THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2013

Significant Accounting Policies [Abstract]

Principles of Consolidation

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.

Accounting Estimates

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.

Accounting for Income Taxes

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 valuation allowance was recorded against the net deferred tax asset as of December 31, 2012.  At September 30, 2013, the Company reversed the majority of the valuation allowance in the amount of $17.2 million, leaving a balance of $1.9 million (see Note 4).

Revenue Recognition

Revenue Recognition.  Innotrac derives its revenue primarily from three sources: (1) fulfillment operations (2) the delivery of call center services integrated with our fulfillment operations and (3) delivering technology solutions and integration services to its clients.  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. The Company purchases product for two clients from vendors under agreements that require our clients to buy the product back from us at original cost when product is shipped 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 paid to Innotrac at the same value paid and no service fees are generated on the product.  The value of the purchase is netted against the reimbursement from our customer with a resulting zero value in our reported revenue and costs of revenue.

Fair Value Measurements

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 market prices in active markets for identical assets or liabilities.

Level 2: Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs developed using the Company’s estimates and assumptions which reflect those that the market participants would use.

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 and accounts payable approximate their fair value, principally due to the short-term maturities of these instruments.  Our 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 September 30, 2013, 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.

The Company’s assets measured at fair market value on a recurring basis are as follows:

		As of September 30, 2013
		Fair Value Measurements Using
		(in 000’s)
	Quoted Prices in			Significant			Significant
	Active Markets			Other			Unobservable
	for Identical			Observable				Inputs
Description	Assets (Level 1)			Inputs (Level 2)				(Level 3)		Total
Deferred Compensation plan assets held in Rabbi Trust (1)		$	969		$	-		$	-		$	969
Total		$	969		$	-		$	-		$	969

	As of December 31, 2012
	Fair Value Measurements Using
	(in 000’s)
	Quoted Prices in		Significant			Significant
	Active Markets		Other			Unobservable
	for Identical		Observable				Inputs
Description	Assets (Level 1)		Inputs (Level 2)				(Level 3)		Total
Deferred Compensation plan assets held in Rabbi Trust (1)	$	837		$	-		$	-	$	837
Total	$	837		$	-		$	-	$	837

(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 any level of the fair value hierarchy for assets measured at fair value for the three and nine months ended September 30, 2013 or the year ended December 31, 2012.

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.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In February 2013, the FASB issued ASU 2013-02 to Topic 220 – Reporting of amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments to the Codification in this ASU require additional disclosure on the face of financial statements or in the notes to the financial statements, depending on materiality, for amounts reclassified out of accumulated other comprehensive income by component.  This ASU supersedes certain presentation requirements of ASU No. 2011-05 and ASU 2011-12 to Topic 220.  This amendment to this ASU was effective for reporting periods beginning after December 15, 2012 with early adoption permitted.  The Company adopted these provisions in the fourth quarter of 2012. Adoption of this provisions did not have a material impact on the Company’s consolidated financial statements since the Company has only immaterial other comprehensive income amounts.

In July 2013, the FASB issued ASU 2013-11 to Topic 740 – Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.  The amendment to the Codification in this ASU requires an unrecognized tax benefit to be presented as a decrease in a deferred tax asset where a net operating loss, a similar tax loss, or a tax credit carryforward exists and certain criteria are met. This ASU is effective prospectively for annual and interim reporting periods beginning after December 15, 2013. The Company is currently evaluating the potential impact of the adoption of this guidance on its consolidated financial statements.