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 January 31, 2012.

 

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 January 31, 2012, we had 3,635,925 shares of common stock outstanding.

 

 

ITEX CORPORATION

FORM 10-Q

For the Three-month and Six-month Period Ended January 31, 2012

 

INDEX

 

			Page(s)
PART  I.	Financial Information
ITEM 1.	Financial Statements
	Consolidated Balance Sheets as of January 31, 2012 (unaudited) and July 31, 2011		1
	Consolidated Statements of Income for the Three and Six-Months Ended January 31, 2012 and 2011 (unaudited)		2
	Consolidated Statement of Stockholders’ Equity for the Six-Months Ended January 31, 2012 (unaudited)		3
	Consolidated Statements of Cash Flows for the Six-Months Ended January 31, 2012 and 2011 (unaudited)		4
	Notes to Consolidated Financial Statements (unaudited)		5
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
ITEM 4T.	Controls and Procedures		42
PART II.	Other Information		42
ITEM 1.	Legal Proceedings		42
ITEM 2.	Unregistered Sales of Equity Securities		42
ITEM 6.	Exhibits		43
	Signatures		44

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

ITEX CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

 

		January 31, 2012				July 31, 2011
		(unaudited)
ASSETS
Current assets:
Cash		$	5,807			$	5,386
Accounts receivable, net of allowance of $341 and $354			997				805
Prepaid expenses			92				131
Loans and advances			62				10
Prepaid advertising credits			19				60
Deferred tax asset, net of allowance of $22 and $22			798				798
Notes receivable			291				180
Other current assets			21				6
Total current assets			8,087				7,376
Property and equipment, net of accumulated depreciation of $409 and $468			63				89
Goodwill			3,191				3,266
Deferred tax asset, net of allowance of $130 and $130, and net of current portion			4,373				4,681
Intangible assets, net of accumulated amortization of $2,823 and $2,691			647				855
Notes receivable, net of current portion			1,261				729
Other long-term assets			21				25
Total assets			17,643				17,021
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts and other expenses payable			149				76
Commissions payable to brokers			393				669
Accrued commissions to brokers			1,288				785
Accrued expenses			503				545
Deferred revenue			32				47
Advance payments			118				133
Total current liabilities			2,483				2,255
Long-term liabilities:
Other long-term liabilities			10				8
Total liabilities			2,493				2,263
Stockholders’ equity:
Common stock, $0.01 par value; 9,000 shares authorized; 3,636 shares and 3,646 shares issued and outstanding, respectively			36				36
Additional paid-in capital			28,998				28,867
Accumulated deficit			(13,884	)			(14,145	)
Total stockholders' equity			15,150				14,758
Total liabilities and stockholders’ equity		$	17,643			$	17,021

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

ITEX CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

 

		Three-months Ended January 31,								Six-months Ended January 31,
		2012				2011				2012				2011
Revenue:
Marketplace revenue and other revenue		$	4,229			$	4,417			$	8,199			$	8,530
Costs and expenses:
Cost of Marketplace revenue			2,808				2,764				5,318				5,243
Corporate salaries, wages and employee benefits			503				554				972				1,017
Selling, general and administrative			558				709				1,221				1,434
Depreciation and amortization			77				155				165				309
			3,946				4,182				7,676				8,003
Income from operations			283				235				523				527
Other income/(expense)
Interest, net			31				10				51				20
Other income/(expense), net			312				-				312				34
			343				10				363				54
Income before income taxes			626				245				886				581
Income tax expense			202				94				302				227
Net income		$	424			$	151			$	584			$	354
Net income per common share:
Basic		$	0.12			$	0.04			$	0.16			$	0.10
Diluted		$	0.12			$	0.04			$	0.16			$	0.10
Weighted average shares outstanding:
Basic			3,635				3,581				3,641				3,580
Diluted			3,636				3,588				3,642				3,587

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

ITEX CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE SIX-MONTHS ENDED JANUARY 31, 2012

(In thousands)

(Unaudited)

 

		Common Stock								Additional Paid-in				Stockholder Note				Accumulated
		Shares				Amount				Capital				Receivable				Deficit				Total
Balance at July 31, 2011			3,646			$	36			$	29,452			$	(585	)		$	(14,145	)		$	14,758
Common Stock repurchased and retired			(17	)															(69	)			(69	)
Payments on Broker notes receivables															48								48
Stock based compensation expense			7								152												152
Dividend Payment																			(323	)			(323	)
Net income																			584				584
Balance at January 31, 2012			3,636			$	36			$	29,604			$	(537	)		$	(13,953	)		$	15,150

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

ITEX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Six-months ended January 31,
		2012				2011
		(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	584			$	354
Items to reconcile to net cash provided by operations:
Depreciation and amortization			165				309
Stock based compensation			152				22
Increase (decrease) in allowance for uncollectible receivables			(13	)			78
Change in deferred income taxes			307				205
Gain on sale of assets			(318	)			(35	)
Loss on disposal of equipment			6				1
Changes in operating assets and liabilities:
Accounts receivable, net			(179	)			(224	)
Prepaid expenses			38				(25	)
Prepaid advertising credits			40				66
Loans and advances			(51	)			20
Other assets			(10	)			18
Accounts payable			76				(56	)
Commissions payable to brokers			(276	)			(277	)
Accrued commissions to brokers			502				378
Accrued expenses			(42	)			48
Deferred revenue			(15	)			(54	)
Long-term liabilities			2				2
Advance payments			(15	)			(39	)
Net cash provided by operating activities			953				791
CASH FLOWS FROM  INVESTING ACTIVITIES:
Membership list purchase			(175	)			(72	)
Purchase of property and equipment			(13	)			(17	)
Payments received from notes receivable			106				74
Advances on Loans			(104	)			(100	)
Net cash used in investing activities			(186	)			(115	)
CASH FLOWS FROM  FINANCING ACTIVITIES:
Principal payments on Broker notes receivable			47				-
Repurchase of Common stock			(69	)			-
Cash dividend paid to Common Shareholders			(324	)			(233	)
Net cash used in financing activities			(346	)			(233	)
Net increase in cash			421				443
Cash at beginning of period			5,386				5,169
Cash at end of period		$	5,807			$	5,612
Supplemental cash flow information:
Cash paid for taxes		$	42			$	-
Non-Cash activities:
Sale of media credits			-				86
Notes for asset sales			470				-
Notes for member list			175				-

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

ITEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 1 –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 leading exchange for cashless business transactions (the “Marketplace”) where products and services are exchanged for “currency” only usable in the Marketplace (“ITEX dollars”). We administer the Marketplace and act as a third-party record-keeper for our members’ transactions. A summary of significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows:

 

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 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 2011 Annual Report on Form 10-K.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of ITEX Corporation and its wholly owned subsidiary, BXI Exchange, Inc. All inter-company accounts and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions affecting the amounts reported in the consolidated financial statements and accompanying notes. Changes in these estimates and assumptions may have a material impact on the Company’s financial statements and notes. Examples of estimates and assumptions include estimating:

 

·

certain provisions such as allowances for accounts receivable and notes receivable

·

any impairment of long-lived assets

 

 

·

useful lives of property and equipment

·

the value and expected useful life of intangible assets and goodwill

·

the value of assets and liabilities acquired through business combinations, or sold to brokers

·

tax provisions and valuation allowances

·

accrued commissions and other accrual expenses

·

litigation matters described herein

·

stock-based payments

 

Actual results may vary from estimates and assumptions that were used in preparing the financial statements.

 

Operating and Accounting Cycles

 

For each calendar year, we divide our operations into 13 four-week billing and commission cycles always ending on a Thursday (“operating cycle”). For financial statement purposes, our fiscal year is from August 1 to July 31 (“year”, “2012” for August 1, 2011 to July 31, 2012, “2011” for August 1, 2010 to July 31, 2011). Our fiscal second quarter is from November 1, 2011 to January 31, 2012 (“three-months ended January 31”). The Company’s first six months is from August 1, 2011 to January 31, 2012. We report our results as of the last day of each calendar month (“accounting cycle”).

 

Business Combinations

 

The Company accounts for business combinations using the purchase method of accounting. The total consideration paid in an acquisition is allocated to the fair value of the acquired company’s identifiable assets and liabilities. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. The consolidated financial statements reflect the results of operations of an acquired business from the completion date of an acquisition. The costs to acquire a business, including transaction costs, are allocated to the fair value of net assets acquired for any business combinations occurring prior to August 1, 2009. Subsequent to August 1, 2009, all costs to acquire a business are expensed.

 

The Company identifies and records separately the intangible assets acquired apart from goodwill based on the specific criteria for separate recognition established per the accounting standards codification, namely:

 

·

the asset arises from contractual or other legal rights; or

 

·

the asset is capable of being separated from the acquired entity and sold, transferred, licensed, rented or exchanged.

 

Advertising Credits

 

As a result of a business acquisition in August 2008, the Company obtained advertising credits, which represent prepaid credits for future media print and broadcast placements. The Company recorded a portion of these advertising credits that are expected to be utilized in the next year as a current asset and the balance are recorded as Other current assets. The Company originally recorded the cost of the advertising credits at the fair value at the time of business combination using a net realizable value approach. Under this approach, the value is determined based on the estimated future selling price less reasonable costs of disposal.

 

 

The Company began using the advertising credits for resale to its customers, primarily for ITEX dollars. In addition to ITEX dollars, the Company also receives its cash transaction fee on sales of the advertising credits for ITEX dollars. The asset is relieved and the expense is recorded as the advertising credits are sold by the Company to its customers or as the Company utilizes such credits in its marketing. During the three-months ending January 31, 2012 and 2011, the Company recognized $11 and $10 expense on the sale of advertising credits, respectively. For the six-month periods ending January 31, 2012 and 2011, the Company recognized $14 and $36 expense on sale of advertising credits, respectively. Additionally, the Company used approximately $26 and $14 of advertising credits in the three-months ending January 31, 2012 and 2011 and $26 and $30 of advertising credits in the six-months ending January 31, 2012 and 2011, respectively for its own advertising needs.

 

Goodwill

 

Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired, including domains and other definite-lived intangible assets, and liabilities assumed in business combinations accounted for under the purchase method.

 

Goodwill acquired in a purchase business combination is determined to have an indefinite useful life and is not amortized, but instead tested for impairment at least annually. A two-phase approach is used for testing goodwill for impairment. The first phase is a screen for potential impairment, while the second phase (if necessary) measures the amount of impairment, if any. Goodwill is written down and charged to operating results in any period in which the recorded value of goodwill exceeds its fair value. We analyzed goodwill as of our last fiscal year July 31, 2011 and we did not identify any impairment. We did reduce goodwill by $75 in the six-month period ending January 31, 2012 due to the sale of a membership list that had associated goodwill as part of cost basis.

 

Intangible Assets with Definite Lives

 

Intangible assets acquired in business combinations are estimated to have definite lives and are comprised of membership lists, noncompetition agreements and trade names. The Company amortizes costs of acquired intangible assets using the straight-line method over the contractual life of one to three years for noncompetition agreements, the estimated life of six to ten years for membership lists and the estimated life of ten years for trade names.

 

The carrying value of intangible assets with definite lives is reviewed on a regular basis for the existence of facts that may indicate that the assets are impaired. An asset is considered impaired when the estimated undiscounted future cash flows expected to result from its use and disposition are less than the amount of its carrying value. If the carrying value of an asset is deemed not recoverable, it is adjusted downward to the estimated fair value.

 

Revenue Recognition

 

We generate our revenue by charging members percentage-based transaction fees, association fees, and other fees assessed in United States dollars and Canadian dollars where applicable (collectively and as reported on our financial statements “USD” or “Cash”). We recognize revenue when persuasive evidence of an arrangement exists, the transaction has occurred or a cycle period has ended, the charges are fixed and determinable and no major uncertainty exists with respect to collectability.

 

 

Our largest sources of revenue are transaction fees and association fees. We charge members of the Marketplace an association fee every operating cycle in accordance with our members’ individual agreements. We also charge both the buyer and the seller a transaction fee based on the ITEX dollar value of that Marketplace transaction. Additionally, we may charge various auxiliary fees to members, such as annual membership dues, late fees, and insufficient fund fees. The total fees we charge to members are in USD and partially in ITEX dollars (see below, “Accounting for ITEX Dollar Activities”). We bill members for all fees at the end of each operating cycle. We track all financial activity in our internally developed database. Members have the option of paying USD fees automatically by credit card, by electronic funds transfer or by check. If paying through our Autopay System, generally, the USD transaction fee is 6% of the ITEX dollar amount of the member’s purchases and sales during the operating cycle. If paying by check, generally, the USD transaction fee is 7.5% of the ITEX dollar amount of that member’s purchases and sales during the operating cycle. Additionally, regardless of a member’s transaction activity, each operating cycle we charge most members an association fee of $20 USD ($260 USD annually) and $10 ITEX dollars ($130 ITEX dollars annually).

 

In each accounting cycle, the Company recognizes as revenue all USD transaction fees, association fees and applicable other fees that occurred during that month regardless of which operating cycle the fees occurred. Annual dues, billed in advance of the applicable service periods, are deferred and recognized into revenue on a straight-line basis over the term of one year.

 

For transaction and association fees charged to members, the Company shares a portion of its revenue with the brokers in its Broker Network in the form of commissions based on a percentage of cash collections from members. For those fees, revenues are recorded on a gross basis. Commissions to brokers are recorded as cost of revenue in the period corresponding to the revenue stream on which these commissions are based.

 

The Company records an allowance for uncollectible accounts receivable based upon its assessment of various factors. The Company considers historical experience, the age of the accounts receivable balances, the credit quality of its customers, current economic conditions and other factors that may affect customers’ ability to pay to determine the level of allowance required.

 

Income (Loss) Per Share

 

We prepare our financial statements on the face of the income statement for both basic and diluted earnings per share. Basic earnings per share excludes potential dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. As of January 31, 2012, we had no contracts to issue common stock, but we did have 20 warrants outstanding that were anti-dilutive. The Company had 10 unvested restricted stock units that were dilutive and 392 restricted stock units that were anti-dilutive as of January 31, 2012.

 

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 and six-month periods ended January 31, 2012 and 2011 (in thousands, except per share data) (unaudited):

 

 

		Three-months Ended January 31,								Six-months Ended January 31,
		2012				2011				2012				2011
Net income available for shareholders		$	424			$	151			$	584			$	354
Weighted avg. outstanding shares of common stock			3,635				3,581				3,641				3,580
Dilutive effect of restricted shares			1				7				1				7
Common stock and equivalents			3,636				3,588				3,642				3,587
Earnings per share:
Basic		$	0.12			$	0.04			$	0.16			$	0.10
Diluted		$	0.12			$	0.04			$	0.16			$	0.10

 

Accounting for ITEX Dollar Activities

 

Primarily, we receive ITEX dollars from members’ transaction and association fees, but we also receive ITEX dollars, to a much lesser extent, from other member fees. We expend ITEX dollars for revenue sharing transaction fees and association fees with our Broker Network, co-op advertising with Marketplace members and brokers; and for general Marketplace and corporate expenses. Our policy is to record transactions at the fair value of products or services received when those values are readily determinable.

 

Our accounting policy follows the accounting standards codification which indicates that transactions in which non-monetary assets are exchanged for barter credits should be recorded at fair value of the assets (or services) involved. The fair value of the assets received (in this case ITEX dollars) should be used to measure the cost if it is more clearly evident than the fair value of the asset surrendered or service provided. Our position is that the fair value of the non-monetary asset exchanged is more clearly evident than the fair value of the ITEX dollar received. In addition, there is no cost basis to us for ITEX dollars. Our conclusion may change if we could convert ITEX dollars into USD in the near term, as evidenced by a historical practice of converting ITEX dollars into USD shortly after receipt, or if quoted market prices in USD existed for the ITEX dollar.

 

We expend ITEX dollars primarily on the following items:

 

·

Co-op advertising with Marketplace members and brokers;

·

Revenue sharing with brokers for transaction fees and association fees;

·

Incentives to brokers for registering new members in the Marketplace;

·

General Marketplace and corporate expenses.

 

We believe that fair value should not be regarded as determinable within reasonable limits if major uncertainties exist about the realizability of the value that would be assigned to the asset received in a non-monetary transaction at fair value. If the fair value of the non-monetary asset (or service) transferred or received in the exchange is not readily determinable within reasonable limits, the recorded amount of the non-monetary asset transferred from the enterprise may be the only measure of the transaction. When our ITEX dollar transactions during the periods presented in the accompanying financial statements lacked readily determinable fair values they were recorded at the cost basis of the ITEX dollars surrendered, which was zero. However, we have reflected in our financial statements those items that meet non-monetary recognition by having readily determinable fair values. Our consolidated statements of income include ITEX dollar expenses for corporate expenses for certain products or services we purchased at prices comparable to what we would have expended had we paid in USD.

 

 

While the accounting policies described above are used for financial reporting purposes, the Internal Revenue Service requires, for purposes of taxation, that we recognize revenues, expenses, assets, and liabilities for all transactions in which we either receive or spend ITEX dollars using the ratio of one USD per ITEX dollar. For this reason, we track our ITEX dollar activity in statements to members and brokers and in other ways necessary for the operation of the Marketplace and our overall business.

 

Stock-based Payments

 

The Company accounts for stock-based compensation to its employees and directors and measures of the amount of compensation expense for all stock-based awards at fair value on the date of grant and recognition of compensation expense over the service period for awards expected to vest. Restricted stock awards issued to employees and directors are measured based on the fair market values of the underlying stock on the dates of grant.  

 

Contingencies

 

In the normal course of our business we are periodically involved in litigation or claims. We record litigation or claim-related expenses upon evaluation of among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. We accrue for settlements when the outcome is probable and the amount or range of the settlement can be reasonably estimated. In addition to our judgments and use of estimates, there are inherent uncertainties surrounding litigation and claims that could result in actual settlement amounts that differ materially from estimates. We expense our legal costs associated with these matters when incurred.

 

Deferred Revenue

 

We bill annually for association dues to certain members. We defer this revenue and recognize it over the annual period to which it applies. During 2009, we signed two Web services agreements. These agreements provide for a one-time platform subscription fee payable to ITEX upon signing of the contract. We amortize the subscription fee portion of the contract on a ratable basis over the life of the contract, typically five years. The primary Web services contract signed in 2009 has been terminated by the client in 2011 and we amortized the remaining unamortized balance upon cancellation. As of January 31, 2012 and July 31, 2011 we have $32 and $47 of annual dues deferred revenue and $0 and $0 of deferred revenue derived from Web services reflected on our balance sheet, respectively.

 

Recent Accounting Pronouncements

 

There have been no recent accounting pronouncements or changes in accounting pronouncements during the six-months ended January 31, 2012, 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 – ITEX DOLLAR ACTIVITY

 

As discussed in Note 1, the Company receives 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 the Company as a method of payment in revenue sharing and incentive arrangements with its Broker Network, co-op advertising with Marketplace members, as well as for certain general Marketplace and corporate expenses.

 

 

The Company records transactions at the fair value of products or services received when those values are readily determinable. Most of ITEX dollar transactions during the periods presented in these financial statements lacked readily determinable fair values and were recorded at the cost basis of the ITEX dollars surrendered, determined to be zero.

 

During the six-months ending January 31, 2012 and 2011, the Company spent ITEX dollars on certain products and services for corporate purposes such as legal, consulting, equipment and marketing services with readily determinable fair market values. Those ITEX dollar activities were included in the Company’s consolidated statements of income as follows (in thousands):

 

		Three-months ended January 31,								Six-months ended January 31,
		2012				2011				2012				2011
Revenue:
Marketplace and other revenue		$	64			$	97			$	124			$	169
Costs and expenses:
Cost of marketplace revenue			-				-				-				-
Corporate salaries, wages and employee benefits			-				-				-				-
Selling, general and administrative			64				97				124				169
Depreciation and amortization			1				-				1				-
		$	65			$	97			$	125			$	169
Income from operations			(1	)			-				(1	)			-

 

NOTE 3 – CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, COMMISSIONS PAYABLE TO BROKERS AND ACCRUED COMMISSIONS TO BROKERS

 

As discussed in Note 1, the Company’s billing cycles occur in 13 four-week periods (“operating cycle”) during each year. The billing cycles do not correspond to the end of the calendar month, when the Company reports its results (“accounting cycle”).

 

At the end of each operating cycle, the Company records commissions payable to brokers based on a percentage of USD collections of revenues from association fees and transaction fees. The commissions are paid to brokers in two equal installments with approximately one half paid one week after the end of the operating cycle and the second half paid three weeks after the end of the operating cycle.

 

In addition to commissions payable on cash collected from members, the Company records estimated accrued commissions on revenue recognized but not yet collected, if subject to future commission payouts.

 

The payments for salaries and wages to the Company’s employees occur on the same bi-weekly schedule as commission payments to brokers.

 

 

The timing differences between the Company’s operating cycles and its accounting cycles cause fluctuations in the comparative balances of cash and cash equivalents, accounts receivable, commissions payable to brokers and accrued commissions to brokers presented on the consolidated balance sheets. Depending on the length of time between the end of the operating cycle and the end of the accounting cycle, members’ payments on accounts receivable balances may vary. The longer the time, the greater amount of USD collections causes an increase in the reported cash and cash equivalents balance and a decrease in the net accounts receivable balance.

 

NOTE 4 - INTANGIBLE ASSETS AND GOODWILL

 

The Company recorded intangible assets, consisting of membership lists, noncompetition agreements and a trade name, in connection with business combinations and membership list purchases completed in fiscal years from 2005 to 2011. Changes in the carrying amount of the intangible assets in the six-months ended January 31, 2012 are summarized as follows (in thousands):

 

		Membership Lists				Non-Compete Agreements				Trade Name				Total Intangible Assets
Balance as of July 31, 2011		$	818			$	23			$	14			$	855
Amount allocated to sale of
Corporate-owned offices			(77	)			-				-				(77	)
Amortization			(126	)			(4	)			(1	)			(131	)
Balance as of January 31, 2012		$	615			$	19			$	13			$	647

 

Based on identified intangible assets recorded as of January 31, 2012 and assuming no subsequent impairment of the underlying assets, amortization expense is expected to be as follows (in thousands):

 

Year ending July 31,		Membership List Amortization				Noncompetition Agreement Amortization				Trade Name Amortization				Total Amortization
2012(1)			117				4				1				122
2013			233				8				2				243
2014			91				7				2				100
2015			62								2				64
Thereafter			112				-				6				118
Total		$	615			$	19			$	13			$	647

 

(1)

The expected amortization for 2012 reflects amortization expense that the Company anticipates to be recognized in the six-month period from February 1, 2012 to July 31, 2012.

 

In September 2011, ITEX purchased a trade exchange membership list from a third-party in the amount of $175. This entire list was then immediately sold to an existing broker for $175, resulting in no additional membership list asset on ITEX’s financial statement.

 

 

In November and December 2011, ITEX sold assets, and as part of the sales, ITEX allocated a pro rata portion of the membership list to the sale in the amount of $77. The pro rata percentage amount of unamortized membership list was calculated using the remaining list value per member multiplied by the number of members sold. Also, as part of the November 2011 sale, $75 of Goodwill was allocated as basis on the lists sold. The amount of goodwill applied to the sale was calculated using the relative fair value of the assets sales price compared to the Company’s overall enterprise value.

 

Changes in the carrying amount of goodwill in the six-months ended January 31, 2012 are summarized as follows (in thousands):

 

Balance as of July 31, 2011		$	3,266
Sale of Corporate owned offices			(75	)
Balance as of January 31, 2012		$	3,191

 

NOTE 5 – COMMITMENTS

 

The Company leases office space under operating leases. Lease commitments include leases for the Company’s corporate headquarters in Bellevue, Washington, and a branch office in Milwaukie, Oregon. These leases expire between October 31, 2012 and April 30, 2015. A lease commitment in Chicago, Illinois expired on November 30, 2011.

 

Future minimum payments at January 31, 2012 under operating leases, for office space were as follows (in thousands):

 

		Executive office				Corporate-owned office				Total
Location:		Bellevue, WA				Milwaukie, OR
Expiration date:		April 30, 2015				October 31, 2012
Lease commitments for the year ending July 31,
2012(1)			80				3				83
2013			163				1				164
2014			166				-				166
2015			127				-				127
Total		$	536			$	4			$	540

 

(1)

The expected payments for 2012 reflect future minimum payments for the six-month period from February 1, 2012 to July 31, 2012.

 

Rent expense, including utilities and common area charges, was $60 and $77, respectively for the three-month periods ended January 31, 2012 and 2011. Rent expense was $130 and $153 for the six-month periods ended January 31, 2012 and 2011.

 

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.

 

 

Future minimum payments at January 31, 2012 under the non-cancelable commitments were as follows (in thousands):

 

Year ending July 31,
2012 (1)			18
2013			12
Total		$	30

 

(1)

The expected payments for 2012 reflect future minimum payments for the six-month period from February 1, 2012 to July 31, 2012.

 

NOTE 6 – NOTES PAYABLE AND LINE OF CREDIT

 

The Company has a revolving credit agreement to establish a $3,000 line of credit facility with its primary banking institution, US Bank, effective through November 30, 2012. The interest rate of the facility is one-month LIBOR + 2% and the annual commitment fee for the current line of credit was $4. The line of credit facility was originally established on December 2, 2004.

 

There were no borrowings made under this line of credit in the six-months ending January 31, 2012 and there was no outstanding balance as of January 31, 2012. The Company may utilize this credit facility for short-term needs in the future.

 

NOTE 7 – LEGAL PROCEEDINGS

 

In June 2003, a former broker filed a complaint against us for wrongful termination of his brokerage agreement and breach of contract in connection with the termination of plaintiff's brokerage in 1999 (Bruce Kamm v. ITEX Corporation, Supreme Court of the State of New York County of New York, Index No.: 602031/2003). In November 2005, we filed a motion to dismiss the action for lack of subject matter jurisdiction pursuant to a forum selection clause in the contract between the parties requiring litigation be filed in Oregon. Our motion to dismiss was granted on December 12, 2005. In June 2006, plaintiff re-filed in the Circuit Court of the State of Oregon, (Bruce Kamm and Invision LTD v. ITEX Corporation, Case No. 0606-05949). In March 2011, the Court granted ITEX’s motion for summary judgment, dismissing all of plaintiff's claims. The Court subsequently entered final judgment in ITEX's favor. The Company is advancing the defense costs of directors under its indemnity obligations.

 

On September 7, 2011, a lawsuit was filed by one of the Company’s shareholders against our directors, and also ITEX as a nominal defendant, alleging shareholder derivative claims and seeking unspecified damages, costs and attorney’s fees (David Polonitza v. Steve White, Eric Best and John Wade and ITEX Corporation as a nominal defendant, King County Superior Court for the State of Washington, Case No. 11-2-30760-3). The complaint generally alleges breaches of fiduciary duties by the Company’s directors (as well as abuse of control, gross mismanagement, corporate waste, and unjust enrichment) in connection with the adoption of a Shareholders Rights Plan on March 11, 2011, the amendment of the Company’s Equity Incentive Plan on February 14, 2011 and award of restricted stock grants under the plan in March 2011, a private placement of common stock to franchisees in March 2011 and our stock repurchase program.

 

 

We have not established any reserves for any potential liability relating to the foregoing litigation matter as losses have not been determined to be probable or estimable. However, litigation is subject to inherent uncertainties and unfavorable rulings could occur. Although management currently believes resolving the foregoing proceedings will not have a material adverse impact on our financial statements, management’s view of these matters may change in the future. A material adverse impact on our financial statements could occur for the period in which the effect of an unfavorable final outcome becomes probable and reasonably estimable.

 

From time to time we are subject to a variety of claims and litigation incurred in the ordinary course of business. In our opinion, the outcome of other pending legal proceedings, individually or in the aggregate, will not have a material adverse effect on our business operations, results of operations, cash flows or financial condition.

 

NOTE 8 – INCOME TAXES

 

Deferred tax assets on our balance sheet primarily include Federal and State net operating loss carry forwards (collectively “NOLs”) which are expected to result in future tax benefits. Realization of these NOLs assumes that we will be able to generate sufficient future taxable income to realize these assets. Deferred tax assets also include temporary differences between the financial reporting basis and the income tax basis of our assets and liabilities at enacted tax rates expected to be in effect when such assets or liabilities are realized or settled.

 

In assessing the recoverability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are expected to be deductible. We consider the scheduled reversal of deferred tax liabilities and projections for future taxable income over the periods in which the deferred tax assets are expected to be deductible.

 

On July 31, 2011, we had NOLs of approximately $12,913 available to offset future taxable income. These are composed of approximately $11,008 from ITEX operating losses and approximately $1,905 from BXI operating losses. The future utilization is recorded as a deferred tax asset given that management believes it is more likely than not that we will generate future taxable income. We periodically assess the realizability of our available NOLs to determine whether we believe we will generate enough future taxable income to utilize some portion or all of the available NOLs. During the fourth quarter of 2011, we performed an assessment of our available NOLs. As part of that assessment for the year ended July 31, 2011, we concluded that the portion of our income that will be apportioned to the state of California in future years will not be as large as previously expected. As a result, we believe that we will not be able to utilize a portion of the California NOL. Accordingly, we recorded a $152 valuation allowance during the year ended July 31, 2011 against this NOL. We determined that there is no allowance required on our Federal NOL. As of January 31, 2012 and July 31, 2011, we have a $152 valuation allowance on state of California NOLs.

 

The deferred tax assets recorded represent our estimate of all deferred tax benefits to be utilized in the current year and future periods beyond 2012.

 

The reconciliation of the income tax provision (benefit) calculated using the federal statutory rates to the recorded income tax provision is as follows (dollars in thousands):

 

 

		Three-months ended January 31																Six-months ended January 31,
		2012								2011								2012								2011
		Amount				Rate				Amount				Rate				Amount				Rate				Amount				Rate
Expected tax provison at federal statutory rate		$	216				35	%		$	85				35	%		$	607				35	%		$	204				35	%
State income taxes			(14	)			-3	%			9				4	%			(5	)			-1	%			23				4	%
Provision for income taxes		$	202				32	%		$	94				39	%		$	602				34	%		$	227				39	%

 

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. A reconciliation of the Company’s unrecognized tax benefits as of January 31, 2012 is as follows (in thousands):

 

Balance at July 31, 2011		$	204
Increases/(Decreases) as a result of tax positions taken in the current year		$	(19	)
Increases/(Decreases) as a result of tax positions taken in prior years			-
Balance at January 31, 2012		$	185

 

The Company is subject to income taxes in the U.S. as well as various U.S. state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is subject to U.S. and state income tax examinations by tax authorities for tax years 2005 through the present. The Company does not anticipate any material changes to its recognized tax benefits over the next 12 months.

 

NOTE 9 – STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)

 

On March 30, 2011, the Company sold 151 shares of its common stock for $4.00 per share to nineteen members of the Broker Network. The aggregate purchase price of $605 is payable by six-year promissory notes with interest accruing at 2.44% per annum, the applicable federal rate in effect as of the closing. ITEX will be paid each operating cycle by reducing broker commission checks over the term of the notes. The Company has recorded these notes receivable as contra-equity in the accompanying financial statements. Until March 30, 2014, the purchased shares may not be sold or transferred and are subject to the terms of a voting agreement, which provides the shares will be voted in accordance with the recommendations of the Board of Directors and an irrevocable proxy be given to the corporate secretary of ITEX.

 

 

On March 11, 2011, the Board of Directors of the Company declared a dividend, payable to stockholders of record on March 25, 2011 of one right (a “Right”) per each share of outstanding Common Stock of the Company, par value $0.01 per share (“Common Stock”), to purchase 1/1000th of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share, of the Company (the “Preferred Stock”), at a price of $15.00 per share (such amount, as may be adjusted from time to time as provided in the Rights Agreement described below, the “Purchase Price”). In connection therewith, on March 11, 2011, the Company entered into a Rights Agreement (the “Rights Agreement”) with OTR, Inc, as Rights Agent. The Rights will be exercisable upon the earlier of (i) such date the Company learns that a person or group, without Board approval, acquires or obtains the right to acquire beneficial ownership of 15% or more of ITEX’s outstanding common stock or a person or group that already beneficially owns 15% or more of the Company’s outstanding common stock at the time the Rights Agreement was entered into, without Board approval, acquires any additional shares (other than pursuant to the Company’s compensation or benefit plans) (any person or group specified in this sentence, an “Acquiring Person”) and (ii) such date a person or group announces an intention to commence or following the commencement of (as designated by the Board) a tender or exchange offer which could result in the beneficial ownership of 15% or more of ITEX’s outstanding common stock. The Rights will expire on March 11, 2014, unless earlier redeemed or exchanged by the Company. If a person or group becomes an Acquiring Person, each Rights holder (other than the Acquiring Person) will be entitled to receive, upon exercise of the Right and payment of the Purchase Price, that number of 1/1000ths of a share of Preferred Stock equal to the number of shares of Common Stock which at the time of the applicable triggering transaction would have a market value of twice the Purchase Price. In the event the Company is acquired in a merger or other business combination by an Acquiring Person, or 50% or more of the Company’s assets are sold to an Acquiring Person, each Right will entitle its holder (other than an Acquiring Person) to purchase common shares in the surviving entity at 50% of the market price.

 

The Company has 5,000 shares of preferred stock authorized at $0.01 par value. No shares were issued or outstanding as of January 31, 2012.

 

On March 9, 2010, the Company announced a $2,000 stock repurchase program, authorized by the Board of Directors. The program authorizes the repurchase of shares in open market purchases or privately negotiated transactions, has no expiration date and may be modified or discontinued by the Board of Directors at any time. In the six-month period ended January 31, 2012, 17 shares at an average cost of $3.96 per share were purchased.

 

NOTE 10 – STOCK-BASED PAYMENTS (in thousands, except per share amounts)

 

In March 2004 the Company adopted the ITEX Corporation 2004 Equity Incentive Plan (the “2004 Plan”), for which 400 shares of common stock were authorized for issuance. The 2004 Plan provides for the grant of incentive and nonqualified stock options, restricted stock, and stock bonuses to the Company's employees, directors, officers or consultants.

 

In March 2011, the Company issued 197 restricted shares to thirteen of the Company’s employees, valued at the grant date stock price of $4.25 per share, with a vesting period of five years from the date of grant. The fair value of these shares as of the grant date was $837. The grant is to be amortized to compensation expense over the respective requisite service period of five years.

 

In March 2011, the Company issued 190 restricted shares to the Company’s CEO, valued at the grant date stock price of $4.25 per share, with a vesting period of eleven and one-half years from the date of grant. The fair value of these shares as of the grant date was $808. The grant first vests 19 shares in October 2013 and then another 19 shares vest annually in October of each subsequent year. The grant is to be amortized to compensation expense over the respective requisite service period of eleven and one-half years.

 

 

In March 2011, the Company issued 5 restricted shares to a consultant who is also a Board of Director, valued at the grant date stock price of $4.25 per share, with a vesting period of one year from the date of grant. The fair value of these shares as of the grant date was $21. The grant is to be amortized to compensation expense over the respective requisite service period of one year.

 

In February 2011, the Board of Directors of the Company approved an amendment to the 2004 Equity Incentive Plan, as amended and restated (the “Plan”), that increased the number of shares of the Company’s common stock that may be delivered pursuant to awards granted under the Plan by an additional 400 shares to bring the total common shares authorized under the plan to 800 shares. Eight shares remained available for future grants under the 2004 Plan for the period ended January 31, 2012.

 

In October 2009, the Company issued 39 restricted shares to the Company’s CEO, valued at the grant date stock price of $3.40 per share, with a vesting period of three years from the date of grant. The grant is to be amortized to compensation expense over the respective requisite service period of three years.

 

We account for stock-based compensation in accordance with the related guidance. Under the fair value recognition provisions, we estimate stock-based compensation cost at the grant date based on the fair value of the award. We recognize that expense ratably over the requisite service period of the award.

 

The stock-based compensation expense charged against the results of operations was as follows (in thousands):

 

		Three-months ended January 31,								Six-months ended January 31,
		2012				2011				2012				2011
Stock-based compensation expense included in:
Corporate salaries, wages and employee benefits		$	71			$	11			$	141			$	22
Selling, general and administrative			5				-				11				-
Total stock-based compensation expense		$	76			$	11			$	152			$	22

 

At January 31, 2012, 402 shares of common stock granted under the 2004 Plan remained unvested. At January 31, 2012, the Company had $1,481 of unrecognized compensation expense, expected to be recognized over a weighted-average period of approximately seven and one-quarter years.

 

NOTE 11 – SUBSEQUENT EVENTS

 

On February 24, 2012, the Board of Directors declared a cash dividend in the amount of $0.04 per share, payable on March 20, 2012 to stockholders of record as of the close of business on March 9, 2012.

 

 

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, The Membership Trading Community^SM, is a leading exchange for cashless business transactions across North America (the “Marketplace”). We service our member businesses through our independent licensed brokers and franchise network (individually, “broker” and together, the “Broker Network”) in the United States and Canada. Our business services and payment systems enable approximately 25 thousand member businesses (our “members”) to trade products and services without exchanging cash. These products and services are instead exchanged for ITEX dollars which can only be redeemed in the Marketplace (“ITEX dollars”). We administer the Marketplace and act as a third-party record-keeper for our members’ transactions. We generate revenue by charging members percentage-based transaction fees, association fees, and other fees assessed in United States dollars and Canadian dollars where applicable (collectively and as reported on our financial statements, “USD” or “Cash”).

 

For each calendar year, we divide our operations into 13 four-week billing and commission cycles always ending on a Thursday (“operating cycle”). For financial statement purposes, our fiscal year is from August 1 to July 31 (“year”, “2012” for August 1, 2011 to July 31, 2012, “2011” for August 1, 2010 to July 31, 2011). Our second quarter is the three-month period from November 1, 2011 to January 31, 2012 (“three-month period ended January 31”). The Company’s first six months is from August 1, 2011 to January, 31, 2012. We report our results as of the last day of each calendar month (“accounting cycle”). The timing of billing and collection activities after the end of the billing cycle does not correspond with the end of the accounting period, therefore this timing difference results in the fluctuations of the balances of cash, accounts receivable, commissions payable and accrued commissions on the consolidated balance sheet and consolidated statement of cash flows.

 

Each operating cycle we generally charge our members association fees of $20 USD ($260 USD annually) and $10 ITEX dollars ($130 ITEX dollars annually). We also charge transaction fees in USD from both the buyer and seller computed as a percentage of the ITEX dollar value of the transaction.

 

The following summarizes our operational and financial highlights for the quarter and our outlook:

 

 

Comparative Results. For the three-months ended January 31, 2012, as compared to the three-months ended January 31, 2011, our revenue decreased by $188, or 4%, from $4,417 to $4,229 and our income from operations increased by $48, or 20%, from $235 to $283. For the six-month period ended January 31, 2012, as compared to the six-month period ended January 31, 2011, our revenue decreased by $331, or 4%, from $8,530 to $8,199 and our income from operations decreased by $4, or 1%, from $527 to $523.

 

·

Revenue Sources. Our decrease in revenues for the six-months ended January 31, 2012 was primarily attributable to the reduction in our web services revenue. Our primary source of web services revenue since the 3rd quarter of fiscal 2009 had been derived from subscription fees, transactional, support and consulting fees primarily from one web services client. On February 28, 2011, the web services agreement was terminated by the customer. For the three-months ended January 31, 2012, as compared to the three-months ended January 31, 2011, our web services revenue decreased by $190, from $190 to $0. For the six-months ended January 31, 2012, as compared to the six-months ended January 31, 2011, our web services revenue decreased by $393, from $393 to $0.

 

Revenue from our core business of association and transaction fees increased for the three and six-month period ending January 31, 2012, by $73 and $199, respectively, when compared to the corresponding 2011 period. Our primary customers are small businesses with less than ten employees. We believe this segment of the business community is vulnerable in a difficult economic environment, with strained or insufficient cash flow being a major impediment to growth. As the economy gains momentum we believe our member businesses will improve and expect modest increases in our Marketplace transaction volume.

 

·

Revenue Trends and Growth. As discussed above, due primarily to the reduction in our web services revenue, we experienced a downturn in overall revenue this quarter and do not anticipate that any web services revenue will be generated during 2012. Although we seek to increase revenues through organic growth and the development of new revenue sources, the primary driver of revenue growth in recent years has been through our business acquisitions. These acquisitions are intermittent and cannot be relied upon as a future source of revenue growth, because of the absence of acquisition candidates, lack of financing, or unacceptable terms. We have approximately 28% recurring revenues from association fees. Approximately two-thirds of our net revenues each quarter come from transaction fees during that quarter. We believe the expansion of our membership base will increase our recurring revenues. We continue to seek to increase our revenue by:

 

·

enhancing our internet applications;

·

marketing the benefits of participation in the Marketplace;

·

adding new brokers.

 

·

Adding new brokers is an important component of our overall growth plan, and we are increasing our broker recruiting efforts. One recruitment program which has achieved some success is our Broker Mentor program, in which existing brokers recruit prospective brokers and provide ongoing training to the prospective broker until certain performance thresholds are met. Upon meeting the performance thresholds, the prospective broker is offered a franchise for a reduced fee of $5 from our standard broker fee of $20. The mentoring broker receives a 5% commission override on the cash collected per cycle by the new broker. We added nine new brokers in 2011 and 2012 as a result of this and other initiatives.

 

 

·

Corporate-owned Offices. The ITEX system is approximately 98% broker managed and 2% corporate operated. As a general operating philosophy, we depend on the ability of our brokers to enroll new members, train them in the use of the Marketplace, grow our transactional volume by facilitating business among members, manage member relationships, provide members with information about ITEX products and services, and assure the payment of our fees. Our broker model requires less capital investment and lower operating expenses than if we operated all of the offices in our network directly. From time to time, we complement our Broker Network with corporate-owned locations, acquired either as a result of business acquisitions or as a result of ensuring the orderly transition of broker locations. Part of our strategy when we acquire exchange members is to incubate the asset with corporate direction and assistance, flush out non-performing members, synchronize fee plans, and then transfer certain management rights to these members to new or existing franchisees, with the contractual rights and revenues generated by these members remaining with ITEX. The result is a wider member base, managed by new franchisees, and a member list asset that continues to be owned by ITEX. Two of our corporate-owned offices were sold to new franchisees during the three-months ended January 31, 2012.

 

·

Supporting Members, Brokers and Employees. 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. We are in the process of upgrading our payment processing and team software with .NET technologies.

 

·

Geographical expansion. We have acquired eight trade exchange membership lists since 2005 and integrated them into the ITEX system. The acquisitions have contributed to our member counts and revenue and allowed us to expand the breadth of our network by opening offices in several geographic areas in which the ITEX presence was previously weak or nonexistent. In addition, we removed competitors from our industry, strengthening our brand. Part of our strategy when we acquire an exchange’s members is to distribute members to existing franchisees or spin off to new franchisees. We continue to evaluate and consider other potential strategic transactions, if and when such opportunities arise.

 

·

Financial Position. Our financial condition and balance sheet remain strong at January 31, 2012, with a cash balance of $5,807. Our net cash flows provided by operating activities were $953 for the six-month period ended January 31, 2012, compared to $791 for the corresponding period the previous year. We intend to continue to strengthen our business model, which has the ability to generate consistent cash flows with low capital expenditure requirements. We continue to evaluate the best use of our cash. 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.

 

 

RESULTS OF OPERATIONS

 

Condensed Results (in thousands, except per share data):

 

		Three-months ended January 31,								Six-months ended January 31,
		2012				2011				2012				2011
Revenue		$	4,229			$	4,417			$	8,199			$	8,530
Cost of marketplace revenue		$	2,808			$	2,764			$	5,318			$	5,243
Operating expenses			1,138				1,418				2,358				2,760
Income from operations			283				235				523				527
Other income,net			343				10				363				54
Income before income taxes			626				245				886				581
Income tax expense			202				94				302				227
Net income		$	424			$	151			$	584			$	354
Net income per common share:
Basic		$	0.12			$	0.04			$	0.16			$	0.10
Diluted		$	0.12			$	0.04			$	0.16			$	0.10
Average common and equivalent shares:
Basic			3,635				3,581				3,641				3,580
Diluted			3,636				3,588				3,642				3,587

 

Revenue for the three-months ended January 31, 2012, as compared to the corresponding period of fiscal 2011 decreased by $188, or 4%. Revenue for the six-month period ended January 31, 2012, as compared to the corresponding six-month period of fiscal 2011, decreased by $331, or 4%. The decrease in revenues for the three-months ended January 31, 2012 was primarily due to the reduction in our web service and media initiatives which decreased by $219, offset somewhat by an increase in our association fees of $20 and an increase in transaction fees of $53. The decrease in revenues for the six-months ended January 31, 2012 was primarily due to the reduction in our web service and media initiatives which decreased by $443, offset somewhat by an increase in our association fees of $47 and an increase in transaction fees of $152.

 

Cost of Marketplace revenue which includes association and transaction commissions paid to brokers, corporate-owned office expense and other Marketplace related expenses increased by $44, or 2% for the three-month period ended January 31, 2012, compared to the corresponding period of fiscal 2011. Cost of Marketplace revenue increased by $75, or 1% for the six-month period ended January 31, 2012, compared to the corresponding period of fiscal 2011. The cost of Marketplace revenue increases were in line with the corresponding increase in association and transaction revenues.

 

Operating expenses which include corporate salaries, wages and employee benefits, selling, general and administrative, depreciation and amortization decreased by $280, or 20% for the three-months ended January 31, 2012, compared to the corresponding period of fiscal 2011. Operating expenses decreased by $401, or 15% for the six-month period ended January 31, 2012, compared to the corresponding period of fiscal 2011.

 

 

The decrease in operating expenses in the three-months ended January 31, 2012, as compared to the corresponding period of fiscal 2011, resulted from a $51 decrease in corporate salaries, wages and benefits, $151 decrease in selling, general and administrative expense, as we proactively adjusted costs related to web services and corporate-owned offices, including reducing corporate staff to 20. In addition, depreciation and amortization decreased by $78.

 

The primary decrease in operating expenses in the six-month period ended January 31, 2012, as compared to the corresponding period of fiscal 2011, resulted from a $213 decrease in selling, general and administrative expenses which included a $45 decrease in corporate salaries, wages and employee benefits, as a result of reduced costs related to web services and corporate-owned offices, including reducing corporate staff to 20. In addition, depreciation and amortization decreased by $144. The decreases above were offset somewhat by $155 in legal fees for a stockholder derivative lawsuit.

 

Income from operations for the three-months ended January 31, 2012, as compared to the corresponding quarter of fiscal 2011, increased by $48, or 20%. Income from operations for the six-month period ended January 31, 2012, as compared to the corresponding period of fiscal 2011, decreased by $4, or 1%.

 

Net income for the three-months ended January 31, 2012, as compared to the corresponding period of fiscal 2011, increased by $273, or 181%. Net income for the six-month period ended January 31, 2012, as compared to the corresponding period of fiscal 2011, increased by $230, or 65%. The increase in net income is primarily attributable to a gain on the sale of corporate-owned offices.

 

Earnings per share, both basic and diluted, increased by $0.08 to $0.12 per share in the three-months ended January 31, 2012 compared to the three-months ended January 31, 2011. Earnings per share, both basic and diluted, increased $0.06 to $0.16 per share for the six-month period ended January 31, 2012 compared to the six-month period ended January 31, 2011.

 

Revenue, Costs and Expenses

 

The following table sets forth our selected consolidated financial information for the three-months ended January 31, 2012 and 2011 with amounts expressed as a percentage of total revenues (in thousands) (unaudited):

 

 

		Three-months ended January 31,																Six-months ended January 31,
		2012								2011								2012								2011
		Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent
Revenue:
Marketplace revenue and other revenue		$	4,229				100.0	%		$	4,417				100.0	%		$	8,199				100.0	%		$	8,530				100.0	%
Costs and expenses:
Cost of Marketplace revenue			2,808				66.4	%			2,764				62.6	%			5,318				64.9	%			5,243				61.5	%
Salaries, wages and employee benefits			503				11.9	%			554				12.5	%			972				11.9	%			1,017				11.9	%
Selling, general and administrative			558				13.2	%			709				16.1	%			1,221				14.9	%			1,434				16.8	%
Depreciation and amortization			77				1.8	%			155				3.5	%			165				2.0	%			309				3.6	%
			3,946				93.3	%			4,182				94.7	%			7,676				93.6	%			8,003				93.8	%
Income from operations			283				6.7	%			235				5.3	%			523				6.4	%			527				6.2	%
Interest income, net			31				0.7	%											51				0.6	%
Gain on sale of assets, net			312				7.4	%			10				0.2	%			312				3.8	%			54				0.6	%
Income before income taxes			626				14.8	%			245				5.5	%			886				10.8	%			581				6.8	%
Provision for income taxes			202				4.8	%			94				2.1	%			302				3.6	%			227				2.6	%
Net income		$	424				10.0	%		$	151				3.4	%		$	584				7.1	%		$	354				4.2	%

 

Marketplace revenue

 

Marketplace revenue consists of transaction fees, association fees and other revenues. Other revenue includes web services, media and ITEX dollar revenue. The following are the components of Marketplace revenue that are included in the consolidated statements of income (in thousands) (unaudited):

 

		Three-months ended January 31,								Percent				Six-months ended January 31,								Percent
		2012				2011				increase  (decrease)				2012				2011				increase  (decrease)
Transaction fees		$	2,900			$	2,847				2	%		$	5,551			$	5,399				3	%
Association fees			1,209				1,189				2	%			2,425				2,378				2	%
Other revenue			120				381				-69	%			223				753				-70	%
		$	4,229			$	4,417				-4	%		$	8,199			$	8,530				-4	%

 

 

Total revenue decreased by $188, or 4%, for the three-months ended January 31, 2012, as compared to the corresponding period ended January 31, 2011. Total revenue decreased by $331, or 4% for the six-month period ended January 31, 2012, as compared to the six-month period ended January 31, 2011.

 

Transaction fee revenue for the three-months ended January 31, 2012, as compared to the corresponding quarter of fiscal 2011, increased by $53, or 2%. Transaction fee revenue for the six-month period ended January 31, 2012, as compared to the corresponding period of fiscal 2011, increased by $152, or 3%. The increase for both the three and the six-month periods is the result of a greater volume of business being transacted in the ITEX Marketplace.

 

Association fee revenue for the three-months ended January 31, 2012, as compared to the corresponding quarter of fiscal 2011, increased by $20, or 2%. Association fee revenue for the six-month period ended January 31, 2012, as compared to the corresponding period of fiscal 2011, increased by $47, or 2%. The increase for both the three and the six-month periods is the result of an increase in the net members participating in the Marketplace.

 

Other revenue for the three-months ended January 31, 2012, as compared to the corresponding quarter of fiscal 2011, decreased by $261, or 69%. Other revenue for the six-months ended January 31, 2012, as compared to the corresponding quarter of fiscal 2011, decreased by $530, or 70%. The decrease in other revenues was primarily from the reduction of our web services revenues which generated $0 in both the three and six-months ended January 31, 2012, as compared to $190 and $393, respectively, for the corresponding periods in 2011. In addition, ITEX dollar revenue utilized in the Marketplace during the three and six-months ended January 31, 2012 decreased by $33 and $45, respectively, when compared to the corresponding periods in 2011.

 

ITEX Dollar Revenue

 

As described in notes to our consolidated financial statements, we receive ITEX dollars from members’ transaction and association fees, and, to a lesser extent, from other member fees. ITEX dollars earned from members are later used by us as a method of payment in revenue sharing and incentive arrangements with our Broker Network, including co-op advertising, as well as for certain general corporate and Marketplace 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.

 

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 equal to expenses we incurred and paid for in ITEX dollars. We recorded $64 and $97 as ITEX dollar revenue for the three-months ended January 31, 2012 and 2011, respectively. We recorded $124 and $169 as ITEX dollar revenue for the six-months ended January 31, 2012 and 2011, respectively.

 

The corresponding ITEX dollar expenses in the three and six-month periods ending January 31, 2012 were 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.

 

 

Costs 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):

 

		Three-months ended January 31,								Percent				Six-months ended January 31,								Percent
		2012				2011				increase (decrease)				2012				2011				increase (decrease)
Transaction fee commissions		$	2,176			$	2,007				8	%		$	4,007			$	3,772				6	%
Association fee commissions			439				418				5	%			843				815				3	%
Corporate-owned office costs			90				239				-62	%			275				453				-39	%
Other costs of revenue			103				100				3	%			193				203				-5	%
		$	2,808			$	2,764				2	%		$	5,318			$	5,243				1	%
Costs of Marketplace revenue as percentage of total revenue			66	%			63	%							65	%			62	%

  

Costs of Marketplace revenue for the three-months ended January 31, 2012, as compared to the three-months ended January 31, 2011, increased by $44, or 2%. Costs of Marketplace revenue for the six-month period ended January 31, 2012, as compared to six-month period ended January 31, 2011, increased by $75, or 1%. The overall increase in costs of Marketplace revenue corresponds to the increase in total revenue for the same periods. Costs of Marketplace revenue as a percentage of total revenue increased slightly for both the three and six-month periods ended January 2012 and 2011, respectively because of the increase in commissions paid out due to the sale of corporate-owned offices to new brokers. Corporate-owned offices have no associated commissions due ─ however, transaction and association fee commissions are paid out once a corporate-owned office is sold.

 

Transaction fee commissions increased by $169, or 8% for the three-months ended January 31, 2012, as compared to the corresponding period of fiscal 2011. The increase in transaction fee commissions is due to a corresponding increase in the transaction fee revenue and the sale of corporate-owned offices. Transaction fee commissions increased by $235 or 6% for the six-month period ended January 31, 2012 as compared to the corresponding period of fiscal 2011 as transaction fee revenue increased by a similar rate during the comparable periods, in conjunction with the sale of corporate-owned offices.

 

Association fee commissions increased by $21 and $28, or 5% and 3%, respectively for the three and six-month periods ended January 31, 2012 as compared to the corresponding periods of fiscal 2011. The increase in commissions was in line with the corresponding increase in association fee revenue for the same periods and due to the impact from the sale of corporate-owned offices.

 

 

Corporate-owned office costs consist of compensation and operating expenses. Corporate-owned office costs decreased by $149 and $178, or 62% and 39%, respectively for the three and six-month periods ended January 31, 2012 as compared to the corresponding periods of fiscal 2011. The decrease is due to decreased expenses associated with managing a portion of the web services initiatives out of our corporate-owned stores, the expiration of an office lease and ancillary costs as a result of the sale of corporate-owned offices.

 

Other costs of revenue consist of miscellaneous Marketplace-related expenses such as broker computer upgrades, marketing and credit card processing fees along with other commissions not associated with association or transaction revenue. Other costs of revenue increased by $3, or 3% for the three-month period ended January 31, 2012 as compared to the corresponding period of 2011. Other costs of revenue decreased by $10 or 5% for the six-month period ended January 31, 2012 as compared to the corresponding period of 2011.

 

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. 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 January 31,								Percent				Six-months ended January 31,								Percent
		2012				2011				decrease				2012				2011				decrease
Corporate salaries, wages and employee benefits		$	503			$	554				-9	%		$	972			$	1,017				-4	%
Corporate salaries, wages and employee benefits as percentage of total revenue			12	%			13	%							12	%			12	%

  

Salaries, wages, employee benefits decreased by $51 and $45, or 9% and 4%, respectively for the three and six-month periods ended January 31, 2012 as compared to the corresponding periods of fiscal 2011. The decrease is primarily related to decreased headcount costs from the planned reduction in the staff required to manage the terminated web services. This is offset somewhat, by the increase in stock-based compensation of $60 and $119 for the three and six-month periods ending January 31, 2012 as compared to the corresponding periods in 2011.

 

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 January 31,								Percent				Six-months ended January 31,								Percent
		2012				2011				decrease				2012				2011				decrease
Selling, general and administrative expenses		$	558			$	709				-21	%		$	1,221			$	1,434				-15	%
Selling, general and administrative expenses as percentage of total revenue			13	%			16	%							15	%			17	%

   

  

Selling, general and administrative expenses decreased by $151 and by $213, or 21% and 15%, respectively, for the three and six-month periods ended January 31, 2012, as compared to the three and six-month periods ended January 31, 2011. Our selling, general and administrative expenses also decreased as a percentage of total revenues in the periods presented.

 

The decrease is due primarily to a decrease in legal fees. Legal fees for the three and six-month periods ended January 31, 2012 decreased by $69 and by $136, or 26% and 28%, respectively, compared to the three and six-months ended January 31, 2011. The primary decrease in legal fees was due to the Company prevailing and ending its defense of a litigation matter initiated in 2003 (as discussed in NOTE 7 to our consolidated financial statements). This decrease was offset by $155 in legal fees incurred as a result of a stockholder derivative claim expensed in the six-months ended January 31, 2012.

 

Additionally, bad debt expense for the three-months ended January 31, 2012 decreased by $43, or 54% to $37 as compared to $80 for the three-months ended January 31, 2011. Bad debt expense for the six-months ended January 31, 2012 decreased by $67, or 30% to $156 as compared to $223 for the six-months ended January 31, 2011.

 

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 January 31,								Percent				Six-months ended January 31,								Percent
		2012				2011				decrease				2012				2011				decrease
Depreciation and amortization		$	77			$	155				-50	%		$	165			$	309				-47	%
Depreciation and amortization as percentage of total revenue			2	%			4	%							2	%			4	%

 

 

Depreciation and amortization decreased by $78 and $144, or 50% and 47%, respectively, for the three and the six-month periods ended January 31, 2012, as compared to the three and six-month periods ended January 31, 2011. Depreciation and amortization also decreased as a percentage of total revenues in the three and six-month periods ended January 31, 2012 compared to the corresponding periods in 2011.

 

Other income

 

Other income includes interest received on notes receivable and promissory notes, and certain one-time gains.

 

Comparative results are as follows (in thousands) (unaudited):

 

		Three-months ended January 31,								Percent				Six-months ended January 31,								Percent
		2012				2011				increase				2012				2011				increase
Interest income		$	31			$	10				210	%		$	51			$	20				155	%
Gain on sale of assets		$	312			$	-				-			$	312			$	34				818	%
Other income		$	343			$	10				3330	%		$	363			$	54				572	%
Other income, as percentage of total revenue			8	%			0	%							4	%			1	%

 

Interest income is derived primarily from our notes receivable for corporate 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 increased the amount of outstanding loans to our brokers. Since the end of fiscal 2011, these loans have increased to $1,552 from $909. Each loan is primarily secured by the broker’s ITEX office. Other income for the three and six-month period ended January 31, 2012 includes a $318 gain on the sale of corporate-owned offices offset by a loss of $6 on the disposition of fixed assets. Other income for the six-month period ended January 31, 2011 includes a $35 gain on the sale of advertising credits offset by a loss of $1 on the disposition of fixed assets.

 

Income Taxes

 

Comparative results are as follows (in thousands) (unaudited):

 

		Three-Months ended January 31																Six-months ended January 31,
		2012								2011								2012								2011
		Amount				Rate				Amount				Rate				Amount				Rate				Amount				Rate
Expected tax provison at federal statutory rate		$	216				35	%		$	85				35	%		$	307				35	%		$	204				35	%
State income taxes			(14	)			-3	%			9				4	%			(5	)			-1	%			23				4	%
Provision for income taxes		$	202				32	%		$	94				39	%		$	302				34	%		$	227				39	%

 

 

We recognized a $202 and $302 provision for income taxes, in the three and six-month periods ended January 31, 2012, respectively, as compared to the $94 and $227 provision for income taxes in the three and six-month periods ended January 31, 2011. Provision for income taxes increased by $108 for the three-months ended January 31, 2012, as compared to the corresponding period of fiscal 2011. The increase was due to an increase in taxable income in the three-months ended January 31, 2012. The provision for income taxes increased by $75 for the six-month period ended January 31, 2012, as compared to the corresponding period of fiscal 2011, due to the corresponding increase in pre-tax income.

 

The Federal effective tax rate related to our provision for income taxes in the three and six-months ended January 31, 2012 is similar to that used in the period ending January 31, 2011. The State effective tax rate related to our provision for income taxes in the three and six-months ended January 31, 2012 is lower to that used in the three and six-month periods ending January 31, 2011, due 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 ongoing operations primarily with cash provided by our operating activities. Our principal sources of liquidity are cash flows provided by operating activities, existing cash and cash equivalents, and a line of credit facility. As of July 31, 2012 and January 31, 2011, we had $5,807 and $5,386, respectively, in cash. Additionally, we have a revolving credit agreement to establish a $3,000 line of credit facility from our primary banking institution, U.S. Bank (“line of credit”). The current line of credit agreement expires in November 2012. We have no outstanding balance on our line of credit as of January 31, 2012.

The following table presents a summary of our cash flows for the six-months ended January 31, 2012 and 2011 (in thousands) (unaudited):

 

		Six-months ended January 31,
		2012				2011
Cash provided by operating activities		$	953			$	791
Cash used in investing activities			(186	)			(115	)
Cash used in financing activities			(346	)			(233	)
Increase in cash		$	421			$	443

 

Our business model has historically proven to be successful in providing positive cash flow from operating activities. This positive cash flow enabled us, in large part, to complete three trade exchange membership list acquisitions in fiscal 2011 and one in the first quarter of 2012. We feel that our cash flows from operating activities will remain adequate to fund ongoing operating requirements.

 

As part of our future expansion activities or as part of our evaluation of strategic opportunities, we may seek to acquire certain competitors or other business to business enterprises, consider partnering or other collaborative agreements, or a merger or other strategic transaction. In the meantime, we plan to continue to use capital to fund our stock repurchase plan and to pay quarterly dividends. We may also consider other avenues to return capital to stockholders. We expect that our current working capital would be adequate for these purposes. However, we may seek external financing for a portion of any strategic transaction, subject to the consent of any secured creditors. At this time, we are focusing on the organic growth of our core business.

 

 

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 six-months ended January 31, 2012, net cash provided by operating activities was $953 compared with $791 in the six-months ended January 31, 2011 an increase of $162, or 20%. The increase in net cash provided by the operating activities is primarily the result of an increase in net income.

 

The difference between our net income and our net cash provided by operating activities was attributable to non-cash expenses included in net income, and changes in the operating assets and liabilities, as presented below (in thousands) (unaudited):

 

		Six-months ended January 31,
		2012				2011
Net income		$	584			$	354
Add: non-cash  expenses			299				580
Add: changes in operating assets and liabilities			70				(143	)
Net cash provided by operating activities		$	953			$	791

 

Non-cash expenses are primarily associated with the amortization of intangible assets, depreciation and amortization of property and equipment, stock-based compensation, changes in the deferred portion of the provision (benefit) for income taxes and gain on sale of assets.  

 

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.

 

The total cash we received exclusively from our members, net of credit card returns, electronic fund transfer returns, and return checks is as follows (in thousands) (unaudited):

 

 

		Six-months ended January 31,
		2012								2011
		Amount				Percent of total				Amount				Percent of total
Credit cards		$	5,516				68	%		$	5,277				66	%
Electronic funds transfer			2,036				25	%			2,071				26	%
Cash and checks			605				7	%			669				8	%
Cash received from Marketplace members		$	8,157				100	%		$	8,017				100	%

 

Investing Activities

 

Net cash used in investing activities was primarily the result of a business acquisition, purchase of property and equipment and intangible assets, and advances on loans offset by the collections on notes receivable.

 

For the six-months ended January 31, 2012, net cash used by investing activities was $186 compared with $115 used in investing activities in the six-months ended January 31, 2011, an increase of $71, or 62%. In the six-months ended January 31, 2012, the net cash used in investing activities was primarily related to $175 purchase of a member list that was subsequently sold to a broker, $104 in loans made to brokers, $13 in purchases of property and equipment, offset by $106 in payments on existing notes receivables. In the six-months ended January 31, 2011, the net cash used in investing activities was primarily related to $100 in loans made to brokers, $72 cash consideration paid for the acquisition of a trade exchange membership list and $17 in purchases of new equipment, offset by $74 in payments received from notes during the period.

 

Financing Activities

 

Our net cash used in financing activities consists of cash dividends to stockholders and discretionary repurchases of our common stock.

 

For the six-months ended January 31, 2012, net cash used in financing activities was $346 compared with $233 used in financing activities in the six-months ended January 31, 2011, an increase of cash used in financing activities of $113, or 48%. The increase is primarily due to the increase of our cash dividend paid out to stockholders from $233 in the six-months ending January, 2011 to $324 paid in the six-months ending January 31, 2012. In addition, we also repurchased 17 shares of our common stock during the six-months ending January 31, 2012.

 

Commitments

 

We lease office space under operating leases. Lease commitments include leases for the Company’s corporate headquarters in Bellevue, Washington, and a branch office in Milwaukie, Oregon. These leases expire between October 31, 2012 and April 30, 2015.

 

In addition to the lease commitments, 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 January 31, 2012 are presented below (in thousands) (unaudited):

 

 

Year ending July 31,		Operating leases				Purchase commitments				Total
2012 (1)			83				18				101
2013			164				12				176
2014			166				-				166
2015			127				-				127
Total		$	540			$	30			$	570

  

  

(1)

The expected payments for 2012 reflect future minimum payments for the six-month period from February 1, 2012 to July 31, 2012.

 

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

·

accounting for goodwill and other long-lived intangible assets;

·

accounting for income taxes

·

share-based compensation; and

·

litigation matters

 

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 2011 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 Item 1 of 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”, Part II Item 7 and elsewhere in this report. These factors, among others, may adversely impact and impair our business and should be considered in evaluating our financial outlook.

 

Our revenue growth and success is tied to the operations of our independent Broker Network, and as a result the loss of our brokers or the financial performance of our brokers can negatively impact our business

 

We service our member businesses primarily through our independent licensed broker and franchise network (individually, “broker”, together, the “Broker Network”) as well as through a corporate-owned office, and 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 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

 

In 2011 our revenue decreased by approximately 3% compared to 2010 and for the six-months ended January 31, 2012 revenue decreased 4% compared to the same period in 2011. Although we seek to increase revenues through organic growth and the development of new revenue streams, we cannot assure you that our revenues will increase in future quarters or future years. We may be unable to add revenue through acquisitions, either because of the absence of acquisition candidates, lack of financing, or unacceptable terms. Other than extrapolating from historical data based on the size of the Marketplace, it is difficult for us to project the level of our revenues accurately. We have approximately 28% recurring revenues. We do not have an order backlog, and approximately two-thirds of our net revenues each quarter come from transaction fees during that quarter. Our operating results in one or more future quarters may fall below the expectations of investors.

 

 

We cannot assure you that we can continue to be operated profitably, which depends on many factors, including the success of our development and expansion efforts, the control of expense levels and the success of our business activities. We are currently subject to increased expense levels as a result of responding to a proxy contest, litigation and other actions by dissident stockholders. We invest in marketing, broker and member support, technology and further development of our operating infrastructure. Some of this investment may entail long-term commitments. As a result, we may be unable to adjust our spending rapidly enough to compensate for any unexpected revenue shortfall, which may harm our profitability. Market information for the barter industry is difficult to ascertain. Despite our efforts to expand our revenues, we may not be successful. We experience a certain amount of attrition from members leaving the Marketplace. If new member enrollments do not continue or are insufficient to offset attrition, we will increasingly need to focus on keeping existing members active and increasing their activity level in order to maintain or grow our business. We cannot assure you that this strategy would be successful to offset declining revenues or profits.

 

Our brokers could take actions that could harm our business, our reputation and adversely affect the ITEX Marketplace

       

Our agreements with our brokers require that they understand and comply with all laws and regulations applicable to their businesses, and operate in compliance with our Marketplace Rules. Brokers are independently owned and operated and are not our employees, partners, or affiliates. We set forth operational standards and guidelines; however, we have limited control over how our broker businesses are run. Our brokers have individual business strategies and objectives, and may not operate their offices in a manner consistent with our philosophy and standards. We cannot assure that our brokers will avoid actions that adversely affect the reputation of ITEX or the Marketplace. Improper activity stemming from one broker can generate negative publicity which could adversely affect our entire Broker Network and the Marketplace. Our image and reputation and the image and reputation of other brokers may suffer materially, and system-wide sales could significantly decline if our brokers do not operate their businesses according to our standards. While we ultimately can take action to terminate brokers and franchisees that do not comply with the standards contained in our agreements, and even though we may implement compliance and monitoring functions, we may not be able to identify problems and take action quickly enough and, as a result, our image and reputation may suffer, causing our revenues or profitability to decline. Further, the success and growth of our Broker Network depends on our maintaining a satisfactory working relationship with our existing brokers and attracting new brokers to our network. Lawsuits and other disputes with our brokers could discourage our brokers from expanding their business or lead to negative publicity, which could discourage new brokers from entering our network or existing brokers from renewing their agreements, and could have a material adverse effect on our business, financial condition and results of operations.

 

We could be negatively affected as a result of a proxy fight and related litigation.

  

In July 2010, a dissident shareholder group declared its intention to change the management structure of ITEX.  It nominated a full opposition slate of individuals for election to replace our Board of Directors at the 2010 Annual Meeting of Shareholders, while stating it was preparing its own executive team to replace existing ITEX management.  The dissident group was unsuccessful in 2010, and according to a Schedule 13D filed on August 23, 2011, most of the members of the 2010 dissident shareholder group have disbanded. However, remaining group members representing 5.1% of our voting common stock filed preliminary proxy materials with the SEC in September 2011 announcing their intention to elect two of their nominees to replace a majority of the Board of Directors. In addition, a member of the group has filed a shareholder derivative lawsuit against the Company’s Board of Directors (See Note 7 ― “Legal Proceedings” included in the “Notes to Consolidated Financial Statements.”) A proxy contest and related litigation could negatively affect us because:

 

 

·

Responding to proxy contests, litigation and other actions by dissident shareholders can be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees;

 

·

Perceived uncertainties as to our future direction may divert the attention of, damage morale and create instability among members of our Broker Network as well as our management and employees, 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 to our Board of Directors with a specific agenda, it may adversely affect our ability to effectively and timely implement our current business plan which could have a material adverse effect on our results of operations and financial condition;

 

·

If certain corporate governance proposals are implemented that are not scaled to the size of our company or do not provide a benefit commensurate with their cost, our profitability as well as the value creation capabilities of our organization may be adversely affected;

 

·

Increases in legal fees, administrative and associated costs incurred in connection with responding to a proxy contest and related litigation are substantial;

 

	·	A proxy contest, or the threat of one, could cause our stock price to experience periods of volatility or stagnation; and

·

A successful election outcome by a dissident shareholder who is also engaged in litigation against ITEX could further adversely affect the Company by resulting in an “insured v. insured exclusion” under our D&O insurance policy, which excludes indemnification for claims against directors and officers alleged by other directors and officers or policyholders under the same policy. There is a risk that our insurer would decline to cover claims, or that defense costs advanced by the Company during the pendency of the claim would later be determined to be not covered under the policy and would not be repaid or recovered. We cannot assure you that an adverse determination would not be made by our insurer which could have a material adverse effect on our business, financial condition and results of operations.

 

We may be held responsible by members, third parties, regulators or courts for the actions of, or failures to act by, our brokers or their employees, which exposes us to possible adverse judgments, other liabilities and negative publicity

 

From time to time we are subject to claims for the conduct of our brokers in situations where a broker has caused injury to a member as a result of a transaction in the Marketplace. Third parties, regulators or courts may seek to hold us responsible for the actions or failures to act by our brokers or their employees. Failure to comply with laws and regulations by our brokers, or litigation involving potential liability for broker activities could be costly and time consuming for us, divert management attention, result in increased costs of doing business, lead to adverse judgments, expose us to possible fines and negative publicity, or otherwise harm our business.

 

 

Failure to deal effectively with member disputes could result in costly litigation, damage our reputation and harm our business

 

ITEX faces risks with respect to transactional disputes between members of the Marketplace. From time to time we receive complaints from members who may not have received the products or services that they had purchased, concerning the quality of the products or services, or who believe they have been defrauded by other members or ITEX brokers. We also receive complaints from sellers because a buyer has changed his or her mind and decided not to honor the contract to purchase the item. While ITEX does, in some cases, as part of its transaction dispute resolution process reverse transactions, reduce or eliminate credit lines, suspend accounts, or take other measures with members who fail to fulfill their payment or delivery obligations to other members, the determination as to whether a transaction is reversed or how to resolve a specific dispute is made by ITEX in its sole discretion. Measures we may take to resolve transactional disputes or combat risks of fraud have the potential to damage relations with our members or brokers or decrease transactional activity in the Marketplace by restricting the activities of certain members. Furthermore, negative publicity and member sentiment generated as a result of member complaints or fraudulent or deceptive conduct by members of our Marketplace could damage our reputation, or reduce our ability to attract new members or retain our current members.

 

We occasionally receive communications from members requesting reimbursement or threatening or commencing legal action against us if no reimbursement is made. In addition, because we service our member businesses through our Broker Network, we are subject to claims and could potentially be found liable for the conduct of our brokers in a situation where that broker has caused injury to a member. Litigation involving disputes between members and liability for broker actions could be costly and time consuming for us, divert management attention, result in increased costs of doing business, lead to adverse judgments, or otherwise harm our business. In addition, affected members may complain to regulatory agencies that could take action against us, including imposing fines or seeking injunctions.

 

Use of our services for illegal purposes could damage our reputation and harm our business

 

Our members, typically small businesses, actively market products and services through the Marketplace and our website. The law relating to the liability of providers of online services for the activities of users or members of their service is often the subject of litigation. We may be unable to prevent our members from selling unlawful or stolen goods or unlawful services, or selling goods or services in an unlawful manner, and we could be subject to allegations of civil or criminal liability for unlawful activities carried out by users through our services. It is possible that third parties, including government regulators and law enforcement officials, could allege that our services aid and abet certain violations of certain laws, for example, laws regarding the sale of counterfeit items, the fencing of stolen goods, selective distribution channel laws, and the sale of items outside of the U.S. that are regulated by U.S. export controls.

 

Although we have prohibited the listing of illegal goods and services and implemented other protective measures, we may be required to spend substantial resources to take additional protective measures or discontinue certain service offerings, any of which could harm our business. Any costs incurred as a result of potential liability relating to the alleged or actual sale of unlawful goods or services could harm our business. In addition, negative media publicity relating to the listing or sale of unlawful goods and stolen goods using our services could damage our reputation, diminish the value of our brand names, and make members reluctant to use our services.

 

 

ITEX’s trade dollar currency is also susceptible to potentially illegal or improper uses. Recent changes in law have increased the penalties for intermediaries providing payment services for certain illegal activities. Despite measures taken by ITEX as administrator and as a third-party record-keeper to detect and lessen the risk of this kind of conduct, illegal activities could still be funded using ITEX dollars. Any resulting claims or liabilities could harm our business.

 

Our business is subject to online security risks, including security breaches and identity theft

 

We host confidential information as part of our client relationship management and transactional processing platform. Our security measures may not detect or prevent security breaches that could harm our business. Currently, a significant number of our members authorize us to bill their credit card accounts directly for fees charged by us. We take a number of measures to ensure the security of our hardware and software systems and member and client information. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in the technology used by us to protect transaction data being breached or compromised. Other large Internet companies have been the subject of sophisticated and highly targeted attacks on portions of their sites. In addition, any party who is able to illicitly obtain a members’ password could access the members’ transaction data. An increasing number of websites have reported breaches of their security. Any compromise of our security could harm our reputation and, therefore, our business, and could result in a violation of applicable privacy and other laws. In addition, a party that is able to circumvent our security measures could misappropriate proprietary information, cause interruption in our operations, damage our computers or those of our users, or otherwise damage our reputation and business. Under credit card rules and our contracts with our card processors, if there is a breach of credit card information that we store, we could be liable to the credit card issuing banks for their cost of issuing new cards and related expenses. In addition, if we fail to follow credit card industry security standards, even if there is no compromise of customer information, we could incur significant fines or lose our ability to give customers the option of using credit cards to pay their fees. If we were unable to accept credit cards, our business would be seriously damaged.

 

We continue to enhance our systems for data management and protection, and intrusion detection and prevention. However, our servers may be vulnerable to computer viruses, physical or electronic break-ins, and similar disruptions. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. Security breaches, including any breach by us or by parties with which we have commercial relationships that result in the unauthorized release of our members’ personal information, could damage our reputation and expose us to a risk of loss or litigation and possible liability. Our insurance policies carry coverage limits which may not be adequate to reimburse us for losses caused by security breaches.

 

Unplanned system interruptions or system failures could harm our business and reputation

 

Any interruption in the availability of our transactional processing services due to hardware and operating system failures will reduce our revenues and profits. Our revenue depends on members using our processing services. Any unscheduled interruption in our services results in an immediate, and possibly substantial, loss of revenues. Frequent or persistent interruptions in our services could cause current or potential members to believe that our systems are unreliable, leading them to switch to our competitors or to avoid our websites or services, and could permanently harm our reputation. Furthermore, any system failures could result in damage to our members’, clients’ or 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’ personal and financial information could result in liability and harm our reputation

 

We store personal and financial information for members of the Marketplace. 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 clients’ 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 7 ― “Legal Proceedings” included in the “Notes to Consolidated Financial Statements.”) Adverse outcomes in one or more of these claims may result in significant monetary damages that could adversely affect our ability to conduct our business. Although management currently believes resolving all of these matters, individually or in the aggregate, will not have a material adverse impact on our financial statements, the litigation and other claims are subject to inherent uncertainties and management’s view of these matters may change in the future. A material adverse impact on our financial statements also could occur for the period in which the effect of an unfavorable final outcome becomes probable and reasonably estimable.

 

 

If we lose the services of our chief executive officer, our business could suffer

 

Our performance depends substantially on the continued services of our Chief Executive Officer, Steven White. Mr. White also currently fills the executive positions of Interim Chief Financial Officer and Chief Accounting Officer. Our board places heavy reliance on Mr. White’s experience and management skills. We have not entered into a formal employment agreement with Mr. White, other than an agreement to receive a payment in connection with a “change of control,” as defined in the agreement. If we were to lose the services of Mr. White, we could face substantial difficulty in hiring a qualified successor or successors, and could experience a loss in performance while any successor obtains the necessary training and experience. Corporate staff and our franchisees and brokers could lose confidence in the direction and stability of the Company and choose to pursue other opportunities. In addition, in connection with a management transition we may need to attract, train, retain and motivate additional financial, technical, managerial, marketing or support personnel. We face the risk that if we are unable to attract and integrate new personnel, or retain and motivate existing personnel, our business, financial condition and results of operations will be adversely affected.

 

Alliances, mergers and acquisitions could result in operating difficulties, dilution and other harmful consequences

 

We have acquired eight trade exchange membership lists since 2005 and integrated them into the ITEX system. We expect to continue to evaluate and consider other potential strategic transactions, including business combinations, acquisitions and dispositions of businesses, technologies, services, products and other assets and strategic investments. At any given time we may be engaged in discussions or negotiations with respect to one or more of these types of transactions. Any of these transactions could be material to our financial condition and results of operations. The process of integrating an acquired company, business or technology may create unforeseen operating difficulties and expenditures and is risky. The areas where we may face difficulties include:

 

•

Diversion of management time, as well as a shift of focus from operating the businesses to challenges related to integration and administration;

 

•

Challenges associated with integrating employees from the acquired company into the acquiring organization.  These may include declining employee morale and retention issues resulting from changes in, or acceleration of, compensation, or changes in management, reporting relationships, future prospects, or the direction of the business;

 

•

The need to integrate each company’s accounting, management, information, human resource and other administrative systems to permit effective management, and the lack of control if such integration is delayed or not implemented;

 

•

The need to implement controls, procedures and policies appropriate for a public company at companies that prior to acquisition had lacked such controls, procedures and policies;

 

•

The need to transition operations, members, and customers onto our existing platforms; and

 

•

Liability for activities of the acquired company before the acquisition, including violations of laws, rules and regulations, commercial disputes, tax liabilities and other known and unknown liabilities.

 

The expected benefit of any of these strategic relationships may not materialize and the cost of these efforts may negatively impact our financial results. Future alliances, mergers or acquisitions or dispositions could result in potentially dilutive issuances of our equity securities, the expenditure of our cash or the incurrence of debt, contingent liabilities or amortization expenses, or write-offs of goodwill, any of which could adversely affect our results of operations and dilute the economic and voting rights of our stockholders. Future acquisitions may require us to obtain additional equity or debt financing, which may not be available on favorable terms or at all.

 

 

We may need additional financing; current funds may be insufficient to finance our plans for growth or our operations

 

Although we believe that our financial condition is stable and that our cash balances and operating cash flows provide adequate resources to fund our ongoing operating requirements, we have limited funds and may have contractual obligations in the future. Our existing working capital may not be sufficient to allow us to execute our business plan as fast as we would like or may not be sufficient to take full advantage of all available strategic opportunities. We believe our current core operations reflect a scalable business strategy, which will allow our business model to be executed with limited outside financing. However, we also may expand our operations, enter into a strategic transaction, or acquire competitors or other business to business enterprises. We have a line of credit with our primary banking institution, which will provide additional reserve capacity for general corporate and working capital purposes, and if necessary, enable us to make certain expenditures related to the growth and expansion of our business model. However, if adequate capital were not available or were not available on acceptable terms at a time when we needed it, our ability to execute our business plans, develop or enhance our services, make acquisitions or respond to competitive pressures would be significantly impaired. Further, we cannot be certain that we will be able to implement various financing alternatives or otherwise obtain required working capital if needed or desired.

 

We are dependent on the value of foreign currency.

 

We transact business in Canadian dollars as well as U.S. dollars. Revenues denominated in Canadian dollars comprised 7.8% and 7.0% in the years ended July 31, 2011 and 2010, respectively. While foreign currency exchange fluctuations are not believed to materially adversely affect our operations at this time, changes in the relation of the Canadian dollar to the U.S. dollar could continue to affect our revenues, cost of sales, operating margins and result in exchange losses.

 

If we fail to maintain an effective system of internal controls, we may not be able to detect fraud or report our financial results accurately, which could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price

 

Effective internal controls are necessary for us to provide reliable financial reports and to detect and prevent fraud. We periodically assess our system of internal controls to review their effectiveness and identify potential areas of improvement. These assessments may conclude that enhancements, modifications or changes to our system of internal controls are necessary. Performing assessments of internal controls, implementing necessary changes, and maintaining an effective internal controls process is expensive and requires considerable management attention. Internal control systems are designed in part upon assumptions about the likelihood of future events, and all such systems, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. We face the risk that the design of our controls and procedures may prove to be inadequate or that our controls and procedures may be circumvented, thereby causing delays in detection of errors or inaccuracies in data and information. It is possible that any lapses in the effective operations of controls and procedures could materially affect earnings, that we could suffer losses, that we could be subject to costly litigation, that investors could lose confidence in our reported financial information and our reputation, and that our operating results could be harmed, which could have a negative effect on the trading price of our common stock.

 

 

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we must certify the effectiveness of our internal controls over financial reporting annually. If we are unable to assert that our internal control over financial reporting is effective for a particular year we could lose investor confidence in the accuracy and completeness of our financial reports. That could adversely affect our competitive position in our business, and the market price for our common stock.

 

Our Brokers may default on their loans

 

From time to time we finance the operational and expansion activities of our brokers. We loan brokers funds for general operational purposes, to acquire the management rights to select member accounts, and for other reasons. These loans are repaid from regular deductions from broker commissions. We have increased the amount of our loans to brokers from $605 in 2010 to $909 in 2011 and $1,552 at January 31, 2012. In the event one or more brokers default on their loans, it may adversely affect our financial condition.

 

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, who is also the Interim Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, our CEO and Interim CFO concluded that our disclosure controls and procedures are effective 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 fiscal 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 7 – Legal Proceedings of the Notes to consolidated financial statements (Item 1) 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 January 31, 2012 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act.

 

 

		(a)				(b)				(c)				(d)
Period		Total Number of Shares Purchased				Average Price Paid per Share				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)				Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (2)
11/01/11 - 11/30/11			-				-				-				-
12/01/11 – 12/31/11			-				-				-				-
01/01/12 - 01/31/12			600			$	3.00				115,556			$	1,639,550

 

(1)	Shares were repurchased under a $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.  No shares were purchased other than through publicly announced programs during the periods shown.
(2)	Amounts shown in this column reflect amounts remaining under the $2.0 million stock repurchase program referenced in Note 1 above.

 

Item 6. Exhibits

  

Exhibit Number		Description
10.1		Form of Franchisee Stock Purchase Agreement dated as of March 30, 2011
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 and 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

 

 

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:  March 8, 2012		By:	/s/ Steven White
			Steven White
			Chief Executive Officer
			Interim Chief Financial Officer