InPhonic's Missed Connections

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If there was hope that the company might be able to regain its financial footing by spinning off its distribution responsibilities, it would prove short-lived. A few weeks later, Steinberg handed off his CEO title to Andy Zeinfeld, who was president of the company at the time. (Zeinfeld declined comment through a company spokesman.) Then, on Oct. 5, InPhonic defaulted on its secured-lender loans and announced that its agreement with Brightstar had been terminated. Marcelo Claure, Brightstar's founder, president, and CEO, says a non-disclosure agreement prohibits him from discussing the termination in detail, but notes that the decision was his. "I personally made the decision that I didn't want to move forward with a transaction," he says.

What followed next, was the beginning of the end for InPhonic -- at least the company that Steinberg had envisioned. COO Brian Curran was fired on Oct. 10, the company hired Lazard Middle Market as a financial advisor on Oct. 11 to "explore strategic alternatives to increase the company's cash liquidity and to maximize shareholder value," and John Sculley resigned from the board one week later. (Curran could not be reached for comment.) On Nov. 7, Steinberg resigned as chairman of the board, a position he had kept after relinquishing the chief executive post.

Delly Tamer, founder and CEO of privately held LetsTalk.com, a major competitor of InPhonic, has kept tabs on the company from its beginning. When news arose of the bankruptcy filing, Tamer says, it became obvious that financial discipline had not been a substantial enough priority at InPhonic. "With how much money they raised, the question is where is this money going? " he says, taking note of their IPO and an additional $100 million in debt financing received from Goldman Sachs and Citigroup. "You want to be a public company, you have to really abide by and follow GAAP [Generally Accepted Accounting Principles] guidelines. It's not a walk in the park."

But the numbers beneath the accounting errors may have been indicators of more deep-set flaws in InPhonic's business model. InPhonic had tried to grow "too much, too quickly," Tamer says. "When any Internet company does an acquisition… in my view, 80 percent of the work is what you do after you acquire it -- the integration of the acquisition and assimilation of cultures," he says. "It's unclear to me that they did that."

In addition, the fast-paced growth seems to have come at the expense of profitability. Even while InPhonic's revenue jumped from $154.9 million in 2004 to $320.5 million in 2005, its net loss increased from $10.2 million to $38.2 million. "Going public before profitability is not [necessarily] an error," Tamer says. "But when they went public in 2004, Wall Street probably expected profitability soon after the public offering. The question is: Did they try hard enough to be profitable?"

CFO Schwarz declined comment through a spokesman, but in court papers he offered the following factors as contributing to the bankruptcy: "increased spending on marketing that proved to be unprofitable, insufficient improvement in revenue assurance and collection efforts, inability to maintain adequate inventory of the most popular wireless devices, increasing general and administrative expenses, and declining gross margin in revenue generated by customer activations."

In May, Steinberg, InPhonic and Winkler, the former CFO, were named in a shareholder class-action complaint filed in the District of Columbia's U.S. District Court. The complaint argues that the defendants "engaged in a scheme to deceive the market and engaged in a course of conduct that artificially inflated InPhonic's share price and operated as a fraud or deceit on purchasers of InPhonic shares by misrepresenting the Company's financial condition and business prospects." InPhonic has not yet filed a response, but in an SEC filing in June the company said, "We believe that the allegations… are without merit and intend to vigorously defend the litigation."

Not long after the suit was filed -- and the company's financial restatements were finally over -- Steinberg told a conference call of analysts, according to a transcript, "You know, you hate to say this, but at the end of the day, if anything good came out of this process, it was learning how to better manage our financial operations on a going-forward basis and save money."

"If we can make some lemonade out of lemons," he added, "we have learned a lot about how to better operate this business."

But whatever lessons Steinberg may have learned, they apparently came too late. Now, InPhonic is Versa Capital's problem. The company declined to be interviewed for this story, other than providing this prepared statement: "We believe the business holds great promise and look forward to working with Andy Zeinfeld and his management team as they complete the upcoming transition and closing, and return their full focus to executing the newly restructured and viable business plan."

Versa seems to be starting fresh in at least one respect. The name InPhonic can no longer be found anywhere on the homepage of the company's website; the name Simplexity has replaced it.

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Senior reporter Jason Del Rey covers technology, branding, and company culture for Inc. magazine and contributes to the From the Reporters daily blog. Before joining Inc., his work appeared in Newsday, The (Newark) Star-Ledger, and the Staten Island Advance, and on ESPN.com. He lives in New York City. @DelRey