Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. INNOTRAC CORP (1051114) 10-Q published on Nov 14, 2013 at 4:08 pm
Reporting Period: Sep 29, 2013
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.
Management assesses the ability to realize the benefit of deferred tax assets and records a valuation allowance if it is more likely than not that all or a portion of the deferred tax assets will not be realized. We consider the probability of future taxable income and our historical profitability, among other factors, in assessing the amount of the valuation allowance. We recorded a valuation allowance against the Company’s net deferred tax assets as of December 31, 2012, 2011 and 2010 because operating losses at the time created uncertainty about the realization of deferred tax assets in future years. During the period ended September 30, 2013, we released $17.2 million of our valuation allowance related to our deferred tax assets. These deferred tax assets relate primarily to net operating loss carryforwards, which we determined it is more likely than not we will be able to utilize due to the expected generation of sufficient taxable income in the future. All of the $17.2 million valuation allowance release was recorded as an income tax benefit in the Condensed Consolidated Statements of Operations. As a result, the Company’s effective tax rate for the three and nine months ended September 30, 2013 was ($1,350.9%) and (520.8%), respectively. The valuation allowance remaining at September 30, 2013 is $1.9 million, which primarily relates to a reserve against state and local taxes, where there is sufficient uncertainty as to whether we will be able to utilize this deferred tax asset in the future to necessitate maintaining an allowance.
The Company leases a single engine aircraft from a related party company owned by the Chairman/CEO. The Company paid approximately $53,000 and $58,000 related to this lease for the three months ended September 30, 2013 and 2012, respectively. The Company paid approximately $162,000 and $166,000 related to this lease for the nine months ended September 30, 2013 and 2012, respectively. The Company incurred expenses of $367,000 related to improvements to the aircraft in 2012 and will depreciate this amount over the life of the lease. In August 2012, the Company and the Chairman/CEO entered into a new ten-year lease with respect to the aircraft, under the terms of which i) should the airplane not be made available for use as required by the Company, the Chief Executive Officer will reimburse the Company for the undepreciated portion of certain improvements made in August, 2012, and ii) if the Company should cancel the lease of the aircraft before its contract term ending in August 2022, the Company would not require the Chief Executive Officer to reimburse the Company for the undepreciated portion of the improvements. As of September 30, 2013 the undepreciated portion of these improvements amounted to $327,000.
The Company’s freight expense decreased 8.6% to $3.2 million for the three months ended September 30, 2013 compared to $3.5 million for the three months ended September 30, 2012 in line with the corresponding decrease in freight revenue. The Company’s freight expense increased 17.4% to $10.1 million for the nine months ended September 30, 2013 compared to $8.6 million for the nine months ended September 30, 2012 in line with the corresponding increase in freight revenue as described above. The gross margin on freight for the three months ended September 30, 2013 was lower because of a customer deciding to purchase freight direct rather than through Innotrac, resulting in a change in the mix of freight margin which varies by carrier type. The gross margin on freight revenue was consistent for the nine months ended September 30, 2013.
We recorded a valuation allowance against the Company’s net deferred tax assets as of December 31, 2012, 2011 and 2010 because operating losses at that time created uncertainty about the realization of deferred tax assets in future years. During the three months ended September 30, 2013, the Company released $17.2 million of the valuation allowance recorded in prior periods because it was determined that it is more likely than not that the tax benefits would be utilized by the generation of taxable income in the future. The Company’s effective tax rate for the three and nine months ended September 30, 2012 was 0% as a result of a valuation allowance recorded against the Company’s net deferred tax assets. During the three and nine months ended September 30, 2013, the Company recorded $24,000 and $54,000 in tax expenses related to alternative minimum tax liability, respectively.