INNOTRAC CORPORATION | ||
(Exact name of registrant as specified in its charter) | ||
Georgia | 58-1592285 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification Number) | |
6465 East Johns Crossing, Johns Creek, Georgia
|
30097
|
|
(Address of principal executive offices)
|
(Zip Code)
|
Outstanding at August 5, 2011 | |||
Common Stock $.10 par value per share (1) | 13,057,107 Shares |
(1)
|
13,057,107 shares includes 722,304 restricted shares.
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Page
|
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Part I. Financial Information
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||||
Item 1.
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Financial Statements:
|
2
|
||
Condensed Consolidated Balance Sheets at June 30, 2011 (Unaudited) and December 31, 2010
|
3
|
|||
Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2011 and 2010 (Unaudited)
|
4
|
|||
Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 2011 and 2010 (Unaudited)
|
5
|
|||
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (Unaudited)
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6
|
|||
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
7
|
|||
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
15
|
||
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risks
|
24
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||
Item 4.
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Controls and Procedures
|
24
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||
Part II. Other Information
|
||||
Item 6.
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Exhibits
|
25
|
||
Signatures
|
26
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June 30, 2011
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December 31, 2010
|
|||||||
(unaudited)
|
||||||||
ASSETS | ||||||||
Current assets:
|
||||||||
Cash and cash equivalents
|
$ | 3,567 | $ | 238 | ||||
Accounts receivable (net of allowance for doubtful accounts of $94 at June 30, 2011 and $242 at December 31, 2010)
|
10,724 | 15,279 | ||||||
Inventories, net
|
788 | 3,626 | ||||||
Prepaid expenses and other
|
1,338 | 1,149 | ||||||
Total current assets
|
16,417 | 20,292 | ||||||
Property and equipment:
|
||||||||
Rental equipment
|
120 | 128 | ||||||
Computer software and equipment
|
39,445 | 38,626 | ||||||
Furniture, fixtures and leasehold improvements
|
8,441 | 8,257 | ||||||
48,006 | 47,011 | |||||||
Less accumulated depreciation and amortization
|
(37,268 | ) | (35,631 | ) | ||||
10,738 | 11,380 | |||||||
Other assets, net
|
1,125 | 1,122 | ||||||
Total assets
|
$ | 28,280 | $ | 32,794 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
Current liabilities:
|
||||||||
Accounts payable
|
$ | 2,931 | $ | 5,920 | ||||
Line of credit
|
- | - | ||||||
Accrued salaries
|
1,442 | 1,601 | ||||||
Equipment lease payable
|
295 | 264 | ||||||
Accrued expenses and other
|
2,194 | 2,211 | ||||||
Total current liabilities
|
6,862 | 9,996 | ||||||
Noncurrent liabilities:
|
||||||||
Deferred compensation
|
792 | 758 | ||||||
Equipment lease payable
|
47 | 132 | ||||||
Other noncurrent liabilities
|
628 | 609 | ||||||
Total noncurrent liabilities
|
1,467 | 1,499 | ||||||
Commitments and contingencies (see Note 5)
|
- | - | ||||||
Shareholders’ equity:
|
||||||||
Preferred stock: 10,000,000 shares authorized, $0.10 par value, no shares issued or outstanding
|
- | - | ||||||
Common stock: 50,000,000 shares authorized, $0.10 par value, 13,057,107 shares issued and outstanding at June 30, 2011 12,860,759 shares issued and outstanding at December 31, 2010
|
1,306 | 1,286 | ||||||
Additional paid-in capital
|
66,566 | 66,609 | ||||||
Other comprehensive income
|
1 | - | ||||||
Accumulated deficit
|
(47,939 | ) | (46,596 | ) | ||||
Total Innotrac shareholders’ equity
|
19,934 | 21,299 | ||||||
Noncontrolling interest
|
17 | - | ||||||
Total equity
|
19,951 | 21,299 | ||||||
Total liabilities and equity
|
$ | 28,280 | $ | 32,794 |
Three Months Ended June 30,
|
||||||||
2011
|
2010
|
|||||||
(unaudited)
|
(unaudited)
|
|||||||
Service revenues
|
$ | 16,589 | $ | 15,339 | ||||
Freight revenues
|
2,025 | 3,116 | ||||||
Total revenues
|
18,614 | 18,455 | ||||||
Cost of service revenues
|
7,684 | 6,827 | ||||||
Freight expense
|
2,064 | 3,069 | ||||||
Selling, general and administrative expenses
|
8,794 | 8,745 | ||||||
Depreciation and amortization
|
840 | 884 | ||||||
Total operating expenses
|
19,382 | 19,525 | ||||||
Operating loss
|
(768 | ) | (1,070 | ) | ||||
Other expense (income):
|
||||||||
Interest expense
|
48 | 41 | ||||||
Total other expense (income)
|
48 | 41 | ||||||
Loss before income taxes and noncontrolling interest in net loss
|
(816 | ) | (1,111 | ) | ||||
Income taxes
|
- | - | ||||||
Noncontrolling interest in net loss
|
- | - | ||||||
Net loss
|
$ | (816 | ) | $ | (1,111 | ) | ||
Loss per share:
|
||||||||
Basic
|
$ | (0.06 | ) | $ | (0.09 | ) | ||
Diluted
|
$ | (0.06 | ) | $ | (0.09 | ) | ||
Weighted average shares outstanding:
|
||||||||
Basic
|
12,815 | 12,861 | ||||||
Diluted
|
12,815 | 12,861 |
Six Months Ended June 30,
|
||||||||
2011
|
2010
|
|||||||
(unaudited)
|
(unaudited)
|
|||||||
Service revenues
|
$ | 33,876 | $ | 31,367 | ||||
Freight revenues
|
5,707 | 6,441 | ||||||
Total revenues
|
39,583 | 37,808 | ||||||
Cost of service revenues
|
15,436 | 14,173 | ||||||
Freight expense
|
5,702 | 6,360 | ||||||
Selling, general and administrative expenses
|
18,002 | 17,547 | ||||||
Depreciation and amortization
|
1,691 | 1,732 | ||||||
Total operating expenses
|
40,831 | 39,812 | ||||||
Operating loss
|
(1,248 | ) | (2,004 | ) | ||||
Other expense (income):
|
||||||||
Interest expense
|
94 | 80 | ||||||
Total other expense (income)
|
94 | 80 | ||||||
Loss before income taxes and noncontrolling interest in net loss
|
(1,342 | ) | (2,084 | ) | ||||
Income taxes
|
- | - | ||||||
Noncontrolling interest in net loss
|
- | - | ||||||
Net loss
|
$ | (1,342 | ) | $ | (2,084 | ) | ||
Loss per share:
|
||||||||
Basic
|
$ | (0.10 | ) | $ | (0.16 | ) | ||
Diluted
|
$ | (0.10 | ) | $ | (0.16 | ) | ||
Weighted average shares outstanding:
|
||||||||
Basic
|
12,838 | 12,734 | ||||||
Diluted
|
12,838 | 12,734 |
Six Months Ended June 30,
|
||||||||
2011
|
2010
|
|||||||
(unaudited)
|
(unaudited)
|
|||||||
Cash flows from operating activities:
|
||||||||
Net loss
|
$ | (1,342 | ) | $ | (2,084 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
||||||||
Depreciation and amortization
|
1,691 | 1,732 | ||||||
Provision for bad debts
|
35 | (24 | ) | |||||
(Gain) loss on disposal of fixed assets
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(16 | ) | 9 | |||||
Stock compensation expense-stock options
|
2 | (3 | ) | |||||
Stock compensation (income) expense-restricted stock
|
(25 | ) | 48 | |||||
Decrease in other long-term assets
|
38 | 27 | ||||||
Increase in other long-term liabilities
|
19 | 114 | ||||||
Changes in operating assets and liabilities:
|
||||||||
Decrease in accounts receivable, gross
|
4,520 | 2,233 | ||||||
Decrease (increase) in inventory
|
2,838 | (742 | ) | |||||
Decrease (increase) in prepaid expenses and other
|
(155 | ) | 477 | |||||
Decrease in accounts payable
|
(3,203 | ) | (1,583 | ) | ||||
Decrease in accrued expenses and other
|
(176 | ) | (546 | ) | ||||
Net cash provided by (used in) operating activities
|
4,226 | (342 | ) | |||||
Cash flows from investing activities:
|
||||||||
Capital expenditures
|
(748 | ) | (506 | ) | ||||
Proceeds from disposition of assets
|
17 | - | ||||||
Net change in noncurrent assets and liabilities
|
(7 | ) | (8 | ) | ||||
Net cash used in investing activities
|
(738 | ) | (514 | ) | ||||
Cash flows (used in) from financing activities:
|
||||||||
Net borrowings (repayments) under line of credit
|
- | 895 | ||||||
Capital lease (payments) funding
|
(142 | ) | (119 | ) | ||||
Contribution from noncontrolling interest
|
17 | - | ||||||
Loan commitment fees
|
(34 | ) | (62 | ) | ||||
Net cash (used in) provided by financing activities
|
(159 | ) | 714 | |||||
Net increase (decrease) in cash and cash equivalents
|
3,329 | (142 | ) | |||||
Cash and cash equivalents, beginning of period
|
238 | 1,118 | ||||||
Cash and cash equivalents, end of period
|
$ | 3,567 | $ | 976 | ||||
Supplemental cash flow disclosures:
|
||||||||
Cash paid for interest
|
$ | 63 | $ | 54 | ||||
Non-cash investing and financing activities:
|
||||||||
Capital lease for computer equipment
|
$ | 87 | $ | - | ||||
Capital expenditures in accounts payable
|
$ | (214 | ) | $ | - |
As of June 30, 2011
Fair Value Measurements Using
(in 000’s)
|
||||||||||||||||
Description
|
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
|
Significant
Other
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
Total
|
||||||||||||
As of June 30, 2011
|
||||||||||||||||
Deferred Compensation – Rabbi Trust (1)
|
$ | 792 | $ | - | $ | - | $ | 792 | ||||||||
Total
|
$ | 792 | $ | - | $ | - | $ | 792 | ||||||||
As of December 31, 2010
|
||||||||||||||||
Deferred Compensation – Rabbi Trust (1)
|
$ | 758 | $ | - | $ | - | $ | 758 | ||||||||
Total
|
$ | 758 | $ | - | $ | - | $ | 758 |
(1)
|
This is an executive deferred compensation plan for certain employees, as designated by the Company’s Board of Directors. The Company invests contributions to this plan in employee-directed marketable equity securities which are recorded at quoted market prices. The contributions are fully invested in five different mutual funds having various growth, industry and geographic characteristics.
|
3.
|
EARNINGS PER SHARE
|
Three Months
Ended June 30,
|
Six Months
Ended June 30,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
Diluted earnings per share:
|
||||||||||||||||
Weighted average shares outstanding
|
12,815 | 12,861 | 12,838 | 12,734 | ||||||||||||
Employee and director stock options
|
- | - | - | - | ||||||||||||
Weighted average shares assuming dilution
|
12,815 | 12,861 | 12,838 | 12,734 |
5.
|
COMMITMENTS AND CONTINGENCIES
|
6.
|
RELATED PARTY TRANSACTION
|
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|||||||||||||||
Business Line/Vertical
|
2011
|
2010
|
2011
|
2010
|
||||||||||||
eCommerce / Direct to Consumer
|
52.4 | % | 48.4 | % | 48.1 | % | 47.3 | % | ||||||||
Direct Marketing
|
31.0 | 33.1 | 35.5 | 34.3 | ||||||||||||
Modems & Telecommunications products
|
13.2 | 15.6 | 13.6 | 15.5 | ||||||||||||
Business-to-Business (“B2B”)
|
3.4 | 2.9 | 2.8 | 2.9 | ||||||||||||
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
Service revenues
|
89.1 | % | 83.1 | % | 85.6 | % | 83.0 | % | ||||||||
Freight revenues
|
10.9 | 16.9 | 14.4 | 17.0 | ||||||||||||
Total Revenues
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of service revenues
|
41.3 | 37.0 | 39.0 | 37.5 | ||||||||||||
Cost of freight expense
|
11.1 | 16.6 | 14.4 | 16.8 | ||||||||||||
Selling, general and administrative expenses
|
47.2 | 47.4 | 45.5 | 46.4 | ||||||||||||
Depreciation and amortization
|
4.5 | 4.8 | 4.3 | 4.6 | ||||||||||||
Operating loss
|
(4.1 | ) | (5.8 | ) | (3.2 | ) | (5.3 | ) | ||||||||
Other expense, net
|
(0.3 | ) | (0.2 | ) | (0.2 | ) | (0.2 | ) | ||||||||
Loss before income taxes
|
(4.4 | ) | (6.0 | ) | (3.4 | ) | (5.5 | ) | ||||||||
Income tax benefit
|
- | - | - | - | ||||||||||||
Net loss
|
(4.4 | )% | (6.0 | )% | (3.4 | )% | (5.5 | )% |
INNOTRAC CORPORATION | |||
(Registrant) | |||
Date: August 11, 2011
|
By:
|
/s/ Scott D. Dorfman | |
Scott D. Dorfman | |||
President, Chief Executive Officer and Chairman | |||
of the Board (Principal Executive Officer) | |||
Date: August 11, 2011 |
By:
|
/s/ George M. Hare | |
George M. Hare | |||
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
I, Scott D. Dorfman, certify that:
|
|
1. |
I have reviewed this quarterly report on Form 10-Q of Innotrac Corporation;
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
(a)
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
(b)
|
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles;
|
(c)
|
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
(d)
|
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
(a)
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
(b)
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
Date: August 11, 2011
|
||
/s/ Scott D. Dorfman
|
||
Scott D. Dorfman
|
||
President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer)
|
I, George M. Hare, certify that:
|
|
1. |
I have reviewed this quarterly report on Form 10-Q of Innotrac Corporation;
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
(a)
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
(b)
|
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles;
|
(c)
|
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
(d)
|
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
(a)
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
|
(b)
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
Date: August 11, 2011
|
||
/s/ George M. Hare
|
||
George M. Hare
|
||
Chief Financial Officer
|
||
Principal Financial Officer (Principal Accounting Officer)
|
I, Scott D. Dorfman, Chief Executive Officer of Innotrac Corporation (the “Company”), certify, pursuant to 18 U.S.C. § 1350 as adopted by § 906 of the Sarbanes-Oxley Act of 2002, that:
|
|
(1)
|
the Quarterly Report on Form 10-Q of the Company for three months ended June 30, 2011 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
|
(2)
|
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
Dated: August 11, 2011
|
||
/s/ Scott D. Dorfman
|
||
Scott D. Dorfman
|
||
President, Chief Executive Officer and Chairman
|
||
of the Board (Principal Executive Officer)
|
I, George M. Hare, Chief Financial and Principal Accounting Officer of Innotrac Corporation (the “Company”), certify, pursuant to 18 U.S.C. § 1350 as adopted by § 906 of the Sarbanes-Oxley Act of 2002, that:
|
|
(1)
|
the Quarterly Report on Form 10-Q of the Company for the three months ended June 30, 2011 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
|
(2)
|
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
Dated: August 11, 2011
|
||
/s/ George M. Hare
|
||
George M. Hare
|
||
Chief Financial Officer (Principal Accounting Officer)
|
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Thousands, except Share data |
Jun. 30, 2011
|
Dec. 31, 2010
|
---|---|---|
Condensed Balance Sheets | Â | Â |
Accounts receivable, allowance for doubtful accounts receivable | $ 94 | $ 242 |
Preferred stock, shares authorized | 10,000,000 | 10,000,000 |
Preferred stock, par value | $ 0.10 | $ 0.10 |
Preferred stock, shares issued | 0 | 0 |
Preferred stock, shares outstanding | 0 | 0 |
Common stock, shares authorized | 50,000,000 | 50,000,000 |
Common stock, par value | $ 0.10 | $ 0.10 |
Common stock, shares issued | 13,057,107 | 12,860,759 |
Common stock, shares outstanding | 13,057,107 | 12,860,759 |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Thousands, except Per Share data |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2011
|
Jun. 30, 2010
|
Jun. 30, 2011
|
Jun. 30, 2010
|
|
Condensed Statements of Operations | Â | Â | Â | Â |
Service revenues | $ 16,589 | $ 15,339 | $ 33,876 | $ 31,367 |
Freight revenues | 2,025 | 3,116 | 5,707 | 6,441 |
Total revenues | 18,614 | 18,455 | 39,583 | 37,808 |
Cost of service revenues | 7,684 | 6,827 | 15,436 | 14,173 |
Freight expense | 2,064 | 3,069 | 5,702 | 6,360 |
Selling, general and administrative expenses | 8,794 | 8,745 | 18,002 | 17,547 |
Depreciation and amortization | 840 | 884 | 1,691 | 1,732 |
Total operating expenses | 19,382 | 19,525 | 40,831 | 39,812 |
Operating loss | (768) | (1,070) | (1,248) | (2,004) |
Other expense (income): | Â | Â | Â | Â |
Interest expense | 48 | 41 | 94 | 80 |
Total other expense (income) | 48 | 41 | 94 | 80 |
Loss before income taxes and noncontrolling interest in net loss | (816) | (1,111) | (1,342) | (2,084) |
Income taxes | 0 | 0 | 0 | 0 |
Noncontrolling interest in net loss | 0 | 0 | 0 | 0 |
Net loss | $ (816) | $ (1,111) | $ (1,342) | $ (2,084) |
Loss per share: | Â | Â | Â | Â |
Basic | $ (0.06) | $ (0.09) | $ (0.10) | $ (0.16) |
Diluted | $ (0.06) | $ (0.09) | $ (0.10) | $ (0.16) |
Weighted average shares outstanding: | Â | Â | Â | Â |
Basic | 12,815 | 12,861 | 12,838 | 12,734 |
Diluted | 12,815 | 12,861 | 12,838 | 12,734 |
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Document and Entity Information
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6 Months Ended | |
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Jun. 30, 2011
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Aug. 05, 2011
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Document and Entity Information | Â | Â |
Document Type | 10-Q | Â |
Amendment Flag | false | Â |
Document Period End Date | Jun. 30, 2011 | |
Document Fiscal Period Focus | Q2 | Â |
Document Fiscal Year Focus | 2011 | Â |
Entity Registrant Name | INNOTRAC CORP | Â |
Entity Central Index Key | 0001051114 | Â |
Current Fiscal Year End Date | --12-31 | Â |
Entity Filer Category | Smaller Reporting Company | Â |
Entity Common Stock, Shares Outstanding | Â | 13,057,107 |
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Earnings Per Share
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Earnings Per Share | Â | ||||||||||||||||||||||||||||||||||||
Earnings Per Share | 3. EARNINGS PER SHARE
The following table shows the shares (in thousands) used in computing diluted earnings per share ("EPS") in accordance with ASC topic No. 260 – Earnings per Share:
Options outstanding to purchase 593,000 shares of the Company's common stock for the three and six months ended June 30, 2011 were not included in the computation of diluted EPS because their effect was anti-dilutive. Options outstanding to purchase 1.1 million shares of the Company's common stock for the three and six months ended June 30, 2010 were not included in the computation of diluted EPS because their effect was anti-dilutive. Included in the 1.1 million of outstanding options and warrants for the three and six months ended June 30, 2010 was a warrant to purchase 150,000 shares of Innotrac stock which expired on December 8, 2010.
On January 1, 2009 the Company adopted an update to ASC topic No. 260, which requires the inclusion of all unvested stock awards which contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, in the number of shares outstanding in our basic and diluted EPS calculations. As a result, we have included 722,304 restricted shares in our calculation of basic and diluted EPS for the three and six months ended June 30, 2011. For the three and six months ended June 30, 2010, we included 525,956 of restricted shares in our calculation of basic and diluted EPS. These restricted shares were issued under the Innotrac Corporation 2000 Stock Option and Incentive Award Plan and the Innotrac Corporation 2010 Stock Award Plan. Both plans provide for immediate voting rights, forfeiture of unvested shares if a grantee's employment or service with the Company ends for any reason (other than a change in control, as defined in the plan), and vesting of shares upon the earlier of a change in control as defined in the plan or 25% on each of the 7th, 8th, 9th and 10th anniversary of the issuance date. |
Significant Accounting Policies
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Significant Accounting Policies | Â | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Significant Accounting Policies | 1. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed for quarterly financial reporting are the same as those disclosed in the Notes to Financial Statements included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2010. Certain of the Company's more significant accounting policies are as follows:
Principles of Consolidation, The consolidated financial statements include the accounts of the Company and its majority owned subsidiary. On April 11, 2011 the Company completed the formation of Innotrac Europe GmbH ("Innotrac Europe"), a joint venture between Innotrac and PVS Fulfillment-Service GmbH ("PVS") in Neckarsulm, Germany. Innotrac has a 50.1% ownership stake in the joint venture. All significant intercompany transactions and balances have been eliminated in consolidation.
Foreign Currency Translation, The financial statements of foreign subsidiaries have been translated into U.S. Dollars in accordance with Accounting Standards Codification ("ACS") topic No. 830-30 - Translation of Financial Statements. The financial position and results of operations of the Company's foreign subsidiary are measured using the foreign subsidiary's local currency as the functional currency. Revenue and expenses of the subsidiary have been translated into U.S. Dollars at the average exchange rate prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet date. The resulting translation gain and loss adjustments are recorded directly as a separate component of stockholders' equity, unless there is a sale or complete liquidation of the underlying foreign investment. Foreign currency translation adjustments were immaterial during the three and six month period ended June 30, 2011.
Gains and losses that result from foreign currency transactions are included in the "other expense (income)" line in the consolidated statements of operations. For the three and six month period ended June 30, 2011, we incurred an immaterial amount of net foreign currency transaction gains and losses.
Accounting Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Impairment of Long-Lived Assets. The Company reviews long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment would be measured based on a projected cash flow model. If the projected undiscounted cash flows for the asset are not in excess of the carrying value of the related asset, the impairment would be determined based upon the excess of the carrying value of the asset over the projected discounted cash flows for the asset.
Accounting for Income Taxes. Innotrac utilizes the liability method of accounting for income taxes in accordance with ASC topic No. 740 – Income Taxes. Under the liability method, deferred taxes are determined based on the difference between the financial and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. A full valuation allowance was recorded against the deferred tax asset as of December 31, 2010 and June 30, 2011 (see Note 4).
Revenue Recognition. Innotrac derives its revenue primarily from two sources: (1) fulfillment operations and (2) the delivery of call center services integrated with our fulfillment operations. Innotrac's fulfillment services operations record revenue at the conclusion of the material selection, packaging and upon completion of the shipping process. The shipping process is considered complete after transfer to an independent freight carrier and receipt of a bill of lading or shipping manifest from that carrier. Innotrac's call center service revenue is recognized according to written pricing agreements based on the number of calls, minutes or hourly rates when those calls and time rated services occur. All other revenues are recognized as services are rendered. As required by the consensus reached in ASC topic No. 605 - Revenue Recognition, 1) revenues have been recorded net of the cost of the goods for all fee-for-service clients and 2) the Company records reimbursements received from customers for out-of-pocket expenses, primarily freight and postage fees, as revenue and the associated expense as cost of revenue. For two clients we purchase their product from our client's vendor under agreements that require our clients to buy the product back from us at original cost when we ship the product to our client's end consumer or after a period of time if the product has not been shipped from our fulfillment centers. The value of these products is repaid to us at the same amount as we paid for them and no service fees are generated on the products. We net the value of the purchase against the reimbursement from our customer with a resulting zero value in our reported revenue and costs of revenue.
Stock-Based Compensation Plans. The Company records compensation expense in the financial statements based on the fair value of all share based grants to employees, including grants of employee stock options. The expense is recognized over the period during which an employee is required to provide services in exchange for the award, which is usually the vesting period. The Company recorded $1,000 and $2,000 in compensation expense (income) on stock options for the three months ended June 30, 2011 and 2010, respectively. For the six months ended June 30, the Company recorded $2,000 and ($3,000) in 2011 and 2010, respectively. In addition, the Company issued 265,956 restricted shares on April 16, 2007, 260,000 restricted shares on March 29, 2010 and 310,000 restricted shares on June 10, 2011. On March 31, 2011 88,652 shares from the April 16, 2007 grant and 25,000 shares from the March 29, 2010 grant were forfeited and the related compensation expense of $103,000 was recognized since the issuance of the shares was reversed. As a result, the Company recorded $49,000 and $29,000 in compensation expense for restricted shares for the three months ended June 30, 2011 and 2010, respectively. For the six months ended June 30, 2011 and 2010, the Company recorded ($25,000) and $48,000 of compensation expense (income) respectively.
Fair Value Measurements. The Company accounts for all financial and non-financial assets and liabilities in accordance with ASC topic No. 820- Fair Value Measurements and Disclosures, measured at fair value on a recurring and non recurring basis. ASC topic No. 820 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States of America, and expands disclosures about fair value measurements.
The Company determined the fair values of certain financial instruments based on the fair value hierarchy established in ASC topic No. 820. ASC topic No. 820 requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value;
Level 1: quoted price (unadjusted) in active markets for identical assets
Level 2: inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument
Level 3: inputs to the valuation methodology are unobservable for the asset or liability
ASC topic No. 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
We had no amounts advanced or outstanding on our debt instrument at June 30, 2011 and December 31, 2010. Since our debt instrument consists of a revolving credit line, which under certain conditions can mature within one year of June 30, 2011, any amount outstanding would approximate fair value. The interest rate is equal to the market rate for such instruments of similar duration and credit quality.
The carrying value of our Deferred Compensation – Rabbi Trust is a fully funded and fully invested plan which is adjusted to the market value, as reported by the independent plan administrator, of the investments as of each financial statement date with the offsetting change in value adjusted to the value of the liability to the employees who participate in the plan.
(1)This is an executive deferred compensation plan for certain employees, as designated by the Company's Board of Directors. The Company invests contributions to this plan in employee-directed marketable equity securities which are recorded at quoted market prices. The contributions are fully invested in five different mutual funds having various growth, industry and geographic characteristics.
Recent Accounting Pronouncements Not Yet Adopted
In May 2011, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2010-04 to Topic 820 – Fair Value Measurements and Disclosures. This update represents the converged guidance of the FASB and the International Accounting Standards Board on fair value measurement. The amendments in this update have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term "fair value." The common requirements are expected to result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards. The amendments are to be applied prospectively and are effective for fiscal years beginning after December 15, 2011. The Company plans to adopt these provisions in the first quarter of 2012. Adoption of these provisions is not expected to have a material impact on the Company's consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05 to Topic 220 – Presentation of Comprehensive Income. The amendments in this update allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments are to be applied retrospectively and are effective for fiscal years beginning after December 15, 2011. The Company plans to adopt these provisions in the first quarter of 2012. Adoption of these provisions is not expected to have a material impact on the Company's consolidated financial statements, however it will impact the presentation of these statements.
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Income Taxes
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6 Months Ended |
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Jun. 30, 2011
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Income Taxes | Â |
Income Taxes | 4. INCOME TAXES
Innotrac utilizes the liability method of accounting for income taxes in accordance with ASC topic No. 740 – Income Taxes. Under the liability method, deferred taxes are determined based on the difference between the financial and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance is recorded against deferred tax assets if the Company considers it is more likely than not that deferred tax assets will not be realized. Innotrac's gross deferred tax asset as of June 30, 2011 and December 31, 2010 was approximately $23.0 million and $22.7 million, respectively. This deferred tax asset was generated primarily by net operating loss carryforwards created by net losses in prior years. Innotrac has Federal net operating loss carryforwards of $49.7 million at December 31, 2010 that expire between 2020 and 2030.
Innotrac's ability to generate taxable income from future operations is dependent upon general economic conditions, collection of existing outstanding accounts receivable, competitive pressures on sales and margins and other factors beyond management's control. These factors, combined with losses in recent years, create uncertainty about the ultimate realization of the gross deferred tax asset in future years. Therefore, a valuation allowance of approximately $21.8 million and $21.3 million has been recorded as of June 30, 2011 and December 31, 2010, respectively. Income taxes associated with future earnings may be offset by a reduction in the valuation allowance. For the three and six months ended June 30, 2011, the deferred income tax benefit of $286,000 and $471,000, respectively, was offset by a corresponding increase in the deferred tax asset valuation allowance. When and if the Company can return to consistent profitability and management determines that it is more likely than not that the Company will be able to utilize the deferred tax assets prior to their expiration, the valuation allowance may be reduced or eliminated.
ASC topic No. 740 requires that the Company determine whether it is more likely than not that a tax position will be sustained upon audit, based on the technical merits of the position. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Company had a gross deferred tax asset of approximately $22.7 million at December 31, 2010, which did not change significantly during the six months ended June 30, 2011. As discussed in Note 8 to the financial statements in the 2010 Form 10-K, the Company has a valuation allowance against the full amount of its deferred tax asset. The Company has recognized tax benefits from all tax positions we have taken, and there has been no adjustment to any net operating loss carryforwards as a result of ASC topic No. 740 and there are no unrecognized tax benefits and no related ASC topic No. 740 tax liabilities at June 30, 2011.
The Company generally recognizes interest and/or penalties related to income tax matters in general and administrative expenses. As of June 30, 2011, we have no accrued interest or penalties related to uncertain tax positions. |
Commitments and Contingencies
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Jun. 30, 2011
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Commitments and Contingencies | Â |
Commitments and Contingencies | 5. COMMITMENTS AND CONTINGENCIES
Legal Proceedings. The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. There are no material pending legal proceedings to which the Company is a party. The Company is required to provide a variety of services under its contracts with clients. There currently exists an ongoing discussion with one client regarding the cost to remediate certain defects in Company-managed software which our client believes precipitated under-billings by our client to its customers. Management previously accrued $100,000 relating to this matter, and during the second quarter of 2011 the Company began executing a remediation plan. The Company incurred costs during this period of $46,000 relating to the remediation plan, thereby reducing the accrual related to this matter to $54,000 at June 30, 2011. |
Related Party Transaction
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Jun. 30, 2011
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Related Party Transaction | Â |
Related Party Transaction | 6. RELATED PARTY TRANSACTION
In early 2004, the Company learned that certain trading activity of the IPOF Fund L.P., an owner of more than 5% of the outstanding Common Stock, may have violated the short-swing profit rules under Section 16(b) of the Securities Exchange Act of 1934. The Company promptly conducted an investigation of the matter. IPOF Fund L.P. and its affiliates entered into a settlement agreement with the Company on March 3, 2004 regarding the potential Section 16(b) liability issues that provided for the Company's recovery of $301,957 no later than March 3, 2006. In December 2005, the United States District Court in Cleveland, Ohio appointed a receiver to identify and administer the assets of the IPOF Fund, L.P. and its general partner, David Dadante. The Company informed the IPOF receiver of such agreement, but the likelihood of recovering such amount from the receiver is doubtful. The Company has not recorded any estimated receivable from this settlement. Additionally, the Federal Court has indefinitely restricted the financial institutions holding Company stock owned by the IPOF Fund L.P. and Mr. Dadante in margin accounts from selling any of these shares. The court has permitted open market sales by the receiver as he may in his sole discretion determine to be consistent with his duty to maximize the value of the assets of IPOF Fund, L.P. and as warranted by market conditions. The receiver has indicated to the Company that he does not intend to direct any open market sales during this period except in circumstances in which he believes that there would be no material adverse impact on the market price for the Company's shares.
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Financing Obligations
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6 Months Ended |
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Jun. 30, 2011
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Financing Obligations | Â |
Financing Obligations | 2. FINANCING OBLIGATIONS
The Company has a revolving credit facility (the "Credit Facility") with Wells Fargo, N. A. (the "Bank"), which has a maximum borrowing limit of $15.0 million. The Credit Facility is used to fund the Company's capital expenditures, operational working capital and seasonal working capital needs. The Credit Facility was renewed on March 27, 2009 when the Company entered into a Fourth Amended and Restated Loan and Security Agreement (the "2009 Credit Agreement") with the Bank, setting forth the new terms of the Credit Facility. The Credit Agreement has been further amended by the First and Second Amendments on May 14, 2010 and March 30, 2011, respectively. The amended Credit Agreement includes a maturity date of June 30, 2013 and continues the Bank's security interest in all of the Company's assets. There was no outstanding balance as of June 30, 2011 under the Credit Facility.
Interest on borrowings pursuant to the 2009 Credit Agreement is payable monthly at specified rates of either, at the Company's option, the Base Rate (as defined in the 2009 Credit Agreement) plus between 2.00% and 2.50%, or the LIBOR Rate (as defined in the 2009 Credit Agreement) plus between 3.00% and 3.50%, in each case with the applicable margin depending on the Company's Average Excess Availability (as defined in the 2009 Credit Agreement). The Company pays a specified fee on undrawn amounts under the Credit Facility which fee was one-half of one percent, or 0.5% on and before March 30, 2011, the date of Second Amendment to the Credit Agreement, and is three quarters of one percent, or 0.75% thereafter. After an event of default, all loans will bear interest at the otherwise applicable rate plus 2.00% per annum.
The 2009 Credit Agreement contains financial, affirmative and negative covenants by the Company as are usual and customary for financings of this kind which can result in the acceleration of the maturity of amounts borrowed under the Credit Facility, including, without limitation, a restriction on cash dividends, a change in ownership control covenant, a subjective material adverse change covenant and financial covenants. The financial covenants include an annual capital expenditure limit, a minimum excess availability limit, monthly and cumulative loss limits for June 2010 through March 2012. The Second amendment provides for a determination in March 2012 of specific financial covenants based on the financial projections of the Company for the business period starting in April 2012 through the June 2013 termination date of the Credit Agreement. The provisions of the 2009 Credit Agreement require that the Company maintain a lockbox arrangement with the Bank, and allows the Bank to declare any outstanding borrowings to be immediately due and payable as a result of noncompliance with any of the covenants. Accordingly, in the event of noncompliance, the Company's payment obligations with respect to such borrowings could be accelerated. Therefore, when the Company has a balance on its line of credit, it is classified as a current liability. As of June 30, 2011, the Company was in compliance with all terms of the Credit Facility.
Although the maximum borrowing limit was $15.0 million at June 30, 2011, the Credit Facility limits borrowings to a specified percentage of eligible accounts receivable and inventory, which totaled $8.4 million at June 30, 2011. Additionally, the terms of the Credit Facility provide that the amount borrowed and outstanding at any time combined with certain reserves for rental payments, letters of credit outstanding and general reserves be subtracted from the Credit Facility limit or the value of the total collateral to arrive at an amount of unused availability to borrow. The total collateral under the Credit Facility at June 30, 2011 amounted to $8.4 million. There were no amounts borrowed under the Credit Facility at June 30, 2011 however the value of reserves and letters of credit at that date totaled $4.1 million. As a result, the Company had $4.3 million of borrowing availability under the Credit Facility at June 30, 2011.
The Company entered into a $758,000 capital lease which began in July 2009 and ends in June 2012 for the acquisition of computer equipment and related licensed computer security software. Additionally, from time to time, the Company enters into capital leases for warehouse equipment such as forklifts. The amortization of these assets is included in depreciation expense. The total amount of remaining lease payments to be paid on capital leases, including interest and taxes, was $381,000 and $557,000 at June 30, 2011 and 2010 respectively. For the three months ended June 30, 2011, the Company repaid $77,000 of principal outstanding and $6,000 of interest expense related to capital leases. For the six months ended June 30, 2011, the Company repaid $142,000 of principal outstanding and $11,000 of interest expense related to capital leases.
For the three months ended June 30, 2011, we recorded interest expense of $1,000 on the Credit Facility at a weighted average interest rate of 3.24%. The rate of interest being charged on the Credit Facility at June 30, 2011 was 3.19%. For the three months ended June 30, 2010, we recorded interest expense of $1,000 on the Credit Facility at a weighted average interest rate of 3.32%. The Company also incurred unused Credit Facility fees of approximately $26,000 and $17,000 for the three months ended June 30, 2011 and 2010 respectively, which unused Credit Facility fees are included in the total interest expense of $48,000 and $41,000 for the three months ended June 30, 2011 and 2010 respectively.
For the six months ended June 30, 2011, we recorded interest expense of $7,000 on the revolving credit agreement at a weighted average interest rate of 3.15%. For the six months ended June 30, 2010, we recorded interest expense of $3,000 at a weighted average rate of 3.11% on the revolving credit agreement. The Company also incurred unused revolving credit facility fees of approximately $42,000 and $34,000 for the six months ended June 30, 2011 and 2010, respectively, which unused Credit Facility fees are included in the total interest expense of $94,000 and $80,000 for the six months ended June 30, 2011 and 2010 respectively. |