UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
10-Q
Mark One)
x |
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period
ended October 31, 2014.
OR
¨ |
Transition report pursuant to 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
(Exact name of registrant as specified in
its charter)
Nevada |
|
93-0922994 |
(State or other jurisdiction of
incorporation or organization) |
|
(IRS Employer
Identification No.) |
3326 160th Ave SE, Suite 100, Bellevue, WA 98008-6418 |
(Address of principal executive offices) |
|
(425) 463-4000 |
|
(Registrant’s telephone number including area code) |
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 x No
¨
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes x No
¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act. (Check one):
|
¨ |
Large accelerated filer |
|
¨ |
Accelerated filer |
|
¨ |
Non-accelerated filer |
|
x |
Smaller reporting company |
|
(Do not check if a smaller
reporting company) |
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨
No x
As of October 31, 2014, we had 2,837,215
shares of common stock outstanding (including unvested restricted stock).
ITEX CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ITEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
| |
October 31, 2014 | | |
July 31, 2014 | |
| |
(unaudited) | | |
| |
ASSETS | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash | |
$ | 4,097 | | |
$ | 3,673 | |
Accounts receivable, net of allowance of $402 and $357 | |
| 655 | | |
| 658 | |
Prepaid expenses | |
| 84 | | |
| 104 | |
Loans and advances | |
| 20 | | |
| 15 | |
Deferred tax asset, net of allowance of $15 | |
| 542 | | |
| 542 | |
Notes receivable | |
| 330 | | |
| 318 | |
Other current assets | |
| 33 | | |
| 30 | |
Total current assets | |
| 5,761 | | |
| 5,340 | |
| |
| | | |
| | |
Property and equipment, net of accumulated depreciation of $424 and $415 | |
| 65 | | |
| 74 | |
Goodwill | |
| 3,191 | | |
| 3,191 | |
Deferred tax asset, net of allowance of $95 and net of current portion | |
| 3,413 | | |
| 3,492 | |
Intangible assets, net of accumulated amortization of $3,284 and $3,270 | |
| 143 | | |
| 157 | |
Notes receivable, net of current portion | |
| 1,044 | | |
| 1,106 | |
Other long-term assets | |
| 9 | | |
| 11 | |
Total assets | |
| 13,626 | | |
| 13,371 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts and other expenses payable | |
| 57 | | |
| 52 | |
Commissions payable to brokers | |
| 251 | | |
| 267 | |
Accrued commissions to brokers | |
| 883 | | |
| 728 | |
Accrued expenses | |
| 324 | | |
| 254 | |
Deferred revenue | |
| 24 | | |
| 32 | |
Advance payments | |
| 106 | | |
| 106 | |
Note payable, current portion | |
| 1 | | |
| 3 | |
Total current liabilities | |
| 1,646 | | |
| 1,442 | |
Total Liabilities | |
| 1,646 | | |
| 1,442 | |
| |
| | | |
| | |
Commitments and contingencies | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’ equity: | |
| | | |
| | |
Common stock, $0.01 par value; 9,000 shares authorized; 2,605 shares and 2,602 shares issued and outstanding, respectively | |
| 26 | | |
| 26 | |
Additional paid-in capital | |
| 25,243 | | |
| 25,222 | |
Stockholder notes receivable | |
| (143 | ) | |
| (161 | ) |
Accumulated deficit | |
| (13,146 | ) | |
| (13,158 | ) |
Total stockholders' equity | |
| 11,980 | | |
| 11,929 | |
Total liabilities and stockholders’ equity | |
$ | 13,626 | | |
$ | 13,371 | |
The accompanying notes are an integral part
of these consolidated financial statements.
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
| |
Three-months ended
October 31, | |
| |
2014 | | |
2013 | |
| |
(unaudited) | |
Revenue: | |
| | | |
| | |
Marketplace revenue and other revenue | |
$ | 3,117 | | |
$ | 3,426 | |
| |
| | | |
| | |
Costs and expenses: | |
| | | |
| | |
Cost of marketplace revenue | |
| 1,923 | | |
| 2,137 | |
Corporate salaries, wages and employee benefits | |
| 445 | | |
| 521 | |
Selling, general and administrative | |
| 516 | | |
| 496 | |
Depreciation and amortization | |
| 23 | | |
| 42 | |
| |
| 2,907 | | |
| 3,196 | |
| |
| | | |
| | |
Income from operations | |
| 210 | | |
| 230 | |
| |
| | | |
| | |
Other income: | |
| | | |
| | |
Interest, net | |
| 24 | | |
| 31 | |
Other income, net | |
| - | | |
| - | |
| |
| 24 | | |
| 31 | |
| |
| | | |
| | |
Income before income taxes | |
| 234 | | |
| 261 | |
| |
| | | |
| | |
Income tax expense | |
| 79 | | |
| 85 | |
| |
| | | |
| | |
Net income | |
$ | 155 | | |
$ | 176 | |
| |
| | | |
| | |
Net income per common share: | |
| | | |
| | |
Basic | |
$ | 0.06 | | |
$ | 0.07 | |
Diluted | |
$ | 0.06 | | |
$ | 0.07 | |
| |
| | | |
| | |
Weighted average shares outstanding: | |
| | | |
| | |
Basic | |
| 2,607 | | |
| 2,602 | |
Diluted | |
| 2,611 | | |
| 2,613 | |
The accompanying notes are an integral part
of these consolidated financial statements.
ITEX CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS’
EQUITY
FOR THE THREE-MONTHS ENDED OCTOBER 31,
2014
(In thousands)
(Unaudited)
| |
Common Stock | | |
Additional Paid-in | | |
Stockholder Note | | |
Accumulated | | |
| |
| |
Shares | | |
Amount | | |
Capital | | |
Receivable | | |
Deficit | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Balance at July 31, 2014 | |
| 2,602 | | |
$ | 26 | | |
$ | 25,222 | | |
$ | (161 | ) | |
$ | (13,158 | ) | |
$ | 11,929 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Common stock repurchased and retired | |
| (14 | ) | |
| - | | |
| (42 | ) | |
| - | | |
| - | | |
| (42 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Payments on stockholder notes receivable | |
| - | | |
| - | | |
| - | | |
| 18 | | |
| - | | |
| 18 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Cancellation of broker stock purchase | |
| (1 | ) | |
| - | | |
| (4 | ) | |
| - | | |
| - | | |
| (4 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock based compensation expense | |
| 18 | | |
| - | | |
| 67 | | |
| - | | |
| - | | |
| 67 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Dividend payment | |
| - | | |
| - | | |
| - | | |
| - | | |
| (143 | ) | |
| (143 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net income | |
| - | | |
| - | | |
| - | | |
| - | | |
| 155 | | |
| 155 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance at October 31, 2014 | |
| 2,605 | | |
$ | 26 | | |
$ | 25,243 | | |
$ | (143 | ) | |
$ | (13,146 | ) | |
$ | 11,980 | |
The accompanying notes are an integral part
of these consolidated financial statements.
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| |
Three-months ended October 31, | |
| |
2014 | | |
2013 | |
| |
| |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | | |
| | |
Net income | |
$ | 155 | | |
$ | 176 | |
Items to reconcile to net cash provided by operations: | |
| | | |
| | |
Depreciation and amortization | |
| 24 | | |
| 42 | |
Stock based compensation | |
| 67 | | |
| 69 | |
Increase (decrease) in allowance for uncollectible receivables | |
| 45 | | |
| (16 | ) |
Change in deferred income taxes | |
| 79 | | |
| 92 | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| (42 | ) | |
| 30 | |
Prepaid expenses | |
| 20 | | |
| 26 | |
Loans and advances | |
| (5 | ) | |
| (11 | ) |
Other assets | |
| (3 | ) | |
| (10 | ) |
Accounts payable and other expenses payable | |
| 5 | | |
| 71 | |
Commissions payable to brokers | |
| (16 | ) | |
| (37 | ) |
Accrued commissions to brokers | |
| 155 | | |
| 153 | |
Accrued expenses | |
| 70 | | |
| 31 | |
Deferred revenue | |
| (8 | ) | |
| (6 | ) |
Advance payments | |
| - | | |
| (12 | ) |
Long-term liabilities | |
| - | | |
| (3 | ) |
Net cash provided by operating activities | |
| 546 | | |
| 595 | |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
Purchase of property and equipment | |
| (1 | ) | |
| (1 | ) |
Payments on notes payables | |
| (2 | ) | |
| - | |
Payments received from notes receivable | |
| 65 | | |
| 171 | |
Advances on notes receivable | |
| (15 | ) | |
| (338 | ) |
| |
| | | |
| | |
Net cash provided by (used in) investing activities | |
| 47 | | |
| (168 | ) |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | | |
| | |
Principal payments on stockholder notes receivable | |
| 16 | | |
| 16 | |
Repurchase of common stock | |
| (42 | ) | |
| (19 | ) |
Cash dividend paid to Common Shareholders | |
| (143 | ) | |
| (145 | ) |
Net cash used in financing activities | |
| (169 | ) | |
| (148 | ) |
| |
| | | |
| | |
Net increase in cash | |
| 424 | | |
| 279 | |
Cash at beginning of period | |
| 3,673 | | |
| 3,352 | |
Cash at end of period | |
$ | 4,097 | | |
$ | 3,631 | |
| |
| | | |
| | |
Supplemental cash flow information: | |
| | | |
| | |
Cash paid for taxes | |
$ | 2 | | |
$ | 25 | |
The accompanying notes are an integral part
of these consolidated financial statements.
ITEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 –
DESCRIPTION OF OUR COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (In thousands, except per share amounts)
Description of the 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 marketplace (the “Marketplace”) in which products and
services are exchanged by Marketplace members utilizing our “virtual currency” (“ITEX dollars”). Our virtual
currency is only usable in the Marketplace and allows thousands of member businesses (our “members”) to acquire products
and services without exchanging cash. We administer the Marketplace and provide record-keeping and payment transaction processing
services for our members.
Unaudited Interim Financial Information
We have prepared the accompanying consolidated financial statements
pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting.
These consolidated financial statements are unaudited and, in our opinion, include all adjustments, consisting of normal recurring
adjustments and accruals necessary for a fair presentation of our consolidated balance sheets, operating results, and cash flows
for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States (“GAAP”) have been omitted in accordance with the
rules and regulations of the SEC. The preparation of financial statements in conformity with GAAP requires management to make certain
estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent liabilities
as of the date of the financial statements and the reported amount of revenue and expenses during the reporting period. These consolidated
financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in
Item 8 of Part II, “Financial Statements and Supplementary Data,” of our 2014 Annual Report on Form 10-K filed with
the SEC on October 15, 2014.
Principles of Consolidation
The consolidated financial statements include
the accounts of ITEX Corporation and its wholly-owned subsidiaries, BXI Exchange, Inc. and Virtual Currency Systems Corp. All inter-company
accounts and transactions have been eliminated in consolidation.
Use of Estimates
Management has made a number of estimates
and assumptions relating to the reporting of revenues, expenses, assets and liabilities and the disclosure of contingent assets
and liabilities to prepare these consolidated financial statements. Actual results could differ from these estimates.
Income Per Share
We prepare our financial statements using
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 October
31, 2014, we had no contracts to issue common stock, but we did have 20 warrants outstanding that were anti-dilutive. The Company
also had 232 unvested shares of restricted stock. All of these shares were dilutive and resulted in an additional 4,000 shares
being included in dilutive earnings per share as of October 31, 2014.
The following table presents a reconciliation
of the denominators used in the computation of net income per common share basic and net income per common share – diluted
for the three-month period ended October 31, 2014 (in thousands, except per share data) (unaudited):
| |
Three-months Ended October 31, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
Net income available for shareholders | |
$ | 155 | | |
$ | 176 | |
| |
| | | |
| | |
Weighted avg. outstanding shares of common stock | |
| 2,607 | | |
| 2,602 | |
Dilutive effect of restricted shares | |
| 4 | | |
| 11 | |
Common stock and equivalents | |
| 2,611 | | |
| 2,613 | |
Earnings per share: | |
| | | |
| | |
Basic | |
$ | 0.06 | | |
$ | 0.07 | |
Diluted | |
$ | 0.06 | | |
$ | 0.07 | |
Recent Accounting Pronouncements
There have been no recent accounting pronouncements
or changes in accounting pronouncements during the three-months ended October 31, 2014, as compared to the recent accounting
pronouncements described in the Company’s Annual Report on Form 10-K, that are of significance, or potential significance
to the Company.
NOTE 2 –
COMMITMENTS
The Company leases office space under an operating lease. The
lease commitment is for the Company’s corporate headquarters in Bellevue, Washington. The corporate headquarters lease expires
on April 30, 2015.
Future minimum payments at October 31, 2014 under the operating
lease for office space is as follows (in thousands):
| |
Executive office | |
Lease commitment
for the year ending
July 31, | |
| | |
| |
| | |
2015(1) | |
$ | 84 | |
(1) |
|
The expected payments for 2015 reflect future minimum payments for the nine-month period from November 1, 2014 to July 31, 2015. |
Rent expense,
including utilities and common area charges, was $40 and $40, respectively for the three-months ended October 31, 2014 and 2013.
In addition to
the foregoing lease commitments, the Company is a party to several non-cancelable and non-refundable purchase commitments. Those
purchase obligations consist primarily of arrangements for telecommunications and co-location services for the Company’s
network operations.
There are no future
minimum payments at October 31, 2014 under any non-cancelable commitments.
NOTE 3 –
LEGAL PROCEEDINGS AND LITIGATION CONTINGENCIES
From time to time we are subject to a variety
of claims and litigation incurred in the ordinary course of business. In our opinion, the outcome of our pending legal proceedings,
individually or in the aggregate, will not have a material adverse effect on our business operations, results of operations, cash
flows or financial condition.
Management has regular litigation reviews,
including updates from outside counsel, to assess the need for accounting recognition or disclosure of contingencies relating to
pending lawsuits. The Company accrues an undiscounted liability for those contingencies where the incurrence of a loss is probable,
and the amount can be reasonably estimated. The Company does not record liabilities when the likelihood that the liability has
been incurred is probable but the amount cannot be reasonably estimated or when the liability is believed to be only reasonably
possible or remote. For contingencies where an unfavorable outcome is reasonably possible and which are significant, the Company
discloses the nature of the contingency and, where feasible, an estimate of the possible loss. For purposes of our litigation contingency
disclosures, “significant” includes material matters as well as other items which management believes should be disclosed.
Management judgment is required related
to contingent liabilities and the outcome of litigation because both are difficult to predict. Litigation is subject to inherent
uncertainties and unfavorable rulings could occur. Although management currently does not believe resolving any pending proceeding
will have a material adverse impact on our financial statements, management’s view of these matters may change in the future.
A material adverse impact on our financial statements could occur for the period in which the effect of an unfavorable final outcome
becomes probable and reasonably estimable.
NOTE 4 –
INCOME TAXES
Income tax expense during interim periods
is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently
occurring items which are recorded in the interim period.
The Federal effective tax rate related
to our provision for income taxes in the three-months ended October 31, 2014 is similar to that used in the period ended October
31, 2013. The State effective tax rate related to our provision for income taxes in the three-months ended October 31, 2014 differs
slightly from that used in the three-month periods ending October 31, 2013, due to a reduction in the accrued expenses on our consolidated
balance sheet for uncertain tax positions related primarily to state jurisdictions.
The computation of the annual estimated
effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the
expected operating income for the year, projections of the proportion of income earned and taxed in various jurisdictions, permanent
and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year. The accounting
estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional
information becomes known or as the tax environment changes.
As of October 31, 2014 we have recognized
a net income tax expense of $79 which is our estimated federal and state income tax liability for the three-months ended October 31,
2014. Realization of our deferred tax asset is dependent upon future earnings in specific tax jurisdictions, the timing and amount
of which are uncertain. As of October 31, 2014 the net deferred tax asset was $3,955.
We account for any uncertainty in income
taxes by recognizing the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will
be sustained on examination by the taxing authorities, based on the technical merits of the position. We measure the tax benefits
recognized in the financial statements from such a position based on the largest benefit that has a greater than 50% likelihood
of being realized upon ultimate resolution. The application of income tax law is inherently complex. As such, we are required to
make subjective assumptions and judgments regarding income tax exposures. The result of the reassessment of our tax positions did
not have an impact on the consolidated financial statements.
NOTE 5 –
STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)
The Company has
5,000 shares of preferred stock authorized at $0.01 par value. No preferred shares were issued or outstanding as of October 31,
2014.
On March 9, 2010, the
Company announced a $2,000 stock repurchase program, authorized by the Board of Directors. The program authorizes the repurchase
of shares in open market purchases or privately negotiated transactions, has no expiration date and may be modified or discontinued
by the Board of Directors at any time. During the three-month period ended October 31, 2014, the Company repurchased 14 shares
of common stock for $42. There were 4 shares of common stock for $19 purchased during the three-month period ended October 31,
2013.
NOTE 6 –
STOCK-BASED PAYMENTS (in thousands)
We account for stock-based compensation
in accordance with the related guidance. Under the fair value recognition provisions, we estimate stock-based compensation cost
at the grant date based on the fair value of the award. We recognize that expense ratably over the requisite service period of
the award and recognized $67 and $69 of stock based compensation expense for the periods ending October 31, 2014 and 2013, respectively.
At October 31, 2014, 213
shares of common stock granted under the 2004 Plan remained unvested and 19 under the 2014 plan. At October 31, 2014, the Company
had $761 of unrecognized compensation expense, expected to be recognized over a weighted-average period of approximately six years.
NOTE 7 –
SUBSEQUENT EVENTS
On November 20, 2014, the Board of Directors
declared a cash dividend in the amount of $0.05 per share, payable on December 19, 2014 to stockholders of record as of the close
of business on December 9, 2014.
On November 30, 2014, the Company and U.S.
Bank entered into an Amendment to its Credit Agreement and Note to extend the maturity date to November 30, 2015, with a maximum
loan amount of $1.0 million. There is no current outstanding balance on the line of credit.
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands, except per share amounts)
In addition to current and historical information,
this Quarterly Report on Form 10-Q 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 detailed discussion of certain risks and uncertainties that could cause
actual results and events to differ materially from our forward-looking statements in the section titled “Risk Factors”
below. We undertake no obligation to update or revise publicly any forward-looking statement after the date of this report, whether
as a result of new information, future events or otherwise.
Overview
ITEX operates a marketplace (the “Marketplace”)
in which products and services are exchanged by Marketplace members utilizing our “virtual currency” (“ITEX dollars”).
Our virtual currency is only usable in the Marketplace and allows thousands of member businesses (our “members”) to
acquire products and services without exchanging cash. We service our member businesses through our independent licensed brokers
and franchise network (individually, “broker” and together, the “Broker Network”) in the United States
and Canada. We administer the Marketplace and provide record-keeping and payment transaction processing services for our members.
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”, “2015” for August 1, 2014 to July 31, 2015,
“2014” for August 1, 2013 to July 31, 2014). Our first quarter is the three-month period from August 1, 2014 to October
31, 2014 (“three-month period ended October 31”). We report our results as of the last day of each calendar month (“accounting
cycle”). The timing of billing and collection activities after the end of the billing cycle does not correspond with the
end of the accounting period, therefore this timing difference results in the fluctuations of the balances of cash, accounts receivable,
commissions payable and accrued commissions on the consolidated balance sheets and consolidated statements of cash flows.
Each operating cycle we generally charge
our members association fees of $20 USD ($260 USD annually) and $10 ITEX dollars ($130 ITEX dollars annually). We also charge transaction
fees in USD from both the buyer and seller computed as a percentage of the ITEX dollar value of the transaction.
The following summarizes our operational
and financial highlights for the quarter and our outlook (in thousands except per share data):
| · | Comparative Results. For the three-months ended October 31, 2014, as compared to the three-months ended October
31, 2013, our revenue decreased by $309, or 9%, from $3,426 to $3,117. Our income from operations decreased by $20, or 9%, from
$230 to $210. Net income decreased by $21, or 12%, from $176 to $155. |
| · | Revenue Sources. Our decrease in revenues for the three-months ended October 31, 2014 reflects a reduction in
our transaction volume and a reduction in our membership base. Association revenue decreased $62, or 6% from $1,110 to $1,048 and
our transaction revenue decreased $248, or 11% from $2,204 to $1,956. |
| · | Internet Applications and Web Services. We continually enhance our internet applications and web services to
make our online services more user friendly to our employees, brokers and members, and to create confidence in the Marketplace.
In 2014 we upgraded our payment processing and team software with .NET technologies. We refresh the content at our website www.itex.com
to better tell our story and make it more community driven. We are seeking potential additional revenue opportunities which may
be derived from licensing our virtual currency platform to third parties. |
| · | Smart Phone technology. We seek to provide useful tools to members to enable them to expand their trading community,
find local customers and instantly complete transactions through a mobile device. During this quarter we launched a Smart Phone
application, ITEX MobileSM with ITEXpaySM which enables our members to easily register new prospects into
our Marketplace, complete transactions and search for other members. |
| · | Revenue Trends. Our reduction in revenue this quarter was due to a reduction in members and a corresponding reduction
in transaction and association fees generated from our members. We believe the reduction in members and transaction volume is attributed
in part to the prolonged weak economic climate for small businesses (our primary clientele) and increased competition from pricing
and convenience of big box stores and Internet outlets. Although we seek to increase revenues through organic growth and the development
of new revenue sources, the primary driver of revenue growth in past years has been through our business acquisitions. These acquisitions
are intermittent and cannot be relied upon as a future source of revenue growth, because of the absence of acquisition candidates,
lack of financing, or unacceptable terms. We have approximately 30% recurring revenues from association fees. Approximately two-thirds
of our revenues each year come from transactions fees assessed during that year. We believe the expansion of our membership base
will increase our recurring revenues. We continue to seek to increase our revenue by: |
| o | enhancing our internet applications; |
| o | offering expanded tools and features with ITEX MobileSM; |
| o | marketing the benefits of participation in the Marketplace; |
| o | expanding Marketplace offerings of goods and services; |
In order to add new brokers we are sustaining our
broker recruiting incentives. Through our Broker Mentor program, existing brokers recruit prospective brokers and provide ongoing
training to the prospective broker until certain performance thresholds are met. Upon meeting the performance thresholds, the prospective
broker is offered a franchise for a reduced fee of $5 from our standard fee of $20. The mentoring broker receives a 5% commission
override on the cash collected per cycle by the new broker.
| · | Financial Position. At October 31, 2014, we had a cash balance of $4,097, compared to a balance of $3,673 at
July 31, 2014. Our net cash flows provided by operating activities were $546 for the three-month period ended October 31, 2014,
compared to $595 for the corresponding period the previous year. Our business model has demonstrated the ability to generate consistent
cash flows, which have historically supplied us with our primary source of liquidity. We seek to maintain a liquidity cushion sufficient
to fund our business activity and handle contingencies, while preserving the ability to return cash to our stockholders through
dividends and share buybacks. However, our Board of Directors may decide to use capital for acquisitions, revenue generating opportunities
or other corporate purposes. See Risk Factor below “Our ability to pay dividends on our common stock is subject to the
discretion of our Board of Directors and may be limited by our lack of liquidity or access to capital.” |
RESULTS OF OPERATIONS
Condensed Results (in thousands, except per share data):
| |
Three Months Ended October 31, | |
| |
2014 | | |
2013 | |
| |
(unaudited) | |
Marketplace revenue and other revenue | |
$ | 3,117 | | |
$ | 3,426 | |
| |
| | | |
| | |
Cost of marketplace revenue | |
| 1,923 | | |
| 2,137 | |
Operating expenses | |
| 984 | | |
| 1,059 | |
Income from operations | |
| 210 | | |
| 230 | |
| |
| | | |
| | |
Other income, net | |
| 24 | | |
| 31 | |
Income before income taxes | |
| 234 | | |
| 261 | |
| |
| | | |
| | |
Provision for income taxes | |
| 79 | | |
| 85 | |
| |
| | | |
| | |
Net income | |
$ | 155 | | |
$ | 176 | |
| |
| | | |
| | |
Net income per common share: | |
| | | |
| | |
Basic | |
$ | 0.06 | | |
$ | 0.07 | |
Diluted | |
$ | 0.06 | | |
$ | 0.07 | |
| |
| | | |
| | |
Average common and equivalent shares: | |
| | | |
| | |
Basic | |
| 2,607 | | |
| 2,602 | |
Diluted | |
| 2,611 | | |
| 2,613 | |
Revenue for the three-months ended October
31, 2014, as compared to the corresponding three-months ended October 31, 2013, decreased by $309, or 9%. The decrease in revenues
during the three-months ended October 31, 2014 was from a reduction in members and a reduction in transaction and association fees
generated from our members.
Cost of marketplace revenue which includes
association and transaction commissions paid to brokers, corporate-owned office expense and other marketplace-related expenses
decreased by $214, or 10% for the three-month period ended October 31, 2014, as compared to the corresponding three-months ended
October 31, 2013.
Operating expenses which include corporate
salaries, wages and employee benefits, selling, general and administrative, depreciation and amortization decreased by $75, or
7% for the three-months ended October 31, 2014, compared to the corresponding period of fiscal 2014.
Income from operations for the three-months
ended October 31, 2014, as compared to the corresponding three-months ended October 31, 2013, decreased by $20 or 9%. This net
decrease is primarily the result of the decrease in marketplace revenue for the period ended October 31, 2014.
Net income for the three-months ended October
31, 2014, as compared to the corresponding three-months ended October 31, 2013, decreased by $21 or 12% primarily as a result of
the $309 decrease in revenues, offset by a $214 reduction in cost of marketplace and a $75 reduction in operating expenses in the
three-months ended October 31, 2014, as compared to the corresponding three-months ended October 31, 2013.
Earnings per share, both basic and diluted,
decreased by $0.01 to $0.06 per share in the three-months ended October 31, 2014 compared to the three-months ended October 31,
2013.
Revenue, Costs and Expenses
The following table sets forth our selected
consolidated financial information for the three-months ended October 31, 2014 and 2013 with amounts expressed as a percentage
of total revenues (in thousands) (unaudited):
| |
Three-months ended October 31, | |
| |
2014 | | |
2013 | |
| |
Amount | | |
Percent | | |
Amount | | |
Percent | |
Revenue: | |
| | | |
| | | |
| | | |
| | |
Marketplace revenue and other revenue | |
$ | 3,117 | | |
| 100 | % | |
$ | 3,426 | | |
| 100 | % |
| |
| | | |
| | | |
| | | |
| | |
Costs and expenses: | |
| | | |
| | | |
| | | |
| | |
Cost of marketplace revenue | |
| 1,923 | | |
| 62 | % | |
| 2,137 | | |
| 63 | % |
Salaries, wages and employee benefits | |
| 445 | | |
| 14 | % | |
| 521 | | |
| 15 | % |
Selling, general and administrative | |
| 516 | | |
| 16 | % | |
| 496 | | |
| 14 | % |
Depreciation and amortization | |
| 23 | | |
| 1 | % | |
| 42 | | |
| 1 | % |
| |
| 2,907 | | |
| 93 | % | |
| 3,196 | | |
| 93 | % |
| |
| | | |
| | | |
| | | |
| | |
Income from operations | |
| 210 | | |
| 7 | % | |
| 230 | | |
| 7 | % |
| |
| | | |
| | | |
| | | |
| | |
Other Income, net | |
| 24 | | |
| 1 | % | |
| 31 | | |
| 1 | % |
| |
| | | |
| | | |
| | | |
| | |
Income before income taxes | |
| 234 | | |
| 8 | % | |
| 261 | | |
| 8 | % |
| |
| | | |
| | | |
| | | |
| | |
Provision for income taxes | |
| 79 | | |
| 3 | % | |
| 85 | | |
| 3 | % |
| |
| | | |
| | | |
| | | |
| | |
Net income | |
$ | 155 | | |
| 5 | % | |
$ | 176 | | |
| 5 | % |
Marketplace revenue
Marketplace revenue consists of transaction
fees, association fees and other revenues net. Revenue also includes a nominal amount of ITEX dollars (non-cash). The following
are the components of Marketplace revenue that are included in the consolidated statements of income (in thousands) (unaudited):
| |
Three-months ended October 31, | | |
Percent
increase | |
| |
2014 | | |
2013 | | |
(decrease) | |
| |
(unaudited) | | |
| |
| |
| | |
| | |
| |
Transaction fees | |
$ | 1,956 | | |
$ | 2,204 | | |
| -11 | % |
Association fees | |
| 1,048 | | |
| 1,110 | | |
| -6 | % |
Other revenue | |
| 113 | | |
| 112 | | |
| 1 | % |
| |
$ | 3,117 | | |
$ | 3,426 | | |
| -9 | % |
Marketplace revenue for the three-months
ended October 31, 2014 decreased by $309, or 9% to $3,117 as compared to $3,426 for the three-months ended October 31, 2013.
Transaction fees for the three-months ended
October 31, 2014 decreased by $248, or 11%, to $1,956 from $2,204 for the three-months ended October 31, 2013. The decrease in
transaction fees was due to lower transaction volume for the three-months ended October 31, 2014, as compared to the three-months
ended October 31, 2013.
Association fees for the three-months ended
October 31, 2014 decreased by $62, or 6%, to $1,048 from $1,110 for the three-months ended October 31, 2013. The decrease in association
fees is due to a decrease in net active membership accounts for the comparable periods.
Other revenue for the three-months ended
October 31, 2014 increased by $1, or 1% to $113 as compared to $112 for the three-months ended October 31, 2013.
ITEX Dollar Revenue
As described in notes to our consolidated
financial statements, we receive ITEX dollars from members’ transaction and association fees, and, to a lesser extent, from
other member fees. ITEX dollars earned from members are later used by us as a method of payment in revenue sharing and incentive
arrangements with our Broker Network, including co-op advertising, as well as for certain general corporate expenses. ITEX dollars
are only usable in our Marketplace.
We take extensive measures to maintain the
integrity of our role in the Marketplace economy, and to protect against the misuse or misappropriation of ITEX dollars. For example:
| · | All ITEX dollar purchases for corporate and Marketplace purposes are approved by senior management. |
| · | We do not sell or purchase ITEX dollars for USD. |
Occasionally we spend ITEX dollars in the
Marketplace for our corporate needs. As discussed in the notes to our consolidated financial statements, we record ITEX dollar
revenue in the amounts ultimately equal to expenses we incurred and paid for in ITEX dollars, resulting in an overall net effect
of $0 on the operating and net income lines. We recorded $49 and $42 as ITEX dollar revenue for the three-months ended October
31, 2014 and 2013, respectively.
The corresponding ITEX dollar expenses in
the period ended October 31, 2014 was for equipment, legal services, printing, outside services and miscellaneous expenses. We
plan to continue to utilize ITEX dollars for our corporate purposes in future periods.
Cost of Marketplace Revenue
Cost of marketplace revenue consists of
commissions paid to brokers, salaries and employee benefits of our corporate-owned offices, payment of processing fees and other
expenses directly correlated to marketplace revenue. The following are the main components of cost of marketplace revenue that
are included in the consolidated statements of income (in thousands)(unaudited):
| |
Three-months ended October 31, | | |
Percent
increase | |
| |
2014 | | |
2013 | | |
(decrease) | |
| |
(unaudited) | | |
| |
| |
| | |
| | |
| |
Transaction fee commissions | |
$ | 1,461 | | |
$ | 1,662 | | |
| -12 | % |
Association fee commissions | |
| 371 | | |
| 397 | | |
| -7 | % |
Other costs of revenue | |
| 91 | | |
| 78 | | |
| 17 | % |
| |
$ | 1,923 | | |
$ | 2,137 | | |
| -10 | % |
| |
| | | |
| | | |
| | |
Costs of marketplace revenue as percentage of total revenue | |
| 62 | % | |
| 62 | % | |
| | |
Cost of marketplace revenue for the three-months
ended October 31, 2014 was $1,923 as compared to $2,137 for the three-months ended October 31, 2013, a decrease of $214, or 10%.
The overall cost of Marketplace as a percentage of revenue remained the same at 62% for both periods.
Transaction fee commissions are paid to
brokers upon the collection of the transaction revenue. Transaction fee commissions for the three-months ended October 31, 2014
decreased by $201 or 12% to $1,461 as compared to $1,662 for the three-months ended October 31, 2013. The decrease in transaction
fee commissions is due to the reduction in transaction fee revenue which is similar to the 10% reduction is transaction fee revenues
for the same comparable period.
Association fee commissions are paid to
brokers upon the collection of the association revenue. Association fee commissions for the three-months ended October 31, 2014
decreased by $26, or 7% to $371 as compared to $397 for the three-months ended October 31, 2013. The decrease in association fee
commissions is due to a similar reduction in association fee revenue.
Other costs of revenue consist of miscellaneous
Marketplace-related expenses such as marketing and credit card processing fees along with other commissions not associated with
association or transaction revenue. Other costs of revenue increased by $13 or 17% to $91 as compared to $78 for the three-months
ended October 31, 2014.
Corporate Salaries, Wages and Employee
Benefits
Salaries, wages and employee benefits include
expenses for corporate employee salaries and wages, payroll taxes, payroll related insurance, healthcare benefits, stock-based
compensation, recruiting costs and other personnel related items. Comparative results are as follows (in thousands) (unaudited):
| |
Three-months ended October 31, | | |
Percent | |
| |
2014 | | |
2013 | | |
decrease | |
| |
(unaudited) | | |
| |
| |
| | |
| | |
| |
Corporate salaries, wages and employee benefits | |
$ | 445 | | |
$ | 521 | | |
| -15 | % |
| |
| | | |
| | | |
| | |
Corporate salaries, wages and employee benefits as percentage of total revenue | |
| 14 | % | |
| 15 | % | |
| | |
Corporate salaries, wages and employee benefits
expenses for the three-months ended October 31, 2014, as compared to the three-months ended October 31, 2013, decreased by $76,
or 15%. The decrease is primarily due to a reduction in headcount.
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, business travel, insurance,
bad debts, business taxes, and other expenses. As discussed above in “ITEX Dollar Revenue”, certain ITEX dollar expenses
are also included. Comparative results are as follows (in thousands) (unaudited):
| |
Three-months ended October 31, | | |
Percent | |
| |
2014 | | |
2013 | | |
increase | |
| |
| | | |
| | | |
| | |
Selling, general and administrative expenses | |
$ | 516 | | |
$ | 496 | | |
| 4 | % |
| |
| | | |
| | | |
| | |
Selling, general and administrative expenses as percentage of total revenue | |
| 17 | % | |
| 14 | % | |
| | |
Selling, general and administrative
expenses for the three-months ended October 31, 2014, as compared to the three-months ended October 31, 2013, increased by $20,
or 4%. Our selling general and administrative expenses also increased as a percentage of total revenues in the periods presented.
The increase is due primarily to an increase foreign currency expense. Foreign currency expense for the three-months ended October
31, 2014 increased by $20, or 182% to $31 as compared to $11 for the three-months ended October 31, 2013. This was offset somewhat
by a reduction in consulting fees which decreased by $20 or 59% to $14 as compared to $34 for the three-months ended October 31,
2013.
Depreciation and Amortization
Depreciation and amortization expenses include
depreciation on our fixed assets and amortization of our intangible assets, including intangible assets obtained in business combinations.
Comparative results are as follows (in thousands) (unaudited):
| |
Three-months ended October 31, | | |
Percent | |
| |
2014 | | |
2013 | | |
decrease | |
| |
| | |
| | |
| |
Depreciation and amortization | |
$ | 23 | | |
$ | 42 | | |
| -45 | % |
| |
| | | |
| | | |
| | |
Depreciation and amortization as percentage of total revenue | |
| 1 | % | |
| 1 | % | |
| | |
Depreciation and amortization for the three-months
ended October 31, 2014, as compared to the three-months ended October 31, 2013, decreased by $19, or 45%. The decrease is primarily
related to the completion of the amortization of a non-compete agreement and membership lists associated with acquisition of certain
assets.
Other income
Other income includes interest received
on notes receivable and promissory notes, and gains or losses on the sale of assets.
Comparative results are as follows (in thousands)
(unaudited):
| |
Three-months ended October 31, | | |
Percent | |
| |
2014 | | |
2013 | | |
(decrease) | |
| |
| | |
| | |
| |
Interest income | |
$ | 24 | | |
$ | 31 | | |
| -23 | % |
| |
| | | |
| | | |
| | |
Other income | |
$ | 24 | | |
$ | 31 | | |
| -23 | % |
| |
| | | |
| | | |
| | |
Other income, as percentage of total revenue | |
| 1 | % | |
| 1 | % | |
| | |
Interest income is derived primarily from
our notes receivable for corporate-owned office sales and general loans to brokers. As part of our initiative to support brokers
and as a way to generate return on capital, we have outstanding loans to our brokers. Each loan is primarily secured by the broker’s
ITEX office.
Income Taxes
Comparative results are as follows (in thousands)
(unaudited):
| |
Three-months ended October 31 | |
| |
2014 | | |
2013 | |
| |
Amount | | |
Rate | | |
Amount | | |
Rate | |
Expected tax provison at federal statutory rate | |
$ | 80 | | |
| 34 | % | |
$ | 91 | | |
| 35 | % |
State income benefit | |
| (1 | ) | |
| 0 | % | |
| (6 | ) | |
| -2 | % |
| |
| | | |
| | | |
| | | |
| | |
Provision for income taxes | |
$ | 79 | | |
| 34 | % | |
$ | 85 | | |
| 33 | % |
We recognized a $79 provision for income
taxes, in the three-month period ended October 31, 2014, as compared to the $85 provision for income taxes in the three-month period
ended October 31, 2013. Provision for income taxes decreased by $6 for the three-months ended October 31, 2014, as compared to
the corresponding period of fiscal 2014. The decrease was primarily due to the decrease in taxable income in the three-months ended
October 31, 2014.
The Federal effective tax rate related to
our provision for income taxes in the three-month period ended October 31, 2014 is similar to that used in the period ended October
31, 2013. The State effective tax rate related to our provision for income taxes in the three-months ended October 31, 2014 is
slightly different than that used in the three-month period ending October 31, 2013, due to the resolution of certain state tax
positions which led to a reduction in the accrued expenses on our consolidated balance sheet for uncertain tax positions related
primarily to state jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
We finance our ongoing operations primarily
from existing cash, investing activities, and cash flows from operations. As of October 31, 2014, and July 31, 2014, we had $4,097
and $3,673, respectively, in cash. Additionally, we have a revolving credit agreement to establish a $1,000 line of credit facility
from our primary banking institution, U.S. Bank (“line of credit”). The current line of credit agreement expires in
November 2015. We had no outstanding balance on our line of credit as of October 31, 2014.
The following table
presents a summary of our cash flows for the three-months ended October 31, 2014 and 2013 (in thousands) (unaudited):
| |
Three-months ended October 31, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
Cash provided by operating activities | |
$ | 546 | | |
$ | 595 | |
Cash provided by (used) in provided by investing activities | |
| 47 | | |
| (168 | ) |
Cash used in financing activities | |
| (169 | ) | |
| (148 | ) |
Increase in cash | |
$ | 424 | | |
$ | 279 | |
As part of our contemplated future expansion
activities and our evaluation of strategic alternatives and opportunities, we may seek to acquire certain competitors or other
business to business enterprises, or consider partnering or other collaboration agreements, or a merger or other strategic transaction.
Such alliances, mergers or acquisitions or dispositions could result in potentially dilutive issuances of our equity securities,
the expenditure of our cash or the incurrence of debt or contingent liabilities. We expect that our current working capital would
be adequate for this purpose. However, we may seek to finance a portion of the acquisition cost subject to the consent of any secured
creditors. We 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. Inflation affecting the U.S. dollar is not expected to have a material effect on our operations in the foreseeable
future.
Operating Activities
For the three-months ended October 31, 2014,
net cash provided by operating activities was $546 compared with $595 in the three-months ended October 31, 2013 a decrease of
$49, or 8%. The decrease in net cash provided by the operating activities is primarily a result of the $20 decrease in net income
and an increase of $39 of accrued expenses in the three-month period ended October 31, 2014 as compared to the period ended October
31, 2013.
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) (unaudited):
| |
Three-months ended October 31, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
Net income | |
$ | 155 | | |
$ | 176 | |
Add: non-cash expenses | |
| 214 | | |
| 187 | |
Add: changes in operating assets and liabilities | |
| 177 | | |
| 232 | |
Net cash provided by operating activities | |
$ | 546 | | |
$ | 595 | |
Non-cash expenses
are primarily associated with the amortization of intangible assets, depreciation and amortization of property and equipment, stock-based
compensation expense, the changes in the deferred portion of the provision (benefit) 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.
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.
Investing Activities
Net cash (used in) provided by investing
activities was primarily the result of purchase of property and equipment and intangible assets, the collections on notes receivable
from corporate office sales and advances on broker loans.
For the three-months ended October 31, 2014,
net cash provided by investing activities was $47 compared with $168 used in investing activities in the three-months ended October
31, 2013, an increase of $215, or 128%. In the three-months ended October 31, 2014, the net cash provided by investing activities
was primarily related to $65 in note receivable principal collections offset by $15 in advances on loans. In the three-months ended
October 31, 2013, the net cash used in investing activities was primarily related to $338 in advances on loans offset by $171 in
note receivable principal collections.
Financing Activities
Our net cash used in financing activities
consists of cash dividends to stockholders, discretionary repurchases of our common stock and principal payments on stockholders’
notes receivable.
For the three-months ended October 31, 2014,
net cash used in financing activities was $169 compared with $148 used in financing activities in the three-months ended October
31, 2013, an increase of cash used in financing activities of $21, or 14%. The increase is primarily due to additional shares purchased
during the period ended October 31, 2014.
In
the three-months ended October 31, 2014, we declared and paid $143 in cash dividends to our stockholders.
Commitments
We lease office
space under an operating lease. The lease commitment is for the Company’s corporate headquarters in Bellevue, Washington.
The lease for the corporate headquarters expires on April 30, 2015.
In addition to
the lease commitment, we are a party to several non-cancelable and non-refundable purchase commitments. Those purchase obligations
consist primarily of arrangements for telecommunications and co-location services for our network operations. Our contractual commitments
at October 31, 2014 are presented below (in thousands) (unaudited):
Year ending July 31, | |
Operating lease | | |
Purchase commitments | | |
Total | |
| |
| | |
| | |
| |
2015 (1) | |
$ | 84 | | |
$ | - | | |
$ | 84 | |
(1) |
|
The expected payments for 2015 reflect future minimum payments for the nine-month period from November 1, 2014 to July 31, 2015. |
Critical Accounting Policies and Estimates
Our discussion
and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of financial statements
in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate
significant estimates used in preparing our financial statements, including those related to:
| · | revenue recognition, including allowances for uncollectible accounts; |
| · | accounting for ITEX dollar activities; |
| · | the allocation of purchase price in business combinations; |
| · | valuation of notes receivable; |
| · | accounting for goodwill and other long-lived intangible assets; |
| · | accounting for income taxes; |
| · | share-based compensation; and |
We base our estimates
on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates if our assumptions change or if actual circumstances differ
from those in our assumptions.
For a summary of all of our significant
accounting policies, including the critical accounting policies discussed above, see Note 1, Summary of Significant Accounting
Policies, to our consolidated financial statements filed with our 2014 annual report on Form 10-K.
Recent Accounting Pronouncements
For a discussion of new accounting pronouncements
and their impact on the Company, see Note 1 of the Notes to Consolidated Financial Statements included in this Form 10-Q.
FACTORS THAT MAY AFFECT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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”, ITEM 2 and elsewhere
in this report. These factors, among others, may adversely impact and impair our business and should be considered in evaluating
our financial outlook.
Our revenue growth and success is tied to the operations
of our independent Broker Network, and as a result the loss of our brokers or the financial performance of our brokers can negatively
impact our business
We service
our member businesses primarily through our independent licensed broker and franchise network (individually, “broker”,
together, the “Broker Network”) as well as through any corporate-owned offices we may operate from time to time. Our
financial success primarily depends on our brokers and the manner in which they operate and develop their offices. We depend on
the ability of our brokers to enroll new members, train them in the use of the Marketplace, grow our transactional volume by facilitating
business among members, manage member relationships, provide members with information about ITEX products and services, and assure
the payment of our fees. Brokers are independently owned and operated and have a contractual relationship with ITEX, typically
for a renewable five-year term. Our inability to renew a significant portion of these agreements on terms satisfactory to our
brokers and us could have a material adverse effect on our business, financial condition and results of operations. Further, our
brokers may not be successful in increasing the level of revenues generated compared to prior years, or even sustaining their
own business activities, which depends on many factors, including industry trends, the strength of the local economy, the success
of their marketing activities, control of expense levels, the employment and management of personnel, and being able to secure
adequate financing to operate their businesses. There can be no assurance that our brokers will be successful in adding members
or increasing the volume of transactions through the Marketplace, or that if they do not renew their agreements or terminate operations
we will be able to attract new brokers at rates sufficient to maintain a stable or growing revenue base. If our brokers are unsuccessful
in generating revenue, enrolling new members to equalize the attrition of members leaving the Marketplace, or if a significant
number of brokers become financially distressed and terminate operations, our revenues could be reduced and our business operating
results and financial condition may be materially adversely affected.
Future revenue growth remains uncertain and our operating
results and profitability may decline
Marketplace revenue decreased 9% for the
year ended July 31, 2014, compared to the previous year ended July 31, 2013 and decreased 9% for the three-months ended October
31, 2014 compared same period ending October 31, 2013. Although we seek to increase revenues through organic growth and the development
of new revenue streams, we cannot assure you that our revenues will increase in future quarters or future years. We may be unable
to add revenue through acquisitions, either because of the absence of acquisition candidates, lack of financing, or unacceptable
terms. We have approximately 30% recurring revenues. We do not have an order backlog, and approximately two-thirds of our revenues
each quarter come from variable transaction fees computed as a percentage of the ITEX dollar value of the transactions occurring
during that quarter. Our operating results in one or more future quarters may fall below the expectations of investors.
We cannot assure you that we can continue
to be operated profitably, which depends on many factors, including the overall development and expansion of our industry, our
success in expanding our member base, the control of our expense levels and the success of our business activities. We may make
investments in marketing, broker and member support, technology and further development of our operating infrastructure which entail
long-term commitments. Our industry as a whole may be adversely affected by industry trends and economic factors. Despite our efforts
to expand our revenues, we may not be successful. We experience a certain amount of attrition from members leaving the Marketplace.
If new member enrollments do not continue or are insufficient to offset attrition, we will increasingly need to focus on keeping
existing members active and increasing their activity level in order to maintain or grow our business. We cannot assure you that
this strategy would be successful to offset declining revenues or profits.
Our ability to pay dividends on our common stock is subject
to the discretion of our Board of Directors and may be limited by our lack of liquidity or access to capital.
Our dividend policy is subject to the discretion
of our Board of Directors and depends upon a number of factors, including our earnings, financial condition, cash and capital needs
and general economic or business conditions. Although we are currently declaring cash dividends on our common stock as a way to
return value to our stockholders, we are not required to do so and we cannot assure you that we will continue to pay dividends
in the future. We have sought to maintain a liquidity cushion sufficient to fund our business activities and handle contingencies,
while preserving the ability to return cash to our stockholders through dividends and share buybacks. However, our Board of Directors
may decide to use capital for acquisitions, revenue generating opportunities or other corporate purposes. If liquidity from our
cash flow is inadequate or unavailable, we may be required to scale back or eliminate the dividends we pay to our stockholders.
Any reduction of, or the elimination of, our common stock dividend in the future could adversely affect the market price of our
common stock.
Our brokers could take actions that could harm our business,
our reputation and adversely affect the ITEX Marketplace
Our agreements with our brokers require
that they understand and comply with all laws and regulations applicable to their businesses, and operate in compliance with our
Marketplace Rules. Brokers are independently owned and operated and are not our employees, partners, or affiliates. We set forth
operational standards and guidelines; however, we have limited control over how our broker businesses are run. Our brokers have
individual business strategies and objectives, and may not operate their offices in a manner consistent with our philosophy and
standards. We cannot assure that our brokers will avoid actions that adversely affect the reputation of ITEX or the Marketplace.
Improper activity stemming from one broker can generate negative publicity which could adversely affect our entire Broker Network
and the Marketplace. Our image and reputation and the image and reputation of other brokers may suffer materially, and system-wide
sales could significantly decline if our brokers do not operate their businesses according to our standards. While we ultimately
can take action to terminate brokers that do not comply with the standards contained in our agreements, and even though we may
implement compliance and monitoring functions, we may not be able to identify problems and take action quickly enough and, as a
result, our image and reputation may suffer, causing our revenues or profitability to decline. Further, the success and growth
of our Broker Network depends on our maintaining a satisfactory working relationship with our existing brokers and attracting new
brokers to our network. Lawsuits and other disputes with our brokers could discourage our brokers from expanding their business
or lead to negative publicity, which could discourage new brokers from entering our network or existing brokers from renewing their
agreements, and could have a material adverse effect on our business, financial condition and results of operations.
Stockholders or investors may attempt to effect changes
or acquire control over our business, which could adversely affect our results of operations and financial condition.
Recent developments in corporate governance
indicate there is lack of agreement between boards of directors and stockholders as to the relative balance of authority in the
corporate decision-making process, and shareholders are challenging the longstanding legal principle
that directors, rather than the stockholders, manage the business and affairs of the corporation. During the past several years,
U.S. companies have seen a high and increasing level of insurgent campaigns, proxy solicitations, and shareholder derivative actions
or other attempts to acquire control of companies or effect operational changes. Within the last four years, we have been the subject
of two proxy contests seeking control of our board of directors, as well as a related lawsuit. We cannot assure you that we will
not be subject to further proxy contests, litigation or other activity or demands in the future. If we are, such activity or demands
could harm the Company because:
| · | Responding to proxy contests, litigation and other actions by dissident shareholders can interfere with our ability to execute
our strategic plan, disrupt our operations, be costly and time-consuming, and divert the attention of our management and employees
from the pursuit of business strategies; |
| · | Perceived uncertainties as to our future direction diverts the attention of, damages morale and creates instability among members
of our Broker Network, and adversely impact our existing and potential strategic and operational relationships and opportunities; |
| · | We may experience difficulties in hiring, retaining and motivating personnel during the resulting uncertain and turbulent times; |
| · | If individuals are elected or appointed to our Board of Directors with a specific agenda, it may adversely affect our ability
to effectively implement our business strategy and create additional value for our stockholders; |
| · | We would experience substantial increases in legal fees, insurance, administrative and associated costs incurred in connection
with responding to proxy contests and related litigation; |
| · | A successful change in control of the Company could result
in substantial compensation charges and other expenses, and potentially allow an insurgent shareholder to reimburse his proxy
or takeover expenses, resulting in substantial charges. |
We may be held responsible by members, third parties,
regulators or courts for the actions of, or failures to act by, our brokers or their employees, which exposes us to possible adverse
judgments, other liabilities and negative publicity
From time to time we are subject to claims
for the conduct of our brokers in situations where a broker is alleged to have caused injury to a member as a result of a transaction
in the Marketplace. Third parties, regulators or courts may seek to hold us responsible for the actions or failures to act by our
brokers or their employees. The failure to comply with laws and regulations by our brokers, or litigation involving potential liability
for broker activities could be costly and time consuming for us, divert management attention, result in increased costs of doing
business, lead to adverse judgments, expose us to possible fines and negative publicity, or otherwise harm our business.
Failure to deal effectively with member disputes could
result in costly litigation, damage our reputation and harm our business
ITEX faces risks with respect to transactional
disputes between members of the Marketplace. From time to time we receive complaints from members who may not have received the
products or services that they had purchased, concerning the quality of the products or services, or who believe they have been
defrauded by other members. We also receive complaints from sellers because a buyer has changed his or her mind and decided not
to honor the contract to purchase the item. While ITEX does, in some cases, as part of its transaction dispute resolution process,
reverse transactions, reduce or eliminate credit lines, suspend accounts, or take other measures with members who fail to fulfill
their payment or delivery obligations to other members, the determination as to whether a transaction is reversed or how to resolve
a specific dispute is made by ITEX in its sole discretion. Measures we may take to resolve transactional disputes or combat risks
of fraud have the potential to damage relations with our members or brokers or decrease transactional activity in the Marketplace
by restricting the activities of certain members. Furthermore, negative publicity and member sentiment generated as a result of
member complaints or fraudulent or deceptive conduct by members of our Marketplace could damage our reputation, or reduce our ability
to attract new members or retain our current members.
We occasionally receive communications from
members requesting reimbursement or threatening or commencing legal action against us if no reimbursement is made. In addition,
because we service our member businesses through our Broker Network, we are subject to claims and could potentially be found liable
for the conduct of our brokers in a situation where that broker has caused injury to a member. Litigation involving disputes between
members and liability for broker actions could be costly and time consuming for us, divert management attention, result in increased
costs of doing business, lead to adverse judgments, or otherwise harm our business. In addition, affected members may complain
to regulatory agencies that could take action against us, including imposing fines or seeking injunctions.
Use of our services for illegal purposes could damage
our reputation and harm our business
Our members, typically small businesses,
actively market products and services through the Marketplace and our website. We may be unable to prevent our members from selling
unlawful or stolen goods or unlawful services, or selling goods or services in an unlawful manner, and we could be subject to allegations
of civil or criminal liability for unlawful activities carried out by members through our services. It is possible that third parties,
including government regulators and law enforcement officials, could allege that our services aid and abet certain violations of
certain laws, for example, laws regarding the sale of counterfeit items, the fencing of stolen goods, selective distribution channel
laws, and the sale of items outside of the U.S. that are regulated by U.S. export controls.
Although we have prohibited the listing
of illegal goods and services and implemented other protective measures, we may be required to spend substantial resources to take
additional protective measures or discontinue certain service offerings, any of which could harm our business. Any costs incurred
as a result of potential liability relating to the alleged or actual sale of unlawful goods or services could harm our business.
In addition, negative media publicity relating to the listing or sale of unlawful goods and stolen goods using our services could
damage our reputation, diminish the value of our brand, and make members reluctant to use our services.
ITEX’s virtual currency, ITEX dollars,
is also susceptible to potentially illegal or improper uses. Recent changes in law have increased the penalties for intermediaries
providing payment services for certain illegal activities. Despite measures taken by ITEX as administrator and as transaction processor
and record-keeper to detect and lessen the risk of this kind of conduct, illegal activities could still be funded using ITEX dollars.
Any resulting claims or liabilities could harm our business.
Our business is subject to online security risks, including
security breaches and identity theft
We host confidential information as part
of our client relationship management and transactional processing platform. Our security measures may not detect or prevent security
breaches that could harm our business. Currently, a significant number of our members authorize us to bill their credit card or
bank accounts directly for fees charged by us. We take a number of measures to ensure the security of our hardware and software
systems and member and client information. Advances in computer capabilities, new discoveries in the field of cryptography or other
developments may result in the technology used by us to protect transaction data being breached or compromised. Many companies
have been the subject of sophisticated and highly targeted attacks on portions of their websites. In addition, any party who is
able to illicitly obtain a members’ password could access the members’ transaction data. An increasing number of websites
have reported breaches of their security. Any compromise of our security could harm our reputation and, therefore, our business,
and could result in a violation of applicable privacy and other laws. In addition, a party that is able to circumvent our security
measures could misappropriate proprietary information, cause interruption in our operations, damage our computers or those of our
users, or otherwise damage our reputation and business. Under credit card rules and our contracts with our card processors, if
there is a breach of credit card information that we store, we could be liable to the credit card issuing banks for their cost
of issuing new cards and related expenses. In addition, if we fail to follow credit card industry security standards, even if there
is no compromise of customer information, we could incur significant fines or lose our ability to give customers the option of
using credit cards to pay their fees. If we were unable to accept credit cards, our business would be seriously damaged.
We continue to enhance our systems for data
management and protection, and intrusion detection and prevention. In the third quarter of 2014, we upgraded our software platform
with .NET technology. However, our servers may be vulnerable to computer viruses, physical or electronic break-ins, and similar
disruptions. We may need to expend significant resources to protect against security breaches or to address problems caused by
breaches. Security breaches, including any breach by us or by parties with which we have commercial relationships that result in
the unauthorized release of our members’ personal information, could damage our reputation and expose us to a risk of loss
or litigation and possible liability. Our insurance policies carry coverage limits which may not be adequate to reimburse us for
losses caused by security breaches.
Unplanned system interruptions or system failures could
harm our business and reputation
Any interruption in the availability of
our transactional processing services due to hardware and operating system failures will reduce our revenues and profits. Our revenue
depends on members using our processing services. Any unscheduled interruption in our services results in an immediate, and possibly
substantial, loss of revenues. Frequent or persistent interruptions in our services could cause current or potential members to
believe that our systems are unreliable, leading them to switch to our competitors or to avoid our website or services, and could
permanently harm our reputation. Furthermore, any system failures could result in damage to our members’ and brokers’
businesses. These persons could seek compensation from us for their losses. Even if unsuccessful, this type of claim likely would
be time-consuming and costly for us to address.
Although our systems have been designed
around industry-standard architectures to reduce downtime in the event of outages or catastrophic occurrences, they remain vulnerable
to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, terrorist attacks, computer
viruses, computer denial-of-service attacks, and similar events or disruptions. Some of our systems are not fully redundant, and
our disaster recovery planning may not be sufficient for all eventualities. Our systems are also subject to break-ins, sabotage,
and intentional acts of vandalism. Despite any precautions we may take, the occurrence of a natural disaster, a decision by any
of our third-party hosting providers to close a facility we use without adequate notice for financial or other reasons, or other
unanticipated problems at our hosting facilities could cause system interruptions, delays, and loss of critical data, and result
in lengthy interruptions in our services. Our business interruption insurance may not be sufficient to compensate us for losses
that may result from interruptions in our service as a result of system failures.
Failure to comply with laws and regulations that protect
our members’ and brokers’ personal and financial information could result in liability and harm our reputation
We store personal and financial information
for members of the Marketplace and our brokers. Privacy concerns relating to the disclosure and safeguarding of personal and financial
information have drawn increased attention from federal and state governments. Federal and state law requires us to safeguard our
members’ and brokers’ financial information, including credit card information. Although we have established security
procedures to protect against identity theft and the theft of this personal and financial information, breaches of our privacy
may occur. To the extent the measures we have implemented are breached or if there is an inappropriate disclosure of confidential
or personal information or data, we may become subject to litigation or administrative sanctions, which could result in significant
fines, penalties or damages and harm to our brand and reputation. Even if we were not held liable, a security breach or inappropriate
disclosure of confidential or personal information or data could harm our reputation. In addition, we may be required to invest
additional resources to protect us against damages caused by these actual or perceived disruptions or security breaches in the
future. Changes in these federal and state regulatory requirements could result in more stringent requirements and could result
in a need to change our business practices. Establishing systems and processes to achieve compliance with these new requirements
may increase our costs and could have a material adverse effect on our business, financial condition and results of operations.
We have claims and lawsuits against us that may result
in adverse outcomes
From time
to time we are subject to a variety of claims and lawsuits. See Note 3 ― “Legal
Proceedings and Litigation Contingencies” included in the “Notes to Consolidated Financial Statements”. Adverse
outcomes in one or more claims could occur which may result in significant monetary damages that could adversely affect our ability
to conduct our business. Although management does not believe resolving any pending matter,
individually or in the aggregate, would have a material adverse impact on our financial statements, litigation and other claims
are subject to inherent uncertainties and management’s view of these matters may change in the future. A
material adverse impact on our financial statements could occur for the period in which the effect of an unfavorable final outcome
becomes probable and reasonably estimable.
If we lose the services of our Chief Executive Officer,
our business could suffer
Our Board places heavy reliance on the continued
services of our Chief Executive Officer, Steven White, and his industry experience and relationships, management and operational
skills. We have not entered into an employment agreement with Mr. White. If we were to lose the services of Mr. White, we could
face substantial difficulty in hiring a qualified successor or successors, and could experience a loss in performance while any
successor obtains the necessary training and experience. Corporate staff and our brokers could lose confidence in the direction
and stability of the Company and choose to pursue other opportunities. In addition, in connection with a management transition
we may need to attract, train, retain and motivate additional financial, technical, managerial, marketing or support personnel.
We face the risk that if we are unable to attract and integrate new personnel, or retain and motivate existing personnel, our business,
financial condition and results of operations will be adversely affected.
Alliances, mergers and acquisitions could result in operating
difficulties, dilution and other harmful consequences
We expect to evaluate and consider potential
strategic transactions, including business combinations, acquisitions and dispositions of businesses, technologies, services, products
and other assets and strategic investments. At any given time we may be engaged in discussions or negotiations with respect to
one or more of these types of transactions. Any of these transactions could be material to our financial condition and results
of operations. The process of integrating an acquired company, business or technology may create unforeseen operating difficulties
and expenditures and is risky. The areas where we may face difficulties include:
|
• |
|
Diversion of management time, as well as a shift of focus from operating the businesses to challenges related to integration and administration; |
|
• |
|
Challenges associated with integrating employees from the acquired company into the acquiring organization. These may include declining employee morale and retention issues resulting from changes in, or acceleration of, compensation, or changes in management, reporting relationships, future prospects, or the direction of the business; |
|
• |
|
The need to integrate each company’s accounting, management, information, human resource and other administrative systems to permit effective management, and the lack of control if such integration is delayed or not implemented; |
|
• |
|
The need to implement controls, procedures and policies appropriate for a public company at companies that prior to acquisition had lacked such controls, procedures and policies; |
|
• |
|
The need to transition operations, members, and customers onto our existing platforms; and |
|
• |
|
Liability for activities of the acquired company before the acquisition, including violations of laws, rules and regulations, commercial disputes, tax liabilities and other known and unknown liabilities. |
The expected benefit of any of these strategic
relationships may not materialize and the cost of these efforts may negatively impact our financial results. Future alliances,
mergers or acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the expenditure
of our cash or the incurrence of debt, contingent liabilities or amortization expenses of which could adversely affect our results
of operations and dilute the economic and voting rights of our stockholders. Future acquisitions may require us to obtain additional
equity or debt financing, which may not be available on favorable terms or at all.
We may need additional financing; current funds may be
insufficient to finance our plans for growth or our operations
We believe that our financial condition
is stable and that our cash balances and operating cash flows provide adequate resources to fund our ordinary operating requirements.
However, our existing working capital may not be sufficient to allow us to execute our business plan as fast as we would like or
may not be sufficient to take full advantage of all available strategic opportunities. We believe our current core operations reflect
a scalable business strategy, which will allow our business model to be executed with limited outside financing. However, we also
may expand our operations, enter into a strategic transaction, or acquire competitors or other business to business enterprises.
We have a line of credit with our primary banking institution, which will provide additional reserve capacity for general corporate
and working capital purposes, and if necessary, enable us to make certain expenditures related to the growth and expansion of our
business model. However, if adequate capital was not available or were not available on acceptable terms at a time when we needed
it, our ability to execute our business plans, develop or enhance our services, make acquisitions or respond to competitive pressures
would be significantly impaired. Further, we cannot be certain that we will be able to implement various financing alternatives
or otherwise obtain required working capital if needed or desired.
We are dependent on the value of foreign currency.
We transact business in Canadian dollars
as well as USD. Revenues denominated in Canadian dollars comprised 6.7% and 7.6% in the years ended July 31, 2014 and 2013, respectively.
Foreign currency expense for the three-months ended October 31, 2014 increased by $20 compared to the three-months ended October
31, 2013. While foreign currency exchange fluctuations are not believed to materially adversely affect our operations at this time,
changes in the relation of the Canadian dollar to the USD could affect our revenues, cost of sales, operating margins and result
in exchange losses.
Our Brokers may default on their loans
From time to time we finance the operational
and expansion activities of our brokers. We loan brokers funds for general operational purposes, to acquire the management rights
to select member accounts, and for other reasons. These loans are repaid from regular deductions from broker commissions. We had
outstanding loans to brokers of $1,374 at October 31, 2014 and $1,424 at July 31, 2014. In the event one or more brokers default
on their loans, it may adversely affect our financial condition.
The emergence of “virtual currencies” could
result in competitive trading platforms which may reduce transaction volume and revenues
Virtual currencies are receiving increasing
interest from investors, businesses and governments. Examples include private virtual currency or payment systems such as BitCoin,
Ripple, and Litecoin. As peer-to-peer currencies, they rely on a system of mutual trust and do not rely on a central bank, a third
party or other intermediary to effect transactions or act as guarantor in the event the currency collapses. They do not have the
status of legal tender. However, increased popularity or government acceptance of virtual currencies could encourage competitors
to utilize virtual or community currencies or the exchange of online credits for goods and services. Our potential competitors
could enjoy advantages, including greater financial resources and access to capital, a wider geographic presence, more accessible
branch office locations, more aggressive marketing campaigns, better brand recognition, the ability to offer a wider array of services
or more favorable pricing alternatives. If other virtual or community currencies gain widespread merchant acceptance, to the extent
that we cannot compete effectively, it may adversely affect our business operations and financial performance.
The emergence of increased regulation related to virtual
currencies could increase our costs by requiring us to update our products and services; or subject us to operational requirements
that result in substantial compliance costs which would adversely affect our business
Innovation in the payments industry has
led to a variety of virtual currencies, community currencies and reward points, and federal and state regulatory regimes are seeking
to revise antiquated currency provisions. The increased attention to virtual currencies could result in changes in federal or state
regulations or the adoption of new regulations that could affect us as well as many companies transacting in credits that might
be called “virtual currency.” For example, the Financial Crimes Enforcement Network (“FinCEN”), a bureau
of the U.S. Treasury, as the delegated administrator of the Bank Secrecy Act (“BSA”) issued interpretive guidance in
March 2013 to clarify the applicability of regulations to persons creating, obtaining, distributing, exchanging, accepting, or
transmitting virtual currencies. Although we do not believe we as a payment processor are currently subject to the BSA requirements
that could potentially change with new regulation. Registering with FinCEN and complying with FinCEN’s regulations would
be burdensome, as would getting licensed as a money transmitter and complying with the money transmission regulatory regimes in
each state. Changes to existing laws or regulations or adoption of new laws or regulations relating to the use of virtual currencies
could require us to incur significant costs to update our products and services, significantly increase our compliance costs or
may impose conditions that we are unable to meet. This could make our business cost-prohibitive in the affected state or states
and could materially adversely affect our business.
The market for our securities has
limited liquidity and may become less liquid
Our common stock currently trades on the
over-the-counter market known as the OTCQB Marketplace. The OTC Marketplace has three tiers, consisting of OTCQX, OTCQB and OTC
Pink marketplaces. Many of the securities quoted in the OTC Marketplace do not have a liquid market. They are infrequently traded
and can move up or down in price substantially from one trade to the next. As a result, an investment in our shares may be illiquid
even if there is a market. Moreover, our securities are not listed on a national securities exchange. Under current regulations
national securities exchanges have the ability to offer certain advantages to listed companies. For example, securities listed
on a national securities exchange are exempt from state Blue Sky laws covering the offer or sale of securities within the state.
We avail ourselves of applicable Blue Sky exemptions, however there are certain states in which we have not qualified for an exemption
and our shares may not be traded. National securities exchanges also offer the ability to margin certain listed securities and
the potential inclusion of listed securities in certain exchange-traded funds and indices. These differences between our marketplace
and the national securities exchanges may make certain investors choose to not invest in our stock.
In 2014, the OTC Markets Group introduced
new eligibility requirements for the OTCQB Marketplace, including requiring companies to commence paying an annual fee. Issuers
that do not pay the new fee will be downgraded to the OTC Pink marketplace. We do not presently intend to pay the additional fee,
and expect to be downgraded to the OTC Pink marketplace in December 2014. On the OTC Pink marketplace, the trading market for our
shares may be less liquid, the ability of our stockholders to sell their shares in the secondary market may be more limited, and
our share price could decrease.
ITEM
4. CONTROLS AND PROCEDURES
(a) Disclosure controls and procedures.
Under the supervision and with the participation
of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our
disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report.
Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective as of the end of
the period covered by this report.
(b) 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 we believe have materially affected, or are reasonably likely
to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 3 ― “Legal Proceedings
and Litigation Contingencies” included in the “Notes to Consolidated Financial Statements” for information regarding
legal proceedings.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
The following table provides information
about our purchases or any affiliated purchaser during the three-months ended October 31, 2014 of equity securities that are registered
by us pursuant to Section 12 of the Exchange Act.
| |
(a) | | |
(b) | | |
(c) | | |
(d) | |
Period | |
Total Number of Shares Purchased | | |
Average Price Paid per Share | | |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | |
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (1) | |
8/01/14 - 8/31/14 | |
| - | | |
| - | | |
| - | | |
| - | |
9/01/14 – 9/30/14 | |
| - | | |
| - | | |
| - | | |
| - | |
10/01/14 - 10/31/14 | |
| 14,003 | | |
$ | 2.99 | | |
| 14,003 | | |
$ | 1,055,054 | |
| (1) | Amounts shown in this column reflect amounts remaining
under the $2.0 million stock repurchase program, authorized by the Board of Directors and announced on March 9, 2010. The program
authorizes the repurchase of shares in open market purchases or privately negotiated transactions, has no expiration date and
may be modified or discontinued by the Board of Directors at any time. |
Item
6. Exhibits
Exhibit
Number |
Description |
|
|
|
31.1 |
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 |
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1** |
|
Certification by Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2** |
|
Certification by Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101.INS |
|
XBRL Instance Document |
101.SCH |
|
XBRL Taxonomy Extension Schema |
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase |
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase |
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase |
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase |
|
|
|
** |
|
Furnished, not filed |
SIGNATURES
In accordance with the requirements of the
Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
ITEX CORPORATION |
|
|
(Registrant) |
|
|
|
|
Date: December 5, 2014 |
|
By: |
/s/ Steven White |
|
|
Steven White |
|
|
Chief Executive Officer |
|
|
(Duly Authorized Officer) |
|
|
|
|
Date: December 5, 2014 |
|
By: |
/s/ John Wade |
|
|
John Wade |
|
|
Chief Financial Officer |
EXHIBIT 31.1
CERTIFICATION
I, Steven White, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of ITEX Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant disclosure controls and procedures and presented in this report our conclusion
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions): |
| a. | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and |
| b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting. |
Date: |
December 5, 2014 |
|
|
|
|
|
|
/s/ Steven White |
|
|
|
|
Steven White |
|
|
|
|
Chief Executive Officer |
|
EXHIBIT 31.2
CERTIFICATION
I, John Wade, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of ITEX Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| c. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared; |
| d. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles; |
| e. | Evaluated the effectiveness of the registrant disclosure controls and procedures and presented in this report our conclusion
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and |
| f. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions): |
| a. | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and |
| b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting. |
Date: |
December 5, 2014 |
|
|
|
|
|
|
/s/ John Wade |
|
|
|
|
John Wade |
|
|
|
|
Chief Financial Officer |
|
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT
OF 2002
(18 U.S.C. SECTION 1350)
In connection with the Quarterly Report
of ITEX Corporation, a Nevada corporation (the “Company”) on Form 10-Q for the quarter ended October 31, 2014, as filed
with the Securities and Exchange Commission (the “Report”), Steven White, Chief Executive Officer of the Company, does
hereby certify, pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350), that to his knowledge:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company. |
/s/ Steven White |
|
Steven White |
|
Chief Executive Officer |
|
|
|
December 5, 2014 |
|
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT
OF 2002
(18 U.S.C. SECTION 1350)
In connection with the Quarterly Report
of ITEX Corporation, a Nevada corporation (the “Company”) on Form 10-Q for the quarter ended October 31, 2014, as filed
with the Securities and Exchange Commission (the “Report”), John Wade, Chief Financial Officer of the Company, does
hereby certify pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350), that to his knowledge:
| (3) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (4) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company. |
/s/ John Wade |
|
John Wade |
|
Chief Financial Officer |
|
|
|
December 5, 2014 |
|
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