10-Q 1 inx_10q-093009.htm QUARTERLY REPORT inx_10q-093009.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