UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

 

FORM 10-Q

 

Mark One)

x

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended October 31, 2015.

 

OR

 

¨

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                                          to                                         

 

Commission File Number 0-18275

 

ITEX CORPORATION

(Exact name of registrant as specified in its charter)

 

Nevada		93-0922994
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

 

3326 160th Ave SE, Suite 100, Bellevue, WA 98008-6418

(Address of principal executive offices)

 

(425) 463-4000

(Registrant’s telephone number including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x  No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x  No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

	¨	Large accelerated filer		¨	Accelerated filer
	¨	Non-accelerated filer		x	Smaller reporting company
	(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨  No x

 

As of October 31, 2015, we had 2,084,869 shares of common stock outstanding (including unvested restricted stock).

 

 

ITEX CORPORATION

FORM 10-Q

 

INDEX

  

		Page(s)
PART  I.	Financial Information
ITEM 1.	Financial Statements
	Consolidated Balance Sheets as of October 31, 2015 (unaudited) and July 31, 2015	1
	Consolidated Statements of Income for the Three-Months Ended October 31, 2015 and 2014 (unaudited)	2
	Consolidated Statement of Stockholders’ Equity for the Three-Months Ended October 31, 2015 (unaudited)	3
	Consolidated Statements of Cash Flows for the Three-Months Ended October 31, 2015 and 2014 (unaudited)	4
	Notes to Consolidated Financial Statements (unaudited)	5
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	17
ITEM 4.	Controls and Procedures	17
PART II.	Other Information	18
ITEM 1.	Legal Proceedings	18
ITEM 2.	Unregistered Sales of Equity Securities	18
ITEM 6.	Exhibits	19
	Signatures	19

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

ITEX CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands)

 

		October 31, 2015				July 31, 2015
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	2,472			$	2,047
Accounts receivable, net of allowance of $420 and $439			578				398
Prepaid expenses			76				174
Loans and advances			15				8
Deferred tax asset, net of allowance of $15 and $15			554				554
Notes receivable			281				291
Other current assets			14				11
Total current assets			3,990				3,483
Property and equipment, net of accumulated depreciation of $404 and $397			31				38
Goodwill			3,191				3,191
Deferred tax asset, net of allowance of $84 and $84 and net of current portion			3,043				3,124
Intangible assets, net of accumulated amortization of $3,339 and $3,325			88				102
Notes receivable - net of current portion			735				792
Other long-term assets			7				10
Total assets			11,085				10,740
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts and other expenses payable			64				50
Commissions payable to brokers			227				259
Accrued commissions to brokers			808				659
Accrued expenses			253				261
Deferred revenue			23				27
Advance payments			126				112
Total current liabilities			1,501				1,368
Total liabilities			1,501				1,368
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value; 9,000 shares authorized; 1,908 shares and 1,890 shares issued and outstanding, respectively			19				19
Additional paid-in capital			22,417				22,361
Stockholder notes receivable			(5	)			(6	)
Accumulated deficit			(12,847	)			(13,002	)
Total stockholders' equity			9,584				9,372
Total liabilities and stockholders’ equity		$	11,085			$	10,740

 

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

 

 

ITEX CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

  

		Three-months ended October 31,
		2015				2014
		(unaudited)
Revenue:
Marketplace revenue and other revenue		$	2,814			$	3,117
Costs and expenses:
Cost of marketplace revenue			1,741				1,923
Corporate salaries, wages and employee benefits			432				445
Selling, general and administrative			405				516
Depreciation and amortization			21				23
			2,599				2,907
Income from operations			215				210
Other income:
Interest, net			20				24
			20				24
Income before income taxes			235				234
Income tax expense			80				79
Net income		$	155			$	155
Net income per common share:
Basic		$	0.08			$	0.06
Diluted		$	0.08			$	0.06
Weighted average shares outstanding:
Basic			1,896				2,607
Diluted			1,909				2,611

 

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

 

 

ITEX CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE THREE-MONTHS ENDED OCTOBER 31, 2015

(In thousands)

(Unaudited)

 

		Common Stock								Additional Paid-in				Stockholder Note				Accumulated
		Shares				Amount				Capital				Receivable				Deficit				Total
Balance at July 31, 2015			1,890			$	19			$	22,361			$	(6	)		$	(13,002	)		$	9,372
Common stock repurchased and retired			(1	)			-				(3	)			-				-				(3	)
Payments on stockholder notes receivable			-				-				-				1				-				1
Stock based compensation expense			19				-				59				-				-				59
Net income			-				-				-				-				155				155
Balance at October 31, 2015			1,908			$	19			$	22,417			$	(5	)		$	(12,847	)		$	9,584

 

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

 

 

ITEX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

(Unaudited)

 

		Three-months ended October 31,
		2015				2014
CASH FLOWS FROM  OPERATING ACTIVITIES:
Net income		$	155			$	155
Items to reconcile to net cash provided by operations:
Depreciation and amortization			21				24
Stock based compensation			59				67
Bad debt expense			51				77
Change in deferred income taxes			81				79
Changes in operating assets and liabilities:
Accounts receivable			(231	)			(74	)
Prepaid expenses			98				20
Loans and advances			(7	)			(5	)
Other assets			-				(3	)
Accounts payable and other expenses payable			14				5
Commissions payable to brokers			(32	)			(16	)
Accrued commissions to brokers			149				155
Accrued expenses			(8	)			70
Deferred revenue			(4	)			(8	)
Advance payments			14				-
Net cash provided by operating activities			360				546
CASH FLOWS FROM  INVESTING ACTIVITIES:
Purchase of property and equipment			-				(1	)
Payments on notes payables			-				(2	)
Payments received from notes receivable			67				65
Advances on notes receivable			-				(15	)
Net cash provided by investing activities			67				47
CASH FLOWS FROM  FINANCING ACTIVITIES:
Principal payments on stockholder notes receivable			1				16
Repurchase of common stock			(3	)			(42	)
Cash dividend paid to Common Shareholders			-				(143	)
Net cash used in financing activities			(2	)			(169	)
Net increase in cash			425				424
Cash at beginning of period			2,047				3,673
Cash at end of period		$	2,472			$	4,097
Supplemental cash flow information:
Cash paid for taxes		$	11			$	2

 

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

 

 

ITEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

NOTE 1 – DESCRIPTION OF OUR COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (In thousands, except per share amounts)

 

Description of the Company

 

ITEX Corporation (“ITEX”, “Company”, “we” or “us”) was incorporated in October 1985 in the State of Nevada. Through our independent licensed broker and franchise network (individually, “broker,” and together the “Broker Network”) in the United States and Canada, we operate a “Marketplace” in which products and services are exchanged by Marketplace members utilizing “ITEX dollars.” ITEX dollars are only usable in the Marketplace and allow thousands of member businesses (our “members”) to acquire products and services without exchanging cash. We administer the Marketplace and provide record-keeping and payment transaction processing services for our members.

 

Unaudited Interim Financial Information

 

We have prepared the accompanying consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These consolidated financial statements are unaudited and, in our opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of our consolidated balance sheets, operating results, and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent liabilities as of the date of the financial statements and the reported amount of revenue and expenses during the reporting period. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in Item 8 of Part II, “Financial Statements and Supplementary Data,” of our 2015 Annual Report on Form 10-K filed with the SEC on October 13, 2015.

 

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

 

Management has made a number of estimates and assumptions relating to the reporting of revenues, expenses, assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements. Actual results could differ from these estimates.

 

 

Income Per Share

 

We present in our financial statements on the face of the income statement both basic and diluted earnings per share. Basic earnings per share excludes potential dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. As of October 31, 2015, we had no contracts to issue common stock. The Company had 176 unvested restricted stock units that were dilutive as of October 31, 2015.

 

The following table presents a reconciliation of the denominators used in the computation of net income per common share basic and net income per common share – diluted for the three-month period ended October 31, 2015 (in thousands, except per share data) (unaudited):

 

		Three-months Ended October 31,
		2015				2014
Net income available for shareholders		$	155			$	155
Weighted avg. outstanding shares of common stock			1,896				2,607
Dilutive effect of restricted shares			13				4
Common stock and equivalents			1,909				2,611
Earnings per share:
Basic		$	0.08			$	0.06
Diluted		$	0.08			$	0.06

 

Recent Accounting Pronouncements

 

In November 2015, the FASB issued Accounting Standards Update (ASU) 2015-17, Balance Sheet Classification of Deferred Taxes, intended to improve how deferred taxes are classified on organizations’ balance sheets. The ASU eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will now be required to classify all deferred tax assets and liabilities as noncurrent. The pronouncement is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted as of the beginning of an interim or annual period. The adoption of ASU 2015-17 is not expected to have any material impact on the Company’s consolidated financial statements.

 

NOTE 2 – COMMITMENTS

 

The Company leases office space under operating leases. Lease commitments include a lease for the Company’s corporate headquarters in Bellevue, Washington. The Company operates on this lease under a month-to-month basis. As of October 31, 2015, there are no future minimum commitments under this operating lease.

 

The lease expense for our executive office space for the three-months ended October 31, 2015 and 2014 was $21 and $40, respectively.

 

  

NOTE 3 – LEGAL PROCEEDINGS AND LITIGATION CONTINGENCIES

 

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

 

Management has regular litigation reviews, including updates from outside counsel, to assess the need for accounting recognition or disclosure of contingencies relating to pending lawsuits. The Company accrues an undiscounted liability for those contingencies where the incurrence of a loss is probable, and the amount can be reasonably estimated. The Company does not record liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated or when the liability is believed to be only reasonably possible or remote. For contingencies where an unfavorable outcome is reasonably possible and which are significant, the Company discloses the nature of the contingency and, where feasible, an estimate of the possible loss. For purposes of our litigation contingency disclosures, “significant” includes material matters as well as other items which management believes should be disclosed.

 

Management judgment is required related to contingent liabilities and the outcome of litigation because both are difficult to predict. Litigation is subject to inherent uncertainties and unfavorable rulings could occur. Although management currently does not believe resolving any pending proceeding will have a material adverse impact on our financial statements, management’s view of these matters may change in the future. A material adverse impact on our financial statements could occur in the future if the effect of an unfavorable final outcome becomes probable and reasonably estimable.

 

NOTE 4 – INCOME TAXES

 

Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items which are recorded in the interim period. 

 

The Federal effective tax rate related to our provision for income taxes in the three-months ended October 31, 2015 is similar to that used in the period ended October 31, 2014.

 

The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in various jurisdictions, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional information becomes known or as the tax environment changes.

 

As of October 31, 2015 we have recognized a net income tax expense of $80 which is our estimated federal and state income tax liability for the three-months ended October 31, 2015. Realization of our deferred tax asset is dependent upon future earnings in specific tax jurisdictions, the timing and amount of which are uncertain.  As of October 31, 2015 the net deferred tax asset was $3,597.

 

  

We account for any uncertainty in income taxes by recognizing the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. We measure the tax benefits recognized in the financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The application of income tax law is inherently complex. As such, we are required to make subjective assumptions and judgments regarding income tax exposures. The result of the reassessment of our tax positions did not have an impact on the consolidated financial statements.

 

NOTE 5 – STOCKHOLDERS’ EQUITY (in thousands, except per share amounts)

 

The Company has 5,000 shares of preferred stock authorized at $0.01 par value. No preferred shares were issued or outstanding as of October 31, 2015.

 

On March 9, 2010, the Company announced a $2,000 stock repurchase program. The program authorizes the repurchase of shares in open market purchases or privately negotiated transactions, has no expiration date and may be modified or discontinued by the Board of Directors at any time. During the three-month period ended October 31, 2015, the Company repurchased 1 share of common stock for $3. There were 14 shares of common stock for $42 purchased during the three-month period ended October 31, 2014.

 

NOTE 6 – STOCK-BASED PAYMENTS (in thousands)

 

We account for stock-based compensation in accordance with the related guidance. Under the fair value recognition provisions, we estimate stock-based compensation cost at the grant date based on the fair value of the award. We recognize that expense ratably over the requisite service period of the award and recognized $59 and $67 of stock based compensation expense for the periods ending October 31, 2015 and 2014, respectively.

 

At October 31, 2015, 161 shares of common stock granted under the 2004 Plan remained unvested and 15 under the 2014 plan. At October 31, 2015, the Company had $543 of unrecognized compensation expense, expected to be recognized over a weighted-average period of approximately six years.

 

NOTE 7 – SUBSEQUENT EVENTS

 

On August 20, 2015, the Board of Directors of ITEX Corporation declared a semi-annual cash dividend in the amount of $0.10 per share, payable on December 10, 2015 to stockholders of record as of the close of business on December 1, 2015.

 

  

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” in Item 1A of our Form 10-K filed with the Securities and Exchange Commission (“SEC”) on October 13, 2015. 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 Corporation operates a marketplace (the “Marketplace”) in which products and services are exchanged by Marketplace members utilizing ITEX dollars (“ITEX dollars”). ITEX dollars are only usable in the Marketplace and allow thousands of member businesses (our “members”) to acquire products and services without exchanging cash. We service our member businesses through our independent licensed brokers and franchise network (individually, “broker” and together, the “Broker Network”) in the United States and Canada. We administer the Marketplace and provide record-keeping and payment transaction processing services for our members. We generate revenue by charging members percentage-based transaction fees, association fees, and other fees assessed in United States dollars and Canadian dollars where applicable (collectively and as reported on our financial statements, “USD” or “Cash”).

 

For each calendar year, we divide our operations into 13 four-week billing and commission cycles always ending on a Thursday (“operating cycle”). For financial statement purposes, our fiscal year is from August 1 to July 31 (“year”, “2016” for August 1, 2015 to July 31, 2016, “2015” for August 1, 2014 to July 31, 2015). Our first quarter is the three-month period from August 1, 2015 to October 31, 2015 (“three-month period ended October 31”). We report our results as of the last day of each calendar month (“accounting cycle”). The timing of billing and collection activities after the end of the billing cycle does not correspond with the end of the accounting period, therefore this timing difference results in the fluctuations of the balances of cash, accounts receivable, commissions payable and accrued commissions on the consolidated balance sheets and consolidated statements of cash flows.

 

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

 

The following summarizes our operational and financial highlights for the quarter and our outlook (in thousands except per share data):

 

·

Comparative Results. For the three-months ended October 31, 2015, as compared to the three-months ended October 31, 2014, our revenue decreased by $303, or 10%, from $3,117 to $2,814. However, our income from operations increased by $5, or 2%, from $210 to $215. Net income was the same amount for both periods at $155.

 

  

·

Revenue Sources. Our decrease in revenues for the three-months ended October 31, 2015 reflects a reduction in our transaction volume and a reduction in our membership base. Association revenue decreased $76, or 7% from $1,048 to $972 and our transaction revenue decreased $194, or 10% from $1,956 to $1,762.

 

·

Revenue Trends. Our reduction in revenue this quarter was due to a reduction in members and a corresponding reduction in transaction and association fees generated from our members. Based on reported revenues and informal market information available to us, trade exchanges overall are faced with a general decline in year-over-year revenue. We believe this reflects, in part, the effect of enhanced competition. Trade exchanges currently compete with a wide variety of online and offline companies providing products and services to consumers and merchants, including big box stores. There are numerous avenues to move excess inventory or products and services. We strive to view industry change as an opportunity to conceive new services, technologies, or new ideas that can further transform the industry and our business. We have approximately 33% recurring revenues from association fees. Approximately two-thirds of our revenues each year come from transactions fees assessed during that year. We believe the expansion of our membership base will increase our recurring revenues. We continue to seek to increase our revenue by:

 

o

enhancing our internet applications;

 

o

offering expanded tools and features with ITEX MobileSM;

 

o

marketing the benefits of participation in the Marketplace;

 

o

expanding Marketplace offerings of goods and services;

 

o

adding and retaining qualified brokers.

 

In order to add new brokers we are sustaining our broker recruiting incentives. Through our Broker Mentor program, existing brokers recruit prospective brokers and provide ongoing training to the prospective broker until certain performance thresholds are met. Upon meeting the performance thresholds, the prospective broker is offered a franchise for a reduced fee.

 

·

Financial Position. At October 31, 2015, we had a cash balance of $2,472, compared to a balance of $2,047 at July 31, 2015. Our net cash flows provided by operating activities were $360 for the three-month period ended October 31, 2015, compared to $546 for the corresponding period the previous year.

 

  

RESULTS OF OPERATIONS

 

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

 

		Three Months Ended October 31,
		2015				2014
		(unaudited)
Marketplace revenue and other revenue		$	2,814			$	3,117
Cost of marketplace revenue			1,741				1,923
Operating expenses			858				984
Income from operations			215				210
Other income, net			20				24
Income before income taxes			235				234
Provision for income taxes			80				79
Net income		$	155			$	155
Net income per common share:
Basic		$	0.08			$	0.06
Diluted		$	0.08			$	0.06
Average common and equivalent shares:
Basic			1,896				2,607
Diluted			1,909				2,611

 

Revenue for the three-months ended October 31, 2015, as compared to the corresponding three-months ended October 31, 2014, decreased by $303, or 10%. The decrease in revenues during the three-months ended October 31, 2015 was from a reduction in members and a reduction in transaction and association fees generated from our members.

 

Cost of Marketplace revenue consists of commissions paid to brokers, payment of processing fees and other expenses directly correlated to Marketplace revenue, decreased by $182, or 9% for the three-month period ended October 31, 2015, as compared to the corresponding three-months ended October 31, 2014.

 

Operating expenses which include corporate salaries, wages and employee benefits, selling, general and administrative, depreciation and amortization decreased by $126, or 13% for the three-months ended October 31, 2015, compared to the corresponding period of fiscal 2015.

 

Income from operations for the three-months ended October 31, 2015, as compared to the corresponding three-months ended October 31, 2014, increased by $5 or 2%. This net increase is primarily the result of the $126 decrease in operating expenses offset by the $121 decrease in gross profit for the period ended October 31, 2015.

 

Net income for the three-months ended October 31, 2015, as compared to the corresponding three-months ended October 31, 2014, was the same amount at $155.

 

Earnings per share, both basic and diluted, increased by $0.02 to $0.08 per share in the three-months ended October 31, 2015 compared to the three-months ended October 31, 2014.

 

  

Revenue, Costs and Expenses

 

The following table sets forth our selected consolidated financial information for the three-months ended October 31, 2015 and 2014 with amounts expressed as a percentage of total revenues (in thousands) (unaudited):

 

		Three-months ended October 31,
		2015								2014
		Amount				Percent				Amount				Percent
Revenue:
Marketplace revenue and other revenue		$	2,814				100	%		$	3,117				100	%
Costs and expenses:
Cost of marketplace revenue			1,741				62	%			1,923				62	%
Salaries, wages and employee benefits			432				15	%			445				14	%
Selling, general and administrative			405				14	%			516				16	%
Depreciation and amortization			21				1	%			23				1	%
			2,599				92	%			2,907				93	%
Income from operations			215				8	%			210				7	%
Other Income, net			20				1	%			24				1	%
Income before income taxes			235				9	%			234				8	%
Provision for income taxes			80				3	%			79				3	%
Net income		$	155				6	%		$	155				5	%

 

Marketplace revenue

 

Marketplace revenue consists of transaction fees, association fees and other revenues net. Revenue also includes a nominal amount of ITEX dollars (non-cash). The following are the components of Marketplace revenue that are included in the consolidated statements of income (in thousands) (unaudited):

 

		Three-months ended October 31,								Percent
		2015				2014				(decrease)
		(unaudited)
Transaction fees		$	1,762			$	1,956				-10	%
Association fees			972				1,048				-7	%
Other revenue			80				113				-29	%
		$	2,814			$	3,117				-10	%

 

Marketplace revenue for the three-months ended October 31, 2015 decreased by $303, or 10% to $2,814 as compared to $3,117 for the three-months ended October 31, 2014.

 

Transaction fees for the three-months ended October 31, 2015 decreased by $194, or 10%, to $1,762 from $1,956 for the three-months ended October 31, 2014. The decrease in transaction fees was due to lower transaction volume for the three-months ended October 31, 2015, as compared to the three-months ended October 31, 2014.

 

 

 

Association fees for the three-months ended October 31, 2015 decreased by $76, or 7%, to $972 from $1,048 for the three-months ended October 31, 2014. The decrease in association fees is due to a decrease in net active membership accounts for the comparable periods.

 

Other revenue for the three-months ended October 31, 2015 decreased by $33, or 29% to $80 as compared to $113 for the three-months ended October 31, 2014.

 

ITEX Dollar Revenue

 

As described in the 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 in revenue sharing and incentive arrangements with our Broker Network, including co-op advertising for members, as well as for certain general corporate expenses. ITEX dollars are only usable in our Marketplace.

 

Occasionally we spend ITEX dollars in the Marketplace for our corporate needs. As discussed in the notes to our consolidated financial statements, we record ITEX dollar revenue in the amounts ultimately equal to expenses we incurred and paid for in ITEX dollars, resulting in an overall net effect of $0 on the operating and net income lines. We recorded $23 and $49 as ITEX dollar revenue for the three-months ended October 31, 2015 and 2014, respectively.

 

The corresponding ITEX dollar expenses in the period ended October 31, 2015 was for equipment, legal services, printing, outside services and miscellaneous expenses. We plan to continue to utilize ITEX dollars for our corporate purposes in future periods.

 

Cost of Marketplace Revenue

 

Cost of marketplace revenue consists of commissions paid to brokers, payment of processing fees and other expenses directly correlated to marketplace revenue. The following are the main components of cost of marketplace revenue that are included in the consolidated statements of income (in thousands)(unaudited):

 

		Three-months ended October 31,								Percent
		2015				2014				(decrease)
		(unaudited)
Transaction fee commissions		$	1,316			$	1,461				-10	%
Association fee commissions			348				371				-6	%
Other costs of revenue			77				91				-15	%
		$	1,741			$	1,923				-9	%
Costs of marketplace revenue as percentage of total revenue			62	%			62	%

 

Cost of marketplace revenue for the three-months ended October 31, 2015 was $1,741 as compared to $1,923 for the three-months ended October 31, 2014, a decrease of $182, or 9%.

 

  

Transaction fee commissions for the three-months ended October 31, 2015 decreased by $145 or 10% to $1,316 as compared to $1,461 for the three-months ended October 31, 2014. The decrease in transaction fee commissions is due to the reduction in transaction fee revenue which is similar to the 10% reduction is transaction fee revenues for the comparable period.

 

Association fee commissions for the three-months ended October 31, 2015 decreased by $23, or 6% to $348 as compared to $371 for the three-months ended October 31, 2014. The decrease in association fee commissions is due to a similar reduction in association fee revenue.

 

Other costs of revenue consist of miscellaneous Marketplace-related expenses such as marketing and credit card processing fees and other commissions not associated with association or transaction revenue. Other costs of revenue decreased by $14 or 15% to $771 as compared to $91 for the three-months ended October 31, 2014.

 

Corporate Salaries, Wages and Employee Benefits

 

Corporate salaries, wages and employee benefits include expenses for employee salaries and wages, payroll taxes, 401(k), payroll related insurance, healthcare benefits, stock-based compensation, recruiting costs and other personnel related items.

 

Corporate salaries, wages and employee benefits expenses for the three-months ended October 31, 2015, as compared to the three-months ended October 31, 2014, decreased by $13, or 3%. The decrease is primarily due to a reduction in headcount.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses (“SG&A”), include consulting, legal and professional services, as well as expenses for rent and utilities, marketing, business travel, insurance, bad debts, business taxes, and other expenses. As discussed above in “ITEX Dollar Revenue,” certain ITEX dollar expenses are also included.

 

SG&A expenses for the three-months ended October 31, 2015, as compared to the three-months ended October 31, 2014, decreased by $111 or 22%. 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, foreign currency expense and rent. Legal fees decreased by $43, foreign currency expense decreased by $26 and rent decreased by $19 for the three-months ended October 31, 2015.

 

Depreciation and Amortization

 

Depreciation and amortization expenses include depreciation on our fixed assets and amortization of our intangible assets.

 

Depreciation and amortization for the three-months ended October 31, 2015, as compared to the three-months ended October 31, 2014, decreased by $2, or 9%.

 

Other income

 

Other income includes interest received on notes receivable and promissory notes. Interest income is derived primarily from our notes receivable for corporate-owned office sales and general loans to brokers.

 

  

Income Taxes

 

We recognized an $80 provision for income taxes, in the three-month period ended October 31, 2015, as compared to the $79 provision for income taxes in the three-month period ended October 31, 2014.

 

The Federal effective tax rate related to our provision for income taxes in the three-month period ended October 31, 2015 is similar to that used in the period ended October 31, 2014. The State effective tax rate related to our provision for income taxes in the three-months ended October 31, 2015 is the same as that used in the three-month period ended October 31, 2014.

 

LIQUIDITY AND CAPITAL RESOURCES

 

We finance our ongoing operations primarily from existing cash, investing activities, and cash flows from operations. As of October 31, 2015, and July 31, 2015, we had $2,472 and $2,047, respectively, in cash.

 

The following table presents a summary of our cash flows for the three-months ended October 31, 2015 and 2014 (in thousands) (unaudited):

 

		Three-months ended October 31,
		2015				2014
Cash provided by operating activities		$	360			$	546
Cash provided by investing activities			67				47
Cash used in financing activities			(2	)			(169	)
Increase in cash		$	425			$	424

 

We believe that our financial condition is stable and that our cash balances, other liquid assets, and cash flows from operating activities provide adequate resources to fund ongoing operating requirements.

 

Inflation has not had a material impact on our business. Inflation affecting the U.S. dollar is not expected to have a material effect on our operations in the foreseeable future.

 

Operating Activities

 

For the three-months ended October 31, 2015, net cash provided by operating activities was $360 compared with $546 in the three-months ended October 31, 2014 a decrease of $186, or 34%. The comparable period decrease in net cash provided by the operating activities is primarily a result of the $119 increase in accounts receivable and a decrease of $78 of accrued expenses in the three-month period ended October 31, 2015 as compared to the period ended October 31, 2014.

 

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

 

  

		Three-months ended October 31,
		2015				2014
Net income		$	155			$	155
Add: non-cash expenses			142				214
Add: changes in operating assets and liabilities			63				177
Net cash provided by operating activities		$	360			$	546

 

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

 

Investing Activities

 

Net cash provided by investing activities was primarily the result of collections on notes receivable from corporate office sales and advances on broker loans.

 

For the three-months ended October 31, 2015, net cash provided by investing activities was $67 compared with $47 provided by investing activities in the three-months ended October 31, 2014, an increase of $20, or 43%. In the three-months ended October 31, 2015, the net cash provided by investing activities was primarily related to $67 in note receivable principal collections. In the three-months ended October 31, 2014, the net cash provided by investing activities was primarily related to $65 in note receivable principal collections offset by $15 in advances on notes receivable.

 

Financing Activities

 

Our net cash used in financing activities consists of cash dividends to stockholders, discretionary repurchases of our common stock and principal payments on stockholders’ notes receivable.

 

For the three-months ended October 31, 2015, net cash used in financing activities was $2 compared with $169 used in financing activities in the three-months ended October 31, 2014, a decrease of cash used in financing activities of $167. In the three-months ended October 31, 2015, we did not pay out a dividend as we have moved to a semi-annual payment format and we purchased $3 of shares. In the three-months ended October 31, 2014, we paid $143 in cash dividends to our stockholders and purchased $42 of shares.

 

Commitments

 

The Company leases office space under operating leases. Lease commitments include a lease for the Company’s corporate headquarters in Bellevue, Washington. The Company operates on this lease under a month-to-month basis. As of October 31, 2015, there are no future minimum commitments under this operating lease.

 

The lease expense for our executive office space for the three-months ended October 31, 2015 and 2014 was $21 and $40, respectively.

 

  

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate significant estimates used in preparing our financial statements, including those related to:

 

·

revenue recognition, including allowances for uncollectible accounts;

·

accounting for ITEX dollar activities;

·

the allocation of purchase price in business combinations;

·

valuation of notes receivable;

·

accounting for goodwill and other long-lived intangible assets;

·

accounting for income taxes;

·

share-based compensation; and

·

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 2015 annual report on Form 10-K.

 

Recent Accounting Pronouncements

 

For a discussion of new accounting pronouncements and their impact on the Company, see Note 1 of the Notes to Consolidated Financial Statements included in this Form 10-Q.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

(a) Disclosure controls and procedures.

 

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report.

 

 

(b) Changes in internal control over financial reporting.

 

There have been no changes in our internal controls over financial reporting during our most recent quarter that we believe have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

See Note 3 ― “Legal Proceedings and Litigation Contingencies” included in the “Notes to Consolidated Financial Statements” for information regarding legal proceedings.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

The following table provides information about our purchases or any affiliated purchaser during the three-months ended October 31, 2015 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act.

 

		(a)				(b)				(c)				(d)
Period		Total Number of Shares Purchased				Average Price Paid per Share				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs				Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (1)
8/01/15 - 8/31/15			-				-				-				-
9/01/15 – 9/30/15			-				-				-				-
10/01/15 - 10/31/15			917			$	3.26				917			$	1,025,960

 

(1)

Amounts shown in this column reflect amounts remaining under the $2.0 million stock repurchase program, authorized by the Board of Directors and announced on March 9, 2010.  The program authorizes the repurchase of shares in open market purchases or privately negotiated transactions, has no expiration date and may be modified or discontinued by the Board of Directors at any time.

 

  

Item 6. Exhibits

 

Exhibit Number		Description
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**		Certification by Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**		Certification by Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema
101.CAL		XBRL Taxonomy Extension Calculation Linkbase
101.DEF		XBRL Taxonomy Extension Definition Linkbase
101.LAB		XBRL Taxonomy Extension Label Linkbase
101.PRE		XBRL Taxonomy Extension Presentation Linkbase
**		Furnished, not filed

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	ITEX CORPORATION
	(Registrant)
Date:  December 11, 2015	By:	/s/ Steven White
	Steven White
	Chief Executive Officer
	(Duly Authorized Officer)
Date:  December 11, 2015	By:	/s/ John Wade
	John Wade
	Chief Financial Officer