Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  
FORM 10-Q
 
ý      Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended January 31, 2018
 
OR
 
o         Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from             to            
 
Commission File Number 001-35588
 
Liberty Tax, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
27-3561876
(State of incorporation)
 
(IRS employer identification no.)
 
1716 Corporate Landing Parkway
Virginia Beach, Virginia 23454
(Address of principal executive offices)
 (757) 493-8855
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.  Yes o No ý
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No ý
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
 
Large accelerated filer
o

Accelerated filer
x

Non-accelerated filer
 o
Smaller reporting company
o
(Do not check if a smaller reporting company)
 
Emerging growth company
x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No ý
 The number of shares outstanding of the registrant’s Class A common stock as of October 1, 2018 was 14,036,684 shares.





LIBERTY TAX, INC.
 
Form 10-Q for the Quarterly Period Ended January 31, 2018
 
Table of Contents
 
 
 
Page
 
 
Number
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets as of January 31, 2018, April 30, 2017 and January 31, 2017
 
 
 
 
Condensed Consolidated Statements of Operations for the three and nine months ended January 31, 2018 and 2017
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended January 31, 2018 and 2017
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the nine months ended January 31, 2018 and 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I. FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS 

1



LIBERTY TAX, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
January 31, 2018, April 30, 2017 and January 31, 2017
(In thousands, except share data)
 
January 31, 2018
 
April 30, 2017
 
January 31, 2017
Assets
(unaudited)
 
 

 
(unaudited)
Current assets:
 

 
 

 
 
Cash and cash equivalents
$
4,084

 
$
16,427

 
$
3,459

Receivables:
 
 
 

 
 

Accounts receivable
67,550

 
54,723

 
63,013

Notes receivable - current
69,015

 
27,845

 
79,122

Interest receivable, net of uncollectible amounts
4,476

 
1,967

 
5,201

Allowance for doubtful accounts - current
(7,987
)
 
(10,052
)
 
(8,529
)
Total current receivables, net
133,054

 
74,483

 
138,807

Assets held for sale
12,070

 
11,989

 
17,549

Income taxes receivable
14,820

 
55

 
12,827

Deferred income tax asset

 
6,956

 
3,881

Other current assets
19,473

 
5,757

 
23,079

Total current assets
183,501

 
115,667

 
199,602

Property, equipment, and software, net
40,050

 
39,789

 
41,734

Notes receivable, non-current
17,676

 
18,213

 
27,455

  Allowance for doubtful accounts, non-current
(1,006
)
 
(1,968
)
 
(1,713
)
Total notes receivables, non-current
16,670

 
16,245

 
25,742

Deferred tax asset - non-current
174

 

 

Goodwill
9,210

 
8,576

 
4,811

Other intangible assets, net
23,068

 
21,224

 
22,648

Other assets
2,535

 
2,767

 
3,214

Total assets
$
275,208

 
$
204,268

 
$
297,751

Liabilities and Stockholders’ Equity
 

 
 

 
 
Current liabilities:
 

 
 

 
 
Current installments of long-term obligations
$
5,223

 
$
7,738

 
$
5,688

Accounts payable and accrued expenses
22,027

 
12,953

 
22,259

Due to Area Developers (ADs)
11,742

 
23,143

 
13,157

Income taxes payable

 
6,442

 

Deferred revenue - current
2,024

 
2,892

 
3,436

Total current liabilities
41,016

 
53,168

 
44,540

Long-term obligations, excluding current installments, net
16,421

 
18,461

 
19,238

Revolving credit facility
120,189

 

 
131,215

Deferred revenue and other - non-current
5,193

 
5,817

 
5,307

Deferred income tax liability
3,682

 
10,367

 
8,203

Total liabilities
186,501

 
87,813

 
208,503

Commitments and contingencies
 

 
 

 
 
Stockholders’ equity:
 

 
 
 
 

Special voting preferred stock, $0.01 par value per share, 10 shares authorized, issued and outstanding

 

 

Class A common stock, $0.01 par value per share, 21,200,000 shares authorized, 12,750,057, 12,682,550 and 12,681,245 shares issued and outstanding, respectively
127

 
127

 
127

Class B common stock, $0.01 par value per share, 1,000,000 shares authorized, 200,000 shares issued and outstanding, respectively
2

 
2

 
2

Exchangeable shares, $0.01 par value, 1,000,000 shares authorized, issued and outstanding
10

 
10

 
10

Additional paid-in capital
10,689

 
8,371

 
7,862

Accumulated other comprehensive loss, net of taxes
(990
)
 
(2,084
)
 
(1,673
)
Retained earnings
78,869

 
110,029

 
82,920

Total stockholders’ equity
88,707

 
116,455

 
89,248

Total liabilities and stockholders’ equity
$
275,208

 
$
204,268

 
$
297,751


See accompanying notes to condensed consolidated financial statements.

2



LIBERTY TAX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations
Three and Nine Months Ended January 31, 2018 (unaudited) and 2017 (unaudited)
(In thousands, except share count and per share data)
 
 
 
Three Months Ended January 31,
 
Nine Months Ended January 31,
 
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 

 
 

 
 

 
 

Franchise fees
 
$
90

 
$
522

 
$
354

 
$
1,126

Area Developer fees
 
507

 
1,001

 
2,209

 
3,118

Royalties and advertising fees
 
17,610

 
19,078

 
20,598

 
21,862

Financial products
 
18,106

 
18,745

 
19,324

 
19,528

Interest income
 
2,612

 
3,246

 
7,009

 
8,500

Assisted tax preparation fees, net of discounts
 
5,225

 
3,551

 
8,413

 
5,324

Other revenues
 
4,094

 
2,280

 
6,295

 
3,348

Total revenues
 
48,244

 
48,423

 
64,202

 
62,806

Operating expenses:
 
 

 
 

 
 

 
 

Employee compensation and benefits
 
11,574

 
11,240

 
32,277

 
29,836

Selling, general, and administrative expenses
 
22,366

 
18,193

 
41,120

 
35,679

Area Developer expense
 
4,890

 
5,958

 
5,658

 
6,979

Advertising expense
 
5,623

 
5,424

 
9,702

 
8,838

Depreciation, amortization, and impairment charges
 
3,995

 
2,503

 
8,526

 
6,330

Restructuring expense
 
(9
)
 

 
3,362

 

Total operating expenses
 
48,439

 
43,318

 
100,645

 
87,662

Income (loss) from operations
 
(195
)
 
5,105

 
(36,443
)
 
(24,856
)
Other income (expense):
 
 
 
 
 
 
 
 
Foreign currency transaction gain (loss)
 
57

 
15

 
128

 
(10
)
Gain on sale of available-for-sale securities
 

 

 

 
50

Interest expense
 
(829
)
 
(977
)
 
(1,618
)
 
(2,053
)
Income (loss) before income taxes
 
(967
)
 
4,143

 
(37,933
)

(26,869
)
Income tax expense (benefit)
 
555

 
1,688

 
(13,550
)
 
(10,552
)
Net income (loss)
 
(1,522
)
 
2,455

 
(24,383
)
 
(16,317
)
Less: Net loss attributable to participating securities
 

 
(177
)
 

 

Net income (loss) attributable to Class A and Class B common stockholders
 
$
(1,522
)
 
$
2,278

 
$
(24,383
)
 
$
(16,317
)
Net income (loss) per share of Class A and Class B common stock:
 
 
 
 
 
 
 
 
Basic
 
$
(0.11
)
 
$
0.18

 
$
(1.89
)
 
$
(1.26
)
Diluted
 
$
(0.11
)
 
$
0.18

 
$
(1.89
)
 
$
(1.26
)
 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding basic
 
12,934,941

 
12,902,577

 
12,907,039

 
12,899,757

Weighted-average shares outstanding diluted
 
12,934,941

 
13,924,210

 
12,907,039

 
12,899,757

 
 
 
 
 
 
 
 
 
Dividends declared per share of common stock and common stock equivalents
 
$
0.16

 
$
0.16

 
$
0.48

 
$
0.48


See accompanying notes to condensed consolidated financial statements.

3



LIBERTY TAX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)
Three and Nine Months Ended January 31, 2018 (unaudited) and 2017 (unaudited)
(In thousands)
 
 
 
Three Months Ended January 31,
 
Nine Months Ended January 31,
 
 
2018
 
2017
 
2018
 
2017
Net income (loss)
 
$
(1,522
)
 
$
2,455

 
$
(24,383
)
 
$
(16,317
)
Unrealized gain (loss) on interest rate swap agreement, net of taxes of $11, $14, $11 and $14, respectively
 
31

 
(22
)
 
41

 
(22
)
Unrealized gain on available-for-sale securities, net of taxes of $0, $0, $0 and $345, respectively
 

 

 

 
580

Reclassified loss on sale of available-for-sale securities included in income, net of taxes of $0, $0, $0 and $20, respectively
 

 

 

 
(30
)
Foreign currency translation adjustment
 
372

 
189

 
1,052

 
(513
)
Forward contracts related to foreign currency exchange rates
 

 
9

 

 
9

Comprehensive loss
 
$
(1,119
)
 
$
2,631

 
$
(23,290
)
 
$
(16,293
)

 See accompanying notes to condensed consolidated financial statements.

4



LIBERTY TAX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
Nine Months Ended January 31, 2018 (unaudited) and 2017 (unaudited)
(In thousands)

 
 
 
Nine Months Ended January 31,
 
 
2018
 
2017
Cash flows from operating activities:
 
 

 
 

Net loss
 
$
(24,383
)
 
$
(16,317
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 

 
 

Provision for doubtful accounts
 
7,865

 
6,482

Depreciation, amortization, and impairment charges
 
8,526

 
6,330

Amortization of deferred financing costs
 
116

 

Loss on disposal of fixed and intangible assets
 
2,370

 

Stock-based compensation expense
 
2,523

 
1,520

Gain on sale of available-for-sale securities
 

 
(50
)
Gain on bargain purchases and sales of Company-owned offices
 
(1,626
)
 
(634
)
Equity in loss of affiliate
 
(71
)
 

Deferred tax expense
 
113

 
1,046

Changes in accrued income taxes
 
(21,119
)
 
(16,728
)
Changes in other assets and liabilities
 
(36,709
)
 
(43,694
)
Net cash used in operating activities
 
(62,395
)
 
(62,045
)
Cash flows from investing activities:
 
 

 
 

Issuance of operating loans to franchisees and ADs
 
(57,839
)
 
(63,670
)
Payments received on operating loans to franchisees
 
5,377

 
4,065

Purchases of AD rights, Company-owned offices and acquired customer lists
 
(2,456
)
 
(8,141
)
Proceeds from sale of Company-owned offices and AD rights
 
451

 
1,291

Proceeds from sale of available-for-sale securities
 

 
5,049

Purchases of property, equipment and software
 
(3,980
)
 
(4,303
)
Net cash used in investing activities
 
(58,447
)
 
(65,709
)
Cash flows from financing activities:
 
 
 
 

Proceeds from the exercise of stock options
 
95

 

Repurchase of common stock and tax impact of stock compensation
 

 
(417
)
Dividends paid
 
(6,669
)
 
(6,670
)
Repayment of amounts due to former ADs and franchisees
 
(5,200
)
 
(1,204
)
Repayment of long-term obligations
 

 
(3,710
)
Borrowings under revolving credit facility
 
120,525

 
132,531

Repayments under revolving credit facility
 
(336
)
 
(1,316
)
Proceeds from mortgage debt
 

 
2,200

Payment for debt issue costs
 

 
(35
)
Cash paid for taxes on exercises/vesting of stock-based compensation
 
(299
)
 

Tax benefit of stock option exercises
 

 
60

Net cash provided by financing activities
 
108,116

 
121,439

Effect of exchange rate changes on cash, net
 
383

 
(132
)
Net decrease in cash and cash equivalents
 
(12,343
)
 
(6,447
)
Cash and cash equivalents at beginning of period
 
16,427

 
9,906

Cash and cash equivalents at end of period
 
$
4,084

 
$
3,459


  See accompanying notes to condensed consolidated financial statements.


5



LIBERTY TAX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
Nine Months Ended January 31, 2018 (unaudited) and 2017 (unaudited)
(In thousands)
 
 
 
Nine Months Ended January 31,
 
 
2018
 
2017
Supplemental disclosures of cash flow information:
 
 

 
 

Cash paid for interest, net of capitalized interest of $425 and $106, respectively
 
$
1,563

 
$
1,702

Cash paid for taxes, net of refunds
 
7,344

 
5,062

Accrued capitalized software costs included in accounts payable
 

 
7

During the nine months ended January 31, 2018 and 2017, the Company acquired certain assets from ADs, franchisees, and third parties as follows:
 
 
 
 
Fair value of assets purchased
 
$
11,082

 
$
27,016

Receivables applied, net of amounts written off, due ADs and related deferred revenue
 
(6,668
)
 
(11,656
)
Bargain purchase gains
 
(1,100
)
 
(513
)
Long-term obligations and accounts payable issued to seller
 
(858
)
 
(6,706
)
Cash paid to ADs, franchisees and third parties
 
$
2,456

 
$
8,141

During the nine months ended January 31, 2018 and 2017, the Company sold certain assets to ADs and franchisees as follows:
 
 

 
 

Book value of assets sold
 
$
1,129

 
$
9,287

Gain on sale - revenue deferred
 
18

 
617

Gain (loss) on sale - gain (loss) recognized
 
88

 
(98
)
Notes received
 
(784
)
 
(6,552
)
Long-term obligations and accounts payable assumed by acquiree
 

 
(1,963
)
Cash received from ADs and franchisees
 
$
451

 
$
1,291


See accompanying notes to condensed consolidated financial statements.

6



LIBERTY TAX, INC. AND SUBSIDIARIES
 
Notes to Condensed Consolidated Financial Statements
 
January 31, 2018 and 2017 (Unaudited)
 
(1) Organization and Significant Accounting Policies
 
Description of Business
Liberty Tax, Inc. (the "Company"), a Delaware corporation, is a holding company engaged through its subsidiaries as a franchisor and, to a lesser degree, an operator of a system of income tax preparation offices located in the United States of America (the "U.S.") and Canada. The Company's principal operations are conducted through JTH Tax, Inc. (d/b/a Liberty Tax Service), the Company's largest subsidiary. Through this system of income tax preparation offices, the Company also facilitates refund-based tax settlement financial products, such as Refund Transfer products in the U.S. and personal income tax refund discounting in Canada. The Company also offers online tax preparation services. In fiscal 2015, the Company changed its name from JTH Holding, Inc. to Liberty Tax, Inc.

The Company provides a substantial amount of lending to its franchisees and area developers ("ADs"). The Company allows franchisees and ADs to defer a portion of the franchise fee and AD fee, which are paid over time. The Company also offers its franchisees working capital loans to assist in funding their operations between tax seasons.

The Company’s operating revenues are seasonal in nature, with peak revenues occurring in the months of January through April.  Therefore, results for interim periods are not indicative of results to be expected for the full year.

Unless the context requires otherwise, the terms "Liberty Tax," "Liberty Tax Service," "we," the "Company," "us," and "our" refer to Liberty Tax, Inc. and its consolidated subsidiaries.
 
Basis of Presentation
 The condensed consolidated financial statements include the accounts of Liberty Tax, Inc. and its wholly-owned subsidiaries. Assets and liabilities of the Company's Canadian operations have been translated into U.S. dollars using the exchange rate in effect at the end of the period. Revenues and expenses have been translated using the average exchange rates in effect each month of the period. Foreign exchange transaction gains and losses are recognized when incurred. The Company reclassifies to accounts payable checks issued in excess of funds available and reports them as cash flow from operating activities. The Company consolidates any entities in which it has a controlling interest, the usual condition of which is ownership of a majority voting interest. The Company also considers for consolidation an entity in which the Company has certain interests where a controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity ("VIE"), is required to be consolidated by its primary beneficiary. The Company does not possess any ownership interests in franchisee entities; however, the Company may provide financial support to franchisee entities. Because the Company's franchise arrangements provide franchisee entities the power to direct the activities that most significantly impact their economic performance, the Company does not consider itself the primary beneficiary of any such entity that might be a VIE. Based on the results of management's analysis of potential VIEs, the Company has not consolidated any franchisee entities. The Company's maximum exposure to loss resulting from involvement with potential VIEs is attributable to accounts and notes receivables and future lease payments due from franchisees. When the Company does not have a controlling interest in an entity but has the ability to exert significant influence over the entity, the Company applies the equity method of accounting. Intercompany balances and transactions have been eliminated in consolidation.
 
The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information.  The condensed consolidated financial statements, including these notes, are unaudited and exclude some of the disclosures required only in annual financial statements.  The consolidated balance sheet data as of April 30, 2017 was derived from the Company’s April 30, 2017 Annual Report on Form 10-K filed on July 7, 2017.

In the opinion of management, all adjustments necessary for a fair presentation of such condensed consolidated financial statements in accordance with GAAP have been recorded.  These adjustments consisted only of normal recurring items. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s

7



consolidated financial statements and notes thereto included in its April 30, 2017 Annual Report on Form 10-K filed on July 7, 2017.

Office Count

The following table shows the U.S. office activity and the number of Canadian and Company-owned offices for the 2018, 2017, and 2016 tax seasons:
 
 
Tax Season
 
 
2018
 
2017
 
2016
U.S. Office Locations:
 
 
 
 
 
 
Permanent Office Locations:
 
 
 
 
 
 
Operated during the prior tax season
 
3,710

 
3,960

 
3,764

Offices opened
 
65

 
172

 
453

Offices closed
 
(493
)
 
(422
)
 
(257
)
Operated during the current tax season
 
3,282

 
3,710

 
3,960

 
 
 
 
 
 
 
Seasonal Office Locations:
 
 
 
 
 
 
Operated during the prior tax season
 
67

 
211

 
262

Offices opened
 
2

 
37

 
127

Offices closed
 
(45
)
 
(181
)
 
(178
)
Operated during the current tax season
 
24

 
67

 
211

 
 
 
 
 
 
 
Processing Centers
 
37

 
46

 
54

Total U.S. Office Locations
 
3,343

 
3,823

 
4,225

 
 
 
 
 
 
 
Canada Office Locations
 
267

 
254

 
262

 
 
 
 
 
 
 
Total Office Locations
 
3,610

 
4,077

 
4,487

 
 
 
 
 
 
 
Additional Office Information:
 
 
 
 
 
 
Company-owned offices
 
344

 
362

 
310

Franchised offices
 
3,266

 
3,715

 
4,177

Total Office Locations
 
3,610

 
4,077

 
4,487


SiempreTax+ is operating 77 offices during the 2018 tax season compared to 159 during the 2017 season and 144 during the 2016 season. These offices include second locations opened by current franchisees in existing territories, conversions of existing Liberty Tax offices and offices opened in new territories.

Territory Sales
 
During the first nine months of fiscal 2018, we sold approximately 61 new territories, compared to approximately 85 during the same period in fiscal 2017 and 180 in fiscal 2016.

Use of Estimates

Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period, to prepare these condensed consolidated financial statements and accompanying notes in conformity with GAAP. Actual results could differ from those estimates.


8



Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation. Specifically, the Company retitled the revenue line titled "Tax preparation fees, net of discounts" for the three and nine months ended January 31, 2018 to "Assisted tax preparation fees, net of discounts". Revenue related to the Company's DIY online tax software was reclassified to "Other revenue" for the three and nine months ended January 31, 2018.
Accounting Pronouncements
On May 1, 2017, the Company adopted Accounting Standards Update ("ASU") No. 2016-09, "Compensation-Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting." This update provides for simplification of the accounting for share-based payment transactions, including the income tax consequences and classification on the statement of cash flows. Under the update, the excess tax benefits and deficiencies that result from the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes should be recognized as income tax expense or benefit in the reporting period in which they occur. Previously, the excess tax benefits were recognized in additional paid-in capital and tax deficiencies were recognized either as an offset to accumulated excess tax benefits, if any, or in the consolidated statements of income. The update also provides that excess tax benefits should be classified along with other income tax cash flows as an operating activity on the consolidated statement of cash flows. Prior to the update, excess tax benefits were separated from other income tax cash flows and classified as a financing activity. These amendments have been adopted by the Company on a prospective transition method basis. Additionally, cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity on the consolidated statement of cash flows. Previously, no guidance was provided for cash flow classification of cash paid for tax-withholding purposes for shares withheld for tax purposes. This amendment has been adopted by the Company on a retrospective basis. There were no reclassifications of prior periods required as a result of the retrospective adoption of this amendment. Under the update, an entity can elect to either estimate the number of awards that are expected to vest or account for forfeitures as they occur. The Company has elected to account for forfeitures when they occur. The impact to retained earnings as a result of the adoption was immaterial. All amendments of the update have been adopted for all periods beginning on or after May 1, 2017.
On May 1, 2017, the Company adopted ASU 2015-17, "Income Taxes (Topic 740)," which requires entities with a classified balance sheet to present all deferred tax assets and liabilities as non-current. The update has been adopted prospectively to all deferred tax liabilities and assets and prior periods have not been retrospectively adjusted.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 replaces existing revenue recognition guidance and requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 is effective for the Company in fiscal year 2019, which began on May 1, 2018. The Company is in the process of implementing ASU 2014-09, and has made significant progress with its implementation plan. The Company expects ASU 2014-09 will have an impact on the Company’s financial statements, including the balance sheet, the statement of income, the statement of comprehensive income, the statement of stockholder's equity, the statement of cash flows, and disclosures. However, the Company has not completed its assessment or quantified the impact. The Company’s preliminary conclusion is ASU 2014-09 will change the timing of revenue recognition of initial franchise fees and area developer fees. Currently, franchise fees are recognized when the Company’s obligations to prepare the franchise for operations have been substantially completed and cash has been received. AD fees are recognized on a straight-line basis over the contract term not to exceed the amount of cash received. The Company’s preliminary conclusion is those fees will be recognized over the term of the related franchise or AD agreements under ASU 2014-09. The amount recognized for those fees will reflect the Company’s estimates of the amount of consideration to which it expects to be entitled, which may be lower than the contractual amounts of the fees. The Company’s preliminary conclusion is ASU 2014-09 will not materially impact the timing of revenue recognition of royalty and advertising fees, financial products revenue, or tax preparation fees. The Company plans to adopt ASU 2014-09 using the modified retrospective method. The Company will record a cumulative effective adjustment to retained earnings as of May 1, 2018. Results for reporting periods beginning after May 1, 2018 will be presented under the new guidance issued in ASU 2014-09. Prior period amounts will not be adjusted and will continue to be reported under the previous accounting standards.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." This update will replace existing lease guidance in GAAP and will require lessees to recognize lease assets and lease liabilities on the balance sheet for all leases and disclose key information about leasing arrangements, such as information about variable lease payments and options to renew and terminate leases. When implemented, lessees and lessors will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The update is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently finalizing its implementation plan and evaluating the impact of the new pronouncement on its consolidated financial statements. The

9



Company expects the adoption of this pronouncement to result in a material increase in the assets and liabilities on its consolidated balance sheets and to not have a material impact on its consolidated statements of income.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230)", which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. The update is intended to reduce the existing diversity in practice and is effective for the Company beginning with its first quarterly filing in fiscal year 2019. The Company will adopt the update for all periods beginning on or after May 1, 2018.
In June 2016, the FASB issued ASU No. 2016-13, "Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", which changes how companies will measure credit losses for most financial assets and certain other instruments that aren't measured at fair value through net income. The standard replaces the "incurred loss" approach with an "expected loss" model for instruments measured at amortized cost (which generally will result in the earlier recognition of allowances for losses) and requires companies to record allowances for available-for-sale debt securities, rather than reduce the carrying amount. In addition, companies will have to disclose significantly more information, including information used to track credit quality by year of origination, for most financing receivables. The ASU should be applied as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the standard is effective. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for all entities for annual periods beginning after December 15, 2018, and interim periods therein. The ASU is effective for the Company beginning in the first quarter of fiscal year 2021. The Company is currently evaluating the impact of the adoption of this newly issued standard to its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business", which clarifies the definition of a business with the objection of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. The ASU is effective for the Company beginning in the first quarter of fiscal year 2019. The Company will adopt the update for all periods beginning on or after May 1, 2018 and does not believe it will have an impact on its current accounting for business combinations.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This new standard eliminates Step 2 from the goodwill impairment test. Instead, an entity should compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The standard will be effective for the Company in the first quarter of our fiscal year 2021. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this newly issued standard to its consolidated financial statements.
 
Foreign Operations 

Canadian operations contributed $0.3 million and $0.5 million in revenues for the three months ended January 31, 2018 and 2017, respectively and $1.7 million and $1.7 million in revenues for the nine months ended January 31, 2018 and 2017, respectively.

The Company may have exposure to foreign currency fluctuations due to transactions between its US and Canadian subsidiaries.

 
(2) Accounts and Notes Receivable
 
The Company provides select financing to ADs and franchisees for the purchase of franchises, areas, Company-owned offices, and operating loans for working capital and equipment needs. The franchise-related notes generally are payable over five years and the operating loans generally are due within one year. Most notes bear interest at an annual rate of 12%

Most of the notes receivable are due from the Company's ADs and franchisees and are collateralized by the underlying franchise and, when the AD or franchise is an entity, are guaranteed by the owners of the respective entity. The debtors' ability to repay the notes is dependent upon both the performance of the tax preparation industry as a whole and the individual franchise or AD areas.

At January 31, 2018, the Company had unfunded lending commitments for working capital loans to franchisees and ADs of $16.0 million through the end of the current fiscal year.

10



Allowance for Doubtful Accounts
The adequacy of the allowance for doubtful accounts is assessed on a quarterly basis and adjusted as deemed necessary. Management believes the recorded allowance is adequate based upon its consideration of the estimated fair value of the franchises and AD areas collateralizing the receivables. Any adverse change in the tax preparation industry or the individual franchise or AD areas could affect the Company's estimate of the allowance.
Activity in the allowance for doubtful accounts for the three and nine months ended January 31, 2018 and 2017 was as follows: 
 
 
Three Months Ended January 31,
 
Nine Months Ended January 31,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In thousands)
Balance at beginning of period
 
$
9,849

 
$
8,991

 
$
12,021

 
$
8,850

Provision for doubtful accounts
 
4,410

 
3,195

 
7,865

 
6,482

Write-offs
 
(5,330
)
 
(1,967
)
 
(11,054
)
 
(5,051
)
Foreign currency adjustment
 
64

 
23

 
161

 
(39
)
Balance at end of period
 
$
8,993

 
$
10,242

 
$
8,993

 
$
10,242


Management considers specific accounts and notes receivable to be impaired if the net amounts due exceed the fair value of the underlying franchise at the time of the annual valuation performed as of April 30 of each year, and estimates an allowance for doubtful accounts based on that excess. In establishing the fair value of the underlying franchise, management considers a variety of factors, including recent sales between franchisees, sales of Company-owned stores, net fees of open offices earned during the most recently completed tax season, and the number of unopened offices. The Company performs its impairment analysis annually due to the seasonal nature of its operations. At the end of each fiscal quarter, the Company considers the activity during the period for accounts and notes receivable impaired at each prior fiscal year end and adjusts the allowance for doubtful accounts accordingly. While not specifically identifiable as of the balance sheet date, the Company's analysis of its experience also indicates that a portion of other accounts and notes receivable may not be collectible. Net amounts due include contractually obligated accounts and notes receivable plus accrued interest, reduced by unrecognized revenue, the allowance for uncollected interest, amounts due ADs, and amounts owed to the franchisee by the Company.

11



The allowance for doubtful accounts at January 31, 2018, April 30, 2017 and January 31, 2017, was allocated as follows:
 
 
January 31, 2018
 
April 30, 2017
 
January 31, 2017
 
 
(In thousands)
Impaired:
 
 

 
 
 
 

Notes and interest receivable, net of unrecognized revenue
 
$
9,778

 
$
14,646

 
$
10,012

Accounts receivable
 
9,189

 
11,396

 
6,341

Less amounts due to ADs and franchisees
 
(817
)
 
(1,834
)
 
(589
)
Amounts receivable less amounts due to ADs and franchisees
 
$
18,150

 
$
24,208

 
$
15,764

 
 
 
 
 
 
 
Allowance for doubtful accounts for impaired notes and accounts receivable
 
$
8,013

 
$
9,542

 
$
6,814

 
 
 
 
 
 
 
Non-impaired:
 
 

 
 
 
 

Notes and interest receivable, net of unrecognized revenue
 
$
81,389

 
$
33,379

 
$
101,766

Accounts receivable
 
58,361

 
43,327

 
56,672

Less amounts due to ADs and franchisees
 
(11,213
)
 
(23,119
)
 
(12,994
)
Amounts receivable less amounts due to ADs and franchisees
 
$
128,537

 
$
53,587

 
$
145,444

 
 
 
 
 
 
 
Allowance for doubtful accounts for non-impaired notes and accounts receivable
 
$
980

 
$
2,478

 
$
3,428

 
 
 
 
 
 
 
Total:
 
 
 
 
 
 
Notes and interest receivable, net of unrecognized revenue
 
$
91,167

 
$
48,025

 
$
111,778

Accounts receivable
 
67,550

 
54,723

 
63,013

Less amounts due to ADs and franchisees
 
(12,030
)
 
(24,953
)
 
(13,583
)
Amounts receivable less amounts due to ADs and franchisees
 
$
146,687

 
$
77,795

 
$
161,208

 
 
 
 
 
 
 
Total allowance for doubtful accounts
 
$
8,993

 
$
12,021

 
$
10,242


The Company’s average investment in impaired receivables during the nine months ended January 31, 2018 and 2017 was $21.2 million and $16.8 million, respectively.
 
Analysis of Past Due Receivables

The breakdown of accounts and notes receivable past due at January 31, 2018 was as follows:
 
 
Past due
 
Current
 
Interest receivable, net
 
Total
receivables
 
 
(In thousands)
Accounts receivable
 
$
34,233

 
$
33,317

 
$

 
$
67,550

Notes and interest receivable, net (1)
 
9,805

 
76,886

 
4,476

 
91,167

Total accounts, notes and interest receivable
 
$
44,038

 
$
110,203

 
$
4,476

 
$
158,717


(1)    Interest receivable is shown net of an allowance for uncollectible interest of $2.3 million.

12



Accounts receivable are considered to be past due if unpaid 30 days after billing, and notes receivable are considered past due if unpaid 90 days after the due date. If it is determined the likelihood of collecting substantially all of the notes and accrued interest is not probable the notes are put on non-accrual status. The Company’s investment in notes receivable on non-accrual status was $9.8 million, $7.0 million and $11.6 million at January 31, 2018, April 30, 2017, and January 31, 2017, respectively. Payments received on notes in non-accrual status are applied to the principal until the note is current then to interest income. Non-accrual notes that are paid current and expected to remain current are moved back into accrual status during the next annual review.


(3) Restructuring Expense

The Company incurred $3.4 million of expenses in the nine months ended January 31, 2018 related to restructuring initiatives implemented to improve the Company's overall profitability. The expenses incurred are presented in the Restructuring expense line item in the consolidated statements of income. The composition of the restructuring expenses incurred for the nine months ended January 31, 2018 were as follows (in thousands):

Expense
 
Cash
 
Accrued Expenses
 
Non-cash
 
Total Expense
Contract termination costs - licensing and support
 
$
355

 
$
1,699

 
$

 
$
2,054

Contract termination costs - impairment
 

 

 
549

 
549

Property and intangible impairments and exit costs
 
242

 
15

 
292

 
549

Employee termination costs
 
210

 

 

 
210

Total
 
$
807

 
$
1,714

 
$
841

 
$
3,362


The property and intangible impairments and exit costs were comprised of expenses related to lease obligations and non-cash charges associated with intangible write-downs. The accrued restructuring expenses are primarily related to maintenance termination costs of $1.7 million. $0.7 million is included in "Accounts payable and accrued expenses" and $1.0 million is included in "Deferred revenue and other - non-current" lines in the accompanying consolidated balance sheets.

The Company has incurred additional expenses and charges in fiscal 2019 comprised of expenses related to lease obligations and non-cash charges associated with intangible write-downs. The restructuring initiatives are expected to be completed by October 2018.


(4) Goodwill and Intangible Assets 

Changes in the carrying amount of goodwill for the nine months ended January 31, 2018 and 2017 were as follows:
 
 
January 31, 2018
 
January 31, 2017
 
 
(In thousands)
Balance at beginning of period
 
$
8,576

 
$
4,228

Acquisitions of assets from franchisees and others
 
1,850

 
858

Disposals and foreign currency changes, net
 
(184
)
 
(185
)
Purchase price reallocation
 
(1,032
)
 

Impairments
 

 
(90
)
Balance at end of period
 
$
9,210

 
$
4,811

 
 
 
 
 

13



Components of intangible assets were as follows as of January 31, 2018, April 30, 2017 and January 31, 2017:
 
 
January 31, 2018
 
 
Weighted average amortization period
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
 
 
(In thousands)
Amortizable intangible assets:
 
 
 
 
 
 
 
 
Customer lists acquired from unrelated third parties
 
5 years
 
$
3,187

 
$
(1,390
)
 
$
1,797

Tradenames
 
3 years
 
431

 
(136
)
 
295

Non-compete agreements
 
2 years
 
241

 
(115
)
 
126

Assets acquired from franchisees:
 
 
 
 
 
 
 
 
Customer lists
 
4 years
 
2,193

 
(1,642
)
 
551

Reacquired rights
 
2 years
 
1,712

 
(1,642
)
 
70

AD rights
 
9 years
 
29,932

 
(9,703
)
 
20,229

Total intangible assets
 
 
 
$
37,696

 
$
(14,628
)
 
$
23,068


 
 
April 30, 2017
 
 
Weighted average amortization period
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
 
 
(In thousands)
Amortizable intangible assets:
 
 
 
 
 
 
 
 
Customer lists acquired from unrelated third parties
 
4 years
 
$
2,827

 
$
(899
)
 
$
1,928

Assets acquired from franchisees:
 
 
 
 
 
 
 
 
Customer lists
 
4 years
 
1,189

 
(908
)
 
281

Reacquired rights
 
2 years
 
935

 
(919
)
 
16

AD rights
 
10 years
 
26,427

 
(7,428
)
 
18,999

Total intangible assets
 
 
 
$
31,378

 
$
(10,154
)
 
$
21,224


 
 
January 31, 2017
 
 
Weighted average amortization period
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
 
 
(In thousands)
Amortizable intangible assets:
 
 
 
 
 
 
 
 
Customer lists acquired from unrelated third parties
 
4 years
 
$
1,027

 
$
(546
)
 
$
481

Assets acquired from franchisees:
 
 
 
 
 
 
 
 
Customer lists
 
4 years
 
1,555

 
(667
)
 
888

Reacquired rights
 
2 years
 
430

 
(422
)
 
8

AD rights
 
10 years
 
26,521

 
(6,741
)
 
19,780

Acquired assets pending final allocation (1)
 
-
 
1,491

 

 
1,491

Total intangible assets
 
 
 
$
31,024

 
$
(8,376
)
 
$
22,648

(1) Represents recent business acquisitions for which final purchase price allocations have not yet been determined.
The Company acquired $3.5 million, and $8.1 million of AD rights during the nine months ended January 31, 2018 and 2017, respectively.

14



During the nine months ended January 31, 2018, the Company did not acquire any assets of U.S. or Canadian franchisees, or third parties that were not classified as assets held for sale. During the nine months ended January 31, 2017, the Company acquired $2.6 million of assets from third parties that were not classified as assets held for sale.
During the third and fourth quarters of fiscal 2017, the Company acquired the assets of six unrelated offices of smaller regional or local accounting firms for cash of $2.3 million and $2.7 million of contingent consideration that is included in long-term obligations. These offices perform year-round accounting services. No adjustments to the fair values of the identifiable assets acquired and liabilities assumed as of the acquisition dates were recorded in the three months ended January 31, 2018.
(5) Assets Held For Sale

At the end of the third quarter of fiscal 2018 and 2017, assets acquired from U.S. franchisees were classified as assets held for sale. During the nine months ended January 31, 2018, the Company acquired $7.0 million in assets from U.S. franchisees and third parties that were first accounted for as business combinations, with the value allocated to customer lists and reacquired rights of $3.5 million and goodwill of $3.5 million prior to being recorded as assets held for sale. During the nine months ended January 31, 2017, the Company acquired $16.3 million in assets from U.S. franchisees and third parties that were first accounted for as business combinations, with the value allocated to customer lists and reacquired rights of $8.1 million and goodwill of $8.2 million prior to being recorded as assets held for sale. The company intends to sell the majority of assets associated with Company-owned offices within one year. The acquired businesses are operated as Company-owned offices until a buyer is located and a new franchise agreement is entered into.

Changes in the carrying amount of assets held for sale for the nine months ended January 31, 2018 and 2017 were as follows:
 
Nine Months Ended January 31,
 
2018
 
2017
 
(In thousands)
Balance at beginning of period
$
11,989

 
$
9,886

Reacquired and acquired from third parties
6,992

 
16,334

Sold or terminated, impairments and other
(6,911
)
 
(8,671
)
Balance at end of period
$
12,070

 
$
17,549


During fiscal 2018, the Company reviewed assets held for sale that were deemed unlikely to be sold in the preceding 12 months. Those identified were transferred to assets held for use and amortization expense was recorded on a cumulative basis for customer lists and reacquired rights.


(6) Long-Term Obligations
 
The Company has a credit facility that consists of a term loan with original principal $21.2 million and a revolving credit facility that currently allows borrowing of up to 193.8 million with an accordion feature that permits the Company to request an increase in availability of up to an additional $50.0 million. Outstanding borrowings accrue interest, which is paid monthly at a rate of the one-month London Interbank Offered Rate ("LIBOR") plus a margin ranging from 1.50% to 2.25% depending on the Company’s leverage ratio.

The average interest rate paid during the nine months ended January 31, 2018 and 2017 was 2.99% and 2.23%, respectively. The indebtedness is collateralized by substantially all the assets of the Company, and both loans mature on April 30, 2019. 

The credit facility contains certain financial covenants that the Company must meet, including leverage and fixed-charge coverage ratios as well as minimum net worth requirements. In addition, the Company must reduce the outstanding balance under its revolving credit facility to zero for a period of at least 45 consecutive days each fiscal year. The Company was in compliance with the financial covenants at January 31, 2018

In December 2016, the Company obtained a mortgage payable to a bank in monthly installments of principal payments plus interest at the one-month LIBOR plus 1.85% through December 2026 with a balloon payment of 0.8 million due at maturity. The mortgage is collateralized by land and building.

15



In December 2016, in connection with obtaining a mortgage payable to a bank, the Company entered into an interest rate swap agreement that allows it to manage fluctuations in cash flow resulting from changes in the interest rate on the mortgage. This swap effectively changes the variable-rate of the Company's mortgage into a fixed rate of 4.12%. The Company has designated this swap agreement as a cash flow hedge. At January 31, 2018, the fair value of the interest rate swap is less than $0.1 million and is included in accounts payable and accrued expenses. The interest rate swap expires in December 2026.
Long-term obligations at January 31, 2018, April 30, 2017, and January 31, 2017 consisted of the following:
 
 
January 31, 2018
 
April 30, 2017
 
January 31, 2017
 
 
(In thousands)
Credit Facility:
 
 

 
 
 
 

Revolver
 
$
120,189

 
$

 
$
131,215

Term loan, net of debt issuance costs
 
15,376

 
17,471

 
17,391

Total credit facility
 
135,565

 
17,471

 
148,606

 
 
 
 
 
 
 
Long-Term Obligations
 
 
 
 
 
 
Term loan, net of debt issuance costs
 
15,376

 
17,471

 
17,391

   Due former ADs, franchisees and third parties
 
4,198

 
6,568

 
5,345

   Mortgages
 
2,070

 
2,160

 
2,190

 
 
21,644

 
26,199

 
24,926

   Less: current installments
 
(5,223
)
 
(7,738
)
 
(5,688
)
Long-term obligations, excluding current installments, net
 
$
16,421

 
$
18,461

 
$
19,238



(7) Income Taxes
 
On December 20, 2017, the United States Congress passed legislation making significant changes to income taxation at the federal level for individuals, pass-through entities, and corporations. The legislation, known as the Tax Cuts and Jobs Act (the "Tax Act"), was signed into law by the President on December 22, 2017. For corporations, the changes include a reduction in the statutory rate on taxable income from 35% to 21%, and a move from a worldwide tax system to a territorial tax system for companies with foreign operations. Under the territorial system, except in limited situations or for limited types of income, earnings from foreign operations will generally no longer be subject to U.S. taxation. The law accommodates the move from the previous worldwide tax system by providing for a one-time transition tax on the undistributed post-1986 earnings of foreign subsidiaries as of either November 2, 2017 or December 31, 2017, whichever undistributed earnings amount is greater. Other provisions of the Tax Act allow for immediate expensing of investments in property, plant, and equipment, and impose limitations on the deductibility of interest, executive compensation, meals and entertainment, and lobbying expenses.

Under the applicable accounting guidance, corporations are required to account for the effects of changes in income tax law on their financial statements as a component of taxes provided on income from continuing operations in the period those changes are enacted, which for the Company is the fiscal quarter and nine-month period ended January 31, 2018. Due to the complexities associated with understanding and applying various aspects of the Tax Act and quantifying or estimating amounts upon which calculations required to account for the Tax Act are based, the U.S. Securities and Exchange Commission (“SEC”) recognized that it may be difficult for many companies to complete the determination of all accounting effects of the Tax Act within the available timeframe for issuing their financial statements for the period of enactment. As a result, the SEC provided guidance under Staff Accounting Bulletin 118, permitting corporations to record and report specific items impacted by the Tax Act on the basis of reasonable estimates if final amounts have not been determined and designate them as provisional amounts, or to continue to account for specific items under the previous law if it is not possible to develop reasonable estimates within the timeframe for issuance of the financial statements. In subsequent reporting periods, as the accounting for those items is finalized, companies are expected to record the appropriate adjustments to the initial accounting, removing the provisional designation on an item in the period that the accounting for that item is completed. A measurement period of no more than one year from the date of enactment of the Tax Act is provided under the SEC guidance to complete all such adjustments.

In determining the recorded effect of the Tax Act presented above, the Company developed reasonable estimates and made reasonable interpretations with respect to the application of the law in areas that will likely receive future clarification.

16



The primary effects of the Tax Act on the Company’s financial statements for the current reporting periods, as reflected in the below table, are considered provisional at this time in order to allow additional time to complete the accounting. The Company continues to analyze the Tax Act, and future treasury regulations, technical corrections, notices, rulings, and other guidance issued by the government that could result in changes or refinements to amounts recorded in the current reporting period.

The most significant effects of the Tax Act on the Company's financial statements for the current reporting periods are:

(1)
an adjustment of recorded deferred tax assets and liabilities to the tax rates at which they are expected to reverse in the future, and

(2)
a liability recorded for U.S. income taxes on undistributed foreign earnings expected to be paid under the one-time transition tax provisions of the Tax Act.

The following table outlines consolidated income tax expense and the effective tax rates on pre-tax earnings for the quarter and nine months ended January 31, 2018, including the effects recorded for the Tax Act:

 
Three Months Ended January 31,
 
Nine Months Ended January 31,
2018 
2018 
 
(in thousands)
 
Amount
 
Effective
 
Amount
 
Effective
 
Tax Rate
Tax Rate
Income before income taxes
$
(967
)
 

 
$
(37,933
)
 

 
 
 
 
 
 
 
 
Income tax benefit:
 
 
 
 
 
 
 
Determined under previous tax law
(491
)
 
50.8
 %
 
(14,604
)
 
38.5
 %
 
 
 
 
 
 
 
 
Effect of the Tax Act:
 
 
 
 
 
 
 
Remeasurement of deferred tax assets and liabilities
(1,603
)
 
165.8
 %
 
(1,603
)
 
4.2
 %
One-time transition tax on undistributed foreign earnings
1,223

 
(126.5
)%
 
1,223

 
(3.2
)%
Change in current US tax rate
1,412

 
(146.0
)%
 
1,420

 
(3.7
)%
All other effects
14

 
(1.4
)%
 
14

 
 %
Total effect of the Tax Act
1,046

 
(108.2
)%
 
1,054

 
(2.8
)%
 
 
 
 
 
 
 
 
Total income tax expense (benefit) under the Tax Act
$
555

 
(57.4
)%
 
$
(13,550
)
 
35.7
 %

As noted above, the effect of the Tax Act includes a $1.6 million net reduction of current period income tax expense from remeasuring net deferred tax liabilities to the lower rates at which they are now expected to reverse, generally at the new 21% statutory U.S. tax rate. In addition, the effect of the Tax Act includes an amount of net current period tax expense from remeasuring net deferred tax assets attributable to foreign currency translation adjustments and other amounts that were initially recorded through other comprehensive income (loss) (“OCI”) to the new lower rates. The Company does not currently have any deferred tax items related to OCI recorded and as such does not impact its current period tax expense to account for the remeasurement regarding OCI.

Prior to the enactment of the Tax Act, the Company had undistributed earnings of its foreign subsidiary that was classified as permanently reinvested. Accordingly, the Company did not have to record a tax liability on those earnings. The Tax Act however requires the Company to calculate tax, known as the one-time transition tax, on those unremitted earnings which is allowed to be paid over an eight-year period. The total provisional liability recorded by the Company for this transition tax is approximately $1.2 million.

As noted in the above table, with the effects of the tax law changes, the Company’s consolidated effective income tax rates were (57.4%) and 35.7% for the three and nine months ended January 31, 2018 respectively. Without the changes in the tax law, those effective income tax rates would have been 50.8% and 38.5% respectively. The effective tax rates for the three and nine months ended January 31, 2017 were 40.7% and 39.3%.

17



(8) Stockholders’ Equity

Stockholders' Equity Activity
During the nine months ended January 31, 2018 and 2017, activity in stockholders’ equity was as follows:
 
 
Nine Months Ended January 31,
 
 
2018
 
2017
 
 
(in thousands, except for share amounts)
Class A common stock issued from the exercise of stock options
 
9,000

 

Class A common stock issued from the vesting of restricted stock and as director compensation
 
58,507

 
20,725

Class B common stock converted to Class A common shares
 

 
700,000

Class A common stock repurchased
 

 
33,153

 
 
 
 
 
Proceeds from exercise of stock options
 
$
95

 
$

Stock-based compensation expense
 
$
2,523

 
$
1,520

Repurchase of common stock
 

 
417

Tax effect of stock option exercises
 
$

 
$
(394
)
Dividends declared
 
$
6,777

 
$
6,670


During the nine months ended January 31, 2017, the sole holder of the Company's Class B common stock converted 700,000 of those shares to the Company's Class A common stock on a one-for-one basis and for no additional consideration.

Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss at January 31, 2018, April 30, 2017 and January 31, 2017 were as follows.
 
 
January 31, 2018
 
April 30, 2017
 
January 31, 2017
 
 
(in thousands)
Foreign currency adjustment
 
$
(1,008
)
 
$
(2,059
)
 
$
(1,660
)
Unrealized gain on equity securities, available-for-sale, net of taxes
 

 
30

 

Loss on sale of available-for-sale securities, net of taxes
 

 
(30
)
 

Unrealized gain (loss) on interest rate swap agreement, net of taxes
 
18

 
(25
)
 
(22
)
Forward contracts related to foreign currency exchange rates
 

 

 
9

Total accumulated other comprehensive loss
 
$
(990
)
 
$
(2,084
)
 
$
(1,673
)

Net Income (Loss) per Share
 
Net income (loss) per share of Class A and Class B common stock is computed using the two-class method. Basic net income (loss) per share is computed by allocating undistributed earnings to common stock and participating securities (exchangeable shares) and using the weighted-average number of common stock outstanding during the period.  Undistributed losses are not allocated to participating securities because they do not meet the required criteria for such allocation. 
 
Diluted net income (loss) per share is computed using the weighted-average number of common stock and, if dilutive, the potential common stock outstanding during the period. Potential common stock consists of the incremental common stock issuable upon the exercise of stock options and vesting of restricted stock units. The dilutive effect of outstanding stock options and restricted stock units is reflected in diluted earnings per share by application of the treasury stock method. Additionally, the computation of the diluted net income (loss) per share of Class A common stock assumes the conversion of Class B common stock and exchangeable shares, if dilutive, while the diluted net loss per share of Class B common stock does not assume conversion of those shares.

18



 
The rights, including liquidation and dividend rights, of the holders of Class A and Class B common stock are identical, with the exception of the election of directors. As a result, the undistributed earnings for each year are allocated based on the contractual participation rights of the Class A and Class B common stock as if the earnings for the year had been distributed.  Participating securities have dividend rights that are identical to Class A and Class B common stock.
The computation of basic and diluted net loss per share for the three and nine months ended January 31, 2018 and 2017 is as follows:
 
 
Three Months Ended 
 January 31, 2018
 
Three Months Ended 
 January 31, 2017
 
 
Class A
 
Class B
 
Class A
 
Class B
 
 
Common Stock
 
Common Stock
 
Common Stock
 
Common Stock
 
 
(in thousands, except for share and per
share amounts)
Basic net income (loss) per share:
 
 

 
 

 
 

 
 

Numerator
 
 

 
 

 
 

 
 

Allocation of undistributed income (loss)
 
$
(1,499
)
 
$
(23
)
 
$
2,417

 
$
38

Amounts allocated to participating securities:
 
 

 
 

 
 

 
 

Exchangeable shares
 
108

 
2

 
(174
)
 
(3
)
Net income (loss) attributable to common stockholders
 
$
(1,391
)
 
$
(21
)
 
$
2,243

 
$
35

Denominator
 
 
 
 
 
 
 
 
Weighted-average common stock outstanding
 
12,734,941

 
200,000

 
12,702,577

 
200,000

 
 
 
 
 
 
 
 
 
Basic net income (loss) per share
 
$
(0.11
)
 
$
(0.11
)
 
$
0.18

 
$
0.18

 
 
 
 
 
 
 
 
 
Diluted net income (loss) per share:
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
Allocation of undistributed earnings for basic computation
 
$
(1,391
)
 
$
(21
)
 
$
2,243

 
$
35

Reallocation of undistributed earnings as a result of assumed conversion of:
 
 
 
 
 
 
 
 
Class B common stock to Class A common stock
 

 

 
35

 

Exchangeable shares to Class A common stock
 

 

 
177

 

 
 
$
(1,391
)
 
$
(21
)
 
$
2,455

 
$
35

Denominator
 
 

 
 

 
 

 
 

Number of shares used in basic computation
 
12,734,941

 
200,000

 
12,702,577

 
200,000

Weighted-average effect of dilutive securities
 
 
 
 
 
 
 
 
Class B common stock to Class A common stock
 

 

 
200,000

 

Exchangeable shares to Class A common stock
 

 

 
1,000,000

 

Employee stock options
 

 

 
21,633

 
311

 
 
12,734,941

 
200,000

 
13,924,210

 
200,311

 
 
 
 
 
 
 
 
 
Diluted net income (loss) per share
 
$
(0.11
)
 
$
(0.11
)
 
$
0.18

 
$
0.17


As a result of the net losses for the periods shown, diluted net loss per share excludes the impact of shares of potential common stock from the exercise of options to purchase 1,147,386 and 1,366,871 shares for the three months ended January 31, 2018 and 2017, respectively, because the effect would be anti-dilutive.


19



 
 
Nine Months Ended 
 January 31, 2018
 
Nine Months Ended 
 January 31, 2017
 
 
Class A
 
Class B
 
Class A
 
Class B
 
 
Common Stock
 
Common Stock
 
Common Stock
 
Common Stock
 
 
(in thousands, except for share and per
share amounts)
Basic and diluted net loss per share:
 
 

 
 

 
 

 
 

Numerator
 
 

 
 

 
 

 
 

Allocation of undistributed losses
 
$
(24,005
)
 
$
(378
)
 
$
(15,955
)
 
$
(362
)
Denominator
 
 
 
 
 
 
 
 
Weighted-average common stock outstanding
 
12,707,039

 
200,000

 
12,613,525

 
286,232

 
 
 
 
 
 
 
 
 
Basic and diluted net loss per share
 
$
(1.89
)
 
$
(1.89
)
 
$
(1.26
)
 
$
(1.26
)

As a result of the net losses for the periods shown, diluted net loss per share excludes the impact of shares of potential common stock from the exercise of options to purchase 1,301,175 and 1,277,479 shares for the nine months ended January 31, 2018 and 2017, respectively, because the effect would be anti-dilutive.


(9) Stock Compensation Plans
 
Stock Options
 
The Company has an equity and cash incentive plan, for the issuance of up to 2,500,000 shares of Class A common stock in which employees and outside directors are eligible to receive awards. At January 31, 2018, 1,532,865 shares of Class A common stock remain available for grant.
Stock option activity during the nine months ended January 31, 2018 was as follows:
 
 
Number of
options
 
Weighted
average
exercise price
Balance at beginning of period
 
1,387,331

 
$
18.02

Granted
 
272,502

 
13.25

Exercised
 
(9,000
)
 
10.51

Expired or forfeited
 
(869,257
)
 
16.23

Balance at end of period
 
781,576

 
$
18.43


Intrinsic value is defined as the fair value of the stock less the cost to exercise. The total intrinsic value of options exercised during the nine months ended January 31, 2018 was less than $0.1 million. The total intrinsic value of stock options outstanding at January 31, 2018 was $0.0 million. Stock options vest from six months to five years from the date of grant and expire from four to seven years after the vesting date.

Nonvested stock options activity during the nine months ended January 31, 2018 was as follows: 
 
 
Nonvested
options
 
Weighted
average
exercise price
Balance at beginning of period
 
678,118

 
$
15.88

Granted
 
272,502

 
13.25

Vested
 
(533,119
)
 
13.75

Forfeited
 
(88,000
)
 
22.97

Balance at end of period
 
329,501

 
$
15.25

 

20



The termination of the Company's CEO resulted in the vesting of 340,071 options. At January 31, 2018, unrecognized compensation costs related to nonvested stock options were $1.0 million. These costs are expected to be recognized through fiscal 2021.
The following table summarizes information about stock options outstanding and exercisable at January 31, 2018:
 
 
Options Outstanding
 
Options Exercisable
Range of exercise prices
 
Number of shares outstanding
 
Weighted average exercise price
 
Weighted average remaining contractual life (in years)
 
Number of options exercisable
 
Weighted average exercise price
 
 
 
 
 
$10.90 - $12.79
 
229,462

 
$
12.09

 
4.1
 
145,048

 
$
12.79

$12.80 - $16.38
 
215,680

 
14.44

 
5.5
 
27,592

 
15.38

$16.39 - $26.17
 
166,018

 
21.59

 
3.5
 
129,018

 
21.99

$26.18 - $33.38
 
170,416

 
28.94

 
3.2
 
150,417

 
28.35


 
781,576

 
$
18.43

 

 
452,075

 
$
20.75


Restricted Stock Units
 
Restricted stock activity during the nine months ended January 31, 2018 was as follows:
 
 
Number of
Restricted stock units
 
Weighted
average fair value at grant date
Balance at beginning of period
 
176,396

 
$
13.61

Granted
 
192,560

 
12.21

Vested
 
(82,144
)
 
13.83

Forfeited
 
(46,258
)
 
13.51

Balance at end of period
 
240,554

 
$
12.48

 
The resignation of the Company's CFO resulted in the vesting of 31,746 restricted stock units. At January 31, 2018, unrecognized compensation costs related to restricted stock units were $2.4 million. These costs are expected to be recognized through fiscal 2022.

(10) Fair Value of Financial Instruments
 
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities subject to fair value measurements on a recurring basis are classified according to a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. Valuation methodologies for the fair value hierarchy are as follows:
 
Level 1 — Quoted prices for identical assets and liabilities in active markets.

Level 2 — Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-based valuations in which all significant inputs are observable in the market.

Level 3 — Unobservable inputs in which little or no market data exists, therefore, requiring an entity to develop its own assumptions.

The Company measures or monitors certain of its assets and liabilities on a fair value basis. Fair value is used on a recurring basis for those assets and liabilities for which fair value is the primary basis of accounting. Other assets and liabilities are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. The following tables present, at January 31, 2018, April 30, 2017 and January 31, 2017, for each of the fair value hierarchy levels, the assets and liabilities that are measured at fair value on a recurring and nonrecurring basis (in thousands):

21



 
 
January 31, 2018
 
 
 
 
Fair value measurements using
 
 
Total
 
Level 1