t72947_10k.htm

ITEM 8. FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

Innotrac Corporation:

We have audited the accompanying consolidated balance sheets of Innotrac Corporation (a Georgia corporation) and subsidiary (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Innotrac Corporation and subsidiary as of December 31, 2011 and 2010, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ GRANT THORNTON LLP

Atlanta, Georgia

March 30, 2012

INNOTRAC CORPORATION and SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(dollars in 000’s)

	December 31,
	2011			2010
Assets
Current assets:
Cash and cash equivalents	$	3,283		$	238
Accounts receivable, net of allowance of $97 (2011) and $242 (2010)		16,977			15,279
Inventories, net		743			3,626
Prepaid expenses and other		1,066			1,149
Total current assets		22,069			20,292

Property and equipment:
Rental equipment		-			128
Computers, machinery and equipment		39,425			38,626
Furniture, fixtures and leasehold improvements		8,557			8,257
		47,982			47,011
Less accumulated depreciation and amortization		(36,809	)		(35,631	)
		11,173			11,380

Other assets, net		1,100			1,122
Total assets	$	34,342		$	32,794

	December 31,
Liabilities and Shareholders’ Equity	2011			2010
Current liabilities:
Accounts payable	$	7,914		$	5,920
Line of credit		-			-
Accrued salaries		1,669			1,601
Equipment lease payable		281			264
Accrued expenses and other		2,534			2,211
Total current liabilities		12,398			9,996

Noncurrent liabilities:
Deferred compensation		735			758
Equipment lease payable		251			132
Other noncurrent liabilities		1,142			609
Total noncurrent liabilities		2,128			1,499

Commitments and contingencies (see Notes 5 and 6)		-			-

Shareholders’ equity:
Preferred stock: 10,000,000 shares authorized, $0.10 par value, no shares outstanding		-			-
Common stock: 50,000,000 shares authorized, $0.10 par value, 13,035,440 shares issued and outstanding 2011 12,860,759 shares issued and outstanding 2010		1,304			1,286
Additional paid-in capital		66,632			66,609
Accumulated other comprehensive loss		(3	)		-
Accumulated deficit		(48,132	)		(46,596	)
Total Innotrac shareholders’ equity		19,801			21,299
Noncontrolling interest		15			-
Total equity		19,816			21,299
Total liabilities and equity	$	34,342		$	32,794

The accompanying notes are an integral part of these consolidated financial statements.

INNOTRAC CORPORATION and SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in 000’s, except per share data)

	Year Ended December 31,
	2011			2010

Service revenues	$	74,943		$	67,359
Freight revenues		9,741			12,260
Total revenues		84,684			79,619

Cost of service revenues		36,211			30,983
Freight expense		9,642			12,069
Selling, general and administrative		36,802			35,608
Depreciation and amortization		3,380			3,463
Total operating expenses		86,035			82,123
Operating loss		(1,351	)		(2,504	)
Other expense:
Interest expense		186			183
Other expense		3			-
Total other expense		189			183

Loss before income taxes		(1,540	)		(2,687	)
Income taxes		-			-
Net loss		(1,540	)		(2,687	)
Net loss attributable to noncontrolling interest		2			-
Net loss attributable to Innotrac	$	(1,538	)	$	(2,687	)

Loss per share:
Basic	$	(0.12	)	$	(0.21	)
Diluted	$	(0.12	)	$	(0.21	)

Weighted average shares outstanding:
Basic		12,940			12,798
Diluted		12,940			12,798

The accompanying notes are an integral part of these consolidated financial statements.

INNOTRAC CORPORATION and SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(dollars and number of shares in 000’s)

								Accumulated
	Common Stock				Additional			Other
					Paid – in			Comprehensive			Accumulated			Total Equity			Noncontrolling			Total
	Shares		Amount		Capital			Income			Deficit			of Innotrac			Interest			Equity

Balance at December 31, 2009		12,601	$	1,260	$	66,528			-		$	( 43,909	)	$	23,879			-		$	23,879
Restricted stock compensation expense		260		26		82			-			-			108			-			108
Stock option compensation expense		-		-		(1	)		-			-			(1	)		-			(1	)
Net loss		-		-		-			-			(2,687	)		(2,687	)		-			(2,687	)
Balance at December 31, 2010		12,861	$	1,286	$	66,609		$	-		$	( 46,596	)	$	21,299		$	-		$	21,299
Restricted stock compensation expense		174		18		21			-			-			39			-			39
Stock option compensation expense		-		-		2			-			-			2			-			2
Noncontrolling interest in subsidiary		-		-		-			-			2			2			17			19
Foreign currency translation adjustment in subsidiary		-		-		-			(3	)		-			(3	)		-			(3	)
Net loss		-		-		-			-			(1,538	)		(1,538	)		(2	)		(1,540	)
Balance at December 31, 2011		13,035	$	1,304	$	66,632		$	(3	)	$	(48,132	)		19,801		$	15		$	19,816

The accompanying notes are an integral part of these consolidated financial statements.

INNOTRAC CORPORATION and SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in 000’s)

	Year Ended December 31,
	2011			2010
Cash flows from operating activities:
Net loss	$	(1,540	)	$	(2,687	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		3,380			3,463
Provision for bad debts		43			145
(Gain) on disposal of fixed assets		(15	)		(9	)
Stock compensation expense-stock options		2			(1	)
Stock compensation expense-restricted stock		39			108
Changes in operating assets and liabilities:
Accounts receivable, gross		(1,741	)		(902	)
Inventory		2,883			(533	)
Prepaid expenses and other assets		116			573
Long-term assets		10			65
Accounts payable		1,649			610
Accrued expenses, accrued salaries and other		391			(468	)
Long-term liabilities		532			162
Net cash provided by operating activities		5,749			526

Cash flows from investing activities:
Capital expenditures		(2,389	)		(1,119	)
Proceeds from disposition of assets		26			23
Net change in noncurrent assets and liabilities		(10	)		(9	)
Net cash used in investing activities		(2,373	)		(1,105	)

Cash flows from financing activities:
Net (repayments) under line of credit		-			-
Capital lease payments		(314	)		(239	)
Contribution from noncontrolling interest		17			-
Loan commitment fees		(34	)		(62	)
Net cash used in financing activities		(331	)		(301	)
Net increase (decrease) in cash and cash equivalents		3,045			(880	)

Cash and cash equivalents, beginning of period		238			1,118

Cash and cash equivalents, end of period	$	3,283		$	238

Supplemental cash flow disclosures:
Cash paid for interest	$	126		$	120
Cash paid for state income taxes	$	29		$	18
Non-cash investing and financing activities: Capital lease obligation for computer and warehouse equipment purchased	$	451		$	22
Capital expenditures in accounts payable	$	345		$	-

The accompanying notes are an integral part of these consolidated financial statements.

INNOTRAC CORPORATION and SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2011 AND 2010

1. ORGANIZATION

Innotrac Corporation (“Innotrac” or the “Company”), a Georgia corporation, provides order processing, order fulfillment and call center services. The Company offers inventory management, inbound call center, pick/pack/ship services, order tracking, transaction processing and returns handling from its leased facilities in Atlanta, Georgia; Pueblo, Colorado; Reno, Nevada; Bolingbrook, Illinois; Hebron, Kentucky; and Columbus, Ohio.

2. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation. The financial statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America. 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 year ended December 31, 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 year ended December 31, 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.

Customer Concentration. Except for one major client, from whom 26% of total revenues were derived in 2011 and 25% of total revenues were derived in 2010, and two other smaller clients who represented 12% and 10% of total revenues in 2011 and 9% and 9% of total revenues in 2010, no other single customer provided more than 10% of revenues during these years. As of December 31, 2011, these three clients represented approximately 20%, 11% and 14% of total accounts receivable. As of December 31, 2010 these three clients represented approximately 10%, 8% and 11% of total accounts receivable. For the years ended December 31, 2011 and 2010, our ten largest customers represented 77% and 79% of our total revenues, respectively.

Cash and Cash Equivalents. The Company considers all short-term, highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company maintains its cash balances in financial institutions. These balances may, at times, exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash balances.

Reserve for Uncollectible Accounts. The Company makes estimates each reporting period associated with its reserve for uncollectible accounts. These estimates are based on the aging of the receivables and known specific facts and circumstances.

Fair Value Measurements. The Company accounts for fair value in accordance with ASC topic No. 820 – Fair Value Measurements and Disclosures for all financial and non-financial assets and liabilities accounted for at fair value on a 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 or liabilities that the Company has the ability to access at the measurement date.

Level 2: inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.

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.

The carrying value of our cash, accounts receivable, accounts payable and other debt instruments approximates fair value since our debt instrument consists of a revolving credit line, which under certain conditions can mature within one year of December 31, 2011, and because of its short term nature. The interest rate is equal to the market rate for such instruments of similar duration and credit quality.

	As of December 31, 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
Deferred Compensation plan assets held in Rabbi Trust (1)	$	735	$	-	$	-	$	735

Total	$	735	$	-	$	-	$	735

	As of December 31, 2010 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
Deferred Compensation plan assets held in 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 in other assets on the accompanying consolidated balance sheets at quoted market prices. The contributions are fully invested in five different mutual funds having various growth, industry and geographic characteristics.

There were no significant transfers into and out of each level of the fair value hierarchy for assets measured at fair value for the year ended December 31, 2011.

All transfers, if any, are recognized by the Company at the end of each reporting period.

Transfers between Levels 1 and 2 generally relate to whether a market becomes active or inactive. Transfers between Levels 2 and 3 generally relate to whether significant relevant observable inputs are available for the fair value measurement in their entirety.

Inventories. Inventories are stated at the lower of cost or market, with cost determined by the first-in, first-out method. Substantially all inventory at December 31, 2011 and 2010 is for the account of a single client who has indemnified the Company from substantially all risk associated with such inventory.

Property and Equipment. Property and equipment are stated at cost. Depreciation is determined using straight-line methods over the following estimated useful lives:

	Computers and software	3-5 years
	Machinery and equipment	5-7 years
	Furniture and fixtures	7-10 years

Leasehold improvements are amortized using the straight-line method over the shorter of the service lives of the improvements or the remaining term of the lease. Depreciation and amortization expense for the years ended December 31, 2011 and 2010 for all property and equipment, including capital leases, was $3.4 million and $3.5 million respectively. Computers, machinery and equipment include capital leases of $1.3 million and $800,000 at December 31, 2011 and 2010, respectively. Accumulated depreciation includes $447,000 at December 31, 2011 and $274,000 at December 31, 2010 related to capital leases. Maintenance and repairs are expensed as incurred.

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. During the years ended December 31, 2011 and 2010, there was no impairment of long-lived assets.

Accounting for Income Taxes. Innotrac utilizes the liability method of accounting for income taxes in accordance with Accounting Standards Codification (“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. A full valuation allowance has been recorded against deferred tax assets at December 31, 2011 and 2010 (see Note 7).

Revenue Recognition. Innotrac derives its revenue primarily from two sources: (1) fulfillment operations and (2) the delivery of business services. Innotrac’s fulfillment services operations record revenue at the conclusion of the material selection, packaging and upon completion of the shipping process. The shipping 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 services business recognizes revenue according to written pricing agreements based on number of calls, minutes or hourly rate basis. 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.

Cost of Revenues. The primary components of cost of revenues include labor costs, telephone minute fees, and packaging material costs. Costs related to facilities, equipment, account services and information technology are included in selling, general and administrative expense along with other operating costs. As a result of the Company’s policy to include facility, account services and information technology costs in selling, general and administrative expense, our gross margins may not be comparable to other fulfillment companies.

Stock-Based Compensation Plans. The Company accounts for stock based compensation according to the provisions of the Compensation – Stock Compensation topic of the ASC, which establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the employee’s requisite service period.

Earnings Per Share. Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding. In the computation of diluted earnings per share, the weighted average number of common shares outstanding is adjusted for the effect of all dilutive potential common stock equivalent shares.

Recent Accounting Pronouncements.

In May 2011, the FASB issued ASU 2011-04 to Topic 820 - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs which provides guidance for required disclosure on fair value measurements, including a consistent meaning of the term “fair value”, thereby facilitating 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, to 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, consisting of an income statement followed by a separate statement of other comprehensive income. Also, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial 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.

In December 2011, the FASB issued Accounting Standards Update 2011-12 (“ASU 2011-12”) which defers certain provisions of ASU 2011-05. One provision of ASU 2011-05 required entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented (for both interim and annual financial statements). This requirement is indefinitely deferred under ASU 2011-12 and will be further deliberated by the FASB at a future date. During the deferral period, all entities are required to comply with existing requirements for reclassification adjustments in Accounting Standards Codification 220 (“ASC 220”), Comprehensive Income, which indicates that “[a]n entity may display reclassification adjustments on the face of the financial statement in which comprehensive income is reported, or it may disclose reclassification adjustments in the notes to the financial statements.” The ASU 2011-05 and 2011-12 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.

3. ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company grants credit to our customers without requiring collateral. The amount of accounting loss for which we are at risk in these unsecured accounts receivable is limited to their carrying value. Accounts receivable were composed of the following at December 31, 2011 and 2010 (in 000’s):

	2011			2010

Billed receivables	$	16,564		$	14,698
Unbilled receivables		510			823
		17,074			15,521
Less: Allowance for doubtful accounts		(97	)		(242	)
	$	16,977		$	15,279

Changes in the allowance for doubtful accounts were composed of the following during the twelve months ended December 31, 2011 and 2010 (in 000’s):

Description	Balance at Beginning of Period		Charged to Expenses		Charged to Other Accounts		Deductions			Balance at End of Period
(in 000’s)
Allowance for doubtful accounts
Year ended December 31,
2011	$	242	$	43	$	-	$	(188	)	$	97
2010	$	172	$	145	$	-	$	(75	)	$	242

4. FINANCING OBLIGATIONS

The Company has a Credit Facility which had a maximum borrowing limit of $15.0 million at December 31, 2011 and 2010. 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 “Credit Facility”) with the Bank, setting forth the new terms of the Credit Facility. The Credit Facility has been further amended by the First, Second and Third Amendments on May 14, 2010, March 30, 2011 and March 29, 2012 respectively. The amended Credit Facility 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 on December 31, 2011 or December 31, 2010 under the Credit Facility.

Interest on borrowings pursuant to the Credit Facility is payable monthly at specified rates of either, at the Company’s option, the Base Rate (as defined in the Credit Facility) plus between 2.00% and 2.50%, or the LIBOR Rate (as defined in the Credit Facility) 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 Credit Facility). The Company paid a specified fee of one-half of one percent, or 0.5%, until March 30, 2011, and after March 30, 2011 paid and will pay in the future three quarters of one percent, or 0.75% on undrawn amounts under the Credit Facility. After an event of default, all loans will bear interest at the otherwise applicable rate plus 2.00% per annum.

The 2009 Credit Facility contains such 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, and as revised by the Second Amendment monthly and cumulative (loss) or profit limits for periods through the effective date of the Third Amendment. The Second Amendment provided for a determination in March of 2012 of specific financial covenants based on the financial projections of the Company for the business periods following March 31, 2012. The provisions of the Credit Facility 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 December 31, 2011, the Company was in compliance with all terms of the Credit Facility.

Although the maximum borrowing limit is $15.0 million, the Credit Facility limits borrowings to a specified percentage of eligible accounts receivable and inventory, together “Eligible Collateral”, which totaled $13.2 million at December 31, 2011. Additionally, the terms of the Credit Facility provide that the amount borrowed and outstanding at any time combined with certain reserves for 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 December 31, 2011 amounted to $13.2 million. At December 31, 2011, there were no borrowings outstanding under the Credit Facility, however, the value of reserves and letters of credit outstanding totaled $4.1 million. As a result, the Company had $9.1 million of borrowing availability under the Credit Facility at December 31, 2011.

As a result of the Third Amendment to the Credit Facility, effective March 29, 2012, the financial covenants and additional terms of the credit facility for periods after December 31, 2011 are as follows:

i)	an annual capital expenditure limit of $6.0 million for 2012.

ii)	an Availability Block of $3.0 million from January 1, 2012 to March 29, 2012 when the Third Amendment became effective,

iii)

after March 29, 2012 an Availability Block of $4.0 million, which block will be reduced to $3.0 million when the twelve month trailing fixed charge ratio exceeds 1.1, and further reduced to $2.5 million when both the trailing twelve month fixed charge ratio has a) exceeded 1.2 for three consecutive months and b) is projected to exceed 1.2 for the immediately upcoming three consecutive months.,

iv)	a $1.8 million 5 year term loan will be funded within the $15.0 million Credit Facility limit at an annual rate of interest charged on amounts outstanding of the LIBOR Rate (as defined in the Credit Facility) plus 4.0%,

v)	the assets of the Company included in the collateral supporting the Credit Facility will be increased to include up to $1.8 million in value as determined by an independent appraisal of the equipment being purchased with the proceeds of the equipment loan.

vi)	maximum monthly (loss) limits of ($382,000) for the months of January 2012 and February 2012, after which periods the maximum monthly (loss) covenant will be removed.

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 amount available to borrow under the Credit Facility will increase and decrease mainly as a result of changes in the value of accounts receivable and inventory caused by variations in revenue or the timing of collection of accounts receivable. Our availability to borrow under the Credit Facility will change from quarter to quarter due to the seasonality of our business and revenues which causes our accounts receivable and, therefore, our Eligible Collateral to be higher at the end of the calendar year than the other three calendar quarter periods.

For the year ended December 31, 2011, we recorded interest expense of $7,000 on the Credit Facility at a weighted average interest rate of 3.17%. The rate of interest being charged on the Credit Facility at December 31, 2011 was 3.3%. The average daily borrowings outstanding on the Credit Facility for the years ended December 31, 2011 and 2010 were $8,000 and $22,000 respectively. The maximum borrowing outstanding on the Credit Facility for any one day during the years ended December 31, 2011 and 2010 were $2.3 million and $3.3 million respectively. For the year ended December 31, 2010, we recorded interest expense of $22,000 on the Credit Facility at a weighted average interest rate of 3.31%. The Company also incurred unused Credit Facility fees of approximately $92,000 and $68,000 for the year ended December 31, 2011 and 2010, respectively. Additionally, the Company reported $62,000 and $65,000 of amortized loan costs as interest expense during the year ended December 31, 2011 and 2010, respectively.

5. LEASES

Capital Leases. Innotrac has entered into various capital leases for warehouse and computer equipment. The amortization of these assets is included in depreciation and amortization expense. Aggregate future minimum lease payments under these noncancellable capital leases as of December 31, 2011 are as follows (in 000’s):

	Capital Leases
2012	$	323
2013		170
2014		113
		606
Less amounts representing interest and taxes		(74	)
Present value of future minimum lease payments		532
Less current portion		(281	)
Capital lease obligations, net of current portion	$	251

Operating Leases. Innotrac leases office and warehouse space and equipment under various operating leases. The primary office and warehouse operating leases provide for escalating payments over the lease term. Innotrac recognizes rent expense on a straight-line basis over the lease term.

Aggregate future minimum lease payments under noncancellable operating leases with original periods in excess of one year as of December 31, 2011 are as follows (in 000’s):

	Operating Leases
2012		9,134
2013		8,534
2014		6,595
2015		3,676
2016		3,428
Thereafter		2,907
Total minimum lease payments	$	34,274

Rent expense under all operating leases totaled approximately $9.5 million and $9.4 million during the years ended December 31, 2011 and 2010, respectively.

6. 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.

7. INCOME TAXES

Details of the income tax benefit (provision) for the years ended December 31, 2011 and 2010 are as follows (in 000’s):

	2011			2010
Current tax expense	$	-		$	-
Deferred tax (benefit) expense		(536	)		(982	)
Change in valuation allowance		536			982
Income tax benefit (provision)	$	-		$	-

Deferred income taxes reflect the net effect of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company’s deferred tax assets and liabilities as of December 31, 2011 and 2010 are as follows (in 000’s):

	2011			2010

Deferred tax assets:
Net operating loss carryforwards	$	18,942		$	18,166
Allowance for doubtful accounts		35			89
Accruals		137			313
Goodwill		3,045			3,697
Other		802			470
Gross deferred tax assets		22,961			22,735
Less valuation allowance		(21,847	)		(21,311	)
Gross deferred tax assets net of valuation allowance		1,114			1,424
Deferred tax liabilities:
Goodwill		-			-
Depreciation		(1,114	)		(1.424	)
Gross deferred tax liabilities		(1,114	)		(1,424	)
Net deferred 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 December 31, 2011 is approximately $23.0 million. This deferred tax asset was generated primarily by net operating loss carryforwards created by net losses in prior years and the goodwill impairment charge of $25.2 million recorded in 2009. Innotrac has a net operating loss carryforward of $51.8 million at December 31, 2011 that expire between 2020 and 2031.

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 December 31, 2011 and 2010, respectively. Income taxes associated with future earnings may be offset by a reduction in the valuation allowance. For the year ended December 31, 2011, the deferred income tax benefit of $536,000 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 tax years that are open for audit as of December 31, 2011 are 2008, 2009, 2010 and 2011. 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 December 31, 2011 and 2010.

The Company generally recognizes interest and/or penalties related to income tax matters in general and administrative expenses. As of December 31, 2011 and 2010, we have no accrued interest or penalties related to uncertain tax positions.

The difference between the provision for income taxes (benefit) and the amount computed by applying the U.S. federal income tax rate for the years ended December 31, 2011 and 2010 is as follows:

	2011			2010

Statutory federal income tax (benefit) expense	$	(531	)	$	(914	)
Expired state tax credits		-			-
State income taxes, net of federal effect		(42	)		(69	)
Permanent book-tax differences		28			45
AMT credit affecting change in valuation allowance		-			-
Other		9			(44	)
Valuation allowance for deferred tax assets		536			982
Income tax provision (benefit)	$	-		$	-

8. EARNINGS PER SHARE

The following table shows the shares used in computing diluted earnings per share (“EPS”) in accordance with ASC topic No. 260 – Earnings per Share, (in 000’s):

	2011		2010
Diluted earnings per share: Weighted average shares outstanding		12,940		12,798
Employee and director stock options		-		-
Weighted average shares assuming dilution		12,940		12,798

Options to purchase 520,000 shares of the Company’s common stock outstanding at December 31, 2011 and options to purchase 761,000 shares of the Company’s common stock at December 31, 2010 were not included in the computation of diluted EPS because their effect was anti-dilutive.

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 700,637 restricted shares in our calculation of basic and diluted EPS for the year ended December 31, 2011. For the year ended December 31, 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 or on specific vesting dates. The vesting period for all restricted shares issued prior to June 2011 is 25% on each of the 7th, 8th, 9th and 10th anniversary of the issuance date, or earlier upon a change in control. Vesting for restricted shares issued to employees in June 2011 follow the same schedule of 25% on each of the 7th, 8th, 9th and 10th anniversary of the issuance date, or earlier upon a change in control. The vesting period for restricted shares issued to non-employee Directors of the Company beginning in June 2011 follows the same schedule of 25% vesting on each of the 7th, 8th, 9th, and 10th anniversary (or earlier upon a change in control), unless the Director’s service with the Company terminates other than for cause prior to all shares vesting, in which case shares vest one third on the date of issuance and one third on each of the 1st and 2nd anniversary of the issuance date.

9. EMPLOYEE RETIREMENT PLANS

Innotrac employees may participate in a 401(k) defined contribution plan. The plan covers all employees who have at least six months of service and are 18 years of age or older. Participants may elect to defer up to 15% of compensation up to a maximum amount determined annually pursuant to IRS regulations. Innotrac’s current policy is to provide matching employer contributions equal to 5% of contributions for less than four years of service and 10% of contributions for over four years of service. Total matching contributions made to the plan and charged to expense by Innotrac for the years ended December 31, 2011 and 2010 were approximately $32,000 and $39,000, respectively.

The Company has an executive deferred compensation plan, a Rabbi Trust, for certain employees, as designated by the Company’s Board of Directors. Participants may elect to defer up to 30% of compensation. Innotrac’s policy is to provide matching employer contributions ranging from 20% to 100% of employee contributions based on years of service. However, this match was suspended since 2008. The Company invests all contributions in employee-directed marketable equity securities which are recorded at quoted market prices on the accompanying balance sheet (in other assets with an equal value in deferred compensation liability) and aggregated $735,000 and $758,000 at December 31, 2011 and 2010, respectively. The monies invested in the plan and held by the Rabbi Trust are subject to general creditors of the Company in the event of a Company bankruptcy filing.

10. STOCK BASED COMPENSATION

The Company has adopted three stock option plans: the 1997 Stock Option Plan (the “1997 Plan”), the 2000 Stock Option and Incentive Award Plan (the “2000 Plan”) and the 2010 Innotrac Stock Award Plan (the “2010 Plan” and the three plans together “The Plans”). The Plans provide key employees, officers, directors, contractors and consultants an opportunity to own shares of common stock of the Company and to provide incentives for such persons to promote the financial success of the Company. Awards under The Plans may be structured in a variety of ways, including as “incentive stock options,” as defined in Section 422 of the Internal Revenue Code, as amended, non-qualified stock options, restricted stock awards, and stock appreciation rights (“SARs”). Incentive stock options may be granted only to full-time employees (including officers) of the Company. Non-qualified options, restricted stock awards, SARs, and other permitted forms of awards may be granted to any person employed by or performing services for the Company, including directors, contractors and consultants. In November 2007, the 1997 Plan expired and in March 2010, the 2000 Plan expired. The 2010 Plan provides for the issuance of an aggregate 1,200,000 shares of the Company’s Common Stock, plus any shares that are subject to outstanding grants under the terminated Innotrac Corporation 2000 Stock Option and Incentive Award Plan, which expire, are forfeited or otherwise terminate without delivery of shares. At December 31, 2011, there were 1,100,417 shares available to be issued under the 2010 Plan.

Incentive stock options are also subject to certain limitations prescribed by the Internal Revenue Code, including the requirement that such options may not be granted to employees who own more than 10% of the combined voting power of all classes of voting stock of the Company, unless the option price is at least 110% of the fair market value of the common stock subject to the option. The Board of Directors of the Company (or a committee designated by the Board) otherwise generally has discretion to set the terms and conditions of options and other awards, including the term, exercise price and vesting conditions, if any; to select the persons who receive such grants and awards; and to interpret and administer The Plans.

A summary of the options outstanding and exercisable by price range as of December 31, 2011 is as follows (shares in 000’s):

	Options Outstanding					Options Exercisable
Range of Exercise Prices		As of December 31, 2011	Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		As of December 31, 2011		Weighted Average Exercise Price	Weighted Average Remaining Contractual Life
$1.77 - $3.54		229	1.54	$	3.22		229	$	3.22	1.54
$3.54 - $5.31		291	3.54		4.56		291		4.56	3.54
		520	2.66	$	3.97		520	$	3.97	2.66

A summary of activity in the Company’s three stock option plans is as follows (shares in 000’s):

	Shares			Weighted Average Price
Outstanding at December 31, 2009		1,048		$	4.14
Granted		-			-
Exercised		-			-
Expired		(279	)		4.34
Forfeited		(8	)		2.82
Outstanding at December 31, 2010		761		$	4.08
Granted		-			-
Exercised		-			-
Expired		241			4.33
Forfeited		-			-
Outstanding and exercisable at December 31, 2011		520			3.97

The Company did not issue any options during the years 2011 and 2010. When the Company issues options, the Black-Sholes pricing model is used to value stock options at issuance date. Stock option grants generally have a contractual term of 10 years. The grant date fair value of options vesting in 2011 and 2010 was $44,000 and $44,000, respectively. There is no aggregate intrinsic value of stock options outstanding at December 31, 2011 as the exercise price of all of our outstanding stock options is higher than the closing stock price at December 31, 2011. We recognized approximately $2,000 and ($1,000) of compensation expense relating to our stock option grants in 2011 and 2010, respectively. As of December 31, 2011, there was no amount of unrecognized compensation expense related to non-vested stock options.

On April 16, 2007, 265,956 shares of restricted stock were issued to certain executives under the terms provided in the 2000 Plan. The grant date fair value of this award was $2.82 per share. On March 29, 2010, 260,000 restricted shares were issued to certain executives and the Board of Directors under the terms provided in the 2010 Plan which plan was ratified on June 2, 2010 at the Company’s 2010 annual meeting. The grant date fair value of this award was $1.64 per share. On June 10, 2011, 310,000 shares of restricted stock were issued to certain executives and the Board of Directors under the terms provided in the 2010 Plan. The vesting period for all restricted shares issued prior to June 2011 is 25% on each of the 7th, 8th, 9th and 10th anniversary of the issuance date, or earlier upon a change in control. Vesting for restricted shares issued to employees in June 2011 follow the same schedule of 25% on each of the 7th, 8th, 9th and 10th anniversary of the issuance date, or earlier upon a change in control. The vesting period for restricted shares issued to Directors of the Company beginning in June 2011 follows the same schedule of 25% on each of the 7th, 8th, 9th, and 10th anniversary (or earlier upon a change in control), unless the Director’s service with the Company terminates other than for cause prior to all shares vesting, in which case shares vest one third on the date of issuance and one third on each of the 1st and 2nd anniversary of the issuance date.

A summary of restricted stock activity during the years ended December 31, 2011 and 2010 is as follows:

	Shares			Weighted Average Grant Date Fair Value
Non-vested at December 31, 2009		265,956		$	2.82
Granted		260,000			1.64
Vested		-			-
Forfeited		-			-
Non-vested at December 31, 2010		525,956			2.24
Granted		310,000			1.70
Vested		(13,333	)		1.70
Forfeited		(135,319	)		2.54
Non-vested at December 31, 2011		687,304		$	2.09

We recognized approximately $39,000 and $108,000 of compensation expense relating to our restricted stock grants in 2011 and 2010, respectively. As of December 31, 2011, there was approximately $1.0 million of unrecognized compensation expense related to non-vested restricted stock. This cost is expected to be recognized over a weighted average period of 7.8 years.

11. RELATED PARTY TRANSACTIONS

Policy on Related Person Transactions

The Company recognizes that transactions between the Company or its subsidiaries and any of its directors or executive officers can present potential or actual conflicts of interest. Accordingly, as a general matter it is the Company’s preference to avoid such transactions. Nevertheless, the Company recognizes that there are circumstances where such transactions may be in, or not inconsistent with, the best interests of the Company. Therefore, the Company has adopted a formal policy that requires the Company’s Audit Committee to review and, if appropriate, approve or ratify any such transactions. Pursuant to the policy, the Committee will review any transaction in which the Company is or will be a participant and the amount involved exceeds $120,000, and in which any of the Company’s directors, executive officers or 5% shareholders had, has or will have a direct or indirect material interest. After its review, the Committee will only approve or ratify those transactions that are in, or are not inconsistent with, the best interests of the Company and its shareholders.

Certain Related Person Transactions

The Company leases a single engine aircraft from a company wholly-owned by the Chairman and Chief Executive Officer, pursuant to an agreement that provides for the Company to pay for approximately 86% of all expenses associated with this aircraft. This allocation is determined annually based on actual business usage. The Company paid approximately $201,000 and $199,000 for the years ended December 31, 2011 and 2010, respectively.

In 2003, the Company and the IPOF Group (consisting of IPOF Fund, LP and its general partner, David Dadante), which as of December 31, 2011 beneficially owned approximately 4.3 million shares of Common Stock, entered into an amended Agreement to permit the IPOF Group to acquire up to 40% of the Common Stock on the terms set forth in that Agreement without becoming an “Acquiring Person” under the Company’s Rights Agreement with SunTrust Bank. The Agreement with the IPOF Group contains various restrictions on the IPOF’s Group right to vote and take certain other shareholder actions. Among these restrictions, the IPOF Group agreed to vote all shares in excess of 15% proportionately with vote(s) cast by the other shareholders of the Company and not seek to place a representative on the Company’s Board or seek to remove any member of the Board. The IPOF Group further acknowledged that it is an “affiliate,” as defined under applicable federal securities law.

During 2004, the Company became aware of possible IPOF Group violations of the short-swing profit rules under Section 16(b) of the Securities and Exchange Act of 1934. Upon conclusion of the investigation of this matter, the Company and IPOF Group, on March 3, 2004, entered into a Settlement Agreement regarding the potential Section 16(b) liability issues that provided for the Company’s recovery in 2006 of $301,957. 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.

The United States District Court in Cleveland, Ohio has appointed a receiver to identify and administer the assets of the IPOF Fund, L.P. and its general partner, Mr. David Dadante. Based on information from the receiver, the Company understands that the Fund and Mr. Dadante own 4,321,777 shares of common stock of the Company, representing approximately 33.2% of the total shares outstanding, all of which are held as collateral in margin accounts maintained at several financial institutions. The Company continues to engage in discussions from time to time with the receiver in an effort to cause the shares to be sold in a manner that causes as little disruption to the market for Company stock as possible. The Federal Court has indefinitely restricted the financial institutions holding Company stock owned by the IPOF Fund 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, 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.

12. SUBSEQUENT EVENTS

On March 29, 2012, the Company entered into Amendment No. 3 (the “Third Amendment”) to the Fourth Amended and Restated Loan and Security Agreement (the “Credit Facility”) with the Bank. The Company entered into the Third Amendment to set financial covenants after March 31, 2012, increase the capital expenditure limit for 2012, provide the terms for a $1.8 million equipment loan to be used to install equipment in the Company’s new facility in Groveport, Ohio. The Third Amendment was immediately effective upon signing.

The Third Amendment provided for the following specific changes to the terms of the Credit Facility:

a.	the capital expenditure limit for the year 2012 will be increased to $6.0 million to allow for the total expansion cost of the new Groveport Ohio facility.

c.	a $1.8 million 5 year term loan will be funded within the $15.0 million Credit Facility limit at an annual rate of interest charged on amounts outstanding of the LIBOR Rate (as defined in the Credit Facility) plus 4.0%,

d.	the assets of the Company included in the collateral supporting the Credit Facility will be increased to include up to $1.8 million in value as determined by an independent appraisal of the equipment being purchased with the proceeds of the equipment loan.

e.	maximum monthly (loss) limits of ($382,000) for the months of January 2012 and February 2012, after which periods the maximum monthly (loss) covenant will be removed.

13. PRIOR YEAR FINANCIAL STATEMENT PRESENTATION

The value of total operating expenses presented on the prior year consolidated statement of operations was misstated due to a clerical error. The value of each operating expense included in the value of total operating expenses was properly presented. The value of total operating expenses presented of $82,198 was incorrect. The correct value of total operating expenses, as presented in this report, for the year ended December 31, 2010 is $82,123. The amounts for operating income, income before taxes and net income were correctly presented in the prior year consolidated statement of operations.

14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

(000’s, except per share data)	First			Second			Third			Fourth

2011 Quarters:
Revenues, net	$	20,969		$	18,614		$	19.517		$	25,584
Operating (loss) income		(480	)		(768	)		(446	)		343
Net (loss) income		(526	)		(816	)		(490	)		294
Net (loss) income per share-basic		(0.04	)		(0.06	)		(0.04	)		0.02
Net (loss) income per share-diluted	$	(0.04	)	$	(0.06	)	$	(0.04	)	$	0.02

2010 Quarters:
Revenues, net	$	19,353		$	18,455		$	18,570		$	23,241
Operating income (loss)		(934	)		(1,070	)		(770	)		270
Net income (loss)		(973	)		(1,111	)		(821	)		218
Net income (loss) per share-basic		(0.08	)		(0.09	)		(0.06	)		0.02
Net income (loss) per share-diluted	$	(0.08	)	$	(0.09	)	$	(0.06	)	$	0.02

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial (and principal accounting) Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of December 31, 2011. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.

Management’s Report on Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed by, or under the supervision of, a public company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”) including those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has assessed the effectiveness of our internal control over financial reporting as of December 31, 2011. In making this assessment, our management used the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon that assessment, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s internal controls over financial reporting were effective as of the end of the period covered by this report.

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report is not subject to attestation by our independent registered public accounting firm pursuant to the rules of the SEC for small companies.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item 10 contained under the headings “Board Matters,” “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company’s 2011 Annual Meeting of Shareholders, to be filed with the Commission, is hereby incorporated herein by reference. Pursuant to Instruction 3 to Paragraph (b) of Item 401 of Regulation S-K, information relating to the executive officers of the Company is included in Item 1 of this Report.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item 11 contained under the heading “Compensation of Executive Officers and Directors” included in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company’s 2011 Annual Meeting of Shareholders, to be filed with the Commission, is hereby incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this Item 12 contained under the headings “Voting Securities and Principal Shareholders” and “Equity Compensation Plans” in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company’s 2012 Annual Meeting of Shareholders, to be filed with the Commission, is hereby incorporated herein by reference.

For purposes of determining the aggregate market value of the Company’s voting stock held by nonaffiliates, shares held by all current directors and executive officers of the Company and holders of 10% or more of the Company’s Common Stock have been excluded. The exclusion of such shares is not intended to, and shall not, constitute a determination as to which persons or entities may be “affiliates” of the Company as defined by the Commission.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item 13 contained under the headings “Board Matters” and “Related Person Transactions” in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company’s 2012 Annual Meeting of Shareholders, to be filed with the Commission, is hereby incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this Item 14 contained under the heading “Independent Registered Public Accounting Firm” in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company’s 2012 Annual Meeting of Shareholders, to be filed with the Commission, is hereby incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)	Financial Statements, Financial Statement Schedules and Exhibits

Financial Statements

The following financial statements and notes thereto are included in Item 8 of this Report.

Report of Independent Registered Public Accounting Firm

Balance Sheets as of December 31, 2011 and 2010

Statements of Operations for the years ended December 31, 2011 and 2010

Statements of Shareholders’ Equity for the years ended December 31, 2011 and 2010

Statements of Cash Flows for the years ended December 31, 2011 and 2010

Exhibits

The following exhibits are required to be filed with this Report by Item 601 of Regulation S-K:

Exhibit Number		Description of Exhibits

3.1		Amended and Restated Articles of Incorporation of the Registrant, (incorporated by reference to Exhibit 3.1 to the Registrant’s Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998)

3.2		Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on form 10-K for the year ended December 31, 2006, Commission File No. 000-23741), filed with the Commission on April 17, 2007)

4.1		Form of Common Stock Certificate of the Registrant (incorporated by reference to Exhibit 4.1 to the Registrant’s Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998)

10.1+		2000 Stock Option and Incentive Award Plan and amendment thereto (incorporated by reference to Exhibit 4.3 and 4.4 to the Registrant’s Form S-8 (Commission File No. 333-54970) filed with the Commission on February 5, 2001)

10.4 (v)		Third Amended and Restated Loan and Security Agreement by and between the Registrant and Wachovia Bank, National Association, Successor by merger to SouthTrust Bank, dated March 28, 2006 (incorporated by reference to Exhibit 10.4(v) to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005 (Commission File No. 000-23741), filed with the Commission on March 31, 2006)

(w)		First Amendment Agreement to the Third Amended and Restated Loan and Security Agreement by and between the Registrant and Wachovia Bank, National Association, Successor by merger to SouthTrust Bank, dated July 24, 2006 (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006 (Commission File No. 000-23741), filed with the Commission on August 14, 2006)


(x)		Waiver and Amendment Agreement to the Third Amended and Restated Loan and Security Agreement by and between the Registrant and Wachovia Bank, National Association, Successor by merger to SouthTrust Bank, dated November 14, 2006 (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2006 (Commission File No. 000-23741), filed with the Commission on November 14, 2006)

(y)		Second Waiver and Amendment Agreement to the Third Amended and Restated Loan and Security Agreement by and between the Registrant and Wachovia Bank, National Association, Successor by merger to SouthTrust Bank, dated April 16, 2007 (incorporated by reference to Exhibit 10.4(y) to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006, Commission File No. 000-23741), filed with the Commission on April 17, 2007)

(z)		Fourth Amendment Agreement to the Third Amended and Restated Loan and Security Agreement by and between the Registrant and Wachovia Bank, National Association, Successor by merger to SouthTrust Bank, dated June 29, 2007 (incorporated by reference to Exhibit 10.4(z) to the Registrant’s Form 8-K (Commission File No. 000-23741), filed with the Commission on July 3, 2007)

(aa)		Fifth Amendment to Loan and Security Agreement with Wachovia Bank, National Association (incorporated by reference to Exhibit 10.4(aa) to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2007 (Commission File No. 000-23741), filed with the Commission on November 14, 2007)

10.4 (bb)		Sixth Amendment to the Loan and Security Agreement between Innotrac and Wachovia Bank, National Association, dated October 22, 2008 (incorporated by reference to exhibit 10.4 (bb) to the Form 8-K (Commission File No. 000-23741) filed with the Securities and Exchange Commission on October 27, 2008)

10.4 (cc)		Seventh Amendment to the Loan and Security Agreement between Innotrac and Wachovia Bank, National Association, dated March 1, 2009 (incorporated by reference to exhibit 10.4 (cc) to the Form 8-K (Commission File No. 000-23741) filed with the Securities and Exchange Commission on March 5, 2009)

10.5+		2002 Senior Executive Incentive Compensation Plan (incorporated by reference to Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001 (Commission File No. 000-23741), filed with the Commission on March 28, 2002)

10.19(a)		Agreement dated August 14, 2003 by and between IPOF Fund, LP, an Ohio limited partnership (“IPOF”), David Dadante, an individual resident of Ohio and the general partner of IPOF and the Registrant (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q/A for the quarterly period ended June 30, 2003 (Commission File No. 000-23741), filed with the Commission on August 20, 2003)

(b)		First Amendment dated November 24, 2003 to the Agreement by and between IPOF Fund, LP, an Ohio limited partnership (“IPOF”), David Dadante, an individual resident of Ohio and the general partner of IPOF and the Registrant (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (Commission File No. 000-23741), filed with the Commission on November 24, 2003)

10.23+		Employment Agreement dated April 16, 2007, by and between Scott D. Dorfman and the Registrant (incorporated by reference to Exhibit 10.23 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006, Commission File No. 000-23741), filed with the Commission on April 17, 2007)

10.24+		Employment Agreement dated April 16, 2007, by and between Larry C. Hanger and the Registrant (incorporated by reference to Exhibit 10.24 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006, Commission File No. 000-23741), filed with the Commission on April 17, 2007)

10.25+		Employment Agreement dated April 16, 2007, by and between Robert J. Toner, Jr. and the Registrant (incorporated by reference to Exhibit 10.25 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006, Commission File No. 000-23741), filed with the Commission on April 17, 2007)

10.28+		Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.28 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006, Commission File No. 000-23741), filed with the Commission on April 17, 2007)

10.30		Fourth Amended and Restated Loan and Security Agreement between the Registrant and Wachovia Bank, National Association, dated March 27, 2009 (incorporated by reference to Exhibit 10.30 to the Registrants Annual Report on Form 10-K for the year ended December 31, 2009, commission File No. 000-23741), filed with the Commission on March 31, 2010)

10.30(a)		Amendment No. 1 to the Fourth Amended and Restated Loan And Security Agreement between the Registrant and Wachovia Bank, National Association, dated May 14, 2010. (incorporated by reference to Exhibit 10.30(a) to the Registrants Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2010, commission File No. 000-23741), filed with the Commission on May 17, 2010)

10.30(b)		Amendment No. 2 to the Fourth Amended and Restated Loan And Security Agreement between the Registrant and Wachovia Bank, National Association, which changed its name to Wells Fargo, N.A. dated March 30, 2011. (incorporated by reference to Exhibit 10.30(b) to the Registrants Annual Report on Form 10-K for the year ended December 31, 2010, commission File No. 000-23741), filed with the Commission on March 31, 2011)

10.30(c)*		Amendment No. 3 to the Fourth Amended and Restated Loan And Security Agreement between the Registrant and Wachovia Bank, National Association, dated March 29, 2012.

10.32+		Innotrac Corporation 2010 Stock Award Plan (+ incorporated by reference to Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009, Commission File No. 000-23741), filed with the Commission on March 31, 2010)

23.1*		Consent of Grant Thornton, LLP

24.1*		Power of Attorney (included on signature page)

31.1*		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)

31.2*		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)

32.1*		Certification of Chief Executive Officer Pursuant to 18 U.S.C.ss.1350

32.2*		Certification of principal financial officer Pursuant to 18 U.S.C.ss.1350

101*		The following financial information from Innotrac Corporation’s Annual Report on Form 10-K for the year ended December 31, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2011 and December 31, 2010, (ii) Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009, (iii) Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2011, 2010 and 2009, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2011, and 2010 and (v) the Notes to Consolidated Financial Statements.

*	Filed herewith.

+	Management contract or compensatory plan or arrangement required to be filed as an exhibit.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 30th day of March 2012.

	INNOTRAC CORPORATION

		/s/ Scott D. Dorfman
		Scott D. Dorfman
		Chairman of the Board, President and Chief Executive Officer
		(Principal Executive Officer)

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities indicated on the 30th day of March 2012.

Know all men by these presents, that each person whose signature appears below constitutes and appoints Scott D. Dorfman and George M. Hare, or either of them, as attorneys-in-fact, with power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact may do or cause to be done by virtue hereof.

Signature		Title

/s/ Scott D. Dorfman		Chairman of the Board, President and Chief Executive
Scott D. Dorfman		Officer (Principal Executive Officer)

/s/ George M. Hare		Chief Financial Officer (Principal Accounting Officer)
George M. Hare

/s/ Thomas J. Marano		Director
Thomas J. Marano

/s/ Bruce V. Benator		Director
Bruce V. Benator

/s/ James W. Childs		Director
James W. Childs

/s/ Joel E. Marks		Director
Joel E. Marks

Georgia			58-1592285
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

	Large accelerated filer o		Accelerated filer o
	Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company x

		2011			2010
	eCommerce/Direct to Consumer		67.2	%		60.6	%
	Direct Marketing		18.1			22.1
	Modems and Telecommunications products		12.0			14.9
	B2B		2.7			2.4
			100.0	%		100.0	%
Note:	The above table is compiled by presenting the total of any individual client in a single Business Line/Vertical consistently in the years 2011 and 2010 based on the predominant category of the client’s revenues for the year ended 2011.

	High		Low
2011
First Quarter	$	1.62	$	1.28
Second Quarter	$	1.93	$	1.27
Third Quarter	$	1.59	$	1.02
Fourth Quarter	$	1.40	$	0.92
Fiscal Year Ended December 31, 2011	$	1.93	$	0.92
2010
First Quarter	$	1.74	$	1.21
Second Quarter	$	1.75	$	1.14
Third Quarter	$	1.25	$	0.80
Fourth Quarter	$	1.47	$	0.85
Fiscal Year Ended December 31, 2010	$	1.75	$	0.80

Business Line/Vertical (1)	2011			2010
eCommerce/Direct to Consumer		67.2	%		60.6	%
Direct Marketing		18.1			22.1
Modems & Telecommunications products		12.0			14.9
B2B		2.7			2.4
		100.0	%		100.0	%

6465 East Johns Crossing, Johns Creek, Georgia 30097
(Address of principal executive offices)	(Zip Code)


			Page

PART I			2
	ITEM 1.	BUSINESS	2
		CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS	7
		EXECUTIVE OFFICERS OF THE REGISTRANT	8
	ITEM 1A.	RISK FACTORS	9
	ITEM 1B.	UNRESOLVED STAFF COMMENTS	11
	ITEM 2.	PROPERTIES	11
	ITEM 3.	LEGAL PROCEEDINGS	12

PART II			13
	ITEM 5.	MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	13
	ITEM 6.	SELECTED FINANCIAL DATA	13
	ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	13
	ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	23
	ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	24
	ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	43
	ITEM 9A.	CONTROLS AND PROCEDURES	43
	ITEM 9B.	OTHER INFORMATION	43

PART III			44
	ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	44
	ITEM 11.	EXECUTIVE COMPENSATION	44
	ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	44
	ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	44
	ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	44

PART IV			45
	ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES	45

Name	Age	Position

Scott D. Dorfman	54	Chairman of the Board, President and Chief Executive Officer

Larry C. Hanger	57	Senior Vice President—Client Services

Robert J. Toner	48	Senior Vice President—Chief Operating Officer

George M. Hare	56	Chief Financial Officer, Principal Accounting Officer and Corporate Secretary


	Thousands of Dollars Year Ended December 31,
	2011			2010
Service revenues	$	74,943		$	67,359
Freight revenues		9,741			12,260
Total revenues		84,684			79,619
Cost of service revenues		36,211			30,983
Freight expense		9,642			12,069
Selling, general and administrative		36,802			35,608
Depreciation and amortization		3,380			3,463
Operating (loss)		(1,381	)		(2,504	)
Other expense		189			183
Loss before taxes		(1,540	)		(2,687	)
Income tax (provision) benefit		-			-
Net loss attributable to noncontrolling interest		(2	)		-
Net loss attributable to Innotrac	$	(1,538	)	$	(2,687	)

	Percent of Total Revenues
	Year Ended December 31,
	2011			2010
Service revenues		88.5	%		84.6	%
Freight revenues		11.5			15.4
Total revenues		100.0			100.0
Cost of service revenues		42.7			38.9
Freight expense		11.4			15.2
Selling, general and administrative		43.5			44.7
Depreciation and amortization		4.0			4.4
Operating loss		(1.6	)		(3.2	)
Other expense		0.2			0.2
Loss before taxes		(1.8	)		(3.4	)
Income tax (provision) benefit		-			-
Net loss attributable to noncontrolling interest		-			-
Net loss		(1.8	)%		(3.4	)%

	Payments Due by Period
	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
Operating leases	$	34,274	$	9,134	$	15,129	$	7,104	$	2,907
Capital Leases	$	606	$	323	$	283	$	-	$	-
Line of Credit (1)	$	-	$	-	$	-	$	-	$	-