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EX-31.2 - EXHIBIT 31.2 - ITEX CORPv432920_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - ITEX CORPv432920_ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - ITEX CORPv432920_ex32-1.htm
EX-32.2 - EXHIBIT 32.2 - ITEX CORPv432920_ex32-2.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

 

FORM 10-Q

 

Mark One)

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

For the quarterly period ended January 31, 2016.

 

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, 2016, we had 2,104,776 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 January 31, 2016 (unaudited) and July 31, 2015 1
     
  Consolidated Statements of Income for the Three and Six-Months Ended January 31, 2016 and 2015 (unaudited) 2
     
  Consolidated Statement of Stockholders’ Equity for the Six-Months Ended January 31, 2016 (unaudited) 3
     
  Consolidated Statements of Cash Flows for the Six-Months Ended January 31, 2016 and 2015 (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 18
     
ITEM 4. Controls and Procedures 19
     
PART II. Other Information 19
     
ITEM 1. Legal Proceedings 19
     
ITEM 2. Unregistered Sales of Equity Securities 19
     
ITEM 6. Exhibits 20
     
  Signatures 20

 

 

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

ITEX CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands)

 

   January 31, 2016   July 31, 2015 
   (unaudited)     
ASSETS          
Current assets:          
Cash and cash equivalents  $2,441   $2,047 
Accounts receivable, net of allowance of $374 and $439   743    398 
Prepaid expenses   109    174 
Loans and advances   18    8 
Deferred tax asset, net of allowance of $15 and $15   554    554 
Notes receivable   269    291 
Other current assets   23    11 
Total current assets   4,157    3,483 
           
Property and equipment, net of accumulated depreciation of $412 and $397   24    38 
Goodwill   3,191    3,191 
Deferred tax asset, net of allowance of $84 and $84 and net of current portion   2,945    3,124 
Intangible assets, net of accumulated amortization of $3,352 and $3,325   75    102 
Notes receivable - net of current portion   666    792 
Other long-term assets   6    10 
Total assets   11,064    10,740 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
Accounts and other expenses payable   47    50 
Commissions payable to brokers   -    259 
Accrued commissions to brokers   960    659 
Accrued expenses   236    261 
Deferred revenue   21    27 
Advance payments   108    112 
Total current liabilities   1,372    1,368 
           
Total liabilities   1,372    1,368 
           
Commitments and contingencies          
           
Stockholders’ equity:          
Common stock, $0.01 par value; 9,000 shares authorized; 1,943 shares and 1,890 shares issued and outstanding, respectively   19    19 
Additional paid-in capital   22,535    22,361 
Stockholder notes receivable   (4)   (6)
Accumulated deficit   (12,858)   (13,002)
Total stockholders' equity   9,692    9,372 
           
Total liabilities and stockholders’ equity  $11,064   $10,740 

 

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

 

 1 

 

 

ITEX CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

 

   Three-months Ended
January 31,
   Six-months Ended
January 31,
 
   2016   2015   2016   2015 
   (unaudited)       (unaudited)     
                 
Revenue:                    
Marketplace revenue and other revenue  $2,980   $3,238   $5,793   $6,355 
                     
Costs and expenses:                    
Cost of Marketplace revenue   1,861    2,012    3,602    3,936 
Corporate salaries, wages and employee benefits   509    512    941    956 
Selling, general and administrative   308    554    711    1,069 
Depreciation and amortization   21    23    44    46 
    2,699    3,101    5,298    6,007 
                     
Income from operations   281    137    495    348 
                     
Other income/(expense)                    
Interest, net   12    26    33    49 
                     
    12    26    33    49 
                     
Income before income taxes   293    163    528    397 
                     
Income tax expense   96    55    176    134 
                     
Net income  $197   $108   $352   $263 
                     
Net income per common share:                    
Basic  $0.10   $0.04   $0.18   $0.10 
Diluted  $0.10   $0.04   $0.18   $0.10 
                     
Weighted average shares outstanding:                    
Basic   1,928    2,630    1,912    2,619 
Diluted   1,928    2,632    1,912    2,622 

 

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

 

 2 

 

 

ITEX CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE SIX-MONTHS ENDED JANUARY 31, 2016

(In thousands)

(Unaudited)

 

       Additional   Stockholder         
   Common Stock   Paid-in   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   (6)   -    (20)   -    -    (20)
                               
Payments on stockholder notes receivable   -    -    -    2    -    2 
                               
Stock based compensation expense   59    -    194    -    -    194 
                               
Dividend payment   -    -    -    -    (208)   (208)
                               
Net income   -    -    -    -    352    352 
                               
Balance at January 31, 2016   1,943   $19   $22,535   $(4)  $(12,858)  $9,692 

 

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

 

 3 

 

 

ITEX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands) 

(Unaudited)

 

   Six-months ended January 31, 
   2016   2015 
     
CASH FLOWS FROM  OPERATING ACTIVITIES:          
Net income  $352   $263 
Items to reconcile to net cash provided by operations:          
Depreciation and amortization   44    46 
Stock based compensation   194    202 
Bad debt expense   108    163 
Change in deferred income taxes   179    135 
Changes in operating assets and liabilities:          
Accounts receivable   (453)   (339)
Prepaid expenses   65    (5)
Loans and advances   (10)   (4)
Other assets   (9)   (9)
Accounts payable   (3)   (10)
Commissions payable to brokers   (259)   (267)
Accrued commissions to brokers   301    304 
Accrued expenses   (25)   40 
Deferred revenue   (6)   (8)
Advance payments   (4)   (15)
Net cash provided by operating activities   474    496 
           
CASH FLOWS FROM  INVESTING ACTIVITIES:          
Payments on note payable   -    (3)
Purchase of property and equipment   (2)   (1)
Payments received from notes receivable   148    183 
Advances on Loans   -    (31)
Net cash provided by investing activities   146    148 
           
CASH FLOWS FROM  FINANCING ACTIVITIES:          
Principal payments on stockholder notes receivable   2    28 
Repurchase of common stock   (20)   (42)
Cash dividend paid to Common Shareholders   (208)   (286)
Net cash used in financing activities   (226)   (300)
           
Net increase in cash and cash equivalents   394    344 
Cash and cash equivalents at beginning of period   2,047    3,673 
Cash and cash equivalents at end of period  $2,441   $4,017 
           
Supplemental cash flow information:          
Cash paid for taxes  $22   $3 

 

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

 

 4 

 

 

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.

 

 5 

 

 

Goodwill

 

We analyzed goodwill as of January 31, 2016 using a the same discounted cash flow methodology with a risk-adjusted weighted average cost of cost of capital (WACC) as used at the year ended July 31, 2015. Our evaluation determined that goodwill was not impaired at January 31, 2016.

 

Income Per Share

 

We prepare our financial statements using both basic and diluted earnings per share. Basic earnings per share excludes potential dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. As of January 31, 2016, we had no contracts to issue common stock. The Company also had 161 unvested shares of restricted stock of which no shares were dilutive for the three and six-month periods ended January 31, 2016.

 

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, 2016 and 2015 (in thousands, except per share data) (unaudited):

 

   Three-months Ended
January 31,
   Six-months Ended
January 31,
 
   2016   2015   2016   2015 
                 
Net income available for common shareholders  $197   $108   $352   $263 
                     
Weighted avg. outstanding shares of common stock   1,912    2,630    1,928    2,619 
Dilutive effect of restricted shares   -    2    -    3 
Common stock and equivalents   1,912    2,632    1,928    2,622 
Earnings per share:                    
Basic  $0.10   $0.04   $0.18   $0.10 
Diluted  $0.10   $0.04   $0.18   $0.10 

 

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.

 

In February, 2016, the FASB issued ASU 2016-02, which amends the FASB Accounting Standards Codification and creates Topic 842, “Leases.”  The new topic supersedes Topic 840, “Leases,” and increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosures of key information about leasing arrangements.  The guidance is effective for reporting periods beginning after December 15, 2018.  ASU 2016-02 mandates a modified retrospective transition method.  The Company is currently assessing the impact this guidance will have on its consolidated financial statements.

 

There have been no other recent accounting pronouncements or changes in accounting pronouncements during the six-months ended January 31, 2016, 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.

 

 6 

 

 

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 January 31, 2016, there are no future minimum commitments under this operating lease.

 

The lease expense for our executive office space for the three-months ended January 31, 2016 and 2015 was $21 and $40, respectively. For the six-months ended January 31, 2016 and 2015 lease expense was $42 and $81, 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 effective Federal and State tax rate related to our provision for income taxes in the three and six-months ended January 31, 2016 is similar to that used in the corresponding periods ended January 31, 2015.

 

 7 

 

 

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.

 

For the three and six-month periods ended January 31, 2016, we have recognized income tax expense of $96 and $176, respectively for our estimated federal and state income tax provision including both current and deferred income taxes. 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 January 31, 2016 the net deferred tax asset was $3,499.

 

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 January 31, 2016.

 

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 six-month period ended January 31, 2016, the Company repurchased 6 shares of common stock for $20. During the six-month period ended January 31, 2015, the Company repurchased 14 shares of common stock for $42.

 

NOTE 6 – STOCK-BASED PAYMENTS (in thousands, except per share amounts)

 

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. We recognized $136 and $134 of stock based compensation expense for the three-month periods ended January 31, 2016 and 2015, respectively and $194 and $202 of stock based compensation expense for the six-month periods ended January 31, 2016 and 2015, respectively

 

At January 31, 2016, 161 shares of common stock granted under the 2004 Plan remained unvested and no unvested shares under the 2014 plan existed. At January 31, 2016, 293 shares remained available for future grants under the 2014 plan and the Company had $488 of unrecognized compensation expense, expected to be recognized in the future over a weighted-average period of approximately six years.

 

NOTE 7 – SUBSEQUENT EVENTS

 

None.

 

 8 

 

  

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 operates a marketplace (the “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 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 second quarter is the three-month period from November 1, 2015 to January 31, 2016 (“three-month period ended January 31”). Our first six months is from August 1, 2015 to January 31, 2016. 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.

 

 9 

 

 

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 January 31, 2016, as compared to the three-months ended January 31, 2015, our revenue decreased by $258, or 8%, from $3,238 to $2,980. Our income from operations increased by $144 or 105%, from $137 to $281. For the six-month period ended January 31, 2016, as compared to the six-month period ended January 31, 2015, our revenue decreased by $562, or 9%, from $6,355 to $5,793. Income from operations increased by $147 or 42%, from $348 to $495.

 

·Revenue Sources. Our decrease in revenues for the three and six-months ended January 31, 2016 reflects a reduction in our transaction volume and a reduction in our membership base. For the three-months ended January 31, 2016, as compared to the three-months ended January 31, 2015 association revenue decreased $102, or 10% from $1,040 to $938 and our transaction revenue decreased $168, or 8% from $2,070 to $1,902. For the six-months ended January 31, 2016, as compared to the six-months ended January 31, 2015 association revenue decreased $178, or 9% from $2,088 to $1,910 and our transaction revenue decreased $363, or 9% from $4,026 to $3,663.

 

·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 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:

 

oenhancing our internet applications;

 

ooffering expanded tools and features with ITEX MobileSM;

 

omarketing the benefits of participation in the Marketplace;

 

oexpanding Marketplace offerings of goods and services;

 

oadding 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 January 31, 2016, we had a cash balance of $2,441, compared to a balance of $2,047 at July 31, 2015. Our net cash flows provided by operating activities were $474 for the six-month period ended January 31, 2016, compared to $496 for the corresponding period the previous year.

 

 10 

 

 

RESULTS OF OPERATIONS

 

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

 

   Three-months ended
January 31,
   Six-months ended
January 31,
 
   2016   2015   2016   2015 
                 
Marketplace revenue and other revenue  $2,980   $3,238   $5,793   $6,355 
                     
Cost of marketplace revenue  $1,861   $2,012   $3,602   $3,936 
Operating expenses   838    1,089    1,696    2,071 
Income from operations   281    137    495    348 
                     
Other income, net   12    26    33    49 
Income before income taxes   293    163    528    397 
                     
Income tax expense   96    55    176    134 
                     
Net income  $197   $108   $352   $263 
                     
Net income per common share:                    
Basic  $0.10   $0.04   $0.18   $0.10 
Diluted  $0.10   $0.04   $0.18   $0.10 
                     
Average common and equivalent shares:                    
Basic   1,928    2,630    1,912    2,619 
Diluted   1,928    2,630    1,912    2,619 

 

Revenue for the three-months ended January 31, 2016, as compared to the corresponding period of fiscal 2015 decreased by $258, or 8%. Revenue for the six-month period ended January 31, 2016, as compared to the corresponding six-month period of fiscal 2015, decreased by $562, or 9%. The decrease in revenues for the three and six-months ended January 31, 2016 was from a reduction in transaction volume along with a reduction in the number of 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 $151, or 8% for the three-month period ended January 31, 2016, compared to the corresponding period of fiscal 2015. Cost of Marketplace revenue decreased by $334, or 8% for the six-month period ended January 31, 2016, compared to the corresponding period of fiscal 2015. The cost of Marketplace revenue decreases, on percentage of revenue basis, were in line with the corresponding decrease in association and transaction revenues.

 

Operating expenses which include corporate salaries, wages and employee benefits, selling, general and administrative, depreciation and amortization decreased by $251 or 23% for the three-months ended January 31, 2016, compared to the corresponding period of fiscal 2015. Operating expenses decreased by $375, or 18% for the six-month period ended January 31, 2016, compared to the corresponding period of fiscal 2015.

 

The decrease in operating expenses in the three-months ended January 31, 2016, as compared to the corresponding period of the prior fiscal year, resulted primarily from a $246 decrease in selling and G&A. The decrease in operating expenses in the six-months ended January 31, 2016, as compared to the corresponding period of fiscal 2015, resulted primarily from a $358 decrease in selling and G&A and a $15 decrease in salaries and benefits.

 

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Income from operations for the three-months ended January 31, 2016, as compared to the corresponding quarter of fiscal 2015, increased by $144, or 105%. Income from operations for the six-month period ended January 31, 2016, as compared to the corresponding period of fiscal 2015, increased by $147, or 42%.

 

Net income for the three-months ended January 31, 2016, as compared to the corresponding period of fiscal 2015, increased by $89, or 82%. Net income for the six-month period ended January 31, 2016 as compared to the corresponding period of fiscal 2015, increased by $89, or 34%.

 

Earnings per share, both basic and diluted, increased by $0.06, or 150% to $0.10 per share in the three-months ended January 31, 2016 compared to the three-months ended January 31, 2015. Earnings per share, both basic and diluted, increased $0.08, or 80% to $0.18 per share for the six-month period ended January 31, 2016 compared to the six-month period ended January 31, 2015.

 

Revenue, Costs and Expenses

 

The following table sets forth our selected consolidated financial information for the three and six-months ended January 31, 2016 and 2015 with amounts expressed as a percentage of total revenues (in thousands) (unaudited):

 

   Three-months ended January 31,   Six-months ended January 31, 
   2016   2015   2016   2015 
                     
   Amount   Percent   Amount   Percent   Amount   Percent   Amount   Percent 
Revenue:                                        
Marketplace revenue and other revenue  $2,980    100%  $3,238    100%  $5,793    100%  $6,355    100%
                                         
Costs and expenses:                                        
Cost of Marketplace revenue   1,861    62%   2,012    62%   3,602    62%   3,936    62%
Salaries, wages and employee benefits   509    16%   512    16%   941    16%   956    15%
Selling, general and administrative   308    10%   554    17%   711    12%   1,069    17%
Depreciation and amortization   21    1%   23    1%   44    1%   46    1%
    2,699    91%   3,101    96%   5,298    91%   6,007    95%
                                         
Income from operations   281    9%   137    4%   495    9%   348    5%
                                         
Interest income, net   12    1%   26    1%   33    0%   49    1%
                                         
Income before income taxes   293    10%   163    5%   528    9%   397    3%
                                         
Provision for income taxes   96    3%   55    2%   176    3%   134    2%
                                         
Net income  $197    7%  $108    3%  $352    6%  $263    4%

 

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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
January 31,
   Percent   Six-months ended
January 31,
   Percent 
   2016   2015   increase (decrease)   2016   2015   (decrease) 
                         
                         
Transaction fees  $1,902   $2,070    -8%  $3,663   $4,026    -9%
Association fees   938    1,040    -10%   1,910    2,088    -9%
Other revenue   140    128    9%   220    241    -9%
   $2,980   $3,238    -8%  $5,793   $6,355    -9%

 

Marketplace revenue decreased by $258, or 8%, for the three-months ended January 31, 2016, as compared to the corresponding period ended January 31, 2015. Marketplace revenue decreased by $562, or 9% for the six-month period ended January 31, 2016, as compared to the six-month period ended January 31, 2015.

 

Transaction fee revenue for the three-months ended January 31, 2016, as compared to the corresponding quarter of fiscal 2015, decreased by $168, or 8%. Transaction fee revenue for the six-month period ended January 31, 2016, as compared to the corresponding period of fiscal 2015, decreased by $363, or 9%. The decrease for both the three and the six-month periods is the result of lower transaction volume.

 

Association fee revenue for the three-months ended January 31, 2016, as compared to the corresponding quarter of fiscal 2015, decreased by $102, or 10%. Association fee revenue for the six-month period ended January 31, 2016, as compared to the corresponding period of fiscal 2015, decreased by $178, or 9%. The decrease for both the three and the six-month periods is due to a decrease in net active membership accounts.

 

Other revenue for the three-months ended January 31, 2016, as compared to the corresponding quarter of fiscal 2015, increased by $12, or 9%. Other revenue for the six-months ended January 31, 2016, as compared to the corresponding quarter of fiscal 2015, decreased by $21, or 9%.

 

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.

 

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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 $80 and $73 as ITEX dollar revenue for the three-months ended January 31, 2016 and 2015, respectively. We recorded $102 and $123 as ITEX dollar revenue for the six-months ended January 31, 2016 and 2015, respectively.

 

The corresponding ITEX dollar expenses in the three and six-month periods ended January 31, 2016 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.

 

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
January 31,
   Percent   Six-months ended
January 31,
   Percent 
   2016   2015   (decrease)   2016   2015   (decrease) 
                         
Transaction fee commissions  $1,447   $1,561    -7%  $2,763   $3,022    -9%
Association fee commissions   348    380    -8%   696    751    -7%
Other costs of revenue   66    71    -7%   143    163    -12%
   $1,861   $2,012    -8%  $3,602   $3,936    -8%
                               
Costs of Marketplace revenue
as percentage of total revenue
   62%   62%        62%   62%     

 

Costs of Marketplace revenue for the three-months ended January 31, 2016, as compared to the three-months ended January 31, 2015, decreased by $151, or 8%. Costs of Marketplace revenue for the six-month period ended January 31, 2016, as compared to six-month period ended January 31, 2015, decreased by $334, or 8%. The overall decrease in costs of Marketplace revenue corresponds to the decrease in total Marketplace revenue for the same periods. Costs of Marketplace revenue as a percentage of total revenue was the same for both the three and six-month periods ended January 2016.

 

Transaction fee commissions decreased by $114, or 7% for the three-months ended January 31, 2016, as compared to the corresponding period of fiscal 2015. Transaction fee commissions decreased by $259, or 9% for the six-month period ended January 31, 2016 as compared to the corresponding period of fiscal 2015. The reduction in the three and six-month periods was due to a corresponding decrease in transaction fee revenue for the comparable periods.

 

Association fee commissions decreased by $32, or 8% for the three-month period ended January 31, 2016 as compared to the corresponding periods of fiscal 2015. The decrease in commissions was due to the corresponding decrease in association fee revenue for the same period. Association fee commissions decreased by $55, or 7% for the six-month period ended January 31, 2016 as compared to the corresponding periods of fiscal 2015. The decrease in commissions for the three and six-month periods was due to the corresponding decrease in association fee revenue for the comparable periods.

 

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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 $5, or 7% for the three-month period ended January 31, 2016 as compared to the corresponding period of 2015. Other costs of revenue increased by $20 or 12% for the six-month period ended January 31, 2016 as compared to the corresponding period of 2015.

 

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 decreased by $3 and $15 or 1% and 2%, respectively for the three and six-month periods ended January 31, 2016 as compared to the corresponding periods of fiscal 2015. The decrease in both periods is primarily related to a reduction in headcount during the six-months ended January 31, 2016.

 

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 decreased by $246 and by $358, or 44% and 33%, respectively, for the three and six-month periods ended January 31, 2016, as compared to the three and six-month periods ended January 31, 2015. 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 foreign currency expense due to the Canadian dollar declining in value against the US dollar and bad debt expense. Foreign currency expense decreased for the three and six-month periods ended January 31, 2016 by $114 and by $139, or 97% and 94%, respectively, compared to the three and six-months ended January 31, 2015. Bad debt expense decreased for the three and six-month periods ended January 31, 2015 by $29 and by $55, or 34%, respectively, compared to the three and six-months ended January 31, 2015. In addition, legal fees for the three and six-month periods ended January 31, 2016 decreased by $57 and by $100, or 59% and 52% as compared to the comparable periods in 2015.

 

Depreciation and Amortization

 

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

 

Depreciation and amortization decreased by $2 and $2, or 9% and 4%, respectively, for the three and the six-month periods ended January 31, 2016, as compared to the three and six-month periods ended January 31, 2015. The decrease is primarily related to the completion of the amortization of a non-compete agreement and membership lists associated with acquisition of certain assets.

 

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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 a $96 and $176 provision for income taxes, in the three and six-month periods ended January 31, 2016, respectively, as compared to the $55 and $134 provision for income taxes in the three and six-month periods ended January 31, 2015. Provision for income taxes increased by $41 and $42, respectively for the three and six-months ended January 31, 2016, as compared to the corresponding period of fiscal 2015. The increase in income taxes in 2016 was due to the increase in taxable income in the comparable periods.

 

The Federal effective tax rate related to our provision for income taxes in the three and six-months ended January 31, 2016 is similar to that used in the same periods ended January 31, 2015. The State effective tax rate related to our provision for income taxes in the three and six-months ended January 31, 2016 and 2015 is lower than statutory rates due to the resolution of certain state tax positions which led to a reduction in the accrued expenses on our consolidated balance sheet for uncertain tax positions related primarily to state jurisdictions.

 

LIQUIDITY AND CAPITAL RESOURCES

 

We finance our ongoing operations primarily from existing cash, investing activities, and cash flows from operations. As of January 31, 2016, and July 31, 2015, we had $2,441 and $2,047, respectively, in cash.

 

The following table presents a summary of our cash flows for the six-months ended January 31, 2016 and 2015 (in thousands) (unaudited):

 

   Six-months ended January 31, 
   2016   2015 
         
Cash provided by operating activities  $474   $496 
Cash provided by investing activities   146    148 
Cash used in financing activities   (226)   (300)
Increase in cash  $394   $344 

 

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.

 

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Operating Activities

 

For the six-months ended January 31, 2016 net cash provided by operating activities was $474 compared with $496 in the six-months ended January 31, 2015 a decrease of $22 or 4%. The decrease in net cash provided by the operating activities is a result of the increase in net income offset by the net change in operating assets and liabilities.

 

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, 
   2016   2015 
         
Net income  $352   $263 
Add: non-cash  expenses   525    462 
Changes in operating assets and liabilities   (403)   (229)
Net cash provided by operating activities  $474   $496 

 

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

 

Investing Activities

 

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

 

For the six-months ended January 31, 2016, net cash provided by investing activities was $146 compared with $148 provided by investing activities in the six-months ended January 31, 2015, a decrease of $2, or 1%. In the six-months ended January 31, 2016, the net cash provided by investing activities was primarily related to $148 in note receivable principal collections offset by $2 in purchases of property and equipment.

 

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 six-months ended January 31, 2016, net cash used in financing activities was $226 compared with $300 used in financing activities in the six-months ended January 31, 2015, a decrease of cash used in financing activities of $74, or 25%. The decrease is primarily due to a $78 decrease in dividends paid during the six-months ended January 31, 2016, when compared to the previous comparable period.

 

In the six-months ended January 31, 2016, we declared and paid $208 in cash

dividends to our stockholders compared to $286 in cash dividends paid to our stockholders in the six-months ended January 31, 2015.

 

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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 January 31, 2016, there are no future minimum commitments under this operating lease.

 

The lease expense for our executive office space for the six-months ended January 31, 2016 and 2015 was $42 and $81, 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;
·evaluation of impairment of goodwill and other long-lived assets;
·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.

 

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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 January 31, 2016 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) 
11/01/15 - 11/30/15   -    -    -    - 
12/01/15 – 12/31/15   261   $3.10    261   $1,025,151 
01/01/16 - 01/31/16   4,832   $3.41    4,832   $1,008,674 

 

(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.

           

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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: March 10, 2016 By:   /s/ Steven White
    Steven White
    Chief Executive Officer
    (Duly Authorized Officer)
     
Date: March 10, 2016 By: /s/ John Wade
    John Wade
    Chief Financial Officer

 

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