstar Systems, Inc. dated July 10, 2000

Exhibit 3.4 to Form 8-A, Registration No. 001-31949, filed December 29, 20033.6

Certificate of Ownership and Merger

Exhibit 3.1 to Form 8-K, Registration No. 001-31949, dated January 6, 20064.1

Specimen Common Stock Certificate

Exhibit 4.1 to Amendment 2 to Form S-1, Registration No. 333-09789, filed October 3, 199610.1

Amended & Restated Allstar Systems, Inc. 1996 Incentive Stock Plan, dated effective July 1, 1997

Exhibit 10.9 to Form 10-K Registration No. 001-31949, filed March 12, 200410.2

Amended & Restated I-Sector Corp. Stock Incentive Plan, dated effective July 28, 2003

Exhibit 10.10 to Form 10-K Registration No. 001-31949, filed March 12, 200410.3

Amended & Restated Internetwork Experts, Inc., Stock Incentive Plan dated effective August 1, 2003

Exhibit 10.11 to Form 10-K Registration No. 001-31949, filed March 12, 200410.4

First Amendment to I-Sector Corporation Incentive Plan

Exhibit 10.1 to Form 8-K, Registration No. 001-31949, dated January 4, 200510.5

Second Amendment to I-Sector Corporation Incentive Plan, as amended and restated

Exhibit 10.2 to Form 8-K, Registration No. 001-31949, dated March 21, 200510.6

Third Amendment to I-Sector Corporation Incentive Plan

Exhibit 10.1 to Form 8-K, Registration No. 001-31949, dated May 17, 200510.7

Fourth Amendment to I-Sector Corporate Incentive Plan

Exhibit 10.1 to Form 8-K, Registration No. 001-31949, filed June 6, 200610.8

Fifth Amendment to I-Sector Corporate Incentive Plan

Exhibit 10.1 to Form 8-K, Registration No. 001-31949, filed May 15, 200710.9

Sixth Amendment to I-Sector Corporate Incentive Plan

Exhibit 10.1 to Form 8-K, Registration No. 001-31949, filed May 13, 200810.10

Seventh Amendment to INX Inc. Incentive Plan

Exhibit 10.1 to Form 8-K, Registration No. 001-31949, filed May 12, 2009.10.11

INX Inc. 2008 Employee Stock Purchase Plan

Exhibit 10.2 to Form 8-K, Registration No. 001-31949, filed May 13, 200810.12

Employment Agreement by and between INX Inc. and James H. Long, dated November 3, 2010

Exhibit 10.1 to Form 8-K, Registration No. 001-31949, filed November 4, 201010.13

Confidentiality Agreement by and between INX Inc. and James H. Long, dated November 3, 2010

Exhibit 10.2 to Form 8-K, Registration No. 001-31949, filed November 4, 201010.14

Employment Agreement by and between Internetworking Sciences, Inc., a predecessor in interest to INX Inc. and Mark T. Hilz, dated July 5, 2000

Exhibit 10.3 to Form 8-K, Registration No. 001-31949, filed November 4, 201010.15

Confidentiality Agreement by and between Internetworking Sciences, Inc., a predecessor in interest to INX Inc. and Mark T. Hilz, dated July 5, 2000

Exhibit 10.4 to Form 8-K, Registration No. 001-31949, filed November 4, 201010.16

Employment Agreement by and between INX Inc. and Philip Rydzewski, dated December 29, 2010

Exhibit 10.1 to Form 8-K, Registration No. 001-31949, filed December 30, 201010.17

Confidentiality Agreement by and between INX Inc. and Philip Rydzewski, dated December 29, 2010

Exhibit 10.2 to Form 8-K, Registration No. 001-31949, filed December 30, 2010





96




10.18

Form of Change in Control Retention Agreement

Exhibit 10.1 to Form 8-K, Registration No. 001-31949, dated December 8, 200610.19

Form of First Amendment to Change in Control Retention Agreement

Exhibit 10.1 to Form 8-K, Registration No. 001-31949, dated December 21, 200710.20

Credit Agreement by and among Castle Pines Capital LLC, I-Sector Corporation, Valerent, Inc., InterNetwork Experts, Inc., and Stratasoft, Inc. dated December 27, 2005

Exhibit 10.1 to Form 8-K, Registration No. 001-31949, dated May 4, 200710.21

Credit Agreement by and among Castle Pines Capital LLC, INX, Inc., and Valerent, Inc. dated April 30, 2007

Exhibit 10.1 to Form 10-Q, Registration No. 001-31949, dated August 15, 200510.22

Acquisition Facility Amendment to Amended and Restated Credit Agreement by and among Castle Pines Capital LLC, and INX, Inc. dated August 1, 2007

Exhibit 10.2 to Form 10-Q, Registration No. 001-31949, dated August 6, 200710.23

Amended and Restated Financial Covenants Amendment to Amended and Restated Credit Agreement by and between INX Inc. and Castle Pines Capital LLC dated August 31, 2007

Exhibit 10.2 to Form 8-K, Registration No. 001-31949, filed September 4, 200710.24

Amendment and Joinder to Credit Agreement by and among Select, Inc. and Castle Pines Capital LLC dated August 31, 2007

Exhibit 10.3 to Form 8-K, Registration No. 001-31949, filed September 4, 200710.25

Amendment to Amended and Restated Credit Agreement by and among INX Inc., Select, Inc., and Castle Pines Capital LLC

Exhibit 10.1 to Form 8-K, Registration No. 001-31949, filed June 4, 200810.26

Amendment to Amended and Restated Credit Agreement and Amendment to Amended and Restated Financial Covenants Amendment to Amended

and Restated Credit Agreement between INX Inc. and Castle Pines Capital LLC

Exhibit 10.1 to Form 8-K, Registration No. 001-31949, filed December 23, 200910.27

Systems Integrator Agreement by and between Cisco Systems, Inc. and Internetwork Experts, Inc., dated November 13, 2001

Exhibit 10.4 to Form 10-K, Registration No. 001-31949, dated March 12, 200410.28

Amendment One, dated January 28, 2002 to Systems Integrator Agreement by and between Cisco Systems, Inc. and Internetwork Experts, Inc., dated November 13, 2001

Exhibit 10.5 to Form 10-K, Registration No. 001-31949, dated March 12, 200410.29

Amendment Two, dated November 21, 2002 to Systems Integrator Agreement by and between Cisco Systems, Inc. and Internetwork Experts, Inc., dated November 13, 2001

Exhibit 10.6 to Form 10-K, Registration No. 001-31949, dated March 12, 200410.30

Amendment Three, dated January 20, 2003 to Systems Integrator Agreement by and between Cisco Systems, Inc. and Internetwork Experts, Inc., dated November 13, 2001

Exhibit 10.7 to Form 10-K, Registration No. 001-31949, dated March 12, 200410.31

Amendment Four, dated January 16, 2004 to Systems Integrator Agreement by and between Cisco Systems, Inc. and Internetwork Experts, Inc., dated November 13, 2001

Exhibit 10.8 to Form 10-K, Registration No. 001-31949, dated March 12, 200410.32

Amendment Five, dated January 27, 2005 to Systems Integrator Agreement by and between Cisco Systems, Inc. and Internetwork Experts, Inc., dated November 13, 2001

Exhibit 10.23 to Form 10-K, Registration No. 001-31949, dated March 27, 200610.33

Amendment Six, dated April 18, 2005 to Systems Integrator Agreement by and between Cisco Systems, Inc. and Internetwork Experts, Inc., dated November 13, 2001

Exhibit 10.24 to Form 10-K, Registration No. 001-31949, dated March 27, 200610.34

Amendment Seven, dated March 2, 2006, to Systems Integrator Agreement by and between Cisco Systems, Inc. and Internetwork Experts, Inc., dated November 13, 2001

Exhibit 10.25 to Form 10-K, Registration No. 001-31949, dated March 27, 200610.35

Amendment Eight, dated March 20, 2006, to Systems Integrator Agreement by and between Cisco Systems, Inc. and INX Inc. (formerly Internetwork Experts, Inc.), dated November 13, 2001

Exhibit 10.26 to Form 10-K, Registration No. 001-31949, dated March 27, 200610.36

Amendment Nine, dated November 13, 2006, to Systems Integrator Agreement by and between Cisco Systems, Inc. and INX Inc. (formerly Internetwork Experts, Inc.), dated November 13, 2001

Exhibit 10.30 to Form 10-K, Registration No. 001-31949, dated March 7, 2008





97




10.37

Amendment Ten, dated January 25, 2007 to Systems Integrator Agreement by and between Cisco Systems, Inc. and Internetwork Experts, Inc., dated November 13, 2001

Exhibit 10.37 to Form 10-K, Registration No. 001-31949, dated March 7, 200810.38

Amendment Eleven, dated April 10, 2007 to Systems Integrator Agreement by and between Cisco Systems, Inc. and Internetwork Experts, Inc., dated November 13, 2001

Exhibit 10.38 to Form 10-K, Registration No. 001-31949, dated March 7, 200810.39

Amendment dated December 13, 2007 to Systems Integrator Agreement by and between Cisco Systems, Inc. and Internetwork Experts, Inc., dated November 13, 2001

Exhibit 10.39 to Form 10-K, Registration No. 001-31949, dated March 7, 200810.40

Amendment dated October 1, 2007, to Systems Integrator Agreement by and between Cisco Systems, Inc. and Internetwork Experts, Inc., dated November 13, 2001

Exhibit 10.40 to Form 10-K, Registration No. 001-31949, dated March 7, 200810.41

Renewal Amendment, effective February 11, 2009, to the Systems Integrator Agreement by and between Cisco Systems, Inc. and Internetwork Experts, Inc. dated November 13, 2001

Exhibit 10.1 to Form 10-Q, Registration No. 001-31949, filed May 12, 2009.10.42

Addendum dated June 29, 2010, to Systems Integrator Agreement by and between Cisco Systems, Inc. and Internetwork Experts, Inc., dated November 13, 2001

Filed herewith10.43

Amendment Twelve dated October 19, 2010, to Systems Integrator Agreement by and between Cisco Systems, Inc. and Internetwork Experts, Inc., dated November 13, 2001

Filed herewith10.44

Office Lease by and between Equastone Kirkwood, LP and INX Inc.

Exhibit 10.2 to Form 8-K, Registration No. 001-31949, filed July 20, 2009.10.45

Asset Purchase Agreement by and among INX Inc., Access Flow, Inc., Steve Kaplan and Gary Lamb dated June 6, 2008

Exhibit 10.1 to Form 8-K, Registration No. 001-31949, filed June 9, 200810.46

Asset Purchase Agreement by and among INX Inc., NetTeks Technology Consultants, Inc., Ethan F. Simmons, Matthew J. Field, and Michael P. DiCenzo dated November 14, 2008

Exhibit 10.1 to Form 8-K, Registration No. 001-31949, filed November 18, 200810.47

First Amendment to Asset Purchase Agreement by and among INX Inc., NetTeks Technology Consultants, Inc., Ethan F. Simmons, Matthew J. Field, and Michael P. DiCenzo dated June 19, 2009.

Exhibit 10.1 to Form 8-K, Registration No. 001-31949, filed June 24, 200910.48

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, Registration No. 001-31949, filed July 20, 2009.10.49

Asset Purchase Agreement by and among INX Inc., Marketware Inc., and Timothy Darryl Johnson dated December 31, 2009

Exhibit 10.1 to Form 8-K, Registration No. 001-31949, filed January 5, 201010.50

Lease Agreement between Vantage Development #21, Inc. and I-Sector Corporation dated April 9, 2004

Filed herewith10.51

First Amendment to Lease Agreement between Vantage Development #21, Inc. and INX Inc., dated June 9, 2006

Filed herewith10.52

Second Amendment to Lease Agreement between Vantage Development #21, Inc. and INX Inc., dated July 19, 2010

Filed herewith21.1

List of Subsidiaries of the Company

Exhibit 21.1 to Form 10-K, Registration No. 001-31949, dated March 10, 200923.1

Consent of Grant Thornton LLP

Filed herewith31.1

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

Filed herewith31.2

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

Filed herewith32.1

Section 1350 Certification of Chief Executive Officer

Filed herewith32.2

Section 1350 Certification of Chief Financial Officer

Filed herewith