Attached files
file | filename |
---|---|
EX-31.2 - CERTIFICATION - INX Inc | ex31-2.htm |
EX-32.1 - CERTIFICATION - INX Inc | ex32-1.htm |
EX-32.2 - CERTIFICATION - INX Inc | ex32-2.htm |
EX-31.1 - CERTIFICATION - INX Inc | ex31-1.htm |
EX-10.2 - OFFICE LEASE - INX Inc | ex10-2.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
R
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2009
|
|
OR
|
|
£
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from January 1, 2009 to September 30,
2009
|
Commission
file number: 1-31949
INX
Inc.
(Exact
name of Registrant as specified in its charter)
Delaware
|
76-0515249
|
(State
of incorporation)
|
(I.R.S.
Employer Identification Number)
|
11757
Katy Freeway
Houston,
Texas 77079
(Address
of principal executive offices)
(Zip
code)
(713)
795-2000
(Registrant’s
telephone number including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes R No
£
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). R
Yes £
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer £
|
Accelerated
filer £
|
Non-accelerated
filer £
|
Smaller
reporting company R
|
(Do
not check if a smaller reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No
R
The
Registrant has 9,020,541 shares of common stock outstanding as of November 4,
2009.
1
INX
Inc. and Subsidiaries
FORM
10-Q for the Quarter Ended September 30, 2009
INDEX
Part I.
Financial Information
|
3
|
Item
1. Financial Statements (Unaudited):
|
3
|
Condensed
Consolidated Statements of Operations for the three months ended September
30, 2009 and 2008
|
3
|
Condensed
Consolidated Statements of Operations for the nine months ended September
30, 2009 and 2008
|
4
|
Condensed
Consolidated Balance Sheets at September 30, 2009 and December 31,
2008
|
5
|
Condensed
Consolidated Statement of Stockholders’ Equity for the nine months ended
September 30, 2009
|
6
|
Condensed
Consolidated Statements of Cash Flows for the nine months ended September
30, 2009 and 2008
|
7
|
Notes
to Condensed Consolidated Financial Statements
|
9
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
20
|
Item
4T. Controls and Procedures
|
26
|
Part
II. Other Information
|
26
|
Item
1. Legal Proceedings
|
26
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
26
|
Item
6. Exhibits
|
27
|
Signature
|
27
|
2
PART
1. FINANCIAL INFORMATION
Item
1. Financial Statements (Unaudited):
INX INC.
AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except share and per share amounts)
(Unaudited)
Three
Months
Ended
September 30,
|
||||||||
2009
|
2008
|
|||||||
(As
Restated,
Note
10)
|
||||||||
Revenue:
|
||||||||
Products
|
$
|
46,813
|
$
|
59,576
|
||||
Services
|
11,046
|
12,366
|
||||||
Total
revenue
|
57,859
|
71,942
|
||||||
Cost
of products and services:
|
||||||||
Products
|
36,620
|
49,509
|
||||||
Services
|
8,272
|
9,107
|
||||||
Total
cost of products and services
|
44,892
|
58,616
|
||||||
Gross
profit
|
12,967
|
13,326
|
||||||
Selling,
general and administrative expenses
|
13,284
|
12,595
|
||||||
Operating
(loss) income
|
(317
|
)
|
731
|
|||||
Interest
and other income, net
|
83
|
106
|
||||||
(Loss)
income from continuing operations before income taxes
|
(234
|
)
|
837
|
|||||
Income
tax expense
|
93
|
466
|
||||||
Net
(loss) income from continuing operations
|
(327
|
)
|
371
|
|||||
(Loss)
income from discontinued operations, net of income taxes
|
(48
|
)
|
9
|
|||||
Net
(loss) income
|
$
|
(375
|
)
|
$
|
380
|
|||
Net
(loss) income per share:
|
||||||||
Basic:
|
||||||||
(Loss)
income from continuing operations
|
$
|
(0.04
|
)
|
$
|
0.04
|
|||
Loss
from discontinued operations, net of income taxes
|
—
|
—
|
||||||
Net
(loss) income per share
|
$
|
(0.04
|
)
|
$
|
0.04
|
|||
Diluted:
|
||||||||
(Loss)
income from continuing operations
|
$
|
(0.04
|
)
|
$
|
0.04
|
|||
Loss from
discontinued operations, net of income taxes
|
—
|
—
|
||||||
Net
(loss) income per share
|
$
|
(0.04
|
)
|
$
|
0.04
|
|||
Shares
used in computing net (loss) income per share:
|
||||||||
Basic
|
8,927,549
|
8,746,691
|
||||||
Diluted
|
8,927,549
|
9,338,353
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
3
INX INC.
AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except share and per share amounts)
(Unaudited)
Nine
Months
Ended
September 30,
|
||||||||
2009
|
2008
|
|||||||
(As
Restated,
Note
10)
|
||||||||
Revenue:
|
||||||||
Products
|
$
|
137,834
|
$
|
161,497
|
||||
Services
|
35,706
|
34,079
|
||||||
Total
revenue
|
173,540
|
195,576
|
||||||
Cost
of products and services:
|
||||||||
Products
|
109,619
|
132,457
|
||||||
Services
|
25,926
|
23,894
|
||||||
Total
cost of products and services
|
135,545
|
156,351
|
||||||
Gross
profit
|
37,995
|
39,225
|
||||||
Selling,
general and administrative expenses
|
38,337
|
34,850
|
||||||
Operating
(loss) income
|
(342
|
)
|
4,375
|
|||||
Interest
and other income (expense), net
|
100
|
(65
|
)
|
|||||
(Loss)
income from continuing operations before income taxes
|
(242
|
)
|
4,310
|
|||||
Income
tax expense
|
212
|
1,829
|
||||||
Net
(loss) income from continuing operations
|
(454
|
)
|
2,481
|
|||||
(Loss)
income from discontinued operations, net of income taxes
|
(104
|
)
|
23
|
|||||
Net
(loss) income
|
$
|
(558
|
)
|
$
|
2,504
|
|||
Net
(loss) income per share:
|
||||||||
Basic:
|
||||||||
(Loss)
income from continuing operations
|
$
|
(0.05
|
)
|
$
|
0.31
|
|||
Loss from
discontinued operations, net of income taxes
|
(0.01
|
)
|
—
|
|||||
Net
(loss) income per share
|
$
|
(0.06
|
)
|
$
|
0.31
|
|||
Diluted:
|
||||||||
(Loss)
income from continuing operations
|
$
|
(0.05
|
)
|
$
|
0.29
|
|||
Loss from
discontinued operations, net of income taxes
|
(0.01
|
)
|
—
|
|||||
Net
(loss) income per share
|
$
|
(0.06
|
)
|
$
|
0.29
|
|||
Shares
used in computing net (loss) income per share:
|
||||||||
Basic
|
8,818,793
|
7,958,966
|
||||||
Diluted
|
8,818,793
|
8,579,268
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
4
INX INC.
AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share and par value amounts)
(Unaudited)
September
30,
2009
|
December
31,
2008
|
|||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$
|
12,116
|
$
|
10,937
|
||||
Accounts
receivable, net of allowance of $895 and $735
|
45,807
|
52,866
|
||||||
Inventory,
net
|
1,681
|
2,406
|
||||||
Other
current assets
|
1,408
|
1,275
|
||||||
Total
current assets
|
61,012
|
67,484
|
||||||
Property
and equipment, net of accumulated depreciation of $6,957 and
$5,429
|
4,576
|
5,207
|
||||||
Goodwill
|
13,954
|
12,751
|
||||||
Intangible
assets, net of accumulated amortization of $2,943 and
$2,346
|
1,554
|
1,852
|
||||||
Other
assets
|
53
|
—
|
||||||
Total
assets
|
$
|
81,149
|
$
|
87,294
|
||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable
|
$
|
5,721
|
$
|
5,170
|
||||
Accounts
payable - floor plan
|
31,294
|
40,002
|
||||||
Accrued
expenses
|
6,910
|
6,899
|
||||||
Current
portion of capital lease obligations
|
198
|
77
|
||||||
Notes
payable
|
—
|
91
|
||||||
Other
current liabilities
|
1,042
|
1,072
|
||||||
Total
current liabilities
|
45,165
|
53,311
|
||||||
Long-term
Liabilities:
|
||||||||
Long-term
portion of capital lease obligations
|
267
|
163
|
||||||
Other
long-term liabilities
|
608
|
250
|
||||||
Total
long-term liabilities
|
875
|
413
|
||||||
Commitments
and contingencies (Note 9)
|
||||||||
Stockholders’
Equity:
|
||||||||
Preferred
stock, $.01 par value, 5,000,000 shares authorized, no shares
issued
|
—
|
—
|
||||||
Common
stock, $.01 par value, 15,000,000 shares authorized, 8,975,403 and
8,709,304 shares issued and outstanding
|
89
|
87
|
||||||
Additional
paid-in capital
|
52,837
|
50,742
|
||||||
Accumulated
deficit
|
(17,817
|
)
|
(17,259
|
)
|
||||
Total
stockholders’ equity
|
35,109
|
33,570
|
||||||
Total
liabilities and stockholders’ equity
|
$
|
81,149
|
$
|
87,294
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
5
INX INC.
AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In
thousands, except share amounts)
(Unaudited)
$.01
par value
Common
Stock
|
Additional
Paid-In
|
Accumulated
|
||||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
||||||||||||||||
Balance
at December 31, 2008
|
8,709,304
|
$
|
87
|
$
|
50,742
|
$
|
(17,259
|
)
|
$
|
33,570
|
||||||||||
Issuance
of common stock under restricted stock grants
|
84,564
|
—
|
—
|
—
|
—
|
|||||||||||||||
Issuance
of common stock grants to directors
|
19,149
|
—
|
90
|
—
|
90
|
|||||||||||||||
Issuance
of common stock under employee stock purchase plan
|
161,928
|
2
|
324
|
—
|
326
|
|||||||||||||||
Share-based
compensation expense
|
—
|
—
|
1,524
|
—
|
1,524
|
|||||||||||||||
Tax
withholdings related to net share settlements of restricted stock
awards
|
(16,156
|
)
|
—
|
(60
|
)
|
—
|
(60
|
)
|
||||||||||||
Purchase
and retirement of common stock
|
(19,466
|
)
|
—
|
(66
|
)
|
—
|
(66
|
)
|
||||||||||||
Exercise
of stock options
|
5,500
|
—
|
22
|
—
|
22
|
|||||||||||||||
Excess
tax benefit from stock option exercises
|
—
|
—
|
66
|
—
|
66
|
|||||||||||||||
Issuance
of shares as additional purchase price consideration and broker’s fees for
Access Flow, Inc. acquisition
|
28,580
|
—
|
185
|
—
|
185
|
|||||||||||||||
Issuance
of shares as purchase price consideration for AdvancedNetworX, Inc.
acquisition
|
2,000
|
—
|
10
|
—
|
10
|
|||||||||||||||
Net
loss
|
—
|
—
|
—
|
(558
|
)
|
(558
|
)
|
|||||||||||||
Balance
at September 30, 2009
|
8,975,403
|
$
|
89
|
$
|
52,837
|
$
|
(17,817
|
)
|
$
|
35,109
|
The
accompanying notes are an integral part of this condensed consolidated financial
statement.
6
INX INC.
AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
Nine
Months
Ended
September 30,
|
||||||||
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
(As
Restated,
Note
10)
|
|||||||
Net
(loss) income
|
$
|
(558
|
)
|
$
|
2,504
|
|||
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||
Net
loss (income) from discontinued operations
|
104
|
(23
|
)
|
|||||
Tax
expense from discontinued operations
|
—
|
7
|
||||||
Depreciation
and amortization
|
2,310
|
1,766
|
||||||
Share-based
compensation expense
|
1,614
|
1,205
|
||||||
Excess
tax benefits from stock option exercises
|
(66
|
)
|
(1,590
|
)
|
||||
Loss
on retirement of assets
|
35
|
27
|
||||||
Bad
debt expense
|
260
|
—
|
||||||
Changes
in operating assets and liabilities, net of effect of
acquisitions:
|
||||||||
Accounts
receivable
|
6,799
|
(5,949
|
)
|
|||||
Inventory
|
725
|
(428
|
)
|
|||||
Accounts
payable
|
551
|
(292
|
)
|
|||||
Other
assets and liabilities
|
(421
|
)
|
4,702
|
|||||
Net
cash provided by operating activities
|
11,353
|
1,929
|
||||||
CASH
FLOWS FROM INVESTING ACTIVITIES, net of effect of
acquisitions:
|
||||||||
Acquisition
of AdvancedNetworX, Inc.
|
(465
|
)
|
—
|
|||||
Acquisition
of Access Flow, Inc.
|
(209
|
)
|
(2,500
|
)
|
||||
Acquisition
of Select, Inc.
|
(25
|
)
|
10
|
|||||
Transaction
costs paid for acquisitions
|
—
|
(161
|
)
|
|||||
Proceeds
from sale of property and equipment
|
8
|
—
|
||||||
Increase
in restricted cash for lease deposit
|
(53
|
)
|
—
|
|||||
Capital
expenditures
|
(813
|
)
|
(1,785
|
)
|
||||
Net
cash used in investing activities
|
(1,557
|
)
|
(4,436
|
)
|
||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
(Payments)
borrowings under floor plan financing, net
|
(8,708
|
)
|
5,813
|
|||||
Proceeds
from issuance of common stock under registered direct
offering
|
—
|
8,870
|
||||||
Proceeds
from issuance of common stock under employee stock purchase
plan
|
326
|
164
|
||||||
Payment
of short-term credit facility
|
—
|
(6,000
|
)
|
|||||
Exercise
of stock options
|
22
|
827
|
||||||
Excess
tax benefits from stock option exercises
|
66
|
1,590
|
||||||
Purchase
of common stock
|
(66
|
)
|
(2,096
|
)
|
||||
Tax
withholdings related to net share settlements of restricted stock
awards
|
(60
|
)
|
(12
|
)
|
||||
Proceeds
from other short-term borrowings
|
—
|
251
|
||||||
Payments
on notes payable and capital lease obligations
|
(197
|
)
|
(434
|
)
|
||||
Net
cash (used in) provided by financing activities
|
(8,617
|
)
|
8,973
|
|||||
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
1,179
|
6,466
|
||||||
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
10,937
|
9,340
|
||||||
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$
|
12,116
|
$
|
15,806
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
7
INX INC.
AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
Nine
Months
Ended
September 30,
|
||||||||
2009
|
2008
|
|||||||
SUPPLEMENTAL
NONCASH INVESTING AND FINANCING ACTIVITIES:
|
||||||||
Capital
lease obligation:
|
||||||||
Cost
of assets acquired
|
$
|
297
|
$
|
—
|
||||
Capital
lease obligation incurred
|
(297
|
)
|
—
|
|||||
Acquisition
of AdvancedNetworX, Inc.:
|
||||||||
Fair
value of assets acquired
|
1,142
|
—
|
||||||
Estimated
additional purchase price accrued
|
(477
|
)
|
—
|
|||||
Liabilities
assumed and accrued
|
(190
|
)
|
—
|
|||||
Common
stock issued
|
(10
|
)
|
—
|
|||||
Acquisition
of Access Flow, Inc.:
|
||||||||
Fair
value of assets acquired
|
394
|
6,011
|
||||||
Common
stock issued
|
(185
|
)
|
(3,272
|
)
|
||||
Transaction
costs and noncompete agreements accrued
|
—
|
(78
|
)
|
|||||
Acquisition
of Network Architects, Corp.:
|
||||||||
Fair
value of assets acquired
|
—
|
740
|
||||||
Common
stock issued
|
—
|
(740
|
)
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
8
INX
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In
thousands, except share and per share amounts)
1.
Description of Business
INX Inc.
(“INX” or the “Company”) is a provider of technology infrastructure solutions
for enterprise-class organizations such as corporations, schools and federal,
state and local governmental agencies. The solutions INX provides consist of
three broad categories of technology infrastructure: network infrastructure,
unified communications and data center. Network infrastructure solutions consist
of network routing and switching, wireless networking and network security
solutions. Unified communications solutions consist of Internet Protocol (“IP”)
network-based voice or telephone solutions as well as IP network-based video
communications solutions. Data center solutions consist of network storage
solutions and data center server virtualization solutions. The accompanying
condensed consolidated financial statements include the accounts of INX Inc. and
its wholly-owned subsidiaries, Select, Inc. and Valerent, Inc. All intercompany
transactions and accounts are eliminated in consolidation. Select, Inc. and
Valerent, Inc. were merged into INX Inc. as of the close of business on
December 31, 2008.
The
accompanying unaudited financial data as of September 30, 2009 and for the
three-month and nine-month periods ended September 30, 2009 and 2008 have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. The December 31, 2008 Condensed
Consolidated Balance Sheet was derived from audited financial statements, but
does not include all disclosures required by accounting principles generally
accepted in the United States. However, the Company believes the disclosures are
adequate to make the information presented not misleading. These Condensed
Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements and the notes thereto, included in the
Company’s Annual Report on Form 10-K/A for the year ended December 31,
2008.
In the
opinion of management, all adjustments (which include normal recurring
adjustments, except as disclosed herein) necessary for a fair presentation of
financial position as of September 30, 2009, results of operations for the
three-month and nine-month periods ended September 30, 2009 and 2008, cash flows
for the nine months ended September 30, 2009 and 2008, and stockholders’ equity
for the nine months ended September 30, 2009, have been included. The results of
the interim periods are not necessarily indicative of results for the full year
or any future period.
During
2009, the Company adopted accounting for subsequent events requiring the
disclosure of the date through which an entity has evaluated subsequent events
and the basis for selecting that date. For the period ended September 30, 2009,
the Company evaluated subsequent events from September 30, 2009 to November 12,
2009, the filing date with the Securities and Exchange Commission of this report
on Form 10-Q.
3.
Recent Accounting Pronouncements
During
the third quarter of 2009, the Company adopted the codification of accounting
hierarchy (the “Codification”). The Codification became the single source of
authoritative Generally Accepted Accounting Principles (“GAAP”) in the United
States, other than rules and interpretive releases issued by the United States
Securities and Exchange Commission (“SEC”). The Codification reorganized GAAP
into a topical format that eliminates the previous GAAP hierarchy and instead
established two levels of guidance – authoritative and nonauthoritative. All
non-grandfathered, non-SEC accounting literature that was not included in the
Codification became nonauthoritative. The adoption of the Codification did not
change previous GAAP, but rather simplified user access to all authoritative
literature related to a particular accounting topic in one place. Accordingly,
the adoption had no impact on the Company’s consolidated financial position and
results of operations.
In
October 2009, the Financial Accounting Standards Board (“FASB”) issued
“Multiple-Deliverable Revenue Arrangements”, amending guidance to require an
entity to use an estimated selling price when vendor specific objective evidence
or acceptable third party evidence does not exist for any products or services
included in a multiple element arrangement. The arrangement consideration should
be allocated among the products and services based upon their relative selling
prices, thus eliminating the use of the residual method of
allocation. Expanded qualitative and quantitative disclosures
regarding significant judgments made and changes in applying this guidance are
required. This guidance is effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after
June 15, 2010. Early adoption and retrospective application are also
permitted. The Company is currently evaluating the impact of adopting this
provision.
9
In
October 2009, the FASB issued “Certain Revenue Arrangements That Include
Software Elements”, amending guidance to exclude tangible products containing
software components and non-software components that function together to
deliver the product’s essential functionality. Entities that sell joint hardware
and software products that meet this scope exception will be required to follow
this guidance, effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010.
Early adoption and retrospective application are also permitted. The Company is
currently evaluating the impact of adopting this provision.
In April
2009, the FASB amended disclosure requirements regarding Fair Value of Financial
Instruments to
require additional disclosures about fair value of certain financial instruments
for interim reporting periods of publicly traded companies as well as in annual
financial statements. The amendment is effective for interim periods ending
after June 15, 2009. The Company does not have material financial
instruments within the scope of the amendment. The adoption of the
amended disclosure requirements did not have a material impact on the Company’s
consolidated financial statements.
On
January 1, 2009 the Company changed its method of determining whether
instruments granted in share-based payment transactions are
participating securities in response to changes in FASB interpretive
guidance. Subsequent to January 1, 2009, all outstanding unvested
share-based payment awards that contain rights to nonforfeitable dividends
participate in undistributed earnings with common shareholders are considered
participating securities and the two-class method of computing basic and diluted
EPS must be applied. The changes did not have a material effect on
the Company’s basic earnings per share.
In
December 2007, the FASB revised accounting for business combinations to better
represent the economic value of a business combination transaction. The
revisions from the previous requirements include, but are not limited to:
(1) acquisition costs are recognized separately from the
acquisition; (2) known contractual contingencies at the time of the
acquisition are considered part of the liabilities acquired and
measured at their fair value; all other contingencies are part of the
liabilities acquired measured at their fair value only if it is more likely than
not that they meet the definition of a liability; (3) contingent
consideration based on the outcome of future events are recognized and measured
at the time of the acquisition; (4) business combinations achieved in
stages (step acquisitions) recognize the identifiable assets and
liabilities, as well as noncontrolling interests, in the acquiree, at the full
amounts of their fair values; and (5) a bargain purchase (defined as a
business combination in which the total acquisition-date fair value of the
identifiable net assets acquired exceeds the fair value of the consideration
transferred plus any noncontrolling interest in the
acquiree) requires that excess to be recognized as a gain
attributable to the acquirer. The Company adopted the revised guidance on
January 1, 2009. All business combinations entered into after January 1,
2009 have been recorded in accordance with the revised guidance.
4.
Acquisitions
The
following acquisitions were consummated to improve the Company’s geographical
presence and enhance its technical capabilities.
AdvancedNetworX
Under an
Asset Purchase Agreement dated July 17, 2009 (the “Agreement”), the Company
purchased the operations and certain assets, and assumed specified liabilities
of AdvancedNetworX, Inc. (“AdvancedNetworX”). AdvancedNetworX, a
Raleigh, North Carolina-based network consulting organization founded in
September 2007, generated revenue of approximately $1,700 for the 12 months
ended June 30, 2009. The acquisition will create a presence for INX in the Mid
Atlantic region. The Company completed the acquisition simultaneously
with the execution of the Agreement. The Agreement contains customary
representations and warranties and requires AdvancedNetworX and its shareholders
to indemnify the Company for certain liabilities arising under the Agreement,
subject to certain limitations and conditions.
The
consideration paid and liabilities assumed at closing pursuant to the Agreement
totaled $665, consisting of (a) $465 in cash, (b) $156 in liabilities under
customer contracts, (c) $34 in capital lease obligations assumed and (d) 2,000
shares of the Company’s common stock, $0.01 par value (the “Common Stock”),
which are held in escrow under holdback provisions defined in the
Agreement. The Common Stock was valued at the share price on July 17,
2009, which was $5.08 per share totaling $10. Transaction costs
of $16 were expensed as incurred.
10
Additional
purchase consideration is payable based on AdvancedNetworX’s branch office
operating income contribution during each of the one-year periods ending July
31, 2010, July 31, 2011, and July 31, 2012. The Agreement specifies
the computation of additional purchase consideration earned including a minimum
of zero and a maximum of $700 for each of the aforementioned
periods. At the Company’s option, up to 60% of such additional
purchase price may be paid in the form of Common Stock. Estimated additional
purchase consideration payable under the terms of the Agreement was recorded at
fair value on the acquisition date in the amount of $477. The
estimated additional purchase consideration payable is classified as other
long-term liabilities in the accompanying condensed consolidated balance sheet
as of September 30, 2009. The Company estimates such amounts will be earned
during the one-year periods ending July 31, 2011 and 2012. The
estimated additional consideration will be remeasured to fair value at each
reporting date until settled with changes in fair value recorded in selling,
general and administrative expense.
The
following table summarizes the allocation of the purchase price to the fair
value of the assets acquired and liabilities assumed:
Intangible
assets:
|
||||
Customer
relationships, amortized over 2 years
|
$ | 30 | ||
Noncompete
agreements, amortized over 2 years
|
269 | |||
Property
and equipment
|
59 | |||
Goodwill
|
784 | |||
Liabilities
assumed
|
(540 | ) | ||
Fair
value of estimated additional purchase price
|
(477 | ) | ||
Net
assets acquired
|
$ | 125 |
Goodwill
represents the excess of the purchase price of an acquired business over the
fair value of the underlying net tangible and intangible assets and is
deductible for Federal income tax purposes. Among the factors that contributed
to a purchase price in excess of the fair value of the net tangible and
intangible assets were the expected benefits from increasing the Company’s
national footprint with a developed workforce dedicated to engineering
excellence. Revenues and operating loss for the acquired operations
of AdvancedNetworX were $333 and $155, respectively, in the accompanying
condensed consolidated statements of operations for the three and nine month
periods ended September 30, 2009.
Access
Flow, Inc.
Under an
Asset Purchase Agreement dated June 6, 2008 (the “APA”), the Company
purchased the operations and certain assets, and assumed specified liabilities
of Access Flow, Inc. (“AccessFlow”). AccessFlow is a Sacramento,
California-based consulting organization focused on delivering VMware-based data
center virtualization solutions, with revenues for the twelve months ended
March 31, 2008 of approximately $10,500. The consideration paid at closing
pursuant to the APA was (a) $2,450 in cash and (b) 262,692 shares
of the Common Stock, of which 24,000 shares were placed in escrow under holdback
provisions defined in the agreement. During the quarter ended September 30,
2009, shares held in escrow were released to AccessFlow after a reduction of
3,359 shares representing $34 for costs reimbursable under the APA escrow
provisions. The 3,359 shares returned from escrow were
retired. Upon the release of the remaining shares in escrow to
AccessFlow, 1,032 shares in Company common stock representing $14 were issued to
the broker of the transaction. The two shareholders of AccessFlow entered
into five-year noncompete agreements at closing, which provide for payments to
each in the aggregate amount of $50 in equal monthly installments of
approximately $8 each per month over the six month period subsequent to
closing.
Additional
purchase price consideration valued at $377 was earned by AccessFlow for the
achievement of certain customer billing milestones during the twelve-month
period ending June 30, 2009. The consideration consisted of a cash
payment of $182 and issuance of 29,435 shares of the Company’s common stock with
a value of $195. The calculation of the number of shares of Company’s
common stock was determined by dividing $182 by $6.18, the average closing price
per share for the common stock as reported by Nasdaq for the five consecutive
trading days prior to September 23, 2009. Additionally, cash of $9 and 1,472
shares valued at $10 were paid to the broker of the transaction. The
additional purchase price consideration and broker’s fee were recorded as
goodwill.
11
Additional
purchase consideration is payable to AccessFlow based on certain financial
performance during the one-year period ending June 30, 2010. The financial
performance upon which such additional purchase consideration is based includes
the following business components: (i) the acquired AccessFlow Sacramento,
California branch office revenue excluding its hosting business, (ii) the
acquired AccessFlow hosting business, and (iii) customer billings for
certain virtualization products and services specified in the APA generated by
the Company’s pre-existing fourteen branch office locations. The APA specifies
the computation of additional purchase consideration earned under each business
component, including a minimum and maximum amount payable. For each business
component the minimum annual additional consideration payable is zero and the
maximum annual additional consideration payable is (i) $405,
(ii) $405, and (iii) $540, respectively. At the Company’s option, 50%
of such additional consideration may be paid in the form of Common Stock.
Additional purchase consideration, if any, will be recorded as
goodwill.
NetTeks
Technology Consultants, Inc.
Under an
Asset Purchase Agreement dated November 14, 2008 (the “NetTeks APA”), the
Company purchased the operations and certain assets, and assumed specified
liabilities of NetTeks Technology Consultants, Inc. (“NetTeks”). NetTeks is a
Boston, Massachusetts-based network consulting organization with offices in
downtown Boston and Glastonbury, Connecticut, with revenues for the twelve
months ended September 30, 2008 of approximately $12,700. The Company
completed the acquisition simultaneously with the execution of the NetTeks APA.
Neither NetTeks nor any shareholder of NetTeks has any prior affiliation with
the Company. The NetTeks APA contains customary representations and warranties
and requires NetTeks and its shareholders to indemnify the Company for certain
liabilities arising under the NetTeks APA, subject to certain limitations and
conditions.
The
consideration paid at closing pursuant to the NetTeks APA was (a) $1,350 in
cash and (b) 30,770 shares of the Common Stock, of which 15,385 common
stock shares were held in escrow under holdback provisions defined in the
NetTeks APA. Additional purchase consideration is payable based on
NetTeks’ branch office operating income contribution during the six month period
ending December 31, 2009 and the year ending December 31, 2010. The NetTeks
APA specifies the computation of additional purchase consideration earned
including a minimum of zero and a maximum of $1,500 for the period ending
December 31, 2009 and $1,700 for the period ending December 31, 2010.
At the Company’s option, 50% of such additional purchase price may be paid in
the form of Common Stock. Additional purchase consideration, if any, will be
recorded as goodwill.
VocalMash
Under an
Asset Purchase Agreement dated December 4, 2008 (“VocalMash APA”), the
Company purchased the operations of VocalMash, a business owned and operated by
INX’s Vice President of Sales. VocalMash is an application integration company
that utilizes Web 2.0 technologies to integrate unified communications systems
with other enterprise applications. The Company completed the acquisition
simultaneously with the execution of the VocalMash APA. The VocalMash APA
contains customary representations and warranties and requires VocalMash and its
owner to indemnify the Company for certain liabilities arising under the
VocalMash APA, subject to certain limitations and conditions.
The
consideration paid at closing pursuant to the VocalMash APA was
60,000 shares of the Company’s common stock. The common stock was valued at
$4.89 per share or $293. Additional purchase consideration of up to a
maximum of $380 may be payable under the VocalMash APA based on the achievement
of operating income contribution targets for 2009. Additional purchase
consideration, if any, will be recorded as goodwill.
Pro
Forma Summary
The
following pro forma consolidated amounts give effect to the Company’s
acquisition of AdvancedNetworX, AccessFlow, NetTeks, and VocalMash as if they
had occurred January 1, 2008 and January 1, 2009. The pro forma consolidated
amounts presented below are based on continuing operations. The pro forma
consolidated amounts are not necessarily indicative of the operating results
that would have been achieved had the transaction been in effect and should not
be construed as being representative of future operating results.
12
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenues
|
$
|
57,989
|
$
|
75,907
|
$
|
174,457
|
$
|
210,863
|
||||||||
Net
(loss) income from continuing operations
|
$
|
(359
|
)
|
$
|
342
|
$
|
(888)
|
$
|
1,964
|
|||||||
Net
(loss) income
|
$
|
(407
|
)
|
$
|
514
|
$
|
(992)
|
$
|
2,495
|
|||||||
Net
(loss) income per share from continuing operations:
|
||||||||||||||||
Basic
|
$
|
(0.04
|
)
|
$
|
0.04
|
$
|
(0.10)
|
$
|
0.24
|
|||||||
Diluted
|
$
|
(0.04
|
)
|
$
|
0.04
|
$
|
(0.10)
|
$
|
0.23
|
|||||||
Net
(loss) income per share:
|
||||||||||||||||
Basic
|
$
|
(0.05
|
)
|
$
|
0.06
|
$
|
(0.10)
|
$
|
0.31
|
|||||||
Diluted
|
$
|
(0.05
|
)
|
$
|
0.05
|
$
|
(0.10)
|
$
|
0.29
|
|||||||
Weighted
average shares used in calculation:
|
||||||||||||||||
Basic
|
8,927,893
|
8,839,461
|
8,851,011
|
8,051,736
|
||||||||||||
Diluted
|
8,927,893
|
9,431,123
|
8,851,011
|
8,672,038
|
Select,
Inc.
Under a
Stock Purchase Agreement dated August 31, 2007 (the “SPA”), the Company
purchased all issued and outstanding capital stock of Select, Inc. (“Select”).
Located in Boston, Massachusetts, Select is a Cisco-centric solutions provider
focused on delivering IP Telephony, IP Storage and network infrastructure
solutions throughout New England with approximately $40,000 in annual revenues.
Additional purchase consideration is payable if Select branch office revenue is
greater than $53,000 and operating profit contribution is greater than or equal
to $3,710 during the twelve-month period ending August 31,
2009. The revenue and operating profit targets were not achieved and
no payments were due under the SPA.
Goodwill
The
changes in the carrying amount of goodwill for the nine months ended September
30, 2009 were as follows:
Goodwill
|
Accumulated
Impairment Losses
|
Total
|
||||||||||
Balance
as of December 31, 2008
|
$
|
22,147
|
$
|
(9,396
|
)
|
$
|
12,751
|
|||||
Goodwill
acquired during the year
|
1,203
|
1,203
|
||||||||||
Balance
as of September 30, 2009
|
$
|
23,350
|
$
|
(9,396
|
)
|
$
|
13,954
|
5. Earnings Per
Share
The
following table presents the calculation of basic and diluted earnings per
share:
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Numerator:
|
||||||||||||||||
Net
income (loss) from continuing operations-basic and diluted
|
$
|
(327
|
)
|
$
|
371
|
$
|
(454
|
)
|
$
|
2,481
|
||||||
(Loss)
income on disposal of discontinued operations, net of income
taxes
|
(48
|
)
|
9
|
(104
|
)
|
23
|
||||||||||
Net
income (loss)
|
$
|
(375
|
)
|
$
|
380
|
$
|
(558
|
)
|
$
|
2,504
|
||||||
Denominator:
|
||||||||||||||||
Weighted-average
shares outstanding-basic
|
8,927,549
|
8,746,691
|
8,818,793
|
7,958,966
|
||||||||||||
Effect
of dilutive securities — shares issuable from assumed conversion of common
stock options, restricted stock, and warrants
|
—
|
591,662
|
—
|
620,301
|
||||||||||||
Weighted-average
shares outstanding-diluted
|
8,927,549
|
9,338,353
|
8,818,793
|
8,579,268
|
13
The
following table presents the number of shares of common stock that were excluded
in the calculation of diluted earnings per share since their effect would have
been antidilutive.
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Warrants
|
40,000
|
575,000
|
40,000
|
619,955
|
||||||||||||
Options
|
519,618
|
214,100
|
550,518
|
189,100
|
||||||||||||
Restricted
shares
|
621,249
|
—
|
511,798
|
—
|
||||||||||||
Employee
Stock Purchase Plan
|
8,972
|
—
|
2,991
|
—
|
||||||||||||
Weighted-average
shares considered antidilutive
|
1,189,839
|
789,100
|
1,105,307
|
809,055
|
For
current periods presented, the computation of diluted earnings (losses) per
share excludes warrants and outstanding stock options, restricted stock awards
and employee stock purchase plans shares because the Company reported losses
during the period, and including them would have had an anti-dilutive effect on
loss per share. For prior periods presented, the computation of diluted earnings
(losses) per share excludes outstanding stock options and warrants with exercise
prices greater than the average market price of the Company's common shares,
because the inclusion of such options and warrants would be anti-dilutive and
such options and warrants are not considered participating securities. In any
period during which the average market price of the Company's common shares
exceeds the exercise prices of these stock options and warrants, such stock
options and warrants will be included in our diluted earnings (losses) per share
computation using the if converted method of accounting.
6.
Share-Based Compensation
The
Company recognized employee share-based compensation expense for stock options,
restricted stock grants, and the employee stock purchase plan of $471 and $479
during the three months ended September 30, 2009 and 2008, respectively, and
$1,524 and $1,115 during the nine months ended September 30, 2009 and 2008,
respectively. In addition, during the nine months ended September 30,
2009 and 2008, the Company issued 19,149 shares and 7,443 shares, respectively,
to its non-employee directors. The issued shares vest immediately and
were valued at $90 and $90, respectively, determined by multiplying the number
of shares issued by the closing price per share for the common stock as reported
by NASDAQ on May 12, 2009 and May 13, 2008. The unrecognized
compensation cost related to the Company's unvested stock options as of
September 30, 2009 and 2008 was $1,013 and $1,764, respectively and is expected
to be recognized over a weighted-average period of 1.5 years and 1.8 years,
respectively. The unrecognized compensation cost related to the Company's
unvested restricted shares as of September 30, 2009 and 2008 was $3,494 and
$3,250, respectively and is expected to be recognized over a weighted-average
period of 2.2 years and 4.1 years, respectively.
7.
Senior Credit Facility
The
Company has a $60,000 maximum aggregate line of credit with Castle Pines
Capital LLC (“CPC”) under a senior credit facility. The CPC senior credit
facility is used primarily for inventory financing and working capital
requirements. At September 30, 2009, $31,294 was outstanding under
the Facility and is presented as Accounts Payable - Floor Plan in the
accompanying condensed consolidated balance sheet, and the unused availability
was $2,959. The carrying value of the balance outstanding
approximates its fair value given the short-term maturity of the
instruments. Substantially all of our assets are pledged as
collateral under the senior credit facility. At September 30, 2009, the Company
was in compliance with the loan covenants of the senior credit
facility.
14
8.
Stockholders’ Equity
On
September 10, 2008, the Board of Directors authorized a common stock
repurchase plan of up to $2,000 of the Company’s common stock on or before
December 31, 2008. The purchases were required to be made in open market or
privately negotiated transactions in compliance with Rule 10b-18 under the
Securities Exchange Act of 1934, as amended, subject to market and business
conditions, applicable legal requirements and other factors. The plan also
required the purchased shares to be retired as soon as practicable following the
purchase. The plan did not obligate the Company to purchase any particular
amount of common stock and could be suspended at any time at the Company’s
discretion. On December 3, 2008, the Board of Directors modified
the September 10, 2008 common stock repurchase plan, authorizing the
repurchase of $2,000 during the period January 1, 2009 to March 31,
2009. During the three-month period ended March 31, 2009, 19,466
shares were purchased for $66 and retired. From inception of the repurchase plan
to March 31, 2009, 300,339 shares were purchased for $1,762, an
average purchase price of $5.87 per share. The repurchase plan expired on
March 31, 2009.
On May
12, 2009, the Board of Directors authorized a new common stock repurchase plan
of up to $2,000 of the Company’s common stock on or before October 31, 2009. The
purchases are required to be made in open market or privately negotiated
transactions in compliance with Rule 10b-18 under the Securities Exchange
Act of 1934, as amended, subject to market and business conditions, applicable
legal requirements and other factors. The plan also requires the purchased
shares to be retired as soon as practicable following the purchase. The plan
does not obligate the Company to purchase any particular amount of common stock
and could be suspended at any time at the Company’s discretion. No
shares of common stock were repurchased under the plan during the period May 12,
2009 to September 30, 2009 or subsequent to September 30,
2009. The plan expired on October 31, 2009.
9.
Commitments and Contingencies
Self-Insured
Medical Plan
Effective
January 1, 2009, the Company changed its employee medical insurance coverage to
self-insure for losses up to $100 per claim. The Company maintains
stop loss coverage with a third party insurer to limit its total exposure with
an annual aggregate loss limit of $2,357 based on the current enrollment in the
plan. During the nine-month period ended September 30, 2009, medical claims and
administrative fees totaling $1,654 were incurred and a liability recorded of
$211 at September 30, 2009 as an estimate of the ultimate cost of claims
incurred as of the balance sheet date. The Company’s liability is
based on an analysis of historical data and actuarial estimates and includes
known claims and an estimate of claims incurred but not yet
reported. Management believes that it has adequately reserved for the
self-insurance liability; however, any significant variation in claims incurred
but not paid from historical trends could cause actual expense to differ
materially from the accrued liability.
Litigation
On
February 6, 2009, INX filed a lawsuit in the United States District Court
Eastern District of Texas styled InternetworkExperts, Inc.
(INX) v. InternationalBusiness Machines Corporation
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. The amount that may ultimately be
recovered, if any, cannot be determined at this time, and such amount will be
recorded only upon settlement and payment by the defendant.
On August
3, 2009, INX filed a lawsuit in the 152nd
District Court of Harris County styled “INX, Inc. v. General Consulate of
Equatorial Guinea seeking damages plus interest, attorney fees, and costs of
suit for breach of contract in connection with the Company’s lease of its then
Houston, Texas location. The amount that may ultimately be recovered,
if any, cannot be determined at this time, and such amount will be recorded only
upon settlement and payment by the defendant.
The
Company served as a subcontractor to Complete Communications Services, Inc.
(“CoCom”), a subcontractor on certain school district contracts during 2007. On
August 24, 2007, CoCom filed a Chapter 11 Petition in
U.S. Bankruptcy Court. As of December 31, 2008, the Company had no
outstanding accounts receivable from CoCom. The Company received payments of
$102 during the ninety day period preceding the bankruptcy filing which could
potentially be deemed preferential. The CoCom Bankruptcy Trustee filed suit on
August 21, 2009 to recover these payments. The Company reached a
settlement agreement in October 2009 with the Bankruptcy Trustee which required
payment of $15 in satisfaction of all claims, which is included in selling,
general and administrative expense in the accompanying condensed consolidated
financial statements.
15
INX is
also party to other litigation and claims which management believes are normal
in the course of its operations. While the results of such litigation and claims
cannot be predicted with certainty, INX believes the final outcome of such
matters will not have a materially adverse effect on its results of operations,
financial position, or cash flows.
Contingencies
On
January 6, 2009, Lyondell Chemical Company (“Lyondell”) filed a
Chapter 11 Petition in U.S. Bankruptcy Court. As of December 31,
2008, the Company had an account receivable from Lyondell of $99, less an
allowance for doubtful accounts of $99. The Company received payments of $539
during the ninety day period preceding the bankruptcy filing which could
potentially be deemed preferential. INX cannot predict the final outcome of this
matter, including whether it could have a materially adverse effect on its
results of operations, financial position, or cash flows.
INX has
contracts with the federal government and its agencies and subcontracts with
various federal government contractors. INX is subject to audit from
time to time for compliance with government regulations and contract provisions
including costs incurred. An adverse finding under an audit could
result in the disallowance of our costs under a government contract, termination
of a government contract, forfeiture of profits, suspension of payments, fines
and suspension and prohibition from doing business with the federal government.
In the event that an audit results in disallowance of our costs under a
contract, INX has the right to appeal the findings of the audit under applicable
dispute resolution provisions. Under a subcontract with Northrop
Grumman, the Federal Government made written claims totaling $131 which
were settled in September 2009 with the amount claimed recorded as a reduction
of outstanding accounts receivable.
10.
Restatement of Previously Issued Financial Statements
On August
12, 2009, management of the Company in consultation with the Audit Committee of
the Board of Directors, determined that the Company's financial statements
included in the Annual Report on Form 10-K for the fiscal year ended December
31, 2008 and Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 2009 required restatement. The restated reports were filed on
September 2, 2009. The restatement affected the condensed
consolidated financial statements as previously presented in the Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 2008 as
follows:
|
●
|
The
Company previously presented its floor plan financing balances as trade
accounts payable because it believed that its principal vendor had a
substantial investment in the floor plan financing
company. During the preparation of the Quarterly Report on Form
10-Q for the quarter ended June 30, 2009, the Company became aware that
the principal vendor had no ownership interest in its floor plan financing
company. Consequently, the Company corrected its presentation
of the floor plan balances in its Balance Sheets from trade accounts
payable to accounts payable - floor plan and the related amounts in its
Statements of Cash Flows from operating activities to financing
activities. The correction of the error has no effect on the
previously reported Statements of Operations. There is no
impact to the Company's current liabilities or total liabilities as a
result of this correction as of September 30, 2008.
|
● | In addition to the aforementioned corrections, the Company recorded certain immaterial adjustments affecting the consolidated financial statements as of and for the three-month and nine-month periods ended September 30, 2008, which increased selling general and administrative expense by $50 and reduced income tax expense by $4. These adjustments relate to stock option modifications. |
The
following is a summary of the impact of the restatement as of and for the
three-month and nine-month periods ended September 30, 2008 on the unaudited
condensed consolidated financial statements.
16
Condensed
Consolidated Statement of Operations for the three months ended September 30,
2008:
As
Previously
Reported
|
Restatement
Adjustment
|
As
Restated
|
||||||||||
Revenue:
|
||||||||||||
Products
|
$
|
59,576
|
$
|
59,576
|
||||||||
Services
|
12,366
|
12,366
|
||||||||||
Total
revenue
|
71,942
|
71,942
|
||||||||||
Cost
of products and services:
|
||||||||||||
Products
|
49,509
|
49,509
|
||||||||||
Services
|
9,107
|
9,107
|
||||||||||
Total
cost of products and services
|
58,616
|
58,616
|
||||||||||
Gross
profit
|
13,326
|
13,326
|
||||||||||
Selling,
general and administrative expenses
|
12,545
|
$
|
50
|
12,595
|
||||||||
Operating
income
|
781
|
(50
|
)
|
731
|
||||||||
Interest
and other income, net
|
106
|
106
|
||||||||||
Income
from continuing operations before income taxes
|
887
|
(50
|
)
|
837
|
||||||||
Income
tax expense
|
470
|
(4
|
)
|
466
|
||||||||
Net
income from continuing operations
|
417
|
(46
|
)
|
371
|
||||||||
Income
from discontinued operations, net of income taxes
|
9
|
9
|
||||||||||
Net
income
|
$
|
426
|
$
|
(46
|
)
|
$
|
380
|
|||||
Net
income per share:
|
||||||||||||
Basic:
|
||||||||||||
Income
from continuing operations
|
$
|
0.05
|
$
|
(0.01
|
)
|
$
|
0.04
|
|||||
Income
from discontinued operations, net of income taxes
|
—
|
—
|
||||||||||
Net
income per share
|
$
|
0.05
|
$
|
(0.01
|
)
|
$
|
0.04
|
|||||
Diluted:
|
||||||||||||
Income
from continuing operations
|
$
|
0.05
|
$
|
(0.01
|
)
|
$
|
0.04
|
|||||
Income
from discontinued operations, net of income taxes
|
—
|
—
|
||||||||||
Net
income per share
|
$
|
0.05
|
$
|
(0.01
|
)
|
$
|
0.04
|
|||||
Shares
used in computing net income per share:
|
||||||||||||
Basic
|
8,746,691
|
8,746,691
|
||||||||||
Diluted
|
9,338,353
|
9,338,353
|
17
Condensed
Consolidated Statement of Operations for the nine months ended September 30,
2008:
As
Previously
Reported
|
Restatement
Adjustment
|
As
Restated
|
||||||||||
Revenue:
|
||||||||||||
Products
|
$
|
161,497
|
$
|
161,497
|
||||||||
Services
|
34,079
|
34,079
|
||||||||||
Total
revenue
|
195,576
|
195,576
|
||||||||||
Cost
of products and services:
|
||||||||||||
Products
|
132,457
|
132,457
|
||||||||||
Services
|
23,894
|
23,894
|
||||||||||
Total
cost of products and services
|
156,351
|
156,351
|
||||||||||
Gross
profit
|
39,225
|
39,225
|
||||||||||
Selling,
general and administrative expenses
|
34,800
|
$
|
50
|
34,850
|
||||||||
Operating
income
|
4,425
|
(50
|
)
|
4,375
|
||||||||
Interest
and other income, net
|
(65
|
)
|
(65
|
)
|
||||||||
Income
from continuing operations before income taxes
|
4,360
|
(50
|
)
|
4,310
|
||||||||
Income
tax expense
|
1,833
|
(4
|
)
|
1,829
|
||||||||
Net
income from continuing operations
|
2,527
|
(46
|
)
|
2,481
|
||||||||
Income
from discontinued operations, net of income taxes
|
23
|
23
|
||||||||||
Net
income
|
$
|
2,550
|
$
|
(46
|
)
|
$
|
2,504
|
|||||
Net
income per share:
|
||||||||||||
Basic:
|
||||||||||||
Income
from continuing operations
|
$
|
0.32
|
$
|
(0.01
|
)
|
$
|
0.31
|
|||||
Income
from discontinued operations, net of income taxes
|
—
|
—
|
||||||||||
Net
income per share
|
$
|
0.32
|
$
|
(0.01
|
)
|
$
|
0.31
|
|||||
Diluted:
|
||||||||||||
Income
from continuing operations
|
$
|
0.30
|
$
|
(0.01
|
)
|
$
|
0.29
|
|||||
Income
from discontinued operations, net of income taxes
|
—
|
—
|
||||||||||
Net
income per share
|
$
|
0.30
|
$
|
(0.01
|
)
|
$
|
0.29
|
|||||
Shares
used in computing net income per share:
|
||||||||||||
Basic
|
7,958,966
|
7,958,966
|
||||||||||
Diluted
|
8,579,268
|
8,579,268
|
18
Condensed
Consolidated Balance Sheet at September 30, 2008:
As
Previously
Reported
|
Restatement
Adjustment
|
As
Restated
|
||||||||||
Current
Assets:
|
||||||||||||
Cash
and cash equivalents
|
$
|
15,806
|
$
|
15,806
|
||||||||
Accounts
receivable, net
|
51,077
|
51,077
|
||||||||||
Inventory,
net
|
1,872
|
1,872
|
||||||||||
Deferred
income taxes
|
2,100
|
2,100
|
||||||||||
Other
current assets
|
1,101
|
1,101
|
||||||||||
Total
current assets
|
71,956
|
71,956
|
||||||||||
Property
and equipment, net
|
5,593
|
5,593
|
||||||||||
Goodwill
|
21,438
|
21,438
|
||||||||||
Intangible
and other assets, net
|
4,146
|
4,146
|
||||||||||
Total
assets
|
$
|
103,133
|
$
|
—
|
$
|
103,133
|
||||||
Current
Liabilities:
|
||||||||||||
Notes
payable
|
$
|
36
|
$
|
36
|
||||||||
Current
portion of capital lease obligations
|
77
|
77
|
||||||||||
Accounts
payable
|
42,719
|
$
|
(38,285
|
)
|
4,434
|
|||||||
Accounts
payable -floor plan
|
—
|
38,285
|
38,285
|
|||||||||
Accrued
expenses
|
8,409
|
8,409
|
||||||||||
Other
current liabilities
|
757
|
(4
|
)
|
753
|
||||||||
Total
current liabilities
|
51,998
|
(4
|
)
|
51,994
|
||||||||
Long-term
Liabilities:
|
||||||||||||
Deferred
income taxes
|
1,565
|
1,565
|
||||||||||
Long-term
portion of capital lease obligations
|
176
|
176
|
||||||||||
Other
long-term liabilities
|
301
|
301
|
||||||||||
Total
long-term liabilities
|
2,042
|
2,042
|
||||||||||
Stockholders’
Equity:
|
||||||||||||
Common
stock
|
87
|
87
|
||||||||||
Additional
paid-in capital
|
51,001
|
50
|
51,051
|
|||||||||
Accumulated
deficit
|
(1,995
|
)
|
(46
|
)
|
(2,041
|
)
|
||||||
Total
stockholders’ equity
|
49,093
|
4
|
49,097
|
|||||||||
Total
liabilities and stockholders’ equity
|
$
|
103,133
|
$
|
—
|
$
|
103,133
|
19
Condensed
Consolidated Statement of Cash Flows for the nine months ended September 30,
2008:
As
Previously
Reported
|
Restatement
Adjustment
|
As
Restated
|
||||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
Net
income
|
$
|
2,550
|
$
|
(46
|
)
|
$
|
2,504
|
|||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
Net
income from discontinued operations
|
(23
|
)
|
(23
|
)
|
||||||||
Tax
expense from discontinued operations
|
7
|
7
|
||||||||||
Depreciation
and amortization
|
1,766
|
1,766
|
||||||||||
Share-based
compensation expense
|
1,155
|
50
|
1,205
|
|||||||||
Excess
tax benefits from stock option exercises
|
—
|
(1,590
|
)
|
(1,590
|
)
|
|||||||
Loss
on retirement of assets
|
27
|
27
|
||||||||||
Bad
debt expense
|
—
|
—
|
||||||||||
Changes
in operating assets and liabilities, net of effect of
acquisitions:
|
||||||||||||
Accounts
receivable
|
(5,949
|
)
|
(5,949
|
)
|
||||||||
Inventory
|
(428
|
)
|
(428
|
)
|
||||||||
Accounts
payable
|
5,474
|
(5,766
|
)
|
(292
|
)
|
|||||||
Other
assets and liabilities
|
3,163
|
1,539
|
4,702
|
|||||||||
Net
cash provided by operating activities
|
7,742
|
(5,813
|
)
|
1,929
|
||||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
Acquisition
of Access Flow, Inc.
|
(2,500
|
)
|
(2,500
|
)
|
||||||||
Acquisition
of Select, Inc. purchase price adjustments
|
10
|
10
|
||||||||||
Transaction
costs paid for acquisitions
|
(161
|
)
|
(161
|
)
|
||||||||
Increase
in restricted cash for lease deposit
|
—
|
—
|
||||||||||
Capital
expenditures
|
(1,785
|
)
|
(1,785
|
)
|
||||||||
Net
cash used in investing activities
|
(4,436
|
)
|
(4,436
|
)
|
||||||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
(Payments)
borrowings under floor plan financing, net
|
—
|
5,813
|
5,813
|
|||||||||
Proceeds
from issuance of common stock under registered direct
offering
|
8,870
|
8,870
|
||||||||||
Proceeds
from issuance of common stock under employee stock purchase
plan
|
164
|
164
|
||||||||||
Payment
of short-term credit facility
|
(6,000
|
)
|
(6,000
|
)
|
||||||||
Exercise
of stock options
|
827
|
827
|
||||||||||
Excess
tax benefits from stock option exercises
|
1,590
|
1,590
|
||||||||||
Purchase
of common stock
|
(2,096
|
)
|
(2,096
|
)
|
||||||||
Tax
withholdings related to net share settlements of restricted stock
awards
|
(12
|
)
|
(12
|
)
|
||||||||
Proceeds
from other short-term borrowings
|
251
|
251
|
||||||||||
Payments
on notes payable and capital lease obligations
|
(434
|
)
|
(434
|
)
|
||||||||
Net
cash provided by financing activities
|
3,160
|
5,813
|
8,973
|
|||||||||
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
6,466
|
—
|
6,466
|
|||||||||
CASH
AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
9,340
|
9,340
|
||||||||||
CASH
AND CASH EQUIVALENTS AT END OF PERIOD
|
$
|
15,806
|
$
|
—
|
$
|
15,806
|
Item 2. Management’s Discussion and
Analysis of Financial Condition and Resultsof Operations
The
following discussion is qualified in its entirety by, and should be read in
conjunction with, our condensed consolidated financial statements, including the
notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our
Annual Report on Form 10-K/A for the fiscal year ended December 31, 2008, as
previously filed with the Securities and Exchange Commission. Amounts are
presented in thousands except for share, per share data, percentages, and
ratios.
20
Special
notice regarding forward-looking statements
This
quarterly report on Form 10-Q contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 relating to
future events or our future financial performance. Readers are cautioned that
any statement that is not a statement of historical fact including, but not
limited to, statements which may be identified by words including, but not
limited to, “anticipate,” “appear,” “believe,” “could,” “estimate,” “expect,”
“hope,” “indicate,” “intend,” “likely,” “may,” “might,” “plan,” “potential,”
“seek,” “should,” “will,” “would,” and other variations or negative expressions
thereof, are predictions or estimations and are subject to known and unknown
risks and uncertainties. Numerous factors, including factors that we have little
or no control over, may affect INX’s actual results and may cause actual results
to differ materially from those expressed in the forward-looking statements
contained herein. In evaluating such statements, readers should consider the
various factors identified in our Annual Report on Form 10-K/A for our fiscal
year ended December 31, 2008, as filed with the Securities and Exchange
Commission including the matters set forth in Item 1A. — “Risk Factors,” which
could cause actual events, performance or results to differ materially from
those indicated by such statements.
Restatement
On August
12, 2009, management of the Company in consultation with the Audit Committee of
the Board of Directors, determined that the Company's financial statements
included in the Annual Report on Form 10-K for the fiscal year ended December
31, 2008 and Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 2009 required restatement. The restated reports were filed on
September 2, 2009. The restatement affected the condensed
consolidated financial statements as previously presented in the Quarterly
Report on Form 10-Q for the fiscal quarter ended September 30, 2008 as
follows:
|
●
|
The
Company previously presented its floor plan financing balances as trade
accounts payable because it believed that its principal vendor had a
substantial investment in the floor plan financing
company. During the preparation of the Quarterly Report on Form
10-Q for the quarter ended June 30, 2009, the Company became aware that
the principal vendor had no ownership interest in its floor plan financing
company. Consequently, the Company corrected its presentation
of the floor plan balances in its Balance Sheets from trade accounts
payable to accounts payable - floor plan and the related amounts in its
Statements of Cash Flows from operating activities to financing
activities. The correction of the error has no effect on the
previously reported Statements of Operations. There is no
impact to the Company's current liabilities or total liabilities as a
result of this correction as of September 30,
2008.
|
|
●
|
In
addition to the aforementioned corrections, the Company recorded certain
immaterial adjustments affecting the consolidated financial statements as
of and for the three-month and nine-month periods ended September 30,
2008, which increased selling, general and administrative expense by
$50 and reduced income tax expense by $4. These adjustments
relate to stock option
modifications.
|
The
effect of the aforementioned corrections on the condensed consolidated financial
statements as of and for the three month and nine month periods ended September
30, 2008 previously filed on the Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 2008 are more fully described in Note 10 of the
Notes to Condensed Consolidated Financial Statements. The “Liquidity
and Capital Resources” section of this Item 2 has been restated to reflect the
impact of the aforementioned corrections.
Results
of Operations
Period Comparisons. The
following tables set forth, for the periods indicated, certain financial data
derived from our condensed consolidated statements of operations. Percentages
shown in the table below are percentages of total revenue, except for the
products and services components of gross profit, which are percentages of the
respective product and service revenue.
21
Three Months Ended September 30, 2009 Compared To the Three Months
Ended September
30,2008
Three
Months Ended September 30,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Amount
|
%
|
Amount
|
%
|
|||||||||||||
Revenue:
|
(As
Restated, Note 10)
|
|||||||||||||||
Products
|
$
|
46,813
|
80.9
|
$
|
59,576
|
82.8
|
||||||||||
Services
|
11,046
|
19.1
|
12,366
|
17.2
|
||||||||||||
Total
revenue
|
57,859
|
100.0
|
71,942
|
100.0
|
||||||||||||
Gross
profit:
|
||||||||||||||||
Products
|
10,193
|
21.8
|
10,067
|
16.9
|
||||||||||||
Services
|
2,774
|
25.1
|
3,259
|
26.4
|
||||||||||||
Total
gross profit
|
12,967
|
22.4
|
13,326
|
18.5
|
||||||||||||
Selling,
general and administrative expenses
|
13,284
|
22.9
|
12,595
|
17.5
|
||||||||||||
Operating
(loss) income
|
(317
|
)
|
(0.5
|
)
|
731
|
1.0
|
||||||||||
Interest
and other income, net
|
83
|
0.1
|
106
|
0.1
|
||||||||||||
Income
tax expense
|
93
|
0.2
|
466
|
0.6
|
||||||||||||
Net
(loss) income from continuing operations
|
(327
|
)
|
(0.6
|
)
|
371
|
0.5
|
||||||||||
(Loss
) income from discontinued operations, net of income taxes
|
(48
|
)
|
—
|
9
|
—
|
|||||||||||
Net
(loss) income
|
$
|
(375
|
)
|
(0.6
|
)
|
$
|
380
|
0.5
|
Revenue. Total revenue
decreased by $14,083, or 19.6%, to $57,859 from $71,942. Products revenue
decreased $12,763, or 21.4% to $46,813 from $59,576. The decrease in products
revenue was primarily due to unanticipated product availability issues from our
key manufacturer supplier, Cisco Systems, Inc., which led to an inability to
complete certain projects during the quarter. We currently believe
the product availability issues will improve somewhat during the latter part of
the fourth quarter. Services revenue decreased $1,320 or 10.7% to $11,046 from
$12,366. Professional services revenue decreased significantly over the prior
year and managed services revenues were approximately the same as the prior
year. Professional services revenue decreased in the Federal
Division, Gulf Coast Region, and Northwest Region, partially offset by increases
in the Central Texas and Southwest Regions and newly acquired locations in the
New England Region.
Gross Profit. Total gross
profit decreased by $359, or 2.7%, to $12,967 from $13,326. Gross profit as a
percentage of revenue increased to 22.4% from 18.5%, due to higher products
revenue margin partially offset by lower services revenue margin. Gross profit
on the products sales component increased $126 or 1.3%, to $10,193 from $10,067
and, as a percentage of sales, increased to 21.8% from 16.9%, due to
substantially higher vendor rebates on lower sales and reduced large project
sales at low margins. Gross profit on services revenue decreased $485
or 14.9% to $2,774 from $3,259 and gross profit as a percent of services revenue
decreased to 25.1% from 26.4%. The services gross margin decreased in 2009 due
to reduced professional services revenues on a cost base which is primarily
fixed in nature and lower managed services gross margin due to the higher cost
base of an acquired location.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses increased by $689,
or 5.5% to $13,284 from $12,595. As a percentage of total revenue, these
expenses increased to 22.9% in 2009 versus 17.5% in 2008. Increased 2009
expenses reflect selling, general and administrative expenses of the operations
acquired in the NetTeks, AdvancedNetworX, and VocalMash acquisitions,
higher professional fees of $368 primarily due to the restatement of prior
period financial statements and the start of the annual audit in the third
quarter of 2009 instead of the fourth quarter as in prior years, and higher bad
debt expense in 2009 of $249. These increases were partially offset
by reduced commission expense due to lower sales and proportionately higher
sales to non-commissioned accounts.
Operating (Loss) Income.
Operating income decreased $1,048 to a loss of $317 from income of $731,
primarily due to lower sales and proportionately higher selling, general and
administrative expenses, partially offset by higher gross margins.
Interest and Other Income (Expense),
Net. Interest and other income (expense), net, changed by $23 to income
of $83 from income of $106, primarily due to payment discounts offered through
January 2010 by our senior credit facility lender and interest income on cash
balances.
Income Tax Expense. Income
tax expense decreased by $373 to $93 from $466, primarily due to lower 2009
pretax income. An income tax benefit was not recognized for the 2009
loss due to the corresponding valuation allowance recorded as discussed further
under “Deferred Tax
Assets” below.
22
Net (Loss) Income. Net income decreased
$755 to a loss of $375 from income of $380, primarily due to lower sales and
proportionately higher selling, general and administrative expenses, partially
offset by higher gross margins, higher interest and other income, and lower
income tax expense.
Nine Months Ended September 30, 2009 Compared To the Nine Months Ended September 30,2008
Nine
Months Ended September 30,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Amount
|
%
|
Amount
|
%
|
|||||||||||||
Revenue:
|
(As
Restated, Note 10)
|
|||||||||||||||
Products
|
$
|
137,834
|
79.4
|
$
|
161,497
|
82.6
|
||||||||||
Services
|
35,706
|
20.6
|
34,079
|
17.4
|
||||||||||||
Total
revenue
|
173,540
|
100.0
|
195,576
|
100.0
|
||||||||||||
Gross
profit:
|
||||||||||||||||
Products
|
28,215
|
20.5
|
29,040
|
18.0
|
||||||||||||
Services
|
9,780
|
27.4
|
10,185
|
29.9
|
||||||||||||
Total
gross profit
|
37,995
|
21.9
|
39,225
|
20.1
|
||||||||||||
Selling,
general and administrative expenses
|
38,337
|
22.1
|
34,850
|
17.9
|
||||||||||||
Operating
(loss) income
|
(342
|
)
|
(0.2
|
)
|
4,375
|
2.2
|
||||||||||
Interest
and other income (expense), net
|
100
|
0.1
|
(65
|
)
|
—
|
|||||||||||
Income
tax expense
|
212
|
0.2
|
1,829
|
0.9
|
||||||||||||
Net
(loss) income from continuing operations
|
(454
|
)
|
(0.3
|
)
|
2,481
|
1.3
|
||||||||||
(Loss
) income from discontinued operations, net of income taxes
|
(104
|
)
|
—
|
23
|
—
|
|||||||||||
Net
(loss) income
|
$
|
(558
|
)
|
(0.3
|
)
|
$
|
2,504
|
1.3
|
Revenue. Total revenue
decreased by $22,036, or 11.3%, to $173,540 from $195,576. Products revenue
decreased $23,663, or 14.7% to $137,834 from $161,497. The decrease in products
revenue was primarily due to the effect of the macroeconomic downturn in
the United States during the first and second quarter of 2009 and the
unanticipated product availability issues from our key manufacturer
supplier during the third quarter of 2009 referenced above.
Services revenue increased $1,627 or 4.8% to $35,706 from $34,079. Professional
services and managed service revenue increased by approximately the same
amount. Professional services revenue increased in the Central Texas
Region, Southwest Region, Southern California Region, and the newly acquired
location in the New England Region, partially offset by decreases in the Federal
Division, Gulf Coast Region, and Northwest Region. Managed services
revenue increased in newly acquired New England and Northern California
locations and existing Southern California Region partially offset by decreased
revenue in the Gulf Coast Region.
Gross Profit. Total gross
profit decreased by $1,230, or 3.1%, to $37,995 from $39,225. Gross profit as a
percentage of revenue increased to 21.9% from 20.1%, due to higher products
revenue margins partially offset by lower services margins. Gross profit on the
products sales component decreased $825 or 2.8%, to $28,215 from $29,040
and, as a percentage of sales, increased to 20.5% from 18.0% due to
proportionately higher 2009 vendor rebates and increased 2009 revenues for third
party support contracts recorded on a net basis. Gross profit on
services revenue decreased $405 or 4.0% to $9,780 from $10,185 and gross profit
as a percent of services revenue decreased to 27.4% from 29.9%. The services
gross margin decreased in 2009 due to reduced professional services revenues on
a cost base which is primarily fixed in nature and lower managed services gross
margin due to the higher cost base of an acquired location.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses increased by
$3,487, or 10.0% to $38,337 from $34,850. As a percentage of total revenue,
these expenses increased to 22.1% in 2009 versus 17.9% in
2008. Increased 2009 expenses reflect selling, general and
administrative expenses of the operations acquired in the NetTeks, AccessFlow,
AdvancedNetworX, and VocalMash acquisitions, higher professional fees of
$537 primarily due to the restatement of prior period financial statements and
the start of the annual audit in the third quarter of 2009 instead of the fourth
quarter as in prior years, and higher bad debt expense in 2009 of
$346. These increases were partially offset by reduced commission
expense due to lower sales and proportionately higher sales to non-commissioned
accounts.
23
Operating (Loss) Income. Operating
income decreased $4,717 to a loss of $342 from income of $4,375, primarily due
to lower sales and proportionately higher selling, general and administrative
expenses partially offset by higher gross margins.
Interest and Other Income (Expense),
Net. Interest and other income (expense), net, changed by $165 to income
of $100 from expense of $65, primarily due to the elimination of borrowings
under our senior credit facility in June 2008.
Income Tax Expense. Income
tax expense decreased by $1,617 to $212 from $1,829, primarily due to lower 2009
pretax income. An income tax benefit was not recognized for the 2009
loss due to the corresponding valuation allowance recorded as discussed further
under “Deferred Tax
Assets” below.
Net (Loss) Income. Net income
decreased $3,062 to a loss of $558 from income of $2,504, primarily due to lower
sales and proportionately higher selling, general and administrative expenses
partially offset by higher gross margins and lower income tax
expense.
Tax Loss Carryforward.
Because of our operating losses in 2003, 2005, 2006 and 2008, and
exercises of stock options, we have accumulated a net operating loss
carryforward for federal income tax purposes that, at September 30, 2009, was
approximately $3,268. Since United States tax laws limit the time during which
an NOL may be applied against future taxable income and tax liabilities, we may
not be able to take full advantage of our NOL carryforward for federal income
tax purposes. The carryforward will expire during the period 2023 through 2026
if not otherwise used. A change in ownership, as defined by federal income tax
regulations, could significantly limit the Company’s ability to utilize its
carryforward.
We
recognize tax benefits associated with the exercise of stock options directly to
stockholders’ equity only when realized. Accordingly, deferred tax assets are
not recognized for net operating loss carryforwards resulting from windfall tax
benefits. A windfall tax benefit occurs when the actual tax benefit realized
upon an employee’s disposition of a share-based award exceeds the cumulative
book compensation charge associated with the award. At September 30, 2009, we
have windfall tax benefits of $3,268 included in NOL carryforward but not
reflected in deferred tax assets.
Deferred Tax Assets. In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which temporary
differences, generally become deductible. Management considers the reversal of
deferred tax liabilities, projected future income, and tax planning strategies
in making this assessment. Management’s evaluation of the realizability of
deferred tax assets must consider both positive and negative evidence. The
weight given to the potential effects of positive and negative evidence is based
on the extent to which it can be objectively verified. During the fourth quarter
of 2008 and through the nine months ended September 30, 2009, we recorded a
valuation allowance related to the net operating loss carryforwards and other
temporary items as we determined it is more likely than not that we will not be
able to use the assets to reduce future tax liabilities. As of
September 30, 2009, the net deferred tax asset was $4,228 and was fully reserved
with a valuation allowance of the same amount.
Liquidity
and Capital Resources
Sources
of Liquidity
Our
principal sources of liquidity are collections from our accounts receivable and
our credit facility (the “Credit Facility”) with Castle Pines Capital LLC
(“CPC”), which we believe are sufficient to meet our short-term and long-term
liquidity requirements. We use the Credit Facility to finance the majority of
our purchases of inventory and to provide working capital when our cash flow
from operations is insufficient. Our working capital increased to $15,847 at
September 30, 2009 from $14,173 at December 31, 2008, primarily due to cash flow
generated by operations.
The total
Credit Facility is $60,000 with an additional $10 million credit facility
specifically for acquisitions (“Acquisition Facility”). Substantially all of our
assets are pledged as collateral under the Credit Facility. Advances under the
Acquisition Facility are specific to each acquisition and subject to approval by
CPC based on pre-established criteria. There were no borrowings under the
Acquisition Facility outstanding at September 30, 2009.
24
As of
September 30, 2009, borrowing capacity and availability were as
follows:
Total
Credit Facility
|
$
|
60,000
|
||
Borrowing
base limitation
|
(25,747
|
)
|
||
Total
borrowing capacity
|
34,253
|
|||
Less
interest-bearing borrowings
|
—
|
|||
Less
non-interest bearing advances
|
(31,294
|
)
|
||
Total
unused availability
|
$
|
2,959
|
In
addition to unused borrowing availability, liquidity at September 30, 2009
included our cash balance of $12,116. The “unused availability” is the amount
not borrowed, but eligible to be borrowed. The borrowing base restrictions
generally restrict our borrowings under the Credit Facility to 85% of the
eligible receivables, 100% of our floorplanned inventory and 75% of Cisco vendor
rebates receivable.
We use
the Credit Facility to finance purchases of Cisco products from Cisco and from
certain wholesale distributors. Cisco provides 60-day terms, and other wholesale
distributors typically provide 30-day terms. Balances under the Credit Facility
that are within those respective 60-day and 30-day periods (the “Free Finance
Period”) do not accrue interest and are presented as “Accounts Payable - Floor
Plan” in our balance sheet. To the extent that we have credit availability under
the Credit Facility, we have the ability to extend the payment terms past the
Free Finance Period for up to 120 days after original invoice date. Amounts
extended past the Free Finance Period accrue interest and are presented as notes
payable on our balance sheet. No such amounts related to this Credit
Facility were outstanding at September 30, 2009 or December 31,
2008. The interest rate of the Credit Facility is the prime rate plus
0.5% (3.75% at September 30, 2009) and the interest rate of the Acquisition
Facility is the prime rate plus 2.0% (5.25% at September 30, 2009).
As
defined in the Credit Facility there are restrictive covenants measured at each
quarter and year-end regarding minimum tangible net worth, maximum debt to
tangible net worth ratio, minimum working capital and a minimum current ratio.
At September 30, 2009, we were in compliance with the loan covenants and we
anticipate that we will be able to comply with the loan covenants during the
next twelve months. If we violate any of the loan covenants, we would be
required to seek waivers from CPC for those non-compliance events. If CPC
refused to provide waivers, the amount due under the Credit Facility could be
accelerated and we could be required to seek other sources of
financing.
Cash Flows. During the nine
months ended September 30, 2009, our cash increased by $1,179. Operating
activities provided cash of $11,353, investing activities used $1,557 and
financing activities used $8,617.
Operating Activities.
Operating activities provided $11,353 in the nine months ended September
30, 2009, as compared to providing cash of $1,929 in the comparable 2008 period.
During the nine months ended September 30, 2009, net income and noncash
adjustments to net income provided cash of $3,699 and changes in asset and
liability accounts provided cash of $7,654, primarily through the reduction of
account receivable from reduced sales and improved collections.
Investing Activities.
Investing activities used $1,557 in the nine months ended September 30,
2009, compared to $4,436 used during the comparable period in 2008. Our 2009
investing activities primarily consisted of capital expenditures ($813),
acquisition of AdvancedNetworX ($465), and payment of earnout in connection with
the 2008 acquisition of AccessFlow ($209). Our investing activities
in 2008 primarily consisted of the acquisition of Access Flow, Inc. ($2,661),
including transaction costs and capital expenditures ($1,785).
Capital expenditures in both years were primarily related to purchases of
computer equipment and software, and to a lesser degree, leasehold improvements.
During the next twelve months, we do not expect to incur significant capital
expenditures requiring cash, except for acquisitions, for which we cannot
predict the certainty or magnitude. As further described in Note 4 to
the condensed consolidated financial statements, the AccessFlow, NetTeks,
VocalMash, and AdvancedNetworX acquisition agreements contain contingent cash
payment provisions that may be earned in future periods.
Financing Activities.
Financing activities used $8,617 in the nine months ended September 30,
2009, as compared to providing $8,973 in the comparable period in 2008. Funds
used in the nine months ended September 30, 2009 were primarily from net
payments under the floor plan financing ($8,708) and the issuance of stock under
the employee stock purchase plan ($326). The financing activities
during the nine months ended September 30, 2008 generated cash primarily from
the issuance of common stock ($8,870, net of issuance costs), net borrowings
under the floor plan financing ($5,813), the exercise of stock options ($827),
and excess tax benefits from stock option exercises ($1,590), partially offset
by the repayment of the Acquisition Facility ($6,000) and common stock
repurchases ($2,096).
25
Item
4T. Controls and Procedures
Material
Weakness Previously Disclosed
As
discussed in Item 4T of our Quarterly Report on Form 10-Q/A for the period
ended March 31, 2009 and our Quarterly Report on Form 10-Q for the period ended
June 30, 2009, we identified material weaknesses in the design and operation of
our internal controls over (i) the review of the calculation of the services
revenue accrual, (ii) the validation of the significant facts and assumptions
underlying our conclusions of the appropriate accounting policies related to
non-standard financing contracts, and (iii) the controls over approval of
modified grants of stock options and restricted stock and the related
application, monitoring and reporting of the appropriate accounting
policies. Although we have designed and implemented controls that we
believe will remediate the material weaknesses, we are unable to conclude the
material weaknesses has been remediated as of September 30, 2009 because
many of the remedial actions we have taken are recent and therefore an
insufficient amount of time has passed for us to verify that the additional
remediation measures are operating effectively.
Evaluation
of Disclosure Controls and Procedures
Under the
supervision and with the participation of certain members of our management,
including our Chief Executive Officer and Chief Financial Officer, we completed
an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) to the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)). In
light of the material weaknesses discussed above, which have not been fully
remediated as of the end of the period covered by this Quarterly Report, our
Chief Executive Officer and Chief Financial Officer concluded, after the
evaluation described above, that our disclosure controls were not effective. As
a result of this conclusion, the financial statements for the period covered by
this report were prepared with particular attention to the material weaknesses
previously disclosed. Accordingly, management believes that the condensed
consolidated financial statements included in this Quarterly Report fairly
present, in all material respects, our financial condition, results of
operations and cash flows as of and for the periods presented.
Changes
in Internal Control over Financial Reporting
During
the third quarter of fiscal 2009, as part of our plan to address the
aforementioned material weaknesses, we implemented (i) enhanced review
procedures related to the calculation of our service revenue accrual, (ii)
review and documentation of significant facts and assumptions underlying our
accounting conclusions related to non-standard financing contracts, and (iii)
controls over approval of modified grants of stock options and restricted stock
and the related application, monitoring and reporting of the appropriate
accounting policies. These actions are reasonably likely to materially affect
our internal control over financial reporting, as defined in
Rule 13a-15(f) under the Exchange Act. There have not been any other
changes in our internal control over financial reporting during the quarter
ended September 30, 2009 that materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
See Note
9 to condensed consolidated financial statements in Part I, Item 1, which is
incorporated herein by reference.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer
Purchases of Equity Securities
On May
12, 2009, the Board of Directors authorized a new common stock repurchase plan
of up to $2,000 of the Company’s common stock on or before October 31, 2009. The
purchases are required to be made in open market or privately negotiated
transactions in compliance with Rule 10b-18 under the Securities Exchange
Act of 1934, as amended, subject to market and business conditions, applicable
legal requirements and other factors. The plan also requires the purchased
shares to be retired as soon as practicable following the purchase. The plan
does not obligate the Company to purchase any particular amount of common stock
and could be suspended at any time at the Company’s discretion. No
shares of common stock were repurchased during the period May 12, 2009 to
September 30, 2009 or subsequent to September 30, 2009. The plan
expired on October 31, 2009.
26
Item
6. Exhibits
See
exhibit list in the Index to Exhibits, which is incorporated herein by reference
as the list of exhibits required as part of this report.
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
INX
Inc.
|
|||
Date:
November 12, 2009
|
By:
|
/s/ Brian
Fontana,
|
|
Brian
Fontana, Vice President
and
Chief Financial Officer
|
|||
27
Index
to Exhibits
Exhibit
No.
|
Description
|
Filed
Herewith or
Incorporated
by Reference
From:
|
||
10.1
|
Asset
Purchase Agreement by and among INX Inc., AdvancedNetworX, Inc., Mark
Alexander, Robert Roesch, Gary Clevenger, Deborah Shaw, Sherri McEvoy,
Kevin Jones, Robert Timm, and Larry Blackwood dated July 17,
2009
|
Exhibit
10.1 to Form 8-K filed July 20, 2009.
|
||
10.2
|
Office
Lease by and between Equastone Kirkwood, LP and INX Inc.
|
Filed
herewith.
|
||
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Principal Executive
Officer
|
Filed
herewith.
|
||
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Principal Financial
Officer
|
Filed
herewith.
|
||
32.1
|
Section
1350 Certification of Principal Executive Officer
|
Filed
herewith.
|
||
32.2
|
Section
1350 Certification of Principal Financial Officer
|
Filed
herewith.
|
28