UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.20549
FORM 10 - K
(Mark One)
| x | | Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended July 31, 2013.
or
| ¨ | | Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number 0-18275
ITEX CORPORATION
(Name of small business issuer in its charter)
| Nevada | | 93-0922994 |
(State or other jurisdiction of
incorporation or organization) | | (IRS Employer
Identification No.) |
| 3326 160th Avenue SE, Suite 100, Bellevue, WA 98008-6418 |
(Address of principal executive offices)
(Issuer’s telephone number including area code)
| Securities registered under Section 12 (b) of the Exchange Act | None |
| | |
| Securities registered pursuant to Section 12 (g) of the Exchange Act | Common Stock $0.01 par value |
| Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act | Yes ¨ No þ |
| Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act | Yes ¨ No þ |
| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | Yes þ No ¨ |
| Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). | Yesþ No¨ |
| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K | Yes þ No ¨ |
| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. | |
Large accelerated filer¨ Non-accelerated filer ¨ | Accelerated filer ¨ Smaller Reporting Company þ |
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Yes ¨ No þ |
The aggregate market value of the common stock held by non-affiliates of the Company as of January 31, 2013 was approximately $6,700,421 based upon 1,942,151 shares held by such persons and the closing bid price of $3.45 as reported by the OTC Markets (“OTCQB”). Shares of common stock held by each officer and director and by each person who owns 10.0% or more of the outstanding common stock have been excluded because these people may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.
As of September 30, 2013, we had 2,903,373 shares of common stock outstanding (including unvested restricted stock).
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive Proxy Statement to be furnished to stockholders in connection with our annual meeting of stockholders to be held on December 13, 2013 are incorporated by reference into Part III.
ITEX CORPORATION
FORM 10-K
For The Fiscal Year Ended July 31, 2013
INDEX
| | | | Page |
| PART I | | | |
| ITEM 1. | | Business | 1 |
| ITEM 1A. | | Risk Factors | 9 |
| ITEM 2. | | Properties | 17 |
| ITEM 3. | | Legal Proceedings | 17 |
| ITEM 4. | | Mine Safety Disclosures | 17 |
| | | | |
| PART II | | | |
| ITEM 5. | | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 17 |
| ITEM 7. | | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 18 |
| ITEM 8. | | Financial Statements and Supplementary Data | 37 |
| ITEM 9. | | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure | 64 |
| ITEM 9A. | | Controls and Procedures | 64 |
| ITEM 9B. | | Other Information | 65 |
| | | | |
| PART III | | | |
| ITEM 10. | | Directors, Executive Officers and Corporate Governance | 65 |
| ITEM 11. | | Executive Compensation | 66 |
| ITEM 12. | | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 66 |
| ITEM 13. | | Certain Relationships and Related Transactions, and Director Independence | 66 |
| ITEM 14. | | Principal Accountant Fees and Services | 66 |
| | | | |
| PART IV | | | |
| ITEM 15. | | Exhibits and Financial Statement Schedules | 66 |
| | | | |
| | | Signatures | 68 |
PART I
Special Note Regarding Forward-Looking Statements
In addition to current and historical information, this Annual Report on Form 10-K contains forward-looking statements. These statements relate to our future operations, prospects, potential products, services, developments, business strategies or our future financial performance. Forward-looking statementsreflect our expectations and assumptions only as of the date of this report and are subject to risks and uncertainties. Actual events or results may differ materially. We have included a discussion of certain risks and uncertainties that could cause actual results and events to differ materially from our forward-looking statements in the sectionentitled“Risk Factors” (refer to Part I Item 1A). We undertake no obligation to update or revise publicly any forward-looking statement after the date of this report, whether as a result of new information, future events or otherwise.
Overview
ITEX, The Membership Trading CommunitySM, is a leading marketplace for cashless business transactions across North America (“the Marketplace”). We service our member businesses through our independent licensed brokers and franchise network, (individually, “broker” and together, the “Broker Network”) in the United States and Canada, as well as through any corporate-owned offices we may operate from time to time. Ourbusiness services and payment systems enable member businesses (our “members”) to trade products and services without exchanging cash. Theseproducts and services are instead exchanged for ITEX dollars which can only be redeemed in the Marketplace (“ITEX dollars”). We administer the Marketplace and act as a third-party record-keeper for our members’ transactions. We generate revenue by charging members percentage-based transaction fees, association fees, and other fees assessed in United States dollars and Canadian dollars where applicable (collectively and as reported on our financial statements, “USD” or “Cash”).
We maintain our executive offices at 3326 160th Avenue SE, Suite 100, Bellevue, Washington 98008-6418. Our telephone number is 425-463-4000. We routinely post important information on our website under the Investor Relations section of our website. Our website address iswww.itex.com. There we also make available, free of charge, our SEC reports including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after we file such material electronically with, or furnish it to, the SEC. These reports are also available from the SEC website at www.sec.gov. The information found on our website is not part of this or any other report we file with or furnish to the SEC.
Marketplace Transactions
The Marketplace provides a forum for our members to purchase from and sell their products and services to other members using “ITEX dollars” instead of USD. An ITEX dollar is an accounting unit used to record the value of transactions as determined by the members in the Marketplace. ITEX dollars are not intended to constitute legal tender, securities, or commodities and have no readily determinable correlation to USD. ITEX dollars may only be used in the manner and for the purpose set forth in our Member Agreement and the rules of the Marketplace. As described below, we issue, on a case by case basis, ITEX dollar credit lines to certain members. Members with positive ITEX dollar account balances or those within their ITEX dollar credit line may use available ITEX dollars to purchase products or services from other members and may sell their products or services to other members. Those members with negative ITEX dollar account balances are obligated to sell their products or services to other Marketplace members in order to offset their negative account balance.
We assist members in marketing their products and services through our Broker Network, newsletters, e-mail, on our website at www.itex.com and through other promotional means. Transactions are generally conducted by members directly but can be facilitated by our brokers.
Businesses use our Marketplace to attract new customers, increase sales and market share, and to utilize unproductive assets, surplus inventory, or excess capacity. The Marketplace is especially useful to businesses where the variable costs of products or services are low, such as hospitality, media, and service related businesses. For example, a hotel that has not filled its rooms by the end of the day has lost potential revenue but still has nearly the same overhead associated with owning and maintaining its facility. Selling these unused rooms for ITEX dollars is beneficial for both the traveler (buyer) and the hotel (seller). The traveler receives a hotel room without spending cash and the hotel fills an empty room, with the ability to use the ITEX dollars earned to purchase other products or services in the Marketplace.
In order to facilitate transactions, we may grant ITEX dollar credit lines to certain members. When considering an ITEX dollar credit line, we assess the financial stability of the member and the demand by others for the member’s product or service. Members without a line of credit may only use their ITEX dollars received from selling their product or service to purchase other products or services in the Marketplace.
For tax purposes, the Internal Revenue Service (“IRS”) considers ITEX dollar sales to be equivalent to USD sales and ITEX dollar expenses to be equivalent to USD expenses. ITEX is obliged under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) to annually send Forms 1099-B to each of our members and to the IRS, which we do electronically. The Form 1099-B reflects the member’s total ITEX dollar sales for the calendar year less the amount of any returns. The IRS requires Form 1099-B recipients to report their ITEX dollars received (sales) as gross income on their tax returns. Expenditures of ITEX dollars may be reported as deductions in tax returns if they qualify as a deductible business expense or as other deductions that are permitted by the Internal Revenue Code.
Broker Network
Brokers are independent contractors with respect to the Company. Combined, our corporate staff, brokers and their staff, and outside contractors total approximately 320 individuals who support the Marketplace. Because we depend on a high rate of repeat business, the quality of broker interactions with members is an important element of our business strategy. We develop strong, cooperative relationships with our Broker Network by providing training, marketing materials and programs, internet and computer-related support, incentive programs, and investments in customer relationship management technology.
Our brokers provide Marketplace members with information about products and services that are available locally, nationally and in Canada. Brokers are responsible for enrolling new members, training them in Marketplace policies and procedures, facilitating their transactions and assuring payment in USD of transaction fees, association fees and other fees to us. In turn, brokers receive a commission in USD for a percentage of revenue collected from the members serviced by those brokers.
Our franchise agreements and independent licensed broker contracts generally provide for a five-year term unless terminated for reasons defined in the agreement. These agreements provide for subsequent five-year renewal terms as long as the franchisee or broker is not in breach of the agreement and are in compliance with our performance requirements, policies, and procedures then in place.
We offer the sale of ITEX franchises to qualified individuals under our most current franchise agreement which we periodically amend as current events and circumstances deem necessary. Through our franchisees, we distribute our services by licensing our business ideas and concepts while retaining legal ownership of those concepts and ideas, including our name, logos, trademarks and member relationships. Our franchise agreement grants a limited license and right to use and operate a recognizable ITEX outlet to the franchisee by utilizing our business system, technology and proprietary marks. The franchise agreement allows us to oversee the obligations and responsibilities of the franchisee. Under federal and state franchise and business opportunity laws, franchisees are entitled to additional protections including the provision that many of the substantive aspects of the business relationship (e.g., termination, transfer, cancellation, and non-renewal) will be governed by state law. See “Government Regulation.”
Sources of Revenue
For each calendar year, we divide our operations into 13 four-week billing and commission cycles always ending on a Thursday (“operating cycle”). For financial statement purposes, our fiscal year is from August 1 to July 31 (“year”, “2013” for August 1, 2012 to July 31, 2013, “2012” for August 1, 2011 to July 31, 2012). We report our results as of the last day of each calendar month (“accounting cycle”).
Our main sources of revenue are transaction and association fees. We typically charge both the buyer and the seller a transaction fee based on the ITEX dollar value of that Marketplace transaction. We also charge members of the Marketplace an association fee every operating cycle in accordance with our members’ individual agreements. Additionally, we may charge various auxiliary fees to members, such as annual membership dues, late fees, insufficient fund fees and other fees. The fees we charge members are in USD and partially in ITEX dollars. We bill members for all fees at the end of each operating cycle. We track all financial activity in our internally developed database. Members have the option of paying USD fees automatically by credit card, by electronic funds transfer or by check. In both of the years ended July 31, 2013 and 2012, members made approximately 93% of their payments through electronic funds transfer or by credit cards. Members that pay through our Autopay System will generally be charged a USD transaction fee equal to 6.0% of the ITEX dollar amount of the member’s purchases and sales during the operating cycle. If paying by check, generally, the USD transaction fee is 7.5% of the ITEX dollar amount of that member’s purchases and sales during the operating cycle. Additionally, regardless of a member’s transaction activity, each operating cycle we charge most members an association fee of $20 USD ($260 USD annually) and $10 ITEX dollars ($130 ITEX dollars annually). Transaction and association fees composed 97% and 98% of our total revenue in 2013 and 2012, respectively.
We prepare our financial statements on an accrual basis in accordance with United States Generally Accepted Accounting Principles (GAAP). Refer toNote 1 ― “Summary of Significant Accounting Policies” included in the “Notes to Consolidated Financial Statements”, Item 8 – Financial Statements for a description of our accounting policies. As discussed in our critical accounting policies, we recognize at fair value of the goods or services received when those goods or services have readily determinable fair values. We recognize ITEX dollars as required by the IRS for income tax reporting purposes. We account for ITEX dollar transactions and USD fee assessments in statements to members and brokers. The majority of the ITEX dollars we earn are distributed back to the Broker Network as revenue share and sales incentives. Additionally, we use ITEX dollars we earn to fund the ITEX co-op advertising program utilized by both members and brokers. We utilize less than 5% of ITEX dollars earned for ITEX operating expenses.
Business Strategy
Our goal is to expand our market share of the cashless transaction industry, principally in North America. We believe we can successfully increase the number of members participating in our Marketplace and our revenues if we provide members:
| o | An efficient method to execute and track transactions in the Marketplace.We have internally developed a comprehensive, customer relationship management and payment processing software called Trade Exchange Account Manager “TEAM.” This web-based software solution provides members, brokers and our management team with enhanced information systems and marketing tools. We continue to upgrade and enhance our multi-channel payment system in order to provide efficient internet access to ITEX members and our Broker Network. |
| o | A community where members can interact and safely transact business with other members. Our website has a casual, community approach conveying to members the variety of businesses that comprise the Marketplace and the benefits that come with their participation. Our Broker Network and corporate staff monitor Marketplace transactions to ensure a fair and equitable environment for our members. Members may sell in the Marketplace only those products and services they have the legal right to sell. Our Marketplace Rules seek to enable and facilitate fair transactions among and between members by fostering a system of good business practices. |
| o | More coverage by increasing the size and effectiveness of our Broker Network.We seek to attract new franchisees in order to increase the trade regions covered by the Marketplace. A portion of our website atwww.itex.comprovides information about our franchise program, in which we identify target markets, provide detail about our company and business model, and allow potential franchisees to calculate sample financial forecasts. |
| o | Excellent customer service by the Broker Network and our corporate office.In furtherance of our objective of servicing members, we provide training and support for brokers and refine our franchisee and broker operating manuals and related support materials on a continual basis. Additionally, we hold a national convention and regional meetings each year in which we discuss and openly share solutions for current issues and plan for future enhancements and benefits to our Marketplace. |
| o | A strong social media presence.We seek to leverage the power of social media to create and enhance relationships with and for our members, facilitate transactions, as well as to attract new members to our Marketplace. We are on several of the leading social media websites, including Facebook, YouTube, LinkedIn, Google+ and Twitter. |
Members
The Marketplace has approximately 23,000 members in the United States and Canada. The majority of members are businesses with fewer than 10 employees. Members may choose to participate in the Marketplace for a number of reasons including to:
| · | Increase sales and market share |
| · | Add new channels of distribution |
| · | Utilize unproductive assets, surplus inventory or excess capacity |
Members earn ITEX dollars which they have the opportunity to spend on products and services offered by other ITEX members. The following is an illustrative example of how the Marketplace can be utilized:
A dentist earns ITEX dollars by providing dental work to four new customers, the owner of a vacation resort, a restaurant owner, a landscaper and a plumber, all members of the Marketplace. These other members originally acquired ITEX dollars by providing products or services to other Marketplace members.
The dentist decides to remodel her office. Through the Marketplace, she hires a contractor who agrees to perform the remodeling work for $3,000 ITEX dollars. Upon completion of the job, the dentist authorizes the deduction of $3,000 ITEX dollars from her ITEX account, payable to the contractor’s ITEX account.
Sales, Marketing and Transactions
The primary function of new member enrollment is to grow the Marketplace member base, increase transactional opportunities and generate additional revenue. We provide standardized marketing and support materials, advertising, ongoing training, and promotion to assist our Broker Network in expanding the member base. Our brokers contact prospective members to market the benefits of joining the Marketplace. In addition, brokers obtain new members by attending various meetings and networking events in their areas and through the referrals of existing Marketplace members. We offer a Member Referral Program that provides discounted association fees to existing members that refer new qualified members to the Marketplace, and are using social media channels to encourage referrals.
Our marketing strategy is to promote our Membership Trading Community and attract new members to the Marketplace while instructing them how to effectively use the Marketplace to grow their business. Our marketing efforts include a program of support and education for our members and brokers in addition to continual upgrades and features of our website,www.itex.com. Tools for brokers to customize and use in their sales efforts include pre-designed advertisements, brochures and sales presentations to give ITEX a consistent look and message. To promote the Marketplace and the ITEX brand, we market products and services of existing members through our website, directories, newsletters, e-mail, and other means. In addition, we utilize national and web-based advertising campaigns.
Our brokers focus on generating transaction volume. Brokers facilitate transactions between members by identifying their needs and making them aware of products and services available in the Marketplace that could fulfill those needs. Brokers actively market products and services available to and from the members they service on our website and pursue potential member businesses to offer more transactional opportunities. Members can also log onto our website and initiate product or service listings on the Marketplace or search for products or services to purchase. Reoccurring transactions often develop between Marketplace members, generating transaction fees with less interaction by brokers.
Systems and Technologies
The Marketplace is handled by TEAM, our internally developed, proprietary, online system that is based on Microsoft® technologies. We designed TEAM to facilitate the activities of all parties involved in the Marketplace, from our corporate management and accounting personnel to brokers and members. The system extends well beyond record keeping and transaction processing. The major features of the system are as follows:
| · | Account Information Manager (“AIM”) Online - provides our brokers and corporate staff with customer relationship management features including notes, transaction histories, calendaring and scheduling capabilities as well as Marketplace management features. |
| · | Marketplace - an online classified ad section where members can list products and services they are offering for ITEX dollars as well as locate products and services they are seeking to purchase with ITEX dollars. |
| · | Member Directory - a categorized listing of ITEX members that allows members to advertise their business. |
| | | |
| · | Reporting – brokers, corporate management and accounting personnel are provided with a number of reports allowing for a comprehensive analysis of various aspects of the Marketplace. |
We take a number of measures to ensure the security of our hardware and software systems and member information. We continue to enhance our systems for data management and protection, intrusion detection and prevention, upgrade our network architecture, and to expand our disaster recovery processing capacity. Our technologies are co-hosted in Washington and Idaho and we perform back-ups daily. We continue to improve the speed and reliability of our information systems and transaction tools for all of TEAM’s users by continually updating hardware and enhancing our software with new, internally developed programs and functionalities.
Industry Overview
Our industry was developed approximately 50 years ago when various trade exchanges (“Exchanges”) established a non USD-based index of valuation for credits and debits called “trade dollars.” For us, the index of valuation is the ITEX dollar and our trade exchange is our Marketplace, consisting of approximately 23,000 members served by our 90 locations. In 2011 we conducted an informal market analysis to determine the size of our industry, contacting hundreds of Exchanges across the United States. Based on our information, we estimate the industry size to consist of approximately 300 exchange locations servicing 90,000 members, generating $680 million in gross merchandise value (GMV) transactions and $56 million in revenues.
Competition
We view our two primary competitors to be local Exchanges and internet distribution channels. We believe that we are the Exchange leader in the United States and Canada based on reported USD revenues, participating member businesses and regions served. Based on available industry information, we believe the next largest Exchange in the U.S. is International Monetary Systems, Ltd.
Internet distribution channel competitors include companies such as eBay, Travelocity, Priceline, Amazon and Overstock. Similar to our Marketplace, these companies provide distribution channels to move excess or surplus inventory. The greater the number of avenues to move excess inventory, the more competitive it is to attract businesses to trade their inventory in our Marketplace. We also compete with these companies with respect to price, ease of use and brand name awareness.
We compete primarily on a service basis, the number of products and services available in the Marketplace and the liquidity of ITEX dollars. We expect to encounter competition in our efforts to expand our Marketplace. In addition to existing Exchanges, new competitors could launch new Exchanges at a relatively low cost since technological and financial barriers to entry are relatively low. However, we believe participation from a significant number of members is necessary as a critical mass to offer a quality Exchange. We also know there is a steep learning curve to manage an Exchange as well as a potentially significant investment in software. Each member of our senior management team has a minimum of 20 years of industry experience and our two technology software engineers have each been with ITEX for more than 10 years. We believe significant ramp-up time would be required to make a competitive Exchange successful. Nevertheless, competitors could undertake this effort, including companies with longer operating histories, greater market presence and name recognition, larger customer bases and greater financial, technical and marketing resources than we have. Such companies could be strong competitors if they decided to develop a focused business effort in our industry.
In general, customer demands for wider availability of products and services, on-demand customer service, better computer servicing technology and the acceptance of the internet as a medium for communication and transacting business have resulted in a more competitive industry. We believe that in order to capture greater market share, local Exchanges will need to offer a wider selection of products and services, service a more diverse and dispersed member clientele and have greater access to growth capital and management expertise.
We believe we can remain in a good competitive position as long as we continue to maintain the quality of our services and our relationships with our Broker Network and our member base. Our ability to compete successfully will depend on our ability to continually enhance and improve our existing products and services, to adapt to current technologies, to offer products and services that meet the needs of our brokers, members and potential members, to successfully develop and market new products and services, and to continually improve our operating efficiencies. However, our competitors may develop competing technologies, products or strategic alliances and affiliations that make our brand, products and services less marketable or less useful or desirable. Furthermore, we may not be able to successfully enhance our products and services or develop new products or services to meet our members’ needs. Increased competition, legal challenges or other circumstances, could result in erosion of our market share and may require price reductions and increased spending on marketing and product development to remain competitive.
Government Regulation
Along with our brokers, we are subject to various federal, state and local laws, regulations and administrative practices affecting our businesses. These include the requirement to obtain business licenses, withhold taxes, remit matching contributions for our employees’ social security accounts, and other such legal requirements, regulations and administrative practices required of businesses in general. We are a third party record-keeper under the Tax Equity and Fiscal Responsibility Act (“TEFRA”) and we are required to account for and report annually to the IRS the total ITEX dollar sales transactions, net of any returns, of each member in our Marketplace.
Our brokers are independent contractors, and it is the legal responsibility of the businesses comprising our Broker Network to pay and withhold all applicable federal and state income taxes (including estimated taxes), Social Security, Medicare and all applicable federal and state self-employment taxes, and in general to comply with all applicable federal, state, and local laws, statutes, codes, rules, regulations and standards, including but not limited to the Americans with Disabilities Act. However, certain federal and state laws and regulations are implicated by virtue of our relationship with our Broker Network. For example, state regulators may seek to hold us responsible for unrecognized tax liabilities or the actions of, or failures to act by, our brokers or their employees. SeeItem 1A ─ Risk Factors ─We may be held responsible by members, third parties, regulators or courts for the actions of, or failures to act by, our brokers or their employees, which exposes us to possible adverse judgments, other liabilities and negative publicity. Furthermore, although we have prohibited the listing of illegal goods and services in the Marketplace and implemented other protective measures, we may be unable to prevent our members from selling unlawful or stolen goods or unlawful services, or selling goods or services in an unlawful manner. It is possible that government regulators and law enforcement officials could allege that our services aid and abet certain violations of certain laws. SeeItem 1A ─ Risk Factors ─Use of our services for illegal purposes could damage our reputation and harm our business.
We store personal and financial information for members of the Marketplace and our brokers. Federal and state law requires us to safeguard personal and financial information, including credit card information. SeeItem 1A ─ Risk Factors ─Failure to comply with laws and regulations that protect our members’ and brokers’ personal and financial information could result in liability and harm our reputation. In addition, under federal (Federal Trade Commission Act) and state franchise and business opportunity laws, franchisees are entitled to certain protections including mandatory disclosures and the provision that many of the substantive aspects of the business relationship (i.e., termination, transfer, cancellation, and non-renewal) will be governed by state law. An adverse finding in one or more of these business relationship aspects could govern the enforceability of our agreements or permit the recovery of damages and penalties which could have a material adverse effect on our financial condition.
With respect to our online technologies, there are currently relatively few laws or regulations directly applicable to access to, or commerce on, the internet other than those relating to data security. However, it is possible that a number of additional laws and regulations may be adopted with respect to the internet, covering issues such as taxes, user privacy, information security, pricing and characteristics and quality of products and services. We cannot predict the impact, if any, that future internet-related regulation or regulatory changes might have on our business.
Proprietary Rights
We rely on a combination of copyright and trademark laws, trade secrets, software security measures, franchise and license agreements and nondisclosure agreements to protect our proprietary technology and software products. We have registered service marks for the word mark ITEX®, as well as “ITEX” used in connection with our logo design, and have applications pending for a variety of other marks, including “The Membership Trading Community.” We may file additional service mark word and design applications for ITEX. We seek to police the use of our marks and to oppose any infringement. We have registered the internet domain name “ITEX.com” and other related domain names.
We cannot be certain that others will not develop substantially equivalent or superseding proprietary technology or be certain that equivalent products or services will not be marketed in competition with our products and services thereby substantially reducing the value of our proprietary rights. Furthermore, there can be no assurance that any confidentiality agreements between us and our employees or any license agreements with our brokers will provide meaningful protection of our proprietary information in the event of any unauthorized use or disclosure of such proprietary information.
Employees
As of July 31, 2013, we had 20 full-time, part-time, contract or temporary employees in our corporate headquarters. From time to time, we utilize independent consultants or contractors for technology support, marketing, sales and support, and accounting or administrative functions. Our employees are not represented by any collective bargaining unit and we have never experienced a work stoppage. We believe relations with our employees are good.
This Annual Report on Form 10-K contains statements that are forward-looking such as estimates, projections, statements relating to our business plans, objectives and expected operating results. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. All statements that express expectations and projections with respect to future matters may be affected by changes in our strategic direction, as well as developments beyond our control. We cannot assure you that our expectations will necessarily come to pass. Actual results could differ materially because of issues and uncertainties such as those listed below, in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, Part II Item 7 and elsewhere in this report. These factors, among others, may adversely impact and impair our business and should be considered in evaluating our financial outlook.
Our revenue growth and success is tied to the operations of our independent Broker Network, and as a result the loss of our brokers or the financial performance of our brokers can negatively impact our business
We service our member businesses primarily through our independent licensed broker and franchise network (individually, “broker”, together, the “Broker Network”) as well as through any corporate-owned offices we may operate from time to time. Our financial success primarily depends on our brokers and the manner in which they operate and develop their offices. We depend on the ability of our brokers to enroll new members, train them in the use of the Marketplace, grow our transactional volume by facilitating business among members, manage member relationships, provide members with information about ITEX products and services, and assure the payment of our fees. Brokers are independently owned and operated and have a contractual relationship with ITEX, typically for a renewable five-year term. Our inability to renew a significant portion of these agreements on terms satisfactory to our brokers and us could have a material adverse effect on our business, financial condition and results of operations. Further, our brokers may not be successful in increasing the level of revenues generated compared to prior years, or even sustaining their own business activities, which depends on many factors, including industry trends, the strength of the local economy, the success of their marketing activities, control of expense levels, the employment and management of personnel, and being able to secure adequate financing to operate their businesses. There can be no assurance that our brokers will be successful in adding members or increasing the volume of transactions through the Marketplace, or that if they do not renew their agreements or terminate operations we will be able to attract new brokers at rates sufficient to maintain a stable or growing revenue base. If our brokers are unsuccessful in generating revenue, enrolling new members to equalize the attrition of members leaving the Marketplace, or if a significant number of brokers become financially distressed and terminate operations, our revenues could be reduced and our business operating results and financial condition may be materially adversely affected.
Future revenue growth remains uncertain and our operating results and profitability may decline
For the year ended July 31, 2013, our revenue decreased 6% compared to the same period in 2012. Although we seek to increase revenues through organic growth and the development of new revenue streams, we cannot assure you that our revenues will increase in future quarters or future years. We may be unable to add revenue through acquisitions, either because of the absence of acquisition candidates, lack of financing, or unacceptable terms. We have approximately 30% recurring revenues. We do not have an order backlog, and approximately two-thirds of our revenues each quarter come from transaction fees computed as a percentage of the ITEX dollar value of the transactions occurring during that quarter. Our operating results in one or more future quarters may fall below the expectations of investors.
We cannot assure you that we can continue to be operated profitably, which depends on many factors, including the overall development and expansion of the barter industry, our success in expanding our market share of the industry, the control of our expense levels and the success of our business activities. We have been subject to increased expense levels in recent years as a result of responding to proxy contests, litigation and other actions initiated by dissident stockholders. We may make investments in marketing, broker and member support, technology and further development of our operating infrastructure which entail long-term commitments. The barter industry as a whole may be adversely affected by industry trends and economic factors. Despite our efforts to expand our revenues, we may not be successful. We experience a certain amount of attrition from members leaving the Marketplace. If new member enrollments do not continue or are insufficient to offset attrition, we will increasingly need to focus on keeping existing members active and increasing their activity level in order to maintain or grow our business. We cannot assure you that this strategy would be successful to offset declining revenues or profits.
Our ability to pay dividends on our common stock is subject to the discretion of our Board of Directors and may be limited by our lack of liquidity or access to capital.
Our dividend policy is subject to the discretion of our Board of Directors and depends upon a number of factors, including our earnings, financial condition, cash and capital needs and general economic or business conditions. Although we are currently declaring cash dividends on our common stock as a way to return value to our stockholders, we are not required to do so and we cannot assure you that we will continue to pay dividends in the future. We have sought to maintain a liquidity cushion sufficient to fund our business activities and handle contingencies, while preserving the ability to return cash to our stockholders through sustainable dividends and share buybacks. However, our Board of Directors may decide to use capital for acquisitions, revenue generating opportunities or other corporate purposes. If liquidity from our cash flow is inadequate or unavailable, we may be required to scale back or eliminate the dividends we pay to our stockholders. Any reduction of, or the elimination of, our common stock dividend in the future could adversely affect the market price of our common stock.
Our brokers could take actions that could harm our business, our reputation and adversely affect the ITEX Marketplace
Our agreements with our brokers require that they understand and comply with all laws and regulations applicable to their businesses, and operate in compliance with our Marketplace Rules. Brokers are independently owned and operated and are not our employees, partners, or affiliates. We set forth operational standards and guidelines; however, we have limited control over how our broker businesses are run. Our brokers have individual business strategies and objectives, and may not operate their offices in a manner consistent with our philosophy and standards. We cannot assure that our brokers will avoid actions that adversely affect the reputation of ITEX or the Marketplace. Improper activity stemming from one broker can generate negative publicity which could adversely affect our entire Broker Network and the Marketplace. Our image and reputation and the image and reputation of other brokers may suffer materially, and system-wide sales could significantly decline if our brokers do not operate their businesses according to our standards. While we ultimately can take action to terminate brokers and franchisees that do not comply with the standards contained in our agreements, and even though we may implement compliance and monitoring functions, we may not be able to identify problems and take action quickly enough and, as a result, our image and reputation may suffer, causing our revenues or profitability to decline. Further, the success and growth of our Broker Network depends on our maintaining a satisfactory working relationship with our existing brokers and attracting new brokers to our network. Lawsuits and other disputes with our brokers could discourage our brokers from expanding their business or lead to negative publicity, which could discourage new brokers from entering our network or existing brokers from renewing their agreements, and could have a material adverse effect on our business, financial condition and results of operations.
Significant stockholders or investors may attempt to effect changes or acquire control over our business, which could adversely affect our results of operations and financial condition.
Recent developments in corporate governance indicate there is lack of agreement between boards of directors and stockholders as to the relative balance of authority in the corporate decision-making process, and shareholdersare challenging the longstanding legal tenet that directors, rather than the stockholders, manage the business and affairs of the corporation. During the past several years, U.S. companies have seen a high and increasing level of insurgent campaigns, proxy solicitations, and shareholder derivative actions or other attempts to acquire control of companies or effect operational changes. Since 2010, we have been the subject of two proxy contests to replace the majority of our directors, as well as a derivative lawsuit, each initiated by the same dissident stockholder. During the past year we entered into an agreement with the stockholder, and have recently adopted governance changes which included the addition of two new members of the board of directors. However, we cannot assure you that we will not be subject to further proxy contests, litigation or other activity or demands in the future. If we are, such activity or demands could harm the Company because:
| · | Responding to proxy contests, litigation and other actions by dissident shareholders can interfere with our ability to execute our strategic plan, disrupt our operations, be costly and time-consuming, and divert the attention of our management and employees from the pursuit of business strategies; |
| · | Perceived uncertainties as to our future direction diverts the attention of, damages morale and creates instability among members of our Broker Network, and adversely impact our existing and potential strategic and operational relationships and opportunities; |
| · | We may experience difficulties in hiring, retaining and motivating personnel during the resulting uncertain and turbulent times; |
| · | If individuals are elected or appointed to our Board of Directors with a specific agenda, it may adversely affect our ability to effectively implement our business strategy and create additional value for our stockholders; |
| · | We would experience substantial increases in legal fees, insurance, administrative and associated costs incurred in connection with responding to proxy contests and related litigation; |
| · | A successful change in control of the Company would result in substantial compensation charges and other expenses, and potentially allow an insurgent shareholder to reimburse his proxy or takeover expenses, resulting in substantial charges. |
We may be held responsible by members, third parties, regulators or courts for the actions of, or failures to act by, our brokers or their employees, which exposes us to possible adverse judgments, other liabilities and negative publicity
From time to time we are subject to claims for the conduct of our brokers in situations where a broker is alleged to have caused injury to a member as a result of a transaction in the Marketplace. Third parties, regulators or courts may seek to hold us responsible for the actions or failures to act by our brokers or their employees. The failure to comply with laws and regulations by our brokers, or litigation involving potential liability for broker activities could be costly and time consuming for us, divert management attention, result in increased costs of doing business, lead to adverse judgments, expose us to possible fines and negative publicity, or otherwise harm our business.
Failure to deal effectively with member disputes could result in costly litigation, damage our reputation and harm our business
ITEX faces risks with respect to transactional disputes between members of the Marketplace. From time to time we receive complaints from members who may not have received the products or services that they had purchased, concerning the quality of the products or services, or who believe they have been defrauded by other members. We also receive complaints from sellers because a buyer has changed his or her mind and decided not to honor the contract to purchase the item. While ITEX does, in some cases, as part of its transaction dispute resolution process, reverse transactions, reduce or eliminate credit lines, suspend accounts, or take other measures with members who fail to fulfill their payment or delivery obligations to other members, the determination as to whether a transaction is reversed or how to resolve a specific dispute is made by ITEX in its sole discretion. Measures we may take to resolve transactional disputes or combat risks of fraud have the potential to damage relations with our members or brokers or decrease transactional activity in the Marketplace by restricting the activities of certain members. Furthermore, negative publicity and member sentiment generated as a result of member complaints or fraudulent or deceptive conduct by members of our Marketplace could damage our reputation, or reduce our ability to attract new members or retain our current members.
We occasionally receive communications from members requesting reimbursement or threatening or commencing legal action against us if no reimbursement is made. In addition, because we service our member businesses through our Broker Network, we are subject to claims and could potentially be found liable for the conduct of our brokers in a situation where that broker has caused injury to a member. Litigation involving disputes between members and liability for broker actions could be costly and time consuming for us, divert management attention, result in increased costs of doing business, lead to adverse judgments, or otherwise harm our business. In addition, affected members may complain to regulatory agencies that could take action against us, including imposing fines or seeking injunctions.
Use of our services for illegal purposes could damage our reputation and harm our business
Our members, typically small businesses, actively market products and services through the Marketplace and our website. We may be unable to prevent our members from selling unlawful or stolen goods or unlawful services, or selling goods or services in an unlawful manner, and we could be subject to allegations of civil or criminal liability for unlawful activities carried out by users through our services. It is possible that third parties, including government regulators and law enforcement officials, could allege that our services aid and abet certain violations of certain laws, for example, laws regarding the sale of counterfeit items, the fencing of stolen goods, selective distribution channel laws, and the sale of items outside of the U.S. that are regulated by U.S. export controls.
Although we have prohibited the listing of illegal goods and services and implemented other protective measures, we may be required to spend substantial resources to take additional protective measures or discontinue certain service offerings, any of which could harm our business. Any costs incurred as a result of potential liability relating to the alleged or actual sale of unlawful goods or services could harm our business. In addition, negative media publicity relating to the listing or sale of unlawful goods and stolen goods using our services could damage our reputation, diminish the value of our brand, and make members reluctant to use our services.
ITEX’s trade dollar currency, ITEX dollars, is also susceptible to potentially illegal or improper uses. Recent changes in law have increased the penalties for intermediaries providing payment services for certain illegal activities. Despite measures taken by ITEX as administrator and as a third-party record-keeper to detect and lessen the risk of this kind of conduct, illegal activities could still be funded using ITEX dollars. Any resulting claims or liabilities could harm our business.
Our business is subject to online security risks, including security breaches and identity theft
We host confidential information as part of our client relationship management and transactional processing platform. Our security measures may not detect or prevent security breaches that could harm our business. Currently, a significant number of our members authorize us to bill their credit card or bank accounts directly for fees charged by us. We take a number of measures to ensure the security of our hardware and software systems and member and client information. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in the technology used by us to protect transaction data being breached or compromised. Other companies have been the subject of sophisticated and highly targeted attacks on portions of their websites. In addition, any party who is able to illicitly obtain a members’ password could access the members’ transaction data. An increasing number of websites have reported breaches of their security. Any compromise of our security could harm our reputation and, therefore, our business, and could result in a violation of applicable privacy and other laws. In addition, a party that is able to circumvent our security measures could misappropriate proprietary information, cause interruption in our operations, damage our computers or those of our users, or otherwise damage our reputation and business. Under credit card rules and our contracts with our card processors, if there is a breach of credit card information that we store, we could be liable to the credit card issuing banks for their cost of issuing new cards and related expenses. In addition, if we fail to follow credit card industry security standards, even if there is no compromise of customer information, we could incur significant fines or lose our ability to give customers the option of using credit cards to pay their fees. If we were unable to accept credit cards, our business would be seriously damaged.
We continue to enhance our systems for data management and protection, and intrusion detection and prevention. However, our servers may be vulnerable to computer viruses, physical or electronic break-ins, and similar disruptions. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. Security breaches, including any breach by us or by parties with which we have commercial relationships that result in the unauthorized release of our members’ personal information, could damage our reputation and expose us to a risk of loss or litigation and possible liability. Our insurance policies carry coverage limits which may not be adequate to reimburse us for losses caused by security breaches.
Unplanned system interruptions or system failures could harm our business and reputation
Any interruption in the availability of our transactional processing services due to hardware and operating system failures will reduce our revenues and profits. Our revenue depends on members using our processing services. Any unscheduled interruption in our services results in an immediate, and possibly substantial, loss of revenues. Frequent or persistent interruptions in our services could cause current or potential members to believe that our systems are unreliable, leading them to switch to our competitors or to avoid our website or services, and could permanently harm our reputation. Furthermore, any system failures could result in damage to our members’ and brokers’ businesses. These persons could seek compensation from us for their losses. Even if unsuccessful, this type of claim likely would be time-consuming and costly for us to address.
Although our systems have been designed around industry-standard architectures to reduce downtime in the event of outages or catastrophic occurrences, they remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, terrorist attacks, computer viruses, computer denial-of-service attacks, and similar events or disruptions. Some of our systems are not fully redundant, and our disaster recovery planning may not be sufficient for all eventualities. Our systems are also subject to break-ins, sabotage, and intentional acts of vandalism. Despite any precautions we may take, the occurrence of a natural disaster, a decision by any of our third-party hosting providers to close a facility we use without adequate notice for financial or other reasons, or other unanticipated problems at our hosting facilities could cause system interruptions, delays, and loss of critical data, and result in lengthy interruptions in our services. Our business interruption insurance may not be sufficient to compensate us for losses that may result from interruptions in our service as a result of system failures.
Failure to comply with laws and regulations that protect our members’ and brokers’ personal and financial information could result in liability and harm our reputation
We store personal and financial information for members of the Marketplace and our brokers. Privacy concerns relating to the disclosure and safeguarding of personal and financial information have drawn increased attention from federal and state governments. Federal and state law requires us to safeguard our members’ and brokers’ financial information, including credit card information. Although we have established security procedures to protect against identity theft and the theft of this personal and financial information, breaches of our privacy may occur. To the extent the measures we have implemented are breached or if there is an inappropriate disclosure of confidential or personal information or data, we may become subject to litigation or administrative sanctions, which could result in significant fines, penalties or damages and harm to our brand and reputation. Even if we were not held liable, a security breach or inappropriate disclosure of confidential or personal information or data could harm our reputation. In addition, we may be required to invest additional resources to protect us against damages caused by these actual or perceived disruptions or security breaches in the future. Changes in these federal and state regulatory requirements could result in more stringent requirements and could result in a need to change our business practices. Establishing systems and processes to achieve compliance with these new requirements may increase our costs and could have a material adverse effect on our business, financial condition and results of operations.
We have claims and lawsuits against us that may result in adverse outcomes
From time to time we are subject to a variety of claims and lawsuits. See Note 11 ― “Legal Proceedings and Litigation Contingencies” included in the “Notes to Consolidated Financial Statements”.Adverse outcomes in one or more claims could occur which may result in significant monetary damages that could adversely affect our ability to conduct our business. Although management does not believe resolving any pending matter, individually or in the aggregate, would have a material adverse impact on our financial statements, litigation and other claims are subject to inherent uncertainties and management’s view of these matters may change in the future. A material adverse impact on our financial statements could occur for the period in which the effect of an unfavorable final outcome becomes probable and reasonably estimable.
If we lose the services of our chief executive officer, our business could suffer
We believe our performance depends substantially on the continued services of our Chief Executive Officer, Steven White. Our board places heavy reliance on Mr. White’s industry experience and relationships, management and operational skills. We have not entered into an employment agreement with Mr. White. Mr. White has been awarded restricted stock grants as a long-term retention incentive. If we were to lose the services of Mr. White, we could face substantial difficulty in hiring a qualified successor or successors, and could experience a loss in performance while any successor obtains the necessary training and experience. Corporate staff and our franchisees and brokers could lose confidence in the direction and stability of the Company and choose to pursue other opportunities. In addition, in connection with a management transition we may need to attract, train, retain and motivate additional financial, technical, managerial, marketing or support personnel. We face the risk that if we are unable to attract and integrate new personnel, or retain and motivate existing personnel, our business, financial condition and results of operations will be adversely affected.
Alliances, mergers and acquisitions could result in operating difficulties, dilution and other harmful consequences
We have acquired 11 trade exchange membership lists since 2005 and integrated them into the Marketplace. We expect to continue to evaluate and consider other potential strategic transactions, including business combinations, acquisitions and dispositions of businesses, technologies, services, products and other assets and strategic investments. At any given time we may be engaged in discussions or negotiations with respect to one or more of these types of transactions. Any of these transactions could be material to our financial condition and results of operations. The process of integrating an acquired company, business or technology may create unforeseen operating difficulties and expenditures and is risky. The areas where we may face difficulties include:
| | • | | Diversion of management time, as well as a shift of focus from operating the businesses to challenges related to integration and administration; |
| | • | | Challenges associated with integrating employees from the acquired company into the acquiring organization. These may include declining employee morale and retention issues resulting from changes in, or acceleration of, compensation, or changes in management, reporting relationships, future prospects, or the direction of the business; |
| | • | | The need to integrate each company’s accounting, management, information, human resource and other administrative systems to permit effective management, and the lack of control if such integration is delayed or not implemented; |
| | • | | The need to implement controls, procedures and policies appropriate for a public company at companies that prior to acquisition had lacked such controls, procedures and policies; |
| | • | | The need to transition operations, members, and customers onto our existing platforms; and |
| | • | | Liability for activities of the acquired company before the acquisition, including violations of laws, rules and regulations, commercial disputes, tax liabilities and other known and unknown liabilities. |
The expected benefit of any of these strategic relationships may not materialize and the cost of these efforts may negatively impact our financial results. Future alliances, mergers or acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the expenditure of our cash or the incurrence of debt, contingent liabilities or amortization expenses, or write-offs of goodwill, any of which could adversely affect our results of operations and dilute the economic and voting rights of our stockholders. Future acquisitions may require us to obtain additional equity or debt financing, which may not be available on favorable terms or at all.
We may need additional financing; current funds may be insufficient to finance our plans for growth or our operations
We believe that our financial condition is stable and that our cash balances and operating cash flows provide adequate resources to fund our ordinary operating requirements. However, our existing working capital may not be sufficient to allow us to execute our business plan as fast as we would like or may not be sufficient to take full advantage of all available strategic opportunities. We believe our current core operations reflect a scalable business strategy, which will allow our business model to be executed with limited outside financing. However, we also may expand our operations, enter into a strategic transaction, or acquire competitors or other business to business enterprises. We have a line of credit with our primary banking institution, which will provide additional reserve capacity for general corporate and working capital purposes, and if necessary, enable us to make certain expenditures related to the growth and expansion of our business model. However, if adequate capital were not available or were not available on acceptable terms at a time when we needed it, our ability to execute our business plans, develop or enhance our services, make acquisitions or respond to competitive pressures would be significantly impaired. Further, we cannot be certain that we will be able to implement various financing alternatives or otherwise obtain required working capital if needed or desired.
We are dependent on the value of foreign currency.
We transact business in Canadian dollars as well as USD. Revenues denominated in Canadian dollars comprised 7.6% and 7.2% in the years ended July 31, 2013 and 2012, respectively. While foreign currency exchange fluctuations are not believed to materially adversely affect our operations at this time, changes in the relation of the Canadian dollar to the USD could affect our revenues, cost of sales, operating margins and result in exchange losses.
If we fail to maintain an effective system of internal controls, we may not be able to detect fraud or report our financial results accurately, which could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price
Effective internal controls are necessary for us to provide reliable financial reports and to detect and prevent fraud. We periodically assess our system of internal controls to review their effectiveness and identify potential areas of improvement. These assessments may conclude that enhancements, modifications or changes to our system of internal controls are necessary. Performing assessments of internal controls, implementing necessary changes, and maintaining an effective internal controls process is expensive and requires considerable management attention. Internal control systems are designed in part upon assumptions about the likelihood of future events, and all such systems, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. We face the risk that the design of our controls and procedures may prove to be inadequate or that our controls and procedures may be circumvented, thereby causing delays in detection of errors or inaccuracies in data and information. It is possible that any lapses in the effective operations of controls and procedures could materially affect earnings, that we could suffer losses, that we could be subject to costly litigation, that investors could lose confidence in our reported financial information and our reputation, and that our operating results could be harmed, which could have a negative effect on the trading price of our common stock.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we must certify the effectiveness of our internal controls over financial reporting annually. If we are unable to assert that our internal control over financial reporting is effective for a particular year we could lose investor confidence in the accuracy and completeness of our financial reports. That could adversely affect our competitive position in our business, and the market price for our common stock.
Our Brokers may default on their loans
From time to time we finance the operational and expansion activities of our brokers. We loan brokers funds for general operational purposes, to acquire the management rights to select member accounts, and for other reasons. These loans are repaid from regular deductions from broker commissions. We had outstanding loans to brokers of $1,619 at July 31, 2012 and $1,432 at July 31, 2013. In the event one or more brokers default on their loans, it may adversely affect our financial condition.
Ourcorporate and administrative headquartersoffices are located in Bellevue, Washington. We lease property in the following locations to be utilized by our senior management, sales and marketing, finance, general and administrative personnel:
| | | Area leased | | | Monthly | | | | |
| Location | | (sq. feet) | | | rent | | | Lease expiration | |
| | | | | | | | | | | | | |
| Bellevue, Washington | | | 7,035 | | | $ | 13,778 | | | | April 30, 2015 | |
We believe that our current facilities are adequate and suitable for their current use, and that all of the leased space and all property maintained within are adequately insured.For additional information regarding our obligations under leases,refer toNote 8 ― “Commitments” included in the “Notes to Consolidated Financial Statements”, Item 8 – Financial Statements.
For information regarding legal proceedings, refer toNote 11 ― “Legal Proceedings and Litigation Contingencies” included in the “Notes to Consolidated Financial Statements”, Item 8 – Financial Statements.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
| ITEM 5. | MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
Market Information
Our common stock trades on the middle tier of the OTC Markets Group Inc. (commonly referred to as the “OTCQB”) under the ticker symbol “ITEX.” The range of high and low closing bid prices for our common stock for each quarter during the two most recent years, and dividends paid for the quarter, are as follows:
| | | Fiscal Year 2013 | | | Fiscal Year 2012 | |
| | | Prices | | | Dividends | | | Prices | | | Dividends | |
| | | High | | | Low | | | Paid | | | High | | | Low | | | Paid | |
| First | | $ | 3.76 | | | $ | 3.32 | | | $ | 0.04 | | | $ | 4.00 | | | $ | 2.96 | | | $ | 0.04 | |
| Second | | | 3.61 | | | | 3.20 | | | | 0.04 | | | | 3.50 | | | | 2.96 | | | | 0.04 | |
| Third | | | 3.90 | | | | 3.36 | | | | 0.05 | | | | 4.15 | | | | 3.25 | | | | 0.04 | |
| Fourth | | | 3.90 | | | | 3.63 | | | | 0.05 | | | | 3.96 | | | | 3.78 | | | | 0.04 | |
This table reflects the range of high and low closing bid prices for our common stock during the indicated periods, as compiled by the OTCQB based on trading information reported by the FINRA Composite Feed or other qualified interdealer quotation medium. The quotations merely reflect the prices at which transactions were proposed and do not necessarily represent actual transactions. Prices do not include retail markup, markdown or commissions.
There were 594 holders of record of our common stock as of July 31, 2013. Most shares of our common stock are held by brokers and other institutions on behalf of shareholders.
During 2012, we paid a quarterly dividend of $0.04 per share, which was increased 25% to $0.05 per share in the third quarter of 2013. We expect to pay quarterly dividends in the future, subject to declaration by the Board of Directors. SeeItem 1A ─ Risk Factors ─Our ability to pay dividends on our common stock is subject to the discretion of our Board of Directors and may be limited by our lack of liquidity or access to capital.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information about our purchases or any affiliated purchaser during the three-months ended July 31, 2013 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act.
| | | (a) | | | (b) | | | (c) | | | (d) | |
| Period | | Total Number of
Shares Purchased | | | Average Price Paid per
Share | | | Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs | | | Maximum Number (or
Approximate Dollar
Value) of Shares that
May Yet Be Purchased
Under the Plans or
Programs (1) | |
| 5/01/13 - 5/31/13 | | | - | | | | - | | | | - | | | | - | |
| 6/01/13 – 6/30/13 | | | 1,278 | | | $ | 3.72 | | | | - | | | | - | |
| 7/01/13 - 7/31/13 | | | 1,876 | | | $ | 3.68 | | | | - | | | $ | 1,459,134 | |
| (1) | Amounts shown in this column reflect amounts remaining under the $2.0 million stock repurchase program, authorized by the Board of Directors and announced on March 9, 2010. The program authorizes the repurchase of shares in open market purchases or privately negotiated transactions,has no expiration date and may bemodified or discontinuedby the Board of Directors at any time. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands except per share amounts unless otherwise indicated)
The following discussion is provided as a supplement to the accompanying consolidated financial statements and notes (refer toItem 8 – Financial Statements)and is intended to help provide information we believe is relevant to an assessment and understanding of our results of operations and financial condition. In addition to ourconsolidated financial statements and notes, it should be read in conjunction with the sectionentitled“Risk Factors” (refer to Part I Item 1A)and the cautionary statement regarding forward-looking statements onpage 1.
OVERVIEW
ITEX, The Membership Trading CommunitySM, is a leading exchange for cashless business transactions across North America (the “Marketplace”). We service our member businesses through our independent licensed brokers and franchise network (individually, “broker” and together, the “Broker Network”) in the United States and Canada. Ourbusiness services and payment systems enable approximately twenty-three thousand member businesses (our “members”) to trade products and services without exchanging cash. Theseproducts and services are instead exchanged for ITEX dollars which can only be redeemed in the Marketplace (“ITEX dollars”). We administer the Marketplace and act as a third-party record-keeper for our members’ transactions. We generate revenue by charging members percentage-based transaction fees, association fees, and other fees assessed in United States dollars and Canadian dollars where applicable (collectively and as reported on our financial statements, “USD” or “Cash”).
For each calendar year, we divide our operations into 13 four-week billing and commission cycles always ending on a Thursday (“operating cycle”). For financial statement purposes, our fiscal year is from August 1 to July 31 (“year”, “2013” for August 1, 2012 to July 31, 2013, “2012” for August 1, 2011 to July 31, 2012). Our fourth quarter is the three-month period from May 1, 2013 to July 31, 2013 (“fourth quarter”). We report our results as of the last day of each calendar month (“accounting cycle”). The timing of billing and collection activities after the end of the billing cycle does not correspond with the end of the accounting period, therefore this timing difference results in the fluctuations of the balances of cash, accounts receivable, commissions payable and accrued commissions on the consolidated balance sheet and consolidated statement of cash flows.
Each operating cycle we generally charge our members association fees of $20 USD ($260 USD annually) and $10 ITEX dollars ($130 ITEX dollars annually). We also charge transaction fees in USD from both the buyer and seller computed as a percentage of the ITEX dollar value of the transaction.
The following summarizes our operational and financial highlights for the year (in thousands except per share data):
| · | Comparative Results. For the year ended 2013, as compared to 2012, our revenue decreased by $961, or 6%, from $15,786 to $14,825. However, income from operations increased by $354, or 32%, from $1,110 to $1,464. |
| · | Revenue Sources. Our decrease in revenues for 2013 was primarily due to a reduction in revenues from Association and Transaction fees. Association revenue decreased $234, or 5% from $4,747 to $4,513 and our Transaction revenue decreased $749, or 7% from $10,650 to $9,901. |
| · | Corporate-owned Offices. The ITEX system is currently 100% broker managed. As a general operating philosophy, we depend on the ability of our brokers to enroll new members, train them in the use of the Marketplace, grow our transactional volume by facilitating business among members, manage member relationships, provide members with information about ITEX products and services, and assure the payment of our fees. Our broker model requires less capital investment and lower operating expenses than if we operated all of the offices in our network directly. From time to time, we may complement our Broker Network with corporate-owned locations, acquired either as a result of business acquisitions or as a result of ensuring the orderly transition of broker locations. Part of our strategy when we add exchange members through a business acquisition is to incubate the asset with corporate staff, flush out non-performing members, synchronize fee plans, and then distribute members to existing franchisees or spin off members to new franchises. The result is a wider member base, managed by new franchisees, and a member list asset that continues to be owned by ITEX. |
| · | Revenue Trends and Growth. Our reduction in revenue this year was due to a reduction in members and a corresponding reduction in Transaction fees generated from our members. We believe the reduction in members and transaction volume is attributed in part to the prolonged weak economic climate for small businesses (our primary clientele) and the lingering disruption from two proxy fights and related litigation, and increased competition from pricing of big box stores and Internet outlets. Although we seek to increase revenues through organic growth and the development of new revenue sources, the primary driver of revenue growth in recent years has been through our business acquisitions. These acquisitions are intermittent and cannot be relied upon as a future source of revenue growth, because of the absence of acquisition candidates, lack of financing, or unacceptable terms. We have approximately 30% recurring revenues from association fees. Approximately two-thirds of our revenues each year come from transactions fees assessed during that year. We believe the expansion of our membership base will increase our recurring revenues. We continue to seek to increase our revenue by: |
| o | enhancing our internet applications; |
| o | marketing the benefits of participation in the Marketplace; |
In fiscal 2012 and 2013, our national and web-based advertising campaigns emphasized the benefits of participation in the ITEX Marketplace. We were able to utilize advertising credits obtained in a business acquisition for a majority of the national ad placements. These advertising credits were fully utilized during the 2013 year.
Adding new brokers is an important component of our overall growth plan, and we are sustaining our broker recruiting incentives. Through our Broker Mentor program, existing brokers recruit prospective brokers and provide ongoing training to the prospective broker until certain performance thresholds are met. Upon meeting the performance thresholds, the prospective broker is offered a franchise for a reduced fee of $5 from our standard broker fee of $20. The mentoring broker receives a 5% commission override on the cash collected per cycle by the new broker.
| · | Supporting Members, Brokers and Employees. We enhance our internet applications and web services to make our online services more user friendly to our employees, brokers and members, and to create confidence in the Marketplace. We continue to upgrade our payment processing and team software with ..NET technologies. |
| · | Geographical expansion. We have acquired 11 trade exchange membership lists since 2005 and integrated them into the Marketplace. The acquisitions have contributed to our member counts and revenue and allowed us to expand the breadth of our network by opening offices in several geographic areas in which the ITEX presence was previously weak or nonexistent. In addition, we removed competitors from our industry, strengthening our brand. Part of our strategy when we acquire an exchange’s members is toincubate the new members with corporate staff, flush out non-performing members, synchronize fee plans, and then distribute members to existing franchisees or spin off to new franchisees. Wecontinue to evaluate and consider other potential strategic transactions, if and when such opportunities arise. |
| · | Financial Position. Our financial condition and balance sheet remained strong at July 31, 2013, with cash of $3,352 compared to $1,942 at the same period in 2012. We reduced our cash during the third quarter of fiscal 2012 as a result of the completion of a partial tender offer in which $4,506 was returned to stockholders through the purchase of 1,073 shares of ITEX common stock. Our net cash flows provided by operating activities were $1,752 for the year ended July 31, 2013, compared to $1,893 for the previous year. The decrease in net cash provided by operating activities is primarily due to a decrease in commissions payable to brokers offset somewhat by a $101 increase in net income.We seek to maintain a liquidity cushion sufficient to fund our business activity and handle contingencies, while preserving the ability to return cash to our stockholders through dividends and share buybacks.We initiated a $2,000 stock repurchase plan during the 2010 year which is still in effect. During 2013 we repurchased $101 of our stock through the stock repurchase plan. |
During the fourth quarter of 2010, the board of directors declared and paid our first cash dividend in the amount of 2.5 cents per share. In the second quarter of 2011, the board increased the quarterly dividend 60% to 4.0 cents per share. Then, in the third quarter of 2013, the board increased the quarterly dividend 25% to 5.0 cents per share. Since the inception of the program through July 31, 2013, we have distributed $1,764 in cash dividends.
RESULTS OF OPERATIONS (in thousands except per share amounts unless otherwise indicated)
Condensed Results
| | | Year Ended July 31, | |
| | | 2013 | | | 2012 | |
| | | | | | | |
| Revenue | | $ | 14,825 | | | $ | 15,786 | |
| | | | | | | | | |
| Cost of marketplace revenue | | $ | 9,403 | | | $ | 10,165 | |
| Operating expenses | | | 3,958 | | | | 4,511 | |
| Income from operations | | | 1,464 | | | | 1,110 | |
| | | | | | | | | |
| Other income/(expense) | | | 108 | | | | 414 | |
| Income before income taxes | | | 1,572 | | | | 1,524 | |
| | | | | | | | | |
| Income tax expense | | | 502 | | | | 555 | |
| Net income | | $ | 1,070 | | | $ | 969 | |
| | | | | | | | | |
| Net income per common share: | | | | | | | | |
| Basic | | $ | 0.41 | | | $ | 0.29 | |
| Diluted | | $ | 0.41 | | | $ | 0.29 | |
| | | | | | | | | |
| Average common and equivalent share: | | | | | | | | |
| Basic | | | 2,616 | | | | 3,344 | |
| Diluted | | | 2,626 | | | | 3,345 | |
Year ended July 31, 2013 and 2012. Marketplace and other revenue for the year ended July 31, 2013, decreased $961 or 6% to $14,825 from $15,786 during the prior year. This decrease was due to a reduction in the number of members, a reduction in transaction volume and a corresponding decrease in transaction fees.
Association revenue decreased $234 or 5% to $4,513 from $4,747. The association revenue decrease was due to a reduction in the number of members assessed association fees. Transaction revenue decreased $749 or 7% to $9,901 from $10,650. The transaction revenue decrease was due to reduced transaction volume in the Marketplace in 2013 when compared to 2012.
Income before income taxes for the year ended July 31, 2013 was $1,572, an increase of $48 or 3% from income before income taxes in 2012 of $1,524. We attribute this increase in taxable income primarily to the reduction in our operating expenses of $553, which was offset by a reduction in our gross profit of $199. Also, during the 2012 comparable year, we had a gain on sale of two of our corporate-owned offices for $318.
Earnings per share increased by $0.12 or 41% to $0.41 per share for the year ended July 31, 2013, from $0.29 per share for the year ended July 31, 2012.
Selected Quarterly Financial Results
| Year ended July 31, 2013 | | First
Quarter | | | Second
Quarter | | | Third
Quarter | | | Fourth
Quarter | | | Total | |
| | | | | | | | | | | | | | | | |
| Revenue | | $ | 3,711 | | | $ | 3,960 | | | $ | 3,475 | | | $ | 3,679 | | | $ | 14,825 | |
| Income from operations | | $ | 332 | | | $ | 167 | | | $ | 517 | | | $ | 448 | | | $ | 1,464 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net cash flows from operating activities | | $ | 387 | | | $ | 582 | | | $ | (172 | ) | | $ | 955 | | | $ | 1,752 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total stockholders' equity | | $ | 11,159 | | | $ | 11,458 | | | $ | 11,628 | | | $ | 11,774 | | | $ | 11,774 | |
| Year ended July 31, 2012 | | First
Quarter | | | Second
Quarter | | | Third
Quarter | | | Fourth
Quarter | | | Total | |
| | | | | | | | | | | | | | | | | | | | | |
| Revenue | | $ | 3,791 | | | $ | 4,229 | | | $ | 3,787 | | | $ | 3,979 | | | $ | 15,786 | |
| Income from operations | | $ | 261 | | | $ | 626 | | | $ | 324 | | | $ | (101 | ) | | $ | 1,110 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net cash flows from operating activities | | $ | 452 | | | $ | 501 | | | $ | (172 | ) | | $ | 1,112 | | | $ | 1,893 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total stockholders' equity | | $ | 14,792 | | | $ | 15,150 | | | $ | 10,812 | | | $ | 10,940 | | | $ | 10,940 | |
Revenue, Costs and Expenses
The following table summarizes our selected consolidated financial information for the years ended July 31, 2013 and 2012, with amounts expressed as a percentage of total revenues:
| | | Years Ended July 31, | |
| | | 2013 | | | 2012 | |
| | | Amount | | | Percent of
Revenue | | | Amount | | | Percent of
Revenue | |
| Revenue: | | | | | | | | | | | | | | | | |
| Marketplace revenue and other revenue | | $ | 14,825 | | | | 100 | % | | $ | 15,786 | | | | 100 | % |
| | | | | | | | | | | | | | | | | |
| Costs and expenses: | | | | | | | | | | | | | | | | |
| Cost of Marketplace revenue | | | 9,403 | | | | 63 | % | | | 10,165 | | | | 64 | % |
| Salaries, wages and employee benefits | | | 2,022 | | | | 14 | % | | | 1,977 | | | | 13 | % |
| Selling, general and administrative | | | 1,672 | | | | 11 | % | | | 2,226 | | | | 14 | % |
| Depreciation and amortization | | | 264 | | | | 2 | % | | | 308 | | | | 2 | % |
| | | | 13,361 | | | | 90 | % | | | 14,676 | | | | 93 | % |
| | | | | | | | | | | | | | | | | |
| Income from operations | | | 1,464 | | | | 10 | % | | | 1,110 | | | | 7 | % |
| Other income, net | | | 108 | | | | 1 | % | | | 414 | | | | 3 | % |
| | | | | | | | | | | | | | | | | |
| Income before income taxes | | | 1,572 | | | | 11 | % | | | 1,524 | | | | 10 | % |
| | | | | | | | | | | | | | | | | |
| Income tax expense (benefit) | | | 502 | | | | 4 | % | | | 555 | | | | 4 | % |
| | | | | | | | | | | | | | | | | |
| Net income | | $ | 1,070 | | | | 7 | % | | $ | 969 | | | | 6 | % |
Revenue
Revenue consists of Marketplace transaction fees, association fees and other revenue net of revenue adjustments for both broker offices and corporate-owned offices. Revenue also includes a nominal amount of ITEX dollars (non-cash). The following are the components of revenue that are included in the consolidated statements of income:
| | | Year Ended July 31, | |
| | | 2013 | | | | Percent
change
from 2012 | | | 2012 | |
| Broker offices: | | | | | | | | | | | | |
| Association fees | | $ | 4,512 | | | | -2% | | | $ | 4,610 | |
| Transaction fees | | | 9,895 | | | | -5% | | | | 10,374 | |
| Other revenue | | | 254 | | | | 32% | | | | 193 | |
| | | | | | | | | | | | | |
| Corporate owned offices: | | | | | | | | | | | | |
| Association fees | | | 1 | | | | -99% | | | | 137 | |
| Transaction fees | | | 6 | | | | -98% | | | | 276 | |
| Other revenue | | | 1 | | | | -88% | | | | 8 | |
| | | | | | | | | | | | | |
| Revenue, subtotal | | $ | 14,669 | | | | -6% | | | $ | 15,598 | |
| | | | | | | | | | | | | |
| ITEX dollar revenue | | $ | 156 | | | | -17% | | | $ | 188 | |
| | | | | | | | | | | | | |
| Total Revenue | | $ | 14,825 | | | | -6% | | | $ | 15,786 | |
Year ended July 31, 2013 and 2012. Revenue decreased by $961 or 6% for the year ended 2013 compared to 2012. Association revenue decreased $234 or 5% to $4,513 from $4,747. The association revenue decrease was due to a reduction in the number of members assessed association fees. Transaction revenue decreased $749 or 7% to $9,901 from $10,650. The transaction revenue decrease was due to lower transaction volume in the Marketplace in 2013 when compared to 2012.
Corporate-owned offices association fee, transaction fee and other revenue decreased $413 or 98% from $421 to $8, as we sold our two largest corporate-owned offices during 2012 and also sold the remaining corporate-owned office during the first quarter of 2013, retaining all contractual rights to the members. Therefore in the 2013 year, we only recognized some remaining residual corporate-owned revenue. Our practice is to manage corporate-owned offices internally until the assets can be distributed to existing franchisees or sold to new franchisees.
ITEX Dollar Revenue
As described in notes to our consolidated financial statements, we receive ITEX dollars from members’ transaction and association fees, and, to a lesser extent, from other member fees. ITEX dollars earned from members are later used by us as a method of payment in revenue sharing and incentive arrangements with our Broker Network, including co-op advertising, as well as for certain general corporate expenses. ITEX dollars are only usable in our Marketplace.
We take extensive measures to maintain the integrity of our role in the Marketplace economy, and to protect against the misuse or misappropriation of ITEX dollars. For example:
| · | All ITEX dollar purchases for corporate purposes are approved by senior management. |
| · | We do not sell or purchase ITEX dollars for USD. |
Occasionally we spend ITEX dollars in the Marketplace for our corporate needs. As discussed in Note 1 to our consolidated financial statements, we record ITEX dollar revenue in the amounts ultimately equal to expenses we incurred and paid for in ITEX dollars, resulting in an overall net effect of $0 on the operating and net income lines. We recorded $156 and $188 as ITEX dollar revenue for the years ended July 31, 2013 and 2012, respectively.
During 2011, the Company purchased two assets for $6 that were capitalized and will be depreciated over 5 years, therefore the revenue and expense related to ITEX dollar activities will not match during the depreciable period. In the year of asset acquisition 2011, we reflected $6 in net income and in the future depreciable years, we will reflect a loss of $1. At the end of the five-year depreciable period the net effect will be $0 on net income.
The corresponding ITEX dollar expenses in the year ending July 31, 2013 were for printing, outside services and miscellaneous expenses. We plan to continue to utilize ITEX dollars for our corporate purposes in future periods.
Cost of Marketplace revenue
Cost of Marketplace revenue consists of commissions paid to brokers, salaries and employee benefits of our corporate-owned offices, payment of processing fees and other expenses directly correlated to Marketplace revenue. The following are the main components of cost of Marketplace revenue that are included in the consolidated statements of income:
| | | Year Ended July 31, | |
| | | 2013 | | |
| Percent
change
from 2012 | | | 2012 | |
| Association fee commissions | | $ | 1,636 | | | | -3% | | | $ | 1,680 | |
| Transaction fee commissions | | | 7,463 | | | | -5% | | | | 7,841 | |
| | | | | | | | | | | | | |
| Corporate owned office salaries, wages, employee benefits, and independent contractor expenses | | | 7 | | | | -98% | | | | 301 | |
| Other Marketplace expenses | | | 297 | | | | -5% | | | | 312 | |
| Media costs - Ad Credits | | | - | | | | -100% | | | | 31 | |
| | | $ | 9,403 | | | | -7% | | | $ | 10,165 | |
| | | | | | | | | | | | | |
| Costs of Marketplace revenue as a percentage of total revenue | | | 63 | % | | | | | | | 64 | % |
Year ended July 31, 2013 and 2012. Costs of Marketplace revenue for the year ended 2013, as compared to the year ended 2012, decreased by $762, or 7%. Costs of Marketplace revenue as a percentage of total revenue decreased by 1% from 64% to 63% for the year ended 2013.
Association fee commissions decreased by $44, or 3% for the year ended 2013 as compared to 2012. The decrease in commissions paid was similar to the 2% decrease in the corresponding Broker offices association revenue.
Transaction fee commissions decreased by $378, or 5% for the year ended 2013, as compared to 2012. Transaction fee commissions will generally increase or decrease at a similar percentage as the increase or decrease in broker offices transaction revenue, which was the case for 2013 as Broker offices transaction revenue decreased 5% for the year.
Corporate-owned office costs consist of compensation and operating expenses associated with the operation of the offices. Our corporate-owned office costs decreased by $294 or 98% for the year ended 2013, as compared to the year ended 2012. The net decrease in expense is primarily due to the sale of our two largest corporate-owned stores towards the end of 2012 and a sale of the remaining corporate-owned store during the first quarter of 2013.
Other Marketplace expenses consist of miscellaneous Marketplace related expenses such as credit card processing fees and other commissions not associated with association or transaction revenue. Other Marketplace expenses decreased by $15, or 5% for the year ended 2013 as compared to 2012. The primary decrease is due to a reduction in credit card processing fees incurred in 2013.
Media costs – Ad credits consist of the cost of media ad credits utilized that have been sold to ITEX members. Media costs – Ad credits decreased by $31, or 100% for the year ended 2013 as compared to 2012. The decrease is due to full utilization of the available ad credits by ITEX member accounts during 2012.
The following table reflects the commissions and corporate-owned office costs separately as a percent of their related revenue:
| | | Year Ended July 31, | |
| | | 2013 | | |
| % of
Related
Revenue | | | 2012 | | | % of
Related
Revenue | |
| Association fee commissions | | $ | 1,636 | | | | 36% | | | $ | 1,680 | | | | 36% | |
| Transaction fee commissions | | $ | 7,463 | | | | 75% | | | $ | 7,841 | | | | 76% | |
| Corporate owned office salaries, wages, employee benefits, and independent contractor expenses | | $ | 7 | | | | 88% | | | $ | 301 | | | | 71% | |
Association fee commissions were 36% of their related revenue in both 2013 and 2012. Transaction fee commissions decreased 1% to 75% in 2013 compared to 76% in 2012. Corporate-owned office salaries, wages and employee benefits were 88% of related revenue and 71% of related revenue in 2012. The corporate-owned office costs decreased on a dollar basis due to the sale of our two largest corporate-owned stores towards the end of 2012 and a sale of the remaining corporate-owned store during the first quarter of 2013.
Corporate Salaries, Wages and Employee Benefits
Corporate salaries, wages and employee benefits include expenses for employee salaries and wages, payroll taxes, 401(k), payroll related insurance, healthcare benefits, recruiting costs, temporary services and other personnel-related items. Comparative results are as follows:
| | | Year Ended July 31, | |
| | | 2013 | | | | Percent
change
from 2012 | | | 2012 | |
| Corporate salaries, wages and employee benefits | | $ | 2,022 | | | | 2% | | | $ | 1,977 | |
| Percentage of revenue | | | 14 | % | | | | | | | 13 | % |
Year ended July 31, 2013 and 2012. Corporate salaries, wages and employee benefits expenses increased by $45 or 2% for the year ended 2013, as compared to the year ended 2012. The increase in compensation-related costs for the year is primarily due to the hiring of our current CFO, offset somewhat by a reduction in headcount.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, SG&A, include consulting, legal and professional services, as well as expenses for rent and utilities, marketing, insurance, bad debts, sales tax and other taxes, and other costs. Comparative results are as follows:
| | | Year Ended July 31, | |
| | | 2013 | | | | Percent
change
from 2012 | | | 2012 | |
| Selling, general and administrative expenses | | $ | 1,672 | | | | -25% | | | $ | 2,226 | |
| Percentage of revenue | | | 11 | % | | | | | | | 14 | % |
Year ended July 31, 2013 and 2012.SG&A expenses decreased by $554 or 25% for the year ended 2013 as compared to the year ended 2012. The decrease is due primarily to a $303 decrease in legal fees, a $73 decrease in marketing expense and a $43 decrease in rent expense during 2013.
Depreciation and Amortization
Depreciation and amortization expenses include depreciation on our fixed assets and amortization of our intangible assets. Comparative results are as follows:
| | | Year Ended July 31, | |
| | | 2013 | | | | Percent
change
from 2012 | | | 2012 | |
| Depreciation and amortization | | $ | 264 | | | | -14% | | | $ | 308 | |
| Percentage of revenue | | | 2 | % | | | | | | | 2 | % |
Year ended July 31, 2013 and 2012. Depreciation and amortization decreased by $44, or 14% for the year ended 2013 as compared to the year ended 2012. The primary reason for the decrease is that there were no material additions of property and equipment or amortizable intangible assets in 2013, which resulted in a decreased amount of depreciation and amortization as assets are moving towards being fully amortized and depreciated.
Other Income
Other income includes interest received on notes receivable and promissory notes and gains and losses on sale of assets. The interest income is derived primarily from our notes receivable for corporate-owned office sales and loans to Brokers:
| | | Year Ended July 31, | |
| | | 2013 | | | | Percent
change
from 2012 | | | 2012 | |
| Interest income | | $ | 109 | | | | 7% | | $ | 102 | |
| | | | | | | | | | | | | |
| Gain/(Loss) on sale of assets, net | | $ | (1 | ) | | | -100% | | | $ | 312 | |
| Other income | | $ | 108 | | | | -74% | | | $ | 414 | |
| | | | | | | | | | | | | |
| Other income, as a percentage of revenue | | | 1 | % | | | | | | | 3 | % |
Year ended July 31, 2013 and 2012. Other income decreased by $306 for the year ended 2013 as compared to the year ended 2012. Other income for the year ended 2013 reflects a gain of $4 from the sale of a corporate-owned office and a loss of $5 from the disposition of fixed assets.
Other income for the year ended 2012 includes a $318 gain on sale of assets from the sale of two corporate-owned offices and a loss of $6 from the disposition of fixed assets.
Interest income is derived primarily from our notes receivable for corporate-owned office sales and loans to Brokers. Interest income increased $7 or 7%. The notes receivable are repaid in installments. The installment payments for the various notes receivable end between 2014 and 2023.
Recoverability of Deferred Tax Assets
Deferred tax assets on our balance sheet primarily include federal and state net operating loss carry forwards (collectively “NOLs”) which are expected to result in future tax benefits. Realization of these NOLs assumes that we will be able to generate sufficient future taxable income to realize these assets. Deferred tax assets also include temporary differences betweenthe financial reporting basis and the income tax basis of our assets and liabilities at enacted tax rates expected to be in effect when such assets or liabilities are realized or settled. In 2013 and 2012, respectively, we utilized $1,412 and $1,056 of our available NOLs. As of July 31, 2013, we have approximately $10,444 of NOLs available to offset future taxable income.
We periodically assess the realizability of our available NOLs to determine whether we believe we will generate enough future taxable income to utilize substantially all of the available NOLs. We periodically assess the realizability of our available NOLs to determine whether we believe we will generate enough future taxable income to utilize some portion or all of the available NOLs. We determined that there is no allowance required on our Federal NOL. We determined that we will not be able to utilize the California NOL. As of July 31, 2013 and 2012, we have a $163 and $186 valuation allowance on state of California NOLs.
FINANCIAL CONDITION (in thousands)
Our total assets were $13,514 and $13,111 at July 31, 2013 and 2012, respectively, representing an increase of $403 or 3%.The increase in asset base is a result of cash flow from operations of $1,752, less cash dividends paid out to stockholders in 2013 of $530 and the utilization of $476 of deferred income taxes. In addition, we also repurchased 27 shares of our common stock for $101 through the stock repurchase program.
Our cash totaled $3,352 and $1,942 as of July 31, 2013 and 2012, respectively, representing an increase of $1,410, or 73%. Our cash flow activity is described in more detail below (see “Liquidity and Capital Resources”).
Accounts receivable balances, net of allowances of $363 and $319, were $711 and $716 as of July 31, 2013 and 2012 respectively, representing a decrease of $5 or 1%, primarily due to reduced revenue and the timing of our cycle close in comparable years.
| | | July 31, 2013 | | | | % of Gross
Accounts
Receivable | | | July 31, 2012 | | | | % of Gross
Accounts
Receivable | |
| Gross accounts receivable | | $ | 1,074 | | | | 100% | | | $ | 1,035 | | | | 100% | |
| Less: allowance | | | 363 | | | | 34% | | | | 319 | | | | 31% | |
| Net accounts receivable | | $ | 711 | | | | 66% | | | $ | 716 | | | | 69% | |
Our total current liabilities were $1,732 and $2,161 at July 31, 2013 and 2012, respectively, representing a decrease of $429 or 20%. The decrease is primarily due reductions of $92 in accrued expenses and $346 of commissions payable.
Our stockholders’ equity increased by $834 or 8% to $11,774 at July 31, 2013, compared to $10,940 at July 31, 2012 primarily due to net income of $1,070 and $93 in principal payments received on notes during 2013. This increase was offset somewhat by $530 in dividends paid and $101 of stock repurchases during 2013.
LIQUIDITY AND CAPITAL RESOURCES (in thousands)
Our principal sources of liquidity are our cash provided by operating activities and cash on hand. Net cash provided by operating activities was $1,752 and $1,893 for the years ended July 31, 2013 and 2012, respectively. Our cash balance as of July 31, 2013 totaled $3,352. Additionally, we have a revolving credit agreement for a $1,000 line of credit facility from our primary banking institution, U.S. Bank (“line of credit”), effective through November 30, 2013. We anticipate renewing the credit facility for another year. We have no outstanding balance on our line of credit as of July 31, 2013.
The following table presents a summary of our cash flows for the years ended 2013 and 2012 respectively (in thousands):
| | | Year Ended July 31, | |
| | | 2013 | | | 2012 | |
| Net cash provided by operating activities | | $ | 1,752 | | | $ | 1,893 | |
| Net cash provided by (used in) investing activities | | | 196 | | | | (255 | ) |
| Net cash used in financing activities | | | (538 | ) | | | (5,082 | ) |
| Increase (decrease) in cash and cash equivalents | | $ | 1,410 | | | $ | (3,444 | ) |
We have financed our operational needs through cash flow generated from operations. During 2013, our cash position increased by $1,410 to $3,352. In 2012 we used a significant portion of cash reserves, $4,506, to fund a tender offer. We also used operational cash flow provided by operating activities for routine operating expenses, membership list purchases, loans to brokers, stock buybacks and quarterly dividend payments to common stockholders.
As part of our contemplated future expansion activities and our evaluation of strategic alternatives and opportunities, we mayseek to acquire certain competitors or other business to business enterprises, or consider partnering or other collaboration agreements, or a merger or other strategic transaction. Such alliances, mergers or acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the expenditure of our cash or the incurrence of debt or contingent liabilities. We expect that our current working capital would be adequate for this purpose. However, we may seek to finance a portion of the acquisition cost subject to the consent of any secured creditors. We maintain a $1,000 line of credit facility from our primary banking institution which is effective through November 30, 2013, and which we anticipate renewing for another year. The line of credit was established to provide additional reserve capacity for general corporate and working capital purposes and, if necessary, to enable us to make future expenditures related to the growth and expansion of our business model. We believe that our financial condition is stable and that our cash balances, other liquid assets, and cash flows from operating activities provide adequate resources to fund ongoing operating requirements.
Inflation has not had a material impact on our business during the last two fiscal years. Inflation affecting the U.S. dollar is not expected to have a material effect on our operations in the foreseeable future.
The following summarizes our cash flows by quarter for 2013 and 2012:
| Year ended July 31, 2013 | | First
Quarter | | | Second
Quarter | | | Third
Quarter | | | Fourth
Quarter | | | Total | |
| | | | | | | | | | | | | | | | |
| Net cash provided by operating activities | | $ | 387 | | | $ | 195 | | | $ | 434 | | | $ | 736 | | | $ | 1,752 | |
| Net cash (used in) investing activities | | | 72 | | | | 74 | | | | (19 | ) | | | 69 | | | | 196 | |
| Net cash (used in) financing activities | | | (93 | ) | | | (116 | ) | | | (189 | ) | | | (140 | ) | | | (538 | ) |
| | | $ | 366 | | | $ | 153 | | | $ | 226 | | | $ | 665 | | | $ | 1,410 | |
| Year ended July 31, 2012 | | First
Quarter | | | Second
Quarter | | | Third
Quarter | | | Fourth
Quarter | | | Total | |
| | | | | | | | | | | | | | | | |
| Net cash provided by (used in) operating activities | | $ | 452 | | | $ | 501 | | | $ | (172 | ) | | $ | 1,112 | | | $ | 1,893 | |
| Net cash (used in) investing activities | | | (180 | ) | | | (6 | ) | | | (72 | ) | | | 3 | | | | (255 | ) |
| Net cash (used in) financing activities | | | (202 | ) | | | (144 | ) | | | (4,641 | ) | | | (95 | ) | | | (5,082 | ) |
| | | $ | 70 | | | $ | 351 | | | $ | (4,885 | ) | | $ | 1,020 | | | $ | (3,444 | ) |
Operating Activities
For the year ended July 31, 2013, net cash provided by operating activities was $1,752 compared to $1,893 in the year ended July 31, 2012, a decrease of $141, or 8%. The decrease in net cash provided by operating activities is primarily due to a decrease of $330 in commissions payable to brokers offset somewhat by a $101 increase in net income.
The difference between our net income and our net cash provided by operating activities was attributable to non-cash expenses included in net income, and changes in the operating assets and liabilities, as presented below (in thousands):
| | | Year ended July 31, | |
| | | 2013 | | | 2012 | |
| | | | | | | |
| Net income | | $ | 1,070 | | | $ | 969 | |
| Add: non-cash expenses | | | 1,140 | | | | 839 | |
| Less: changes in operating assets and liabilities | | | (458 | ) | | | 85 | |
| Net cash provided by operating activities | | $ | 1,752 | | | $ | 1,893 | |
Non-cash expenses are associated primarily with the amortization of intangible assets, depreciation and amortization of property and equipment, stock-based compensation expense, and the changes in the deferred portion of the provision for income taxes and gain on sale of membership lists.
Changes in operating assets and liabilities primarily reflect changes in working capital components of the balance sheet apart from cash and cash equivalents. Net cash provided by operating activities also reflects changes in some non-current components of the balance sheet, such as long-term deferred rent and non-current prepaid expenses and deposits.
As discussed earlier in the overview section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations, for each calendar year, we divide our operations into 13 four-week billing and commission cycles always ending on a Thursday, while we report our financial results as of the last day of each calendar month. The timing of billing and collection activities after the end of the billing cycle does not correspond with the end of the accounting period, therefore this timing difference results in the fluctuations of the balances of cash, accounts receivable, commissions payable and accrued commissions and therefore in periodic fluctuations in cash flows resulting from changes in operating assets and liabilities.
The total cash we received exclusively from our Marketplace members, excluding corporate- owned office sales, and net of credit card returns, electronic fund transfer returns, and return checks is as follows (in thousands):
| | | Year Ended July 31, | | | | |
| | | 2013 | | | | Percent
of total | | | 2012 | | | | Percent
of total | |
| Credit cards, net | | $ | 8,883 | | | | 66% | | | $ | 10,751 | | | | 69% | |
| Electronic fund transfers, net | | | 3,607 | | | | 27% | | | | 3,777 | | | | 24% | |
| Checks and cash, net | | | 986 | | | | 7% | | | | 1,110 | | | | 7% | |
| Cash received from Marketplace members, net | | $ | 13,476 | | | | 100% | | | $ | 15,638 | | | | 100% | |
Investing Activities
For the year ended July 31, 2013, net cash provided by investing activities was $196 compared with $255 used in investing activities in the year ended July 31, 2012, an increase of $451, or 177%. In the year ended July 31, 2013, the net cash provided by investing activities was primarily related to $348 in note receivable principal collections, offset somewhat by $160 in advances on loans and $48 used in the purchase of property and equipment.
In the year ended July 31, 2012, the net cash used in investing activities was primarily related to $324 in advances on loans and a $175 membership list purchase, offset somewhat by $259 in note receivable principal collections.
Financing Activities
Our net cash used in financing activities consists of contractual and discretionary debt repayments and discretionary repurchases of our common stock in order to provide more liquidity for our shareholders. The following summarizes our financing activities:
| Year ended July 31, 2013 | | First
Quarter | | | Second
Quarter | | | Third
Quarter | | | Fourth
Quarter | | | Total | |
| | | | | | | | | | | | | | | | |
| Principal payments on Private placement | | $ | 26 | | | $ | 26 | | | $ | 23 | | | $ | 18 | | | $ | 93 | |
| Cash dividend paid to common stockholders | | $ | (119 | ) | | $ | (116 | ) | | $ | (149 | ) | | $ | (146 | ) | | $ | (530 | ) |
| Discretionary repurchase of common stock | | | - | | | | (26 | ) | | | (63 | ) | | | (12 | ) | | | (101 | ) |
| | | $ | (93 | ) | | $ | (116 | ) | | $ | (189 | ) | | $ | (140 | ) | | $ | (538 | ) |
| Year ended July 31, 2012 | | First
Quarter | | | Second
Quarter | | | Third
Quarter | | | Fourth
Quarter | | | Total | |
| | | | | | | | | | | | | | | | |
| Principal payments on Private placement | | $ | 24 | | | $ | 23 | | | $ | 26 | | | $ | 23 | | | $ | 96 | |
| Cash dividend paid to common stockholders | | | (161 | ) | | | (163 | ) | | | (161 | ) | | | (119 | ) | | | (604 | ) |
| Discretionary repurchase of common stock | | | (65 | ) | | | (3 | ) | | | - | | | | - | | | | (68 | ) |
| Tender offer | | $ | - | | | $ | - | | | $ | (4,506 | ) | | $ | - | | | $ | (4,506 | ) |
| | | $ | (202 | ) | | $ | (143 | ) | | $ | (4,641 | ) | | $ | (96 | ) | | $ | (5,082 | ) |
We repurchased 27 and 17 shares of ITEX stock under our stock repurchase program in 2013 and 2012, respectively.
Commitments and Contingencies
We utilize leased facilities in the normal course of our business. As of July 31, 2013, the future minimum commitments under these operating leases are as follows:
Lease commitments
for the year ending
July 31, | | | |
| | | | | |
| 2014 | | | 166 | |
| 2015 | | | 127 | |
| Total | | $ | 293 | |
The lease expense, inclusive of utilities included in our lease payments, for our executive office space and corporate-owned offices for the years ended July 31, 2013 and 2012 was $172 and $215, respectively.
We have purchase commitments for telecommunications and data communications. As of July 31, 2013, the future minimum commitments under these purchase commitments are as follows:
| | | Telecommunications
and data
communications | |
| | | | |
Purchase commitments for
the year ending July 31, | | | |
| 2014 | | $ | 29 | |
| 2015 | | | 2 | |
| Total | | $ | 31 | |
OTHER MATTERS
Critical Accounting Policies and Estimates
We have identified the policies below as critical to our understanding of the results or our business operations. We discuss the impact and any associated risks related to these policies on our business operations throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results.
In the ordinary course of business, we have made a number of estimates and assumptions in preparing our financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates and assumptions. The following critical accounting policies are those that are most important to the portrayal of our consolidated financial statements. These policies require our most difficult, subjective, and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. For a summary of all of our significant accounting policies, including the critical accounting policies discussed below, refer toNote 1 ― “Summary of Significant Accounting Policies” included in the “Notes to Consolidated Financial Statements”, Item 8 – Financial Statements.
Revenue Recognition
We generate our revenue by charging members percentage-based transaction fees, association fees, and other fees assessed in United States dollars and Canadian dollars where applicable (collectively and as reported on our financial statements “USD” or “Cash”). We recognize revenue when persuasive evidence of an arrangement exists, the transaction has occurred or a cycle period has ended, the charges are fixed and determinable and no major uncertainty exists with respect to collectability.
Our largest sources of revenue are transaction fees and association fees. We charge members of the Marketplace an association fee every operating cycle in accordance with our members’ individual agreements. We also charge both the buyer and the seller a transaction fee based on the ITEX dollar value of that Marketplace transaction. Additionally, we may charge various auxiliary fees to members, such as annual membership dues, late fees, and insufficient fund fees. The total fees we charge to members are in USD and partially in ITEX dollars (see below, “Accounting for ITEX Dollar Activity”). We bill members for all fees at the end of each operating cycle. We track all financial activity in our internally developed database. Members have the option of paying USD fees automatically by credit card, by electronic funds transfer or by check. In both of the years ended July 31, 2013 and 2012, members made approximately 93% of their payments through electronic funds transfer or by credit card. Members that pay through our Autopay System will generally be charged a USD transaction fee equal to 6.0% of the ITEX dollar amount of the member’s purchases and sales during the operating cycle. If paying by check, generally, the USD transaction fee is 7.5% of the ITEX dollar amount of that member’s purchases and sales during the operating cycle. Additionally, regardless of a member’s transaction activity, each operating cycle we charge most members an association fee of $20 USD ($260 USD annually) and $10 ITEX dollars ($130 ITEX dollars annually). Transaction and association fees composed 97% and 98% of our total revenue in 2013 and 2012, respectively.
In each accounting cycle, we recognize as revenue all transaction fees, association fees and applicable other fees that occurred during that month regardless of which operating cycle the fees occurred. We defer annual dues, which are prepaid, and recognize this revenue over the periods they apply.
As discussed below, we generally do not record revenues or expenses in our financial statements for ITEX dollars we receive from or expend to members or brokers, but we do record revenues and expenses for ITEX dollars we spend on various products or services where the value of those ITEX dollars is readily determinable (see below, “Accounting for ITEX Dollar Activity”). Comparative results are as follows (in thousands):
| ITEX Dollar Summary | | Year Ended July 31, | |
| | | 2013 | | | 2012 | |
| Fees received from the Marketplace | | $ | 5,101 | | | $ | 5,180 | |
| Expenditures to and for the Marketplace | | | (5,098 | ) | | | (5,158 | ) |
| Increase | | $ | 3 | | | $ | 22 | |
Gross versus Net Revenue Recognition
In the normal course of business, we act as administrator of transactions between Marketplace members. We pay commissions to our brokers after the close of each operating cycle based on member transaction and association fees collected in USD. We report revenue based on the gross amount billed to the ultimate customer, the Marketplace member. When revenues are recorded on a gross basis, any commissions or other payments to brokers are recorded as costs or expenses so that the net amount (gross revenues less expenses) is reflected in operating income.
Determining whether revenue should be reported as gross or net is first based on an assessment of whether we are acting as the principal or acting as an agent in the transaction. In determining whether we serve as principal or agent, we follow the related guidance. Pursuant to such guidance, we serve as the principal in transactions in which we have substantial risks and rewards of ownership. The determination of whether we are acting as a principal or an agent in a transaction involves judgment and is based on an evaluation of the terms of an arrangement. In our case, we administer the Marketplace, act as a third-party record-keeper for our members’ transactions, bill Marketplace members directly pursuant to contractual agreements with them for which we establish the terms, collect all revenue, and assess the collectability of our accounts receivable monthly. Our revenues remain the property of ITEX.
Accounting for ITEX Dollar Activities
Primarily, we receive ITEX dollars from members’ transaction and association fees, but we also receive ITEX dollars, to a much lesser extent, from other member fees. We expend ITEX dollars for revenue sharing transaction fees and association fees with our Broker Network, and for general Marketplace costs. Our policy is to record transactions at the fair value of products or services received when those values are readily determinable
Our accounting policy follows the accounting standards codification which indicates that transactions in which non-monetary assets are exchanged for barter credits should be recorded at fair value of the assets (or services) involved. The fair value of the assets received (in this case ITEX dollars) should be used to measure the cost if it is more clearly evident than the fair value of the asset surrendered or service provided. Our position is that the fair value of the non-monetary asset exchanged is more clearly evident than the fair value of the ITEX dollar received. In addition, there is no cost basis to us for ITEX dollars. Our conclusion may change if we could convert ITEX dollars into USD in the near term, as evidenced by a historical practice of converting ITEX dollars into USD shortly after receipt, or if quoted market prices in USD existed for the ITEX dollar.
We expend ITEX dollars primarily on the following items:
| · | Co-op advertising with Marketplace members and brokers; |
| · | Revenue sharing with brokers for transaction fees and association fees; |
| · | Incentives to brokers for registering new members in the Marketplace. |
We believe that fair value should not be regarded as determinable within reasonable limits if major uncertainties exist about the realizability of the value that would be assigned to the asset received in a non-monetary transaction at fair value. If neither the fair value of the non-monetary asset (or service) transferred or received in the exchange is determinable within reasonable limits, the recorded amount of the non-monetary asset transferred from the enterprise may be the only measure of the transaction. When our ITEX dollar transactions during the periods presented in the accompanying financial statements lacked readily determinable fair values they were recorded at the cost basis of the trade dollars surrendered, which was zero. However, we have reflected in our financial statements those items that meet non-monetary recognition by having readily determinable fair values. Our consolidated statements of income include ITEX dollar expenses for corporate expenses for certain products or services we purchased at prices comparable to what we would have expended had we paid in USD.
While the accounting policies described above are used for financial reporting purposes, the Internal Revenue Service requires, for purposes of taxation, that we recognize revenues, expenses, assets, and liabilities for all transactions in which we either receive or spend ITEX dollars using the ratio of one USD per ITEX dollar. For this reason, we track our ITEX dollar activity in statements to members and brokers and in other ways necessary for the operation of the Marketplace and our overall business.
Valuation of Notes Receivable and Accounts Receivable
We determine a present value of our notes receivable using a monthly average Treasury note rate with approximately the same term as the note to approximate a market value interest rate when we determine that a negotiated interest rate does not properly reflect the risk associated with the notes. We calculate the effective rate on the note given the market rate and the payment streams and record the note accordingly. We periodically review our notes for possible impairment whenever events or changes in circumstances indicate that the carrying value has been impaired and may not be recoverable. Factors we consider important that could trigger an impairment review include the following:
| · | Significant underperformance relative to expected historical or projected future operating results; |
| · | Change in management of the franchisee or independent licensed broker responsible for the note. |
We assess the collectability of accounts receivable monthly based on past collection history and current events and circumstances. Accordingly, we adjust the allowance on accounts receivable to reflect net receivables that we ultimately expect to collect.
Valuation Allowance on Deferred Tax Assets
We account for income taxes using an asset and liability approach as required. This approach results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the book carrying amounts and the tax basis of assets and liabilities. We assess a valuation allowance on our deferred tax assets if it is more likely than not that a portion of our available deferred tax assets will not be realized. We record our deferred tax assets net of valuation allowances.
We also account for uncertainty in income taxes in accordance with related guidance. Under the related provisions, we recognize the tax benefits of tax positions only if it is more likely than not that the tax positions will be sustained, upon examination by the applicable taxing authorities, based on the technical merits of the positions. We also record any potential interest and penalties associated with our tax positions. We have opted to record interest and penalties as a component of income tax expense.
Deferred tax assets on our balance sheet primarily include Federal and State net operating loss carry forwards (collectively “NOLs”) which are expected to result in future tax benefits. Realization of these NOLs assumes that we will be able to generate sufficient future taxable income to realize these assets. Deferred tax assets also include temporary differences betweenthe financial reporting basis and the income tax basis of its assets and liabilities at enacted tax rates expected to be in effect when such assets or liabilities are realized or settled.
In assessing the recoverability of deferred tax assets, we periodically assess the realizability of our available NOLs to determine whether we believe we will generate enough future taxable income to utilize some portion or all of the available NOLs. We determined that there is no allowance required on our Federal NOL. We determined that we will not be able to utilize the California NOL. As of July 31, 2013 and 2012, we have a $163 and $186 valuation allowance on state of California NOLs.
On July 31, 2013, we had NOLs of approximately $10,444 available to offset future taxable income. When circumstances warrant, we re-assess the realizability of our available NOLs for future periods. When this occurs, if we determine that the realizability of our NOLs has changed, we record the impact of that change as a component of our consolidated statements of income in that period.
The deferred tax assets recorded at July 31, 2013 represent our current estimate of all deferred tax benefits to be utilized in the current year and future periods beyond 2013.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired, including domains and other definite-lived intangible assets, and liabilities assumed in business combinations accounted for under the purchase method.
Goodwill acquired in a purchase business combination is determined to have an indefinite useful life and is not amortized, but instead tested for impairment at least annually. In testing goodwill for impairment, we first assess qualitative factors before calculating the fair value or a reporting unit in step 1 of the goodwill impairment test. If we determine that the fair value of the reporting unit is more likely than not less than its carrying value, then we will perform the two-phase approach. The first phase is a screen for potential impairment, while the second phase (if necessary) measures the amount of impairment, if any. Goodwill is written down and charged to operating results in any period in which the recorded value of goodwill exceeds its fair value. We analyzed goodwill as of July 31, 2013, and we did not identify any impairment.
Business Combinations
The Company accounts for business combinations using the purchase method of accounting. The total consideration paid in an acquisition is allocated to the fair value of the acquired company’s identifiable assets and liabilities. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. The consolidated financial statements reflect the results of operations of an acquired business from the completion date of an acquisition. The costs to acquire a business are expensed in the period incurred.
The Company identifies and records separately the intangible assets acquired apart from goodwill based on the specific criteria for separate recognition established per the accounting standards codification, namely:
| • | the asset arises from contractual or other legal rights; or |
| • | the asset is capable of being separated from the acquired entity and sold, transferred, licensed, rented or exchanged. |
Software for Internal Use
We have developed extensive software to manage and track the ITEX dollar activity in the Marketplace and to calculate USD and ITEX dollar fees accordingly. We account for qualifying costs incurred in the development of software for internal use in accordance with the financial guidance. In accordance with this guidance, costs incurred in the planning and post-implementation stages are expensed as incurred, while costs relating to application development are capitalized. Qualifying software development costs, including software in development meeting certain criteria, are included as an element of property and equipment in the consolidated balance sheets.
Share-based Payments
The Company accounts for share-based compensation to its employees and directors and measures of the amount of compensation expense for all stock-based awards at fair value on the date of grant and recognition of compensation expense over the service period for awards expected to vest. Restricted stock awards issued to employees and directors are measured based on the fair market values of the underlying stock on the dates of grant.
Recent Accounting Pronouncements
In July 2013, the FASB issued ASU No. 2013-011,“Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.”This new guidance provides specific financial statement presentation requirements of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance states that an unrecognized tax benefit in those circumstances should be presented as a reduction to the deferred tax asset. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The company does not expect to early adopt this guidance and does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.
There were other various accounting standards and interpretations issued recently, none of which are expected to have a material impact on the Company’s consolidated financial position, operations or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of ITEX Corporation are included in Item 8:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statement of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
ITEX Corporation
Bellevue, Washington
We have audited the accompanying consolidated balance sheets of ITEX Corporation (the “Company”) as of July 31, 2013 and 2012 and the related consolidated statements of income, stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the 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 audits to obtain reasonable assurance about whether the consolidated 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 audits 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 ITEX Corporation as of July 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
EKS&H LLLP
October 21, 2013
Denver, Colorado
ITEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
| | | July 31, 2013 | | | July 31, 2012 | |
| ASSETS | | | | | | | | |
| Current assets: | | | | | | | | |
| Cash | | $ | 3,352 | | | $ | 1,942 | |
| Accounts receivable, net of allowance of $363 and $319 | | | 711 | | | | 716 | |
| Prepaid expenses | | | 107 | | | | 98 | |
| Loans and advances | | | 7 | | | | 12 | |
| Prepaid advertising credits | | | - | | | | 3 | |
| Deferred tax asset, net of allowance of $30 and $23 | | | 818 | | | | 603 | |
| Notes receivable | | | 366 | | | | 334 | |
| Other current assets | | | 13 | | | | 47 | |
| Total current assets | | | 5,374 | | | | 3,755 | |
| | | | | | | | | |
| Property and equipment, net of accumulated depreciation of $423 and $425 | | | 57 | | | | 43 | |
| Goodwill | | | 3,191 | | | | 3,191 | |
| Deferred tax asset, net of allowance of $133 and $163 and net of current portion | | | 3,549 | | | | 4,293 | |
| Intangible assets, net of accumulated amortization of $3,180 and $2,945 | | | 248 | | | | 525 | |
| Notes receivable - net of current portion | | | 1,065 | | | | 1,285 | |
| Other long-term assets | | | 30 | | | | 19 | |
| Total assets | | | 13,514 | | | | 13,111 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts and other expenses payable | | | 101 | | | | 85 | |
| Commissions payable to brokers | | | 308 | | | | 654 | |
| Accrued commissions to brokers | | | 833 | | | | 842 | |
| Accrued expenses | | | 320 | | | | 412 | |
| Deferred revenue | | | 33 | | | | 32 | |
| Advance payments | | | 130 | | | | 136 | |
| Note Payable, current portion | | | 7 | | | | - | |
| Total current liabilities | | | 1,732 | | | | 2,161 | |
| | | | | | | | | |
| Long-term liabilities: | | | | | | | | |
| Other long-term liabilities | | | 8 | | | | 10 | |
| Total Liabilities | | | 1,740 | | | | 2,171 | |
| | | | | | | | | |
| Commitments and contingencies | | | | | | | | |
| | | | | | | | | |
| Stockholders’ equity: | | | | | | | | |
| Common stock, $0.01 par value; 9,000 shares authorized; 2,596 shares and 2,614 shares issued and outstanding, respectively | | | 26 | | | | 26 | |
| Additional paid-in capital | | | 25,214 | | | | 25,183 | |
| Stockholder notes receivable | | | (226 | ) | | | (489 | ) |
| Accumulated deficit | | | (13,240 | ) | | | (13,780 | ) |
| Total stockholders' equity | | | 11,774 | | | | 10,940 | |
| | | | | | | | | |
| Total liabilities and stockholders’ equity | | $ | 13,514 | | | $ | 13,111 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
| | | Year ended July 31, | |
| | | 2013 | | | 2012 | |
| Revenue: | | | | | | | | |
| Marketplace and other revenue | | $ | 14,825 | | | $ | 15,786 | |
| | | | | | | | | |
| Costs and expenses: | | | | | | | | |
| Cost of Marketplace revenue | | | 9,403 | | | | 10,165 | |
| Corporate salaries, wages and employee benefits | | | 2,022 | | | | 1,977 | |
| Selling, general and administrative | | | 1,672 | | | | 2,226 | |
| Depreciation and amortization | | | 264 | | | | 308 | |
| | | | 13,361 | | | | 14,676 | |
| | | | | | | | | |
| Income from operations | | | 1,464 | | | | 1,110 | |
| | | | | | | | | |
| Other income/(expense): | | | | | | | | |
| Interest income | | | 109 | | | | 102 | |
| Other income (expense), net | | | (1 | ) | | | 312 | |
| | | | 108 | | | | 414 | |
| | | | | | | | | |
| Income before income taxes | | | 1,572 | | | | 1,524 | |
| | | | | | | | | |
| Income tax expense | | | 502 | | | | 555 | |
| | | | | | | | | |
| Net income | | $ | 1,070 | | | $ | 969 | |
| | | | | | | | | |
| Net income per common share: | | | | | | | | |
| Basic | | $ | 0.41 | | | $ | 0.29 | |
| Diluted | | $ | 0.41 | | | $ | 0.29 | |
| | | | | | | | | |
| Weighted average shares outstanding: | | | | | | | | |
| Basic | | | 2,616 | | | | 3,344 | |
| Diluted | | | 2,626 | | | | 3,345 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
| | | Common Stock | | | Additional paid | | | Stockholder Notes | | | Accumulated | | | | |
| | | Shares | | | Amount | | | in capital | | | Receivable | | | deficit | | | Total | |
| | | | | | | | | | | | | | | | | | | |
| Balance, July 31, 2011 | | | 3,646 | | | $ | 36 | | | $ | 29,452 | | | $ | (585 | ) | | $ | (14,145 | ) | | $ | 14,758 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock based compensation expense | | | 58 | | | | 1 | | | | 294 | | | | | | | | | | | | 295 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock repurchased and retired | | | (17 | ) | | | | | | | (68 | ) | | | | | | | | | | | (68 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Tender Offer | | | (1,073 | ) | | | (11 | ) | | | (4,495 | ) | | | | | | | | | | | (4,506 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments on Broker notes receivables | | | | | | | | | | | | | | | 96 | | | | | | | | 96 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Dividend payment | | | | | | | | | | | | | | | | | | | (604 | ) | | | (604 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Income | | | | | | | | | | | | | | | | | | | 969 | | | | 969 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, July 31, 2012 | | | 2,614 | | | $ | 26 | | | $ | 25,183 | | | $ | (489 | ) | | $ | (13,780 | ) | | $ | 10,940 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock based compensation expense | | | 52 | | | | 1 | | | | 301 | | | | | | | | | | | | 302 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock repurchased and retired | | | (27 | ) | | | | | | | (101 | ) | | | | | | | | | | | (101 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments on Broker notes receivables | | | | | | | | | | | | | | | 93 | | | | | | | | 93 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cancellation of Broker stock purchase | | | (43 | ) | | | (1 | ) | | | (169 | ) | | | 170 | | | | | | | | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Dividend payment | | | | | | | | | | | | | | | | | | | (530 | ) | | | (530 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Income | | | | | | | | | | | | | | | | | | | 1,070 | | | | 1,070 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, July 31, 2013 | | | 2,596 | | | $ | 26 | | | $ | 25,214 | | | $ | (226 | ) | | $ | (13,240 | ) | | $ | 11,774 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | Year ended July 31, | |
| | | 2013 | | | 2012 | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
| Net income | | $ | 1,070 | | | $ | 969 | |
| Items to reconcile to net cash provided by operating activities: | | | | | | | | |
| Depreciation and amortization | | | 264 | | | | 308 | |
| Loss on disposal of equipment | | | 5 | | | | 6 | |
| Stock-based compensation | | | 302 | | | | 295 | |
| Increase (decrease) in allowance for uncollectible receivables | | | 44 | | | | (35 | ) |
| Decrease in deferred income taxes | | | 529 | | | | 583 | |
| Gain on Sale - Membership lists | | | (4 | ) | | | (318 | ) |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (39 | ) | | | 124 | |
| Prepaid expenses and advertising credits | | | (6 | ) | | | 90 | |
| Loans and advances | | | 5 | | | | (2 | ) |
| Other assets | | | 23 | | | | (35 | ) |
| Accounts and other expenses payable | | | 16 | | | | 9 | |
| Commissions payable to brokers | | | (346 | ) | | | (15 | ) |
| Accrued commissions to brokers | | | (9 | ) | | | 57 | |
| Accrued expenses | | | (92 | ) | | | (133 | ) |
| Deferred revenue and other long-term liabilites | | | 1 | | | | (15 | ) |
| Long-term liabilities | | | (5 | ) | | | 2 | |
| Advance payments | | | (6 | ) | | | 3 | |
| Net cash provided by operating activities | | | 1,752 | | | | 1,893 | |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
| Membership list purchase | | | (30 | ) | | | (175 | ) |
| Payments received from notes receivable - corporate office sales | | | 348 | | | | 259 | |
| Proceeds from notes payable | | | 15 | | | | - | |
| Payments of note payable | | | (5 | ) | | | - | |
| Notes receivable - advances | | | (84 | ) | | | (324 | ) |
| Purchase of property and equipment | | | (48 | ) | | | (15 | ) |
| Net cash provided by (used in) investing activities | | | 196 | | | | (255 | ) |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
| Principal payments on notes receivable from broker stock purchase | | | 93 | | | | 96 | |
| Repurchase of Common stock | | | (101 | ) | | | (68 | ) |
| Tender Offer | | | - | | | | (4,506 | ) |
| Cash dividend paid to Common Stockholders | | | (530 | ) | | | (604 | ) |
| Net cash used in financing activities | | | (538 | ) | | | (5,082 | ) |
| | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | 1,410 | | | | (3,444 | ) |
| Cash and cash equivalents at beginning of period | | | 1,942 | | | | 5,386 | |
| Cash and cash equivalents at end of period | | $ | 3,352 | | | $ | 1,942 | |
| | | | | | | | | |
| Supplemental cash flow information: | | | | | | | | |
| Cash paid for taxes | | | 17 | | | | 69 | |
| | | | | | | | | |
| Non-cash activities: | | | | | | | | |
| Notes for asset sales | | | - | | | | 470 | |
| Notes for member list | | | 76 | | | | 175 | |
| Cancellation of portion of private placement notes and equity | | | 170 | | | | - | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
ITEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts unless otherwise indicated)
NOTE 1 - DESCRIPTION OF OUR COMPANY AND SUMMARY OF OUR SIGNIFICANT ACCOUNTING POLICIES
Description of our Company
ITEX Corporation (“ITEX”, “Company”, “we” or “us”) was incorporated in October 1985 in the State of Nevada. Through our independent licensed broker and franchise network, and corporate-owned offices (individually, “broker,” and together the “Broker Network”) in the United States and Canada, we operate a leading exchange for cashless business transactions (the “Marketplace”) where products and services are exchanged for “currency” only usable in the Marketplace (“ITEX dollars”). We administer the Marketplace and act as a third-party record-keeper for our members’ transactions. A summary of significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows:
Principles of Consolidation
The consolidated financial statements include the accounts of ITEX Corporation and its wholly owned subsidiary, BXI Exchange, Inc. All inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions affecting the amounts reported in the consolidated financial statements and accompanying notes. Changes in these estimates and assumptions may have a material impact on the Company’s financial statements and notes. Examples of estimates and assumptions include estimating:
| · | certain provisions such as allowances for accounts receivable and notes receivable |
| · | any impairment of long-lived assets |
| · | useful lives of property and equipment |
| · | the value and expected useful life of intangible assets and goodwill |
| · | the value of assets and liabilities acquired through business combinations |
| · | tax provisions and valuation allowances |
| · | accrued commissions and other accrual expenses |
| · | litigation matters described herein |
Actual results may vary from estimates and assumptions that were used in preparing the financial statements.
Operating and Accounting Cycles
For each calendar year, we divide our operations into 13 four-week billing and commission cycles always ending on a Thursday (“operating cycle”). For financial statement purposes, our fiscal year is from August 1 to July 31 (“year”, “2013” for August 1, 2012 to July 31, 2013, “2012” for August 1, 2011 to July 31, 2012). We report our results as of the last day of each calendar month (“accounting cycle”).
Business Combinations
The Company accounts for business combinations using the purchase method of accounting. The total consideration paid in an acquisition is allocated to the fair value of the acquired company’s identifiable assets and liabilities. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. The consolidated financial statements reflect the results of operations of an acquired business from the completion date of an acquisition. The costs to acquire a business, including transaction costs, are expensed as incurred.
The Company identifies and records separately the intangible assets acquired apart from goodwill based on the specific criteria for separate recognition established per the accounting standards codification, namely:
| • | the asset arises from contractual or other legal rights; or |
| • | the asset is capable of being separated from the acquired entity and sold, transferred, licensed, rented or exchanged. |
Concentrations of Credit Risk
At July 31, 2013, we maintained our cash balances at a U.S. Bank branch in Portland, Oregon, an investment bank, a Royal Bank of Canada branch in Vancouver, Canada, and a Bank of Montreal branch in Toronto, Canada. The balances are insured by the Federal Deposit Insurance Corporation up to $250 U.S. dollars and by the Canadian Deposit Insurance Corporation up to $100 Canadian dollars.
Accounts and Notes Receivable
We assess the collectability of accounts receivable monthly based on past collection history and current events and circumstances. Accordingly, we adjust the allowance on accounts receivable to reflect net receivables that we ultimately expect to collect.
We review all notes receivable for possible impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying value has been impaired and may not be recoverable. Factors considered important that could trigger an impairment review include significant underperformance relative to expected historical or projected future operating results and a change in management of the franchisee or independent licensed broker responsible for the note.
Advertising Credits
As a result of a business acquisition in August 2008, the Company obtained advertising credits, which represent prepaid credits for future media print and broadcast placements. The Company recorded the portion of these advertising credits that are expected to be utilized in the next year as a current asset and the balance as a long term asset. The Company originally recorded the cost of the advertising credits at the fair value at the time of business combination using a net realizable value approach. Under this approach, the value is determined based on the estimated future selling price less reasonable costs of disposal.
The Company began using the advertising credits for resale to its customers, primarily for ITEX dollars. In addition to ITEX dollars, the Company also receives its cash transaction fee on sales of the advertising credits for ITEX dollars. The asset is relieved and the expense is recorded as the advertising credits are sold by the Company to its customers or as the Company utilizes such credits in its operations. The Company recognized $0 and $17 expense on sale of advertising credits in the years ended 2013 and 2012, respectively. Additionally the Company used approximately $2 and $55 of advertising credits for its own advertising needs in the years ended 2013 and 2012, respectively.
Loans and Advances and Notes Receivable
At our discretion, we occasionally allow members who complete large transactions to pay the related transaction fee over time, typically ranging from three to six operating cycles. The aggregate total owed to us on July 31, 2013 is $7. Interest rates are typically 13% charged on the outstanding balances. The maximum individual balance owed is $1. Payoff dates for the loans are scheduled within one year.
From time to time we finance the operational and expansion activities of our brokers. We loan brokers funds for general operational purposes, to acquire the management rights to select member accounts, and for other reasons. These loans are repaid from regular deductions from broker commissions. The amount of loans to brokers as of July 31, 2013 was $1,431. Interest rates are typically 6% to 8% charged on the outstanding balances. Payoff dates for the loans are from the year 2014 to 2023.
Property and Equipment
We report property and equipment at cost less accumulated depreciation recorded on a straight-line basis over useful lives ranging from three to seven years. Included in property and equipment are additions and improvements that add to productive capacity or extend useful life of the assets. Property and equipment also includes internally developed software (refer to “Software for Internal Use”). When we sell or retire property or equipment, we remove the cost and related accumulated depreciation from the balance sheet and record the resulting gain or loss in the income statement. We record an expense for the costs of repair and maintenance as incurred.
Software for Internal Use
We have developed extensive software to manage and track the ITEX dollar activity in the Marketplace to calculate USD and ITEX dollar fees accordingly. We account for qualifying costs incurred in the development of software for internal use in accordance with the financial guidance. Costs incurred in the planning and post-implementation stages are expensed as incurred, while costs relating to application development are capitalized. Qualifying software development costs, including software in development meeting certain criteria, are included as an element of property and equipment in the consolidated balance sheets.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired, including domains and other definite-lived intangible assets, and liabilities assumed in business combinations accounted for under the purchase method.
Goodwill acquired in a purchase business combination is determined to have an indefinite useful life and is not amortized, but instead tested for impairment at least annually. In testing goodwill for impairment, we first assess qualitative factors before calculating the fair value or a reporting unit in step 1 of the goodwill impairment test. If we determine that the fair value of the reporting unit is more likely than not less than its carrying value, then we will perform the two-phase approach. The first phase is a screen for potential impairment, while the second phase (if necessary) measures the amount of impairment, if any. Goodwill is written down and charged to operating results in any period in which the recorded value of goodwill exceeds its fair value. We analyzed goodwill as of July 31, 2013 and we did not identify any impairment.
Intangible Assets with Definite Lives
Intangible assets acquired in business combinations are estimated to have definite lives and are comprised of membership lists, noncompetition agreements and trade names. The Company amortizes costs of acquired intangible assets using the straight-line method over the contractual life of one to three years for noncompetition agreements, the estimated life of six to ten years for membership lists and the estimated life of ten years for trade names.
The carrying value of intangible assets with definite lives is reviewed on a regular basis for the existence of facts that may indicate that the assets are impaired. An asset is considered impaired when the estimated undiscounted future cash flows expected to result from its use and disposition are less than the amount of its carrying value. If the carrying value of an asset is deemed not recoverable, it is adjusted downward to the estimated fair value.
Long-Lived Assets
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. We look primarily at the market values of the assets when available, or, alternatively, the undiscounted future cash flows in our assessment of whether or not they have been impaired. If impairment is deemed to have occurred, we then measure the impairment by looking to the excess of the carrying value over the discounted future cash flows or market value, as appropriate.
Commissions Payable to Brokers and Accrued Commissions to Brokers
We compute commissions to brokers as a percentage of cash collections of revenues from association fees, transactions fees, and other fees. We pay most commissions in two tranches with approximately 50% paid one week after the end of the operating cycle and the remainder paid two weeks later. Commissions payable to brokers on our balance sheet as of July 31, 2013 represents commissions payable from the operating cycle ending July 25, 2013. In 2012, the closest operating cycle ended July 26, 2012. Accrued commissions to brokers on our balance sheets are the estimated commissions on the net accounts receivable balance and unpaid commissions on cash already collected as of the financial statement date.
Deferred Revenue
We bill annual dues to certain members acquired as part of legacy fee plans related to acquisitions. We defer this revenue and recognize it over the annual period to which it applies. As of July 31, 2013 and 2012 we have $33 and $32 of annual dues deferred on our balance sheet.
Advance Payments
In some cases, members pre-pay transaction and/or association fees or receive USD credits on their accounts for previously paid fees associated with transactions that are subsequently reversed. We defer these payments and recognize revenue when these fees are earned.
Fair Value of Financial Instruments
All of our financial instruments are recognized in our balance sheet. The carrying amount of our financial instruments including cash, accounts receivable, loans and advances, accounts payable, commissions payable and accrued commissions and other accruals approximate their fair values at July 31, 2013 due to the short-term nature of these instruments. All of these instruments have terms of less than one year. For notes receivable, the Company has determined that the rates are commensurate with current rates for similar transactions, and therefore, net book value approximates fair value.
The fair value of notes payable is based on rates currently available to us for debt of similar terms and remaining maturities. There are no quoted market prices for the debt or similar debt; though we believe the fair value approximates the carrying amounts on our balance sheets due to the short-term nature of these instruments. We have $10 and $0 of note payable debt outstanding as of July 31, 2013 and 2012, respectively.
Revenue Recognition
We generate our revenue by charging members percentage-based transaction fees, association fees, and other fees assessed in United States dollars and Canadian dollars where applicable (collectively and as reported on our financial statements “USD” or “Cash”). We recognize revenue when persuasive evidence of an arrangement exists, the transaction has occurred or a cycle period has ended, the charges are fixed and determinable and no major uncertainty exists with respect to collectability.
Our largest sources of revenue are transaction fees and association fees. We charge members of the Marketplace an association fee every operating cycle in accordance with our members’ individual agreements. We also charge both the buyer and the seller a transaction fee based on the ITEX dollar value of that Marketplace transaction. Additionally, we may charge various auxiliary fees to members, such as annual membership dues, late fees, and insufficient fund fees. The total fees we charge to members are in USD and partially in ITEX dollars (see below, “Accounting for ITEX Dollar Activities”). We bill members for all fees at the end of each operating cycle. We track all financial activity in our internally developed database. Members have the option of paying USD fees automatically by credit card, by electronic funds transfer or by check. In both of the years ended July 31, 2013 and 2012, members made approximately 93% of their payments through electronic funds transfer or by credit cards using our Preferred Member Autopay System (“Autopay System”). If paying through our Autopay System, generally, the USD transaction fee is 6% of the ITEX dollar amount of the member’s purchases and sales during the operating cycle. If paying by check, generally, the USD transaction fee is 7.5% of the ITEX dollar amount of that member’s purchases and sales during the operating cycle. Additionally, regardless of a member’s transaction activity, each operating cycle we charge most members an association fee of $20 USD ($260 USD annually) and $10 ITEX dollars ($130 ITEX dollars annually). Transaction and association fees composed 97% and 98% of our total revenue in 2013 and 2012, respectively.
In each accounting cycle, we recognize as revenue all USD transaction fees, association fees and applicable other fees that occurred during that month regardless of which operating cycle the fees occurred. Annual dues, billed in advance of the applicable service periods, are deferred and recognized into revenue on a straight-line basis over the term of one year.
For transaction and association fees charged to members, we share a portion of our revenue with the brokers in the Broker Network in the form of commissions based on a percentage of cash collections from members. For those fees, revenues are recorded on a gross basis. Commissions to brokers are recorded as cost of revenue in the period corresponding to the revenue stream on which these commissions are based.
We record an allowance for uncollectible accounts based upon its assessment of various factors. We consider historical experience, the age of the accounts receivable balances, the credit quality of its customers, current economic conditions and other factors that may affect customers’ ability to pay to determine the level of allowance required.
Gross versus Net Revenue Recognition
In the normal course of our core business, we act as administrator to execute transactions between Marketplace members. We pay commissions to our brokers after the close of each operating cycle based on member transaction and association fees collected in USD. We report revenue based on the gross amount billed to our ultimate customer, the Marketplace member. When revenues are recorded on a gross basis, any commissions or other payments to brokers are recorded as costs or expenses so that the net amount (gross revenues less expenses) is reflected in operating income.
Accounting for ITEX Dollar Activities
Primarily, we receive ITEX dollars from members’ transaction and association fees, but we also receive ITEX dollars, to a much lesser extent, from other member fees. We expend ITEX dollars for revenue sharing transaction fees and association fees with our Broker Network, and for general Marketplace costs. Our policy is to record transactions at the fair value of products or services received when those values are readily determinable.
Our accounting policy follows the accounting standards codification which indicates that transactions in which non-monetary assets are exchanged for barter credits should be recorded at fair value of the assets (or services) involved. The fair value of the assets received (in this case ITEX dollars) should be used to measure the cost if it is more clearly evident than the fair value of the asset surrendered or service provided. Our position is that the fair value of the non-monetary asset exchanged is more clearly evident than the fair value of the ITEX dollar received. In addition, there is no cost basis to us for ITEX dollars. Our conclusion may change if we could convert ITEX dollars into USD in the near term, as evidenced by a historical practice of converting ITEX dollars into USD shortly after receipt, or if quoted market prices in USD existed for the ITEX dollar.
We expend ITEX dollars primarily on the following items:
| · | Co-op advertising with Marketplace members and brokers; |
| · | Revenue sharing with brokers for transaction fees and association fees; |
| · | Incentives to brokers for registering new members in the Marketplace. |
We believe that fair value should not be regarded as determinable within reasonable limits if major uncertainties exist about the realizability of the value that would be assigned to the asset received in a non-monetary transaction at fair value. If neither the fair value of the non-monetary asset (or service) transferred or received in the exchange is determinable within reasonable limits, the recorded amount of the non-monetary asset transferred from the enterprise may be the only measure of the transaction. When our ITEX dollar transactions during the periods presented in the accompanying financial statements lacked readily determinable fair values they were recorded at the cost basis of the trade dollars surrendered, which was zero. However, we have reflected in our financial statements those items that meet non-monetary recognition by having readily determinable fair values. Our consolidated statements of income include ITEX dollar expenses for corporate expenses for certain products or services we purchased at prices comparable to what we would have expended had we paid in USD.
While the accounting policies described above are used for financial reporting purposes, the Internal Revenue Service requires, for purposes of taxation, that we recognize revenues, expenses, assets, and liabilities for all transactions in which we either receive or spend ITEX dollars using the ratio of one USD per ITEX dollar. For this reason, we track our ITEX dollar activity in statements to members and brokers and in other ways necessary for the operation of the Marketplace and our overall business.
Advertising Expenses
We expense all advertising costs as incurred. Advertising expense was $21 and $55 for the years ending July 31, 2013 and 2012, respectively.
Share-based Payments
We account for share-based compensation to our employees, contractors and directors and measure the amount of compensation expense for all stock-based awards at fair value on the date of grant and recognition of compensation expense over the service period for awards expected to vest. Restricted stock awards issued to employees, contractors and directors are measured based on the fair market values of the underlying stock on the dates of grant. Share based expense was $302 and $295 for the years ending July 31, 2013 and 2012, respectively.
Operating Leases
We account for our executive office lease and other property leases in accordance with related guidance. Accordingly, because our executive office lease has scheduled rent escalation clauses, we record minimum rental payments on a straight-line basis over the term of the lease. We record the appropriate deferred rent liability or asset and amortize that deferred rent over the term of the lease as an adjustment to rent expense.
Accounting for Income Taxes
We account for income taxes using an asset and liability approach as required. Such approach results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the book carrying amounts and the tax basis of assets and liabilities. We assess a valuation allowance on our deferred tax assets if it is more likely than not that a portion of our available deferred tax assets will not be realized. We record our deferred tax assets net of valuation allowances.
We also account for uncertainty in income taxes in that we recognize the tax benefits of tax positions only if it is more likely than not that the tax positions will be sustained, upon examination by the applicable taxing authorities, based on the technical merits of the positions. As required, we record potential interest and penalties associated with our tax positions. We have opted to record interest and penalties, if any, as a component of income tax expense.
Contingencies
In the normal course of our business we are periodically involved in litigation or claims. We record litigation or claim-related expenses upon evaluation of among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. We accrue for settlements when the outcome is probable and the amount or range of the settlement can be reasonably estimated. In addition to our judgments and use of estimates, there are inherent uncertainties surrounding litigation and claims that could result in actual settlement amounts that differ materially from estimates. We expense our legal costs associated with these matters when incurred.
Income per Share
We prepare our financial statements on the face of the income statement for both basic and diluted earnings per share. Basic earnings per share excludes potential dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. As of July 31, 2013, we had no contracts to issue common stock, other than warrants outstanding to purchase up to 20 shares of common stock. The Company had 10 unvested restricted stock units that were dilutive and 297 unvested restricted stock units that were anti-dilutive as of July 31, 2013.
NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS
In July 2013, the FASB issued ASU No. 2013-011,“Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.”This new guidance provides specific financial statement presentation requirements of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance states that an unrecognized tax benefit in those circumstances should be presented as a reduction to the deferred tax asset. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The company does not expect to early adopt this guidance and does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.
There were other various accounting standards and interpretations issued recently, none of which are expected to have a material impact on the Company’s consolidated financial position, operations or cash flows.
NOTE 3 – CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, COMMISSIONS PAYABLE TO BROKERS AND ACCRUED COMMISSIONS TO BROKERS
The timing differences between our operating cycles and our accounting cycles cause fluctuations in the comparative balances of cash and cash equivalents, accounts receivable, commissions payable to brokers and accrued commissions to brokers presented on the consolidated balance sheets. Depending on the length of time between the end of the operating cycle and the end of the accounting cycle, members’ payments on accounts receivable balances may vary. The longer the time, the greater amount of USD collections causes an increase in the reported cash and cash equivalents balance and a decrease in the net accounts receivable balance. The difference between our operating cycle ending date and the reporting date for July 31, 2013 was six business days as our cycle end date was on July 25, 2013. In 2012, our operating cycle ending date was July 26, 2012 or five business days different than the accounting cycle end date of July 31, 2012.
We compute commissions to brokers as a percentage of USD collections of our revenues from association fees, transactions fees, and other fees. Commissions payable to brokers include amounts owed for the most recently ended operating cycle. We pay commissions in two tranches with approximately 50% paid approximately one week after the end of the operating cycle and the remainder paid approximately two weeks later. Commissions accrued are the estimated commissions on the net accounts receivable balance and USD collections on accounts receivable since the most recently ended operating cycle.
Our payments for salaries and wages to our employees occur on the same bi-weekly schedule as our commission payments to brokers.
NOTE 4 – NOTES RECEIVABLE
Notes receivables have been originated primarily by the sales of corporate-owned offices to brokers and loans for general operating purposes. In 2013, we originated loans to a number of brokers as new notes receivables in the amount of $160.
In 2012 we sold a number of membership lists primarily related to the sale of corporate-owned stores. As part of these member list sales and other loans to existing broker offices, new notes receivables were originated in the amount of $969.
The aggregate total owed to us on July 31, 2013 is $1,431. Payoff dates for the loans are scheduled between 2013 and 2023.
Original Principal
Balance on Notes | | | Principal Additions
in 2013 | | | Balance Receivable
at
July 31, 2013 | | | Current Portion | | | Long-Term
Portion | |
| $ | 1,998 | | | $ | 160 | | | $ | 1,431 | | | $ | 366 | | | $ | 1,065 | |
The activity for Notes receivables was as follows:
| Balance at July 31, 2011 | | $ | 909 | |
| Principal additions | | | 969 | |
| Interest income at stated rates | | | 80 | |
| Payments received | | | (339 | ) |
| Balance at July 31, 2012 | | $ | 1,619 | |
| | | | | |
| Principal additions | | | 160 | |
| Interest income at stated rates | | | 98 | |
| Payments received | | | (446 | ) |
| Balance at July 31, 2013 | | $ | 1,431 | |
NOTE 5 - PROPERTY AND EQUIPMENT
The following table summarizes property and equipment:
| | | July 31, 2013 |
| Fixed Asset Type | | Estimated
Useful Life | | Cost | | | Accumulated
Depreciation | | | Net Book
Value | |
| Computers | | 3 years | | $ | 286 | | | $ | (238 | ) | | $ | 48 | |
| Software | | 3 years | | | 88 | | | | (86 | ) | | | 2 | |
| Equipment | | 7 years | | | 40 | | | | (33 | ) | | | 7 | |
| Furniture | | 7 years | | | 14 | | | | (14 | ) | | | - | |
| Leasehold Improvements | | 3.3 years | | | 52 | | | | (52 | ) | | | - | |
| | | | | $ | 480 | | | $ | (423 | ) | | $ | 57 | |
| | | July 31, 2012 |
| Fixed Asset Type | | Estimated
Useful Life | | Cost | | | Accumulated
Depreciation | | | Net Book
Value | |
| Computers | | 3 years | | $ | 278 | | | $ | (245 | ) | | $ | 33 | |
| Software | | 3 years | | | 86 | | | | (84 | ) | | | 2 | |
| Equipment | | 7 years | | | 38 | | | | (31 | ) | | | 7 | |
| Furniture | | 7 years | | | 14 | | | | (13 | ) | | | 1 | |
| Leasehold Improvements | | 3.3 years | | | 52 | | | | (52 | ) | | | - | |
| | | | | $ | 468 | | | $ | (425 | ) | | $ | 43 | |
We depreciate property and equipment using the straight-line method over the assets’ estimated useful lives. Depreciation expense for property and equipment was $29 and $55 for the years ending July 31, 2013 and 2012, respectively.
We amortize leasehold improvements using the straight-line method over the term of the lease. There was no amortization expense for leasehold improvements for the years ending July 31, 2013 or 2012.
NOTE 6 – INTANGIBLE ASSETS
Changes in the carrying amount of the intangible assets are summarized as follows:
| | | Membership
Lists | | | Non-Compete
Agreements | | | Trade Name
Amortization | | | Total
Intangible
Assets | |
| Balance as of July 31, 2011 | | $ | 818 | | | $ | 23 | | | $ | 14 | | | $ | 855 | |
| | | | | | | | | | | | | | | | | |
| Amount allocated to sale of Chicago and Seattle based Member list | | | (77 | ) | | | | | | | | | | | (77 | ) |
| Amortization | | | (243 | ) | | | (8 | ) | | | (2 | ) | | | (253 | ) |
| Balance as of July 31, 2012 | | $ | 498 | | | $ | 15 | | | $ | 12 | | | $ | 525 | |
| | | | | | | | | | | | | | | | | |
| Amount allocated to sale of Portland based Member list | | | (42 | ) | | | - | | | | - | | | | (42 | ) |
| Amortization | | | (225 | ) | | | (8 | ) | | | (2 | ) | | | (235 | ) |
| Balance as of July 31, 2013 | | $ | 231 | | | $ | 7 | | | $ | 10 | | | $ | 248 | |
The Company recorded goodwill in connection with business combinations completed in fiscal years from 2005 to 2009. The acquisitions made in 2005 and in 2008 included contingent consideration recorded as additions to goodwill in subsequent periods, as the final settlement amounts became determinable.
In November 2011, ITEX sold assets originally acquired in the 2007 Intagio acquisition. As part of the sales, ITEX allocated a pro rata portion of the membership list to the sale in the amount of $77. The pro rata percentage amount of unamortized membership list was calculated using the amount of the sold corporate-owned office member transaction volume over the total transaction volume of the retained members acquired in the original purchase transaction.
In September 2012, ITEX sold assets originally acquired in the 2011 Oregon acquisition. As part of the sales, ITEX allocated a pro rata portion of the membership list to the sale in the amount of $42. The pro rata percentage amount of unamortized membership list to apply as basis was calculated using the amount of the sold corporate-owned office members over the retained members acquired in the original purchase transaction.
The following schedule outlines the expected intangible related amortization expense over the respective lives:
| Year ending July 31, | | Membership List
Amortization | | | Non-Compete
Agreement
Amortization | | | Trade Name
Amortization | | | Total Amortization | |
| | | | | | | | | | | | | |
| 2014 | | | 82 | | | | 7 | | | | 2 | | | | 91 | |
| 2015 | | | 53 | | | | - | | | | 2 | | | | 55 | |
| 2016 | | | 53 | | | | - | | | | 2 | | | | 55 | |
| Thereafter | | | 43 | | | | - | | | | 4 | | | | 47 | |
| Total | | $ | 231 | | | $ | 7 | | | $ | 10 | | | $ | 248 | |
NOTE 7 - NOTES PAYABLE AND LINE OF CREDIT
The Company has a note payable in the amount of $10 as of July 31, 2013. The note has $7 in short term and $3 in long term. The Company has a revolving credit agreement to establish a $1,000 line of credit facility with its primary banking institution, US Bank, effective through November 30, 2013.The interest rate of the facility is one-month LIBOR + 2% and the annual commitment fee for the current line of credit was $2. The Company anticipates renewing the line of credit for another year. The line of credit facility was originally established on December 2, 2004. There were no borrowings made under this line of credit in the years ended July 31, 2013 and 2012 and there was no outstanding balance as of July 31, 2013 and 2012. The Company may utilize this credit facility for short-term needs in the future.
NOTE 8 - COMMITMENTS
The Company leases office space under operating leases. Lease commitments include a lease for the Company’s corporate headquarters in Bellevue, Washington. The lease expires on April 2015.
As of July 31, 2013, the future minimum commitments under these operating leases are as follows:
Lease commitments
for the year ending
July 31, | | | |
| 2014 | | | 166 | |
| 2015 | | | 127 | |
| 2016 | | | - | |
| Total | | $ | 293 | |
The lease expense for our executive office space and corporate-owned offices for the years ended July 31, 2013 and 2012 was $172 and $215, respectively.
We have purchase commitments for telecommunications and data communications. As of July 31, 2013, the future minimum commitments under these purchase commitments are as follows:
| | | Telecommunications
and data
communications | |
| | | | |
Purchase commitments for
the year ending July 31, | | | |
| 2014 | | $ | 29 | |
| 2015 | | | 2 | |
| Total | | $ | 31 | |
NOTE 9 – ITEX DOLLAR ACTIVITY
Primarily, we receive ITEX dollars from members’ transaction and association fees, but we also receive ITEX dollars, to a much lesser extent, from other member fees. ITEX dollars earned from members are later used by the Company as a method of payment in revenue sharing and incentive arrangements with its Broker Network, co-op advertising with Marketplace members, as well as for certain general corporate expenses.
We expend ITEX dollars for revenue sharing transaction fees and association fees with our Broker Network, and for general Marketplace costs. We record transactions at the fair value of products or services received when those values are readily determinable. Most of our ITEX dollar transactions during the periods presented in these financial statements lacked readily determinable fair values andwere recorded at the cost basis of the trade dollars surrendered, which we have determined to be zero.
We take extensive measures to maintain the integrity of our role in the Marketplace economy, and to protect against the misuse or misappropriation of ITEX dollars. For example:
| · | All ITEX dollar purchases for corporate purposes are approved by senior management. |
| · | We do not sell or purchase ITEX dollars for USD. |
We spend ITEX dollars in the Marketplace for our corporate needs. As discussed in Note 1 to our consolidated financial statements, we record ITEX dollar revenue in the amounts ultimately equal to expenses we incurred and paid for in ITEX dollars, resulting in an overall net effect of $0 on the operating and net income lines. We recorded $156 and $188 as ITEX dollar revenue for the years ended July 31, 2013 and 2012, respectively.
During 2011, the Company purchased two assets for $6 that were capitalized and will be depreciated over 5 years, therefore the revenue and expense related to ITEX dollar activities will not match during the depreciable period. In the year of asset acquisition 2011, we reflected $6 in net income and in the future depreciable years, we will reflect a loss of $1. At the end of the five-year depreciable period the net effect will be $0 on net income.
The corresponding ITEX dollar expenses in the year ending July 31, 2013 were for equipment, legal fees, printing, outside services and miscellaneous expenses. We will continue to utilize ITEX dollars for our corporate purposes in future periods.
We include these ITEX dollar activities on our Consolidated Statements of Income. The following ITEX dollar activity is included in our Consolidated Statements of Income for the years ending July 31, 2013 and 2012 (in thousands):
| | | Year ended July 31, | |
| | | 2013 | | | 2012 | |
| Revenue: | | | | | | | | |
| Marketplace and other revenue | | $ | 156 | | | $ | 188 | |
| | | | | | | | | |
| Costs and expenses: | | | | | | | | |
| | | | | | | | | |
| Corporate salaries, wages and employee benefits | | | - | | | | - | |
| Selling, general and administrative | | | 156 | | | | 188 | |
| Depreciation | | | 1 | | | | 1 | |
| | | | 157 | | | | 189 | |
| Income from operations | | $ | (1 | ) | | $ | (1 | ) |
NOTE 10 — ACQUISITIONS
Membership lists
In September 2011, we purchased a trade exchange membership list from a third-party in the amount of $175. This entire list was then immediately sold to an existing Broker for $175, resulting in no additional membership list asset on the financial statement.
The expected lives of the membership list and noncompetition agreement are six years and three years, respectively. During 2013 and 2012, we sold $42 and $77, respectively of the acquired member lists to new and existing brokers.
NOTE 11 — LEGAL PROCEEDINGS AND LITIGATION CONTINGENCIES
From time to time we are subject to a variety of claims and litigation incurred in the ordinary course of business. In our opinion, the outcome of our pending legal proceedings, individually or in the aggregate, will not have a material adverse effect on our business operations, results of operations, cash flows or financial condition.
Management has regular litigation reviews, including updates from outside counsel, to assess the need for accounting recognition or disclosure of contingencies relating to pending lawsuits. The Company accrues an undiscounted liability for those contingencies where the incurrence of a loss is probable, and the amount can be reasonably estimated. The Company does not record liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated or when the liability is believed to be only reasonably possible or remote. For contingencies where an unfavorable outcome is reasonably possible and which are significant, the Company discloses the nature of the contingency and, where feasible, an estimate of the possible loss. For purposes of our litigation contingency disclosures, “significant” includes material matters as well as other items which management believes should be disclosed.
Management judgment is required related to contingent liabilities and the outcome of litigation because both are difficult to predict. Litigation is subject to inherent uncertainties and unfavorable rulings could occur. Although management currently does not believe resolving any pending proceeding will have a material adverse impact on our financial statements, management’s view of these matters may change in the future. A material adverse impact on our financial statements could occur for the period in which the effect of an unfavorable final outcome becomes probable and reasonably estimable.
NOTE 12 – STOCK-BASED PAYMENTS
In March 2004 the Company adopted the ITEX Corporation 2004 Equity Incentive Plan (the “2004 Plan”), for which 400 shares of common stock were authorized for issuance. The 2004 Plan provides for the grant of incentive and nonqualified stock options, restricted stock, and stock bonuses to the Company's employees, directors, officers or consultants. In February 2011, the Board of Directors amended and restated the 2004 Plan to increase the aggregate number of shares available for issuance by 400 shares.
During the year ended July 31, 2013, the Company issued 18 restricted shares to certain employees and 10 restricted shares to the new board members. The fair value of these shares as of the grant date was $102. The grant is to be amortized to compensation expense over the respective vesting period.
At July 31, 2013, 307 shares of common stock granted under the 2004 Plan remained unvested. At July 31, 2013, the Company had $1,060 of unrecognized compensation expense, expected to be recognized over a weighted-average period of approximately five years.
No shares remained available for future grants under the 2004 Plan as of July 31, 2013.
We account for stock-based compensation in accordance with the related guidance. Under the fair value recognition provisions, we estimate stock-based compensation cost at the grant date based on the fair value of the award. We recognize that expense ratably over the requisite service period of the award.
The following table summarizes the components of stock based compensation including warrants issued to the Board of Directors and to a non-employee:
| | | Year ended July 31, | |
| | | 2013 | | | 2012 | |
| | | | | | | |
| Employee Compensation | | $ | 281 | | | $ | 281 | |
| Board Compensation | | $ | 21 | | | $ | - | |
| Consultant Compensation | | | - | | | | 14 | |
| Totals | | $ | 302 | | | $ | 295 | |
The following table summarizes the granted, forfeited and vested shares of the 2004 Plan:
| | | Number of Shares/Options | |
| | | Available | | | Restricted
Shares | | | Stock Options | |
| Balance, July 31, 2011 | | | 8 | | | | 792 | | | | - | |
| | | | | | | | | | | | | |
| Granted | | | - | | | | - | | | | - | |
| Forfeited | | | 8 | | | | (8 | ) | | | - | |
| Balance, July 31, 2012 | | | 16 | | | | 784 | | | | - | |
| | | | | | | | | | | | | |
| Granted | | | (28 | ) | | | 28 | | | | | |
| Forfeited | | | 12 | | | | (12 | ) | | | | |
| Balance, July 31, 2013 | | | - | | | | 800 | | | | | |
| | | | | | | | | | | | | |
| Vesting as of July 31, 2013: | | | | | | | | | | | | |
| Shares Vested | | | | | | | 493 | | | | - | |
| Shares Unvested | | | | | | | 307 | | | | - | |
| Balance at July 31, 2013 | | | | | | | 800 | | | | - | |
The stock-based compensation expense charged against the results of operations was as follows:
| | | Year ended July 31, | |
| | | 2013 | | | 2012 | |
| | | | | | | |
| Stock-based compensation expense included in: | | | | | | | | |
| Corporate salaries, wages and employee benefits | | $ | 281 | | | $ | 281 | |
| Selling, general and administrative | | | 21 | | | | 14 | |
| Total stock-based compensation expense | | $ | 302 | | | $ | 295 | |
The following is a summary of the warrants outstanding at July 31, 2012:
| | | Number of
Warrants | | | Exercise Price | | | Year of
Expiration | |
| | | | | | | | | | | | | |
| Warrants | | | 20 | | | $ | 4.75 | | | | 2015 | |
NOTE 13 - STOCKHOLDERS’ EQUITY
On March 16, 2012, the Company commenced a partial tender offer to purchase up to 1,000 shares of its common stock, at a price of $4.20 per share. The tender offerclosedon April 13, 2012,after which the Company purchased and canceled a total of1,073 shares of its common stock at an aggregate cost of $4,506, excluding fees and expenses relating to the tender offer. The total number of shares purchased in the tender offer included an additional 73 shares purchased pursuant to the Company’s right to increase the number of shares purchased by no more than 2 percent of its outstanding shares, without amending or extending the tender offer. The shares purchased in the tender offer represented approximately 26.5% of ITEX’s outstanding common shares (including shares of unvested restricted stock).
On March 30, 2011, the Company sold 151 shares of its common stock for $4.00 per share to nineteen members of the ITEX Broker Network. The aggregate purchase price of $605 is payable by six-year promissory notes with interest accruing at 2.44% per annum, the applicable federal rate in effect as of the closing. The notes are secured by broker commissions. ITEX will be paid each operating cycle by reducing broker commission checks over the term of the note. The Company has recorded these notes receivable as contra-equity in the accompanying financial statements. Until March 30, 2014, the purchased shares may not be sold or transferred and are subject to the terms of a voting agreement, which provides the shares will be voted in accordance with the recommendations of the Board of Directors and an irrevocable proxy be given to the corporate secretary of ITEX. Pursuant to a settlement agreement with a stockholder effective January 2013, we gave all participating brokers the opportunity to cancel their stock purchase agreements. As a result, four brokers cancelled, reducing the aggregate number of purchased shares to 108.
On March 11, 2011, the Board of Directors of the Company declared a dividend, payable to stockholders of record on March 25, 2011 of one right (a “Right”) per each share of outstanding Common Stock of the Company, par value $0.01 per share (“Common Stock”), to purchase 1/1000th of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share, of the Company (the “Preferred Stock”), at a price of $15.00 per share (such amount, as may be adjusted from time to time as provided in the Rights Agreement described below, the “Purchase Price”). In connection therewith, on March 11, 2011, the Company entered into a Rights Agreement (the “Rights Agreement”) with OTR, Inc, as Rights Agent. The Rights will be exercisable upon the earlier of (i) such date the Company learns that a person or group, without Board approval, acquires or obtains the right to acquire beneficial ownership of 15% or more of ITEX’s outstanding common stock or a person or group that already beneficially owns 15% or more of the Company’s outstanding common stock at the time the Rights Agreement was entered into, without Board approval, acquires any additional shares (other than pursuant to the Company’s compensation or benefit plans) (any person or group specified in this sentence, an “Acquiring Person”) and (ii) such date a person or group announces an intention to commence or following the commencement of (as designated by the Board) a tender or exchange offer which could result in the beneficial ownership of 15% or more of ITEX’s outstanding common stock. The Rights will expire on March 11, 2014, unless earlier redeemed or exchanged by the Company. If a person or group becomes an Acquiring Person, each Rights holder (other than the Acquiring Person) will be entitled to receive, upon exercise of the Right and payment of the Purchase Price, that number of 1/1000ths of a share of Preferred Stock equal to the number of shares of Common Stock which at the time of the applicable triggering transaction would have a market value of twice the Purchase Price. In the event the Company is acquired in a merger or other business combination by an Acquiring Person, or 50% or more of the Company’s assets are sold to an Acquiring Person, each Right will entitle its holder (other than an Acquiring Person) to purchase common shares in the surviving entity at 50% of the market price.
On March 9, 2010, the Company announced a $2,000 stock repurchase program, authorized by the Board of Directors. The program authorizes the repurchase of shares in open market purchases or privately negotiated transactions, has no expiration date and may be modified or discontinued by the Board of Directors at any time. In addition to our common stock activity described in Note 12 – Share-Based Payments, as part of our stock repurchase program, we repurchased a total of 27 and 17 shares of ITEX common stock for $101 and $68 in 2013 and 2012, respectively.
The Company has 5,000 shares of preferred stock authorized at $0.01 par value. No shares were issued or outstanding as of July 31, 2013 or 2012.
NOTE 14 - INCOME TAXES
Deferred tax assets on our balance sheet primarily include Federal and State net operating loss carry forwards (collectively “NOLs”) which are expected to result in future tax benefits. Realization of these NOLs assumes that we will be able to generate sufficient future taxable income to realize these assets. Deferred tax assets also include temporary differences between the financial reporting basis and the income tax basis of its assets and liabilities at enacted tax rates expected to be in effect when such assets or liabilities are realized or settled.
In assessing the recoverability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are expected to be deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and projections for future taxable income over the periods in which the deferred tax assets are expected to be deductible.
On July 31, 2013, we had NOLs of approximately $10,444 available to offset future taxable income. These are composed of approximately $8,539 from ITEX operating losses and approximately $1,905 from BXI operating losses. The future utilization is recorded as a deferred tax asset given that management believes it is more likely than not that we will generate future taxable income. We periodically assess the realizability of our available NOLs to determine whether we believe we will generate enough future taxable income to utilize some portion or all of the available NOLs. We determined that there is no allowance required on our Federal NOL. We determined that we will not be able to utilize the California NOL. As of July 31, 2013 and 2012, we have a $163 and $186 valuation allowance on state of California NOLs.
The deferred tax assets recorded represent our estimate of all deferred tax benefits to be utilized in the current year and future periods beyond 2013. The following table reflects the reconciliation of the company’s income tax expense:
| | | Year Ended July 31, | |
| | | 2013 | | | 2012 | |
| | | | | | | |
| Pre-tax financial income | | $ | 1,572 | | | $ | 1,524 | |
| Federal tax expense computed at the statutory rate of 34% | | | 534 | | | | 518 | |
| State tax expense | | | 30 | | | | 42 | |
| State FIN 48 adjustment | | | (57 | ) | | | (48 | ) |
| Change in valuation allowance | | | (23 | ) | | | 34 | |
| Permanent and other differences | | | 18 | | | | 9 | |
| Net tax expense | | | 502 | | | | 555 | |
Our income tax expense is composed of the following:
| | | Year Ended July 31, | |
| | | 2013 | | | 2012 | |
| | | | | | | |
| Current federal tax expense | | $ | 20 | | | $ | 13 | |
| Current state tax expense | | | 10 | | | | (41 | ) |
| | | | 30 | | | | (28 | ) |
| | | | | | | | | |
| Deferred federal tax expense | | | 528 | | | | 510 | |
| Deferred state tax benefit | | | (56 | ) | | | 73 | |
| | | | 472 | | | | 583 | |
| Total | | $ | 502 | | | $ | 555 | |
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at July 31, 2013 and 2012 are presented below:
| | | Year Ended July 31, | |
| | | 2013 | | | 2012 | |
| Deferred Tax Assets: | | | | | | | | |
| Net operating loss carryforwards | | $ | 3,715 | | | $ | 4,217 | |
| Goodwill and other intangible assets | | | 245 | | | | 331 | |
| Non-compete covenants | | | 67 | | | | 72 | |
| Reserve for uncollectible receivables | | | 125 | | | | 110 | |
| Federal tax credits | | | 195 | | | | 175 | |
| Other temporary differences | | | 183 | | | | 177 | |
| | | | 4,530 | | | | 5,082 | |
| Less: Valuation allowance | | | (163 | ) | | | (186 | ) |
| | | | | | | | | |
| Net deferred tax asset | | $ | 4,367 | | | $ | 4,896 | |
| | | | | | | | | |
| The following components are included in net deferred tax assets in the accompanying balance sheets: | |
| | | | | | | | | |
| Current Deferred Tax Assets | | | | | | | | |
| Current deferred tax asset | | | 849 | | | | 626 | |
| Valuation allowance | | | (31 | ) | | | (23 | ) |
| | | | | | | | | |
| Net current deferred tax asset | | $ | 818 | | | $ | 603 | |
| | | | | | | | | |
| Non-Current Deferred Tax Assets | | | | | | | | |
| Non-current deferred tax asset | | | 3,682 | | | | 4,456 | |
| Valuation allowance | | | (133 | ) | | | (163 | ) |
ITEX Federal NOLs of approximately $10,444 expire, if unused, from 2019 to 2024. BXI Federal NOLs of approximately $1,905 expire, if unused, from 2020 to 2026 and are subject to an annual limitation of approximately $172. This limitation is equal to the long-term federal tax exempt rate multiplied by the total purchase price of BXI. Additionally, ITEX has state NOLs for California totaling approximately $2,810 which, if unused, expire from 2013 to 2015.
The Company has AMT credits of $190 and research and development credits of $5 available to offset future taxes payable.
In accordance with the accounting guidance surrounding the uncertainty in Income Taxeswe have recorded unrecognized tax liabilities of $98 as follows:
| | | Year Ended July 31, | |
| | | 2013 | |
| | | | |
| Balance at July 31, 2012 | | $ | 156 | |
| Increases as a result of tax positions taken in the current year | | | 5 | |
| Increases as a result of tax positions taken in the prior year | | | 2 | |
| Decreases resulting from settlements, payments and changes in estimates of probability tax positions will be sustained | | | (65 | ) |
| Balance at July 31, 2013 | | $ | 98 | |
| | | | | |
We file income tax returns in the United States as well as various United States state jurisdictions. The tax years that remain subject to examination are 2008 through 2012 in the United States. We also have available NOLs dating from 1999 which, when used, could be subject to examination by taxing authorities. We do not believe there will be any material changes in our unrecognized tax positions over the next twelve months.
As of July 31, 2013, accrued expenses are included on our consolidated balance sheet for uncertain tax positions related primarily to state jurisdictions in the amount of $98 which includes $30 for interest and penalties associated with unrecognized tax benefits. Interest and penalties are included in income tax expense.
NOTE 15 – GOODWILL
In October 2009 and May and November 2011, ITEX sold assets originally acquired in the 2007 Intagio acquisition that created the majority of the goodwill recorded on our books. As part of the May and November 2011 sales, ITEX allocated a pro rata portion of goodwill to the sales in the amount of $16 and $36, respectively. The pro rata percentage amount for goodwill was calculated using the relative enterprise value of the member lists sold to the estimated enterprise value of the entire ITEX membership list based network.
Changes to goodwill were as follows:
| | | Year Ended July 31, | |
| | | 2013 | | | 2012 | |
| Beginning balance | | $ | 3,191 | | | $ | 3,266 | |
| Sale of Seattle and Chicago corporate-owned offices in Q2 2012 | | | - | | | | (75 | ) |
| Ending balance | | $ | 3,191 | | | $ | 3,191 | |
NOTE 16 – SELECTED QUARTERLY FINANCIAL RESULTS (unaudited)
| Year ended July 31, 2013 | | First
Quarter | | | Second
Quarter | | | Third
Quarter | | | Fourth
Quarter | | | Total | |
| | | | | | | | | | | | | | | | |
| Revenues | | $ | 3,711 | | | $ | 3,960 | | | $ | 3,475 | | | $ | 3,679 | | | $ | 14,825 | |
| Operating costs and expenses | | | 3,379 | | | | 3,461 | | | | 3,121 | | | | 3,400 | | | | 13,361 | |
| Operating income | | | 332 | | | | 499 | | | | 354 | | | | 279 | | | | 1,464 | |
| Other income - net | | | 32 | | | | 28 | | | | 24 | | | | 24 | | | | 108 | |
| Income before taxes | | | 364 | | | | 527 | | | | 378 | | | | 303 | | | | 1,572 | |
| Income tax expense | | | 116 | | | | 169 | | | | 120 | | | | 97 | | | | 502 | |
| Net income | | $ | 248 | | | $ | 358 | | | $ | 258 | | | $ | 206 | | | $ | 1,070 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income per common share | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.09 | | | $ | 0.14 | | | $ | 0.10 | | | $ | 0.08 | | | $ | 0.41 | |
| Diluted | | $ | 0.09 | | | $ | 0.14 | | | $ | 0.10 | | | $ | 0.08 | | | $ | 0.41 | |
| | | | | | | | | | | | | | | | | | | | | |
| Weighted Average Shares outstanding: | | | | | | | | | | | | | | | | | | | | |
| 2013 basic | | | 2,617 | | | | 2,615 | | | | 2,619 | | | | 2,614 | | | | 2,616 | |
| 2013 diluted | | | 2,617 | | | | 2,616 | | | | 2,622 | | | | 2,620 | | | | 2,626 | |
| | | | | | | | | | | | | | | | | | | | | |
| Year ended July 31, 2012 | | First
Quarter | | | Second
Quarter | | | Third
Quarter | | | Fourth
Quarter | | | Total | |
| Revenues | | $ | 3,971 | | | $ | 4,229 | | | $ | 3,787 | | | $ | 3,799 | | | $ | 15,786 | |
| Operating costs and expenses | | | 3,730 | | | | 3,946 | | | | 3,463 | | | | 3,537 | | | | 14,676 | |
| Operating income | | | 241 | | | | 283 | | | | 324 | | | | 262 | | | | 1,110 | |
| Other income - net | | | 20 | | | | 343 | | | | 25 | | | | 26 | | | | 414 | |
| Income before taxes | | | 261 | | | | 626 | | | | 349 | | | | 288 | | | | 1,524 | |
| Income tax expense | | | 101 | | | | 202 | | | | 119 | | | | 133 | | | | 555 | |
| Net income | | $ | 160 | | | $ | 424 | | | $ | 230 | | | $ | 155 | | | $ | 969 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income per common share | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 0.04 | | | $ | 0.12 | | | $ | 0.07 | | | $ | 0.06 | | | $ | 0.29 | |
| Diluted | | $ | 0.04 | | | $ | 0.12 | | | $ | 0.07 | | | $ | 0.06 | | | $ | 0.29 | |
| | | | | | | | | | | | | | | | | | | | | |
| Weighted Average Shares outstanding: | | | | | | | | | | | | | | | | | | | | |
| 2012 basic | | | 3,647 | | | | 3,581 | | | | 3,611 | | | | 2,671 | | | | 3,344 | |
| 2012 diluted | | | 3,648 | | | | 3,588 | | | | 3,634 | | | | 2,672 | | | | 3,345 | |
NOTE 17 – RELATED PARTY TRANSACTIONS
We have periodically engaged related parties for consulting and contract services. In aggregate, related party transactions did not exceed $120 during either of the fiscal years ended July 31, 2013 or 2012.
NOTE 18 – SUBSEQUENT EVENTS
On August 30, 2013, the Board of Directors of ITEX Corporation declared a cash dividend in the amount of $0.05 per share, payable on September 20, 2013 to stockholders of record as of the close of business on September 10, 2013.
| Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| Item 9A. | CONTROLS AND PROCEDURES |
(a) Disclosure controls and procedures.
Under the supervision and with the participation of our management, including the Chief Executive Officer and our Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective.
(b) Management’s Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use, or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
Management conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework published by the Committee of Sponsoring Organizations of the Treadway Commission, referred to as the Internal Control—Integrated Framework. Based on its assessment, management concluded that the Company’s internal control over financial reporting was effective as of July 31, 2013.
This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that exempt non-accelerated filers from including auditor attestation reports.
(c) Changes in internal control over financial reporting.
During the third and fourth quarters of 2013, we appointed Mr. John Wade to the position of Chief Financial Officer and restructured our Audit Committee to consist entirely of independent directors. This change was made to enhance our corporate governance by providing independent oversight over the preparation of our financial statements. Other than this restructuring, which we believe enhances our system of internal controls, there were no changes in our internal controls over financial reporting during our most recent quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Item 9B. OTHER INFORMATION
Not applicable.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Certain of the information called for by Item 10 will be set forth in our definitive proxy statement for the 2013 annual meeting of stockholders (the “Proxy Statement”) to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K under the captions “Director Nominees”, “Section 16(a) Beneficial Ownership Reporting Compliance”, “Corporate Governance” and “Board of Directors” and is incorporated herein by reference.
We have adopted the ITEX Code of Ethics (the “Code of Ethics”), a code of ethics which is applicable to our executive officers, including financial officers, and other finance organization employees. The Code of Ethics is available on the Governance page of the investor relations section of our website at www.itex,com under the tab entitled “Our Story.” Any waiver of, or material amendment to, the Code of Ethics applicable to our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions will be posted promptly to our web site in accordance with applicable SEC rules.
Executive Officers
Steven White has served as Chief Executive Officer of the Company since June 2003. John Wade has served as Chief Financial Officer since January 2013. Background information about these executive officers who are also nominees for election as directors will be set forth in Proxy Statement under the caption “Director Nominees.”
Significant Employees
Brian Argetsinger, Vice President of the Marketplace, joined the Company in 2000. He is responsible for supporting the broker network and overseeing franchise development. Prior to becoming Vice President in 2003, Mr. Argetsinger served as our Northwest Regional Manager and as Broker Services Manager. Prior to joining us, he was an ITEX broker in Seattle from 1991 to 2000.
Rob Benson, Vice President of Operations, joined the Company in 2004. Mr. Benson was General Manager of the Company’s Seattle office from 2001 to 2003. Mr. Benson graduated from the University of Richmond in Virginia with a degree in finance.
Troy Hellman, Information Technology Manager, joined the Company in 2000. Mr. Hellman oversees the administration, operation and maintenance of our IT infrastructure, internal systems, and hardware and software products. Mr. Hellman graduated from Columbia University with a degree in Computer Science.
| Item 11. | EXECUTIVE COMPENSATION |
The information in the Proxy Statement set forth under the captions “Executive Compensation” and “Director Compensation” is incorporated herein by reference.
| Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information in the Proxy Statement set forth under the captions “Securities Authorized for Issuance under Equity Compensation Plans” and “Beneficial Ownership” is incorporated herein by reference.
| Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information in the Proxy Statement set forth under the captions “Corporate Governance,” “Committees of the Board” and “Transactions with Related Persons” is incorporated herein by reference.
| Item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Information concerning principal accountant fees and services appears in the Proxy Statement under the heading “Fees of the Independent Registered Public Accounting Firm” and is incorporated herein by reference.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT INDEX
| | | | | Incorporated by Reference | | |
Exhibit
No. | | Exhibit Description | | Form | | SEC File No. | | Exhibit | | Filing Date | | Filed Herewith |
| | | | | | | | | | | | | |
| 3.1 | | Amended and Restated Articles of Incorporation of ITEX Corporation | | 10-KSB | | 000-18275 | | 3.1 | | 11/13/03 | | |
| 3.2 | | Certificate of Designation of Series A Junior Participating Preferred Stock | | 8-K | | 000-18275 | | 3.1 | | 3/14/11 | | |
| 3.3 | | Amended and Restated Bylaws of ITEX Corporation | | 8-K | | 000-18275 | | 3.2 | | 12/19/08 | | |
| 4.1 | | Rights Agreement between ITEX Corporation and OTR, Inc., dated March 11, 2011 | | 8-K | | 000-18275 | | 4.1 | | 3/14/11 | | |
| 10.1 | | Form of Indemnification Agreement | | 8-K | | 000-18275 | | 10.9 | | 3/07/13 | | |
| | | | | Incorporated by Reference | | |
Exhibit
No. | | Exhibit Description | | Form | | SEC File No. | | Exhibit | | Filing Date | | Filed Herewith |
| 10.2 | | ITEX Corporation 2004 Equity Incentive Plan | | 8-K | | 000-18275 | | 10.1 | | 2/18/11 | | |
| 10.3 | | Form of Executive Restricted Stock Agreement | | 8-K | | 000-18275 | | 10.2 | | 2/18/11 | | |
| 10.4 | | Form of Restricted Stock Agreement | | 8-K | | 000-18275 | | 10.3 | | 2/18/11 | | |
| 10.5 | | Lease dated as of October 21, 2009 | | 8-K | | 000-18275 | | 10.1 | | 11/20/09 | | |
| 10.6 | | Revolving Credit Agreement and Note, dated as of November 4, 2009 | | 8-K | | 000-18275 | | 10.1 | | 11/12/09 | | |
| 10.7 | | Amendment to Loan Agreement and Note | | 8-K | | 000-18275 | | 10.1 | | 11/30/12 | | |
| 10.8 | | Change in Control Agreement dated as of February 28, 2008 between Steven White and ITEX Corporation | | 10-Q | | 000-18275 | | 10.15 | | 3/03/08 | | |
| 10.9 | | Form of Employee Change in Control Agreement | | 10-Q | | 000-18275 | | 10.16 | | 3/03/08 | | |
| 10.10 | | Form of Franchisee Stock Purchase Agreement dated as of March 30, 2011 | | 10-Q | | 000-18275 | | 10.1 | | 3/08/12 | | |
| 21 | | The only subsidiary of ITEX Corporation is BXI Exchange, Inc., a Delaware corporation | | | | | | | | | | |
| 23.1 | | Consent of Independent Registered Public Accounting Firm | | | | | | | | | | P |
| 31.1 | | Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | P |
| 31.2 | | Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | P |
| 32.1 | | Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | P |
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | ITEX CORPORATION |
| | | |
| Date: October 21, 2013 | By: | /s/ Steven White |
| | | Steven White, Chief Executive Officer |
| | | |
| Date: October 21, 2013 | By: | /s/ John Wade |
| | | John Wade, Chief Financial Officer |
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities an on the dates indicated.
| Date: October 21, 2013 | By: | /s/ Steven White |
| | | Steven White, Chairman of the Board |
| | | |
| Date: October 21, 2013 | By: | /s/ John Wade |
| | | John Wade, Director |
| | | |
| Date: October 21, 2013 | By: | /s/ Eric Best |
| | | Eric Best, Director |
| | | |
| Date: October 21, 2013 | By: | /s/ Timothy Morones |
| | | Timothy Morones, Director |
| | | |
| Date: October 21, 2013 | By: | /s/ Kevin Callan |
| | | Kevin Callan, Director |
