UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
20549
FORM 10
- K
(Mark One)
x
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Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the fiscal year ended July 31, 2012.
or
¨
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Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the transition period from
to
Commission File Number 0-18275
ITEX CORPORATION
(Name of small business issuer in its charter)
Nevada
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93-0922994
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(State or other jurisdiction of incorporation or organization)
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(IRS Employer
Identification No.)
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3326 160
th
Avenue SE, Suite 100, Bellevue, WA 98008-6418
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(Address of principal executive offices)
(Issuer’s telephone number including
area code)
Securities registered under Section 12 (b) of the Exchange Act
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None
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Securities registered pursuant to Section 12 (g) of the Exchange Act
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Common Stock
$0.01
par value
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act
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Yes
¨
No
þ
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13
or 15(d) of the Act
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Yes
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No
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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.
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Yes
þ
No
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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).
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Yes
þ
No
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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
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Yes
þ
No
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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.
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Large accelerated filer
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Non-accelerated filer
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Accelerated filer
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Smaller Reporting Company
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Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
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Yes
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No
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The aggregate market value of the common
stock held by non-affiliates of the Company as of January 31, 2012 was approximately $11,480,702 based upon 3,197,967 shares held
by such persons and the closing bid price of $3.59 as reported by the OTC Bulletin Board for that date. 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, 2012, we had 2,616,065
shares of common stock outstanding.
DOCUMENTS INCORPORATED
BY REFERENCE:
No documents are incorporated by reference.
ITEX CORPORATION
FORM 10-K
For The Fiscal Year Ended July 31, 2012
INDEX
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Page
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PART I
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ITEM 1.
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Business
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1
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ITEM 1A.
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Risk Factors
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9
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ITEM 2.
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Properties
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17
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ITEM 3.
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Legal Proceedings
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18
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PART II
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ITEM 5.
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
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18
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ITEM 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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19
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ITEM 8.
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Financial Statements and Supplementary Data
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39
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ITEM 9.
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Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
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68
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ITEM 9A.
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Controls and Procedures
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68
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ITEM 9B.
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Other Information
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68
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PART III
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ITEM 10.
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Directors, Executive Officers and Corporate Governance
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69
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ITEM 11.
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Executive Compensation
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71
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ITEM 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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74
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ITEM 13.
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Certain Relationships and Related Transactions, and Director Independence
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76
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ITEM 14.
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Principal Accountant Fees and Services
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77
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PART IV
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ITEM 15.
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Exhibits and Financial Statement Schedules
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78
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Signatures
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80
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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 statements
reflect 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 section entitled
“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.
ITEM 1. BUSINESS
Overview
ITEX, The Membership Trading Community
SM
,
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 certain corporate-owned offices. Our business
services and payment systems enable member businesses (our “members”) to trade products and services without exchanging
cash. These products 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 160
th
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 tab. Our website address is
www.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 USD 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 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 all 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 more than 350 individuals
supporting 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 Marketplace 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. Refer to “Government Regulation” for more information.
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”, “2012” for August
1, 2011 to July 31, 2012, “2011” for August 1, 2010 to July 31, 2011). 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 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 the years ended July
31, 2012 and 2011, members made approximately 93% and 92%, respectively, 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 98% and 92% of
our total revenue in 2012 and 2011, respectively.
We prepare our financial statements on
an accrual basis in accordance with United States Generally Accepted Accounting Principles (GAAP). Refer to
Note
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 certain 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
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A
system
that
enables
members
to
execute
and
track
transactions
in
the
Marketplace.
We
have
internally
developed
an
industry
exclusive,
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
that
provides
efficient
internet
access
to
ITEX
members
and
our
Broker
Network.
|
|
o
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A
community
where
members
can
meet
and
safely
transact
with
other
members.
Our
website
has
a
casual,
community
approach
conveying
to
Marketplace
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,
pursuant
to
our
Trading
Rules.
We
encourage
members
to
use
caution,
common
sense
and
practice
safe
transactions
when
using
the
Marketplace.
|
|
o
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More
regions
in
which
to
trade
by
increasing
the
size
and
effectiveness
of
our
Broker
Network.
To
attract
new
franchisees
and
increase
the
trade
regions
covered
by
the
Marketplace,
a
portion
of
our
website
at
www.itex.com
provides
information
about
our
franchise
program.
We
identify
target
markets,
provide
added
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.
We
provide
training
and
support
for
new
and
existing
brokers
and
refine
our
franchisee
and
broker
operating
manuals
and
related
support
materials
on
a
continual
basis.
Additionally,
we
hold
a
convention
and
several
regional
meetings
annually
where
we
discuss
and
openly
share
solutions
for
current
issues
and
proactively
plan
for
future
enhancements
and
benefits
to
our
Marketplace.
|
|
o
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A
strong
social
media
presence
.
We
seek
to
leverage
the
power
of
social
media
to
create
and
enhance
relationships
with
and
for
our
members
as
well
as
to
attract
new
members
to
our
Marketplace.
We
are
on
five
of
the
leading
social
media
websites,
including
Facebook,
YouTube,
LinkedIn,
Google+
and
Twitter.
|
Members
The Marketplace has approximately 23,500
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:
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·
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Increase sales
and market share
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·
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Add new channels
of distribution
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·
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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 a representative example of
a transaction:
A dentist earns ITEX dollars by
providing dental work to three new customers, the owner of a vacation resort, a restaurant owner, and a lawyer, all members of
the Marketplace. These other members originally acquired ITEX dollars by providing products or services for 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 $1,500 ITEX dollars. Upon
completion of the job, the dentist authorizes the deduction of $1,500 ITEX dollars from her ITEX account, payable to the contractor’s
ITEX account.
Sales, Marketing and Transactions
Sales
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.
Marketing
Our marketing strategy is to promote our
Membership Trading Community brand 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
,
and
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, 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.
Transactions
Our brokers focus on generating transaction
volume and maximizing the ITEX dollar amount per transaction. 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 by introducing them to the Marketplace. 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 Marketplace 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.
|
|
·
|
Trade Flash
- 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 full 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 23,500 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 having 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 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 can 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 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. Ultimately,
we believe these elements require significant ramp-up times to make a competitive Exchange successful. Regardless, our competitors
could include 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 business have resulted in a more competitive industry. We believe that in order
to capture greater market share, local Exchanges will need to expand into larger regional or national organizations that possess
the ability 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 will 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 products and services to 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, we cannot assure you that
we will be able to compete successfully, that competitors will not 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, price, 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 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. See Item 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. See Item 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 our members’ and clients’
personal and financial information, including credit card information. See Item 1A ─ Risk Factors ─
Failure to
comply with laws and regulations that protect our members’ 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. 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 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, 2012, we had 22 full-time,
part-time, contract or temporary employees – 21 in our corporate headquarters and one in a corporate-owned trade office.
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.
ITEM 1A. RISK FACTORS
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, 2012, our revenue
decreased 4% compared to the same period in 2011. 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 net
revenues each quarter come from transaction fees based on the GMV (gross merchandise value) of 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 success of our development and expansion efforts, the
control of expense levels and the success of our business activities. We have been subject to increased expense levels as a result
of responding to proxy contests, litigation and other actions 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.
We may be unable to adjust our spending rapidly enough to compensate for any unexpected revenue shortfall, which may harm our
profitability. 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 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.
We could be negatively affected as a result of a proxy
fight and related litigation
In July 2010, a dissident shareholder
group declared its intention to change the management structure of ITEX. It nominated an opposition slate of individuals
for election to replace our Board of Directors at the annual meeting of stockholders held in December 2010. Although unsuccessful
in 2010, the founding member of the 2010 group again nominated an opposition slate of individuals to replace a majority of our
directors at the annual meeting held in May 2012. In addition, the dissident shareholder filed a derivative lawsuit against the
Board of Directors, and also the Company as a nominal defendant, and is also seeking to overturn certain Board actions as well
as to set aside the vote of certain shareholders who voted at the 2012 annual meeting See
Note
11 ― “Legal Proceedings and Litigation Contingencies” included in the “Notes to Consolidated Financial
Statements
”.
The extended proxy fight and related litigation has negatively affected the Company and could
cause additional harm because:
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·
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Responding to proxy
contests, litigation
and other actions by
dissident shareholders
is costly and time-consuming,
disrupting our operations
and diverting the attention
of management and our
employees;
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·
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Perceived uncertainties
as to our future direction
diverts the attention
of, damages morale and
creates instability
among members of our
Broker Network as well
as our management and
employees, and adversely
impacts our existing
and potential strategic
and operational relationships
and opportunities;
|
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·
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We may experience
difficulties in hiring,
retaining and motivating
personnel during the
resulting uncertain
and turbulent times;
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·
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If individuals are
elected or appointed
to our Board of Directors
with a specific dissident
agenda, it may adversely
affect our ability to
effectively and timely
implement our current
business plan which
could have a material
adverse effect on our
results of operations
and financial condition;
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·
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If certain corporate
governance proposals
are implemented that
are not scaled to the
size of our company
or do not provide a
benefit commensurate
with their cost, our
profitability as well
as the value creation
capabilities of our
organization may be
adversely affected;
|
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·
|
Increases in legal
fees, insurance, administrative
and associated costs
incurred in connection
with responding to proxy
contests and related
litigation are substantial;
|
|
·
|
Proxy contests,
or the threat of one,
could cause our stock
price to experience
periods of volatility
or stagnation;
|
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·
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A successful election
outcome by a dissident
shareholder in replacing
a majority of our directors
would result in a change
in control of the Company,
which would trigger
employee change in control
agreements and immediate
vesting of restricted
stock awards, resulting
in substantial compensation
charges and other expenses.
See Note 11 ―
“
Legal
Proceedings and Litigation
Contingencies”
included in the “Notes
to Consolidated Financial
Statements
”.
A change in control
could allow a dissident
shareholder to reimburse
his proxy expenses,
resulting in substantial
charges. The effect
of a change in control
by a dissident shareholder
would have a material
adverse effect upon
the Company's operations,
financial condition,
and financial statements
taken as a whole;
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·
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A successful election
outcome by a dissident
shareholder who is also
engaged in litigation
against ITEX could also
potentially adversely
affect the Company by
resulting in an “insured
v. insured exclusion”
under our D&O insurance
policy, which excludes
indemnification for
claims against directors
and officers alleged
by other directors and
officers or policyholders
under the same policy.
There is a risk that
our insurer would decline
to cover claims, or
that defense costs advanced
by the Company during
the pendency of the
claim would later be
determined to be not
covered under the policy
and would not be repaid
or recovered. We cannot
assure you that an adverse
determination would
not be made by our insurer
which could have a material
adverse effect on our
business, financial
condition and results
of operations; and
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·
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The uncertainty
created by the delay
in certifying the election
results of our last
annual meeting could
further negatively impact
the stability and morale
of our broker network
as well as our management
and employees. Overcoming
the disruption, uncertainty,
diversion of focus,
and damaged morale within
the organization and
the Broker Network may
adversely affect our
financial condition
and results of operations,
and require motivational
support in the form
of various incentives.
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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 has 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. 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 or ITEX brokers. 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. The law relating to the liability of providers
of online services for the activities of users or members of their service is often the subject of litigation. 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 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 large Internet companies
have been the subject of sophisticated and highly targeted attacks on portions of their sites. 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 websites 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 of
these claims may result in significant monetary damages that could adversely affect our ability to conduct our business. Although
management currently believes resolving all of these matters, individually or in the aggregate, will not have a material adverse
impact on our financial statements, the 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 also 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. Mr. White also currently fills the executive positions
of Interim Chief Financial Officer and Chief Accounting Officer. Our board places heavy reliance on Mr. White’s experience
and management skills. We have not entered into a formal employment agreement with Mr. White, other than an agreement to receive
a payment in connection with a “change of control,” as defined in the agreement. 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 eight 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:
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•
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Diversion of management time, as well as a shift of focus from operating the businesses to challenges
related to integration and administration;
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•
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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;
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•
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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;
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•
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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;
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•
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The need to transition operations, members, and customers onto our existing platforms; and
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•
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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
Although we believe that our financial
condition is stable and that our cash balances and operating cash flows provide adequate resources to fund our ongoing operating
requirements, we have limited funds. 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 7.2% and 7.8% in the years ended July 31, 2012 and 2011, 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 continue to 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 have
increased the amount of our loans to brokers from $909 at July 31, 2011 to $1,619 at July 31, 2012. In the event one or more brokers
default on their loans, it may adversely affect our financial condition.
Our corporate
and administrative headquarters offices are located in Bellevue, Washington. We lease properties in the following locations that
are utilized by our senior management, sales and marketing, finance, general and administrative personnel:
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Area leased
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Monthly
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Location
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(sq. feet)
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rent
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Lease expiration
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Bellevue, Washington
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|
7,035
|
|
|
$
|
13,778
|
|
|
April 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
Milwaukie, Oregon
(1)
|
|
|
768
|
|
|
|
425
|
|
|
October 31, 2012
|
(1)
|
|
We entered into this lease as part of a 2011 acquisition (refer to “Overview”
included in
“Management’s Discussion and Analysis of Financial Condition and
Results of Operations”, Part II Item 7
.)
|
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 to
Note
8 ― “Commitments” included in the “Notes to Consolidated Financial Statements”, Item 8 – Financial
Statements
.
ITEM 3.
|
LEGAL PROCEEDINGS
|
For information regarding
legal proceedings, refer to
Note 11 ― “Legal Proceedings and Litigation
Contingencies” included in the “Notes to Consolidated Financial Statements”, Item 8 – Financial Statements.
PART II
ITEM 5.
|
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
|
Market Information
During the period from
August 1, 2011 through July 22, 2012, our common stock traded on the OTC Bulletin Board (“OTCBB”) under the symbol
“ITEX.” As of July 23, 2012, our common stock ceased trading on the OCTBB and began trading 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 is as follows:
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low *
|
|
First Quarter
|
|
$
|
4.00
|
|
|
$
|
2.96
|
|
|
$
|
5.25
|
|
|
$
|
4.57
|
|
Second Quarter
|
|
$
|
3.50
|
|
|
$
|
2.96
|
|
|
$
|
4.85
|
|
|
$
|
4.10
|
|
Third Quarter
|
|
$
|
4.15
|
|
|
$
|
3.25
|
|
|
$
|
4.70
|
|
|
$
|
4.17
|
|
Fourth Quarter
|
|
$
|
3.96
|
|
|
$
|
3.78
|
|
|
$
|
4.27
|
|
|
$
|
3.85
|
|
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 598 holders of record of our
common stock as of July 31, 2012. Most shares of our common stock are held by brokers and other institutions on behalf of shareholders.
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 to 4.0 cents per share. In subsequent periods, we have continued to pay dividends
of 4.0 cents per share each quarter or 16.0 cents per share annually.
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, 2012 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)
|
|
5/01/12 - 5/31/12
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
6/01/12 – 6/30/12
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
7/01/12 - 7/31/12
|
|
|
120
|
|
|
$
|
4.00
|
|
|
|
-
|
|
|
$
|
1,560,570
|
|
(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 be
modified or discontinued by 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 to
Item
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 our consolidated financial statements and
notes, it should be read in conjunction the section entitled
“Risk Factors” (refer
to Part I Item 1A
)
and the cautionary statement regarding forward-looking information on page 1.
OVERVIEW
ITEX, The Membership Trading Community
SM
,
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. Our business services and payment systems enable approximately
twenty-three thousand five hundred member businesses (our “members”) to trade products and services without exchanging
cash. These products 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”, “2012” for August 1, 2011 to July 31, 2012,
“2011” for August 1, 2010 to July 31, 2011). Our fourth quarter is the three-month period from May 1, 2012 to July
31, 2012 (“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 and our outlook (in thousands except per share data):
|
·
|
Comparative
Results
. For
the year ended 2012,
as compared to 2011,
our revenue decreased
by $638, or 4%, from
$16,424 to $15,786.
However, our core revenue
increased in 2012, and
income from operations
increased by $7, or
1%, from $1,103 to $1,110.
|
|
·
|
Revenue Sources
.
Our decrease in revenues
for 2012 was primarily
due to a reduction in
revenues from media
and web services which
represented approximately
5%, of our total revenues
in 2011. No revenue
was derived from media
or web services in 2012.
Our principal contract
generating web services
revenue was terminated
during 2011. Our core
revenue streams, which
are Association and
Transaction fees, increased
in 2012. Association
revenue increased $31,
or 1% from $4,716 to
$4,747 and our Transaction
revenue increased $265,
or 3% from $10,385 to
$10,650.
|
|
·
|
Corporate-owned
Offices
. The
ITEX system is approximately
99% broker managed.
We currently have one
corporate-operated office.
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
exiting our media and
web services. During
2012 we did see growth
in our core business,
however we believe we
would have recognized
more core revenue growth
absent the distraction
and disruption caused
by the ongoing proxy
contest and litigation
with dissident shareholders
(See Note 11 ―
“Legal Proceedings
and Litigation Contingencies”
included in the “Notes
to Consolidated Financial
Statements” and
the Risk Factor above
“
We could be
negatively affected
as a result of a proxy
fight and related litigation
”).
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 net revenues
each year come from
transactions occurring
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 2011 and 2012, 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.
Adding new brokers is an important component of
our overall growth plan, and we are increasing our broker recruiting efforts. 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 are in the process
of upgrading our payment
processing and team
software with .NET technologies.
|
In addition, we seek to provide stability amongst
our stakeholders to enhance the value creation capabilities of the organization. Since 2008, ITEX has been subject to several
takeover attempts, including an unsolicited tender offer and two election contests by which dissident stockholders have attempted
to take control of the Board of Directors. In management’s view, these takeover attempts have created disruption, uncertainty,
diversion of focus, and have damaged morale within the organization and the Broker Network. We believe we would have recognized
more core revenue growth over the last two fiscal years without the ongoing disruption caused by these takeover efforts. During
the quarter ended April 30, 2011, we acted to shore up morale and commitment among the Broker Network and our staff. The Board
awarded restricted stock grants to employees under long-term service-based vesting periods both to compensate them and to serve
as a retention incentive. See Financial Statements, Note 10 – Share-Based Payments. These awards served, in part, as retention
bonuses to protect our employee assets by reducing turnover costs and helping make ITEX a more compelling place to stay and work,
even in uncertain and turbulent times. Awards also provide a performance incentive and closely align employee interests with those
of the stockholders. The Board also acted to incentivize members of the Broker Network by providing them with a way to utilize
their own income to make an installment-based investment in the common stock of the Company, aligning their interests with stockholders
and further increasing their personal stake in our long-term success. See Financial Statements, Note 11 – Share-Based Payments.
Each of these Board actions, among others, is being challenged by a dissident stockholder who has filed a shareholder derivative
lawsuit against the Company’s Board of Directors. The dissident also sought to enjoin the voting of the employee and broker
shares at our most recent annual meeting. See
Note 11 ― “Legal Proceedings”
included in the “Notes to Consolidated Financial Statements.”
and the Risk Factor above “
We could
be negatively affected as a result of a proxy fight and related litigation
”.
|
·
|
Geographical
expansion.
We
have acquired eight 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 to
incubate
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.
We
continue
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, 2012,
with cash of $1,942
compared to $5,386 at
the same period in 2011.
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 $1,892 for the
year ended July 31,
2012, compared to $1,684
for the previous year.
The increase is primarily
due to a decrease of
$250 in deferred revenue.
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 2012
we repurchased $68 of
our stock through the
stock repurchase plan.
|
In May 2010, the board initiated a quarterly cash
dividend program. Since the inception of the program through July 31, 2012, we have distributed $1,234 in cash dividends.
RESULTS OF OPERATIONS (in thousands except per share amounts
unless otherwise indicated)
Condensed Results
|
|
Year Ended July 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
15,786
|
|
|
$
|
16,424
|
|
|
|
|
|
|
|
|
|
|
Cost of marketplace revenue
|
|
$
|
10,165
|
|
|
$
|
10,159
|
|
Operating expenses
|
|
|
4,511
|
|
|
|
5,162
|
|
Income from operations
|
|
|
1,110
|
|
|
|
1,103
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense)
|
|
|
414
|
|
|
|
149
|
|
Income before income taxes
|
|
|
1,524
|
|
|
|
1,252
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
555
|
|
|
|
551
|
|
Net income
|
|
$
|
969
|
|
|
$
|
701
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.29
|
|
|
$
|
0.19
|
|
Diluted
|
|
$
|
0.29
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
Average common and equivalent share:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,344
|
|
|
|
3,604
|
|
Diluted
|
|
|
3,345
|
|
|
|
3,648
|
|
Year ended July 31, 2012 and 2011.
Marketplace and other revenue for the year ended July 31, 2012, decreased $638 or 4% to $15,786 from $16,424 during the
prior year. This decrease was primarily due an $811 decrease in our media and web services revenue.
Association revenue increased $31 or 1%
to $4,747 from $4,716. The association revenue increase was due to an increase in the number of members assessed association fees.
Transaction revenue increased $265 or 3% to $10,650 from $10,385. The transaction revenue increase was due to higher transaction
volume in the Marketplace in 2012 when compared to 2011.
Income before income
taxes for the year ended July 31, 2012 was $1,524, an increase of $272 or 22% from income before income taxes in 2011 of $1,252.
We attribute this increase in taxable income primarily to the sale of two of our corporate-owned offices, a year-long effort in
reducing SG&A and a reduction in depreciation and amortization, when combined, was offset somewhat by the decrease in media
and web services revenue.
Earnings per share increased by $0.10 to
$0.29 per share for the year ended July 31, 2012, from $0.19 per share for the year ended July 31, 2011.
Selected Quarterly Financial Results
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
|
)
|
|
$
|
1,111
|
|
|
$
|
1,892
|
|
Total stockholders' equity
|
|
$
|
14,792
|
|
|
$
|
15,150
|
|
|
$
|
10,812
|
|
|
$
|
10,940
|
|
|
$
|
10,940
|
|
Year ended July 31, 2011
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
4,112
|
|
|
$
|
4,417
|
|
|
$
|
3,960
|
|
|
$
|
3,935
|
|
|
$
|
16,424
|
|
Income from operations
|
|
$
|
292
|
|
|
$
|
235
|
|
|
$
|
388
|
|
|
$
|
188
|
|
|
$
|
1,103
|
|
Net cash flows from operating activities
|
|
$
|
354
|
|
|
$
|
437
|
|
|
$
|
(245
|
)
|
|
$
|
1,138
|
|
|
$
|
1,684
|
|
Total stockholders' equity
|
|
$
|
14,993
|
|
|
$
|
15,012
|
|
|
$
|
14,724
|
|
|
$
|
14,758
|
|
|
$
|
14,758
|
|
Revenue, Costs and Expenses
The following table summarizes our selected
consolidated financial information for the years ended July 31, 2012 and 2011, with amounts expressed as a percentage of total
revenues:
|
|
Years Ended July 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Amount
|
|
|
Percent of
Revenue
|
|
|
Amount
|
|
|
Percent of
Revenue
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplace revenue and other revenue
|
|
$
|
15,786
|
|
|
|
100
|
%
|
|
$
|
16,424
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Marketplace revenue
|
|
|
10,165
|
|
|
|
64
|
%
|
|
|
10,159
|
|
|
|
62
|
%
|
Salaries, wages and employee benefits
|
|
|
1,977
|
|
|
|
13
|
%
|
|
|
2,001
|
|
|
|
12
|
%
|
Selling, general and administrative
|
|
|
2,226
|
|
|
|
14
|
%
|
|
|
2,573
|
|
|
|
16
|
%
|
Depreciation and amortization
|
|
|
308
|
|
|
|
2
|
%
|
|
|
588
|
|
|
|
4
|
%
|
|
|
|
14,676
|
|
|
|
93
|
%
|
|
|
15,321
|
|
|
|
94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,110
|
|
|
|
7
|
%
|
|
|
1,103
|
|
|
|
6
|
%
|
Other income, net
|
|
|
414
|
|
|
|
3
|
%
|
|
|
149
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,524
|
|
|
|
10
|
%
|
|
|
1,252
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
555
|
|
|
|
4
|
%
|
|
|
551
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
969
|
|
|
|
6
|
%
|
|
$
|
701
|
|
|
|
4
|
%
|
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,
|
|
|
|
2012
|
|
|
Percent
change
from 2011
|
|
|
2011
|
|
Broker offices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Association fees
|
|
$
|
4,610
|
|
|
|
5
|
%
|
|
$
|
4,406
|
|
Transaction fees
|
|
|
10,374
|
|
|
|
7
|
%
|
|
|
9,737
|
|
Other revenue
|
|
|
193
|
|
|
|
-82
|
%
|
|
|
1,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate owned offices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Association fees
|
|
|
137
|
|
|
|
-56
|
%
|
|
|
310
|
|
Transaction fees
|
|
|
276
|
|
|
|
-57
|
%
|
|
|
648
|
|
Other revenue
|
|
|
8
|
|
|
|
-62
|
%
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue, subtotal
|
|
$
|
15,598
|
|
|
|
-4
|
%
|
|
$
|
16,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEX dollar revenue
|
|
$
|
188
|
|
|
|
-16
|
%
|
|
$
|
224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
15,786
|
|
|
|
-4
|
%
|
|
$
|
16,424
|
|
Year ended July 31, 2012 and 2011.
Revenue decreased by $638 or 4% for the year ended 2012 compared to 2011. This decrease was primarily due an $811 decrease
in our media and web services revenue. Association revenue increased $31 or 1% to $4,747 from $4,716. The association revenue
increase was due to an increase in the number of members assessed association fees. Transaction revenue increased $265 or 3% to
$10,650 from $10,385. The transaction revenue increase was due to higher transaction volume in the Marketplace in 2012 when compared
to 2011.
Corporate-owned offices association fee,
transaction fee and other revenue decreased $558 or 57% from $979 to $421, as we sold our two largest corporate-owned offices
during 2012. Our practice is to manage corporate-owned offices internally until the assets can be distributed to existing franchisees
or sold to new franchisees.
The decrease in other revenue is primarily
related to the termination of our web services revenue initiatives which began in February 2009. The revenue generated from platform
subscription, support and consulting fees resulting from these arrangements amounted to $0 and $699 for the years ended July 31,
2012 and 2011, respectively. In 2011, the web services agreements were terminated by the client. During 2012 we reduced expenses
that were associated with web services so that the operating income impact would be minimized. In addition, our media services
efforts were terminated in 2012, from which we derived $101 in revenue in 2011.
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 $188 and $224 as ITEX dollar revenue for the years ended July 31, 2012 and
2011, 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, 2012 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,
|
|
|
|
2012
|
|
|
Percent
change
from 2011
|
|
|
2011
|
|
Association fee commissions
|
|
$
|
1,680
|
|
|
|
6
|
%
|
|
$
|
1,591
|
|
Transaction fee commissions
|
|
|
7,841
|
|
|
|
8
|
%
|
|
|
7,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate owned office salaries, wages, employee benefits, and independent contractor expenses
|
|
|
301
|
|
|
|
-67
|
%
|
|
|
899
|
|
Other Marketplace expenses
|
|
|
312
|
|
|
|
-4
|
%
|
|
|
324
|
|
Media costs - Ad Credits
|
|
|
31
|
|
|
|
-51
|
%
|
|
|
63
|
|
|
|
$
|
10,165
|
|
|
|
0
|
%
|
|
$
|
10,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of Marketplace revenue as a percentage of total revenue
|
|
|
64
|
%
|
|
|
|
|
|
|
62
|
%
|
Year
ended July 31, 2012 and 2011.
Costs of Marketplace revenue for the year ended 2012, as compared to the year ended 2011,
increased by $6, or 0%. Costs of Marketplace revenue as a percentage of total revenue increased by 2% from 62% to 64% for the
year ended 2011.
Costs of Marketplace revenue as a percentage
of total revenue increased slightly in 2012 because the 2011 year total revenue included media and web services revenue which
had a lower cost of marketplace revenue basis.
Association fee commissions increased by
$89, or 6% for the year ended 2012 as compared to 2011. The increase in commissions paid was similar to the 5% growth in the corresponding
Broker offices association revenue of 5%. We do not pay an association commission on corporate-owned store association revenue.
Transaction fee commissions increased by
$559, or 8% for the year ended 2012, as compared to 2011. 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 2012 as Broker offices
transaction revenue increased 7% 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
$598 or 67% for the year ended 2012, as compared to the year ended 2011. The net decrease in expense is primarily due to the sale
of our two largest corporate-owned stores during 2012.
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 $12, or 4% for the year ended 2012 as compared to 2011. The primary decrease
is due to a reduction in credit card processing fees incurred in 2012.
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 $32,
or 51% for the year ended 2012 as compared to 2011. The primary decrease is due to decreased utilization of the 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,
|
|
|
|
2012
|
|
|
% of
Related
Revenue
|
|
|
2011
|
|
|
% of
Related
Revenue
|
|
Association fee commissions
|
|
$
|
1,680
|
|
|
|
36
|
%
|
|
$
|
1,591
|
|
|
|
36
|
%
|
Transaction fee commissions
|
|
$
|
7,841
|
|
|
|
76
|
%
|
|
$
|
7,282
|
|
|
|
75
|
%
|
Corporate owned office salaries, wages, employee benefits, and independent contractor expenses
|
|
$
|
301
|
|
|
|
71
|
%
|
|
$
|
899
|
|
|
|
92
|
%
|
Association fee commissions
were 36% of their related revenue in both 2012 and 2011. Transaction fee commissions increased 1% to 76% in 2012 compared to 75%
in 2011. Corporate-owned office salaries, wages and employee benefits were reduced to 71% of related revenue down 21% from the
92% of 2011. The corporate-owned office costs decreased on a dollar basis and as a percentage of related revenue year over year
as we sold our two largest corporate-owned offices in 2012.
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,
|
|
|
|
2012
|
|
|
Percent
change
from 2011
|
|
|
2011
|
|
Corporate salaries, wages and employee benefits
|
|
$
|
1,977
|
|
|
|
-1
|
%
|
|
$
|
2,001
|
|
Percentage of revenue
|
|
|
13
|
%
|
|
|
|
|
|
|
12
|
%
|
Year ended July 31, 2012 and 2011.
Corporate salaries, wages and employee benefits expenses decreased by $24 or 1% for the year ended 2012, as compared to
the year ended 2011. The decrease in compensation-related costs for the year is primarily due to a decrease in headcount offset
somewhat by an increase of $165 in stock-based compensation.
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,
|
|
|
|
2012
|
|
|
Percent
change
from 2011
|
|
|
2011
|
|
Selling, general and administrative expenses
|
|
$
|
2,226
|
|
|
|
-13
|
%
|
|
$
|
2,573
|
|
Percentage of revenue
|
|
|
14
|
%
|
|
|
|
|
|
|
16
|
%
|
Year
ended July 31, 2012 and 2011
.
SG&A expenses
decreased by $347 or 13% for the year ended 2012 as compared to the year ended 2011. The decrease is due primarily to a $341 decrease
in legal fees and a $86 decrease in rent expense during 2012. Some of the decrease for 2012 was offset by a $62 increase in foreign
currency expense and a $32 increase in our proxy expenses.
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,
|
|
|
|
2012
|
|
|
Percent
change
from 2011
|
|
|
2011
|
|
Depreciation and amortization
|
|
$
|
308
|
|
|
|
-48
|
%
|
|
$
|
588
|
|
Percentage of revenue
|
|
|
2
|
%
|
|
|
|
|
|
|
4
|
%
|
Year ended July 31, 2012 and 2011.
Depreciation and amortization decreased by $280, or 48% for the year ended 2012 as compared to the year ended 2011. The
primary reason for the decrease is that there were no material additions of property and equipment or amortizable intangible assets
in 2012, 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:
|
|
Year Ended July 31,
|
|
|
|
2012
|
|
|
Percent
change
from 2011
|
|
|
2011
|
|
Interest income
|
|
$
|
102
|
|
|
|
104
|
%
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of assets, net
|
|
$
|
312
|
|
|
|
215
|
%
|
|
$
|
99
|
|
Other income
|
|
$
|
414
|
|
|
|
178
|
%
|
|
$
|
149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, as a percentage of revenue
|
|
|
3
|
%
|
|
|
|
|
|
|
1
|
%
|
Year ended July 31, 2012 and 2011.
Other income increased by $265 for the year ended 2012 as compared to the year ended 2011. 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. Other income for the year ended 2011 includes a $35 gain on sale of advertising credits, reflects a gain of $66
from the sale of membership lists and a loss of $2 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 $52 or 104% as we increased
the balance of the notes from $909 in 2011 to $1,619 in 2012. The notes receivable are repaid in installments. The installment
payments for the various notes receivable end between 2013 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 between the 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 2012 and 2011, respectively, we utilized $1,056 and $1,282 of our available NOLs. As of
July 31, 2012, we have approximately $11,857 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. As part of our evaluation process for the year ended July 31, 2012, we determined that
based on our estimates of future taxable income, we will not be able to utilize the remaining portion of the state of California
NOL. We determined that there is no allowance required on our Federal NOL. We have a $186 and $152 valuation allowance on state
of California NOLs for the period ended July 31, 2012 and 2011, respectively.
FINANCIAL CONDITION (in thousands)
Our total assets were $13,111 and $17,021
at July 31, 2012 and 2011, respectively, representing a decrease of $3,910 or 23%. The decrease in asset base is primarily due
to the completion of a partial tender offer in which we purchased 1,073 shares of our common stock for $4,506, cash dividends
paid out to stockholders in 2012 of $604 and the utilization of $583 of deferred income taxes. In addition, we also repurchased
17 shares of our common stock for $68 through the stock repurchase program.
Our cash totaled $1,942
and $5,386 as of July 31, 2012 and 2011, respectively, representing a decrease of $3,444, or 64%. Our cash flow activity is described
in more detail below (see “Liquidity and Capital Resources”).
Accounts receivable balances,
net of allowances of $319 and $354, were $716 and $805 as of July 31, 2012 and 2011 respectively, representing a decrease of $89
or 11%, primarily due to timing of our cycle close in comparable years.
|
|
July 31, 2012
|
|
|
% of Gross
Accounts
Receivable
|
|
|
July 31, 2011
|
|
|
% of Gross
Accounts
Receivable
|
|
Gross accounts receivable
|
|
$
|
1,035
|
|
|
|
100
|
%
|
|
$
|
1,159
|
|
|
|
100
|
%
|
Less: allowance
|
|
|
319
|
|
|
|
31
|
%
|
|
|
354
|
|
|
|
31
|
%
|
Net accounts receivable
|
|
$
|
716
|
|
|
|
69
|
%
|
|
$
|
805
|
|
|
|
69
|
%
|
Our total current liabilities
were $2,161 and $2,255 at July 31, 2012 and 2011, respectively, representing a decrease of $94 or 4%. The decrease is primarily
due to decreases of accrued expenses of $133, offset by a $56 increase in accrued commissions for the year.
Our stockholders’ equity decreased
by $3,818 or 26% to $10,940 at July 31, 2012, compared to $14,758 at July 31, 2011 primarily due to $4,506 utilized in the tender
offer and $604 in dividends paid during 2012. This decrease was offset somewhat by net income of $969 during 2012.
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 $1,893 and $1,684 for
the years ended July 31, 2012 and 2011, respectively. Our cash balance as of July 31, 2012 totaled $1,942. Additionally, we have
a revolving credit agreement for a $3,000 line of credit facility from our primary banking institution, U.S. Bank (“line
of credit”), effective through November 30, 2012. We anticipate renewing the credit facility at a reduced level for another
year. We have no outstanding balance on our line of credit as of July 31, 2012.
The following
table presents a summary of our cash flows for the years ended 2012 and 2011 respectively (in thousands):
|
|
Year Ended July 31,
|
|
|
|
2012
|
|
|
2011
|
|
Net cash provided by operating activities
|
|
$
|
1,893
|
|
|
$
|
1,684
|
|
Net cash provided by (used in) investing activities
|
|
|
(255
|
)
|
|
|
(525
|
)
|
Net cash used in financing activities
|
|
|
(5,082
|
)
|
|
|
(942
|
)
|
Increase (decrease) in cash and cash equivalents
|
|
$
|
(3,444
|
)
|
|
$
|
217
|
|
We have financed our
operational needs through cash flow generated from operations. During 2012, our cash position decreased by $3,444 to $1,942. In
2012 we used a significant portion of cash reserves to fund the tender offer of $4,506. 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 may seek 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 $3,000 line of credit facility from our primary banking institution which is effective
through November 30, 2012, and which we anticipate renewing at a reduced level 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 2012 and 2011:
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
|
)
|
Year ended July 31, 2011
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
354
|
|
|
$
|
437
|
|
|
$
|
(245
|
)
|
|
$
|
1,138
|
|
|
$
|
1,684
|
|
Net cash (used in) investing activities
|
|
|
(34
|
)
|
|
|
(81
|
)
|
|
|
(42
|
)
|
|
|
(368
|
)
|
|
|
(525
|
)
|
Net cash (used in) financing activities
|
|
|
(90
|
)
|
|
|
(143
|
)
|
|
|
(560
|
)
|
|
|
(149
|
)
|
|
|
(942
|
)
|
|
|
$
|
230
|
|
|
$
|
213
|
|
|
$
|
(847
|
)
|
|
$
|
621
|
|
|
$
|
217
|
|
Operating Activities
For the year ended July 31, 2012, net cash
provided by operating activities was $1,893 compared to $1,684 in the year ended July 31, 2011, an increase of $209, or 12%. The
increase in net cash is primarily due to a $268 increase in net income and a reduction of $250 in deferred revenue.
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,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
969
|
|
|
$
|
701
|
|
Add: non-cash expenses
|
|
|
839
|
|
|
|
1,141
|
|
Add: changes in operating assets and liabilities
|
|
|
85
|
|
|
|
(158
|
)
|
Net cash provided by operating activities
|
|
$
|
1,893
|
|
|
$
|
1,684
|
|
Non-cash expenses
are associated 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, media sales, and revenue from our
subscription-based arrangement for client management platform, and net of credit card returns, electronic fund transfer returns,
and return checks is as follows (in thousands):
|
|
Year Ended July 31,
|
|
|
|
2012
|
|
|
Percent
of total
|
|
|
2011
|
|
|
Percent
of total
|
|
Credit cards, net
|
|
$
|
10,751
|
|
|
|
69
|
%
|
|
$
|
9,770
|
|
|
|
66
|
%
|
Electronic fund transfers, net
|
|
|
3,777
|
|
|
|
24
|
%
|
|
|
3,789
|
|
|
|
26
|
%
|
Checks and cash, net
|
|
|
1,110
|
|
|
|
7
|
%
|
|
|
1,264
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received from Marketplace members, net
|
|
$
|
15,638
|
|
|
|
100
|
%
|
|
$
|
14,823
|
|
|
|
100
|
%
|
Investing Activities
For the year ended July 31, 2012, net cash
used in investing activities was $255 compared with $525 used in investing activities in the year ended July 31, 2011, a decrease
of $270, or 51%. 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. In the year ended
July 31, 2011, the net cash used in investing activities was primarily driven by $472 in purchases of membership lists and $168
of advances on loans offset by $138 in note receivable principle 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, 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
|
)
|
Year ended July 31, 2011
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on Private placement
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
20
|
|
|
$
|
20
|
|
Cash dividend paid to common stockholders
|
|
|
(90
|
)
|
|
|
(143
|
)
|
|
|
(145
|
)
|
|
|
(163
|
)
|
|
|
(541
|
)
|
Discretionary repurchase of common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(415
|
)
|
|
|
(6
|
)
|
|
|
(421
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(90
|
)
|
|
$
|
(143
|
)
|
|
$
|
(560
|
)
|
|
$
|
(149
|
)
|
|
$
|
(942
|
)
|
We repurchased 17 and
94 shares of ITEX stock under our stock repurchase program in 2012 and 2011, respectively. The Company also completed a partial
tender offer in which we purchased 1,073 shares in 2012.
Commitments and Contingencies
We utilize leased facilities in the normal
course of our business. As of July 31, 2012, the future minimum commitments under these operating leases are as follows:
|
|
Executive office
|
|
|
Corp owned office
|
|
|
Total
|
|
Location:
|
|
Bellevue, WA
|
|
|
Milwaukie, OR
|
|
|
|
|
Expiration date:
|
|
April 30, 2015
|
|
|
October 31, 2012
|
|
|
|
|
Lease commitments
for the year ending
July 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
163
|
|
|
|
1
|
|
|
|
164
|
|
2014
|
|
|
166
|
|
|
|
-
|
|
|
|
166
|
|
2015
|
|
|
127
|
|
|
|
-
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
456
|
|
|
$
|
1
|
|
|
$
|
457
|
|
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, 2012 and
2011 was $215 and $301, respectively.
We have not leased any equipment in 2012
or 2011. We have purchase commitments for telecommunications and data communications. As of July 31, 2012, the future minimum
commitments under these purchase commitments are as follows:
|
|
Telecommunications
and data
communications
|
|
Purchase commitments for
the year ending July 31,
|
|
|
|
2013
|
|
$
|
31
|
|
2014
|
|
|
10
|
|
|
|
|
|
|
Total
|
|
$
|
41
|
|
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 to
Note 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 the years ended July 31, 2012 and 2011, members made approximately 93%
and 92%, respectively, of their payments through electronic funds transfer or by credit. 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 98% and 92% of our total revenue in 2012 and 2011, 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.
Our web services contracts
included multiple deliverable components, in which we recognized revenue from the platform subscription fee on a straight-line
basis over the contract term. The Company recognized revenue from recurring transaction processing, support and consulting fees
as delivery has occurred or services were rendered.
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,
|
|
|
|
2012
|
|
|
2011
|
|
Fees received from the Marketplace
|
|
$
|
5,180
|
|
|
$
|
5,088
|
|
Expenditures to and for the Marketplace
|
|
|
(5,158
|
)
|
|
|
(5,070
|
)
|
Increase
|
|
$
|
22
|
|
|
$
|
18
|
|
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.
The media revenue portion
of our business, which is included in other fee revenue, is accounted for on a net revenue basis. We report as revenue the net
portion remaining after the cost of media sales is deducted.
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 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 periodically assess whether it is more likely 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 become deductible. We consider the scheduled
reversal of deferred tax liabilities and projections for future taxable income over the periods in which the deferred tax assets
are deductible. As part of that assessment for the year ended July 31, 2012, we concluded that the portion of our income that
will be apportioned to the state of California in future years will not be as large as previously expected. As a result, we believe
that we will not be able to utilize the California NOL. Accordingly, we have taken an additional $34 valuation allowance during
the year ended July 31, 2012 against this NOL.
We have taken a
$186 valuation allowance during the year ended July 31, 2012. We determined that there is no allowance required on our Federal
NOL. As of July 31, 2012 and 2011, we have a $186 and $152 valuation allowance on state of California NOLs for the period ended
July 31, 2012 and 2011, respectively.
On July 31, 2012, we
had NOLs of approximately $11,857 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, 2012 represent our current estimate of all deferred tax benefits to be utilized in the current year and future
periods beyond 2012.
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, 2012, 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, including transaction
costs, are allocated to the fair value of net assets acquired for any business combinations occurring prior to August 1, 2009.
Subsequent to August 1, 2009, all costs to acquire a business are expensed.
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
Effective September 2011, the FASB issued
guidance for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Under
the amendments in this update, an entity has the option to first assess qualitative factors to determine whether the existence
of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is
less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more
likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment
test is unnecessary. Under the amendments in this update, an entity has the option to bypass the qualitative assessment for any
reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity
may resume performing the qualitative assessment in any subsequent period. The Company adopted this guidance on December 15, 2011.
Effective July 2012, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update (“ASU”) No. 2012-02 “
Intangibles – Goodwill
and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment
,” for fiscal years beginning after September
15, 2012 which permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived
intangible asset is impaired before performing quantitative impairment testing. The Company will adopt this guidance in the period
after September 15, 2012.
|
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, 2012 and 2011, 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 audit 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 audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining on a test
basis, evidence supporting the amounts and disclosures in the 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 aspects, the financial position of ITEX Corporation as of July 31,
2012 and 2011, and the results of its operations and its cash flows for each of the years then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ Ehrhardt Keefe Steiner & Hottman
PC
|
|
Ehrhardt Keefe Steiner & Hottman PC
|
|
October 23, 2012
Denver, Colorado
ITEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
|
|
July 31, 2012
|
|
|
July 31, 2011
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,942
|
|
|
$
|
5,386
|
|
Accounts receivable, net of allowance of $319 and $354
|
|
|
716
|
|
|
|
805
|
|
Prepaid expenses
|
|
|
98
|
|
|
|
131
|
|
Loans and advances
|
|
|
12
|
|
|
|
10
|
|
Prepaid advertising credits
|
|
|
3
|
|
|
|
60
|
|
Deferred tax asset, net of allowance of $23 and $22
|
|
|
603
|
|
|
|
798
|
|
Notes receivable
|
|
|
334
|
|
|
|
180
|
|
Other current assets
|
|
|
47
|
|
|
|
6
|
|
Total current assets
|
|
|
3,755
|
|
|
|
7,376
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net of accumulated depreciation of $425 and $468
|
|
|
43
|
|
|
|
89
|
|
Goodwill
|
|
|
3,191
|
|
|
|
3,266
|
|
Deferred tax asset, net of allowance of $163 and $130 and net of current portion
|
|
|
4,293
|
|
|
|
4,681
|
|
Intangible assets, net of accumulated amortization of $2,945 and $2,691
|
|
|
525
|
|
|
|
855
|
|
Notes receivable - net of current portion
|
|
|
1,285
|
|
|
|
729
|
|
Other long-term assets
|
|
|
19
|
|
|
|
25
|
|
Total assets
|
|
|
13,111
|
|
|
|
17,021
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts and other expenses payable
|
|
|
85
|
|
|
|
76
|
|
Commissions payable to brokers
|
|
|
654
|
|
|
|
669
|
|
Accrued commissions to brokers
|
|
|
842
|
|
|
|
785
|
|
Accrued expenses
|
|
|
412
|
|
|
|
545
|
|
Deferred revenue
|
|
|
32
|
|
|
|
47
|
|
Advance payments
|
|
|
136
|
|
|
|
133
|
|
Total current liabilities
|
|
|
2,161
|
|
|
|
2,255
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
10
|
|
|
|
8
|
|
Total Liabilities
|
|
|
2,171
|
|
|
|
2,263
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 9,000 shares authorized; 2,614 shares and 3,646
shares issued and outstanding, respectively
|
|
|
26
|
|
|
|
36
|
|
Additional paid-in capital
|
|
|
25,183
|
|
|
|
29,452
|
|
Stockholder note receivable
|
|
|
(489
|
)
|
|
|
(585
|
)
|
Accumulated deficit
|
|
|
(13,780
|
)
|
|
|
(14,145
|
)
|
Total stockholders' equity
|
|
|
10,940
|
|
|
|
14,758
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
13,111
|
|
|
$
|
17,021
|
|
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,
|
|
|
|
2012
|
|
|
2011
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Marketplace and other revenue
|
|
$
|
15,786
|
|
|
$
|
16,424
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of Marketplace revenue
|
|
|
10,165
|
|
|
|
10,159
|
|
Corporate salaries, wages and employee benefits
|
|
|
1,977
|
|
|
|
2,001
|
|
Selling, general and administrative
|
|
|
2,226
|
|
|
|
2,573
|
|
Depreciation and amortization
|
|
|
308
|
|
|
|
588
|
|
|
|
|
14,676
|
|
|
|
15,321
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,110
|
|
|
|
1,103
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense):
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
102
|
|
|
|
50
|
|
Other income (expense), net
|
|
|
312
|
|
|
|
99
|
|
|
|
|
414
|
|
|
|
149
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,524
|
|
|
|
1,252
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
555
|
|
|
|
551
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
969
|
|
|
$
|
701
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.29
|
|
|
$
|
0.19
|
|
Diluted
|
|
$
|
0.29
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
3,344
|
|
|
|
3,604
|
|
Diluted
|
|
|
3,345
|
|
|
|
3,648
|
|
The accompanying notes are an integral part of these Consolidated
Financial Statements.
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY
(In thousands)
|
|
Common Stock
Shares Amount
|
|
|
Additional paid
in capital
|
|
|
Stockholder
Notes
Receivable
|
|
|
Accumulated
deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 31, 2010
|
|
|
3,576
|
|
|
$
|
36
|
|
|
$
|
29,138
|
|
|
$
|
-
|
|
|
$
|
(14,305
|
)
|
|
$
|
14,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense
|
|
|
13
|
|
|
|
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock repurchased and retired
|
|
|
(94
|
)
|
|
|
(1
|
)
|
|
|
(420
|
)
|
|
|
|
|
|
|
|
|
|
|
(421
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private placement - Brokers
|
|
|
151
|
|
|
|
1
|
|
|
|
604
|
|
|
|
(605
|
)
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on Broker notes receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend payment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(541
|
)
|
|
|
(541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
701
|
|
|
|
701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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,
|
|
|
|
2012
|
|
|
2011
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
969
|
|
|
$
|
701
|
|
Items to reconcile to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
308
|
|
|
|
588
|
|
Loss on disposal of equipment
|
|
|
6
|
|
|
|
2
|
|
Stock-based compensation
|
|
|
295
|
|
|
|
130
|
|
Increase (decrease) in allowance for uncollectible receivables
|
|
|
(35
|
)
|
|
|
5
|
|
Decrease in deferred income taxes
|
|
|
583
|
|
|
|
538
|
|
Gain on Sale - Media Credits
|
|
|
-
|
|
|
|
(34
|
)
|
Gain on Sale - Membership lists
|
|
|
(318
|
)
|
|
|
(68
|
)
|
Franchise fee revenue financed with note receivable
|
|
|
-
|
|
|
|
(20
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
124
|
|
|
|
87
|
|
Prepaid expenses and Media credits
|
|
|
90
|
|
|
|
154
|
|
Loans and advances
|
|
|
(2
|
)
|
|
|
45
|
|
Other assets
|
|
|
(35
|
)
|
|
|
60
|
|
Accounts and other expenses payable
|
|
|
9
|
|
|
|
(48
|
)
|
Commissions payable to brokers
|
|
|
(15
|
)
|
|
|
8
|
|
Accrued commissions to brokers
|
|
|
57
|
|
|
|
(4
|
)
|
Accrued expenses
|
|
|
(133
|
)
|
|
|
(160
|
)
|
Deferred revenue and other long-term liabilites
|
|
|
(15
|
)
|
|
|
(265
|
)
|
Long-term liabilities
|
|
|
2
|
|
|
|
(3
|
)
|
Advance payments
|
|
|
3
|
|
|
|
(32
|
)
|
Net cash provided by operating activities
|
|
|
1,893
|
|
|
|
1,684
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Membership list purchase
|
|
|
(175
|
)
|
|
|
(72
|
)
|
Membership list, non-compete, and accounts receivable purchase
|
|
|
-
|
|
|
|
(400
|
)
|
Payments received from notes receivable - corporate office sales
|
|
|
259
|
|
|
|
138
|
|
Advances on loans
|
|
|
(324
|
)
|
|
|
(168
|
)
|
Purchase of property and equipment
|
|
|
(15
|
)
|
|
|
(23
|
)
|
Net cash used in investing activities
|
|
|
(255
|
)
|
|
|
(525
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Principal payments on Private placement
|
|
|
96
|
|
|
|
20
|
|
Repurchase of Common stock
|
|
|
(68
|
)
|
|
|
(421
|
)
|
Tender Offer
|
|
|
(4,506
|
)
|
|
|
-
|
|
Cash dividend paid to Common Stockholders
|
|
|
(604
|
)
|
|
|
(541
|
)
|
Net cash used in financing activities
|
|
|
(5,082
|
)
|
|
|
(942
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(3,444
|
)
|
|
|
217
|
|
Cash and cash equivalents at beginning of period
|
|
|
5,386
|
|
|
|
5,169
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,942
|
|
|
$
|
5,386
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for taxes
|
|
|
69
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
Non-cash activities:
|
|
|
|
|
|
|
|
|
Notes for stock issuances
|
|
|
-
|
|
|
|
605
|
|
Notes for member lists
|
|
|
-
|
|
|
|
170
|
|
Notes for media sale
|
|
|
-
|
|
|
|
86
|
|
Notes for asset sales
|
|
|
470
|
|
|
|
-
|
|
Notes for member list
|
|
|
175
|
|
|
|
-
|
|
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”, “2012” for August
1, 2011 to July 31, 2012, “2011” for August 1, 2010 to July 31, 2011). 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 allocated to the fair value of net assets acquired for any business combinations occurring prior to August 1, 2009. Subsequent
to August 1, 2009, all costs to acquire a business are expensed.
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, 2012, 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 $17 and $63 expense on sale of advertising credits in the years ended 2012 and 2011, respectively. Additionally the
Company used approximately $55 and $105 of advertising credits for its own advertising needs in the years ended 2012 and 2011,
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, 2012 is $12. Interest rates are typically 13% charged
on the outstanding balances. The maximum individual balance owed is $2. 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. We have
increased the amount of our loans to brokers from $909 in 2011 to $1,619 at July 31, 2012.
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, 2012 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, 2012 represents commissions payable from the operating cycle
ending July 26, 2012. In 2011, the closest operating cycle ended July 28, 2011. 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
the acquisition of BXI. We defer this revenue and recognize it over the annual period to which it applies. During 2009, we signed
two web services agreements. These agreements provided for a one-time platform subscription fee payable to ITEX upon signing of
the contract. We amortized the subscription fee portion of the contract on a ratable basis over the life of the contract, typically
five years. The primary web services contract signed in 2009 was terminated by the client in 2011 and we amortized the remaining
unamortized balance upon cancellation. As of July 31, 2012 and 2011 we have $32 and $47 of annual dues deferred revenue and have
$0 and $0 of deferred revenue derived from Web services reflected 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, 2012 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 no debt outstanding as of July 31, 2012 and 2011.
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 the years ended July 31, 2012 and 2011, members made approximately
93% and 92%, respectively, 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 98% and 92% of our total
revenue in 2012 and 2011, respectively.
In each accounting
cycle, the Company recognizes 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, the Company shares a portion of its revenue with the brokers in its 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.
The Company records
an allowance for uncollectible accounts based upon its assessment of various factors. The Company considers 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.
On February 28, 2011, the agreement with
the Company’s principal web services client, entered into in February 2009, was terminated. The web services contract had
been responsible for generating approximately 5% of the Company’s total revenues for the year ended July 31, 2011.
Web services contracts
included multiple deliverable components. The Company recognized revenue from the platform subscription fee on a straight-line
basis over the contract term. The Company recognized revenue from recurring transaction processing, support and consulting fees
as delivery has occurred or services have been rendered.
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.
For the media revenue
portion of our business which is included in other fee revenue, we account for revenue on a net revenue basis. We report as revenue
the net portion remaining after the cost of media sales is deducted.
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 $55 and $105 for the years ending July 31, 2012 and 2011, respectively.
Share-based Payments
The Company accounts for share-based
compensation to its employees, contractors and directors and measures 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 $295 and $130 for the years ending July 31, 2012 and 2011, 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, 2012, we had no contracts to issue common stock, other than warrants outstanding
to purchase up to 20 shares of common stock. The Company had 3 unvested restricted stock units that were dilutive and 340 unvested
restricted stock units that were anti-dilutive as of July 31, 2012.
NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS
Effective September 2011, the FASB issued
guidance for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Under
the amendments in this Update, an entity has the option to first assess qualitative factors to determine whether the existence
of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is
less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more
likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment
test is unnecessary. Under the amendments in this Update, an entity has the option to bypass the qualitative assessment for any
reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity
may resume performing the qualitative assessment in any subsequent period. The Company adopted this guidance on December 15, 2011.
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, 2012 was five business days as our cycle end date was on July 26, 2012.
In 2011, our operating cycle ending date was July 28, 2011 or two business days different than the accounting cycle end date of
July 31, 2011.
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 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 some loans
to existing broker offices, new notes receivables were originated in the amount of $969.
In 2011 we sold a number
of membership lists primarily related to the sale of new broker offices. As part of these member list sales and new broker offices,
new notes receivables were originated in the amount of $444.
The aggregate total owed to us on July
31, 2012 is $1,619. Individual balances owed range from $2 to $373. Payoff dates for the loans are scheduled between 2013 and
2023.
Original Principal
Balance on Notes
|
|
|
Principal Additions
in 2012
|
|
|
Balance Receivable
at
July 31, 2012
|
|
|
Current Portion
|
|
|
Long-Term
Portion
|
|
$
|
1,838
|
|
|
$
|
969
|
|
|
$
|
1,619
|
|
|
$
|
334
|
|
|
$
|
1,285
|
|
The activity for Notes receivables was
as follows:
Balance at July 31, 2010
|
|
$
|
605
|
|
Principal additions
|
|
|
444
|
|
Interest income at stated rates
|
|
|
45
|
|
Payments received
|
|
|
(185
|
)
|
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
|
|
NOTE 5 - PROPERTY AND EQUIPMENT
The following table summarizes property
and equipment:
|
|
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
|
|
|
|
July 31, 2011
|
Fixed Asset Type
|
|
Estimated
Useful Life
|
|
Cost
|
|
|
Accumulated
Depreciation
|
|
|
Net Book
Value
|
|
Computers
|
|
3 years
|
|
$
|
285
|
|
|
$
|
(215
|
)
|
|
$
|
70
|
|
Software
|
|
3 years
|
|
|
86
|
|
|
|
(78
|
)
|
|
|
8
|
|
Equipment
|
|
7 years
|
|
|
69
|
|
|
|
(58
|
)
|
|
|
11
|
|
Furniture
|
|
7 years
|
|
|
65
|
|
|
|
(65
|
)
|
|
|
-
|
|
Leasehold Improvements
|
|
3.3 years
|
|
|
52
|
|
|
|
(52
|
)
|
|
|
-
|
|
|
|
|
|
$
|
557
|
|
|
$
|
(468
|
)
|
|
$
|
89
|
|
We depreciate property and equipment using
the straight-line method over the assets’ estimated useful lives. Depreciation expense for property and equipment was $55
and $102 for the years ending July 31, 2012 and 2011, 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, 2012 or 2011.
NOTE 6 – INTANGIBLE ASSETS
On October 2010, we purchased a membership
list from a third-party in the amount of $72. This membership list will be amortized over a 60 month period.
On May 1, 2011, we acquired certain assets
of a commercial trade exchange network from an Oregon corporation for a cash payment of $400. Included in the assets was a non-compete
agreement, accounts receivable and a membership list of approximately 1,500 member businesses, concentrated primarily in the states
of Washington, Oregon, Utah and Georgia. We added new brokers to service these acquired accounts and established a corporate-owned
office in Milwaukie, Oregon,
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, 2010
|
|
$
|
962
|
|
|
$
|
16
|
|
|
$
|
16
|
|
|
$
|
994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of membership list
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
72
|
|
Trade exchange purchase
|
|
|
257
|
|
|
|
25
|
|
|
|
|
|
|
|
282
|
|
Amount allocated to sale of Cleveland based Member list
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
Amortization
|
|
|
(467
|
)
|
|
|
(18
|
)
|
|
|
(2
|
)
|
|
|
(487
|
)
|
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
|
|
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 May 2011 and 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 $6 and $77 respectively. 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.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
233
|
|
|
|
8
|
|
|
|
2
|
|
|
|
243
|
|
2014
|
|
|
91
|
|
|
|
7
|
|
|
|
2
|
|
|
|
100
|
|
2015
|
|
|
62
|
|
|
|
-
|
|
|
|
2
|
|
|
|
64
|
|
2016
|
|
|
62
|
|
|
|
-
|
|
|
|
2
|
|
|
|
64
|
|
Thereafter
|
|
|
50
|
|
|
|
-
|
|
|
|
4
|
|
|
|
54
|
|
Total
|
|
$
|
498
|
|
|
$
|
15
|
|
|
$
|
12
|
|
|
$
|
525
|
|
NOTE 7 - NOTES PAYABLE AND LINE OF CREDIT
The Company has a revolving credit agreement
to establish a $3,000 line of credit facility with its primary banking institution, US Bank, effective through November 30, 2012.
The interest rate of the facility is one-month LIBOR + 2% and the annual commitment fee for the current line of credit was
$4.
The Company anticipates renewing the line of credit at a reduced level 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, 2012 and 2011 and there was no outstanding balance as of July 31, 2012 and 2011. 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 leases for the Company’s corporate headquarters in Bellevue,
Washington and a branch office in Milwaukie, Oregon. These leases expire between October 31, 2012 and April 2015.
As of July 31, 2012, the future minimum
commitments under these operating leases are as follows:
|
|
Executive office
|
|
|
Corp owned office
|
|
|
Total
|
|
Location:
|
|
Bellevue, WA
|
|
|
Milwaukie, OR
|
|
|
|
|
Expiration date:
|
|
April 30, 2015
|
|
|
October 31, 2012
|
|
|
|
|
Lease commitments
|
|
|
|
|
|
|
|
|
|
for the year ending
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
163
|
|
|
|
1
|
|
|
|
164
|
|
2014
|
|
|
166
|
|
|
|
-
|
|
|
|
166
|
|
2015
|
|
|
127
|
|
|
|
-
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
456
|
|
|
$
|
1
|
|
|
$
|
457
|
|
The lease expense for our executive office
space and corporate-owned offices for the years ended July 31, 2012 and 2011 was $215 and $301, respectively.
We have not leased any equipment in 2012
or 2011.
We have purchase commitments for telecommunications
and data communications. As of July 31, 2012, the future minimum commitments under these purchase commitments are as follows:
|
|
Telecommunications
|
|
|
|
and data
|
|
|
|
communications
|
|
Purchase commitments for
the year ending July 31,
|
|
|
|
2013
|
|
$
|
31
|
|
2014
|
|
|
10
|
|
|
|
|
|
|
Total
|
|
$
|
41
|
|
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
and
were 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 $188 and $224 as ITEX dollar revenue for the years ended July 31, 2012 and 2011, 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, 2012 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, 2012 and 2011 (in thousands):
|
|
Year ended July 31,
|
|
|
|
2012
|
|
|
2011
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Marketplace and other revenue
|
|
$
|
188
|
|
|
$
|
224
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate salaries, wages and employee benefits
|
|
|
-
|
|
|
|
-
|
|
Selling, general and administrative
|
|
|
188
|
|
|
|
217
|
|
Depreciation
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189
|
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
(1
|
)
|
|
$
|
6
|
|
NOTE 10 — ACQUISITIONS
Membership lists
In September 2011,
ITEX 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 ITEX’s financial statement.
On May 1, 2011, ITEX acquired certain assets
of a barter exchange located in Oregon. T
he total consideration consisted of $400 in cash.
The following table
summarizes the estimated fair value of the assets acquired in this asset purchase (in thousands):
Purchase Price Consideration
|
|
|
|
|
Cash paid to Seller
|
|
$
|
400
|
|
|
|
|
|
|
Total consideration paid
|
|
$
|
400
|
|
|
|
|
|
|
Fair Value of the Net Assets Acquired
|
|
|
|
|
Accounts receivable
|
|
|
38
|
|
Membership list
|
|
|
337
|
|
Noncompetition agreement
|
|
|
25
|
|
Net assets acquired
|
|
$
|
400
|
|
The expected lives
of the membership list and noncompetition agreement are six years and three years, respectively. During the period ending July
31, 2012 and 2011, ITEX sold $77 and $80, 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 other 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 believes resolving the foregoing proceeding will
not 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.
On September 7, 2011, a lawsuit was filed
by one of the Company’s shareholders against our directors, and also ITEX as a nominal defendant, alleging shareholder derivative
claims and seeking unspecified damages, costs and attorney’s fees (
David Polonitza v. Steve White, Eric Best and John
Wade and ITEX Corporation as a nominal defendant
, King County Superior Court for the State of Washington, Case No. 11-2-30760-3).
The Company is advancing the defense costs of directors under its indemnity obligations. The complaint generally alleges breaches
of fiduciary duties by the Company’s directors (as well as abuse of control, gross mismanagement, corporate waste, and unjust
enrichment) in connection with the adoption of a Shareholders Rights Plan on March 11, 2011, the amendment of the Company’s
Equity Incentive Plan on February 14, 2011 and award of restricted stock grants under the Plan in March 2011, a private placement
of common stock to franchisees in March 2011 and our stock repurchase program. In a motion filed on May 1, 2012, plaintiff sought
a preliminary injunction to exclude the votes at the annual meeting on May 14, 2012, of both the recipients of restricted stock
grants under the Plan as well as the franchisees who participated in the 2011 private placement. On May 11, 2012, the King County
Superior Court declined to enjoin the vote of the disputed shares at the annual meeting, but enjoined certification of the final
election results pending further order.
As discussed above, plaintiff Polonitza
filed a lawsuit against our directors, and also ITEX as a nominal defendant, alleging shareholder derivative claims. ITEX does
not believe a favorable result for Mr. Polonitza is likely. However, if Mr. Polonitza were to be successful in electing his two
nominees, it would result in a change in control of the Company. Certain employees have change in control agreements, entitling
them to immediate vesting of restricted stock awards, and immediate and conditional payments whenever the incumbent directors cease
to constitute a majority of ITEX’s board. CEO Steven White would be entitled to a lump sum payment equal to one times his
base salary and immediate vesting of all equity-based compensation. As of July 31, 2012, the dollar value of these entitlements
would be $250 plus equity-based compensation valued at $822 and additional costs of $85. Other employees would receive equity-based
compensation valued at $670 if there were to be a change of control in ITEX’s board. In addition, if plaintiff’s slate
of directors were elected and fired Mr. White, either by the Company “without cause,” or by Mr. White “for good
reason,” Mr. White would be entitled to a severance payment equal to twice his base salary or an additional $500 as of July
31, 2012. Additional employees would be entitled to aggregate severance payments of $245 if terminated by ITEX within a three-year
protection period after a change in control, unless terminated for cause. The total cost to ITEX related to compensatory matters
alone could exceed $2,500. A change in control would allow Mr. Polonitza to reimburse his proxy expenses, which he estimated in
his proxy materials to be $100. The effect of the Polonitza litigation could be significant and if he were to prevail, it would
have a material adverse effect upon the Corporation’s operations, financial condition, and financial statements taken as
a whole.
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 f
or
the grant of incentive and nonqualified stock options, restricted stock, and stock bonuses to the Company's employees, directors,
officers or consultants.
In March 2011,
the Company issued 197 restricted shares to thirteen of the Company’s employees, valued at the grant date stock price of
$4.25 per share, with a vesting period of five years from the date of grant.
The fair value of these shares as of the grant
date was $837.
The grant is to be amortized to compensation expense over the respective requisite service
period of five years.
In March 2011,
the Company issued 190 restricted shares to the Company’s CEO, valued at the grant date stock price of $4.25 per share, with
a vesting period of eleven and one-half years from the date of grant.
The fair value of these shares as of the grant date
was $808. The grant first vests 19 shares in October 2013 and then another 19 shares vest annually in October of each subsequent
year.
The grant is to be amortized to compensation expense over the respective requisite service period
of eleven and one-half years.
In March 2011,
the Company issued 5 restricted shares to a consultant who is also a Board of Director, valued at the grant date stock price of
$4.25 per share, with a vesting period of one year from the date of grant.
The fair value of these shares as of the grant
date was $21.
The grant was amortized to compensation expense over the respective requisite service
period of one year.
In February 2011, the Board of Directors
of the Company approved an amendment to the 2004 Equity Incentive Plan, as amended and restated (the “Plan”), that
increased the number of shares of the Company’s common stock that may be delivered pursuant to awards granted under the Plan
by an additional 400 shares. At the time, there were no remaining shares available for awards under the Plan.
At July 31, 2012, 343 shares of common stock
granted under the 2004 Plan remained unvested. At July 31, 2012, the Company had $1,297 of unrecognized compensation expense, expected
to be recognized over a weighted-average period of approximately six years.
16 shares remained available for future
grants under the 2004 Plan as of July 31, 2012.
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 a non-employee:
|
|
Year ended July 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Employee Compensation
|
|
$
|
281
|
|
|
$
|
123
|
|
Consultant Compensation
|
|
|
14
|
|
|
|
7
|
|
Totals
|
|
$
|
295
|
|
|
$
|
130
|
|
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, 2010
|
|
|
-
|
|
|
|
400
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional authorized shares
|
|
|
400
|
|
|
|
-
|
|
|
|
|
|
Granted
|
|
|
(392
|
)
|
|
|
392
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 31, 2011
|
|
|
8
|
|
|
|
792
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
8
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 31, 2012
|
|
|
16
|
|
|
|
784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting as of July 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Vested
|
|
|
|
|
|
|
441
|
|
|
|
-
|
|
Shares Unvested
|
|
|
|
|
|
|
343
|
|
|
|
-
|
|
Balance at July 31, 2012
|
|
|
|
|
|
|
784
|
|
|
|
-
|
|
The stock-based
compensation expense charged against the results of operations was as follows:
|
|
Year ended July 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in:
|
|
|
|
|
|
|
|
|
Corporate salaries, wages and employee benefits
|
|
$
|
281
|
|
|
$
|
123
|
|
Selling, general and administrative
|
|
|
14
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
295
|
|
|
$
|
130
|
|
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 offer
closed
on April 13, 2012
,
after
which the Company purchased and canceled a total of
1,073 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. Because there was a contested election at its annual meeting of stockholders
held on May 14, 2012, the Company re-assigned voting rights to the brokers for the 2012 election.
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 17 and 94 shares of ITEX common stock for $68 and $421 in 2012 and 2011, 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, 2012 or 2011.
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, 2012, we had NOLs of approximately
$11,857 available to offset future taxable income. These are composed of approximately $9,952 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. During the fourth quarter of 2012, we performed an assessment of our available NOLs. As part of that assessment for the year
ended July 31, 2012, we concluded that the portion of our income that will be apportioned to the state of California in future
years will not be as large as previously expected. As a result, we believe that we will not be able to utilize the California NOL.
Accordingly, we have taken a $34 valuation allowance during the year ended July 31, 2012 against this NOL. We determined that there
is no allowance required on our Federal NOL. As of July 31, 2012 and 2011, we have a $186 and $152 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 2012. The following table
reflects the reconciliation of the company’s income tax expense:
|
|
Year Ended July 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Pre-tax financial income
|
|
$
|
1,524
|
|
|
$
|
1,252
|
|
Federal tax expense computed at the statutory rate of 34%
|
|
|
518
|
|
|
|
427
|
|
State tax expense
|
|
|
42
|
|
|
|
26
|
|
State FIN 48 adjustment
|
|
|
(48
|
)
|
|
|
(52
|
)
|
Change in valuation allowance
|
|
|
34
|
|
|
|
152
|
|
Permanent and other differences
|
|
|
9
|
|
|
|
(2
|
)
|
Net tax expense
|
|
|
555
|
|
|
|
551
|
|
Our income tax expense is composed of the
following:
|
|
Year Ended July 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Current federal tax expense
|
|
|
13
|
|
|
|
18
|
|
Current state tax expense
|
|
|
(41
|
)
|
|
|
(5
|
)
|
|
|
|
(28
|
)
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
Deferred federal tax expense
|
|
$
|
510
|
|
|
$
|
391
|
|
Deferred state tax expense
|
|
|
73
|
|
|
|
147
|
|
|
|
|
583
|
|
|
|
583
|
|
Total
|
|
$
|
555
|
|
|
$
|
551
|
|
The tax effects of temporary differences
that give rise to significant portions of deferred tax assets and liabilities at July 31, 2012 and 2011 are presented below:
|
|
Year Ended July 31,
|
|
|
|
2012
|
|
|
2011
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
4,217
|
|
|
$
|
4,582
|
|
Goodwill and other intangibles
|
|
|
39
|
|
|
|
218
|
|
Membership lists
|
|
|
292
|
|
|
|
184
|
|
Non-compete covenants
|
|
|
72
|
|
|
|
79
|
|
Reserve for uncollectible receivables
|
|
|
110
|
|
|
|
127
|
|
Federal tax credits
|
|
|
175
|
|
|
|
162
|
|
Other temporary differences
|
|
|
177
|
|
|
|
280
|
|
|
|
|
5,082
|
|
|
|
5,632
|
|
Less: Valuation allowance
|
|
|
(186
|
)
|
|
|
(152
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
4,896
|
|
|
$
|
5,480
|
|
|
|
|
|
|
|
|
|
|
The following components are included in net deferred tax assets in the accompanying balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Deferred Tax Assets
|
|
|
|
|
|
|
|
|
Current deferred tax asset
|
|
|
626
|
|
|
|
820
|
|
Valuation allowance
|
|
|
(23
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
Net current deferred tax asset
|
|
$
|
603
|
|
|
$
|
798
|
|
|
|
|
|
|
|
|
|
|
Non-Current Deferred Tax Assets
|
|
|
|
|
|
|
|
|
Non-current deferred tax asset
|
|
|
4,456
|
|
|
|
4,812
|
|
Valuation allowance
|
|
|
(163
|
)
|
|
|
(130
|
)
|
|
|
|
|
|
|
|
|
|
Net non-current deferred tax asset
|
|
$
|
4,293
|
|
|
$
|
4,682
|
|
ITEX Federal NOLs of approximately $11,857
expire, if unused, from 2019 to 2022. BXI Federal NOLs of approximately $1,905 expire, if unused, from 2020 to 2025 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 $4,000 which, if unused,
expire from 2013 to 2017. The state of California placed a temporary suspension on usage of NOL’s for tax years 2010 and
2011 which has resulted in an increase in our currently payable state tax liability and extended the original expiration dates
of certain California NOLs by a two-year period.
The Company has AMT credits of $171 and
research and development credits of $5 available to offset future taxes payable.
In accordance with
the accounting guidance surrounding the uncertainty in Income Taxes
we have recorded unrecognized tax liabilities of $156
as follows:
|
|
Year Ended July 31,
|
|
|
|
2012
|
|
|
|
|
|
|
Balance at July 31, 2011
|
|
$
|
204
|
|
Increases as a result of tax positions taken in the current year
|
|
|
7
|
|
Increases as a result of tax positions taken in prior years
|
|
|
20
|
|
Decreases resulting from settlements, payments and changes in estimates of probability tax positions will be sustained
|
|
|
(63
|
)
|
Balance at July 31, 2012
|
|
$
|
168
|
|
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
2011 in the United States. We also have available NOLs dating from 1998 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, 2012, accrued expenses for
uncertain tax positions related primarily to state jurisdictions on our consolidated balance sheet of $168 included $29 for interest
and penalties associated with unrecognized tax benefits.
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,
|
|
|
|
2012
|
|
|
2011
|
|
Beginning balance
|
|
$
|
3,266
|
|
|
$
|
3,282
|
|
Sale of Seattle and Chigago Corporate owned offices in Q2 2012
|
|
|
(75
|
)
|
|
|
-
|
|
Sale of Cleveland based member list Q4 2011
|
|
|
-
|
|
|
|
(16
|
)
|
Ending balance
|
|
$
|
3,191
|
|
|
$
|
3,266
|
|
NOTE 16 – SELECTED QUARTERLY FINANCIAL RESULTS
(unaudited)
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
|
|
Year ended July 31, 2011
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
Total
|
|
Revenues
|
|
$
|
4,112
|
|
|
$
|
4,417
|
|
|
$
|
3,960
|
|
|
$
|
3,935
|
|
|
$
|
16,424
|
|
Operating costs and expenses
|
|
|
3,820
|
|
|
|
4,182
|
|
|
|
3,572
|
|
|
|
3,747
|
|
|
|
15,321
|
|
Operating income
|
|
|
292
|
|
|
|
235
|
|
|
|
388
|
|
|
|
188
|
|
|
|
1,103
|
|
Other income - net
|
|
|
44
|
|
|
|
10
|
|
|
|
13
|
|
|
|
82
|
|
|
|
149
|
|
Income before taxes
|
|
|
336
|
|
|
|
245
|
|
|
|
401
|
|
|
|
270
|
|
|
|
1,252
|
|
Income tax expense
|
|
|
133
|
|
|
|
94
|
|
|
|
162
|
|
|
|
162
|
|
|
|
551
|
|
Net income
|
|
$
|
203
|
|
|
$
|
151
|
|
|
$
|
239
|
|
|
$
|
108
|
|
|
$
|
701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.06
|
|
|
$
|
0.04
|
|
|
$
|
0.07
|
|
|
$
|
0.03
|
|
|
$
|
0.19
|
|
Diluted
|
|
$
|
0.06
|
|
|
$
|
0.04
|
|
|
$
|
0.07
|
|
|
$
|
0.03
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 basic
|
|
|
3,578
|
|
|
|
3,581
|
|
|
|
3,611
|
|
|
|
3,646
|
|
|
|
3,604
|
|
2011 diluted
|
|
|
3,587
|
|
|
|
3,588
|
|
|
|
3,634
|
|
|
|
3,653
|
|
|
|
3,648
|
|
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, 2012 or 2011.
NOTE 18 – SUBSEQUENT EVENTS
On August 16, 2012, the Board of Directors
of ITEX Corporation declared a cash dividend in the amount of $0.04 per share, payable on September 20, 2012 to stockholders of
record as of the close of business on September 10, 2012.
|
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, who is also the Interim 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 Interim 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, 2012.
This Annual Report does not include an attestation
report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s
report was not subject to attestation by our 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.
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
The information included in Part III is reflected in USD and
units, whereas the information in the balance of the document is in ‘000’s for both units and USD.
|
Item 10.
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Directors
The following table sets forth certain information
about our directors as of September 30, 2012:
Name
|
|
Age
|
|
Current Principal Occupation or
Employment and Five-Year Employment History
|
|
Director
Since
|
|
|
|
|
Steven White
|
|
54
|
|
Chief Executive Officer, Interim Chief Financial Officer and Chairman of the Board of Directors of ITEX Corporation (2003-present); President Lakemont Capital (2002-2003); Sr. Vice President of Network Commerce (2000-2001); Chief Executive Officer and Founder of Ubarter.com (1996-2000); President and Founder of Cascade Trade Association (1983-1996)
|
|
2003
|
|
|
|
|
Eric Best
|
|
43
|
|
Director of ITEX Corporation (2003-present); Chief Executive Officer of Mercent Corporation (2005-present); Chief Executive Officer of Emercis (1998-2000); Chief Executive Officer of MindCorps (1996-1999); Co-Founder at Impresys (2009 – present); Chairman of the Board of Directors of Morse Best Innovation (2000-present). Member of Seattle Pacific University Entrepreneurial Studies Council
|
|
2003
|
|
|
|
|
John A. Wade, CPA
|
|
50
|
|
Director, Secretary and Treasurer of ITEX Corporation (2003-present); Principal of Wade Consulting (2007-present);
Chief Financial Officer of Aptimus, Inc. (1998-2007); Chief Financial Officer and Chief Operating Officer of Buzz Oates Enterprises (1994-1998)
|
|
2003
|
Director Qualifications and Skills
Set out below are the specific experience,
qualifications, attributes and skills of each of our directors which led the Board to the conclusion that each individual should
be nominated as a director of the Company.
Steven White
has more than 29 years
of entrepreneurial and executive and board-level experience in the barter industry, including principal executive officer positions,
in addition to ITEX Corporation, at Ubarter.com and Cascade Trade Association. This extensive experience allows Mr. White to bring
to the Board a deep insight into the operations, challenges and issues facing the Company and the barter industry in general.
Mr. White has served as the Chief Executive
Officer of ITEX since the fourth quarter of fiscal 2003. Since that time ITEX has: (1) achieved nine consecutive years of
profitable operations (fiscal 2004 through 2012); (2) increased revenue by 50%; (3) increased annual operational cash flow from
a net loss in 2003 to $1.9 million in 2012 (4) generated more than $17 million of net income (fiscal 2004 through 2012); (5) increased
stockholder equity from a negative ($481,000) in 2003 to $10.9 million in 2012; (6) retired 1.6 million shares of common stock;
and (7) returned $7.4 million to shareholders in the form of share buybacks and dividends.
From 1996 to 2000, Mr. White was
the
President and Chief Executive Officer of Ubarter.com, a web-based cashless trading community originally founded by Mr. White in
1983 as Cascade Trade Association, during which time he supervised and managed the affairs of a public company. In June
2000, Mr. White directed the sale of Ubarter.com to Network Commerce, an Internet-based technology infrastructure and services
company.
Eric Best
has more than 17 years
of entrepreneurial, executive, finance and board-level experience in the
technology sector
. Mr.
Best’s
technology experience
includes founding MindCorps, an e-commerce systems integrator
acquired by Amazon.com in 1999, and Emercis, an e-commerce tools provider acquired by Impressa in 2000. Mr. Best founded
and is currently CEO of Mercent Corporation, a profitable software-as-a-service venture backed by institutional investment from
Madrona Venture Group, The Hillman Company, and TVC Capital that enables retailers to sell through online merchandising channels.
Mr. Best also was founder and Chairman of Seattle-based Morse Best Innovation, a technical marketing agency serving clients such
as Microsoft, Lexmark, and WRQ, which was sold in 2010. He also co-founded Impresys, a software product company that helps customers
create more effective software marketing programs, presentations, and online tutorials. At Amazon.com, he helped manage the company’s
major business partnerships and open technology platform initiatives.
This experience allows Mr. Best
to bring to the Board substantial knowledge of the technology sector and meaningful insight into the branding, commercialization,
software development, financial and capital-related issues technology companies face.
He is a graduate of Seattle Pacific
University and a member of the SPU Entrepreneurial Studies Council and Society of Fellows.
John A. Wade
served
as Chief Financial Officer of Aptimus, Inc. (NASDAQ:APTM),
a public online direct marketing company, from 1998 to 2007,
while that company was involved in strategic and financing transactions
.
Prior to joining Aptimus, Mr. Wade served as CFO and COO for Buzz Oates Enterprises, a real estate development company. Mr. Wade
is currently a Principal at Wade Consulting. Mr. Wade has a Bachelor of Science degree in business administration with a concentration
in accounting from the San Diego State University School of Business and has been a CPA since 1987.
Mr. Wade has more
than 29 years of financial and accounting expertise, including developing disclosure and internal controls for public corporations.
This experience allows Mr. Wade to bring to the Board substantial financial and accounting knowledge, process controls, and valuable
insights as it reviews its strategic alternatives.
We believe that each of our nominees has
professional experience in areas relevant to our strategy and operations. Each of our Directors served in key management positions
in a range of companies, including businesses through which they have developed, as a group, expertise and experience in core business
skills such as strategy and business development, innovation, operations, brand management, finance, compensation and leadership
development, and compliance and risk management. We also believe each of our nominees has other attributes necessary to create
an effective board: the willingness to engage management and each other in a constructive and collaborative fashion; high personal
and professional ethics, integrity and values; good judgment; analytical minds; the willingness to offer a diverse perspective;
the ability to devote significant time to serve on our Board and its committees; and a commitment to representing the long-term
interests of all our stockholders. Although currently consisting of three members, we believe as a collective our Board has a broad
set of competencies and experiences making it well suited to further the interests of ITEX, its stockholders and other stakeholders.
Executive Officer
Steven White has served as Chief Executive
Officer and Interim Chief Financial Officer of the Company since June 2003. See background information above for Mr. White under
the heading “Directors.”
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.
Section 16(a) Beneficial Ownership
Reporting Compliance
Section 16(a) of the Securities Exchange
Act of 1934, as amended, requires that our directors and executive officers, and persons who own more than ten percent of our common
stock, including members of any 13(d) group, file with the SEC initial reports of ownership and reports of changes in ownership
of our common stock and other equity securities. Officers, directors and greater-than-ten percent stockholders are required by
the SEC regulation to furnish us with copies of all Section 16(a) forms they file. Specific due dates have been established by
the SEC, and we are required to disclose in this report any failure to file by those dates. Based solely on our review of such
forms in our possession and on written representations from reporting persons, we believe that there has been compliance with all
Section 16(a) filing requirements applicable to our officers, directors and ten-percent beneficial owners.
Code of Ethics
We have adopted the ITEX Code of Ethics
(the “Code of Ethics”), a code of ethics that applies to our executive officers, including financial officers, and
other finance organization employees. The Code of Ethics is publicly available on our website at
www.itex.com
under the
Investor Relations tab. If we make any substantive amendments to the Code of Ethics or grant any waiver, from a provision of the
code to our executive officers, we will disclose the nature of such amendment or waiver on that website or in a report on Form
8-K.
Audit Committee Information
The Audit Committee of our Board of Directors
currently consists of Messrs. Wade and Best. The Board has determined that John Wade is an “audit committee financial expert”
as defined by Securities and Exchange Commission rules. Mr. Wade serves as Chairman of the Audit Committee.
|
Item 11.
|
EXECUTIVE COMPENSATION
|
Summary Compensation Table*
The following table provides summary information
about compensation received by
our Chief Executive Officer (the “named executive officer”)
for the fiscal years ended July 31, 2012 and July 31, -2011.
Name and Principal
Position
|
|
Year
|
|
|
Salary
|
|
|
Stock
Awards (1)
|
|
|
All Other
Compen-
sation (2)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven White, CEO and
|
|
|
2012
|
|
|
$
|
250,000
|
|
|
|
-
|
|
|
$
|
31,700
|
|
|
$
|
281,700
|
|
Interim CFO
|
|
|
2011
|
|
|
$
|
250,000
|
|
|
$
|
807,500
|
|
|
$
|
10,980
|
|
|
$
|
1,068,480
|
|
|
(*)
|
Columns in the Summary Compensation Table that were not relevant to the compensation paid to the named executive officer were
omitted.
|
|
(1)
|
The amount represents the grant date fair value of stock awards, computed in accordance with FASB ASC 718. The value is based
on the closing price of the Company’s common stock on the date of grant. Stock awards for Mr. White in 2011 reflect
a restricted stock grant of 190,000 shares granted on March 30, 2011. The award vests over an 11.5 year period, for a value of
$70,217 per year.
|
|
(2)
|
The 2011 and 2012 amounts represent dividends paid on unvested restricted stock.
|
Executive officers are eligible to participate
in all of our employee benefit plans, in each case on the same basis as other employees. The Company reimburses executive officers
for all reasonable business expenses incurred by the officer in connection with the performance of the officer’s duties.
Narrative to Summary Compensation Table
We have a 2004 equity
incentive plan (the “Plan”) which allows for grants of nonqualified and incentive stock options and stock awards to
eligible employees, directors, officers or consultants.
On February 14, 2011, the Board of Directors
amended the Plan and authorized 400,000 shares to be available for issuance under the Plan.
On March
30, 2011, the Company issued 392,000 restricted shares
as equity incentive grants
to 15 eligible
recipients under the Plan, valued at the grant date stock price of $4.25 per share.
These shares include 190,000 shares
of restricted common stock issued to Mr. White with a grant date fair value of $807,500. Grants to employees have
a
service-based vesting period of five years from the date of grant, except that
Mr. White’s shares vest over an 11.5
year period, with 19,000 shares first vesting in October 2013, and thereafter 19,000 shares vesting annually in October of each
subsequent year. Mr. White’s award is intended as a long-term retention incentive, and, accordingly, should be viewed as
compensation over the 11.5-year vesting period and not solely as compensation for 2011.
Employment
and Change-in-Control Agreements
.
Our named executive officer is employed at will
and does not have an employment agreement. Our Compensation Committee believes that employment agreements generally encourage a
short-term rather than long-term focus, provide inappropriate security to the executives and undermine the team spirit of the organization.
The terms of our restricted stock awards to the named executive officer provide that each share of restricted stock issued under
the Plan will immediately vest in the event that we are acquired by merger or asset sale, or in the event there is a change in
control or ownership of ITEX.
On February 28, 2008, we entered into a
Change of Control Agreement with Mr. White. The Change in Control Agreement defines the benefits Mr. White would receive in
connection with a “change of control,” (as defined below), or change in control events coupled with the loss of his
employment. Upon a change of control Mr. White would receive a lump sum payment equal to one times his base salary and immediate
vesting of all equity-based compensation. In the event of a change of control, as of July 31, 2012, this payment would be $250,000,
plus additional costs and accounting charges totaling approximately $85,244, plus immediate vesting of all equity-based compensation
valued at $753,350 as of July 31, 2012 See table below entitled “Outstanding Equity Awards at Fiscal Year End
”
.
Upon termination of his employment as CEO either by the Company without “cause,” or by Mr. White for “good
reason” (as defined below) after a change in control occurs, Mr. White would receive a severance payment equal to two
times his base salary, or an additional payment of $500,000 as of July 31, 2012 if Mr. White were terminated as CEO . He would
also receive a continuation of health and insurance benefits if the severance payment is made over a severance period rather than
as a lump sum payment, which as of July 31, 2012 would add additional costs totaling approximately $20,330. The severance payment
may be reduced if it would otherwise be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code or any similar
tax. Under the agreement, Mr. White is subject to certain non-competition and non-solicitation provisions for one year after termination,
and payment of severance benefits is conditioned upon his execution of a release of claims in favor of the Company.
A “change in control” generally
is defined as of any of the following events: the incumbent directors cease to constitute a majority of the members of the Board;
the consummation of a consolidation or merger of ITEX with another business entity; any person becomes a beneficial owner, directly
or indirectly, of 30 percent or more of the combined voting power of ITEX; the disposition of all or substantially all of
the assets of ITEX: the closure and winding up of ITEX’s business and related affairs or the approval by stockholders of
a plan of complete liquidation or dissolution of ITEX. “Good reason” for termination by the executive of his employment
generally means the occurrence (without the executive’s consent) of any one of the following acts: the assignment to Mr.
White of diminished duties or responsibilities; a reduction in his annual base compensation; a failure of the board to nominate
him as a director of the Company; the relocation of his principal place of employment to a location outside of a 25-mile radius; the
failure by the Company to pay him any portion of his current compensation or provide him substantially similar benefits; or any
purported termination of his employment without specified notice.
Personal Benefits
. ITEX seeks
to maintain a corporate culture in which its officers are not entitled to operate under different standards than other employees.
We do not have programs for providing personal-benefit perquisites to officers, such as financial counseling, reserved parking
spaces, athletic club memberships, company car, home security, permanent lodging or defraying the cost of personal entertainment
or family travel. ITEX’s health care and other employee-benefit programs are the same for all eligible employees, including
its officers.
Outstanding Equity Awards at Fiscal Year
End
The following table provides information
on unvested stock awards held by the named executive officers on July 31, 2012.
|
|
Option Awards
|
|
|
Stock Awards
|
|
Name
|
|
|
|
|
Number
of Shares or
Units
of
Stock
That
Have
Not
Vested
(#)
|
|
|
Market
Value of Shares
or
Units
of
Stock
That
Have
Not
Vested
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven White, CEO
|
|
|
N/A
|
|
|
|
193,000
|
(1)
|
|
$
|
753,350
|
|
|
(1)
|
Represents 3,000 shares of restricted common stock granted in 2009, which will be fully vested in October 2012 , and 190,000
shares of restricted common stock granted in 2011, which vest over a 10-year period commencing in October 2013.
|
|
(2)
|
Market values have been calculated using a stock price of $3.90 (closing price of common stock on July 31, 2012, the last trading
day of fiscal 2012).
|
Director Compensation Table*
The following table sets forth information
concerning the compensation of the Company’s non-employee directors for fiscal 2012.
|
|
Fees Earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Or Paid in
|
|
|
Stock
|
|
|
Option
|
|
|
All Other
|
|
|
|
|
Name
|
|
Cash
|
|
|
Awards
|
|
|
Awards
|
|
|
Compensation
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eric Best
|
|
$
|
30,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30,000
|
|
John A. Wade
|
|
$
|
30,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
76,000
|
(1)
|
|
$
|
106,000
|
|
|
(*)
|
Columns in the Director Compensation Table that were not relevant to the compensation paid to directors were omitted.
|
|
(1)
|
The amount consists of consulting fees.
|
Narrative to Director Compensation Table
During fiscal 2012, non-employee directors
each received an annual Board retainer of $30,000. No options or restricted stock awards were granted to non-employee directors
for services as a director. No additional payments were made for committee service. No reimbursements were paid in fiscal 2012
for travel or other out-of-pocket expenses incurred in connection with attendance at meetings of the Board of Directors or its
committees. John Wade was retained by the Company as a consultant to assist with internal audit matters, and was paid consulting
fees of $76,000 in cash in 2012. Steven White is an officer of the Company and did not receive separate compensation for services
as a director.
|
Item 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|
Security Ownership of Certain
Beneficial Owners and Management
The following table sets forth certain information
that has been provided to the Company regarding the beneficial ownership as of September 30, 2012 of the Company’s common
stock by (a) each person who is known by the Company to be a beneficial owner of more than five percent of the outstanding common
stock of the Company, (b) each director or director nominee of the Company, (c) each of the named executive officers, and (d) all
directors and executive officers of the Company as a group.
Name
and Address
(1)
Of
Beneficial
Owner
|
|
Shares
(2)
Beneficially
Owned
|
|
|
Percent
(3)
of
Voting
Shares
|
|
|
|
|
|
|
|
|
|
|
Current Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
Steven White
(4)
|
|
|
577,684
|
|
|
|
19.5
|
%
|
Eric Best
|
|
|
25,000
|
|
|
|
*
|
|
John Wade
|
|
|
57,000
|
|
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
All current directors and executive officers as a group (3 persons)
|
|
|
659,684
|
|
|
|
22.3
|
%
|
|
|
|
|
|
|
|
|
|
Other Beneficial Owners:
|
|
|
|
|
|
|
|
|
The Biglari Group
(5)
|
|
|
340,840
|
|
|
|
11.5
|
%
|
Name
and Address
(1)
Of
Beneficial
Owner
|
|
Shares
(2)
Beneficially
Owned
|
|
|
Percent
(3)
of
Voting
Shares
|
|
The Polonitza Group
(6)
|
|
|
208,687
|
|
|
|
7.1
|
%
|
*
Less than one percent.
|
(1)
|
Except as noted below, the business address of the current directors and executive officers is c/o ITEX Corporation, 3326 –
160th Ave SE, Suite 100, Bellevue, WA 98008.
|
|
(2)
|
Beneficial ownership is determined in accordance with
the rules of the SEC. In computing the number of shares
beneficially owned by a person and the percentage ownership
of that person, shares of common stock subject to options
or warrants held by that person that are exercisable within
60 days of September 30, 2011 are deemed outstanding.
These shares, however, are not deemed outstanding for purposes
of computing the ownership of any other person. To our
knowledge, except as indicated in the footnotes to this
table and subject to applicable community property laws,
the stockholders named in the table have sole voting and
investment power with respect to all shares of common stock
shown as beneficially owned by them.
|
|
(3)
|
Percentage of beneficial ownership is based upon 2,956,479
voting shares outstanding as of July 31, 2012 (including
shares of unvested restricted stock).
|
|
(4)
|
Mr. White has 193,000 unvested restricted stock awards
outstanding.
|
|
(5)
|
The latest Schedule 13D filed by the beneficial
owners indicated that 340,840 shares are held by Sardar
Biglari, Western Sizzlin Corporation and Biglari Holdings
Inc. (the “Biglari Group”). The address of
Western Sizzlin Corporation is 17802 IH 10 West, Suite
400, San Antonio, TX 78257.
|
|
(6)
|
The latest Schedule 13D filed by the beneficial
owners indicated that 208,687 shares are held by David
Polonitza, Richard and Greta Polonitza and Kirk Anderson
(the “Polonitza Group”). The address of Mr.
David Polonitza is 54B Sandra Circle, Apt B1, Westfield,
NJ 07090.
|
Securities authorized for issuance
under equity compensation plans
The following table gives information about
equity awards under the Company’s 2004 Equity Incentive Plan and individual equity arrangements as of July 31, 2012.
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Plan category
|
|
Number of securities
to be issued upon exercise of
outstanding options,
warrants and rights
|
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
|
|
Number of securities
available for future issuance
under equity compensation
plans [excluding securities
reflected in column (a)]
|
|
Equity compensation plans approved by security holders
|
|
|
―
|
|
|
|
―
|
|
|
|
0
|
|
Equity compensation plans not approved by security holders
|
|
|
20,000
|
(1)
|
|
$
|
4.75
|
|
|
|
8,000
|
(2)
|
Total
|
|
|
20,000
|
|
|
|
―
|
|
|
|
8,000
|
|
|
(1)
|
Represents shares underlying a warrant issued to an investor
relations consultant which expires March 1, 2015. There were no other outstanding options or warrants as of July 31, 2012.
|
|
(2)
|
Includes 16,000 shares available for award purposes under
the 2004 Equity Incentive Plan.
|
|
Item 13.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
|
Transactions with Related Persons
Other than compensation arising from the
employment relationship or transactions involving our chief executive officer described above (See Item 11, “Executive Compensation”),
ITEX and its subsidiaries had no transactions during our last fiscal year, nor are there any currently proposed transactions, in
which ITEX or its subsidiaries was or is to be a participant, the amount involved exceeded $120,000, and any director or director
nominee, executive officer, holder of more than 5% of our common stock or any of their immediate family members, or any promoter
or control person, had a material direct or indirect interest.
Indemnification Agreements of Officers
and Directors
. Our bylaws provide that we will indemnify each of our directors and officers to the fullest extent permitted
by Nevada law. Our directors and officers also may be indemnified against liability they may incur for serving in that capacity
pursuant to a liability insurance policy maintained by ITEX for such purpose. ITEX maintains directors’ and officers’
insurance to cover its directors and officers for specific liabilities, including coverage for public securities matters. Further,
ITEX has entered into separate indemnification agreements with its current executive officers and directors which include provisions
providing for mandatory indemnification and for advancement of expenses by ITEX in the event of actions or proceedings against
them.
Director Independence
The Board of Directors has determined that
each member of the board of directors, other than Steven White who is an executive officer, is “independent” as defined
by the NASDAQ Marketplace Rules. The Board made such determinations based on the fact that neither of Messrs. Wade or Best have
had, or currently have, any material relationship with the Company or its affiliates or any executive officer of the Company or
his affiliates, that would currently impair their independence, including, without limitation, any such commercial, industrial,
banking, consulting, legal, accounting, charitable or familial relationship. In making the independence determination, the following
relationships were considered: The CEO of ITEX formerly served as a board member of MorseBest, a company formerly controlled by
Mr. Best, but the CEO did not serve on that company’s compensation committee. Mr. White resigned from the board of MorseBest
in 2010, and Mr. Best subsequently sold his interest in the Company in 2010. During fiscal 2011 and 2012, the Company retained
Mr. Wade as a consultant to assist with internal audit matters, however payments for his services fall below the independence thresholds
set forth in the NASDAQ Marketplace Rules. Mr. Wade also serves as part-time Director of Finance for Mercent Corporation, a company
of which Mr. Best is the Chairman and CEO.
The standing committees of the Board of
Directors of the Company are the Audit Committee and the Compensation and Nominating Committee. The Audit Committee consists of
Messrs. Wade and Best. Mr. Wade currently receives consulting fees for assisting with internal audit matters. As a result, Mr.
Wade does not meet the special standards of independent prescribed by the NASDAQ Marketplace Rules for audit committee members.
|
Item 14.
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PRINCIPAL ACCOUNTANT FEES AND SERVICES
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The following table presents the fees billed
or to be billed to ITEX for audit and other services rendered by Ehrhardt Keefe Steiner & Hottman PC for the audit of our annual
financial statements for the years ended July 31, 2012 and 2011.
Year Ended July 31
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2012
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|
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2011
|
|
|
|
|
|
|
|
|
Audit Fees
(1)
|
|
$
|
113,500
|
|
|
$
|
108,625
|
|
Audit Related Fees
(2)
|
|
|
|
|
|
|
5,174
|
|
Tax Fees
(3)
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
113,500
|
|
|
$
|
113,799
|
|
|
(1)
|
Audit Fees include our quarterly reviews and performance
of our annual audit.
|
|
(2)
|
Audit Related Fees consist of assurance and related services
that are reasonably related to the performance of the audit or review of ITEX’s financial statements. This category includes
fees related to the performance of audits and attest services not required by statute or regulations, and accounting consultations
regarding proposed transactions and acquisitions.
|
|
(3)
|
Tax Fees consist of the aggregate fees billed for professional
services rendered by EKS&H for tax compliance, tax advice, and tax planning.
|
Pre-approval Policies and Procedures
In accordance with Audit Committee policy,
the Audit Committee pre-approves all audit and permissible non-audit services provided by the independent auditors. These services
may include audit services, audit-related services, tax services and other services. The Audit Committee has pre-approved all of
the services provided by Ehrhardt Keefe Steiner & Hottman PC referred to above. In some cases, the Audit Committee provides
pre-approval for up to a year, related to a particular defined task or scope of work and subject to a specific budget. In other
cases, a designated member of the Audit Committee may have the delegated authority from the Audit Committee to pre-approve additional
services, and then must communicate such pre-approvals to the full Audit Committee. The independent auditors and management are
required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditors in
accordance with this pre-approval.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT INDEX
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|
|
|
Incorporated by Reference
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
|
SEC
|
|
|
|
Filing
|
|
Filed
|
No.
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
Date
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.1
|
|
Amended and Restated Articles of Incorporation of ITEX Corporation
|
|
10-KSB
|
|
000-18275
|
|
3.1
|
|
11/13/03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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3.2
|
|
Certificate of Designation of Series A Junior Participating Preferred Stock
|
|
8-K
|
|
000-18275
|
|
3.1
|
|
3/14/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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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
|
|
10-KSB
|
|
000-18275
|
|
10.9
|
|
11/13/03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.2
|
|
ITEX Corporation 2004 Equity Incentive Plan
|
|
8-K
|
|
000-18275
|
|
10.1
|
|
2/18/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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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
|
|
12/01/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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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
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
|
SEC
|
|
|
|
Filing
|
|
Filed
|
No.
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Exhibit
|
|
Date
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
The only subsidiary of ITEX Corporation is BXI Exchange, Inc., a Delaware corporation
|
|
|
|
|
|
|
|
|
|
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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 23, 2012
|
By:
|
/s/ Steven White
|
|
|
Steven White, Chief Executive Officer
|
|
|
Interim Chief Financial Officer
|
|
|
|
Date: October 23, 2012
|
By:
|
/s/ Steven White
|
|
|
Steven White, Principal Accounting 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 23, 2012
|
By:
|
/s/ Steven White
|
|
|
Steven White, Chairman of the Board
|
|
|
|
Date: October 23, 2012
|
By:
|
/s/ John Wade
|
|
|
John Wade, Director
|
|
|
|
Date: October 23, 2012
|
By:
|
/s/ Eric Best
|
|
|
Eric Best, Director
|
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