The following financial statements of ITEX Corporation are
included in Item 8:
The accompanying notes are an integral part of these Consolidated
Financial Statements.
The accompanying notes are an integral part of these Consolidated
Financial Statements.
The accompanying notes are an integral part of these Consolidated
Financial Statements.
The accompanying notes are an integral
part of these Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts unless otherwise indicated)
NOTE 1 - DESCRIPTION OF OUR COMPANY AND SUMMARY OF OUR SIGNIFICANT
ACCOUNTING POLICIES
Description of our 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”. ITEX dollars are only usable in the Marketplace and allows 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. A summary of significant accounting policies
applied in the preparation of the accompanying consolidated financial statements follows:
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.
Accounting Records and Use of Estimates
The accounting records
are maintained in accordance with accounting principles generally accepted in the United States of America. The preparation of
financial statements in conformity with accounting principles generally accepted in the United States requires management to make
estimates and assumptions affecting the amounts reported in the consolidated financial statements and accompanying notes. Changes
in these estimates and assumptions may have a material impact on the Company’s financial statements and notes. Examples
of estimates and assumptions include estimating:
|
·
|
certain
provisions such as allowances for accounts receivable and notes receivable
|
|
·
|
any
impairment of long-lived assets including goodwill
|
|
·
|
useful
lives of property and equipment
|
|
·
|
the
value and expected useful life of intangible assets
|
|
·
|
the
value of assets and liabilities acquired through business combinations
|
|
·
|
tax
provisions and valuation allowances
|
|
·
|
accrued
commissions and other accrual expenses
|
|
·
|
litigation
matters described herein
|
Actual results may vary from estimates
and assumptions that were used in preparing the financial statements.
Operating and Accounting Cycles
For each calendar year,
we divide our operations into 13 four-week billing and commission cycles always ending on a Thursday (“operating cycle”).
For financial statement purposes, our fiscal year is from August 1 to July 31 (“year”, “2016” for August
1, 2015 to July 31, 2016, “2015” for August 1, 2014 to July 31, 2015). We report our results as of the last day of
each calendar month (“accounting cycle”).
Business Combinations
The Company accounts
for business combinations using the acquisition method of accounting. The total consideration paid in an acquisition is allocated
to the fair value of the acquired company’s identifiable assets and liabilities. Any excess of the purchase price over the
estimated fair values of the net assets acquired is recorded as goodwill. The consolidated financial statements reflect the results
of operations of an acquired business from the completion date of an acquisition. The costs to acquire a business, including transaction
costs, are expensed as incurred.
The Company identifies
and records separately the intangible assets acquired apart from goodwill based on the specific criteria for separate recognition
established per the accounting standards codification, namely:
|
·
|
the asset arises
from contractual or other legal rights; or
|
|
·
|
the asset is
capable of being separated from the acquired entity and sold, transferred, licensed,
rented or exchanged.
|
Concentrations
of Credit Risk
At July 31, 2016, we
maintained our cash balances at a Washington Trust Bank branch in Seattle, Washington, an investment bank, a Royal Bank of Canada
branch in Vancouver, Canada, and a Bank of Montreal branch in Toronto, Canada. The balances are insured by the Federal Deposit
Insurance Corporation up to $250 U.S. dollars and by the Canadian Deposit Insurance Corporation up to $100 Canadian dollars.
Accounts and Notes Receivable
We assess the collectability
of accounts receivable monthly based on past collection history and current events and circumstances. Accordingly, we adjust the
allowance on accounts receivable to reflect net receivables that we ultimately expect to collect.
We review all notes receivable
for possible impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying value has
been impaired and may not be recoverable. Factors considered important that could trigger an impairment review include significant
underperformance relative to expected historical or projected future operating results and a change in management of the franchisee
or independent licensed broker responsible for the note.
Loans and Advances and Notes Receivable
At our discretion, we
occasionally allow members who complete large transactions to pay the related transaction fee over time, typically ranging from
three to six operating cycles. The aggregate total owed to us on July 31, 2016 is $4. Interest rates are typically 13% charged
on the outstanding balances. The maximum individual balance owed is $1. Payoff dates for the loans are scheduled within one year.
From time to time we
finance the operational and expansion activities of our brokers. We loan brokers funds for general operational purposes, to acquire
the management rights to select member accounts, and for other reasons. These loans are repaid from regular deductions from broker
commissions. The amount of loans to brokers as of July 31, 2016 was $875. Interest rates are typically 6% to 8% charged on the
outstanding balances. Payoff dates for the loans are from the year 2017 to 2022.
Property and Equipment
We report property and
equipment at cost less accumulated depreciation recorded on a straight-line basis over useful lives ranging from three to seven
years. Included in property and equipment are additions and improvements that add to productive capacity or extend useful life
of the assets. Property and equipment may also include internally developed software (refer to “Software for Internal Use”
below). When we sell or retire property or equipment, we remove the cost and related accumulated depreciation from the balance
sheet and record the resulting gain or loss in the income statement. We record an expense for the costs of repair and maintenance
as incurred.
Software for Internal Use
We have developed extensive
software to manage and track the ITEX dollar activity in the Marketplace to calculate USD and ITEX dollar fees accordingly. We
have expensed costs incurred in the development of software for internal use in the period incurred as such costs were not significant
during the related application development phase.
Goodwill
Goodwill represents the excess of the purchase
price over the fair value of identifiable assets acquired, including domains and other definite-lived intangible assets, and liabilities
assumed in business combinations accounted for under the purchase method.
Goodwill acquired in a purchase business
combination is determined to have an indefinite useful life and is not amortized, but instead tested for impairment at least annually.
In testing goodwill for impairment, we first assess qualitative factors before calculating the fair value of our reporting unit
in step 1 of the goodwill impairment test. If we determine that the fair value of the reporting unit is more likely than not less
than its carrying value, then we will perform the two-phase approach. The first phase is a screen for potential impairment, while
the second phase (if necessary) measures the amount of impairment, if any. Goodwill is written down and charged to operating results
in any period in which the recorded value of goodwill exceeds its estimated fair value.
We analyzed goodwill
as of July 31, 2016 using a discounted cash flow methodology with a risk-adjusted weighted average cost of cost of capital (WACC).
We believe the use of a discounted cash flow approach is the most reliable indicator for the Company to use when determining its
fair market value. In order to determine the future cash flows, we prepared a cash flow forecast for the next 15 years based on
past experience and our anticipated capital expenditures, revenue and expense forecast. In connection with our assessment of goodwill
impairment, management determined that a Step 1 impairment assessment should be performed. Our evaluation determined after performance
of Step 1, that goodwill was impaired at July 31, 2016. We determined a $1,750 impairment in goodwill should be recorded in the
fourth quarter of 2016. The goodwill impairment loss resulted primarily from a sustained decline in the Company’s
projected revenue growth rates and profitability levels. The lower projected operating results reflect changes in assumptions
related to revenue initiatives, organic revenue growth rates, market trends, cost structure, and other expectations about the
anticipated short-term and long-term operating results.
Intangible Assets with Definite
Lives
Intangible assets
acquired in business combinations are estimated to have definite lives and are comprised of membership lists, noncompetition agreements
and trade names. The Company amortizes costs of acquired intangible assets using the straight-line method over the contractual
life of one to three years for noncompetition agreements, the estimated life of six to ten years for membership lists and the
estimated life of ten years for trade names.
The carrying value of
intangible assets with definite lives is reviewed on a regular basis for the existence of facts that may indicate that the assets
are impaired. An asset is considered impaired when the estimated undiscounted future cash flows expected to result from its use
and disposition are less than the amount of its carrying value. If the carrying value of an asset is deemed not recoverable, it
is adjusted downward to the estimated fair value.
Long-Lived Assets
We review our long-lived
assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recovered.
We look primarily at the market values of the assets when available, or, alternatively, the estimated undiscounted future cash
flows in our assessment of whether or not they have been impaired. If impairment is deemed to have occurred, we then measure the
impairment by looking to the excess of the carrying value over the discounted future cash flows or market value, as appropriate.
Commissions Payable to Brokers and Accrued
Commissions to Brokers
We compute commissions to brokers as a
percentage of cash collections of revenues from association fees, transactions fees, and other fees. We pay most commissions in
two tranches with approximately 50% paid one week after the end of the operating cycle and the remainder paid two weeks later.
Commissions payable to brokers on our balance sheet as of July 31, 2016 represents commissions payable from the operating cycle
ending July 21, 2016. In 2015, the closest operating cycle ended July 23, 2015. Accrued commissions to brokers on our balance
sheets are the estimated commissions on the net accounts receivable balance and unpaid commissions on cash already collected as
of the financial statement date.
Deferred Revenue
We bill annual dues to certain members acquired as part of
legacy fee plans related to acquisitions. We defer this revenue and recognize it over the annual period to which it applies. As
of July 31, 2016 and 2015 we have $25 and $27 of annual dues deferred on our balance sheet.
Advance Payments
In some cases, members pre-pay transaction
and/or association fees or receive USD credits on their accounts for previously paid fees associated with transactions that are
subsequently reversed. We defer these payments and recognize revenue when these fees are earned.
Fair Value of Financial Instruments
All of our financial
instruments are recognized in our balance sheet. The carrying amount of our financial instruments including cash, accounts receivable,
loans and advances, accounts payable, commissions payable and accrued commissions and other accruals approximate their fair values
at July 31, 2016 due to the short-term nature of these instruments. All of these instruments have terms of less than one year.
For notes receivable, the Company has determined that the rates are commensurate with current rates for similar transactions,
and therefore, net book value approximates fair value.
Revenue Recognition
We generate our revenue
by charging members percentage-based transaction fees, association fees, and other fees assessed in United States dollars and
Canadian dollars where applicable (collectively and as reported on our financial statements “USD” or “Cash”).
We recognize revenue when persuasive evidence of an arrangement exists, the transaction has occurred or a cycle period has ended,
the charges are fixed and determinable and no major uncertainty exists with respect to collectability.
Our largest sources of revenue are transaction
fees and association fees. We charge members of the Marketplace an association fee every operating cycle in accordance with our
members’ individual agreements. We also charge both the buyer and the seller a transaction fee based on the ITEX dollar
value of that Marketplace transaction. Additionally, we may charge various auxiliary fees to members, such as annual membership
dues, late fees, and insufficient fund fees. The total fees we charge to members are in USD and partially in ITEX dollars (see
below, “Accounting for ITEX Dollar Activities”). We bill members for all fees at the end of each operating cycle.
We track all financial activity in our internally developed database. Members have the option of paying USD fees automatically
by credit card, by electronic funds transfer or by check. In each of the years ended July 31, 2016 and 2015, member payments of
approximately 95% were made through electronic funds transfer, by credit cards and using our Preferred Member Autopay System.
If paying through our Autopay System, generally, the USD transaction fee is 6% of the ITEX dollar amount of the member’s
purchases and sales during the operating cycle. If paying by check, generally, the USD transaction fee is 7.5% of the ITEX dollar
amount of that member’s purchases and sales during the operating cycle. Additionally, regardless of a member’s transaction
activity, each operating cycle we charge most members an association fee of $20 USD ($260 USD annually) and $10 ITEX dollars ($130
ITEX dollars annually). Transaction and association fees composed 96% of our total revenue in 2016 and 2015.
In each accounting
cycle, we recognize as revenue all USD transaction fees, association fees and applicable other fees that occurred during that
month regardless of which operating cycle the fees occurred. Annual dues, billed in advance of the applicable service periods,
are deferred and recognized into revenue on a straight-line basis over the term of one year.
For transaction and
association fees charged to members, we share a portion of our revenue with the brokers in the Broker Network in the form of commissions
based on a percentage of cash collections from members. For those fees, revenues are recorded on a gross basis. Commissions to
brokers are recorded as cost of revenue in the period corresponding to the revenue stream on which these commissions are based.
We record an allowance
for uncollectible accounts based upon its assessment of various factors. We consider historical experience, the age of the accounts
receivable balances, the credit quality of its customers, current economic conditions and other factors that may affect customers’
ability to pay to determine the level of allowance required.
Gross versus Net Revenue Recognition
In the normal course of our
core business, we act as administrator to execute transactions between Marketplace members. We pay commissions to our brokers after
the close of each operating cycle based on member transaction and association fees collected in USD. We report revenue based on
the gross amount billed to our ultimate customer, the Marketplace member. When revenues are recorded on a gross basis, any commissions
or other payments to brokers are recorded as costs or expenses so that the net amount (gross revenues less expenses) is reflected
in operating income.
Accounting for ITEX Dollar Activities
Primarily, we receive ITEX dollars from members’
transaction and association fees, but we also receive ITEX dollars, to a much lesser extent, from other member fees. We expend
ITEX dollars for revenue sharing transaction fees and association fees with our Broker Network, and for general Marketplace costs.
Our policy is to record transactions at the fair value of products or services received when those values are readily determinable.
Our accounting policy follows the accounting
standards codification which indicates that transactions in which non-monetary assets are exchanged for barter credits should be
recorded at fair value of the assets (or services) involved. The fair value of the assets received (in this case ITEX dollars)
should be used to measure the cost if it is more clearly evident than the fair value of the asset surrendered or service provided.
Our position is that the fair value of the non-monetary asset exchanged is more clearly evident than the fair value of the ITEX
dollar received. In addition, there is no cost basis to us for ITEX dollars. Our conclusion may change if we could convert ITEX
dollars into USD in the near term, as evidenced by a historical practice of converting ITEX dollars into USD shortly after receipt,
or if quoted market prices in USD existed for the ITEX dollar.
We expend ITEX dollars primarily on the following
items:
|
·
|
Co-op advertising with Marketplace members and brokers;
|
|
·
|
Revenue sharing with brokers for transaction fees and association fees;
|
|
·
|
Incentives to brokers for registering new members in the Marketplace.
|
We believe that fair value should not be regarded
as determinable within reasonable limits if major uncertainties exist about the realizability of the value that would be assigned
to the asset received in a non-monetary transaction at fair value. If neither the fair value of the non-monetary asset (or service)
transferred or received in the exchange is determinable within reasonable limits, the recorded amount of the non-monetary asset
transferred from the enterprise may be the only measure of the transaction. When our ITEX dollar transactions during the periods
presented in the accompanying financial statements lacked readily determinable fair values they were recorded at the cost basis
of the trade dollars surrendered, which was zero. However, we have reflected in our financial statements those items that meet
non-monetary recognition by having readily determinable fair values. Our consolidated statements of income include ITEX dollar
expenses for corporate expenses for certain products or services we purchased at prices comparable to what we would have expended
had we paid in USD.
While the accounting policies described above
are used for financial reporting purposes, the Internal Revenue Service requires, for purposes of taxation, that we recognize revenues,
expenses, assets, and liabilities for all transactions in which we either receive or spend ITEX dollars using the ratio of one
USD per ITEX dollar. For this reason, we track our ITEX dollar activity in statements to members and brokers and in other ways
necessary for the operation of the Marketplace and our overall business.
Advertising Expenses
We expense all advertising
costs as incurred. Advertising expense was $1 and $5 for the years ended July 31, 2016 and 2015, respectively.
Share-based Payments
We account for share-based
compensation to our employees, contractors and directors and measure the amount of compensation expense for all stock-based awards
at fair value on the date of grant and recognition of compensation expense over the service period for awards expected to vest.
Restricted stock awards issued to employees, contractors and directors are measured based on the fair market values of the underlying
stock on the dates of grant. Share based expense was $250 and $325 for the years ended July 31, 2016 and 2015, respectively.
Operating Leases
We account for our executive
office lease and other property leases in accordance with related guidance. Accordingly, because our executive office lease has
scheduled rent escalation clauses, we record minimum rental payments on a straight-line basis over the term of the lease. We record
the appropriate deferred rent liability or asset and amortize that deferred rent over the term of the lease as an adjustment to
rent expense.
Accounting for Income Taxes
We account for income taxes
using an asset and liability approach as required. Such approach results in the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the book carrying amounts and the tax basis of assets
and liabilities and net operating loss carryforwards. We assess a valuation allowance on our deferred tax assets if it is more
likely than not that a portion of our available deferred tax assets will not be realized. We record our deferred tax assets net
of valuation allowances.
We also account for uncertainty
in income taxes in that we recognize the tax benefits of tax positions only if it is more likely than not that the tax positions
will be sustained, upon examination by the applicable taxing authorities, based on the technical merits of the positions. As required,
we record potential interest and penalties associated with our tax positions. We have opted to record interest and penalties, if
any, as a component of income tax expense.
Contingencies
In the normal course of our business we are
periodically involved in litigation or claims. We record litigation or claim-related expenses upon evaluation of among other factors,
the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. We accrue
for settlements when the outcome is probable and the amount or range of the settlement can be reasonably estimated. In addition
to our judgments and use of estimates, there are inherent uncertainties surrounding litigation and claims that could result in
actual settlement amounts that differ materially from estimates. We expense our legal costs associated with these matters when
incurred.
Net Income (Loss) per Share
We present in our financial statements on the
face of the income statement both basic and diluted earnings per share. Basic earnings per share excludes potential dilution and
is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for
the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. As of July 31, 2016, we had no contracts to issue common stock. The Company had 133 unvested restricted
stock units as of July 31, 2016. These stock units were excluded from the net income (loss) per share as their effect would be
anti-dilutive.
NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued Accounting Standards
Update No. 2014-09,
Revenue from Contracts with Customers (Topic 606) (ASU 2014-09)
, which amends the existing accounting
standards for revenue recognition. ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be
entitled when products or services are transferred to customers. In July 2015, the FASB voted to approve a one-year delay of the
effective date. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim
periods within that reporting period. Early adoption is permitted as of annual reporting periods beginning after December 15,
2016, including interim reporting periods within those annual periods. ASU 2014-09 may be applied retrospectively to each prior
period presented or retrospectively with the cumulative effect recognized as of the date of adoption. In 2016, the FASB issued
additional guidance to clarify the implementation guidance. The Company is evaluating the expected impact on its consolidated financial
statements.
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.
In March 2016, the FASB amended the existing
accounting standards for stock-based compensation, with Accounting Standards Update No. 2016-09,
Compensation-Stock Compensation
(Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09)
. The amendments impact several aspects of
accounting for share-based payment transactions, including the income tax consequences, forfeitures, classification of awards as
either equity or liabilities, and classification on the statement of cash flows. The ASU is effective for reporting periods beginning
after December 15, 2016, with early adoption permitted. If early adoption is elected, all amendments must be adopted in the
same period. The manner of application varies by the various provisions of the guidance, with certain provisions applied on a retrospective
or modified retrospective approach, while others are applied prospectively. The Company is currently evaluating the impact of these
amendments and the transition alternatives on its consolidated financial statements.
In June 2016, the FASB issued Accounting Standards
Update No. 2016-13,
Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial
Instruments (ASU 2016-13)
, an ASU amending the impairment model for most financial assets and certain other instruments. The
ASU is effective for reporting periods beginning after December 15, 2019, with early adoption permitted after December 15,
2018. The ASU must be adopted using a modified-retrospective approach. The Company does not expect adoption to have a material
impact on its consolidated financial statements.
There were other various accounting standards
and interpretations issued recently, none of which are expected to have a material impact on the Company’s consolidated financial
position, operations or cash flows.
NOTE 3 – CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, COMMISSIONS
PAYABLE TO BROKERS AND ACCRUED COMMISSIONS TO BROKERS
The timing differences between
our operating cycles and our accounting cycles cause fluctuations in the comparative balances of cash and cash equivalents, accounts
receivable, commissions payable to brokers and accrued commissions to brokers presented on the consolidated balance sheets. Depending
on the length of time between the end of the operating cycle and the end of the accounting cycle, members’ payments on accounts
receivable balances may vary. The longer the time, the greater amount of USD collections causes an increase in the reported cash
and cash equivalents balance and a decrease in the net accounts receivable balance. The difference between our operating cycle
ending date and the reporting date for July 31, 2016 was six business days as our cycle end date was on July 21, 2016. In 2015,
our operating cycle ending date was July 23, 2015 or six business days different than the accounting cycle end date of July 31,
2015.
We compute commissions to
brokers as a percentage of USD collections of our revenues from association fees, transactions fees, and other fees. Commissions
payable to brokers include amounts owed for the most recently ended operating cycle. We pay commissions in two tranches with approximately
50% paid approximately one week after the end of the operating cycle and the remainder paid approximately two weeks later. Commissions
accrued are the estimated commissions on the net accounts receivable balance and USD collections on accounts receivable since the
most recently ended operating cycle.
Our payments for salaries
and wages to our employees occur on the same bi-weekly schedule as our commission payments to brokers.
NOTE 4 – NOTES RECEIVABLE
Notes receivables have been originated primarily
by the sales of corporate-owned offices to brokers and loans for general operating purposes. In 2016, we originated loans to brokers
as new notes receivables in the amount of $80.
The aggregate total owed to us on July 31, 2016
is $875. Payoff dates for the loans are scheduled between 2017 and 2022.
Original Principal
Balance on Notes
|
|
|
Principal Additions
in 2016
|
|
|
Balance Receivable
at
July 31, 2016
|
|
|
Current Portion
|
|
|
Long-Term
Portion
|
|
$
|
2,338
|
|
|
$
|
80
|
|
|
$
|
875
|
|
|
$
|
283
|
|
|
$
|
592
|
|
The activity for Notes receivables was as follows:
Balance at July 31, 2014
|
|
$
|
1,424
|
|
Principal additions
|
|
|
30
|
|
Interest income at stated rates
|
|
|
90
|
|
Payments received
|
|
|
(461
|
)
|
Balance at July 31, 2015
|
|
$
|
1,083
|
|
|
|
|
|
|
Principal additions
|
|
|
80
|
|
Interest income at stated rates
|
|
|
61
|
|
Payments received
|
|
|
(349
|
)
|
Balance at July 31, 2016
|
|
$
|
875
|
|
NOTE 5 - PROPERTY AND EQUIPMENT
The following table summarizes property and
equipment:
|
|
July 31, 2016
|
Fixed Asset Type
|
|
Estimated
Useful Life
|
|
Cost
|
|
|
Accumulated
Depreciation
|
|
|
Net Book
Value
|
|
Computers
|
|
3 years
|
|
$
|
225
|
|
|
$
|
(218
|
)
|
|
$
|
7
|
|
Software
|
|
3 years
|
|
|
42
|
|
|
|
(36
|
)
|
|
|
6
|
|
Equipment
|
|
7 years
|
|
|
37
|
|
|
|
(34
|
)
|
|
|
3
|
|
Furniture
|
|
7 years
|
|
|
13
|
|
|
|
(13
|
)
|
|
|
-
|
|
Leasehold Improvements
|
|
3.3 years
|
|
|
52
|
|
|
|
(52
|
)
|
|
|
-
|
|
|
|
|
|
$
|
369
|
|
|
$
|
(353
|
)
|
|
$
|
16
|
|
|
|
July 31, 2015
|
Fixed Asset Type
|
|
Estimated
Useful Life
|
|
Cost
|
|
|
Accumulated
Depreciation
|
|
|
Net Book
Value
|
|
Computers
|
|
3 years
|
|
$
|
240
|
|
|
$
|
(216
|
)
|
|
$
|
24
|
|
Software
|
|
3 years
|
|
|
92
|
|
|
|
(79
|
)
|
|
|
13
|
|
Equipment
|
|
7 years
|
|
|
38
|
|
|
|
(37
|
)
|
|
|
1
|
|
Furniture
|
|
7 years
|
|
|
13
|
|
|
|
(13
|
)
|
|
|
-
|
|
Leasehold Improvements
|
|
3.3 years
|
|
|
52
|
|
|
|
(52
|
)
|
|
|
-
|
|
|
|
|
|
$
|
435
|
|
|
$
|
(397
|
)
|
|
$
|
38
|
|
We depreciate property and equipment using the
straight-line method over the assets’ estimated useful lives. Depreciation expense for property and equipment was $26 and
$36 for the years ended July 31, 2016 and 2015, respectively.
We amortize leasehold improvements using the
straight-line method over the term of the lease. There was no amortization expense for leasehold improvements for the years ended
July 31, 2016 or 2015.
NOTE 6 – INTANGIBLE ASSETS
Changes in the carrying amount of the intangible
assets are summarized as follows:
|
|
Membership
Lists
|
|
|
Non-Compete
Agreements
|
|
|
Trade Name
Amortization
|
|
|
Total
Intangible
Assets
|
|
Balance as of July 31, 2014
|
|
$
|
149
|
|
|
$
|
-
|
|
|
$
|
8
|
|
|
$
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
(53
|
)
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of July 31, 2015
|
|
$
|
96
|
|
|
$
|
-
|
|
|
$
|
6
|
|
|
$
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
(52
|
)
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of July 31, 2016
|
|
$
|
44
|
|
|
$
|
-
|
|
|
$
|
4
|
|
|
$
|
48
|
|
The Company recorded goodwill in connection
with business combinations completed in fiscal years from 2005 to 2009.
In September 2012, ITEX sold assets originally
acquired in the 2011 Oregon acquisition. As part of the sales, ITEX allocated a pro rata portion of the membership list to the
sale in the amount of $42. The pro rata percentage amount of unamortized membership list to apply as basis was calculated using
the amount of the sold corporate-owned office members over the retained members acquired in the original purchase transaction.
The expected lives of the membership list and
noncompetition agreement purchased as part of previous acquisitions are six years and three years, respectively.
The following schedule outlines the expected
intangible related amortization expense over the respective lives:
Year ending July 31,
|
|
Membership List
Amortization
|
|
|
Trade Name
Amortization
|
|
|
Total Amortization
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
36
|
|
|
|
2
|
|
|
|
38
|
|
2018
|
|
|
8
|
|
|
|
2
|
|
|
|
10
|
|
Total
|
|
$
|
44
|
|
|
$
|
4
|
|
|
$
|
48
|
|
NOTE 7 - GOODWILL
Changes in the carrying amount of goodwill
for the year ended July 31, 2016 are as follows:
Balance at July 31, 2015
|
|
$
|
3,191
|
|
|
|
|
|
|
Goodwill impairment
|
|
|
(1,750
|
)
|
|
|
|
|
|
Balance at July 31, 2016
|
|
$
|
1,441
|
|
We analyzed goodwill as of July 31, 2016 using
a discounted cash flow methodology with a risk-adjusted weighted average cost of cost of capital (WACC). We believe the use of
a discounted cash flow approach is the most reliable indicator for the Company to use when determining its estimated fair market
value. In order to determine the future cash flows, we prepared a cash flow forecast for the next 15 years based on past experience
and our anticipated capital expenditures, revenue and expense forecast. In connection with our assessment of goodwill impairment,
management determined that a Step 1 impairment assessment should be performed. Our evaluation determined after performance of Step
1, that goodwill was impaired at July 31, 2016. We determined a $1,750 impairment in goodwill should be recorded in the fourth
quarter of 2016. The goodwill impairment loss resulted primarily from a sustained decline in the Company’s projected
revenue growth rates and profitability levels. The lower projected operating results reflect changes in assumptions related to
revenue initiatives, organic revenue growth rates, market trends, cost structure, and other expectations about the anticipated
short-term and long-term operating results.
NOTE 8 - COMMITMENTS
The Company leases
office space for its corporate headquarters in Bellevue, Washington. In the year ended July 31, 2016, we leased our property on
a month-to-month basis. As of July 31, 2016, there were no future minimum commitments under our current operating lease, which
was terminated on September 30, 2016.
In July 2016, we signed
a 5-year lease for a new location in Bellevue, Washington, with a lease commencement date of September 15, 2016. The lease expiration
date is March 31, 2022.
Lease commitments
for the year ending
July 31,
|
|
|
|
|
|
|
|
2017
|
|
$
|
30
|
|
2018
|
|
|
81
|
|
2019
|
|
|
84
|
|
2020
|
|
|
88
|
|
2021
|
|
|
91
|
|
Thereafter
|
|
|
54
|
|
|
|
|
|
|
Total
|
|
$
|
428
|
|
The lease expense for our executive office space
for the years ended July 31, 2016 and 2015 was $89 and $149, respectively.
NOTE 9 – ITEX DOLLAR ACTIVITY
Primarily, we receive ITEX
dollars from members’ transaction and association fees. ITEX dollars earned from members are later used by the Company as
a method of payment in revenue sharing and incentive arrangements with its Broker Network, co-op advertising with Marketplace members,
as well as for certain general corporate expenses.
We
record transactions at the fair value of products or services received when those values are readily determinable. Most of our
ITEX dollar transactions during the periods presented in these financial statements lacked readily determinable fair values and
were recorded at the cost basis of the trade dollars surrendered, which we have determined to be
zero.
As discussed in Note 1 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 $161 and $217 as ITEX dollar revenue
for the years ended July 31, 2016 and 2015, respectively.
NOTE 10 — 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 11 – STOCK-BASED PAYMENTS
In March 2004 the Company adopted and stockholders
approved the ITEX Corporation 2004 Equity Incentive Plan (the “2004 Plan”), which authorized 400 shares of common stock
for issuance pursuant to awards under the plan. The 2004 Plan provided for the grant of incentive and nonqualified stock options,
restricted stock, and stock bonuses to our employees, directors, officers and consultants. In February 2011, the Board of Directors
amended and restated the 2004 Plan to increase the aggregate number of shares available for issuance by 400 shares. No shares remained
available for future grants under the 2004 Plan after July 31, 2013, and the 2004 Plan expired on March 14, 2014.
In December 2013, stockholders approved the
adoption of the ITEX Corporation 2014 Equity Incentive Plan (the “2014 Plan”), pursuant to which 400 shares of common
stock were authorized for issuance. The 2014 Plan provides for the awards of restricted stock, restricted stock units, and other
awards including unrestricted stock awards, stock bonuses, or the payment of cash for bonuses or in settlement of restricted stock
unit awards to the Company’s employees, directors, officers or consultants. 293 shares remained available for future grants
under the 2014 Plan as of July 31, 2016.
During the year ended July 31, 2016, the Company
issued 25 shares to an employee. The fair value of these shares as of the grant date was $80. The grant was expensed in the period
granted.
At July 31, 2016, 133 shares of common stock
granted under the 2004 Plan remained unvested. At July 31, 2016, the Company had $433 of unrecognized compensation expense, expected
to be recognized over a weighted-average period of approximately six years.
We account for stock-based compensation in accordance
with the related guidance. Under the fair value recognition provisions, we estimate stock-based compensation cost at the grant
date based on the fair value of the award. We recognize that expense ratably over the requisite service period of the award.
The following table summarizes
the components of stock based compensation:
|
|
Year ended July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Employee Compensation
|
|
$
|
231
|
|
|
$
|
273
|
|
Board Compensation
|
|
|
19
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
250
|
|
|
$
|
325
|
|
The following table summarizes
the granted, forfeited and vested shares of the 2004 Plan:
|
|
Number of Shares/Options
|
|
|
|
Expired
|
|
|
Restricted
Shares
|
|
|
Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 31, 2014
|
|
|
-
|
|
|
|
400
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 31, 2015
|
|
|
-
|
|
|
|
390
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 31, 2016
|
|
|
-
|
|
|
|
390
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting as of July 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Vested
|
|
|
|
|
|
|
257
|
|
|
|
-
|
|
Shares Unvested
|
|
|
|
|
|
|
133
|
|
|
|
-
|
|
Balance at July 31, 2016
|
|
|
|
|
|
|
390
|
|
|
|
-
|
|
The following table summarizes
the granted, forfeited and vested shares of the 2014 Plan:
|
|
Number of Shares/Options
|
|
|
|
Available
|
|
|
Restricted
Shares
|
|
|
Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 31, 2014
|
|
|
360
|
|
|
|
40
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(44
|
)
|
|
|
44
|
|
|
|
-
|
|
Forfeited
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 31, 2015
|
|
|
318
|
|
|
|
82
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
(25
|
)
|
|
|
25
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 31, 2016
|
|
|
293
|
|
|
|
107
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting as of July 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Vested
|
|
|
|
|
|
|
107
|
|
|
|
-
|
|
Shares Unvested
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
Balance at July 31, 2016
|
|
|
|
|
|
|
107
|
|
|
|
-
|
|
The stock-based compensation
expense charged against the results of operations was as follows:
|
|
Year ended July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in:
|
|
|
|
|
|
|
|
|
Corporate salaries, wages and employee benefits
|
|
$
|
231
|
|
|
$
|
273
|
|
Selling, general and administrative
|
|
|
19
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
250
|
|
|
$
|
325
|
|
NOTE 12 - STOCKHOLDERS’ EQUITY
On March 16, 2015, the Company commenced a partial
tender offer to purchase up to 750 shares of its common stock, at a price of $4.00 per share. The tender offer closed on April
15, 2015, after which the Company purchased and canceled a total of 750 shares of its common stock at an aggregate cost of $3,000,
excluding fees and expenses relating to the tender offer. The shares purchased in the tender offer represented approximately 26%
of ITEX’s outstanding common shares (including shares of unvested restricted stock).
On March 11, 2011, the Board of Directors
of the Company declared a dividend, payable to stockholders of record on March 25, 2011 of one right (a “Right”) per
each share of outstanding Common Stock of the Company, par value $0.01 per share (“Common Stock”), to purchase 1/1000th
of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share, of the Company (the “Preferred Stock”),
at a price of $15.00 per share (such amount, as may be adjusted from time to time as provided in the Rights Agreement described
below, the “Purchase Price”). In connection therewith, on March 11, 2011, the Company entered into a Rights Agreement
(the “Rights Agreement”) with OTR, Inc., as Rights Agent. The Rights will be exercisable upon the earlier of (i) such
date the Company learns that a person or group, without Board approval, acquires or obtains the right to acquire beneficial ownership
of 15% or more of ITEX’s outstanding common stock or a person or group that already beneficially owns 15% or more of the
Company’s outstanding common stock at the time the Rights Agreement was entered into, without Board approval, acquires any
additional shares (other than pursuant to the Company’s compensation or benefit plans) (any person or group specified in
this sentence, an “Acquiring Person”) and (ii) such date a person or group announces an intention to commence or following
the commencement of (as designated by the Board) a tender or exchange offer which could result in the beneficial ownership of 15%
or more of ITEX’s outstanding common stock. If a person or group becomes an Acquiring Person, each Rights holder (other than
the Acquiring Person) will be entitled to receive, upon exercise of the Right and payment of the Purchase Price, that number of
1/1000ths of a share of Preferred Stock equal to the number of shares of Common Stock which at the time of the applicable triggering
transaction would have a market value of twice the Purchase Price. In the event the Company is acquired in a merger or other business
combination by an Acquiring Person, or 50% or more of the Company’s assets are sold to an Acquiring Person, each Right will
entitle its holder (other than an Acquiring Person) to purchase common shares in the surviving entity at 50% of the market price.
The Rights Agreement was originally scheduled to expire on March 11, 2014, unless earlier redeemed or exchanged by the Company.
At the annual meeting on December 13, 2013, stockholders approved an extension of the Rights Agreement to December 13, 2016.
On March 9, 2010, the Company announced
a $2,000 stock repurchase program, authorized by the Board of Directors. The program authorizes the repurchase of shares in open
market purchases or privately negotiated transactions, has no expiration date and may be modified or discontinued by the Board
of Directors at any time. In addition to our common stock activity described in Note 12 – Share-Based Payments, as part of
our stock repurchase program, we repurchased a total of 30 and 23 shares of ITEX common stock for $113 and $76 in 2016 and 2015,
respectively.
The Company has
5,000 shares of preferred stock authorized at $0.01 par value. No shares were issued or outstanding as of July 31, 2016 or 2015.
NOTE 13 - INCOME TAXES
Deferred tax assets on our balance sheet
primarily include Federal and State net operating loss carry forwards (collectively “NOLs”) which are expected to result
in future tax benefits. Realization of these NOLs assumes that we will be able to generate sufficient future taxable income to
realize these assets. Deferred tax assets also include temporary differences between the financial reporting basis and the income
tax basis of its assets and liabilities at enacted tax rates expected to be in effect when such assets or liabilities are realized
or settled.
In assessing the recoverability of deferred
tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in
which those temporary differences are expected to be deductible. We consider the scheduled reversal of deferred tax liabilities,
projected future taxable income and projections for future taxable income over the periods in which the deferred tax assets are
expected to be deductible.
On July 31, 2016, we had NOLs of approximately
$7,997 available to offset future taxable income. These are composed of approximately $6,092 from ITEX operating losses and approximately
$1,905 from BXI operating losses. The future utilization is recorded as a deferred tax asset given that management believes it
is more likely than not that we will generate sufficient future taxable income. We periodically assess the realizability of our
available NOLs to determine whether we believe we will generate enough future taxable income to utilize some portion or all of
the available NOLs. We determined that we will not be able to utilize all of our Federal NOLs as of July 31, 2016. As of July 31,
2016 and 2015, we have an $866 and $0 valuation on Federal NOLs, respectively As of July 31, 2016, California NOLs have expired
and the valuation allowance has been removed accordingly. As of July 31, 2016 and 2015, we have a $0 and $99 valuation allowance
on state of California NOLs, respectively.
The deferred tax assets recorded represent
our estimate of all deferred tax benefits to be utilized in the current year and future periods beyond 2016. The following table
reflects the reconciliation of the company’s income tax expense:
|
|
Year Ended July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Pre-tax financial income
|
|
$
|
(461
|
)
|
|
$
|
1,047
|
|
Federal tax (benefit)/expense computed at the statutory rate of 34%
|
|
|
(157
|
)
|
|
|
356
|
|
State tax expense
|
|
|
84
|
|
|
|
17
|
|
State ASC 740 adjustment
|
|
|
(12
|
)
|
|
|
(16
|
)
|
Change in valuation allowance
|
|
|
769
|
|
|
|
(10
|
)
|
Permanent and other differences
|
|
|
374
|
|
|
|
10
|
|
Net tax expense
|
|
$
|
1,058
|
|
|
$
|
357
|
|
Our income tax expense is composed of the following:
|
|
Year Ended July 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Current federal tax expense
|
|
$
|
14
|
|
|
$
|
8
|
|
Current state tax expense
|
|
|
11
|
|
|
|
9
|
|
|
|
|
25
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
Deferred federal tax expense
|
|
|
1,065
|
|
|
|
355
|
|
Deferred state tax (benefit)
|
|
|
(32
|
)
|
|
|
(15
|
)
|
|
|
|
1,033
|
|
|
|
340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,058
|
|
|
|
357
|
|
The tax effects of temporary differences
that give rise to significant portions of deferred tax assets and liabilities at July 31, 2016 and 2015 are presented below:
|
|
As of July 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred Tax Assets
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
2,719
|
|
|
$
|
3,100
|
|
Goodwill and other intangible assets
|
|
|
227
|
|
|
|
21
|
|
Non-compete covenants
|
|
|
47
|
|
|
|
55
|
|
Reserve for uncollectible receivables
|
|
|
145
|
|
|
|
151
|
|
Federal tax credits
|
|
|
219
|
|
|
|
205
|
|
Other temporary differences
|
|
|
143
|
|
|
|
245
|
|
|
|
|
3,500
|
|
|
|
3,777
|
|
Less: Valuation allowance
|
|
|
(866
|
)
|
|
|
(99
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
2,634
|
|
|
$
|
3,678
|
|
The following components are included in the net deferred tax
assets in the accompanying balance sheets:
Current Deferred Tax Assets
|
|
|
|
|
|
|
|
|
Current deferred tax asset
|
|
|
550
|
|
|
|
569
|
|
Valuation allowance
|
|
|
(136
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
Net Current deferred tax asset
|
|
|
414
|
|
|
|
554
|
|
|
|
|
|
|
|
|
|
|
Non-Current Deferred Tax Assets
|
|
|
|
|
|
|
|
|
Non-current deferred tax asset
|
|
|
2,950
|
|
|
|
3,208
|
|
Valuation allowance
|
|
|
(730
|
)
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
Net non-current deferred tax asset
|
|
|
2,220
|
|
|
|
3,124
|
|
ITEX Federal NOLs of approximately $6,092 expire, if unused,
from calendar years 2019 to 2024. BXI Federal NOLs of approximately $1,905 expire, if unused, from 2020 to 2026 and are subject
to an annual limitation of approximately $172. This limitation is equal to the long-term federal tax exempt rate multiplied by
the total purchase price of BXI. ITEX has no state NOLs for California as they expired in calendar year 2015.
The Company has AMT credits of $214 and research and development
credits of $5 available to offset future taxes payable.
In accordance with the accounting guidance surrounding the uncertainty
in Income Taxes
we have recorded unrecognized tax liabilities of $25 as follows:
|
|
Year Ended July 31,
|
|
|
|
2016
|
|
|
|
|
|
Balance at July 31, 2015
|
|
$
|
37
|
|
Increases as a result of tax positions taken in the current year
|
|
|
6
|
|
Increases as a result of tax positions taken in the prior year
|
|
|
2
|
|
Decreases resulting from settlements, payments and changes in estimates of probability tax positions will be sustained
|
|
|
(20
|
)
|
Balance at July 31, 2016
|
|
$
|
25
|
|
We file income tax returns in the United
States as well as various United States state jurisdictions. We also have available NOLs dating from 1999 which, when used, could
be subject to examination by taxing authorities. We do not believe there will be any material changes in our unrecognized tax positions
over the next twelve months.
As of July 31, 2016, accrued expenses are
included on our consolidated balance sheet for uncertain tax positions related primarily to state jurisdictions in the amount of
$25 which includes $5 for interest and penalties associated with unrecognized tax benefits. Interest and penalties are included
in income tax expense.
NOTE 14 – RELATED PARTY TRANSACTIONS
ITEX and its subsidiaries had no transactions
during our last fiscal year, nor are there any currently proposed transactions, in which ITEX or its subsidiaries was or is to
be a participant, where the amount involved exceeded $120,000, and any director or director nominee, executive officer, holder
of more than 5% of our common stock or any of their immediate family members, or any promoter or control person, had a material
direct or indirect interest.
NOTE 15 – SUBSEQUENT EVENTS
On August 16, 2016, the Board of Directors
of ITEX Corporation declared a semi-annual cash dividend in the amount of $0.10 per share, payable on December 12, 2016 to stockholders
of record as of the close of business on December 1, 2016.