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.
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.
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.
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.
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.
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.
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.
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
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.
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:
|
|
o
|
enhancing our internet applications;
|
|
o
|
offering expanded tools and features with ITEX Mobile
SM
;
|
|
o
|
marketing the benefits of participation in the Marketplace;
|
|
o
|
expanding Marketplace offerings of goods and services;
|
|
o
|
adding and retaining qualified brokers.
|
In order to add new brokers we are sustaining our broker
recruiting incentives. Through our Broker Mentor program, existing brokers recruit prospective brokers and provide ongoing training
to the prospective broker until certain performance thresholds are met. Upon meeting the performance thresholds, the prospective
broker is offered a franchise for a reduced fee.
Financial Position
. At 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.
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):
|
|
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
|
%
|
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):
|
|
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.
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.
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.
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;
|
|
·
|
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
|
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.