Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
INOC > SEC Filings for INOC > Form 10-K on 28-Mar-2013All Recent SEC Filings

Show all filings for INNOTRAC CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-K for INNOTRAC CORP


28-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion may contain certain forward-looking statements that are subject to conditions that are beyond the control of the Company. Actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ include, but are not limited to, the Company's reliance on a small number of major clients; risks associated with the terms and pricing of our contracts; reliance on the telecommunications and direct marketing industries and the effect on the Company of the downturns, consolidation and changes in those industries in recent years; risks associated with the fluctuations in volumes from our clients; risks associated with upgrading, customizing, migrating or supporting existing technology; risks associated with competition; and other factors discussed in more detail in "Item 1A - Risk Factors" of this Annual Report on Form 10-K.


Overview

Innotrac, founded in 1984 and headquartered in Atlanta, Georgia, is an e-commerce provider integrating digital technology, order processing, fulfillment and customer support "contact" center services to support global brands of large corporations that outsource these functions. The Company employs sophisticated order processing and warehouse management technology and operates eight fulfillment centers and one call center in seven cities spanning all time zones across the continental United States.

Prior to 2000, the Company was primarily focused on the telecommunications industry, with over 90% of its revenues being derived through this vertical. Today, the Company primarily serves three lines of business, or industry verticals. This is a result of a significant effort made by the Company to diversify both its industry and client base over the past several years. We classify those industry verticals as i) eCommerce/Direct to Consumer, ii) Direct Marketing, and iii) Business to Business and telecommunications.

During 2012, the company's new business development accelerated with the addition of 10 new clients actively serviced during the year. We have expected launch dates in 2013 for serveral clients committed to using Innotrac, and we are actively pursuing other prospects. Additionally, some of our larger clients experienced an increase in volume in 2012 compared to 2011 and have indicated an expectation of continued volume growth in 2013.

Our business has a long selling cycle. As a result of this selling cycle, new customers who committed to use Innotrac in late 2012 and early 2013 project service to begin in the late 2nd and 3rd quarter of 2013. We experienced a growth of 25% in service revenues in 2012 compared to 2011.

Innotrac has more than twenty-seven years of experience as a provider of fulfillment services and recognizes the importance of maintaining sufficient capacity to support our clients' seasonal needs as well as allow us to grow with new clients. With no outstanding advances on our Credit Facility at December 31, 2012, we have the liquidity to increase our capacity as needed and to continue to invest in our business development activities in 2013.

Macro-Economic Factors

During 2012, the United States economy stabilized and grew slightly following a three year negative cycle. eCommerce activity increased at a greater rate than the general economy and is expected to continue to grow in 2013, providing the potential opportunity for growth in our core business in the coming year.

We are continuing to monitor the economic trends and business experience of our customers and closely manage our operating costs which vary with volume. Additionally, we believe our mix of multiple customer industries provides some protection from the impact of the downturn as the economy recovers. However, as discussed in Item 1A "Risk Factors" of this Annual Report on Form 10-K our results can be negatively affected depending on the severity or concentration by industry of a renewed downturn.

Business Mix

The following table sets forth the percentage of revenues generated by the
Company's various business lines during 2012 and 2011:

                  Business Line/Vertical (1)     2012        2011
                  eCommerce/Direct to Consumer      76.6 %      67.2 %
                  Direct Marketing                  13.7        18.1
                  B2B & Telecommunications           9.7        14.7
                                                   100.0 %     100.0 %

(1) The above table is compiled by presenting the total of any individual client in a single Business Line/Vertical consistently in the years 2012 and 2011 based on the predominant category of the client's revenues for the year ended 2012.


eCommerce/Direct-to-Consumer and Direct Marketing. The Company provides a variety of services for a significant number of eCommerce, retail, and direct marketing clients which include such companies as Target.com, a division of Target Corporation, Ann Taylor Retail, Inc., Microsoft, Inc., Beachbody, LLC and Thane International. Our revenues are a result of the number of orders and customer service calls received. Our client contracts generally do not guarantee volumes. The percentage of our revenues attributable to our eCommerce and retail clients increased during 2012 as compared to 2011 as a result of the growth in their reported revenue during the same period having increased greater than our other client categories. We expect this trend to continue as we anticipate more opportunities for new business in this line and expect a higher level of organic growth than our other consumer categories.

Business to Business (B2B) and Telecomunications. The Company also provides services including customer and distributor communication programs, retailer product rework/finishing services and supplier/retailer compliance reporting for business-to-business ("B2B") clients including NAPA, The Walt Disney Company, and Spanx. The Company has historically been a major provider of fulfillment and customer support services to the telecommunications industry. Consolidation in the industry at the product supply level and changes in the technology of delivery mediums used by the telecommunications industry since 2000 has resulted in a lesser concentration of our service revenues from this industry. Accordingly, we now present our service revenue by customer vertical information with B2B services and telecommunications as a single segment.

Results of Operations

The following tables set forth summary operating data, expressed as dollars and a percentage of revenues, for the years ended December 31, 2012 and 2011. Operating results for any period are not necessarily indicative of results for any future period.

The financial information provided below has been rounded in order to simplify its presentation. However, the percentages below are calculated using the detailed information contained in the Consolidated Financial Statements and notes thereto.

                                                    Thousands of Dollars
                                                   Year Ended December 31,
                                                    2012              2011
         Service revenues                       $      94,006       $  74,943
         Freight revenues                              13,688           9,741
           Total revenues                             107,694          84,684
         Cost of service revenues                      47,113          36,211
         Freight expense                               13,150           9,642
         Selling, general and administrative           39,966          36,802
         Depreciation and amortization                  3,699           3,380
           Operating income (loss)                      3,766          (1,381 )
         Other expense                                    291             189
           Income (loss) before taxes and
         noncontrolling interest in net loss            3,475          (1,540 )
         Income tax (provision) benefit                     -               -
         Noncontrolling interest in net loss                1               2
           Net income (loss) attributable to
         Innotrac                               $       3,476       $  (1,538 )


                                                 Percent of Total Revenues
                                                  Year Ended December 31,
                                                  2012               2011
       Service revenues                               87.3 %             88.5 %
       Freight revenues                               12.7               11.5
         Total revenues                              100.0              100.0
       Cost of service revenues                       43.8               42.7
       Freight expense                                12.2               11.4
       Selling, general and administrative            37.1               43.5
       Depreciation and amortization                   3.4                4.0
         Operating income (loss)                       3.5               (1.6 )
       Other expense                                   0.3                0.2
         Income (loss) before taxes and
       noncontrolling interest in net loss             3.2               (1.8 )
       Income tax (provision) benefit                    -                  -
       Noncontrolling interest in net loss               -                  -
         Net income (loss) attributable to
       Innotrac                                        3.2 %             (1.8 )%

Service revenues. The Company's service revenues increased 25.4% to $94.0 million for the year ended December 31, 2012 from $74.9 million for the year ended December 31, 2011. The $19.1 million increase in service revenues is primarily attributable to:
(i) a $21.0 million increase in our eCommerce vertical primarily due to the addition of several new clients and increased volumes from existing clients,

(ii) a $200,000 increase in revenues from our direct marketing vertical due to the addition of a new clients, offset by

(iii) a $2.1 million decrease in revenues from our B2B and telecommunications clients due to a decrease in volumes.

Freight Revenues. The Company's freight revenues increased $3.9 million or 40.5% to $13.7 million for the year ended December 31, 2012 from $9.7 million for the year ended December 31, 2011. The increase in freight revenues is primarily attributable to the addition of new eCommerce clients. Changes between reporting periods in freight revenue do not have a material impact on our operating profitability due to pricing practices for direct freight costs.

Cost of Service Revenues. The Company's cost of service revenues, which include labor costs for the fulfillment and contact centers, telephone minute fees and packaging material costs, increased $10.9 million or 30.1% to $47.1 million for the year ended December 31, 2012 compared to $36.2 million for the year ended December 31, 2011. Cost of service revenues as a percent of service revenues increased to 50.1% from 48.3% for the years ended December 31, 2012 and 2011, respectively. The $10.9 million increase in cost of service revenues was primarily due to the combined effect of a change in the mix of revenues by client and new customer activity using a higher percentage of temporary labor.

Freight Expense. The Company's freight expense increased $3.5 million or 36.4% to $13.2 million for the year ended December 31, 2012 compared to $9.6 million for the year ended December 31, 2011 due to the increase in corresponding freight revenue as discussed above.

Selling, General and Administrative Expenses. S, G & A expenses, which include facility and equipment costs, sales and marketing expenses, account services and information technology costs, management salaries and legal and accounting fees, increased $3.2 million or 8.6% to $40.0 million or 37.1% of revenues for the year ended December 31, 2012 compared to $36.8 million or 43.5 % of revenues for the year ended December 31, 2011. The $3.2 million increase in expenses in 2012 as compared to 2011 was primarily attributable to a i) a $1.1 million increase in facility and facility management costs due to the addition of a new facility in Ohio and facility management to support several new clients; ii.) a $379,000 increase in information technology costs due to costs related to new client implementations; and iii) a net increase in all other SG&A costs of $1.7 million which includes increased sales commissions related to new clients and adjustments to the Company's worker's compensation claims reserve. SG&A expenses as a percentage of total revenue decreased due to the growth in service revenue outpacing the increases in supporting SG&A expenses.


Depreciation and Amortization Expenses. Depreciation and amortization expense increased to $3.7 million for the year ended December 31, 2012 from $3.4 million for the year ended December 31, 2011. The increase in depreciation was due to $3.3 million expenditures supporting the opening of our Groveport, Ohio facility in May 2012 and $2.0 million in other asset additions across all facilities.

Income Taxes. The Company's effective tax rate for the years ended 2012 and 2011 was 0%. A valuation allowance continues to be recorded against the Company's net deferred tax assets as historical losses have created uncertainty about the realization of tax benefits in future years. Income taxes associated with the income in the year ended December 31, 2012 and the loss from the year ended December 31, 2011 were offset by a corresponding decrease or increase respectively of the valuation allowance resulting in an effective tax rate of 0% for the years ended December 31, 2012 and December 31, 2011. The existence of a net operating loss carryforward at December 31, 2012 means that income taxes associated with any potential taxable earnings for the year ended December 31, 2013 will be offset by a corresponding decrease of this valuation allowance, resulting in an expected effective tax rate of 0% for the year ended December 31, 2013 as well.

Liquidity and Capital Resources

Liquidity. The Company funds its operations and capital expenditures primarily through cash flow from operations and borrowings under a revolving credit facility (the "Credit Facility") with Wells Fargo Bank, N.A. (the "Bank").

The Company had cash and cash equivalents of approximately $4.0 million at December 31, 2012 and $3.3 million at December 31, 2011. Additionally, at both December 31, 2012 and 2011, the Company had no borrowings under its Credit Facility.

During the year ended December 31, 2012, the Company generated $4.9 million in cash flow from operating activities compared to generating $5.7 million cash from operating activities in the year ended December 31, 2011. The $881,000 decrease was primarily the result of the net change in all operating assets and liabilities using $2.5 million of cash for the year ended December 31, 2012 compared to providing $3.8 million during the same period in 2011, offset by the Company generating a net income of $3.5 million for the year ended December 31, 2012 compared to generating a net loss of $1.5 million in the same period in 2011. The $6.3 million decrease in cash provided by operating assets and liabilities for the year ended December 31, 2012 compared to 2011 resulted mainly from the combined effect of i) $4.5 million decrease in cash provided by accounts receivable for the year ended December 31, 2012 compared to the same period in 2011 due to higher growth in revenue during 2012 compared to revenue growth in 2011, ii) $2.9 million greater decreases in inventory occurring in 2011 than in 2012 as a result of the end of an inventory buyback program in 2011 for a single client discussed below, and iii.) $710,000 greater decrease in long-term liabilities related to the impact of straight lining rent expense for our facilities and prepaid maintenance items, offset by a $2.0 million decrease in cash used in accounts payable and accrued expenses in 2012 compared to 2011. The $2.0 million decrease in cash used for accounts payable and accrued expenses was primarily due to an overall increase in vendor payables balance outstanding as of December 31, 2012 due to an increase in temporary employees and amounts due other suppliers to support the increased volume in 2012.

We purchase inventory for two customers under contract terms that provide that the risk of inventory obsolescence remain with our customers. During 2010, one such customer discontinued a specific business program and liquidated the inventory supporting that program. This resulted in the customer repurchasing inventory from the Company at cost. Upon buyback, there was no resulting revenue recorded in our operating results, consistent with past reporting by the Company. In the last week of March 2011, we shipped $2.9 million of inventory under normal payment terms and in mid May 2011, the resulting accounts receivable was collected from the customer.


During the year ended December 31, 2012, net cash used in investing activities consisted mainly of capital expenditures of $5.3 million in 2012 compared to $2.4 million in 2011. The $5.3 million of investing activities for year ended December 31, 2012 includes i) $3.3 million of purchased equipment for the build out of our new fulfillment center in Groveport, Ohio and ii) $2.0 million for all other capital expenditures. The $2.4 million of investing activities for the year ended December 31, 2011 consisted mainly of capital expenditures for all facilities which is comparable to the $2.0 million spent in 2012 for capital expenditures excluding the Groveport facility. As of December 31, 2012, the initial build out of the Groveport, Ohio facility was materially completed with the build out of the remaining 200,000 square feet of space planned for 2013 as new business needs dictate.

As of December 31, 2012 and December 31, 2011, there were no net borrowings under the line of credit and $1.6 million advanced under the Equipment Loan at December 31, 2012. The average daily borrowings outstanding on the Credit Facility for the year ended December 31, 2012 and 2011 were $278,000 and $304,000, respectively. The maximum borrowings outstanding on the Credit Facility for any one day during the year ended December 31, 2012 and 2011 were $2.4 million and $2.3 million, respectively. During the year ended December 31, 2012 and 2011, the Company repaid $429,000 and $314,000 of principal outstanding on capital leases respectively. Additionally, during the year ended December 31, 2012 and 2011, the Company incurred $37,000 and $34,000 of loan commitment fees as a result of the Third and Second Amendments to the Credit Agreement respectively. In addition, during the year ended December 31, 2011, the Company received $17,000 from PVS related to their noncontrolling interest in Innotrac Europe.

The Company generated positive cash flows from operations in 2012 and 2011. During the year ended December 31, 2012, the Company required advances followed by repayment of those advances from its Credit Facility with the Bank resulting in no amount outstanding on the Credit Facility by year end 2012 and 2011. We experienced 25% growth in service revenues in 2012 compared to 2011 and expect continued growth in service revenues in 2013. This past and anticipated growth will require us to increase our fulfillment capacity in 2013 by continuing to add equipment in the new Groveport facility and other capacity improvements in various facilities to meet our customer's volume projections. It is estimated that $2.5 million in capital purchases will be added during 2013 to support this growth.

The Company estimates that its cash and financing needs through 2013 will be met by its available cash at December 31, 2012, cash flows from operations, capital lease financing and availability from its Credit Facility.

Credit Facilities. On March 27, 2009, the Company entered into the Fourth Amended and Restated Loan and Security Agreement (the "Credit Facility") with the Bank, which was subsequently amended several times. The term of the Credit Facility has been extended through June 30, 2013 and the Bank maintains a security interest in all of the Company's assets.

The Credit Facility had a maximum borrowing limit of $15.0 million at both December 31, 2012 and 2011(including the issuance of letters of credit up to $2.0 million in face value), but limits borrowings to a specified percentage of eligible accounts receivable and inventory. The Credit Facility is used to fund the Company's capital expenditures, operational working capital and seasonal working capital needs. Although total advances under the Credit Facility cannot exceed the maximum borrowing limit of $15.0 million, the Credit Facility limits borrowings at any time to a specified percentage of eligible accounts receivable and inventory, together "Eligible Collateral", which totaled $17.8 million at December 31, 2012. 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 facility limit or the value of the total collateral to arrive at an amount of unused availability to borrow under the line of credit. The total collateral under the Credit Facility at December 31, 2012 amounted to $17.8 million, however borrowings were limited to the maximum borrowing limit of $15.0 million. There were no borrowings outstanding under the Credit Facility at December 31, 2012 and the total value of reserves and letters of credit outstanding at that date totaled $2.8 million. As a result, the Company had $12.2 million of borrowing availability under the revolving credit line at December 31, 2012.

On March 29, 2012, the Company entered into the Third Amendment to the Credit Facility which increased the Capital Expenditure limit for 2012 to $6.0 million and provided for a $1.8 million Equipment Loan (the Equipment Loan) to partially fund the purchase of equipment for the Groveport, Ohio facility. Advances under the Equipment Loan have a five year repayment term through 60 equal $30,000 monthly payments which began on July 1, 2012. Advances under the Equipment Loan are collateralized by specifically identified fulfillment equipment as valued by an independent appraiser which is reduced by an amount equal to the monthly repayment of the Equipment.


The Company has granted a security interest in all of its assets to the lender as collateral under the Credit Facility. The provisions of the Credit Facility require that the Company maintain a lockbox arrangement with the lender, and allows the lender to declare any outstanding borrowing amounts to be immediately due and payable as a result of noncompliance with any of the covenants. Accordingly, in the event of noncompliance, these amounts could be accelerated. The Company was in compliance with all terms of the Credit Facility at December 31, 2012 and March 30, 2013.

For the year ended December 31, 2012, we incurred interest expense of $7,000 on the Credit Facility at a weighted average interest rate of 3.33%. For the year ended December 31, 2011, we paid interest expense of $7,000 on the Credit Facility at a weighted average interest rate of 3.17%. At December 31, 2012, the rate of interest being charged on the Credit Facility was 3.21%. The average daily borrowings outstanding on the Credit Facility for the years ended December 31, 2012 and 2011 were $218,000 and $228,000, respectively. The maximum borrowing outstanding on the Credit Facility for any one day during the years ended December 31, 2012 and 2011 were $2.4 million and $2.3 million, respectively. The Company also incurred unused revolving Credit Facility fees of approximately $97,000 and $92,000 for the years ended December 31, 2012 and 2011, respectively.

Interest on borrowings pursuant to the Credit Facility is payable monthly at specified rates ranging from either the Base Rate (as defined in the Credit Facility) plus between 2.00% and 2.50%, or, at the Company's option, 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 will pay a specified fee 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 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, change in ownership control covenants, a subjective material adverse change covenant and financial covenants. The Credit Facility includes such events of default (and, as appropriate, grace periods) and representations and warranties as are usual and customary for financings of this kind. The Company paid a customary closing fee upon the closing of the Credit Facility and would pay a specified fee upon any early termination of the Credit Facility, which fees are customary for transactions of this type.

As a result of the First, Second and Third Amendments, the significant covenants and terms of the Credit Facility are presented below for the periods identified:

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

a. in the event the current Chief Financial Officer of the Company no longer holds that position, the Company is provided with 150 days to fill that position;

b. the definition of collateral is amended to restrict amounts included as accounts receivable for the sale of product to $4.0 million as a sub limit under the unchanged maximum borrowing limit of $15.0 million; and

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

a. the term of the Credit Facility was extended twelve months to June 30, 2013 from the original termination date of June 30, 2012;

b. the fixed charge ratio defined in the First Amendment to the Credit Facility for the monthly periods following April 1, 2011 were i) waived through June 30, 2012, ii) replaced with maximum monthly and cumulative loss limits through March 31, 2012, and iii) the Bank made a commitment to develop in March 2012 specific financial covenants for the period of April 2012 through June 2013 that will be based on the financial projections of the Company; and


c. the unused line fee charged by the Bank was increased from one-half of one percent, or 0.5%, to three quarters of one percent, or 0.75%, per annum of the amount by which the $15.0 million Credit Facility limit exceeds the total of loaned advances outstanding plus letters of credit outstanding calculated on a daily basis.

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

a. the Credit Facility will provide for a $1.8 million 5 year term loan to be funded in the second quarter of 2012 (the "Term Loan") proceeds of which would be used to partially pay for the equipment expansion in the Company's new Groveport, Ohio facility. The Term Loan will be included under the Credit . . .

  Add INOC to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for INOC - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.