INX Breathes Easier After 'Long, Painful' Restatement Process


For a while, things were a little touch-and-go for INX, the Dallas-based infrastructure solution provider powerhouse and Cisco Gold partner.

No, the company wasn't in any danger of going under. It actually grew -- and grew significantly -- throughout the past two years' worth of accounting headaches. But in the process of reviewing tens of thousands of contracts dating back three years in order to fix the ways it recognizes revenue, its top executives learned more about the ins-and-outs of public company accounting than they ever thought they'd need to know.

"In today's complex world, with accounting and revenue recognition for public companies, you have to make sure you have the right systems and processes and not take any of that for granted," said Mark Hilz, INX's president and CEO. "We didn't get it exactly right. It doesn't matter how big or how small the adjustments we made were, the point is we didn't get it right. We're going to make sure in the future we do get it right and won't get back to this again."

INX in March 2010 said it would delay its fourth quarter earnings release, for the year ended Dec. 31, 2009, and would be unable to file its annual 10-K form for the fiscal year 2009 thanks to "the need to reexamine its revenue recognition." In a nutshell, what it meant was that INX had to go back through years worth of financial statements, and audit each one in line with proper accounting formats.

The specific accounting regulation in question was Emerging Issues Task Force (EITF) 00-21: Revenue Arrangements With Multiple Deliverables, which addresses complex contracts that require the separate delivery of multiple goods or services. In the post-Enron era, where financial regulations like Sarbanes-Oxley are quoted like scripture, it's an example of the tighter financial reporting required of public companies, noted Andrew Cadwell, INX's vice president of sales.

"In our business, if we see our position as something that has Cisco or some manufacturers' product and our own services and managed services, each one of those things is recognized differently in revenue," Cadwell explained.

In other words, revenue recognition in a typical VAR engagement can get tricky -- particularly a deal that goes beyond basic product resale and includes products and services as part of a total implementation and solution provider sale.

"We look more like a professional services company that also resells stuff," Cadwell said. "We don't make anything except bundled solutions. The way you count the beans on that is similar to an industry like construction, but even then, selling lumber is a lot different than selling a box full of software. This takes some really specialized knowledge."

INX earlier this week at last confirmed the completion of its financial restatement, and filed both its 2009 and 2010 quarterly and annual financial statements. That document pile included its 2010 Form 10-K, including 2009 financial statements and restated statements from 2008, and 10-Q quarterly reports for the quarters ended March 31, 2010, June 30, 2010, and September 30, 2010, as well as those same quarters in 2009. It has not yet filed its first quarter 2011 financial statements, and according to a company statement, it will be doing so "as soon as practicable."

For the quarter ended Dec. 31, 2010, INX grew revenue 27.8 percent from the previous year's quarter, from $57.1 million to $73 million. It took a net loss of $1.4 million compared to $3.5 million for the previous year's quarter. On an annual basis, INX closed out its 2010 with revenue of $312 million, up 37.5 percent from $226.9 million the year earlier, and profit of $5.4 million, compared to a net loss of $4.4 million in the previous year.

"If you look at our filings, the net effect has been very minimal," Cadwell said. "There's a chance we may have been able to let things ride, but being a public company, we can't. I would bet we have the cleanest books in the industry now."

Next: Reports of INX's Demise Greatly Exaggerated