Attached files
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EX-31.2 - ITEX CORP | v162888_ex31-2.htm |
EX-31.1 - ITEX CORP | v162888_ex31-1.htm |
EX-32.1 - ITEX CORP | v162888_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D. C. 20549
FORM
10 - K
(Mark
One)
x
|
Annual
report under Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For
the fiscal year ended July 31, 2009.
or
¨
|
Transition
report under Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For the
transition period from to
Commission
File Number 0-18275
ITEX
CORPORATION
(Name of
small business issuer in its charter)
Nevada
|
93-0922994
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(IRS
Employer
Identification
No.)
|
3326
160th
Avenue SE, Suite 100, Bellevue, WA
98008-6418
|
(Address
of principal executive offices)
(425)
463-4000
|
(Issuer’s
telephone number including area code)
Securities
registered under Section 12 (b) of the Exchange Act
|
None
|
||
Securities
registered pursuant to Section 12 (g) of the Exchange Act
|
Common
Stock
$.01
par value
|
||
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act
|
Yes o No þ
|
||
Indicate
by check mark if the registrant is not required to file reports pursuant
to Section 13 or 15(d) of the Act
|
Yes o No þ
|
||
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days
|
Yes þ No o
|
||
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).
|
Yes ¨ No ¨
|
||
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K
|
|
||
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.
|
þ
|
||
Large
accelerated filer o
Non-accelerated
filer o
|
Accelerated
filer o
Smaller
Reporting Company þ
|
||
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
|
Yes o No þ
|
The
aggregate market value of the voting common stock held by non-affiliates of the
Company as of July 31, 2009 was approximately $8,714,341 based upon 13,832,288
shares held by such persons and the closing bid price of $0.63 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% 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
October 1, 2009, we had 17,856,248 shares of common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions
of the definitive Proxy Statement to be furnished to shareholders in connection
with the Annual Meeting of Shareholders are incorporated by reference into Part
III.
ITEX
CORPORATION
FORM
10-K
For
The Fiscal Year Ended July 31, 2009
INDEX
Page
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||||
PART
I
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||||
ITEM
1.
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Business
|
1
|
||
ITEM
1A.
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Risk
Factors
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9
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||
ITEM
1B.
|
Unresolved
Staff Comments
|
12
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||
ITEM
2.
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Properties
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12
|
||
ITEM
3.
|
Legal
Proceedings
|
13
|
||
ITEM
4.
|
Submission
of Matters To a Vote of Security Holders
|
13
|
||
PART
II
|
||||
ITEM
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
13
|
||
ITEM
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
14
|
||
ITEM
8.
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Financial
Statements and Supplementary Data
|
32
|
||
ITEM
9.
|
Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosure
|
66
|
||
ITEM
9A.
|
Controls
and Procedures
|
66
|
||
ITEM
9B.
|
Other
Information
|
67
|
||
PART
III
|
||||
ITEM
10.
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Directors,
Executive Officers and Corporate Governance
|
67
|
||
ITEM
11.
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Executive
Compensation
|
68
|
||
ITEM
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
68
|
||
ITEM
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
68
|
||
ITEM
14.
|
Principal
Accountant Fees and Services
|
68
|
||
PART
IV
|
||||
ITEM
15.
|
Exhibits
and Financial Statement Schedules
|
68
|
||
Signatures
|
71
|
ii
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 CommunitySM, is a
leading marketplace for cashless business transactions across North America
(“the Marketplace”). We service our member businesses through our
independent licensed brokers, franchise network, corporate and corporate owned
offices (individually, “Broker” and together, the “Broker Network”) in the
United States and Canada. Our business services and payment systems
enable member businesses (our “members”) to trade goods 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 160th Avenue
SE, Suite 100, Bellevue, Washington 98008-6418. Our telephone number
is 425-463-4000. We routinely post important information on our
website under the Investor Relations 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.
1
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,
medical care and other 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 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 Internal Revenue Service (“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 400 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. Our franchise
agreement does not grant exclusive contractual rights to operate in a
geographical area. 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. Members of the Marketplace
have a direct contractual relationship with us. In turn, Brokers
receive a commission in USD for a percentage of revenue collected from the
members serviced by those Brokers.
2
Our
franchise agreements and independent licensed broker contracts both provide for
a five-year term unless we terminate the contract for cause as 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
is in compliance with our performance requirements, policies, and procedures
then in place.
Since
2003, we have offered the sale of ITEX franchises to qualified individuals and
entities. In addition, we have sought to renew all individual Broker
contracts 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”, “2009”
for August 1, 2008 to July 31, 2009, “2008” for August 1, 2007 to July 31,
2008). 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, 2009 and 2008, members made
approximately 87% and 87%, 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 5.0% 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 95% and 96% of
our total revenue in 2009 and 2008, 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 Internal Revenue Service 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 expend a small amount of ITEX dollars for certain ITEX
operating expenses.
3
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
|
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
technologically advanced multi-channel payment system that provides
efficient internet access to ITEX members and our Broker
Network. These upgrades and enhancements in computer and
communications technology provide Brokers and members with additional
tools and more effective computer applications to more easily engage in
“real-time” transactions.
|
|
o
|
A
community where members can meet and feel comfortable 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. The member business profile section of our
website allows business owners to provide personal pictures, tell the
Marketplace more about themselves and communicate with other member
businesses via blogs. We believe that seeing the photograph of
a business owner and sharing selected personal information will
differentiate member businesses and encourage others to conduct
transactions with them in the
Marketplace.
|
|
o
|
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, we have a franchise portion
of our website, www.itex.com. We
identified target markets, provided added detail about our company and
business model, and allowed 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. Additionally, we hold an annual
convention and several regional meetings where we discuss and attempt to
find solutions for current issues and proactively plan for future
enhancements and benefits to our Trading Community. Our
national sales manager works with Brokers to implement various strategies
and methods for obtaining new members and our business development manager
seeks to execute partnerships with national organizations to attract more
members to the Marketplace.
|
|
o
|
Develop a web based
Software as a Service (Web Services) model. This model
is targeted at mid to large sized businesses to enable them in creating
reward communities or expand their existing relationship within their
customer base, using the ITEX proprietary exchange
platform.
|
4
In 2009,
we launched our new subscription-based service offerings initiative which
resulted in two executed web services agreements – providing new revenue streams
for the Company in addition to expanding trading opportunities for our members.
Under the agreements, for a one-time platform subscription fee and a monthly
transaction processing fee, ITEX hosts the web interface, client relationship
management platform and is responsible for all transactional processing. We also
provide a proprietary processing technology that enables members of any of our
web services clients to seamlessly accept the digital currency of another web
services client.
Members
The
Marketplace has approximately 24,000 members in the United States and
Canada. The majority of members are businesses with fewer than 10
employees. Members may choose to participate in the Marketplace for a
number of reasons including to:
|
·
|
Attract
new customers
|
|
·
|
Increase
sales and market share
|
|
·
|
Add
new channels of distribution
|
|
·
|
Utilize
unproductive assets, surplus inventory or excess
capacity
|
Members
earn ITEX dollars which they have the opportunity to spend on products and
services offered by other ITEX members. The following is a
representative example of a transaction:
A
dentist wants to remodel her office. Through the Marketplace, she
hires a contractor who agrees to perform the remodeling work for $1,500 ITEX
dollars. The dentist has ITEX dollars in her account to spend because
she had previously provided dental work to the owner of a vacation resort, a
restaurant owner and a lawyer, all members of the Marketplace, in exchange for
ITEX dollars. These other members originally acquired ITEX dollars by
providing products or services for other Marketplace members.
Sales,
Marketing and Transactions
Sales
The
primary function of new member enrollment is to grow the Marketplace member base
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 incentive awards and discounted 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. New
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 pursue
strategic affiliations with companies with access to potential business members
and utilize national and web-based advertising campaigns.
5
Transactions
Our
Brokers focus on maximizing 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 ITEX website and pursue potential member
businesses by introducing them to the Marketplace.
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
management 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, 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
General
Our
industry was developed 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. There are several hundred single
office Exchanges in the United States and Canada.
6
Competition
We have
two primary competitors: 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, the number of payments processed, regions served, and completed
transactions of a single, non-USD currency. After ITEX, the next
largest Exchange is International Monetary Systems, Ltd.
Internet
distribution channel competitors include eBay, Travelocity, Priceline, and
Overstock.com. 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 through price and
brand name awareness.
We
compete primarily on a service basis, including 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, smaller
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. Ultimately, we believe these
elements create a difficult barrier to entry for new competitors and may 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,
stronger 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 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.
7
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.
It is the
legal responsibility of our Brokers 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. Except for our three corporate-owned offices,
our Brokers are independent contractors, and we do not own, control or operate
the businesses comprising our Broker Network. However, a number of
federal and state laws and regulations are implicated by virtue of our
relationship with our Broker Network. For example, under various
agency positions, we could potentially be found liable for the conduct of our
independent contractors in a situation where that contractor has caused injury
to a third party. 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. Many states broadly view the requirements of what constitutes a
franchise and, consequently, many types of relationships that are ordinarily not
considered franchises can be brought within the ambit of state and federal
franchise regulation. There is the possibility that one or more of
our non-franchise business relationships could be deemed to constitute a
franchise. An adverse finding in one or more of these regulated areas
could govern the enforceability of our agreements or permit the recovery of
damages and penalties which could have a material adverse effect on our
business, results of operations, cash flows and financial
condition.
With
respect to our online technologies, there are currently 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
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
“ITEX” used in connection with our logo design. We intend to 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 our proprietary rights. Furthermore, there can be no
assurance that any confidentiality agreements between us and our employees or
any license agreements with our customers will provide meaningful protection of
our proprietary information in the event of any unauthorized use or disclosure
of such proprietary information.
8
Employees
As of
July 31, 2009, we had 32 full-time, contract and temporary employees – 21 in our
corporate headquarters and 11 in our corporate owned offices. From
time to time, we utilize independent consultants or contractors for technology
support, marketing, sales and support, 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
future revenue growth and profitability remains uncertain.
During
2009, we increased revenues by 3% through continued organic growth, acquisitions
and through the development of new revenue streams. We cannot assure
you that our revenues will continue to increase in future quarters or future
years. We may continue to add revenue through acquisitions, but we
cannot assure you that we will be successful in our acquisition efforts or that
financing for these endeavors will be available. We have sustained
profitable operations for six years. However, our prospects for the
future must be considered in light of the uncertainty of revenues and
markets. We cannot assure you that we can continue to be operated
profitably, which depend on many factors, including the success of our
development and expansion efforts, the control of expense levels and the success
of our business activities. Our future operating results will depend
on a variety of factors, including those discussed in the other risk factors set
forth below.
Acquisitions
could result in operating difficulties, dilution and other harmful consequences;
Our evaluation of new strategic directions may not result in viable new
alliances, mergers or acquisitions, may not enhance shareholder value, and may
create a distraction for our management and uncertainty that may adversely
affect our operating results and business.
9
We
completed our acquisition of BXI in 2005, certain Intagio assets on August 1,
2007, ATX The Barter Company on March 1, 2008 and Intagio Media Services on
August 1, 2008. Despite these acquisitions, three of which were with
the same company, we have a limited amount of experience acquiring
companies. We have evaluated, and expect to continue to evaluate,
other potential strategic transactions. Strategic alternatives may
include, without limitation, continued execution of our operating plan, the sale
of some or all of our continuing operations, partnering or other collaboration
agreements, or a merger or other strategic transaction. Our
exploration of strategic alternatives may not result in any additional
agreements or transactions, or ensure that, if completed; any agreements or
transactions will be successful, on attractive terms or enhance shareholder
value. It is possible that nothing may result from our exploration or
that we may acquire, be acquired or enter into some other strategic
relationship, and that in consummating or further exploring such avenues, we may
incur additional costs. Furthermore, we may enter into letters
of intent and other non-definitive agreements that do not culminate in a
completed transaction, engage in contract negotiations, or incur due diligence
expenses which affect our quarterly earnings prior to or without entering into a
material definitive agreement required to be disclosed publicly. We
do not intend to disclose developments with respect to this process unless and
until the evaluation of strategic alternatives has been completed or we have
entered into a material definitive agreement. The mere negotiation or
the consummation of any of these transactions could be material to our financial
condition and results of operations. In addition, 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 risks include:
|
·
|
The
need to implement or remediate controls, procedures and policies
appropriate for a public company at companies that prior to the
acquisition lacked these controls, procedures and
policies.
|
|
·
|
Diversion
of management time and focus from operating our business to alliance,
merger or acquisition integration
challenges.
|
|
·
|
Cultural
challenges associated with integrating employees from the acquired company
into the acquiring organization.
|
|
·
|
Retaining
employees from the businesses
acquired.
|
|
·
|
The
need to integrate each company’s accounting, management information, human
resource and other administrative systems to permit effective
management.
|
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
incurrence of debt, contingent liabilities or amortization expenses, or
write-offs of goodwill, any of which could harm our financial
condition. Future acquisitions may require us to obtain additional
equity or debt financing, which may not be available on favorable terms or at
all.
We
are largely dependent on key personnel who may not continue to work for
us.
Potentially,
any loss of key officers, key management, and other personnel could impair our
ability to successfully execute our business strategy, particularly when these
individuals have acquired specialized knowledge and skills with respect to ITEX
and our operations. Although we believe we are currently being
administered capably, we remain substantially dependent on the continued
services of our key personnel and in particular, the services of CEO and interim
CFO Steven White. Management places heavy reliance on Mr. White’s
experience and management skills. We have not entered into formal
employment agreements with Mr. White or any of our employees, other than certain
agreements to receive a payment in connection with a “change of control,” as
defined in the agreement. We carry a $2.0 million life insurance
policy covering Mr. White to insure the business in the event of his death, but
do not carry life insurance for any other key personnel. If Mr. White
or other key personnel were to leave ITEX unexpectedly, we could face
substantial difficulty in hiring qualified successors and could experience a
loss in productivity while any successor obtains the necessary training and
experience. We believe we have the necessary management expertise to
implement our business strategy and that support personnel can be increased as
needed. However, we may need to attract, train, retain and motivate
additional financial, technical, managerial, marketing and 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
will be adversely affected.
10
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 and may have contractual obligations in the
future. 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 business
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 assure you that we will be able to
implement various financing alternatives or otherwise obtain required working
capital if needed or desired.
We
are dependent on our Broker Network and franchise model
We look
to our Broker Network to enroll new members, train them in the use of the
Marketplace, facilitate business among members, provide members with information
about ITEX products and services, and assure the payment of our dues and
fees. Brokers have a contractual relationship with ITEX, typically
for a renewable three or five-year term. There can be no assurance
that our Brokers will continue to participate in the Marketplace, or that we
will be able to attract new franchisees at rates sufficient to maintain a stable
or growing revenue base. We depend on the ability of our Brokers to
expand the number of members and the volume of transactions through the
Marketplace. We cannot assure you that the market for our products
and services will continue to develop as expected. If our industry
does not grow, becomes saturated with competitors, or if our products and
services do not continue to achieve market acceptance, or if our Brokers are
unsuccessful in enrolling new members to equalize the attrition of members
leaving the Marketplace, the overall share of the market handled by our Broker
Network could be reduced, and consequently our business operating results and
financial condition may be materially adversely affected.
We
are dependent on the value of foreign currency.
We
transact business in Canadian dollars as well as US dollars. Revenues
denominated in Canadian dollars comprised 6.6% and 7.7% in the years ended July
31, 2009 and 2008, 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 US dollar could
continue to affect our revenues, cost of sales, operating margins and result in
exchange losses.
11
We
are required to evaluate our internal control over financial reporting under
Section 404 of the Sarbanes Oxley Act of 2002, and any adverse results from such
evaluation could result in a loss of investor confidence in our financial
reports and have an adverse effect on our stock price.
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002 and SEC rules, we are required
to furnish a report by our management assessing the effectiveness of our
internal control over financial reporting. This assessment must
include disclosure of any material weaknesses in our internal control over
financial reporting identified by management. In addition, we must
comply with Section 404(b) requirements to provide an auditor’s attestation
report on internal control over financial reporting beginning with our Annual
Report on Form 10-K for our year ending July 31, 2010. The Committee
of Sponsoring Organizations of the Treadway Commission (COSO) provides a
framework for companies to assess and improve their internal control
systems. The Public Company Accounting Oversight Board’s (“PCOAB”)
Auditing Standard No. 5, adopted by the SEC on July 27, 2007, provides the
professional standards and related performance guidance for auditors to report
on the effectiveness of our internal controls over financial reporting under
Section 404. Our assessment of internal controls over financial
reporting requires us to make subjective judgments and some of the judgments
will be in areas that may be open to interpretation.
While we
have determined in our Management Report on Internal Control over Financial
Reporting included in this Form 10-K, that our internal control over financial
reporting was effective as of July 31, 2009, we must continue to monitor
and assess our internal control over financial reporting. If we
identify one or more future material weaknesses in our internal control over
financial reporting and such weakness remains uncorrected at fiscal year end, we
will be unable to assert our internal control is effective. If we are
unable to assert that our internal control over financial reporting is effective
for a particular year (or if our auditors are unable to attest that we have
maintained, in all material respects, effective internal controls), we could
lose investor confidence in the accuracy and completeness of our financial
reports. That would likely have an adverse effect on our stock
price.
ITEM
1B. UNRESOLVED
STAFF COMMENTS
Not
applicable
ITEM
2. PROPERTIES
Our
corporate and administrative headquarters offices are located in Bellevue,
Washington. We lease properties in the following locations that are
utilized by our sales and marketing, and general and administrative
personnel:
Area leased
|
Monthly
|
||||||||
Location
|
(sq. feet)
|
rent
|
Lease expiration
|
||||||
Bellevue,
Washington
|
7,035 | $ | 12,898 |
April
30, 2010
|
|||||
Solon,
Ohio (1)
|
1,250 | 1,403 |
May
31, 2011
|
||||||
Oakbrook
Terrace, Illinois (1)(2)
|
5,086 | 8,901 |
October
31,
2011
|
(1)
|
This
facility is utilized for a corporate owned office.
|
|
(2)
|
We
entered into this lease as part of the acquisition of Intagio media assets
(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.
12
ITEM
3. LEGAL
PROCEEDINGS
For
information regarding legal proceedings, refer to Note
11 ― “Legal Proceedings” included in the “Notes to Consolidated Financial
Statements”, Item 8 – Financial Statements.
ITEM
4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There
were no matters submitted to a vote of security holders during the fourth
quarter of the year ended July 31, 2009.
PART
II
ITEM
5.
|
MARKET
FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERSAND
ISSUER PURCHASES OF EQUITY
SECURITIES.
|
Market
Information
Our common stock trades on the OTC
Bulletin Board under the symbol “ITEX.OB” The range of high and low bid prices
for our common stock for each quarter during the two most recent years is as
follows:
Fiscal Year Ended July 31,
|
2009
|
2008
|
||||||||||||||
High
|
Low
|
High
|
Low
|
|||||||||||||
First
Quarter
|
$ | 0.85 | $ | 0.35 | $ | 1.01 | $ | 0.66 | ||||||||
Second
Quarter
|
$ | 0.55 | $ | 0.22 | $ | 1.02 | $ | 0.65 | ||||||||
Third
Quarter
|
$ | 0.60 | $ | 0.22 | $ | 0.98 | $ | 0.79 | ||||||||
Fourth
Quarter
|
$ | 0.70 | $ | 0.25 | $ | 0.98 | $ | 0.50 |
This
table reflects the range of high and low bid prices for our common stock during
the indicated periods, as published by the OTC Bulletin Board. 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 876 holders of record of our common stock as of July 31,
2009. Most shares of our common stock are held by brokers and other
institutions on behalf of shareholders.
We have
not paid any cash dividends and do not intend to pay any cash dividends in the
foreseeable future.
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
No
repurchases of common stock were made during the fourth quarter of
2009.
13
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
|
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 CommunitySM, is a
leading marketplace for cashless business transactions across North America
(“the Marketplace”). We service our member businesses through our
independent licensed brokers and franchise network, corporate and corporate
owned offices (individually, “Broker” and together, the “Broker Network”) in the
United States and Canada. Our business services and payment systems
enable member businesses (our “members”) to trade goods 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”, “2009”
for August 1, 2008 to July 31, 2009, “2008” for August 1, 2007 to July 31,
2008). We report our results as of the last day of each calendar
month (“accounting cycle”).
2009
Accomplishments
Achieved
Sixth Consecutive Year of Profitable Operations
Since
2004, we have sustained our profitability and net cash flows from operating
activities by focusing our business model on cashless transaction processing and
supporting our Broker Network. During 2009, we continued our
profitability, increased our stockholders’ equity, and generated positive cash
flows from operating activities. We had net operating loss carry
forwards of approximately $17,545 at the beginning of 2009 which was reduced to
$16,135 as of July 31, 2009. This amount remains available to offset
future taxable income.
Revenue
Growth
For the
year ended July 31, 2009 compared to 2008, our Marketplace revenues increased 3%
to $16,502 from $15,964. We are seeking to increase our
revenues and, correspondingly, our net income by:
|
·
|
minimizing
the barriers to join the
Marketplace;
|
|
·
|
marketing
the benefits of participation in the
marketplace;
|
|
·
|
adding
new franchisees;
|
14
|
·
|
enhancing
our internet applications and web
services;
|
Acquisitions
Funded by Our Cash Flows
In 2009,
we continued to execute growth within our self-funding abilities. In
August 2008, we acquired certain assets of a media services company from The
Intagio Group, Inc., a Delaware corporation (“Intagio”). The
advertising and media sector is currently the largest component of transaction
volume in the ITEX Marketplace. With the media services acquisition,
we seek to expand our capabilities in this market sector by providing an
“in-kind” payment option for hospitality firms in funding their media campaigns
and to create a new revenue stream (“Media”). The purchase price included cash
in the amount of $68, a secured promissory note in the aggregate principal
amount of $688 which was subsequently reduced to $638, and the assumption of
certain liabilities totaling approximately $109. The note was paid in
full during 2009.
In 2009,
we also finished paying the aggregate purchase price for the acquisition of two
separate trading communities from ATX and Intagio, which occurred during the
first and third quarters of 2008. This acquisition allowed us to
expand into San Francisco, Chicago and Cleveland, in addition to adding members
in New York, New Jersey and Connecticut.
National
Partnership
In early
fiscal 2009, we created a new business development department tasked with
creating relationships with companies that have a national presence to assist
our growth on the local level. As a result, we executed an exclusive
partnership agreement with Sysco iCare Marketing, Inc., an enterprise-level
supplier of products and services to the food service and hospitality
industries, resulting in the endorsement of our services, our broker
network and our marketplace for its customer base, in order to establish a wider
value proposition to its customers and other incentives.
Web
Services
We
expanded our investment in information technology personnel and network
infrastructure in support of our new subscription-based service
offerings. We are taking steps to unlock the value of our proprietary
online broker and client relationship management platform by granting
third-party subscription rights to companies whose business model will be
enhanced by using a digital currency. In February 2009, we entered
into our first such subscription-based agreement with a media services company,
followed by a second subscription-based agreement in May 2009 with ITEX Latin
America, Inc., a Panama corporation. We expect this revenue component
to gradually develop as our fees, other than a flat base subscription fee, are
based on the total value of transactional activity hosted by the platform. As of
July 31, 2009 we have a total of $333 of deferred revenue derived from Web
services reflected on our Balance Sheet, of which $76 is in Current liabilities
– Deferred revenue and $257 is in Other long-term liabilities.
15
RESULTS
OF OPERATIONS (in thousands except per share amounts unless otherwise
indicated)
Condensed
Results
Year Ended July 31,
|
||||||||
2009
|
2008
|
|||||||
Revenue
|
$ | 16,502 | $ | 15,964 | ||||
Costs
and expenses
|
15,475 | 14,463 | ||||||
Income
from operations
|
1,027 | 1,501 | ||||||
Other
income - net
|
1 | 16 | ||||||
Income
before income taxes
|
1,028 | 1,517 | ||||||
Income
tax expense (benefit)
|
421 | 583 | ||||||
Net
income
|
$ | 607 | $ | 934 | ||||
Net
income per common share:
|
||||||||
Basic
|
$ | 0.03 | $ | 0.05 | ||||
Diluted
|
$ | 0.03 | $ | 0.05 |
Year ended July
31, 2009 and 2008. Marketplace and other revenue for year
ended July 31, 2009, increased $538 or 3% to $16,502 from $15,964 during the
prior year. We attribute this increase primarily to a $422 increase
in our 2009 transaction fees resulting from an increase in the transaction fee
percentage charged on transactions in the ITEX Marketplace. In addition other
fee revenue increased by $60 primarily from two additional other revenue streams
– Media and Web Services.
Income
before income taxes for the year ended July 31, 2009 was $1,028, a decrease of
$489 or 32% from income before income taxes in 2007 of $1,517. We
attribute this decrease primarily to an increase in bad debt expense of $457 due
to the impact of current economic events. Also contributing were
increases in expenses of amortization of intangible assets of $67 in connection
with our acquisitions, depreciation expense increased $70 and rent expense
increase of $88. A decrease in legal fees of $111 offset the
increases.
Basic and
diluted income per common share for the year ending July 31, 2009 and 2008 was
$0.03 and $0.05, respectively.
16
Selected
Quarterly Financial Results
Year ended July 31, 2009
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Total
|
|||||||||||||||
Revenue
|
3,899 | 4,365 | 3,981 | 4,257 | 16,502 | |||||||||||||||
Income
from operations
|
22 | 235 | 344 | 426 | 1,027 | |||||||||||||||
Net
cash flows from operating activities
|
706 | 481 | 348 | 1,340 | 2,875 | |||||||||||||||
Total
stockholders' equity
|
13,381 | 13,538 | 13,756 | 13,981 | 13,981 | |||||||||||||||
Year
ended July 31, 2008
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Total
|
|||||||||||||||
Revenue
|
3,853 | 4,175 | 3,871 | 4,065 | 15,964 | |||||||||||||||
Income
from operations
|
272 | 482 | 408 | 339 | 1,501 | |||||||||||||||
Net
cash flows from operating activities
|
767 | 1,018 | (15 | ) | 604 | 2,374 | ||||||||||||||
Total
stockholders' equity
|
12,341 | 12,754 | 13,008 | 13,319 | 13,319 |
In the
first quarter of 2008, we expanded the Marketplace by acquiring certain
assets of a commercial trade exchange network from The Intagio Group, Inc
(“Intagio”). The acquisition added approximately 2,000
members.
During
the third quarter of 2008, we acquired from ATX The Barter Company certain
assets of a commercial trade exchange network including a membership list of
approximately 400 member businesses.
During
the first quarter of 2009, we acquired from Intagio certain assets of a media
services company.
Revenue,
Costs and Expenses
The
following table summarizes our selected consolidated financial information for
the years ended July 31, 2009 and 2008, with amounts expressed as a percentage
of total revenues:
17
Years
Ended July 31,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
Amount
|
Percent of
Revenue
|
Amount
|
Percent of
Revenue
|
|||||||||||||
Revenue
|
$ | 16,502 | 100 | % | $ | 15,964 | 100 | % | ||||||||
Costs
and expenses:
|
||||||||||||||||
Cost
of Marketplace revenue
|
10,481 | 64 | % | 10,335 | 65 | % | ||||||||||
Salaries,
wages and employee benefits
|
1,895 | 11 | % | 1,634 | 10 | % | ||||||||||
Selling,
general and administrative
|
2,337 | 14 | % | 1,869 | 12 | % | ||||||||||
Depreciation
and amortization
|
762 | 5 | % | 625 | 4 | % | ||||||||||
15,475 | 94 | % | 14,463 | 91 | % | |||||||||||
Income
from operations
|
1,027 | 6 | % | 1,501 | 9 | % | ||||||||||
Other
income, net
|
1 | 0 | % | 16 | 0 | % | ||||||||||
Income
before income taxes
|
1,028 | 6 | % | 1,517 | 10 | % | ||||||||||
Income
tax expense (benefit)
|
421 | 3 | % | 583 | 4 | % | ||||||||||
Net
income
|
$ | 607 | 4 | % | $ | 934 | 6 | % |
Revenue
Revenue
consists of Marketplace transaction fees, association fees and other fees net of
revenue adjustments. Revenue also includes ITEX dollar revenue. The following
are the components of revenue that are included in the consolidated statements
of income:
Year
Ended July 31,
|
||||||||||||
2009
|
Percent
change
from
2008
|
2008
|
||||||||||
Broker offices:
|
||||||||||||
Association
fees
|
$ | 4,300 | 0 | % | $ | 4,294 | ||||||
Transaction
fees
|
10,269 | 3 | % | 9,925 | ||||||||
Other
fees
|
488 | 14 | % | 427 | ||||||||
Corporate owned offices:
|
||||||||||||
Association
fees
|
325 | 314 | ||||||||||
Transaction
fees
|
825 | 747 | ||||||||||
Other
fees
|
31 | 32 | ||||||||||
Revenue
|
$ | 16,238 | 3 | % | $ | 15,739 | ||||||
ITEX
dollar revenue
|
$ | 264 | 17 | % | $ | 225 | ||||||
Total
revenue
|
$ | 16,502 | 3 | % | $ | 15,964 |
Year ended July
31, 2009 and 2008. Revenue increased by $538 or 3% for the
year ended July 31, 2009 compared to 2008. We attribute this increase
primarily to a $422 increase in our 2009 transaction fees resulting from an
increase in the transaction fee percentage charged on transactions n the ITEX
Marketplace. In addition other fees increased by $61 primarily from $168 from
two new other fee revenue streams – Media and Web Services. This increase was
offset somewhat by a $37 reduction in Franchise fee revenue and $29 reduction in
Statement fee revenue.
18
During
2009, we utilized our ITEX dollars to purchase goods and services for our
corporate use. ITEX dollar revenue contributed $264 and $225 to our
revenue growth in 2009 and 2008 respectively. Our plans to continue
to increase revenue in future periods are discussed in the previous section
under “Overview.”
Cost
of Marketplace revenue
Cost of
Marketplace revenue consists of commissions paid to Brokers, salaries and
employee benefits of our corporate owned offices and expenses directly
correlated to Marketplace revenue. The following are the components
of cost of Marketplace revenue that are included in the consolidated statements
of income:
Year Ended July 31,
|
||||||||||||
2009
|
Percent
change
from 2008
|
2008
|
||||||||||
Association
fee commissions
|
$ | 1,599 | -10 | % | $ | 1,773 | ||||||
Transaction
fee commissions
|
7,736 | 0 | % | 7,757 | ||||||||
Corporate
owned office salaries, wages, employee benefits, and independent
contractor expenses
|
820 | 38 | % | 594 | ||||||||
Other
Marketplace expenses
|
292 | 38 | % | 211 | ||||||||
Media
costs - Ad Credits
|
34 | - | ||||||||||
$ | 10,481 | 1 | % | $ | 10,335 |
Year ended July
31, 2009 and 2008. Cost of Marketplace revenue increased by
$146 or 1% to $10,481 from $10,335 for the year ended July 31, 2009 and 2008,
respectively. This increase was due to a $226 increase in costs
related to the services of our corporate owned offices which were associated
with increased payroll and rents costs offset by a decrease of $174 in
association commissions. Association commissions decreased as a
result of reduced commissions in the consolidation of former BXI Area Director’s
commission structures to the standard ITEX Broker commission
structure.
The
following shows the commissions and corporate owned office costs separately as a
percent of their related revenue:
Year Ended July 31,
|
||||||||||||||||
2009
|
% of
Related
Revenue
|
2008
|
% of
Related
Revenue
|
|||||||||||||
Association
fee commissions
|
$ | 1,599 | 37 | % | $ | 1,773 | 41 | % | ||||||||
Transaction
fee commissions
|
7,736 | 75 | % | 7,757 | 78 | % | ||||||||||
Corporate
owned office salaries, wages, employee benefits, and independent
contractor expenses
|
820 | 69 | % | 594 | 54 | % |
19
Salaries,
Wages and Employee Benefits
Salaries,
wages and employee benefits include expenses for employee salaries and wages,
payroll taxes, 401(k); payroll related insurance, medical and dental benefits,
temporary services and other personnel related items. Comparative
results are as follows:
Year Ended July 31,
|
||||||||||||
2009
|
Percent
change
from 2008
|
2008
|
||||||||||
Corporate
salaries, wages and employee benefits
|
$ | 1,895 | 16 | % | $ | 1,634 | ||||||
Percentage
of revenue
|
11 | % | 10 | % |
Year ended July
31, 2009 and 2008. Corporate salaries, wages and employee
benefits for 2009 increased by $261 or 16% to $1,895 from $1,634 as compared
with 2008. This increase was primarily due to $110 of wages and
salaries associated with our new media services division. In addition, during
2009 we incurred increased wages due to hiring more experienced replacement
employees. Also during 2009 we had an increase of $24 in Medical benefits and
$31 for recruiting fees.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses 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,
|
||||||||||||
2009
|
Percent
change
from 2008
|
2008
|
||||||||||
Selling,
general and administrative expenses
|
$ | 2,337 | 25 | % | $ | 1,869 | ||||||
Percentage
of revenue
|
14 | % | 12 | % |
Year ended July
31, 2009 and 2008. Selling, general and administrative
increased by $468 or 25% to $2,337 from $1,869 for 2009 as compared to
2008. Primary contributors to this increase include: $457 increase
for bad debt expense, and $88 for rent. The increases were offset somewhat by a
decrease of $111 in legal expenses. During 2009 and 2008, we utilized our ITEX
dollars to purchase goods and services for our corporate use totaling $261 and
$224 respectively.
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,
|
||||||||||||
2009
|
Percent
change
from 2008
|
2008
|
||||||||||
Depreciation
and amortization
|
$ | 762 | 22 | % | $ | 625 | ||||||
Percentage
of revenue
|
5 | % | 4 | % |
Year ended July
31, 2009 and 2008. Depreciation and amortization increased by
$137 or 22% to $762 from $625 for 2009 as compared to
2008. Amortization increased by $67 in 2009 primarily in connection
with our acquisition related intangible assets including membership lists and
non-compete agreements. The remaining increase was due to added
depreciation on fixed assets purchased during 2009.
20
Other
Income
Other
income includes interest received on notes receivable and promissory notes,
certain one-time gains and losses and offsetting interest expense on notes
payable. Comparative results are as follows:
Year Ended July 31,
|
||||||||||||
2009
|
Percent
change
from 2008
|
2008
|
||||||||||
Other
income
|
$ | 1 | -94 | % | $ | 16 | ||||||
Percentage
of revenue
|
0 | % | 0 | % |
Year ended July
31, 2009 and 2008. Other income for 2009 decreased by $15 or
94% to $1 from $16 for the same period in 2008. The decrease is
primarily caused by a reduction of $21 in interest income due to lower notes
receivable balances. In addition, there was a $30 loss on investment
in 2009, offset by a decrease of $38 in interest expense due to lower note
payable balances.
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 2009 and 2008, respectively,
we utilized $1,419 and $1,817 of our available NOLs. As of July 31,
2009, we have approximately $16,135 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 of July 31,
2009 and 2008, we have no valuation allowance on available Federal or State
NOLs.
FINANCIAL
CONDITION (in thousands)
Our total
assets were $16,661 and $16,149 at July 31, 2009 and 2008, respectively,
representing an increase of $512 or 3%. This increase resulted
primarily due to generating positive cash flows from operations. Our
cash and cash equivalents totaled $2,557 and $1,061 as of July 31, 2009 and
2008, respectively, representing an increase of $1,496, or 141%. Our
cash flow activity is described in more detail below (see “Liquidity and Capital
Resources”).
Accounts
receivable balances, net of allowances of $351 and $361, were $895 and $1,331 as
of July 31, 2009 and 2008 respectively, representing a decrease of $436 or
33%.
21
July 31, 2009
|
% of Gross
Accounts
Receivable
|
July 31, 2008
|
% of Gross
Accounts
Receivable
|
|||||||||||||
Gross accounts receivable
|
$ | 1,246 | 100 | % | $ | 1,692 | 100 | % | ||||||||
Less:
allowance
|
351 | 28 | % | 361 | 21 | % | ||||||||||
Net
accounts receivable
|
$ | 895 | 72 | % | $ | 1,331 | 79 | % |
Gross
accounts receivable decreased by $446 or 26% primarily due to timing of our
cycle close in comparable years. In 2009 we were able to collect approximately
$500 in billings from credit cards in the day following cycle close which was
one day prior to the 2009 year end. However, in 2008 our cycle closed on the
last day of year end and we were not able to collect any resultant fees, thereby
causing the difference in comparable years.
Our total
current liabilities were $2,420 and $2,822 at July 31, 2009 and 2008,
respectively, representing a decrease of $402 or 14%. The decrease is
due primarily to a decrease of $591 in the current portion of debt as the
Intagio note was paid off in full during 2009.
As a
result of our continued profitability, our stockholders’ equity increased by
$662 or 5% to $13,981 at July 31, 2009, compared to $13,319 at July 31,
2008.
LIQUIDITY
AND CAPITAL RESOURCES (in thousands)
Our
principal sources of liquidity are our cash provided by operating activities,
cash and cash equivalents on hand, and a $1,500 line of credit. Net
cash provided by operating activities was $2,875 and $2,374 for the years ended
July 31, 2009 and 2008, respectively. Our cash and cash
equivalents balance as of July 31, 2009 totaled $2,557. Additionally,
we have a revolving credit agreement to establish a $1,500 line of credit
facility from our primary banking institution, U.S. Bank (“line of
credit”). We have no outstanding balance on our line of credit as of
July 31, 2009.
Our
liquidity is affected by our business acquisitions. During our fiscal 2008, we
spent a total cash consideration of $2,381 on two acquisitions of certain assets
of commercial trade exchange networks as follows:
- the
August 2007 acquisition from Intagio
- the
February 2008 acquisition of ATX Barter.
In
addition to the upfront cash consideration, the August 2007 acquisition also
included a $1.1 million note payable in 24 monthly installments and a $150
contingent consideration paid out in the first quarter of 2009. We
made principal payments on this note payable in the amount of $546 and $591
during 2008 and 2009, respectively. The note was paid in full in April
2009.
In August
2008, we completed the acquisition of certain assets of a media services company
from Intagio for the total cash consideration of $68 and a note payable of
$638. This note was paid in full in November 2008.
The
following table presents a summary of our cash flows for the years ended 2009
and 2008 respectively (in thousands):
22
Year Ended July 31,
|
||||||||
2009
|
2008
|
|||||||
Net
cash provided by operating activities
|
$ | 2,875 | $ | 2,374 | ||||
Net
cash provided by (used in) investing activities
|
(120 | ) | (2,358 | ) | ||||
Net
cash used in financing activities
|
(1,259 | ) | (708 | ) | ||||
Increase
(decrease) in cash and cash equivalents
|
$ | 1,496 | $ | (692 | ) |
We have
financed our operational needs over the last two years through cash flow
generated from operations. During 2009, we increased our cash
position by $1,496 to $2,557. During 2009 we used a portion of operational cash
flow provided by operating activities for acquisitions, routine operating
expenses, and debt re-payments. In Fiscal Year 2010, we plan to
continue the upgrades and improvements to our corporate and broker computer
workstations and anticipate that we will invest approximately $100 in new
software and hardware.
Our
working capital as of July 31, 2009, included advertising
credits originally obtained in our business acquisition in August 2008
in the amount of $157, which represent unsold prepaid credits for future media
print and broadcast placements. We recorded the total advertising credits at
fair value of $468 based on the estimated future selling price less reasonable
costs of disposal. The future operating cash flows may be negatively affected
and our original estimate of the net realizable value of the advertising credits
will be decreased if we are not able to resell the advertising credits to our
customers.
As part
of our contemplated future expansion activities or as part of 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. We expect that our current working capital
would be adequate for this purpose. However, we may seek to finance a
portion of the acquisition cost subject to the consent of any secured
creditors. We maintain a $1,500 line of credit facility from our
primary banking institution, U.S. Bank. 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. There was no outstanding amount under this line of credit as
of July 31, 2009. 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.
23
The
following summarizes our cash flows by quarter for 2009 and
2008:
Year ended July 31, 2009
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Total
|
|||||||||||||||
Net
cash provided by operating activities
|
$ | 706 | $ | 481 | $ | 348 | $ | 1,340 | $ | 2,875 | ||||||||||
Net
cash provided by (used in) investing activities
|
(158 | ) | 45 | (30 | ) | 23 | (120 | ) | ||||||||||||
Net
cash used in financing activities
|
(327 | ) | (601 | ) | (331 | ) | - | (1,259 | ) | |||||||||||
$ | 221 | $ | (75 | ) | $ | (13 | ) | $ | 1,363 | $ | 1,496 | |||||||||
Year
ended July 31, 2008
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Total
|
|||||||||||||||
Net
cash provided by (used in) operating activities
|
$ | 767 | $ | 1,018 | $ | (15 | ) | $ | 604 | $ | 2,374 | |||||||||
Net
cash provided by (used in) investing activities
|
(1,972 | ) | (45 | ) | (345 | ) | 4 | (2,358 | ) | |||||||||||
Net
cash used in financing activities
|
(294 | ) | (136 | ) | (138 | ) | (140 | ) | (708 | ) | ||||||||||
$ | (1,499 | ) | $ | 837 | $ | (498 | ) | $ | 468 | $ | (692 | ) |
Operating
Activities
For the
year ended July 31, 2009, net cash provided by operating activities was $2,875
compared to $2,374 in the year ended July 31, 2008, an increase of $501, or
21%. The increase in net cash provided by the operating activities is
primarily the result of $682 in operating assets and liabilities changes offset
somewhat by a $327 decline in net income.
The
difference between our net income and our net cash provided by operating
activities was attributable to non-cash expenses included in net income, and
changes in the operating assets and liabilities, as presented below (in
thousands):
Year ended July 31,
|
||||||||
2009
|
2008
|
|||||||
Net
income
|
$ | 607 | $ | 934 | ||||
Add:
non-cash expenses
|
1,275 | 1,129 | ||||||
Add:
changes in operating assets and liabilities
|
993 | 311 | ||||||
Net
cash provided by operating activities
|
$ | 2,875 | $ | 2,374 |
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.
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. During the year ended July 31, 2009, we granted
subscription rights to two customers under our web services program to our
proprietary online broker and client relationship management software for a
total consideration of $375 as well as for other recurring fees. The
consideration received is amortized into revenue over a contractual term of five
years. The deferral of this cash consideration provided an increase in cash
flows resulting from changes in the operating assets and
liabilities.
24
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 sales to
brokers, 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,
|
||||||||||||||||
2009
|
Percent
of
total
|
2008
|
Percent
of
total
|
|||||||||||||
Credit
cards, net
|
$ | 9,631 | 61 | % | $ | 9,299 | 61 | % | ||||||||
Electronic
fund transfers, net
|
3,964 | 25 | % | 4,036 | 26 | % | ||||||||||
Checks
and cash, net
|
2,116 | 13 | % | 2,025 | 13 | % | ||||||||||
Cash
received from Marketplace members, net
|
$ | 15,711 | 100 | % | $ | 15,360 | 100 | % |
Investing
Activities
Net cash
used in investing activities was primarily the result of business acquisitions,
purchase of property and equipment and the collections on notes receivable from
corporate office sales.
For the
year ended July 31, 2009, net cash used in investing activities was $120
compared with $2,358 used in investing activities in the year ended July 31,
2008, a decrease in cash used in investing activities of $2,238, or 95%. In
the year ended July 31, 2008, the net cash used in investing activities was
primarily related to $2,381 cash consideration paid for the August 2007
acquisition from Intagio and February 2008 acquisition of ATX Barter. In the
year ended July 31, 2009, the net cash used in investing activities was
primarily related to $68 cash consideration paid for the August 2008 acquisition
from Intagio, $150 final settlement of contingent consideration from the August
2007 acquisition and $124 purchases of property and equipment. Those cash
outlays were partially offset by installment payments received on loans granted
in earlier periods.
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 value for our remaining shareholders. The following summarizes
our financing activities:
25
Year
ended July 31, 2009
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Total
|
|||||||||||||||
Contractual
debt repayments
|
$ | (327 | ) | $ | (147 | ) | $ | (99 | ) | $ | - | $ | (573 | ) | ||||||
Discretionary
accelerated debt repayments
|
- | (454 | ) | (202 | ) | - | (656 | ) | ||||||||||||
Discretionary
repurchase of common stock
|
- | - | (30 | ) | - | (30 | ) | |||||||||||||
$ | (327 | ) | $ | (601 | ) | $ | (331 | ) | $ | - | $ | (1,259 | ) | |||||||
Year
ended July 31, 2008
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Total
|
|||||||||||||||
Contractual
debt repayments
|
$ | (132 | ) | $ | (136 | ) | $ | (138 | ) | $ | (140 | ) | $ | (546 | ) | |||||
Discretionary
accelerated debt repayments
|
- | - | - | - | - | |||||||||||||||
Discretionary
repurchase of common stock
|
(162 | ) | - | - | - | (162 | ) | |||||||||||||
$ | (294 | ) | $ | (136 | ) | $ | (138 | ) | $ | (140 | ) | $ | (708 | ) |
We
repurchased 50 and 203 shares of ITEX stock in 2009 and 2008,
respectively.
On August
1, 2007, in order to partially fund the acquisition of certain assets of a
commercial trade exchange network from Intagio (refer to “Overview” included in
“Management’s
Discussion and Analysis of Financial Condition and Results of Operations”, Part
II Item 7), we borrowed $300 under our Revolving Credit Agreement with
U.S. Bank and issued an 8.0% subordinated secured promissory note (“2007 Note”)
to Intagio in the aggregate principal amount of $1,137 due August 31,
2009. In 2008, we repaid the $300 balance on our line of credit, and
also repaid $546 on the 2007 Note leaving an outstanding balance of $591 as of
July 31, 2008. This amount was paid in full and the note was retired
during 2009 as there is a $0 balance on the note as of July 31,
2009.
Commitments
and Contingencies
We
utilize leased facilities in the normal course of our business. As of
July 31, 2009, the future minimum commitments under these operating leases are
as follows:
Executive
office
|
Corp
owned office
|
Corp
owned office
|
Total
|
|||||||||||||
Location:
|
Bellevue,
WA
|
Chicago,
Il
|
Solon,
OH
|
|||||||||||||
Expiration
date:
|
April
30, 2010
|
October
31, 2011
|
May
31, 2011
|
|||||||||||||
Lease commitments
for
the year ending
July
31,
|
||||||||||||||||
2010
|
$ | 116 | $ | 110 | $ | 17 | $ | 243 | ||||||||
2011
|
- | 112 | 14 | $ | 126 | |||||||||||
2012
|
29 | $ | 29 | |||||||||||||
Total
|
$ | 116 | $ | 251 | $ | 31 | $ | 398 |
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,
2009 and 2008 was $320 and $232, respectively.
We have
not leased any equipment in 2009 or 2008.
26
We have
purchase commitments for telecommunications and data
communications. As of July 31, 2009, the future minimum commitments
under these purchase commitments are as follows:
Telecommunications
and
data
communications
|
||||
Purchase
commitments for
the
year ending July 31,
|
||||
2010
|
$ | 43 | ||
2011
|
15 | |||
Total
|
$ | 58 |
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.
27
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, 2009 and 2008, members made
approximately 87% and 87%, 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 5% to 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 95% and 96% of
our total revenue in 2009 and 2008, 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.
O Web
services contracts include multiple deliverable components, in which we
recognize revenue in accordance with the Emerging Issues Task Force (“EITF”)
Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” The Company
recognizes revenue from the platform subscription fee on a straight-line basis
over the contract term. The Company recognizes revenue from recurring
transaction processing, support and consulting fees as delivery has occurred or
services have been 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,
|
|||||||
2009
|
2008
|
|||||||
Fees
received from the Marketplace
|
$ | 4,715 | $ | 5,179 | ||||
Expenditures
to and for the Marketplace
|
(4,709 | ) | (5,193 | ) | ||||
Increase
(decrease)
|
$ | 6 | $ | (14 | ) |
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 on our Statements of 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 guidance in EITF 99-19, “Reporting Revenue Gross as a
Principal versus Net as an Agent.” 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.
28
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 on revenue sharing association fees and
transaction 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 guidance of the Financial Accounting
Standards Board’s (“FASB”) Emerging Issues Task Force (“EITF”) 93-11, Accounting for Barter Transactions
Involving Barter Credits, which indicates that transactions in which
non-monetary assets are exchanged for barter credits should be accounted for
under the Accounting Principle Board (“APB”) 29, Accounting for Non-monetary
Transactions. The basic principle of APB 29 is that,
generally, exchanges of non-monetary assets 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;
· Revenue
sharing with Brokers for transaction fees and association fees;
· Incentives
to Brokers for registering new members in the Marketplace;
We
believe 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. 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.
29
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 U.S. dollar
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
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 for
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 look
primarily to the undiscounted future cash flows in our assessment of whether or
not note receivable risk being uncollectible or unrecoverable.
Valuation
Allowance on Deferred Tax Assets
We
account for income taxes in accordance with SFAS No. 109, Accounting for Income
Taxes. Under SFAS No. 109, an asset and liability approach is
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 income taxes in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109 (“FIN
48”). Under the provisions of FIN 48, we recognize the tax benefits
of tax positions only if it is more like than not that the tax positions will be
sustained, upon examination by the applicable taxing authorities, based on the
technical merits of the positions. FIN 48 also requires that we
record 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, projected future taxable income
and projections for future taxable income over the periods in which the deferred
tax assets are deductible.
30
On July
31, 2009, we had NOLs of approximately $16,135 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, 2009 represent our current estimate of
all deferred tax benefits to be utilized in the current year and future periods
beyond 2009.
Goodwill
We record
goodwill when the cost of an acquired entity exceeds the net amounts assigned to
identifiable assets acquired and liabilities assumed. In accordance
with Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible
Assets, we conduct a formal impairment test of goodwill on an annual
basis and between annual tests if an event occurs or circumstances change that
would more likely than not reduce the fair value below its carrying
value. We have analyzed goodwill as of July 31, 2009 and we did not
identify any impairment.
Accounting
for Acquisitions
We
account for acquisitions as a purchase in accordance with the provisions of SFAS
No. 141, Business
Combinations. We report all acquired tangible and intangible
assets and liabilities at fair value. We recognize the fair value of
the purchased intangible assets as operating expenses over the estimated useful
life of each separate intangible asset. Any excess purchase price
over the fair values assigned to identifiable tangible and intangible assets is
recorded as goodwill.
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 American Institute of Certified Public
Accountants’ Statement of Position (“SOP”) 98-1, Accounting for Costs of Computer
Software Developed or Obtained for Internal Use. In accordance
with SOP 98-1, 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 the criteria of SOP 98-1, are included as an
element of property and equipment in the consolidated balance
sheets.
Share-Based
Compensation Expense
We
account for share-based compensation in accordance with the provisions of SFAS
No. 123(R), Share-Base
Payment. Under the fair value recognition provisions of SFAS
No. 123(R), we estimate share-based compensation cost at the grant date based on
the fair value of the award. We recognize the expense ratably over
the requisite service period of the award.
We
account for stock-based non-employee compensation in accordance with the
provisions of SFAS No. 123, Accounting for Stock-Based
Compensation and EITF Issue No. 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services. We use the Black-Scholes model to
value such compensation and recognize the expense over the period we receive the
respective services. Additionally, we re-measure any unvested portion
of an award at each measurement date and record the adjustment over the
remaining period we receive the services.
31
Recent
Accounting Pronouncements
In
June 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position No. EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities. EITF 03-6-1 gives guidance as to the circumstances
when unvested share-based payment awards should be included in the computation
of EPS. EITF 03-6-1 is effective for us beginning August 1, 2009, the beginning
of our 2010 reporting periods. We are currently assessing the impact of
EITF 03-6-1 on our results of operations, cash flows and financial
position.
In
April 2008, the FASB issued FASB Staff Position No. FSP 142-3, Determining the Useful Life of
Intangible Assets. FSP 142-3 amends the factors to be
considered in determining the useful life of intangible assets. Its intent
is to improve the consistency between the useful life of an intangible asset and
the period of expected cash flows used to measure its fair value. FSP
142-3 is effective for us beginning August 1, 2009, the beginning of our 2010
reporting periods. We are currently assessing the impact of FSP 142-3 on
our results of operations, cash flows and financial position.
In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities — an amendment to FASB Statement
No. 133. SFAS No. 161 enhances the disclosure
requirements for derivative instruments and hedging activities under FASB
Statement No. 133. Entities are required to provide disclosures about
(i) how and why an entity uses derivative instruments, (ii) how
derivative instruments and related hedged items are accounted for under
Statement No. 133 and its related interpretations, and (iii) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance and cash flows. SFAS No. 161 is effective
for us beginning August 1, 2009, the beginning of our 2010 reporting periods,
though early adoption encouraged. We are currently assessing the impact of
SFAS No. 161 on our results of operations, cash flows and financial
position.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, which
replaces SFAS No. 141 and amends several others. The statement
retains the purchase method of accounting for acquisitions but changes the way
we will recognize assets and liabilities. It also changes the way we
will recognize assets acquired and liabilities assumed arising from
contingencies, requires us to capitalize in-process research and development at
fair value, and requires us to expense acquisition-related costs as
incurred. SFAS No. 141R is effective for us on, but not before,
August 1, 2009, the beginning of our 2010 reporting periods. SFAS No.
141R will apply prospectively to our business combinations completed on or after
August 1, 2009 and will not require us to adjust or modify how we recorded any
acquisition prior to that date.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 51, which changes
the accounting and reporting requirements for minority interests. Under
the provisions of SFAS No. 160, minority interests will be re-characterized as
“noncontrolling interests” and reported as a component of equity separate from
our equity. Subsequently, we would be required to record all changes in
interests that do not result in changes in control as equity transactions.
In addition, we would report net income attributable to noncontrolling
interests on the face of our consolidated Statements of Income. Upon a
loss of control, we would record the interest sold, as well as any interest
retained, at fair value with recognition of any gain or loss in earnings.
SFAS No. 160 is effective for us on, but not before, August 1,
2009, the beginning of our 2010 reporting periods. SFAS No. 160 will apply
prospectively, except for the presentation and disclosure requirements, which
will apply retrospectively. We do not expect the adoption of SFAS
No. 160 will have a material impact on our results of operations, cash
flows or financial position.
32
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which is intended to provide guidance for using fair value to measure assets and
liabilities. In general, this pronouncement is intended to establish
a framework for determining fair value and to expand the disclosures regarding
the determination of fair value. With certain financial instruments,
a cumulative effect of a change in accounting principle may be required with the
impact of the change recorded as an adjustment to opening retained
earnings. We adopted certain provisions of SFAS No. 157 on August 1,
2008, the beginning of our 2009 reporting periods. The adoption
of SFAS No. 157 affected our accounting policy regarding ITEX dollar activities
but there will be no impact on future results of operations, cash flows and
financial position. In February 2008, the FASB issued FASB Staff
Position FAS 157-2, "Effective Date of FASB Statement No. 157". FSP
SFAS No. 157-2 delays the effective date SFAS No. 157 for non-financial assets
and non-financial liabilities, except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis. The
non-financial assets and non-financial liabilities for which the Company has not
applied the fair value provisions of SFAS No. 157 include goodwill and other
intangible assets. Full adoption of SFAS No. 157 is effective for us
beginning August 1, 2009, the beginning of our 2010 reporting
periods. We are currently assessing the impact of the adoption of FSP
SFAS No. 157-2 on our results of operations, cash flows and financial
position.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Liabilities — Including an Amendment of FASB Statement No.
115, which permits an entity to choose to measure many financial
instruments and certain other items at fair value. Most of the
provisions of SFAS No. 159 are elective; however the amendment to SFAS No. 115
applies to all entities with available-for-sale and trading
securities. The FASB’s stated objective in issuing the standard is to
improve financial reporting by entities by providing them with the opportunity
to mitigate volatility in reported earnings caused by measuring related assets
and liabilities differently without having to apply complex hedging accounting
provisions. The provisions of SFAS No. 159 are effective for us on
August 1, 2008, the beginning of our 2009 reporting periods. We have
chosen not to adopt the fair value measurement provisions of SFAS No. 159, so
the impact of SFAS No. 159 will not have a significant impact on our results of
operations, cash flows and financial position.
In June
2009, the FASB issued SFAS No. 168, The Accounting Standards Codification
TM and the
Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB
Statement No. 162. On the effective date of this statement, FASB Accounting Standards Codification™
(ASC) becomes the source of authoritative U.S. accounting and reporting
standards for nongovernmental entities, in addition to guidance issued by the
Securities and Exchange Commission (SEC). At that time, FASB ASC will supersede
all then-existing, non-SEC accounting and reporting standards for
nongovernmental entities. Once effective, all other nongrandfathered, non-SEC
accounting literature not included in FASB ASC will become nonauthoritative.
FASB Statement No. 168 flattens the generally accepted accounting principles
(GAAP) hierarchy to two levels: one that is authoritative (in FASB ASC) and one
that is nonauthoritative (not in FASB ASC). The statement is effective for us on
financial statements issued for interim and annual periods ending after
September 15, 2009. The company will adopt this provision beginning August 1,
2009.
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
33
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 as of
July 31, 2009 and 2008, 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 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 audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of ITEX
Corporation as of July 31, 2009 and 2008, and the consolidated results of their
operations and their 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
Denver,
Colorado
October
14, 2009
34
ITEX
CORPORATION
CONSOLIDATED
BALANCE SHEETS
(In
thousands)
July 31, 2009
|
July 31, 2008
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
2,557 | 1,061 | ||||||
Accounts
receivable, net of allowance of $351 and $361
|
895 | 1,331 | ||||||
Prepaid
expenses
|
82 | 238 | ||||||
Loans
and advances
|
57 | 67 | ||||||
Prepaid
Advertising Credits
|
157 | - | ||||||
Deferred
tax asset
|
739 | 819 | ||||||
Notes
receivable - corporate office sales
|
242 | 204 | ||||||
Other
current assets
|
19 | 13 | ||||||
Total
current assets
|
4,748 | 3,733 | ||||||
Property
and equipment, net of accumulated depreciation of $280 and
$151
|
247 | 176 | ||||||
Goodwill
|
3,318 | 3,168 | ||||||
Deferred
tax asset, net of current portion
|
5,798 | 6,061 | ||||||
Intangible
assets, net of amortization of $1,703 and $1,078
|
1,572 | 2,093 | ||||||
Notes
receivable - corporate office sales, net of current
portion
|
624 | 886 | ||||||
Other
long-term assets
|
354 | 32 | ||||||
Total
assets
|
16,661 | 16,149 | ||||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
and other expenses payable
|
98 | 215 | ||||||
Commissions
payable to brokers
|
691 | 666 | ||||||
Accrued
commissions to brokers
|
828 | 713 | ||||||
Accrued
expenses
|
521 | 445 | ||||||
Deferred
revenue
|
144 | 75 | ||||||
Advance
payments
|
138 | 117 | ||||||
Current
portion of notes payable
|
- | 591 | ||||||
Total
current liabilities
|
2,420 | 2,822 | ||||||
Long-term
liabilities:
|
||||||||
Other
long-term liabilities
|
260 | 8 | ||||||
Total
Liabilities
|
2,680 | 2,830 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders’
equity:
|
||||||||
Common
stock, $.01 par value; 50,000 shares authorized; 17,856 shares and 17,816
shares issued and outstanding, respectively
|
179 | 178 | ||||||
Additional
paid-in capital
|
28,962 | 28,908 | ||||||
Accumulated
deficit
|
(15,160 | ) | (15,767 | ) | ||||
Total
stockholders' equity
|
13,981 | 13,319 | ||||||
Total
liabilities and stockholders’ equity
|
16,661 | 16,149 |
The
accompanying notes are an integral part of these Consolidated Balance
Sheets.
35
ITEX
CORPORATION
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands except per share amounts)
Year ended July 31,
|
||||||||
2009
|
2008
|
|||||||
Revenue:
|
||||||||
Marketplace
and other revenue
|
$ | 16,502 | $ | 15,964 | ||||
Costs
and expenses:
|
||||||||
Cost
of Marketplace revenue
|
10,481 | 10,335 | ||||||
Corporate
salaries, wages and employee benefits
|
1,895 | 1,634 | ||||||
Selling,
general and administrative
|
2,337 | 1,869 | ||||||
Depreciation
and amortization
|
762 | 625 | ||||||
15,475 | 14,463 | |||||||
Income
from operations
|
1,027 | 1,501 | ||||||
Other
income:
|
||||||||
Interest,
net
|
31 | 16 | ||||||
Other
|
(30 | ) | - | |||||
1 | 16 | |||||||
Income
before income taxes
|
1,028 | 1,517 | ||||||
Income
tax expense (benefit), net
|
421 | 583 | ||||||
Net
income
|
$ | 607 | $ | 934 | ||||
Net
income per common share:
|
||||||||
Basic
|
$ | 0.03 | $ | 0.05 | ||||
Diluted
|
$ | 0.03 | $ | 0.05 | ||||
Weighted
average shares outstanding:
|
||||||||
Basic
|
17,820 | 17,643 | ||||||
Diluted
|
17,825 | 17,858 |
The
accompanying notes are an integral part of these Consolidated Statements of
Income.
36
ITEX
CORPORATION
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
(In
thousands)
Common Stock
|
Additional paid
|
Accumulated
|
||||||||||||||||||
Shares
|
Amount
|
in capital
|
deficit
|
Total
|
||||||||||||||||
Balance,
July 31, 2007
|
17,929 | $ | 179 | $ | 28,852 | $ | (16,701 | ) | $ | 12,330 | ||||||||||
Share-based
board compensation
|
90 | 1 | 83 | 84 | ||||||||||||||||
Repurchase
and retirement of common Share
|
(203 | ) | (2 | ) | (160 | ) | (162 | ) | ||||||||||||
Share-based
employee compensation
|
67 | 67 | ||||||||||||||||||
Share-based
non-employee compensation
|
66 | 66 | ||||||||||||||||||
Net
Income
|
934 | 934 | ||||||||||||||||||
Balance,
July 31, 2008
|
17,816 | $ | 178 | $ | 28,908 | $ | (15,767 | ) | $ | 13,319 | ||||||||||
Common
Stock awards issued
|
90 | 1 | (1 | ) | 0 | |||||||||||||||
Common
Stock repurchased and retired
|
(50 | ) | (30 | ) | (30 | ) | ||||||||||||||
Stock
based compensation expense
|
85 | 85 | ||||||||||||||||||
Net
Income
|
607 | 607 | ||||||||||||||||||
Balance,
July 31, 2009
|
17,856 | $ | 179 | $ | 28,962 | $ | (15,160 | ) | $ | 13,981 |
The
accompanying notes are an integral part of these Consolidated Statements of
Stockholders’ Equity.
37
ITEX
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
Year
ended July 31,
|
||||||||
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$ | 607 | $ | 934 | ||||
Items
to reconcile to net cash provided by operating activities:
|
||||||||
Depreciation
and amortization
|
762 | 625 | ||||||
Disposal
of equipment
|
1 | 2 | ||||||
Share-based
compensation
|
161 | 187 | ||||||
Increase
(decrease) in allowance for uncollectible receivables
|
(10 | ) | (142 | ) | ||||
Decrease
(increase) in deferred income taxes
|
343 | 469 | ||||||
Recognition
of imputed interest
|
(12 | ) | (12 | ) | ||||
Write
off of Investment
|
30 | - | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable, net
|
517 | 78 | ||||||
Prepaid
expenses
|
80 | (21 | ) | |||||
Other
assets
|
64 | 6 | ||||||
Accounts
and other expenses payable
|
(226 | ) | 93 | |||||
Commissions
payable to brokers
|
25 | 666 | ||||||
Accrued
commissions to brokers
|
115 | (574 | ) | |||||
Accrued
expenses
|
76 | 121 | ||||||
Deferred
revenue
|
69 | (23 | ) | |||||
Long-term
liabilities
|
252 | (11 | ) | |||||
Advance
payments
|
21 | (24 | ) | |||||
Net
cash provided by operating activities
|
2,875 | 2,374 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Business
acquisitions
|
(68 | ) | (2,381 | ) | ||||
Business
sales
|
- | 50 | ||||||
Investment
in a blogging technology company
|
- | (30 | ) | |||||
Payments
received from notes receivable - corporate office sales
|
236 | 198 | ||||||
Payments
received from loans
|
20 | 341 | ||||||
Advances
on loans
|
(34 | ) | (274 | ) | ||||
BXI
earnout
|
(150 | ) | (150 | ) | ||||
Purchase
of property and equipment
|
(124 | ) | (112 | ) | ||||
Net
cash used in investing activities
|
(120 | ) | (2,358 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Repayments
on third party indebtedness
|
(1,229 | ) | (546 | ) | ||||
Reacquired
shares from non-affiliated parties
|
(30 | ) | (162 | ) | ||||
Net
cash used in financing activities
|
(1,259 | ) | (708 | ) | ||||
Net
increase (decrease) in cash and cash equivalents
|
1,496 | (692 | ) | |||||
Cash
and cash equivalents at beginning of period
|
1,061 | 1,753 | ||||||
Cash
and cash equivalents at end of period
|
$ | 2,557 | $ | 1,061 | ||||
Supplemental
cash flow information:
|
||||||||
Cash
paid for interest
|
35 | 72 | ||||||
Cash
paid for taxes
|
31 | 148 | ||||||
Supplemental
non-cash investing and financing activities:
|
||||||||
Financing
included in business acquisitions - see Note 10 -
Acquisitions
|
- | 300 | ||||||
Non-cash
amounts included in prepaid expenses due to share-based compensation - see
Note 12 - Share-based compensation
|
- | 31 |
The
accompanying notes are an integral part of these Consolidated Statements of Cash
Flows.
38
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, corporate 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 us 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 our financial statements and
notes. Examples of estimates and assumptions include
estimating:
|
·
|
certain
provisions such as allowances for accounts
receivable
|
|
·
|
any
impairment of long-lived assets
|
|
·
|
useful
lives of property and equipment
|
|
·
|
the
value and life of intangible assets
|
|
·
|
the
value of assets and liabilities acquired through business
combinations
|
|
·
|
deferred
revenues and costs
|
|
·
|
expected
lives of customer relationships
|
|
·
|
tax
provisions and valuation allowances
|
|
·
|
accrued
commissions and other accruals
|
|
·
|
litigation
matters described herein
|
Actual
results may vary from estimates and assumptions that were used in preparing the
financial statements.
Reclassifications
Certain
prior-year items have been reclassified to conform to the current-year
presentation.
39
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”, “2009”
for August 1, 2008 to July 31, 2009, “2008” for August 1, 2007 to July 31,
2008). 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 prescribed by Statement of Financial Accounting Standards (“SFAS”)
141, Business
Combinations. 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.
The
Company identifies and records separately the intangible assets acquired apart
from goodwill based on the specific criteria for separate recognition
established in SFAS 141, 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, 2009, we maintained our cash balances at a U.S. Bank branch in Portland,
Oregon, 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. Our cash balances have exceeded these insurable limits
periodically throughout 2009 and 2008. At July 31, 2009 such balances
exceeded these limits by $2,107.
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.
40
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, and it recorded a portion of these advertising credits
that are expected to be utilized in the next year as a current asset and the
balance are recorded as Other assets – long term. 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
$34 and $0 expense on sale of advertising credits in the years ended 2009 and
2008 respectively. Additionally the Company used approximately $34 and $0 of
advertising credits in the years ended 2009 and 2008 respectively for its own
advertising needs.
Loans
and Advances
At our
discretion, we occasionally allow members who complete large transactions to pay
the related transaction fee over time, typically three operating
cycles. Additionally, we occasionally make cash loans and advances to
Brokers for special purposes or as incentives for beneficial changes such as to
convert former BXI brokers to lower ITEX franchise fee commission
structures. The aggregate total owed to us on July 31, 2009 is
$57. The maximum balance owed is $8. Payoff dates for the
loans are scheduled within one year.
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
have also developed software to provide new functionality to access benefits and
other services that we now provide to our Brokers and members of the
Marketplace. We account for qualifying costs incurred in the
development of software for internal use in accordance with the American
Institute of Certified Public Accountants’ Statement of Position (“SOP”) 98-1,
Accounting for Costs of
Computer Software Developed or Obtained for Internal Use. In
accordance with SOP 98-1, 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 the criteria of SOP 98-1, 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.
41
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. SFAS 142, Goodwill and other Intangible
Assets, prescribes the use of the two-phase approach for testing goodwill
for impairment. 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, 2009 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.
In
accordance with SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, 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
In
accordance with the provisions of SFAS No. 144, Accounting for the Impairment or
Disposal of 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. In our
most recent review conducted in the fourth quarter of 2009, we determined no
impairment was 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, 2009 represents commissions payable from the operating cycle ending July 30,
2009. In 2008, the closest operating cycle ended July 31, 2008 so as
of July 31, 2008 all commissions owed were estimated and
accrued. 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 recognized it over the annual period
to which it applies. During 2009, we signed two Web Services
agreements. These agreements provide for a one-time platform subscription fee
payable to Itex upon signing of the contract. We amortize the subscription fee
portion of the contract on a ratable basis over the life of the contract,
typically five years. As of July 31, 2009 we have a total of $333 of deferred
revenue derived from Web services reflected on our Balance Sheet, of which $76
is in Current liabilities – Deferred revenue and $257 is reflected in Other
long-term liabilities.
42
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 significant financial instruments are recognized in our balance
sheet. The carrying amount of our financial instruments including
cash, accounts receivable, loans and advances, notes receivable, accounts
payable, commissions payable and accrued commissions and other accruals
approximate their fair values at July 31, 2009 due to the short-term nature of
these instruments. All of these instruments have terms of less than
one year.
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 which is classified as
long-term as of July 31, 2009.
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, 2009 and 2008, members made
approximately 87% and 87%, 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 5% to 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 95% and 96% of
our total revenue in 2009 and 2008, 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.
43
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 in
accordance with Emerging Issues Task Force Issue (“EITF”) 99-19, Reporting Revenue Gross as a
Principal versus Net as an Agent. 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 12, 2009, the Company signed a Web services agreement
granting a media services company a limited, non-exclusive right to use ITEX’s
proprietary online broker and client relationship management platform, including
billing functionality, data analysis and other offerings, as well as ITEX’s
related hosting services. The agreement provides for a one-time consideration of
$350,000 paid to ITEX, as a platform subscription fee as well as periodic
transaction processing, support and consulting fees.
On May
8, 2009, the Company signed a Web services agreement
granting to ITEX Latin America, Inc. (ILA), a limited, non-exclusive
right to use ITEX’s proprietary online broker and client relationship management
platform, including billing functionality, data analysis and other offerings, as
well as ITEX’s related hosting services, for a term of five years. The agreement
provides for a one-time platform subscription fee to be paid over a period of
five years and recurring transaction processing fees based on gross merchandise
volume, or GMV, which is the total value of all transactional activity hosted by
the platform, as well as for certain other periodic service and consulting fees.
In addition to this cash consideration, ITEX received certain equity interest in
the customer, making up approximately 5% interest in ILA.
Web
services contracts include multiple deliverable components and the Company
recognizes revenue in accordance with the Emerging Issues Task Force (“EITF”)
Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” The Company
recognizes revenue from the platform subscription fee on a straight-line basis
over the contract term. The Company recognizes 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.
44
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 guidance of the Financial Accounting
Standards Board’s (“FASB”) Emerging Issues Task Force (“EITF”) 93-11, Accounting for Barter Transactions
Involving Barter Credits, which indicates that transactions in which
non-monetary assets are exchanged for barter credits should be accounted for
under the Accounting Principle Board (“APB”) 29, Accounting for Non-monetary
Transactions. The basic principle of APB 29 is that,
generally, exchanges of non-monetary assets 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;
|
|
·
|
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. 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 U.S. dollar
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.
Share-Based
Compensation Expense
We
account for share-based compensation in accordance with the provisions of SFAS
No. 123(R), Share-Base
Payment. Under the fair value recognition provisions of SFAS
No. 123(R), we estimate share-based compensation cost at the grant date based on
the fair value of the award. We recognize the expense ratably over
the requisite service period of the award.
45
We
account for stock-based non-employee compensation in accordance with the
provisions of SFAS No. 123, Accounting for Stock-Based
Compensation and EITF Issue No. 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services. We use the Black-Scholes model to
value such compensation and recognize the expense over the period we receive the
respective services. Additionally, we re-measure any unvested portion
of an award at each measurement date and record the adjustment over the
remaining period we receive the services. Determining the appropriate
fair value model and calculating the fair value of stock-based awards, which
includes estimates of stock price volatility, forfeiture rates and expected
lives, requires judgment that could materially impact our operating
results. No warrants were issued in 2009. During 2008, we issued 100
warrants to a consultant for a fair value of $66. We did not issue
stock options in 2009 or 2008.
Operating
Leases
We
account for our executive office lease and other property leases in accordance
with SFAS No. 13, Accounting
for Leases, and FASB Technical Bulletin 85-3, Accounting for Operating Leases with
Scheduled Rent Increases (as amended). 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 in accordance with SFAS No. 109, Accounting for Income
Taxes. Under SFAS No. 109, an asset and liability approach is
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 income taxes in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109 (“FIN
48”). Under the provisions of FIN 48, we recognize the tax benefits
of tax positions only if it is more like than not that the tax positions will be
sustained, upon examination by the applicable taxing authorities, based on the
technical merits of the positions. FIN 48 also requires that we
record potential interest and penalties associated with our tax
positions. We have opted to record interest and penalties as a
component of income tax expense.
Contingencies
In the
normal course of our business we are periodically involved in litigation or
claims. We follow the provisions of SFAS No. 5, Accounting for Contingencies,
to record litigation or claim-related expenses. We evaluate,
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.
46
Income
(Loss) Per Share
We
prepare our financial statements in accordance with the provisions of SFAS No.
128, Earnings per
Share, which requires presentation 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, 2009, we had no contracts to issue common
stock, but we did have 100 warrants outstanding.
NOTE 2 –
RECENT ACCOUNTING PRONOUNCEMENTS
In
June 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position No. EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities. EITF 03-6-1 gives guidance as to the circumstances
when unvested share-based payment awards should be included in the computation
of EPS. EITF 03-6-1 is effective for us beginning August 1, 2009, the beginning
of our 2010 reporting periods. We are currently assessing the impact of
EITF 03-6-1 on our results of operations, cash flows and financial
position.
In
April 2008, the FASB issued FASB Staff Position No. FSP 142-3, Determining the Useful Life of
Intangible Assets. FSP 142-3 amends the factors to be
considered in determining the useful life of intangible assets. Its intent
is to improve the consistency between the useful life of an intangible asset and
the period of expected cash flows used to measure its fair value. FSP
142-3 is effective for us beginning August 1, 2009, the beginning of our 2010
reporting periods. We are currently assessing the impact of FSP 142-3 on
our results of operations, cash flows and financial position.
In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities — an amendment to FASB Statement
No. 133. SFAS No. 161 enhances the disclosure
requirements for derivative instruments and hedging activities under FASB
Statement No. 133. Entities are required to provide disclosures about
(i) how and why an entity uses derivative instruments, (ii) how
derivative instruments and related hedged items are accounted for under
Statement No. 133 and its related interpretations, and (iii) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance and cash flows. SFAS No. 161 is effective
for us beginning August 1, 2009, the beginning of our 2010 reporting periods,
though early adoption encouraged. We are currently assessing the impact of
SFAS No. 161 on our results of operations, cash flows and financial
position.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, which
replaces SFAS No. 141 and amends several others. The statement
retains the purchase method of accounting for acquisitions but changes the way
we will recognize assets and liabilities. It also changes the way we
will recognize assets acquired and liabilities assumed arising from
contingencies, requires us to capitalize in-process research and development at
fair value, and requires us to expense acquisition-related costs as
incurred. SFAS No. 141R is effective for us on, but not before,
August 1, 2009, the beginning of our 2010 reporting periods. SFAS No.
141R will apply prospectively to our business combinations completed on or after
August 1, 2009 and will not require us to adjust or modify how we recorded any
acquisition prior to that date.
47
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 51, which changes
the accounting and reporting requirements for minority interests. Under
the provisions of SFAS No. 160, minority interests will be re-characterized as
“noncontrolling interests” and reported as a component of equity separate from
our equity. Subsequently, we would be required to record all changes in
interests that do not result in changes in control as equity transactions.
In addition, we would report net income attributable to noncontrolling
interests on the face of our consolidated Statements of Income. Upon a
loss of control, we would record the interest sold, as well as any interest
retained, at fair value with recognition of any gain or loss in earnings.
SFAS No. 160 is effective for us on, but not before, August 1,
2009, the beginning of our 2010 reporting periods. SFAS No. 160 will apply
prospectively, except for the presentation and disclosure requirements, which
will apply retrospectively. We do not expect the adoption of SFAS
No. 160 will have a material impact on our results of operations, cash
flows or financial position.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which is intended to provide guidance for using fair value to measure assets and
liabilities. In general, this pronouncement is intended to establish
a framework for determining fair value and to expand the disclosures regarding
the determination of fair value. With certain financial instruments,
a cumulative effect of a change in accounting principle may be required with the
impact of the change recorded as an adjustment to opening retained
earnings. We adopted certain provisions of SFAS No. 157 on August 1,
2008, the beginning of our 2009 reporting periods. The adoption
of SFAS No. 157 affected our accounting policy regarding ITEX dollar activities
but there will be no impact on future results of operations, cash flows and
financial position. In February 2008, the FASB issued FASB Staff
Position FAS 157-2, "Effective Date of FASB Statement No. 157". FSP
SFAS No. 157-2 delays the effective date SFAS No. 157 for non-financial assets
and non-financial liabilities, except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis. The
non-financial assets and non-financial liabilities for which the Company has not
applied the fair value provisions of SFAS No. 157 include goodwill and other
intangible assets. Full adoption of SFAS No. 157 is effective for us
beginning August 1, 2009, the beginning of our 2010 reporting
periods. We are currently assessing the impact of the adoption of FSP
SFAS No. 157-2 on our results of operations, cash flows and financial
position.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Liabilities — Including an Amendment of FASB Statement No.
115, which permits an entity to choose to measure many financial
instruments and certain other items at fair value. Most of the
provisions of SFAS No. 159 are elective; however the amendment to SFAS No. 115
applies to all entities with available-for-sale and trading
securities. The FASB’s stated objective in issuing the standard is to
improve financial reporting by entities by providing them with the opportunity
to mitigate volatility in reported earnings caused by measuring related assets
and liabilities differently without having to apply complex hedging accounting
provisions. The provisions of SFAS No. 159 are effective for us on
August 1, 2008, the beginning of our 2009 reporting periods. We have
chosen not to adopt the fair value measurement provisions of SFAS No. 159, so
the impact of SFAS No. 159 will not have a significant impact on our results of
operations, cash flows and financial position.
In
June 2009, the FASB issued SFAS No. 168, The Accounting Standards Codification
TM and the
Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB
Statement No. 162. On the effective date of this statement, FASB Accounting Standards Codification™
(ASC) becomes the source of authoritative U.S. accounting and reporting
standards for nongovernmental entities, in addition to guidance issued by the
Securities and Exchange Commission (SEC). At that time, FASB ASC will supersede
all then-existing, non-SEC accounting and reporting standards for
nongovernmental entities. Once effective, all other nongrandfathered, non-SEC
accounting literature not included in FASB ASC will become nonauthoritative.
FASB Statement No. 168 flattens the generally accepted accounting principles
(GAAP) hierarchy to two levels: one that is authoritative (in FASB ASC) and one
that is nonauthoritative (not in FASB ASC). The statement is effective for us on
financial statements issued for interim and annual periods ending after
September 15, 2009. The company will adopt this provision beginning August 1,
2009.
48
NOTE 3 –
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, COMMISSIONS PAYABLE TO BROKERS
AND ACCRUED COMMISSIONS TO BROKERS
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.
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, 2008
was 1 business day. In 2008, our operating cycle and accounting cycle
both ended on July 31, 2008. Therefore, commissions earned for that
operating cycle were known and payable.
NOTE 4 –
NOTES RECEIVABLE - CORPORATE OFFICE SALES
During
2004, we sold five corporate-owned offices to franchisees and an independent
licensed broker. We facilitated these sales by issuing notes
receivable to the buyers for part of the purchase prices. In the
first quarter of 2007, one of these offices was sold to another broker by the
existing broker. We settled the note receivable from this office from
the selling broker for $328 in cash and recorded a reserve of $65 on the
note. During 2007, we refinanced a note receivable at current market
rates, extended the termination dates on some notes receivable and modified the
periodic payments accordingly.
In the
first quarter of 2008, we purchased a membership list, representing
approximately two thousand member businesses, from Intagio (see Note 10 –
Acquisitions). These new member businesses are located
primarily in six regions in the United States, four of which were previously not
served by existing Brokers. We retained three of these regions as new corporate
owned offices. We combined and sold two of the regions we acquired in
the Intagio asset purchase to an existing franchisee for $100 ITEX dollars plus
$260 USD composed of a one-time payment of $50 and a note receivable for $210
with a term of approximately seven years. Additionally, we sold a
region acquired in the Intagio asset purchase for $200 to an existing franchisee
who already had one of the notes receivable issued in 2004. Operating
cycle payments remain the same on the note, but we extended the term to account
for the $200 purchase price. Originally, the payoff date of the note
was scheduled to be 2009, but after the sale, the payoff date of the note
increased to 2011. We increased the principal due on that note by the
present value of the payments equal to $184.
The
aggregate total owed to us on July 31, 2009 is $866. Balances owed
range from $9 to $283. Payoff dates for the loans are scheduled
between 2010 and 2016.
49
Original Principal
Balance on 2004
Notes
|
Principal Additions
in 2009
|
Balance Receivable
at
July 31, 2009
|
Current Portion
|
Long-Term
Portion
|
|||||||||||
$
|
2,695
|
$ | - | $ | 866 | $ | 242 | $ | 624 |
The
activity for corporate office receivables was as follows:
Balance
at July 31, 2007
|
$ | 882 | ||
Additions
from sales of Intagio regions
|
394 | |||
Interest
income at stated rates
|
66 | |||
Imputed
interest income
|
12 | |||
Payments
received
|
(264 | ) | ||
Balance
at July 31, 2008
|
$ | 1,090 | ||
Interest
income at stated rates
|
41 | |||
Imputed
interest income
|
12 | |||
Payments
received
|
(277 | ) | ||
Balance
at July 31, 2009
|
$ | 866 |
NOTE 5 -
PROPERTY AND EQUIPMENT
The
following table summarizes property and equipment:
July 31, 2009
|
||||||||||||||
Fixed Asset Type
|
Estimated
Useful Life
|
Cost
|
Accumulated
Depreciation
|
Net Book
Value
|
||||||||||
Computers
|
3
years
|
$ | 267 | $ | (119 | ) | $ | 148 | ||||||
Software
|
3
years
|
79 | (50 | ) | 29 | |||||||||
Equipment
|
7
years
|
64 | (39 | ) | 25 | |||||||||
Furniture
|
7
years
|
65 | (32 | ) | 33 | |||||||||
Leasehold
Improvements
|
3.3
years
|
52 | (40 | ) | 12 | |||||||||
$ | 527 | $ | (280 | ) | $ | 247 |
July 31, 2008
|
||||||||||||||
Fixed Asset Type
|
Estimated
Useful Life
|
Cost
|
Accumulated
Depreciation
|
Net Book
Value
|
||||||||||
Computers
|
3
years
|
$ | 178 | $ | (72 | ) | $ | 106 | ||||||
Software
|
3
years
|
60 | (31 | ) | 29 | |||||||||
Equipment
|
7
years
|
24 | (13 | ) | 11 | |||||||||
Furniture
|
7
years
|
13 | (11 | ) | 2 | |||||||||
Leasehold
Improvements
|
3.3
years
|
52 | (24 | ) | 28 | |||||||||
$ | 327 | $ | (151 | ) | $ | 176 |
50
We
depreciate property and equipment using the straight-line method over the
assets’ estimated useful lives. Depreciation expense for property and
equipment was $121 and $49 for the years ending July 31, 2009 and 2008,
respectively.
In the second quarter of 2007, we
relocated our principal executive offices. Prior to our relocation,
we made $52 in improvements to our new location. We amortize these
leasehold improvements using the straight-line method over the term of the
lease. Amortization expense for leasehold improvements was $16 and
$16 for the years ending July 31, 2009 and 2008, respectively.
NOTE 6 –
INTANGIBLE ASSETS
We acquired a membership list as part of our acquisition
of BXI in the fourth quarter of 2005. We acquired an additional
membership list from a franchisee in the fourth quarter of 2007. In
connection with our asset acquisition from Intagio in the first quarter of 2008
and ATX The Barter Company in the third quarter of 2008 (see Note
10 – Acquisitions), we acquired additional membership lists and
non-compete agreements. We subsequently sold part of the membership
list acquired from Intagio. Changes in the carrying amount of the
intangible assets are summarized as follows:
Membership
Lists
|
Non-Compete
Agreement
|
Trade
Name
|
Total Intagible
Assets
|
|||||||||||||
Balance
as of July 31, 2007
|
$ | 991 | $ | - | $ | - | $ | 991 | ||||||||
Additions
from the Intagio acquisition
|
1,350 | 210 | 1,560 | |||||||||||||
Sales
of certain regions acquired in the Intagio acquisition
|
(213 | ) | - | (213 | ) | |||||||||||
Additions
from the ATX Barter acquisition
|
231 | 81 | 312 | |||||||||||||
Amortization
|
(441 | ) | (116 | ) | (557 | ) | ||||||||||
Balance
as of July 31, 2008
|
$ | 1,918 | $ | 175 | $ | - | $ | 2,093 | ||||||||
Additions
from the Intagio acquisition
|
80 | 4 | 20 | 104 | ||||||||||||
Amortization
|
(487 | ) | (136 | ) | (2 | ) | (625 | ) | ||||||||
Balance
as of July 31, 2009
|
$ | 1,511 | $ | 43 | $ | 18 | $ | 1,572 |
The
following schedule outlines the expected intangible related amortization expense
over the respective lives:
Year
ending July 31,
|
Membership
List
Amoritization
|
Non-Compete
Agreement
Amoritization
|
Trade
Name
|
Total
Amortization
|
||||||||||||
2010
|
488 | 27 | 2 | 517 | ||||||||||||
2011
|
467 | 16 | 2 | 485 | ||||||||||||
2012
|
239 | - | 2 | 241 | ||||||||||||
2013
|
238 | - | 2 | 240 | ||||||||||||
2014
|
79 | - | 2 | 81 | ||||||||||||
Thereafter
|
- | - | 8 | 8 | ||||||||||||
Total
|
$ | 1,511 | $ | 43 | $ | 18 | $ | 1,572 |
51
NOTE 7 -
NOTES PAYABLE AND LINE OF CREDIT
On August
1, 2007, we incurred a $1,137 note payable to The Intagio Group, Inc. in the
form of a senior subordinated secured promissory note (see Note
10 – Acquisitions) with interest at 8.0% and repayments in 24 equal
monthly installments. Our total principal repayments during 2009 and
2008 were $591 and $546 respectively leaving an outstanding balance as of July
31, 2009 of $0.
We have a
revolving credit agreement to establish a $1.5 million line of credit facility
from our primary banking institution at libor plus 2%. The maturity
date of this short-term debt facility is November 30, 2009. During
2008, we borrowed and repaid $300 to fund the Intagio asset acquisition (see Note
10 – Acquisitions). Additionally, we borrowed and repaid
$0 and $210 in 2009 and 2008, respectively, to meet our short term cash flow
needs. There is no outstanding balance under this line of credit as
of July 31, 2009. We may utilize this credit facility for short-term
needs in the future.
On August
1, 2008, we incurred a $688 note payable to The Intagio Group, Inc. in the form
of a senior subordinated secured promissory note with interest at 8.0% and
repayments in 11 equal monthly installment payments of $65,000. The
note was in connection to the acquisition from Intagio of certain assets of a
media services company. In November 2008, the purchase consideration was
adjusted by a mutual agreement between the buyer and the seller. The promissory
note original principal balance was reduced by $50,000 to $638,000 and the
remaining reduced balance was paid in full in November 2008.
NOTE 8 -
COMMITMENTS
The
Company leases office space under non-cancelable operating leases. Lease
commitments include leases for the Company’s corporate headquarters in Bellevue,
Washington, and corporate owned offices in Chicago, Illinois and Cleveland,
Ohio. Those leases expire between April 2010 and October 2011. The
rent for the Company’s office in Cleveland, Ohio, was paid in part in ITEX
dollars until June 1, 2009.
As
of July 31, 2009, the future minimum commitments under these operating leases
are as follows:
Executive office
|
Corp owned office
|
Corp owned office
|
Total
|
|||||||||||||
Location:
|
Bellevue,
WA
|
Chicago,
IL
|
Solon,
Ohio
|
|||||||||||||
Expiration
date:
|
April
30, 2010
|
October
31, 2011
|
May
31, 2011
|
|||||||||||||
Lease commitments
for the year ending
July 31,
|
|
|
|
|
||||||||||||
2010
|
$ | 116 | $ | 110 | $ | 17 | $ | 243 | ||||||||
2011
|
- | 112 | 14 | 126 | ||||||||||||
2012
|
- | 29 | - | 29 | ||||||||||||
Total
|
$ | 116 | $ | 251 | $ | 31 | $ | 398 |
The lease
expense for our executive office space and corporate owned offices for the years
ended July 31, 2009 and 2008 was $320 and $232, respectively.
We have
not leased any equipment in 2009 or 2008.
52
We have
purchase commitments for telecommunications and data
communications. As of July 31, 2009, the future minimum commitments
under these purchase commitments are as follows:
Telecommunications
and data
communications
|
||||
Purchase commitments for
the year ending July 31,
|
||||
2010
|
$ | 43 | ||
2011
|
15 | |||
Total
|
$ | 58 |
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, in accordance
with APB 29, were
recorded at the cost basis of the trade dollars surrendered, which we have
determined to be zero.
In 2009
and 2008, we utilized ITEX dollars on certain products and services for
corporate purposes such as legal, consulting and marketing
services. 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, 2009 and
2008 (in thousands):
Year
ended July 31,
|
||||||||
2009
|
2008
|
|||||||
Revenue:
|
||||||||
Marketplace
and other revenue
|
$ | 264 | $ | 225 | ||||
Costs
and expenses:
|
||||||||
Cost
of Marketplace revenue
|
- | - | ||||||
Corporate
salaries, wages and employee benefits
|
3 | 1 | ||||||
Selling,
general and administrative
|
261 | 224 | ||||||
Depreciation
and amortization
|
- | - | ||||||
264 | 225 | |||||||
Income
from operations
|
- | - |
We do not
include any ITEX dollar amounts on our Consolidated Balance Sheets or
Consolidated Statement of Stockholders’ Equity and we do not include any ITEX
dollar activities on our Consolidated Statement of Cash Flows.
53
NOTE 10 —
ACQUISITIONS
Intagio
Media
On August
1, 2008, ITEX acquired from The Intagio Group, Inc. (“Intagio”) certain assets
of a media services company. The advertising and media sector is
currently the largest component of transaction volume in the ITEX
marketplace. This acquisition allows the Company to expand its
service offerings by providing an “in-kind” payment option for hospitality firms
in funding their media campaigns.
At the
time of purchase, on August 1, 2008, the total original consideration consisted
of $68 in cash and a secured promissory note in the amount of $688 due to the
seller with the interest rate of 8.00% payable in eleven equal monthly payments
of $65.
On
November 10, 2008, the purchase consideration was adjusted by a mutual agreement
between Intagio and the Company. The promissory note original principal balance
was reduced by $50 to $638 and the Company agreed to pay immediately the full
amount of the remaining outstanding balance of the note. During the quarter
ended October 31, 2008, the Company made three monthly installment payments of
$65 on this note. The remaining balance of $454 was paid in full on November 10,
2008. There was no balance outstanding as of July 31, 2009.
The
following table summarizes the estimated fair value of the assets acquired and
liabilities assumed in this business acquisition, giving the effect of the
purchase consideration adjustment as of November 10, 2008 (in
thousands):
Purchase Price
Consideration
|
||||
Cash
paid to Intagio
|
$ | 68 | ||
Notes
payable to Intagio, as adjusted on November 10, 2008
|
638 | |||
Total
consideration paid
|
$ | 706 | ||
Fair Value of the Net Assets
Acquired
|
||||
Advertising
credits
|
$ | 538 | ||
Office
equipment
|
85 | |||
Accounts
receivable
|
71 | |||
Membership
list
|
80 | |||
Trade
name
|
20 | |||
Lease
security deposit
|
17 | |||
Noncompetition
agreement
|
4 | |||
Less:
Liabilities assumed
|
(109 | ) | ||
Net
assets acquired
|
$ | 706 |
The
expected lives of the membership list, trade name and noncompetition agreement
are ten years, ten years and one year, respectively. At the closing,
ITEX paid Intagio the $68 cash purchase price as well as an accelerated final
payment of $150 to satisfy, in full, its maximum post-closing contingent
consideration resulting from the previous acquisition made from Intagio in
August of 2007.
54
Pro
forma results
If we had
acquired the Intagio media services company on August 1, 2007, our pro forma
combined results of operations would have been (in thousands, except per share
data):
Year ended July 31,
2008
|
||||
Revenues
|
$ | 16,454 | ||
Net
income
|
$ | 1,017 | ||
Net
income per share
|
||||
Basic
|
$ | 0.06 | ||
Diluted
|
$ | 0.06 |
ATX the Barter
Company
On
February 1, 2008, in order to increase our Marketplace member base, we acquired
from ATX The Barter Company, Inc. (“ATX The Barter Company”) certain assets of a
commercial trade exchange network including a membership list of approximately
four hundred member businesses. These new member businesses are
located in or near Cleveland, Ohio. The total acquisition cost,
funded from our existing cash balances, included:
|
a)
|
USD
in the amount of $325 paid to ATX The Barter
Company
|
|
b)
|
Third
party acquisition related costs of
$9
|
The
following table summarizes the purchase consideration and fair values of the
assets acquired at the date of acquisition:
Purchase Price
Consideration
|
||||
Cash
paid to ATX Barter
|
$ | 325 | ||
Acquisition
costs
|
9 | |||
Total
consideration paid
|
$ | 334 | ||
Assets Acquired
|
||||
Membership
list
|
$ | 231 | ||
Non-compete
agreement
|
81 | |||
Accounts
receivable
|
17 | |||
Goodwill
|
5 | |||
Total
assets
|
$ | 334 |
We have
included the results of operations for ATX The Barter Company in our financial
statements since February 1, 2008. We will amortize the membership
list over a period of six years and the non-compete agreement over three
years.
55
Intagio
On August
1, 2007, in order to increase our Marketplace member base, we acquired from The
Intagio Group, Inc. (“Intagio”) certain assets of a commercial trade exchange
network including a membership list of approximately two thousand member
businesses. These new member businesses are located primarily in six
regions in the United States, four of which were previously not served by
existing Brokers. The total acquisition cost included:
|
1.
|
USD
in the amount of $2,000 paid to
Intagio
|
|
2.
|
Third
party acquisition related costs of
$47
|
|
3.
|
A
secured promissory note in the amount of $1,137 due to the seller with
interest at the rate of 8.00% and twenty-four equal monthly payments of
$51.
|
|
4.
|
If
and to the extent we achieve certain revenue targets during the four
quarters beginning August 1, 2008, additional USD payments totaling up to
$150.
|
To fund
the $2,000 USD payment, we utilized $1,700 from our cash and cash equivalent
balances and borrowed $300 on our line of credit. During the first
quarter of 2008, we repaid the $300 balance on our line of credit in full and
there was no balance outstanding as of July 31, 2009.
After the
acquisition of the Intagio membership list, we sold three of the newly acquired
regions to two existing franchisees in two separate transactions. On
August 1, 2007, we sold the greater New York City region comprised of
approximately 200 former Intagio member businesses to our existing franchisee in
New Jersey for $200. We financed the entire sales price by adding the
present value of the payments, $184, to an existing note receivable from the
franchisee. We modified the repayment terms accordingly to repay the
entire balance in equal payments through 2011. We recorded a
reduction of goodwill and membership lists and did not record a gain or loss on
this transaction.
On August
20, 2007, we sold the Connecticut and Massachusetts regions comprised of
approximately 500 former Intagio member businesses to our existing franchisee in
Connecticut for $260. We received $50 of the purchase price in USD
and financed the remaining $210 at 7.5% interest with payments in equal
installments through 2014. We recorded a reduction of goodwill and
membership lists and did not record a gain or loss on this
transaction.
The
following table summarizes the purchase consideration and fair values of the
assets acquired at the date of acquisition:
Purchase Price
Consideration
|
||||
Cash
paid to Intagio
|
$ | 2,000 | ||
Acquisition
costs
|
47 | |||
Notes
payable assumed
|
1,137 | |||
Total
consideration paid
|
$ | 3,184 | ||
Assets Acquired
|
||||
Membership
list
|
$ | 1,350 | ||
Non-compete
agreement
|
210 | |||
Accounts
receivable
|
137 | |||
Goodwill
|
1,513 | |||
Advance
payments
|
(26 | ) | ||
Total
assets
|
$ | 3,184 |
We have
included the results of operations for Intagio in our financial statements since
August 1, 2007. We will amortize the membership list over a period of
six years and the non-compete agreement over two years.
56
In
accordance with SFAS No. 141, Business Combinations, in the
above three acquisitions, we assigned all of the acquired identifiable assets
and liabilities a portion of the cost of the acquisition based on their
respective fair values. In our allocation of purchase price to all
identifiable assets acquired in connection with both acquisitions, we evaluated
various criteria and assumptions. When estimating the fair value for
all identifiable intangible assets acquired in connection with these
acquisitions, our evaluation included the preparation of financial projections,
supporting financial data and consideration of a number of factors, including,
in the case of the Intagio acquisition, the analysis of a third-party valuation
firm. We provided the third-party valuation firm with the data and
analysis we utilized in our evaluation, and we reviewed drafts of their
conclusions prior to making the allocations. We are responsible for
the appropriateness of the estimated fair values allocated to the identifiable
intangible assets including membership lists, non-compete agreements and
goodwill.
NOTE 11 —
LEGAL PROCEEDINGS
In June
2003, a former Broker filed a complaint against us for wrongful termination of
his brokerage agreement and breach of contract in connection with the
termination of plaintiff's brokerage in 1999 (Bruce Kamm v. ITEX
Corporation, Supreme Court of the State of New York County of New York,
Index No.: 602031/2003). Plaintiff sought damages against us in the
amount of $5,000 and a preliminary injunction enjoining us from selling a New
York office, previously managed by plaintiff, to any person, company or
entity. In July 2003, the Court denied plaintiff's motion for a
preliminary injunction. Plaintiff failed to prosecute the action,
and, in May 2004, the Court administratively dismissed the
action. During September 2005, the Court granted a motion from
plaintiff to vacate the dismissal of his action and for leave to amend the
complaint. On or about October 12, 2005, we were served with an
amended complaint stating claims of breach of contract, wrongful termination of
the brokerage agreement and breach of covenant of good faith and fair dealing
and seeking damages in the amount of $30,000 plus attorneys' fees. In
November 2005, we filed a motion to dismiss the action for lack of subject
matter jurisdiction pursuant to a forum selection clause in the contract between
the parties requiring litigation be filed in Oregon. Our motion to
dismiss was granted on December 12, 2005. In June 2006, plaintiff
re-filed in the Circuit Court of the State of Oregon, (Bruce Kamm and Invision LTD v. ITEX
Corporation, Case No. 0606-05949), stating claims of breach of
contract and breach of covenant of good faith and fair dealing and seeking
damages in the amount of $30,000 plus attorneys’ fees. A trial date
has been set in April 2010. We believe the termination of plaintiff's
brokerage was for proper cause.
We will
vigorously defend against the lawsuit discussed above. While it is
not feasible to predict the exact outcome of the proceedings, in our opinion,
the foregoing proceeding should ultimately result in any liability that would
have a material adverse effect on our results of operations, cash flows or
financial position. We have not established any reserves for any
potential liability relating to the foregoing litigation
matter. However, litigation is subject to inherent uncertainties and
unfavorable rulings could occur. If so, it could have a material
adverse impact on our Consolidated Financial Statements in future
periods.
From time
to time we are subject to claims and litigation incurred in the ordinary course
of business. In our opinion, the outcome of other pending legal
proceedings, separately and in the aggregate, will not have a material adverse
effect on our business operations, results of operations, cash flows or
financial condition.
NOTE 12 –
SHARE-BASED PAYMENTS
In March
2004 the Company adopted the ITEX Corporation 2004 Equity Incentive Plan (the
"2004 Plan"), for which 2 million shares of common stock have been authorized
for issuance. The 2004 Plan provides for the grant of incentive and nonqualified
stock options, restricted stock, and stock bonuses to the Company's employees,
directors, officers or consultants.
57
195 and
285 shares remained available for future grants under the 2004 Plan for the
years ended July 31, 2009 and 2008, respectively.
In
December 2008, 90,000 shares of restricted common stock, valued at the grant
date stock price of $0.425, were issued to the Company’s three directors as
compensation for their services for the calendar year ending December, 31, 2009.
Those shares vest over calendar year ending December 31, 2009 in twelve equal
monthly installments.
In
December 2007, 90 shares of fully vested shares of common stock , valued at
$0.94 per share, were issued to the Company’s three directors, in equal amounts
of 30 shares each, as compensation for their services for the
calendar year ending December, 31, 2008, which is considered a requisite service
period over which the grants will be amortized. The grants to the Company’s
directors are amortized over their respective requisite services periods of one
year.
In July
2006, the Company issued 340 restricted shares to the Company’s CEO and a
certain employee, valued at the grant date stock price of $0.59 per share, with
the vesting period of 3 years from the date of grant. Those grants are amortized
over their respective requisite services periods of three years.
In
addition to stock issued under the 2004 Plan to employees and directors, in
March 2008, the Company granted 100 fully vested warrants to a vendor in
exchange for investment advisory and financial communication assistance, valued
at $66, based on the Black Scholes valuation model and amortized over the
contractual service period of thirteen months.
We
account for share-based compensation in accordance with the provisions of SFAS
No. 123(R), Share-Base
Payment. Under the fair value recognition provisions of SFAS
No. 123(R), we estimate share-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.
In
December 2008, 90 shares of restricted common stock, valued at the grant date
stock price of $0.425,
were issued to the Company’s three directors as compensation for their services
for the calendar year ending December, 31, 2009. Those shares vest over calendar
year ending December 31, 2009 in twelve equal monthly installments. The fair
value of these shares as of the grant date was $38.
In
December 2007, 90 shares of fully vested shares of common stock , valued at
$0.94
per share, were issued to the Company’s three directors, in equal amounts of 30
shares each, as compensation for their services for the calendar year
ending December, 31, 2008, which is considered a requisite service period. The
grants to the Company’s directors are amortized over their respective requisite
services periods of one year. The fair value of these shares as of the grant
date was $85.
58
The
following table summarizes the components of stock based
compensation:
2009
|
2008
|
|||||||
Employee
Compensation
|
62 | 67 | ||||||
Board
Compensation
|
$ | 58 | $ | 95 | ||||
Warrants
issued to IR Firm
|
41 | 25 | ||||||
Totals
|
$ | 161 | $ | 187 |
As of
July 31, 2009, there are 195 shares available for future grants under the 2004
Plan.
Number of Shares/Options
|
||||||||||||
Available
|
Shares Granted
|
Options Granted
|
||||||||||
Balance,
July 31, 2006
|
495 | 1,505 | - | |||||||||
Granted
|
(120 | ) | 120 | - | ||||||||
Forfeited
|
- | - | - | |||||||||
Balance
at July 31, 2007
|
375 | 1,625 | - | |||||||||
Granted
|
(90 | ) | 90 | - | ||||||||
Forfeited
|
- | - | - | |||||||||
Balance
at July 31, 2008
|
285 | 1,715 | - | |||||||||
Granted
|
(90 | ) | 90 | - | ||||||||
Forfeited
|
- | |||||||||||
Balance,
July 31, 2009
|
195 | 1,805 | - | |||||||||
Vesting
as of July 31, 2009
|
||||||||||||
Shares
Vested
|
1,767 | - | ||||||||||
Shares
Unvested
|
38 | - | ||||||||||
Balance
at July 31, 2009
|
1,805 | - |
During
2008, we retained an outside company for investment advisory and financial
communications assistance. As partial compensation, we granted the
company 100 warrants with a seven year life. We calculated the fair
value of these warrants using the Black-Scholes model with the following
assumptions:
Assumptions
|
||||
Contractual
life (in years)
|
7 | |||
Annualized
volatility
|
73.09 | % | ||
Dividend
rate
|
0 | % | ||
Average
risk free interest rate
|
2.93 | % |
We
determined the fair value of these warrants was $66. We defer the
fair value of the warrant issued and amortized the expense over the contractual
service period of thirteen months.
The
stock-based compensation expense, including the warrant issued to a
non-employee, charged against the results of operations was as follows (in
thousands):
59
Year ended July 31,
|
||||||||
2009
|
2008
|
|||||||
Stock-based
compensation expense included in:
|
||||||||
Corporate
salaries, wages and employee benefits
|
$ | 62 | $ | 67 | ||||
Selling,
general and administrative
|
99 | 120 | ||||||
Total
stock-based compensation expense
|
161 | 187 |
At July
31, 2009, 35 shares of common stock granted under the 2004 Plan remained
unvested. At July 31, 2009, the Company had $16 of unrecognized compensation
expense, expected to be recognized over a weighted-average period of
approximately 5 months.
NOTE 13 -
STOCKHOLDERS’ EQUITY
In addition to our common stock activity described in
Note
12 –
Share-Based
Compensation, to reduce the number of shares of
our common stock outstanding, we repurchased a total of 50 and 203 shares of
ITEX common stock in 2009, 2008, respectively.
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 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, 2009, we had NOLs of approximately $16,135 available to offset future
taxable income. These are composed of approximately $14,230 from ITEX
operating losses and approximately $1,905 from BXI operating
losses. SFAS No. 109 requires the future utilization to be recorded
as a deferred tax asset if management believes if 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 2009, we performed an
assessment of our available NOLs because of an additional year of increased
profitability. In that assessment, we concluded that it was more likely than not
that additional NOLs would result in realizable deferred tax
assets. As of July 31, 2009 and 2008, we have no valuation allowance
on available Federal NOLs.
60
The
deferred tax assets recorded represent our estimate of all deferred tax benefits
to be utilized in the current year and future periods beyond
2009. The following table reflects the reconciliation of the
company’s income tax expense:
Year
Ended July 31,
|
||||||||
2009
|
2008
|
|||||||
Pre-tax
financial income
|
$ | 1,027 | $ | 1,517 | ||||
Federal
tax expense computed at the statutory rate of 34%
|
349 | 516 | ||||||
State
tax expense
|
54 | 81 | ||||||
Change
in valuation allowance
|
- | - | ||||||
Permanent
and other differences
|
18 | (14 | ) | |||||
Net
tax expense
|
$ | 421 | $ | 583 |
Our
income tax benefit is composed of the following:
Year
Ended July 31,
|
||||||||
2009
|
2008
|
|||||||
Deferred
tax expense
|
$ | (343 | ) | $ | (469 | ) | ||
Federal
tax expense
|
(21 | ) | (30 | ) | ||||
State
tax expense
|
(57 | ) | (84 | ) | ||||
Net
tax expense
|
$ | (421 | ) | $ | (583 | ) |
The tax
effects of temporary differences that give rise to significant portions of
deferred tax assets and liabilities at July 31, 2009 and 2008 are presented
below:
61
July
31,
|
||||||||
2009
|
2008
|
|||||||
Deferred
tax assets:
|
||||||||
Tax
deductible BXI goodwill
|
$ | 522 | $ | 611 | ||||
Net
operating loss carryforwards
|
5,899 | 6,198 | ||||||
Reserve
for uncollectible receivables
|
125 | 126 | ||||||
Other
temporary differences
|
167 | 245 | ||||||
$ | 6,713 | $ | 7,180 | |||||
Deferred
Tax Liabilities
|
||||||||
Membership
lists not deductible for tax
|
$ | 169 | $ | 253 | ||||
Media
Intangibles
|
1 | - | ||||||
Unearned
stock compensation
|
6 | 47 | ||||||
$ | 176 | $ | 300 | |||||
Net
deferred tax asset before valuation allowance
|
$ | 6,537 | $ | 6,880 | ||||
Valuation
allowance
|
- | - | ||||||
Net
deferred tax asset
|
$ | 6,537 | $ | 6,880 |
The
following components are included in net deferred tax assets in the accompanying
balance sheets:
Current
Deferred Tax Assets
|
||||||||
Current
deferred tax asset
|
$ | 745 | $ | 866 | ||||
Current
deferred tax liability
|
(6 | ) | (47 | ) | ||||
Valuation
allowance
|
- | - | ||||||
Net
current deferred tax asset
|
$ | 739 | $ | 819 | ||||
Non-Current
Deferred Tax Assets
|
||||||||
Non-current
deferred tax asset
|
$ | 5,968 | $ | 6,314 | ||||
Non-current
deferred tax liability
|
(170 | ) | (253 | ) | ||||
Valuation
allowance
|
- | - | ||||||
Net
non-current deferred tax asset
|
$ | 5,798 | $ | 6,061 |
ITEX
Federal NOLs of approximately $14,230 expire, if unused, from 2018 to
2023. BXI Federal NOLs of approximately $1,905 expire, if unused,
from 2020 to 2024 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 $4,444 which, if
unused, expire from 2012 to 2015. Additionally, we have AMT credits
of $108 available to offset future taxes payable.
On August
1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109 (“FIN
48”). As of July 31, 2009, in accordance with FIN 48, we have
recorded unrecognized tax benefits of $236 as follows:
62
Year
Ended July 31,
|
||||
2009
|
||||
Balance
at July 31, 2008
|
$ | 193 | ||
Increases
as a result of tax positions taken during 2009
|
- | |||
Increases
as a result of tax positions taken in prior years
|
43 | |||
Balance
at July 31, 2009
|
$ | 236 |
We file
income tax returns in the United States and Canadian federal jurisdictions as
well as various United States state jurisdictions. The tax years that
remain subject to examination are 2005 through 2008 in the United
States. We also have available NOLs dating from 1998 which could be
subject to examination by taxing authorities. The tax years that
remain subject to examination in Canada are 2002 through 2008. We do
not believe there will be any material changes in our unrecognized tax positions
over the next twelve months.
As of
July 31, 2009, accrued expenses for uncertain tax positions related primarily to
state jurisdictions on our consolidated balance sheet of $236 included $59 for
interest and penalties associated with unrecognized tax benefits.
NOTE 15 –
401(k) SAVINGS PLAN
Effective
January 1, 2006, we established a 401(k) plan offered to all of our full-time
employees. Eligible employees may contribute, through payroll
deductions, up to the statutory limits. We match each dollar a
participant contributes with a maximum contribution of six percent (6.0%) of a
participant’s eligible compensation. We contributed approximately $82
and $67 to the plan during 2009 and 2008, respectively.
NOTE 16 –
GOODWILL
As a
result of our acquisition of BXI in 2005, we recorded $1,689 in
goodwill. In 2008, we recorded an additional $1,513 in goodwill as a
result of our asset purchase from Intagio which included $47 in acquisition
costs. We subsequently reduced goodwill by $231 for sales of certain
assets to existing franchisees (see Note
10 – Acquisitions). Pursuant to the terms of the BXI
Agreement of Merger dated June 30, 2005, to the extent we and our subsidiaries
(including BXI) achieve certain revenue targets during the first twelve full
quarters following the signing of the Merger Agreement, a maximum of $450
additional payments may be payable based on earnings over these quarters (“BXI
earnout”). The BXI earnout is calculated on quarterly revenue in
excess of $3,000 less certain legal expenses. The maximum quarterly
BXI earnout payment before deductions is $38. The BXI earnout
payments can be reduced by one half of the amount we spend to satisfy certain
BXI legal claims we assumed. Pursuant to the terms of the Asset
Purchase Agreement dated July 25, 2007 with Intagio, we entered into an
additional, but separate, earnout agreement with all of the same provisions of
the BXI earnout except for the term and the payment reduction for amounts spent
on legal claims (“Intagio earnout”). The Intagio earnout is not
concurrent with the BXI earnout. Instead, the Intagio earnout period
begins when the BXI earnout ends on July 31, 2008. The Intagio
earnout term is four full quarters ending July 31, 2009.
As of
July 31, 2008, we completed all earnout payments on the BXI
earnout. Total BXI earnout payments we have made since the
acquisition were $301. On August 1, 2008, we entered into a new
agreement with Intagio to purchase certain assets of a media services business.
At Closing, we paid Intagio the purchase price for the August 1, 2008
transaction as well as a prepayment of $150 to satisfy, in full, our maximum
post-closing obligation to Intagio for the Intagio earnout. After
this payment, we have no further earnout obligations to
Intagio.
63
Changes
to goodwill were as follows:
Year Ended July 31,
|
||||||||
2009
|
2008
|
|||||||
Beginning
balance
|
$ | 3,168 | $ | 1,740 | ||||
Adjustments
for BXI legal claims
|
- | (9 | ) | |||||
Additions
from the Intagio acquisition
|
- | 1,513 | ||||||
Sales
of certain regions acquired in the Intagio acquistion
|
- | (231 | ) | |||||
Additions
from the ATX Barter acquisition
|
- | 5 | ||||||
BXI
earnout payment
|
150 | 150 | ||||||
Ending
balance
|
$ | 3,318 | $ | 3,168 |
NOTE 17 –
SELECTED QUARTERLY FINANCIAL RESULTS (unaudited)
Year ended July 31, 2009
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Total
|
|||||||||||||||
Revenues
|
$ | 3,899 | $ | 4,365 | $ | 3,981 | $ | 4,257 | $ | 16,502 | ||||||||||
Operating
costs and expenses
|
3,877 | 4,130 | 3,637 | 3,831 | 15,475 | |||||||||||||||
Operating
income
|
22 | 235 | 344 | 426 | 1,027 | |||||||||||||||
Other
income - net
|
(2 | ) | 7 | 12 | (16 | ) | 1 | |||||||||||||
Income
before taxes
|
20 | 242 | 356 | 410 | 1,028 | |||||||||||||||
Income
tax expense
|
(25 | ) | 108 | 132 | 206 | 421 | ||||||||||||||
Net
income
|
$ | 45 | $ | 134 | $ | 224 | $ | 204 | $ | 607 | ||||||||||
Net
income per common share
|
||||||||||||||||||||
Basic
|
$ | - | $ | 0.01 | $ | 0.01 | $ | 0.01 | $ | 0.03 | ||||||||||
Diluted
|
$ | - | $ | 0.01 | $ | 0.01 | $ | 0.01 | $ | 0.03 |
Year ended July 31, 2008
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Total
|
|||||||||||||||
Revenues
|
$ | 3,853 | $ | 4,175 | $ | 3,871 | $ | 4,065 | $ | 15,964 | ||||||||||
Operating
costs and expenses
|
3,581 | 3,693 | 3,463 | 3,726 | 14,463 | |||||||||||||||
Operating
income
|
272 | 482 | 408 | 339 | 1,501 | |||||||||||||||
Other
income - net
|
(1 | ) | 6 | 5 | 6 | 16 | ||||||||||||||
Income
before taxes
|
271 | 488 | 413 | 345 | 1,517 | |||||||||||||||
Income
tax expense (benefit)
|
115 | 175 | 183 | 110 | 583 | |||||||||||||||
Net
income
|
$ | 156 | $ | 313 | $ | 230 | $ | 235 | $ | 934 | ||||||||||
Net
income per common share
|
||||||||||||||||||||
Basic
|
$ | 0.01 | $ | 0.02 | $ | 0.01 | $ | 0.01 | $ | 0.05 | ||||||||||
Diluted
|
$ | 0.01 | $ | 0.02 | $ | 0.01 | $ | 0.01 | $ | 0.05 |
NOTE 18 –
RELATED PARTY TRANSACTIONS
We have periodically engaged related
parties for consulting and contract services. In aggregate, related
party transactions did not exceed $65 in the years ended July 31, 2009 or
2008.
64
NOTE 19 –
SUBSEQUENT EVENTS
The
Company has evaluated known subsequent events through the close of business on
October 13, 2009, the last full business day prior to the public issuance of the
financial statements on which the Company committed to publicly issue the
financial statements.
Subsequent
to July 31, 2009, on September 3, 2009 we amended a promissory note for our
Toronto corporate office sale eliminating the 2010 balloon payment
and extending the maturity date of the Original Promissory Note to
March 15, 2015. In addition, the bi-weekly payment was reduced from $3.5 to
$2.5. As of September 3, 2009, the remaining outstanding principal balance of
the original $435 Promissory note is $294.
65
Item
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
Item
9A(T).
|
CONTROLS
AND PROCEDURES
|
(a)
Disclosure controls and procedures.
Under the supervision and with the
participation of our management, including our Chief Executive Officer, who is
also our interim Chief Financial Officer, we have evaluated the effectiveness of
the design and operation of our disclosure controls and procedures as of the end
of the period covered by this report. Disclosure controls and
procedures are defined under SEC rules as controls and other procedures that are
designed to ensure that information required to be disclosed by a company in
reports that it files under the Exchange Act are recorded, processed, summarized
and reported within the required time periods. Based on that
evaluation, our Chief Executive Officer and interim Chief Financial Officer
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 (as such term is defined in Rule 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934) which are designed to
ensure that information required to be disclosed in the reports we file or
submit under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time specified in the Securities
and Exchange Commission’s rules and forms, and that such information is
accumulated and communicated to our management including our CEO and our CFO, as
appropriate to allow timely decisions regarding required
disclosure.
Management
conducted an assessment of the effectiveness of the Company’s internal control
over financial reporting as of July 31, 2009 based on the framework published by
the Committee of Sponsoring Organizations of the Treadway Commission, referred
to as the Internal Control—Integrated Framework. The objective of
this assessment is to determine whether the Company’s internal control over
financial reporting was effective as of July 31, 2009. Based on its
assessment using the criteria in the Internal Control—Integrated Framework,
management believes that, as of July 31, 2009, the Company’s internal control
over financial reporting was effective.
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 temporary rules of the Securities
and Exchange Commission that permit us to provide only management’s report in
this Annual Report.
There are
inherent limitations to the effectiveness of any system of internal control over
financial reporting. Accordingly, even an effective system of internal control
over financial reporting can only provide reasonable assurance with respect to
financial statement preparation and presentation in accordance with accounting
principles generally accepted in the United States of America. Our internal
controls over financial reporting are subject to various inherent limitations,
including cost limitations, judgments used in decision making, assumptions about
the likelihood of future events, the soundness of our systems, the possibility
of human error and the risk of fraud. Moreover, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with policies or procedures may deteriorate over time.
66
(c)
Changes in internal control over financial reporting.
There
have been 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
|
Compensatory
Arrangements of Certain Officers
In
connection with its annual performance review process, on October 8, 2009, the
Company restructured the compensation of Steven White, Chief Executive
Officer. Mr. White will receive an annual base salary of $250,000 for
serving as CEO. Mr. White is not compensated for his services as
interim Chief Financial Officer. Mr. White will no longer receive separate
compensation for his service on the Board of Directors or receive a matching
401(k) employer contribution of up to 6.0% of his eligible
compensation. As incentive compensation, Mr. White was granted
195,000 shares of restricted common stock of the Company to be issued under the
ITEX Corporation 2004 Equity Incentive Plan. The restricted shares vest over a
three-year period, subject to immediate vesting upon the occurrence of a
change in control or the CEO’s termination. Mr. White and the Company
previously entered into a Change of Control Agreement, the form of which is
filed as Exhibit 10.15 to the Company’s Form 10-Q for the quarter ended January
31, 2008, and is incorporated herein by reference, that entitles him to receive
a payment in connection with a “change of control,” as defined in the agreement,
or change in control events coupled with the loss of his
employment. Mr. White is employed at will.
PART
III
Item
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
Information
with respect to our Directors and executive officers may be found under the
captions “Election of Directors” and “Executive Officers” of our Proxy Statement
for the Annual Meeting of Shareholders (the “Proxy
Statement”). Information about our audit committee financial
expert, audit committee and other committees of the Board may be found
under the caption “Committees of the Board of Directors” in the Proxy Statement.
This information is incorporated herein by reference.
The
information in the Proxy Statement set forth under the caption “Section 16(a)
Beneficial Ownership Reporting Compliance” is also incorporated herein by
reference.
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, including any implicit waiver, from a
provision of the code to our Chief Executive Officer, Chief Financial Officer or
Corporate Controller, we will disclose the nature of such amendment or waiver on
that website or in a report on Form 8-K.
67
Item
11.
|
EXECUTIVE
COMPENSATION
|
The
information in the Proxy Statement set forth under the captions “Executive
Compensation” and “Compensation of Directors” is incorporated herein by
reference.
Item
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER
MATTERS
|
The
information in the Proxy Statement set forth under the captions “Securities
Authorized for Issuance under Equity Compensation Plans” and “Security Ownership
of Certain Beneficial Owners and Management” is incorporated herein by
reference.
Item
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The
information in the Proxy Statement set forth under the captions “Committees of
the Board of Directors” and “Transactions with Related Persons” is incorporated
herein by reference.
Item
14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Information
concerning principal accountant fees and services appears in the proxy statement
under the heading “Fees Paid to Ehrhardt Keefe Steiner & Hottman PC” and is
incorporated herein by reference.
Item
15.
|
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
|
EXHIBIT
INDEX
Incorporated
by Reference
|
||||||||||||
Exhibit
No.
|
Exhibit
Description
|
Form
|
SEC
File
No.
|
Exhibit
|
Filing
Date
|
Filed
Herewith
|
||||||
2.1
|
Agreement
of Merger dated as of June 30, 2005, by and among BXI Exchange, Inc., ITEX
Corporation, BXI Acquisition Sub, Inc., and The Intagio Group,
Inc.
|
8-K
|
000-18275
|
2.1
|
7/06/05
|
|||||||
2.2
|
Asset
Purchase Agreement dated as of July 25, 2007, between ITEX Corporation and
The Intagio Group, Inc.
|
8-K
|
000-18275
|
2.1
|
7/30/07
|
|||||||
2.3
|
Asset
Purchase Agreement dated as of August 1, 2008, between ITEX Corporation
and The Intagio Group, Inc.
|
8-K
|
000-18275
|
2.1
|
8/06/08
|
|||||||
3.1
|
Amended
and Restated Articles of Incorporation of ITEX Corporation
|
10-KSB
|
000-18275
|
3.1
|
11/13/03
|
68
Incorporated
by Reference
|
||||||||||||
Exhibit
No.
|
Exhibit
Description
|
Form
|
SEC
File
No.
|
Exhibit
|
Filing
Date
|
Filed
Herewith
|
||||||
3.2
|
Amended
and Restated Bylaws of ITEX Corporation
|
8-K
|
000-18275
|
3.2
|
12/19/08
|
|||||||
10.1
|
Form
of Indemnification Agreement
|
10-KSB
|
000-18275
|
10.9
|
11/13/03
|
|||||||
10.2
|
Contract
for the Purchase of Toronto Corporate Office and Use of ITEX Client
Information dated August 7, 2003, between ITEX Corporation and NYTO Trade
Incorporated, with Secured Promissory Note and Security
Agreement
|
8-K
|
000-18275
|
10.1
|
10/28/03
|
|||||||
10.3
|
Contract
for the Purchase of New York Corporate Office and Use of ITEX
Client
Information
dated August 7, 2003, between ITEX Corporation and 44 Trade Corporation,
with Secured Promissory Note and Security Agreement
|
8-K
|
000-18275
|
10.2
|
10/28/03
|
|||||||
10.4
|
Contract
for the Purchase of Sacramento Corporate Office and Use of ITEX
Client
Information
dated October 2, 2003, between ITEX Corporation and Direct Business
Exchange of California, Inc., with Secured Promissory Note and Security
Agreement
|
8-K
|
000-18275
|
10.3
|
10/28/03
|
|||||||
10.5
|
ITEX
Corporation 2004 Equity Incentive Plan
|
14A
|
000-18275
|
Appendix
B
|
2/13/04
|
|||||||
10.6
|
Form
of Restricted Stock Agreement
|
8-K
|
000-18275
|
10.1
|
7/10/06
|
|||||||
10.7
|
Sublease
dated as of November 3, 2006
|
8-K
|
000-18275
|
10.1
|
11/17/06
|
|||||||
10.9
|
Amendment
to Loan Agreement and Note, dated as of November 13, 2007
|
10-Q
|
000-18275
|
10.14
|
3/03/08
|
|||||||
10.10
|
Form
of Senior Subordinated Secured Promissory Note of ITEX Corporation to The
Intagio Group, Inc.
|
8-K
|
000-18275
|
10.1
|
7/30/07
|
69
Incorporated
by Reference
|
||||||||||||
Exhibit
No.
|
Exhibit
Description
|
Form
|
SEC
File
No.
|
Exhibit
|
Filing
Date
|
Filed
Herewith
|
||||||
10.11
|
Form
of Security Agreement between ITEX and The Intagio Group,
Inc.
|
8-K
|
000-18275
|
10.2
|
7/30/07
|
|||||||
10.12
|
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
|
|||||||
10.13
|
Form
of Employee Change in Control Agreement
|
10-Q
|
000-18275
|
10.16
|
3/03/08
|
|||||||
10.14
|
Form
of Senior Subordinated Secured Promissory Note of ITEX Corporation to The
Intagio Group, Inc.
|
8-K
|
000-18275
|
10.1
|
8/06/08
|
|||||||
10.15
|
Form
of Security Agreement between ITEX and The Intagio Group,
Inc.
|
8-K
|
000-18275
|
10.2
|
8/06/08
|
|||||||
21
|
The
only subsidiary of ITEX Corporation is BXI Exchange, Inc., a Delaware
corporation
|
|||||||||||
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
|
70
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 14, 2009
|
By:
|
/s/ Steven White
|
|
Steven
White, Chief Executive Officer
|
|||
Interim
Chief Financial Officer
|
|||
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities an on
the dates indicated.
|
|||
Date:
October 14, 2009
|
By:
|
/s/ Steven White
|
|
Steven
White, Chief Executive Officer, Interim
|
|||
Chief
Financial Officer and Chairman of the Board
|
|||
Date:
October 14, 2009
|
By:
|
/s/ John Wade
|
|
John
Wade, Secretary, Treasurer, Director
|
|||
Date:
October 14, 2009
|
By:
|
/s/ Eric Best
|
|
Eric
Best, Director
|
71