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EX-32.2 - EXHIBIT 32.2 - ITEX CORPv441527_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - ITEX CORPv441527_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - ITEX CORPv441527_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - ITEX CORPv441527_ex31-1.htm

 

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 April 30, 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 April 30, 2016, we had 2,083,857 shares of common stock outstanding (including unvested restricted stock).

 

 

 

 

ITEX CORPORATION

FORM 10-Q

For the Three-month and Nine-month Period Ended April 30, 2016

 

INDEX

 

    Page(s)
     
PART  I. Financial Information  
     
ITEM 1. Financial Statements  
     
  Consolidated Balance Sheets as of April 30, 2016 (unaudited) and July 31, 2015 1
     
  Consolidated Statements of Income for the Three and Nine-Months Ended April 30, 2016 and 2015 (unaudited) 2
     
  Consolidated Statement of Stockholders’ Equity for the Nine-Months Ended April 30, 2016 (unaudited) 3
     
  Consolidated Statements of Cash Flows for the Nine-Months Ended April 30, 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 19
     
ITEM 4. Controls and Procedures 19
     
PART II. Other Information 19
     
ITEM 1. Legal Proceedings

 19

     
ITEM 2. Unregistered Sales of Equity Securities

 20

     
ITEM 6. Exhibits

 20

  Signatures 21

 

 

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

ITEX CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands)

 

   April 30, 2016   July 31, 2015 
   (unaudited)     
ASSETS          
Current assets:          
Cash and cash equivalents  $2,697   $2,047 
Accounts receivable, net of allowance of $417 and $439   896    398 
Prepaid expenses   148    174 
Loans and advances   9    8 
Deferred tax asset, net of allowance of $15   554    554 
Notes receivable   271    291 
Other current assets   28    11 
Total current assets   4,603    3,483 
           
Property and equipment, net of accumulated depreciation of $418 and $397   18    38 
Goodwill   3,191    3,191 
Deferred tax asset, net of allowance of $84 and net of current portion   2,817    3,124 
Intangible assets, net of accumulated amortization of $3,366 and $3,325   61    102 
Notes receivable - net of current portion   658    792 
Other long-term assets   6    10 
Total assets  $11,354   $10,740 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
Accounts and other expenses payable   48    50 
Commissions payable to brokers   423    259 
Accrued commissions to brokers   534    659 
Accrued expenses   302    261 
Deferred revenue   23    27 
Advance payments   129    112 
Total current liabilities   1,459    1,368 
           
Total liabilities   1,459    1,368 
           
Commitments and contingencies          
           
Stockholders’ equity:          
Common stock, $0.01 par value; 9,000 shares authorized; 1,950 shares and 1,890 shares issued and outstanding, respectively   20    19 
Additional paid-in capital   22,486    22,361 
Stockholder notes receivable   (4)   (6)
Accumulated deficit   (12,607)   (13,002)
Total stockholders' equity   9,895    9,372 
           
Total liabilities and stockholders’ equity  $11,354   $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)

(Unaudited)

 

   Three-months Ended April
30,
   Nine-months Ended
April 30,
 
   2016   2015   2016   2015 
                 
Revenue:                    
Marketplace revenue and other revenue  $2,627   $2,783   $8,420   $9,138 
                     
Costs and expenses:                    
Cost of Marketplace revenue   1,590    1,673    5,192    5,609 
Salaries, wages and employee benefits   447    459    1,388    1,416 
Selling, general and administrative   208    319    918    1,389 
Depreciation and amortization   20    23    63    68 
    2,265    2,474    7,561    8,482 
                     
Income from operations   362    309    859    656 
                     
Other income:                    
Other income   14    20    45    69 
                     
    14    20    45    69 
                     
Income before income taxes   376    329    904    725 
                     
Income tax expense   125    111    301    244 
                     
Net income  $251   $218   $603   $481 
                     
Net income per common share:                    
Basic  $0.13   $0.09   $0.31   $0.19 
Diluted  $0.13   $0.09   $0.31   $0.19 
                     
Weighted average shares outstanding:                    
Basic   1,946    2,527    1,923    2,589 
Diluted   1,946    2,533    1,923    2,594 

 

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

 

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ITEX CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE NINE-MONTHS ENDED APRIL 30, 2016

(In thousands)

(Unaudited)

 

   Common Stock   Additional    Stockholder          
   Shares   Amount   Paid-in
Capital
   Note
Receivable
   Accumulated
Deficit
   Total 
                         
Balance at July 31, 2015   1,890   $19   $22,361   $(6)  $(13,002)  $9,372 
                               
Common stock repurchased and retired   (28)   -    (106)   -    -    (106)
                               
Payments on stockholder notes receivable   -    -    -    2    -    2 
                               
Stock based compensation expense   88    1    231    -    -    232 
                               
Dividend payment   -    -    -    -    (208)   (208)
                               
Net income   -    -    -    -    603    603 
                               
Balance at April 30, 2016   1,950   $20   $22,486   $(4)  $(12,607)  $9,895 

 

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

 

3 

 

 

ITEX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

   Nine-months ended April
30,
 
   2016   2015 
   (unaudited) 
CASH FLOWS FROM  OPERATING ACTIVITIES:          
Net income  $603   $481 
Items to reconcile to net cash provided by operations:          
Depreciation and amortization   63    68 
Stock based compensation   232    265 
Bad debt expense   159    84 
Change in deferred income taxes   307    246 
Changes in operating assets and liabilities:          
Accounts receivable   (657)   (352)
Prepaid expenses   26    (64)
Loans and advances   (1)   10 
Other assets   (13)   11 
Accounts payable and other expenses payable   (2)   (11)
Commissions payable to brokers   164    187 
Accrued commissions to brokers   (125)   (179)
Accrued expenses   41    49 
Deferred revenue   (4)   (6)
Advance payments   17    13 
           
Net cash provided by operating activities   810    802 
           
CASH FLOWS FROM  INVESTING ACTIVITIES:          
Payments on note payable   -    (3)
Purchase of property and equipment   (2)   - 
Payments received from notes receivable   214    280 
Advances on loans   (60)   (30)
Net cash provided by (used in) provided by investing activities   152    247 
           
CASH FLOWS FROM  FINANCING ACTIVITIES:          
Principal payments on Broker notes receivable   2    37 
Repurchase of Common stock   (106)   (42)
Tender offer   -    (3,000)
Cash dividend paid to Common Shareholders   (208)   (430)
Net cash used in financing activities   (312)   (3,435)
           
Net (decrease) increase in cash   650    (2,386)
Cash at beginning of period   2,047    3,673 
Cash at end of period  $2,697   $1,287 
           
Supplemental cash flow information:          
Cash paid for taxes  $23   $14 
Cancellation of Brokers notes receivable  $-   $117 

 

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.

 

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Goodwill

 

We analyzed goodwill as of April 30, 2016 using 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 April 30, 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 April 30, 2016, we had no contracts to issue common stock. The Company also had 133 unvested shares of restricted stock of which no shares were dilutive for the three and nine-month periods ended April 30, 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 nine-month periods ended April 30, 2016 and 2015 (in thousands, except per share data) (unaudited):

 

   Three-months Ended
April 30,
   Nine-months Ended
January 31,
 
   2016   2015   2016   2015 
                 
Net income available for common shareholders  $251   $218   $603   $481 
                     
Weighted avg. outstanding shares of common stock   1,946    2,527    1,923    2,589 
Dilutive effect of restricted shares   -    6    -    5 
Common stock and equivalents   1,946    2,533    1,923    2,594 
Earnings per share:                    
Basic  $0.13   $0.09   $0.31   $0.19 
Diluted  $0.13   $0.09   $0.31   $0.19 

 

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.

 

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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 nine-months ended April 30, 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.

 

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 April 30, 2016, there are no future minimum commitments under this operating lease.

 

The lease expense for our executive office space for the three-months ended April 30, 2016 and 2015 was $23 and $47, respectively. For the nine-months ended April 30, 2016 and 2015 lease expense was $65 and $128, 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.

 

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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 nine-months ended April 30, 2016 is similar to that used in the corresponding periods ended April 30, 2015. 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 nine-month periods ended April 30, 2016, we have recognized income tax expense of $125 and $301, 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 April 30, 2016 the net deferred tax asset was $3,371.

 

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 April 30, 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 nine-month period ended April 30, 2016, the Company repurchased 28 shares of common stock for $106. During the nine-month period ended April 30, 2015, the Company repurchased 14 shares of common stock for $42. As of April 30, 2016 there is $923 remaining under the stock repurchase plan.

 

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 $38 and $61 of stock based compensation expense for the three-month periods ended April 30, 2016 and 2015, respectively and $232 and $265 of stock-based compensation expense for the nine-month periods ended April 30, 2016 and 2015, respectively

 

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At April 30, 2016, 133 shares of common stock granted under the 2004 Plan remained unvested and no unvested shares under the 2014 plan existed. At April 30, 2016, 293 shares remained available for future grants under the 2014 plan and the Company had $451 of unrecognized compensation expense, expected to be recognized in the future over a weighted-average period of approximately six years.

 

NOTE 7 – SUBSEQUENT EVENTS

 

On April 5, 2016, the Board of Directors of ITEX Corporation declared a cash dividend of $0.10 per share payable on June 10, 2016, to stockholders of record as of the close of business on June 1, 2016.

 

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 third quarter is the three-month period from February 1, 2016 to April 30, 2016 (“three-month period ended April 30”). Our first nine months is from August 1, 2015 to April 30, 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.

 

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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 April 30, 2016, as compared to the three-months ended April 30, 2015, our revenue decreased by $156, or 6%, from $2,783 to $2,627, our income from operations increased by $53, or 17%, from $309 to $362, and our net income increased by $33, or 15% from $218 to $251. For the nine-month period ended April 30, 2016, as compared to the nine-month period ended April 30, 2015, our revenue decreased by $718, or 8%, from $9,138 to $8,420 however our income from operations increased by $203 or 31%, from $656 to $859 and our net income increased by $122 or 25% from $481 to $603.

 

·Revenue Sources. Our decrease in revenues for the three and nine-months ended April 30, 2016 reflects a reduction in our transaction volume and a reduction in our membership base. For the three-months ended April 30, 2016, as compared to the three-months ended April 30, 2015 association revenue decreased $34, or 4% from $923 to $889 and our transaction revenue decreased $123, or 7% from $1,768 to $1,645. For the nine-months ended
April 30, 2016, as compared to the nine-months ended April 30, 2015 association revenue decreased $211, or 7% from $3,010 to $2,799 and our transaction revenue decreased $485, or 8% from $5,793 to $5,308.

 

·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.

 

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Financial Position. At April 30, 2016, we had a cash balance of $2,697, compared to a balance of $2,047 at July 31, 2015. Our net cash flows provided by operating activities were $810 for the nine-month period ended April 30, 2016, compared to $802 for the corresponding period the previous year.

 

RESULTS OF OPERATIONS

 

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

 

   Three-months ended
April 30,
   Nine-months ended
April 30,
 
   2016   2015   2016   2015 
   (unaudited)   (unaudited) 
Marketplace revenue and other revenue  $2,627   $2,783   $8,420   $9,138 
                     
Cost of Marketplace revenue  $1,590   $1,673   $5,192   $5,609 
Operating expenses   675    801    2,369    2,873 
Income from operations   362    309    859    656 
                     
Other income (expense)   14    20    45    69 
Income before income taxes   376    329    904    725 
                     
Provision for income taxes   125    111    301    244 
                     
Net income  $251   $218   $603   $481 
                     
Net income per common share:                    
Basic  $0.13   $0.09   $0.31   $0.19 
Diluted  $0.13   $0.09   $0.31   $0.19 
                     
Average common and equivalent shares:                    
Basic   1,946    2,527    1,923    2,589 
Diluted   1,946    2,533    1,923    2,594 

 

Revenue for the three-months ended April 30, 2016, as compared to the corresponding period of fiscal 2015 decreased by $156, or 6%. Revenue for the nine-month period ended April 30, 2016, as compared to the corresponding nine-month period of fiscal 2015, decreased by $718, or 8%. The decrease in revenues for the three and nine-months ended April 30, 2016 was from a reduction in transaction volume along with a reduction in our membership base.

 

Cost of Marketplace revenue, which includes association and transaction commissions paid to brokers and other Marketplace related expenses, decreased by $83, or 5% for the three-month period ended April 30, 2016, compared to the corresponding period of fiscal 2015. Cost of Marketplace revenue decreased by $417, or 7% for the nine-month period ended April 30, 2016, compared to the corresponding period of fiscal 2015. The cost of Marketplace revenue decreases for both periods were in line with the corresponding decrease in revenue.

 

Operating expenses which include corporate salaries, wages and employee benefits, selling, general and administrative, depreciation and amortization decreased by $126 or 16% for the three-months ended April 30, 2016, compared to the corresponding period of fiscal 2016. Operating expenses decreased by $504, or 18% for the nine-month period ended April 30, 2016, compared to the corresponding period of fiscal 2015.

 

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The decrease in operating expenses in the three-months ended April 30, 2016, as compared to the corresponding period of the prior fiscal year, resulted primarily from a $111 decrease in selling and G&A and a $12 decrease in salaries and benefits. The decrease in operating expenses in the nine-months ended April 30, 2016, as compared to the corresponding period of fiscal 2015, resulted primarily from a $471 decrease in selling and G&A and a $28 decrease in salaries and benefits.

 

Income from operations for the three-months ended April 30, 2016, as compared to the corresponding quarter of fiscal 2015, increased by $53, or 17%. Income from operations for the nine-month period ended April 30, 2016, as compared to the corresponding period of fiscal 2015, increased by $203, or 31%.

 

Net income for the three-months ended April 30, 2016, as compared to the corresponding period of fiscal 2015, increased by $33, or 15%. Net income for the nine-month period ended April 30, 2016 as compared to the corresponding period of fiscal 2015, increased by $122, or 25%.

 

Earnings per share, both basic and diluted, increased by $0.04, or 44% to $0.13 per share in the three-months ended April 30, 2016 compared to the three-months ended April 30, 2015. Earnings per share, both basic and diluted, increased $0.12, or 63% to $0.31 per share for the nine-month period ended April 30, 2016 compared to the nine-month period ended April 30, 2015.

 

Revenue, Costs and Expenses

 

The following table sets forth our selected consolidated financial information for the three and nine-months ended April 30, 2016 and 2015, with amounts expressed as a percentage of total revenues (in thousands) (unaudited):

 

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   Three-months ended April 30,   Nine-months ended April 30, 
   2016   2015   2016   2015 
                     
   Amount   Percent   Amount   Percent   Amount   Percent   Amount   Percent 
Revenue:                                        
Marketplace revenue and other revenue  $2,627    100%  $2,783    100%  $8,420    100%  $9,138    100%
                                         
Costs and expenses:                                        
Cost of Marketplace revenue   1,590    60%   1,673    60%   5,192    61%   5,609    61%
Salaries, wages and employee benefits   447    17%   459    16%   1,388    16%   1,416    15%
Selling, general and administrative   208    8%   319    12%   918    12%   1,389    16%
Depreciation and amortization   20    1%   23    1%   63    1%   68    1%
    2,265    86%   2,474    89%   7,561    90%   8,482    93%
                                         
Income from operations   362    14%   309    11%   859    10%   656    7%
                                         
Interest income, net   14    0%   20    1%   45    1%   69    1%
                                         
Income before income taxes   376    14%   329    12%   904    11%   725    8%
                                         
Provision for income taxes   125    5%   111    4%   301    4%   244    3%
                                         
Net income  $251    9%  $218    8%  $603    7%  $481    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
April 30,
   Percent   Nine-months ended
April 30,
   Percent 
                 
   2016   2015   increase
(decrease)
   2016   2015   (decrease) 
                         
                         
Transaction fees  $1,645   $1,768    -7%  $5,308   $5,793    -8%
Association fees   889    923    -4%   2,799    3,010    -7%
Other revenue   93    92    1%   313    335    -7%
   $2,627   $2,783    -6%  $8,420   $9,138    -8%

 

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Marketplace revenue decreased by $156, or 6%, for the three-months ended April 30, 2016, as compared to the corresponding period ended April 30, 2015. Marketplace revenue decreased by $718, or 8% for the nine-month period ended April 30, 2016, as compared to the nine-month period ended April 30, 2015.

 

Transaction fee revenue for the three-months ended April 30, 2016, as compared to the corresponding quarter of fiscal 2015, decreased by $123, or 7%. Transaction fee revenue for the nine-month period ended April 30, 2016, as compared to the corresponding period of fiscal 2015 decreased by $485, or 8%. The decrease for both the three and the nine-month periods is the result of lower transaction volume.

 

Association fee revenue for the three-months ended April 30, 2016, as compared to the corresponding quarter of fiscal 2015, decreased by $34, or 4%. Association fee revenue for the nine-month period ended April 30, 2016, as compared to the corresponding period of fiscal 2015, decreased by $211, or 7%. The decrease for both the three and nine-month periods is due to a decrease in the net active membership accounts.

 

Other revenue for the three-months ended April 30, 2016, as compared to the corresponding quarter of fiscal 2015, increased by $1, or 1%. Other revenue for the nine-months ended April 30, 2016, as compared to the corresponding quarter of fiscal 2015, decreased by $22, or 7%.

 

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 $16 and $24 as ITEX dollar revenue for the three-months ended April 30, 2016 and 2015, respectively. We recorded $119 and $147 as ITEX dollar revenue for the nine-months ended April 30, 2016 and 2015, respectively.

 

The corresponding ITEX dollar expenses in the three and nine-month periods ended April 30, 2016 were for legal services, printing, outside services, and miscellaneous expenses. We plan to continue to utilize ITEX dollars for our corporate purposes in future periods.

 

Costs of Marketplace Revenue

 

Cost of Marketplace revenue consists of commissions paid to brokers, 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):

 

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   Three-months ended
April 30,
   Percent   Nine-months ended
April 30,
   Percent 
                 
   2016   2015   (decrease)   2016   2015   (decrease) 
                         
                         
Transaction fee commissions  $1,221   $1,298    -6%  $3,984   $4,320    -8%
Association fee commissions   316    320    -1%   1,012    1,071    -6%
Other costs of revenue   53    55    -4%   196    218    -10%
   $1,590   $1,673    -5%  $5,192   $5,609    -7%
                               
Costs of Marketplace revenue as percentage of total revenue   61%   60%        62%   61%     

 

Costs of Marketplace revenue for the three-months ended April 30, 2016, as compared to the three-months ended April 30, 2015, decreased by $83, or 5%. Costs of Marketplace revenue for the nine-month period ended April 30, 2016, as compared to nine-month period ended April 30, 2015, decreased by $417, or 7%. The overall decrease in costs of Marketplace revenue corresponds to the decrease in total Marketplace revenue for the same periods.

 

Transaction fee commissions decreased by $77 or 6% for the three-months ended April 30, 2016, as compared to the corresponding period of fiscal 2015. Transaction fee commissions decreased by $336 or 8% for the nine-month period ended April 30, 2016 as compared to the corresponding period of fiscal 2015. The decrease in transaction fee commissions for both the three and nine-month periods is due to similar decreases in the transaction fee revenue.

 

Association fee commissions decreased by $4 and $59, or 1% and 6%, respectively for the three and nine-month periods ended April 30, 2016 as compared to the corresponding periods of fiscal 2015. The decrease in association commissions was primarily due to the decrease in association fee revenue for the same periods.

 

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 $2 and $22 or 4% and 10%, respectively for the three and nine-month periods ended April 30, 2016 as compared to the corresponding periods of fiscal 2015.

 

Salaries, Wages and Employee Benefits

 

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

 

Salaries, wages and employee benefits decreased by $12, or 3%, for the three-month period ended April 30, 2016 and decreased by $28 or 2%, for the nine-month period ended April 30, 2016 as compared to the corresponding periods of fiscal 2015. The decrease in both periods is primarily related to a reduction in headcount.

 

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Selling, General and Administrative Expenses

 

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

 

SG&A expenses decreased by $111 and by $471, or 35% and 34%, respectively, for the three and nine-month periods ended April 30, 2016, as compared to the three and nine-month periods ended April 30, 2015.

 

The decrease is due primarily to a decrease in legal, rent and bad debt. Legal fees for the three and nine-month periods ended April 30, 2016 decreased by $31 and by $130, or 44% and 49%, respectively, compared to the three and nine-months ended April 30, 2015. Rent for the three and nine-month periods ended April 30, 2016 decreased by $24 and by $63, or 51% and 49%, respectively. Bad debt expense for the three and nine-month periods ended April 30, 2016 decreased by $33 and by $87, or 40% and 35%, respectively.

 

Depreciation and Amortization

 

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

 

Depreciation and amortization decreased by $3 and $5, or 13% and 7%, respectively for the three and the nine-month periods ended April 30, 2016, as compared to the three and the nine-month periods ended April 30, 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.

 

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 $125 and $301 provision for income taxes, in the three and nine-month periods ended April 30, 2016, respectively, as compared to the $111 and $244 provision for income taxes in the three and nine-month periods ended April 30, 2015. Provision for income taxes increased by $14 and $57, respectively for the three and nine-months ended April 30, 2016, as compared to the corresponding period of fiscal 2015. The increase in income taxes in 2016 was due to the increase of taxable income in the comparable periods.

 

The Federal effective tax rate related to our provision for income taxes in the three and nine-months ended April 30, 2016 is similar to that used in the same periods ended April 30, 2015. The State effective tax rate related to our provision for income taxes in the three and nine-months ended April 30, 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.

 

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LIQUIDITY AND CAPITAL RESOURCES

 

We finance our ongoing operations primarily from existing cash, investing activities, and cash flows from operations. As of April 30, 2016, and July 31, 2015, we had $2,697 and $2,047, respectively, in cash.

 

The following table presents a summary of our cash flows for the nine-months ended April 30, 2016 and 2015 (in thousands) (unaudited):

 

   Nine-months ended April 30, 
   2016   2015 
         
Cash provided by operating activities  $810   $802 
Cash provided by investing activities   152    247 
Cash used in financing activities   (312)   (3,435)
Increase/(decrease) in cash  $650   $(2,386)

 

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 nine-months ended April 30, 2016 net cash provided by operating activities was $810 compared with $802 in the nine-months ended April 30, 2015 an increase of $8 or 1%. The increase 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):

 

   Nine-months ended April 30, 
   2016   2015 
         
Net income  $603   $481 
Add: non-cash  expenses   761    663 
Changes in operating assets and liabilities   (554)   (342)
Net cash provided by operating activities  $810   $802 

 

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.  

 

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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 nine-months ended April 30, 2016, net cash provided by investing activities was $152 compared with $247 provided by investing activities in the nine-months ended April 30, 2015, a decrease of $95, or 38%. In the nine-months ended April 30, 2016, the net cash provided by investing activities was primarily related to $214 in note receivable principal collections offset by $60 in new loans and $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 nine-months ended April 30, 2016, net cash used in financing activities was $312 compared with $3,435 used in financing activities in the nine-months ended April 31, 2015, a decrease of cash used in financing activities of $3,123, or 91%.

 

In the nine-months ended April 30, 2015, the net cash used in financing activities was primarily related to a $3,000 tender offer, $430 in cash dividends to our stockholders and $42 to repurchase 14 shares of our common stock through our stock repurchase program offset by $37 received in principal payments on stockholder notes receivable.

 

In the nine-months ended April 30, 2016, we declared and paid $208 in cash dividends to our stockholders and $106 to repurchase 28 shares of our common stock through our stock repurchase program offset by $2 received in principal payments on stockholder notes receivable.

 

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 April 30, 2016, there are no future minimum commitments under this operating lease.

 

The lease expense for our executive office space for the nine-months ended April 30, 2016 and 2015 was $65 and $128, 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;

 

18 

 

 

 

·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.

 

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.

 

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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 April 30, 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)
 
02/01/16 - 02/29/16   185   $3.30    185   $1,008,063 
03/31/16 - 03/31/16   20,706   $3.95    20,706   $926,274 
04/01/16 - 04/30/16   828   $3.78    828   $923,159 

 

(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

 

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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:  June 9, 2016 By:   /s/ Steven White
    Steven White
    Chief Executive Officer
    (Duly Authorized Officer)
     
Date:  June 9, 2016 By:   /s/ John Wade
    John Wade
    Chief Financial Officer

 

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