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 October 31, 2017
 
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 October 31, 2017
 
Table of Contents
 
 
 
Page
 
 
Number
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets as of October 31, 2017, April 30, 2017 and October 31, 2016
 
 
 
 
Condensed Consolidated Statements of Operations for the three and six months ended October 31, 2017 and 2016
 
 
 
 
Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended October 31, 2017 and 2016
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the six months ended October 31, 2017 and 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I. FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS 

1



LIBERTY TAX, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
October 31, 2017, April 30, 2017 and October 31, 2016
(In thousands, except share data)
 
October 31, 2017
 
April 30, 2017
 
October 31, 2016
Assets
(unaudited)
 
 

 
(unaudited)
Current assets:
 

 
 

 
 
Cash and cash equivalents
$
5,173

 
$
16,427

 
$
3,739

Receivables:
 
 
 

 
 

Accounts receivable
41,850

 
54,723

 
37,967

Notes receivable - current
39,445

 
27,845

 
43,658

Interest receivable, net of uncollectible amounts
3,487

 
1,967

 
3,777

Allowance for doubtful accounts - current
(8,235
)
 
(10,052
)
 
(6,852
)
Total current receivables, net
76,547

 
74,483

 
78,550

Assets held for sale
16,173

 
11,989

 
18,083

Income taxes receivable
14,726

 
55

 
15,936

Deferred income tax asset

 
6,956

 
3,192

Other current assets
3,909

 
5,757

 
3,196

Total current assets
116,528

 
115,667

 
122,696

Property, equipment, and software, net
39,747

 
39,789

 
41,487

Notes receivable, non-current
18,049

 
18,213

 
26,897

  Allowance for doubtful accounts, non-current
(1,614
)
 
(1,968
)
 
(2,139
)
Total notes receivables, non-current
16,435

 
16,245

 
24,758

Deferred tax asset - non-current
177

 

 

Goodwill
7,448

 
8,576

 
4,124

Other intangible assets, net
23,029

 
21,224

 
16,966

Other assets
2,651

 
2,767

 
3,274

Total assets
$
206,015

 
$
204,268

 
$
213,305

Liabilities and Stockholders’ Equity
 

 
 

 
 
Current liabilities:
 

 
 

 
 
Current installments of long-term obligations
$
5,306

 
$
7,738

 
$
3,663

Accounts payable and accrued expenses
11,936

 
12,953

 
8,505

Due to Area Developers (ADs)
7,484

 
23,143

 
9,210

Income taxes payable

 
6,442

 

Deferred revenue - current
2,428

 
2,892

 
4,455

Total current liabilities
27,154

 
53,168

 
25,833

Long-term obligations, excluding current installments, net
17,106

 
18,461

 
17,068

Revolving credit facility
60,950

 

 
66,635

Deferred revenue and other - non-current
5,611

 
5,817

 
5,905

Deferred income tax liability
3,585

 
10,367

 
9,107

Total liabilities
114,406

 
87,813

 
124,548

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, 12,725,472, 12,682,550 and 12,594,756 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
10,285

 
8,371

 
7,781

Accumulated other comprehensive loss, net of taxes
(1,393
)
 
(2,084
)
 
(1,850
)
Retained earnings
82,578

 
110,029

 
82,687

Total stockholders’ equity
91,609

 
116,455

 
88,757

Total liabilities and stockholders’ equity
$
206,015

 
$
204,268

 
$
213,305


See accompanying notes to condensed consolidated financial statements.

2



LIBERTY TAX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations
Three and Six Months Ended October 31, 2017 (unaudited) and 2016 (unaudited)
(In thousands, except share count and per share data)
 
 
 
Three Months Ended October 31,
 
Six Months Ended October 31,
 
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 

 
 

 
 

 
 

Franchise fees
 
$
193

 
$
364

 
$
264

 
$
604

Area Developer fees
 
634

 
1,147

 
1,702

 
2,117

Royalties and advertising fees
 
1,299

 
1,329

 
2,988

 
2,784

Financial products
 
636

 
247

 
1,218

 
783

Interest income
 
2,101

 
2,596

 
4,398

 
5,254

Assisted tax preparation fees, net of discounts
 
1,549

 
787

 
3,189

 
1,772

Other revenues
 
1,359

 
764

 
2,199

 
1,069

Total revenues
 
7,771

 
7,234

 
15,958

 
14,383

Operating expenses:
 
 

 
 

 
 

 
 

Employee compensation and benefits
 
10,712

 
8,914

 
20,703

 
18,596

Selling, general, and administrative expenses
 
9,554

 
9,207

 
18,754

 
17,486

Area Developer expense
 
397

 
561

 
769

 
1,021

Advertising expense
 
1,702

 
1,496

 
4,079

 
3,414

Depreciation, amortization, and impairment charges
 
2,334

 
1,815

 
4,530

 
3,827

Restructuring expense
 
3,371

 

 
3,371

 

Total operating expenses
 
28,070

 
21,993

 
52,206

 
44,344

Loss from operations
 
(20,299
)
 
(14,759
)
 
(36,248
)
 
(29,961
)
Other income (expense):
 
 
 
 
 
 
 
 
Foreign currency transaction gain (loss)
 
(39
)
 
(17
)
 
71

 
(25
)
Gain on sale of available-for-sale securities
 

 

 

 
50

Interest expense
 
(508
)
 
(732
)
 
(789
)
 
(1,076
)
Loss before income taxes
 
(20,846
)
 
(15,508
)
 
(36,966
)

(31,012
)
Income tax benefit
 
(7,743
)
 
(6,166
)
 
(14,105
)
 
(12,240
)
Net loss
 
(13,103
)
 
(9,342
)
 
(22,861
)
 
(18,772
)
Net loss per share attributable to Class A and Class B common stock:
 
 
 
 
 
 
 
 
Basic and diluted
 
$
(1.02
)
 
$
(0.72
)
 
$
(1.77
)
 
$
(1.46
)
 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding basic and diluted
 
12,903,626

 
12,901,955

 
12,893,088

 
12,898,347

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

 
$
0.16

 
$
0.32

 
$
0.32


See accompanying notes to condensed consolidated financial statements.

3



LIBERTY TAX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Loss
Three and Six Months Ended October 31, 2017 (unaudited) and 2016 (unaudited)
(In thousands)
 
 
 
Three Months Ended October 31,
 
Six Months Ended October 31,
 
 
2017
 
2016
 
2017
 
2016
Net loss
 
$
(13,103
)
 
$
(9,342
)
 
$
(22,861
)
 
$
(18,772
)
Unrealized gain on interest rate swap agreement, net of taxes of $9, $0, $9 and $0, respectively
 
26

 

 
11

 

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
 
(354
)
 
(271
)
 
680

 
(702
)
Comprehensive loss
 
$
(13,431
)
 
$
(9,613
)
 
$
(22,170
)
 
$
(18,924
)

 See accompanying notes to condensed consolidated financial statements.

4



LIBERTY TAX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
Six Months Ended October 31, 2017 (unaudited) and 2016 (unaudited)
(In thousands)
 
 
 
Six Months Ended October 31,
 
 
2017
 
2016
Cash flows from operating activities:
 
 

 
 

Net loss
 
$
(22,861
)
 
$
(18,772
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 

 
 

Provision for doubtful accounts
 
3,455

 
3,287

Depreciation, amortization, and impairment charges
 
4,530

 
3,827

Loss on disposal of fixed and intangible assets
 
841

 

Stock-based compensation expense
 
1,973

 
1,061

Gain on sale of available-for-sale securities
 

 
(50
)
Gain on bargain purchases and sales of Company-owned offices
 
(729
)
 
59

Deferred tax expense
 
7

 
2,635

Changes in accrued income taxes
 
(21,098
)
 
(19,858
)
Changes in other assets and liabilities
 
(5,742
)
 
(11,198
)
Net cash used in operating activities
 
(39,624
)
 
(39,009
)
Cash flows from investing activities:
 
 

 
 

Issuance of operating loans to franchisees and ADs
 
(21,082
)
 
(23,865
)
Payments received on operating loans to franchisees
 
2,110

 
1,766

Purchases of AD rights, Company-owned offices and acquired customer lists
 
(2,112
)
 
(5,672
)
Proceeds from sale of Company-owned offices and AD rights
 
76

 
983

Proceeds from sale of available-for-sale securities
 

 
5,049

Purchases of property, equipment and software
 
(2,704
)
 
(3,092
)
Net cash used in investing activities
 
(23,712
)
 
(24,831
)
Cash flows from financing activities:
 
 
 
 

Proceeds from the exercise of stock options
 
95

 

Tax impact of stock compensation
 

 
(39
)
Dividends paid
 
(4,482
)
 
(4,448
)
Repayment of amounts due to former ADs and franchisees
 
(2,971
)
 
(1,158
)
Repayment of long-term obligations
 
(1,654
)
 
(3,169
)
Borrowings under revolving credit facility
 
61,257

 
66,809

Repayments under revolving credit facility
 
(307
)
 
(174
)
Cash paid for taxes on exercises/vesting of stock-based compensation
 
(153
)
 

Tax benefit of stock option exercises
 

 
60

Net cash provided by financing activities
 
51,785

 
57,881

Effect of exchange rate changes on cash, net
 
297

 
(208
)
Net decrease in cash and cash equivalents
 
(11,254
)
 
(6,167
)
Cash and cash equivalents at beginning of period
 
16,427

 
9,906

Cash and cash equivalents at end of period
 
$
5,173

 
$
3,739


  See accompanying notes to condensed consolidated financial statements.




5



LIBERTY TAX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
Six Months Ended October 31, 2017 (unaudited) and 2016 (unaudited)
(In thousands)
 
 
 
Six Months Ended October 31,
 
 
2017
 
2016
Supplemental disclosures of cash flow information:
 
 

 
 

Cash paid for interest, net of capitalized interest of $305 and $106, respectively
 
$
761

 
$
890

Cash paid for taxes, net of refunds
 
7,011

 
4,923

Accrued capitalized software costs included in accounts payable
 
70

 
40

During the six months ended October 31, 2017 and 2016, the Company acquired certain assets from ADs, franchisees, and third parties as follows:
 
 
 
 
Fair value of assets purchased
 
$
8,002

 
$
17,171

Receivables applied, net of amounts written off, due ADs and related deferred revenue
 
(4,327
)
 
(8,009
)
Bargain purchase gains
 
(674
)
 
(210
)
Long-term obligations and accounts payable issued to seller
 
(889
)
 
(3,280
)
Cash paid to ADs, franchisees and third parties
 
$
2,112

 
$
5,672

During the six months ended October 31, 2017 and 2016, the Company sold certain assets to ADs and franchisees as follows:
 
 

 
 

Book value of assets sold
 
$
305

 
$
6,529

Gain on sale - revenue deferred
 
18

 
617

loss on sale - loss recognized
 
(12
)
 
(235
)
Notes received
 
(235
)
 
(4,400
)
Long-term obligations and accounts payable assumed by acquiree
 

 
(1,528
)
Cash received from ADs and franchisees
 
$
76

 
$
983


See accompanying notes to condensed consolidated financial statements.

6



LIBERTY TAX, INC. AND SUBSIDIARIES
 
Notes to Condensed Consolidated Financial Statements
 
October 31, 2017 and 2016 (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. All 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
As a seasonal business, the Company works throughout the off season to open new offices, and at the same time, some of our franchisees will choose not to reopen for the next season. Some of these decisions are not made until January each year and the Company expects to report office count information for the quarter ended January 31, 2018 once all offices have been opened for the tax season.
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.

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 six months ended October 31, 2016 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 six months ended October 31, 2016.
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

8



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 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 $0.4 million and $0.3 million in revenues for the three months ended October 31, 2017 and 2016, respectively and $1.4 million and $1.2 million in revenues for the six months ended October 31, 2017 and 2016, respectively.
 


9



(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 October 31, 2017, the Company had unfunded lending commitments for working capital loans to franchisees and ADs of $13.3 million through the end of the current fiscal year.

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 six months ended October 31, 2017 and 2016 was as follows: 
 
 
Three Months Ended October 31,
 
Six Months Ended October 31,
 
 
2017
 
2016
 
2017
 
2016
 
 
(In thousands)
Balance at beginning of period
 
$
10,625

 
$
8,623

 
$
12,020

 
$
8,850

Provision for doubtful accounts
 
2,047

 
1,907

 
3,455

 
3,287

Write-offs
 
(2,773
)
 
(1,512
)
 
(5,723
)
 
(3,083
)
Foreign currency adjustment
 
(50
)
 
(27
)
 
97

 
(63
)
Balance at end of period
 
$
9,849

 
$
8,991

 
$
9,849

 
$
8,991


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 to ADs, and amounts owed to the franchisee by the Company.

10



The allowance for doubtful accounts at October 31, 2017, April 30, 2017 and October 31, 2016, was allocated as follows:
 
 
October 31, 2017
 
April 30, 2017
 
October 31, 2016
 
 
(In thousands)
Impaired:
 
 

 
 
 
 

Notes and interest receivable, net of unrecognized revenue
 
$
13,778

 
$
14,646

 
$
9,595

Accounts receivable
 
10,026

 
11,396

 
6,257

Less amounts due to ADs and franchisees
 
(1,010
)
 
(1,834
)
 
(944
)
Amounts receivable less amounts due to ADs and franchisees
 
$
22,794

 
$
24,208

 
$
14,908

 
 
 
 
 
 
 
Allowance for doubtful accounts for impaired notes and accounts receivable
 
$
8,109

 
$
9,542

 
$
6,333

 
 
 
 
 
 
 
Non-impaired:
 
 

 
 
 
 

Notes and interest receivable, net of unrecognized revenue
 
$
47,203

 
$
33,379

 
$
64,737

Accounts receivable
 
31,824

 
43,327

 
31,710

Less amounts due to ADs and franchisees
 
(7,024
)
 
(23,119
)
 
(8,962
)
Amounts receivable less amounts due to ADs and franchisees
 
$
72,003

 
$
53,587

 
$
87,485

 
 
 
 
 
 
 
Allowance for doubtful accounts for non-impaired notes and accounts receivable
 
$
1,740

 
$
2,478

 
$
2,658

 
 
 
 
 
 
 
Total:
 
 
 
 
 
 
Notes and interest receivable, net of unrecognized revenue
 
$
60,981

 
$
48,025

 
$
74,332

Accounts receivable
 
41,850

 
54,723

 
37,967

Less amounts due to ADs and franchisees
 
(8,034
)
 
(24,953
)
 
(9,906
)
Amounts receivable less amounts due to ADs and franchisees
 
$
94,797

 
$
77,795

 
$
102,393

 
 
 
 
 
 
 
Total allowance for doubtful accounts
 
$
9,849

 
$
12,020

 
$
8,991


The Company’s average investment in impaired receivables during the six months ended October 31, 2017 and 2016 was $23.5 million and $16.8 million, respectively.
 
Analysis of Past Due Receivables

The breakdown of accounts and notes receivable past due at October 31, 2017 was as follows:
 
 
Past due
 
Current
 
Interest receivable, net
 
Total
receivables
 
 
(In thousands)
Accounts receivable
 
$
36,789

 
$
5,061

 
$

 
$
41,850

Notes and interest receivable, net (1)
 
11,322

 
46,172

 
3,487

 
60,981

Total accounts, notes and interest receivable, net
 
$
48,111

 
$
51,233

 
$
3,487

 
$
102,831

(1) Interest receivable is shown net of an allowance for uncollectible interest of $2.4 million.
 

11



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 $11.3 million, $7.0 million and $11.5 million at October 31, 2017, April 30, 2017, and October 31, 2016, 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 three and six months ended October 31, 2017 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 three and six months ended October 31, 2017 were as follows (in thousands):

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

 
$
1,700

 
$

 
$
2,055

Contract termination costs - impairment
 

 

 
549

 
549

Property and intangible impairments and exit costs
 
236

 
30

 
292

 
558

Employee termination costs
 
182

 
27

 

 
209

Total
 
$
773

 
$
1,757

 
$
841

 
$
3,371


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 six months ended October 31, 2017 and 2016 were as follows:
 
 
October 31, 2017
 
October 31, 2016
 
 
(In thousands)
Balance at beginning of period
 
$
8,576

 
$
4,228

Acquisitions of assets from franchisees and others
 
29

 

Disposals and foreign currency changes, net
 
(125
)
 
(104
)
Purchase price reallocation
 
(1,032
)
 

Balance at end of period
 
$
7,448

 
$
4,124

Components of intangible assets were as follows as of October 31, 2017, April 30, 2017 and October 31, 2016:

12



 
 
October 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
 
5 years
 
$
3,188

 
$
(1,224
)
 
$
1,964

Tradenames
 
3 years
 
431

 
(100
)
 
331

Non-compete agreements
 
2 years
 
241

 
(85
)
 
156

Assets acquired from franchisees:
 
 
 
 
 
 
 
 
Customer lists
 
4 years
 
1,212

 
(1,011
)
 
201

Reacquired rights
 
2 years
 
946

 
(926
)
 
20

AD rights
 
9 years
 
29,260

 
(8,903
)
 
20,357

Total intangible assets
 
 
 
$
35,278

 
$
(12,249
)
 
$
23,029


 
 
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


 
 
October 31, 2016
 
 
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

 
$
(478
)
 
$
549

Assets acquired from franchisees:
 
 
 
 
 
 
 
 
Customer lists
 
4 years
 
1,323

 
(605
)
 
718

Reacquired rights
 
2 years
 
466

 
(444
)
 
22

AD rights
 
10 years
 
21,790

 
(6,113
)
 
15,677

Total intangible assets
 
 
 
$
24,606

 
$
(7,640
)
 
$
16,966

The Company acquired $2.8 million of AD rights during the six months ended October 31, 2017. The Company did not acquire any AD rights during the six months ended October 31, 2016.
During the six months ended October 31, 2017 and October 31, 2016, 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 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 October 31, 2017.

13




(5) Assets Held For Sale

At the end of the second quarter of fiscal 2018 and 2017, assets acquired from U.S. franchisees were classified as assets held for sale. During the six months ended October 31, 2017, the Company acquired $5.2 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 $2.6 million and goodwill of $2.6 million prior to being recorded as assets held for sale. During the six months ended October 31, 2016, the Company acquired $13.6 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 $6.5 million and goodwill of $7.1 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 six months ended October 31, 2017 and 2016 were as follows:
 
Six Months Ended October 31,
 
2017
 
2016
 
(In thousands)
Balance at beginning of period
$
11,989

 
$
9,886

Reacquired and acquired from third parties
5,231

 
13,647

Sold or terminated, impairments and other
(1,047
)
 
(5,450
)
Balance at end of period
$
16,173

 
$
18,083


During fiscal 2017, 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 of $21.2 million and a revolving credit facility that currently allows borrowing of up to $203.8 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 six months ended October 31, 2017 and 2016 was 2.91% and 2.16%, 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 October 31, 2017

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.

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 October 31, 2017, 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.

14



Long-term obligations at October 31, 2017, April 30, 2017, and October 31, 2016 consisted of the following:
 
 
October 31, 2017
 
April 30, 2017
 
October 31, 2016
 
 
(In thousands)
Credit Facility:
 
 

 
 
 
 

Revolver
 
$
60,950

 
$

 
$
66,635

Term loan, net of debt issuance costs
 
15,898

 
17,471

 
17,983

Total credit facility
 
76,848

 
17,471

 
84,618

 
 
 
 
 
 
 
Long-Term Obligations
 
 
 
 
 
 
   Term loan, net of debt issuance costs
 
15,898

 
17,471

 
17,983

   Due former ADs, franchisees and third parties
 
4,414

 
6,568

 
2,748

   Mortgages
 
2,100

 
2,160

 

 
 
22,412

 
26,199

 
20,731

   Less: current installments
 
(5,306
)
 
(7,738
)
 
(3,663
)
Long-term obligations
 
$
17,106

 
$
18,461

 
$
17,068


(7) Income Taxes
 
The Company computes its provision for, or benefit from, income taxes by applying the estimated annual effective tax rate to income or loss from recurring operations and adjusting for the effects of any discrete income tax items specific to the period.

(8) Stockholders’ Equity

Stockholders' Equity Activity
During the six months ended October 31, 2017 and 2016, activity in stockholders’ equity was as follows:
 
 
Six Months Ended October 31,
 
 
2017
 
2016
 
 
(in thousands, except for share amounts)
Class A common stock issued from the vesting of restricted stock and as director compensation
 
33,922

 
18,800

Class B common stock converted to Class A common shares
 

 
700,000

Class A common stock repurchased
 

 
3,118

 
 
 
 
 
Proceeds from exercise of stock options
 
$
95

 
$

Stock-based compensation expense
 
$
1,973

 
$
1,061

Repurchase of common stock
 

 
39

Tax benefit of stock option exercises
 
$

 
$
(394
)
Dividends declared
 
$
4,590

 
$
4,448


During the six months ended October 31, 2016, 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.


15



Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss at October 31, 2017, April 30, 2017 and October 31, 2016 were as follows.
 
 
October 31, 2017
 
April 30, 2017
 
October 31, 2016
 
 
(In thousands)
Foreign currency adjustment
 
$
(1,380
)
 
$
(2,059
)
 
$
(1,850
)
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 loss on interest rate swap agreement, net of taxes
 
(13
)
 
(25
)
 

Total accumulated other comprehensive loss
 
$
(1,393
)
 
$
(2,084
)
 
$
(1,850
)

Net Loss per Share
 
Net loss per share of Class A and Class B common stock is computed using the two-class method. Basic net 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 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 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.
 
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 six months ended October 31, 2017 and 2016 is as follows:
 
 
Three Months Ended 
 October 31, 2017
 
Three Months Ended 
 October 31, 2016
 
 
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
 
$
(12,900
)
 
$
(203
)
 
$
(9,172
)
 
$
(170
)
Denominator
 
 
 
 
 
 
 
 
Weighted-average common stock outstanding
 
12,703,626

 
200,000

 
12,667,172

 
234,783

 
 
 
 
 
 
 
 
 
Basic and diluted net loss per share
 
$
(1.02
)
 
$
(1.02
)
 
$
(0.72
)
 
$
(0.72
)

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 1,067,327 and 1,180,412 shares for the three months ended October 31, 2017 and 2016, respectively, because the effect would be anti-dilutive.


16



 
 
Six Months Ended 
 October 31, 2017
 
Six Months Ended 
 October 31, 2016
 
 
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
 
$
(22,506
)
 
$
(355
)
 
$
(18,292
)
 
$
(480
)
Denominator
 
 
 
 
 
 
 
 
Weighted-average common stock outstanding
 
12,693,088

 
200,000

 
12,568,999

 
329,348

 
 
 
 
 
 
 
 
 
Basic and diluted net loss per share
 
$
(1.77
)
 
$
(1.77
)
 
$
(1.46
)
 
$
(1.46
)

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 1,362,807 and 1,191,785 shares for the six months ended October 31, 2017 and 2016, 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 October 31, 2017, 943,873 shares of Class A common stock remain available for grant.
Stock option activity during the six months ended October 31, 2017 was as follows:
 
 
Number of
options
 
Weighted
average
exercise price
Balance at beginning of period
 
1,387,331

 
$
18.02

Granted
 
188,088

 
14.30

Exercised
 
(9,000
)
 
10.51

Expired or forfeited
 
(91,353
)
 
14.12

Balance at end of period
 
1,475,066

 
$
17.83


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 six months ended October 31, 2017 was less than $0.1 million. The total intrinsic value of stock options outstanding at October 31, 2017 was $0.2 million. Stock options vest from six months to five years from the date of grant and expire from four to five years after the vesting date.
Nonvested stock options activity during the six months ended October 31, 2017 was as follows: 
 
 
Nonvested
options
 
Weighted
average
exercise price
Balance at beginning of period
 
678,118

 
$
15.88

Granted
 
188,088

 
14.30

Vested
 
(523,119
)
 
13.58

Forfeited
 
(18,000
)
 
10.51

Balance at end of period
 
325,087

 
$
18.95

 

17



The termination of the Company's CEO resulted in the vesting of 340,071 options. At October 31, 2017, unrecognized compensation costs related to nonvested stock options were $1.2 million. These costs are expected to be recognized through fiscal 2021.
The following table summarizes information about stock options outstanding and exercisable at October 31, 2017:
 
 
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
 
 
 
 
 
$10.50 - $15.00
 
794,647

 
$
13.44

 
5.2
 
606,559

 
$
13.19

$15.01 - $19.75
 
284,616

 
17.93

 
2.5
 
266,616

 
17.96

$19.76 - $29.48
 
330,387

 
25.22

 
4.0
 
231,387

 
25.25

$29.48 - $33.38
 
65,416

 
33.38

 
4.0
 
45,417

 
33.38


 
1,475,066

 
$
15.96

 

 
1,149,979

 
$
17.52


Restricted Stock Units
 
Restricted stock activity during the six months ended October 31, 2017 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
 
75,694

 
14.05

Vested
 
(44,516
)
 
14.87

Forfeited
 
(33,890
)
 
13.35

Balance at end of period
 
173,684

 
$
13.63

 
At October 31, 2017, unrecognized compensation costs related to restricted stock units were $1.9 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 October 31, 2017, April 30, 2017 and October 31, 2016, 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):

18



 
 
October 31, 2017
 
 
 
 
Fair value measurements using
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 

 
 

 
 

Nonrecurring:
 
 

 
 

 
 

 
 

Impaired accounts and notes receivable, net of unearned revenue
 
$
15,695

 

 

 
$
15,695

 
 

 


 

 

Liabilities:
 
 

 
 

 
 

 
 

Recurring:
 
 

 
 

 
 

 
 

Contingent consideration included in obligations due to former ADs, franchisees and others
 
$
3,405

 
$

 
$

 
$
3,405

Interest rate swap agreement
 
22

 

 
22

 

Total recurring liabilities
 
$
3,427

 
$

 
$
22

 
$
3,405

 
 

 


 

 


 
 
April 30, 2017
 
 
 
 
Fair value measurements using
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 

 
 

 
 

Recurring:
 
 

 
 

 
 

 
 

Cash equivalents
 
$
10,393

 
$
10,393

 
$

 
$

Total recurring assets
 
10,393

 
10,393

 

 

Nonrecurring:
 
 

 
 

 
 

 
 

Impaired accounts and notes receivable, net of unearned revenue
 
16,500

 

 

 
16,500

Impaired goodwill
 
94

 

 

 
94

Impaired customer lists
 
18

 

 

 
18

Assets held for sale
 
11,989

 

 

 
11,989

Total nonrecurring assets
 
28,601

 

 

 
28,601

Total recurring and nonrecurring assets
 
$
38,994

 
$
10,393

 
$

 
$
28,601

 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

Recurring:
 
 

 
 

 
 

 
 

Contingent consideration included in obligations due to former ADs, franchisees and others
 
$
3,215

 

 
$

 
$
3,215

Total recurring liabilities
 
$
3,215

 
$

 
$

 
$
3,215



19




 
 
October 31, 2016
 
 
 
 
Fair value measurements using
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 

 
 

 
 

Nonrecurring:
 
 

 
 

 
 

 
 

Impaired accounts and notes receivable, net of unearned revenue
 
$
9,519

 

 

 
$
9,519

Total recurring and nonrecurring assets
 
$
9,519

 
$

 
$

 
$
9,519

Liabilities:
 
 

 
 

 
 

 
 

Recurring:
 
 

 
 

 
 

 
 

Contingent consideration included in obligations due to former ADs, franchisees and others
 
$
798

 

 

 
798

Total recurring liabilities
 
$
798

 
$

 
$

 
$
798


The Company’s policy is to recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. There were no transfers into or out of level 1 or 2 requiring fair value measurements for each of the six months ended October 31, 2017 and 2016.

The following methods and assumptions are used to estimate the fair value of our financial instruments.
 
Cash equivalents: The carrying amounts approximate fair value because of the short maturity of these instruments. Cash equivalent financial instruments consist of money market accounts.

Impaired accounts and notes receivable, net of unearned revenue: Accounts and notes receivable are considered to be impaired if the net amounts due exceed the fair value of the underlying franchise or if management considers it probable that all principal and interest will not be collected when contractually due. In establishing the estimated fair value of the underlying franchise, consideration is given to recent sales between franchisees, sales of Company-owned stores, the net fees of open offices, and the number of unopened offices.

Impaired goodwill, reacquired rights, and customer lists: Goodwill, reacquired rights and customer lists associated with a Company-owned office are considered to be impaired if the net carrying amount exceeds the fair value of the underlying office. In establishing the fair value of the underlying office, consideration is given to the related net fees and third-party transactions of frachisees and when appropriate a discounted cash flow model.

Assets held for sale: Assets held for sale are recorded at the lower of the carrying value or the sales price, less costs to sell, which approximates fair value. The sales price is calculated as a percentage of prior year net fees and marketplace transactions.

Contingent consideration included in obligations due to former ADs, franchisee and others: Obligations due to former ADs and franchisees related to estimated contingent consideration are carried at fair value. The fair value of these obligations was determined using a discounted cash flow model.

Interest rate swap agreement: Value of interest rate swap on variable rate mortgage debt. The fair value of this instrument was determined based on third-party market research.

Other Fair Value Measurements

Additionally, accounting standards require the disclosure of the estimated fair value of financial instruments that are not recorded at fair value. For the financial instruments that the Company does not record at fair value, estimates of fair value are made at a point in time based on relevant market data and information about the financial instrument. No readily available market exists for a significant portion of the Company's financial instruments. Fair value estimates for these instruments are based on current economic conditions, interest rate risk characteristics, and other factors. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision. Therefore, the calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. In addition, changes in assumptions could significantly affect these fair value

20



estimates. The following methods and assumptions were used by the Company in estimating fair value of these financial instruments.

Notes receivable: The carrying amount approximates fair value because the interest rate charged by the Company on these notes approximates rates currently offered by local lending institutions for loans of similar terms to individuals/entities with comparable credit risk (Level 3).

Long-term obligations: The carrying amount approximates fair value because the interest rate paid has a variable component (Level 2).

(11) Related Party Transactions

The Company considers directors and their affiliated companies, as well as named executive officers and members of their immediate families, to be related parties.
During fiscal 2017, the Company entered into a three-year contract to purchase a license for the use of Canadian tax software at a price of $0.9 million from a company in which it has an investment accounted for under the equity method. One of the former members of the Company's Board of Directors is affiliated with the company providing this service.
Nicole Ossenfort’s (Chief Executive Officer) franchise and AD agreements

The Company is or was a participant in the following related party transactions with Ms. Ossenfort since the beginning of fiscal 2018:

Ossenfort Franchise. Ms. Ossenfort, together with her husband, Scott Ossenfort (together, with Ms. Ossenfort, the
“Ossenforts”), jointly own a Company franchise through JL Enterprises. JL Enterprises borrows operating funds for working capital to operate the franchise each year. During the six months ended October 31, 2017, JL Enterprises did not borrow operating funds for working capital to operate the franchise. During the six months ended October 31, 2017, the Company has recorded $39,456 of accounts receivable from the Ossenforts for royalties, advertising and financial product charges, of which a balance of $10,931 remained outstanding and payable to the Company as of October 31, 2017.

Ossenfort AD. In January 2012, the Ossenforts acquired AD territories covering Western South Dakota and Western Nebraska from the Company. On September 6, 2017, the Company entered into an agreement to reacquire the AD territories from the Ossenforts for $268,000of which $198,000 consisted of debt forgiveness on the note, with a balance of $34,852 payable to the Ossenforts on July 1, 2018.

During the six months ended October 31, 2017, the Company recorded $166 of accounts receivable from the Ossenforts for new franchise leads and interest, which along with prior year accounts receivable balances were forgiven as a part of the agreement to re-acquire the AD territories. The Ossenforts earned $10,814 for their portion of franchise fees, royalties and interest during the six months ended October 31, 2017.

Shaun York’s (Chief Operating Officer) franchises and AD agreements

The Company is or was a participant in the following related party transactions with Mr. York since the beginning of fiscal 2018:

York Franchises. Mr. York operates eleven Company franchises through Yorkompany LLC, S&P Holding Group LLC, My Business Group LLC and Core Fitness Partners LLC (the “York Franchise Entities”). The York Franchise Entities borrow operating funds from the Company for working capital to operate the franchises each year. During the six months ended October 31, 2017, the York Franchise Entities borrowed operating funds in the amount of $72,101, of which $61,278 remained outstanding and payable to the Company as of October 31, 2017. In addition, during the six months ended October 31, 2017, the Company recorded $90,531 of accounts receivable from the York Franchise Entities for royalties, advertising and financial product charges, of which $37,087 remained outstanding and payable to the Company as of October 31, 2017.

York AD. Mr. York has Area Development arrangements with the Company that are conducted through Yorkompany LLC, S&P Holding Group LLC and TNT Florida Investments LLC (the “York AD Entities”). The York AD Entities were acquired by Mr. York through various transactions with the Company and through third party agreements with AD sellers. In connection with those transactions, the York AD Entities financed a total of $4,059,460 through the Company to acquire the Area Development territories and associated rights. The loans are payable by the York AD Entities in annual installments at

21



12% interest. As of October 31, 2017, the aggregate outstanding principal balance owed by the York AD Entities on the notes was $1,946,635.

During the six months ended October 31, 2017, the Company recorded $13,770 of accounts receivable from the York AD Entities for new franchise leads and interest, of which $2,430 remains unpaid as of October 31, 2017. The York AD Entities earned $150,926 for their portion of franchise fees, royalties and interest during the six months ended October 31, 2017.

York Debt Guarantees. Mr. York also has entered into multiple guarantee agreements with the Company whereby Mr. York has guaranteed all or a portion of the indebtedness owed by other franchisees and ADs to the Company as related to certain financial transactions for which Mr. York had an interest. The indebtedness owed by these franchisees and ADs as of October 31, 2017 is approximately $3,536,379.

John Seal’s (Director) AD agreement

The Company is or was a participant in the following related party transactions with Mr. Seal since the beginning of fiscal 2018:

JMS Tax, an entity controlled by John Seal, a former director of the Company, owns an AD territory in Texas which a portion of the purchase price was financed through a note issued by the Company. The outstanding principal balance on the note was $223,384 as of October 31, 2017.

During the six months ended October 31, 2017, the Company recorded $14,567 of accounts receivable from JMS Tax for new franchise leads and interest of which $4,860remains unpaid as of October 31, 2017. JMS Tax earned $20,114 for their portion of franchise fees, royalties and interest during the six months ended October 31, 2017.

(12) Commitments and Contingencies

In the ordinary course of operations, the Company may become a party to legal proceedings. Based upon information currently available, management believes that such legal proceedings, individually or in the aggregate, will not have a material adverse effect on the Company's business, financial condition, cash flows, or results of operations except as provided below.
    
Delaware Derivative Litigation

Asbestos Workers’ Philadelphia Pension Fund, derivatively on behalf of Liberty Tax, Inc., v. John Hewitt, Defendant, and Liberty Tax, Inc., Nominal Defendant, Case No. 2017-0883, filed in the Court of Chancery of the State of Delaware on December 12, 2017. Plaintiff alleges that the Company's former CEO, John T. Hewitt (“Hewitt”), breached his fiduciary duties as an officer based upon certain allegations of misconduct on his part. The Plaintiff also alleges breach of fiduciary duty against Hewitt in his capacity as a director of LT, Inc. The Complaint seeks compensatory damages and attorney’s fees. No claim or relief is asserted against the Company, which is named solely as a Nominal Defendant.

Erie County Employees Retirement System, derivatively on behalf of Liberty Tax, Inc. , v. John T. Hewitt, Defendant, and Liberty Tax, Inc., Nominal Defendant, Case No. 2017-0914, brought a second derivative suit filed in the Court of Chancery of the State of Delaware on December 22, 2017. Plaintiff also alleges that Hewitt breached his fiduciary duties as an officer based upon certain allegations of misconduct on his part. The Plaintiff also alleges breach of fiduciary duty against Hewitt in his capacity as a director of the Company. The Complaint seeks to enjoin Hewitt from managing our business operations, and seeks compensatory damages and attorney’s fees.

On December 27, 2017, the two above-referenced shareholder matters were consolidated into the case with the caption In Re: Liberty Tax, Inc. Stockholder Litigation, C.A. No. 2017-0883. On April 17, 2018, Plaintiffs filed an amended complaint (the “Amended Complaint”). The Amended Complaint added Gordon D’Angelo, Ellen McDowell, Nicole Ossenfort, and John Seal, with Hewitt as individual defendants (the “Individual Defendants”) and asserted class action allegations. Plaintiff seeks (i) a declaration that the Individual Defendants have breached the Company’s Nominating Charter; (ii) a declaration that the Individual Defendants have breached their fiduciary duties; (iii) an award to the Plaintiffs and the Class in the amount of damages sustained as a result of the Individual breaches; (iv) certification of the action as a class action; (v) an award to the Company in the amount of damages sustained as a result of the Individual Defendants’ breaches of their fiduciary duties; (vi) a grant of further appropriate equitable relief to remedy the Individual Defendants’ breaches, including injunctive relief; (vii) an award to Plaintiffs of the costs and disbursements of this action, including reasonable attorneys’ fees, accountants’ and experts’ fees, costs and expenses; and (viii) such further relief as the Court deems just and proper. The Company has answered the Amended Complaint and discovery is underway. The individuals have filed a notice of motion to dismiss. No briefing schedule

22



has been set on the motion. A scheduling order has been entered which currently schedules trial in this matter to begin on March 18, 2019.

Eastern District of New York Securities Litigation

Rose Mauro, individually and on behalf of all others similarly situated v. Liberty Tax, Inc., Edward L. Brunot, John T. Hewitt, and Kathleen E. Donovan, filed in the United States District Court for the Eastern District of New York on January 12, 2018, Case No. 18 CV 245. Plaintiff filed a securities class action asserting violations of Section 10(b) of the Exchange Act of 1934, as amended (the"Exchange Act") and Rule 10b-5 against all defendants and a second count for violations of Section 20(a) of the Exchange Act against the individual defendants. According to the complaint, throughout the class period, LT, Inc. allegedly issued materially false and misleading statements and/or failed to disclose that: (1) Hewitt created an inappropriate tone at the top; (2) the inappropriate tone at the top led to ineffective entity level controls over the organization; and (3) as a result, defendants’ statements about the operations and prospects were materially false and misleading and/or lacked a reasonable basis at all relevant times.

Patrick Beland, individually and on behalf of all others similarly situated vs. Liberty Tax, Inc., Edward L. Brunot, John T. Hewitt, and Kathleen E. Donovan, filed in the United States District Court for the Eastern District of New York on December 15, 2017, case number 17 CV 7327. Plaintiff filed a securities class action asserting violations of Section 10(b) of the Exchange Act and Rule 10b-5 against all defendants and a second count for violations of Section 20(a) of the Exchange Act against the individual defendants. According to the complaint, throughout the class period, LT, Inc. allegedly issued materially false and misleading statements and/or failed to disclose that: (1) Hewitt created an inappropriate tone at the top; (2) the inappropriate tone at the top led to ineffective entity level controls over the organization; and (3) as a result, defendants’ statements about the business, operations and prospects were materially false and misleading and/or lacked a reasonable basis at all relevant times.

These actions were consolidated with the caption In Re Liberty Tax, Inc. Securities Litigation, Case No. 27 CV 07327 and IBEW Local 98 Pension Fund was appointed the Lead Plaintiff ("Lead Plaintiff"). On June 12, 2018, Lead Plaintiff filed its Consolidated Amended Class Action Complaint, which removed Brunot as a defendant, and added additional securities claim based on Section 14(a) of the Exchange Act and Rules 14-a3 and 14-a9. The Consolidated Amended Class Action Complaint, among other things, asserts that the Company’s SEC filings over a multi-year period failed to disclose the alleged misconduct of the individual defendants and that disclosure of the alleged misconduct caused the Company’s stock price to drop and, thereby harm the purported class of shareholders. The Class Period is alleged to be October 1, 2013 through February 23, 2018. Defendants filed a joint motion to dismiss the Consolidated Amended Class Action Complaint on September 17, 2018. Lead Plaintiff will file its opposition within forty-five (45) days thereafter, and Defendants will have twenty-one (21) days to file their reply brief(s).

Eastern District of Virginia Securities and Derivative Litigation

RSL Senior Partners LLC, derivatively and on behalf of Liberty Tax, Inc. v. Edward L. Brunot, John T. Hewitt, Kathleen E. Donovan, Gordon D’Angelo, John Garel, Thomas Herskovits, Robert M. Howard, Ross N. Longfield. Steven Ibbotson, Ellen M. McDowell, Nicole Ossenfort, George Robson and John Seal and Liberty Tax. Inc. (Nominal Defendant), Case No. 18 cv 127, filed  on March 7, 2018 in the United States District Court for the Eastern District of Virginia. This shareholder derivative action was filed on behalf of the Company seeking to address the alleged wrongs of the Company's directors and officers. The complaint alleges that certain conduct created an inappropriate tone at the top, which resulted in the loss of key executives, employees, directors and otherwise harmed the Company. The complaint asserts claims under Section 14(a) of the Exchange Act, 10b and 10b-5 and 20(a) of the Exchange Act, breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. The Complaint seeks the following relief: (a) declaring that Plaintiff may maintain this action on behalf of the Company, and that Plaintiff is an adequate representative of the Company; (b)  declaring that the Individual Defendants have breached and/or aided and abetted the breach of their fiduciary duties to the Company; (c)  determining and awarding to the Company the damages sustained by it as a result of the violations set forth above from each of the Individual Defendants, jointly and severally, together with pre-judgment and post-judgment interest thereon;  (d)  directing the Company and the Individual Defendants to take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable laws and to protect the Company and its shareholders from a repeat of the damaging events described herein, including, but not limited to, putting forward for shareholder vote the following resolutions for amendments to the Company’s Bylaws or Articles of Incorporation and the following actions as may be necessary to ensure proper corporate governance policies: (1) a proposal to strengthen the Board’s supervision of operations and develop and implement procedures for greater shareholder input into the policies and guidelines of the board; (2) a provision to permit the Class A shareholders of the Company to nominate at least five candidates for election to the board;  (3) a proposal to ensure the establishment of effective oversight of compliance with applicable laws, rules, and regulations; (4)  a

23



proposal to revise the Code of Conduct to include provisions prohibiting sexual harassment and discrimination, and governing the maintenance and disclosure of sexual and romantic relationships between individuals associated with the Company. (e) awarding the Company restitution from Individual Defendants, and each of them; (f) awarding Plaintiff the costs and disbursements of this action, including reasonable attorneys’ and experts’ fees, costs, and expenses; and (g) granting such other and further relief as the Court may deem just and proper.

No claim or relief is asserted against the Company, which is named solely as a Nominal Defendant.

On July 30, 2018, various motions were filed: (i) Defendants Hewitt, McDowell, Ossenfort and Seal collectively moved to dismiss the Complaint; (ii) Defendants Garel, Herskovits, Howard, Ibbotson, Longfield, and Robson collectively moved to dismiss the Complaint; (iii) Defendants Brunot and Donovan collectively moved to dismiss the Complaint; (iv) Company moved to stay the action pending resolution of parallel state (Delaware) and/or federal (New York) proceedings. Plaintiff’s oppositions are due by August 31, 2018. Defendants’ replies to Plaintiff’s oppositions were filed on September 10, 2018.

Franchise Litigation

JTH Tax, Inc. and SiempreTax LLC v. Gregory Aime, Aime Consulting, LLC, Aime Consulting, Inc. and Wolf Ventures, Inc. The Company filed suit in the United States District Court for the Eastern District of Virginia against the defendants, former Company franchisees, on June 9, 2016, as amended on June 22, 2016, claiming the defendants breached the purchase and sale agreement (the “PSA”) entered between the parties on January 21, 2016 and that the defendants had failed to comply with the post termination obligations of the franchise agreements (together with the PSA, the “Aime Agreements”). The Company sought damages in an amount equal to three times the defendants’ earnings and profits, as well as injunctive relief to enforce the defendants to comply with the post termination obligations of the Aime Agreements, to be determined by the trier of fact. The Company specifically sought, in part, to enjoin the defendants from continued operation of a tax preparation business using the Company’s protected trademarks, enforcement of the non-compete provision of the Aime Agreements, and an order that the defendants assign all of the leases related to the franchised businesses to the Company. On July 1, 2016, the Magistrate Judge issued a report and recommendation finding a likelihood of success on the merits and recommending entry of the requested temporary restraining order (the “TRO”) in favor of the Company, which was adopted in part on August 3, 2016. On September 9, 2016, the defendants filed an answer and counterclaim against the Company, alleging breach of the PSA, breach of the implied covenant of good faith and fair dealing and fraud and seeking approximately $2.4 million in damages, plus future loss profits, punitive damages and other expenses.  After a three-day bench trial, on January 13, 2017, the court vacated the TRO, finding in favor of the defendants.  On February 15, 2017, the court issued its written opinion and order granting the defendants’ breach of contract and breach of the implied covenant of good faith and fair dealing claims, denying the Company’s claims against the defendants and finding certain post termination obligations to be unenforceable. Judgment was entered in favor of the defendants for approximately $2.7 million. The Company accrued $2.7 million as of the fourth quarter of fiscal 2017 in connection with the judgment, which is recorded in "Accounts payable and accrued expense" in the accompanying consolidated balance sheets. The Company has filed an appeal of the judgment with the Fourth Circuit Court of Appeals.

On August 8, 2018, the Fourth Circuit Court of Appeals issued an unpublished opinion affirming in part, vacating in part, and remanding to the District Court with instructions via the opinion. The Court of Appeals affirmed the District Courts finding that the Company breached the PSA first, however, the Court of Appeals concluded the District Court erred as a matter of law when it determined that Aime was entitled to lost profits based on the purported extension of the PSA buyback deadline. The Court of Appeals held the alleged extension was not supported by independent consideration and thus not enforceable. It remanded the case for the District Court to recalculate damages consistent with said opinion.

On August 23, 2018, the defendants filed a petition for rehearing of the Fourth Circuit's decision. On September 5, 2018 the Fourth Circuit issued an order denying the petition for rehearing. On September 13, 2018 the Fourth Circuit issued a mandate that the judgment of the Fourth Circuit entered August 8, 2018 takes effect as of the same date of said filing. The matter has now officially be sent back to the District Court to recalculate damages consistent with the Fourth Circuit’s decision. The ultimate outcome of this action and the timing of such outcome is uncertain and there can be no assurance that the Company will benefit financially from such litigation.

Class Action Litigation

Broward Psychology P.A., v. JTH Tax, Inc. (Case 0:18-cv-60412). On February 26, 2018, a class action complaint was filed in the U.S. District Court for the Southern District of Florida by an individual plaintiff for itself and on behalf of all other “similarly situated” persons. The Complaint alleges, among other things, that from March 10, 2014 to 2018, the Company allegedly

24



violated the Telephone Consumer Protection Act of 1991, as amended by the Junk Fax Prevention Act of 2005 (collectively, the “TCPA”), by sending a facsimile advertisement to plaintiff and other putative class members that either were unsolicited and/or did not contain a valid opt-out notice. The complaint seeks certification of the lawsuit as a class action and the award to class members of the greater of actual damages or the sum of $500 for each violation and injunctive and other relief. Under the TCPA, the statutory remedy of $500 per violation may be trebled (i.e., $1,500 per violation) if the court finds the violations to be willful or knowing. On March 30, 2018 the Company filed a dispositive motion arguing that Plaintiff lacked Article III standing to sue Company. By Order dated August 21, 2018, the Court denied the Company’s motion. The Company plans on filing a motion for reconsideration of the Court’s August 21, 2018 Order. Discovery in the case is proceeding. A mediation was held on September 20, 2018 and the case was settled.

Rene Labrado v. JTH Tax, Inc. (Case BC 715076). On July 3, 2018, a class action complaint was filed in the Superior Court of California, County of Los Angeles by a former employee for herself and on behalf of all other “similarly situated” persons. The Complaint alleges, among other things, that the Company allegedly violated various provisions of the California Labor Code, including: unpaid overtime, unpaid meal period premiums, unpaid rest premiums, unpaid minimum wages, final wages not timely paid, wages not timely paid, non-compliant wage statements, failure to keep pay records, unreimbursed business expenses and violation of California Business and Profession Code Section 17200. The Complaint seeks actual, consequential and incidental losses and damages, injunctive relief and other damages. The Company highly contest the allegations set forth in the Complaint and plans on filing a dispositive motion. The Company intends to defend the case vigorously.

The Company is also party to claims and lawsuits that are considered to be ordinary, routine litigation incidental to the business, including claims and lawsuits concerning the preparation of customers' income tax returns, the fees charged to customers for various products and services, relationships with franchisees, intellectual property disputes, employment matters, and contract disputes. Although the Company cannot provide assurance that it will ultimately prevail in each instance, it believes the amount, if any, it will be required to pay in the discharge of liabilities or settlements in these claims will not have a material adverse impact on its consolidated results of operations, financial position, or cash flows.

(13) Subsequent Events
    
On November 6, 2017, George Robson provided notice of his retirement from serving on the Board of the Company, effective immediately. Thomas Herskovits and Robert Howard were both removed from the Board of the Company pursuant to unanimous written consent by John T. Hewitt, the sole holder of Class B common stock and Chairman of the Board. Mr. Hewitt also appointed Nicole Ossenfort and John Seal to the Board.

On November 7, 2017, Kathleen Donovan, Vice President and Chief Financial Officer of the Company provided notice of her resignation, effective at a future date. In accordance with her employment and retention agreements, the Company recorded a charge of $0.9 million in the third quarter of fiscal 2018 with $0.2 million still to be paid in December 2018.

On December 5, 2017, the Board of Directors approved a quarterly cash dividend to stockholders of $0.16 per share payable on or about January 23, 2018 to holders of record of common stock and common stock equivalents on January 12, 2018.

On December 8, 2017, KPMG resigned as the independent registered public accounting firm of the Company, effective immediately.

On December 13, 2017, the Company received a notice from Nasdaq stating that because the Company has not yet filed its Form 10-Q for the quarter ended October 31, 2017, the Company was no longer in compliance with Nasdaq Listing Rule 5250(c)(1), which requires timely filing of periodic reports with the SEC.

On December 14, 2017, the Company announced the appointment of Nicholas E. Bates as Chief Financial Officer, effective January 1, 2018.

On December 15, 2017, Steven Ibbotson submitted his resignation from the Board of the Company, effective immediately.

On December 18, 2017, John Garel submitted his resignation from the Board of the Company, effective immediately.

On February 19, 2018, the Board of the Company terminated Edward L. Brunot and replaced him with Nicole Ossenfort, as President and Chief Executive Officer of the Company.  Additionally, the Board appointed Shaun York as Chief

25



Operating Officer and Ryan Dodson as Chief Strategy Officer of the Company. John T. Hewitt, the Chairman of the Board and the sole holder of the Company's Class B common stock, elected G. William Minner, Jr., to the Board effective immediately.  The appointment of Mr. Minner by Mr. Hewitt was to fill the vacancy resulting from the resignation of Nicole Ossenfort as a director at the request of the Board upon her election as President and Chief Executive Officer of the Company. The Company terminated the Independent Contractor Consulting Agreement, dated December 12, 2017, with Kathleen E. Donovan, the Company's former Vice President and Chief Financial Officer.

On February 21, 2018, Ross Longfield submitted his resignation from the Board of the Company, effective March 21, 2018.

On February 23, 2018, Vanessa M. Szajnoga, Vice President and General Counsel of the Company, and Richard G. Artese, Vice President and Chief Information Officer of the Company, each provided the Company with a notice of resignation, effective immediately.

On March 15, 2018, the Board of Directors approved a quarterly cash dividend to stockholders of $0.16 per share payable on or about April 24, 2018 to holders of record of common stock and common stock equivalents on April 12, 2018.

On March 15, 2018, the Company received a notice from the Nasdaq stating that the Company’s failure to file its Form 10-Q for the quarter ended January 31, 2018 constituted an additional delinquency under Nasdaq Listing Rule 5250(c)(1), which requires timely filing of periodic reports with the SEC. 

On March 27, 2018, John T. Hewitt, the Chairman of the Company and the sole holder of the Company’s Class B common stock, elected Thomas Herskovits back to the Board.

On April 18, 2018, the Audit Committee of the Board of Directors of the Company engaged Carr Riggs and Ingram LLC (“CRI”) as its independent registered public accounting firm for the fiscal year ending April 30, 2018.

On May 9, 2018, Nicholas Bates, Vice President and Chief Financial Officer of the Company, provided notice of his resignation which was effective on June 15, 2018. On June 15, 2018, the Company hired Michael S. Piper as Chief Financial Officer.

On May 29, 2018, the Company held a special meeting of stockholders whereby G. William Minner, Jr., Thomas Herskovits, Patrick A. Cozza and Lawrence Miller were elected as Class A Directors to the Company’s Board of Directors. All the elected Directors were considered "independent" for purposes of the Nasdaq Listing Rules. The Board appointed Mr. Minner to serve as a member of each of the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee of the Board, and designated him as Chairman of the Audit Committee. The Board appointed Mr. Herskovits to serve as a member of each of the Audit Committee, the Nominating and Corporate Governance Committee, and the Strategic Planning Committee of the Board, and designated him as Chairman of the Nominating and Corporate Governance Committee and Strategic Planning Committee. The Board appointed Mr. Cozza to serve as a member of the Audit Committee and the Compensation Committee of the Board, and designated him as Chairman of the Compensation Committee. The Board appointed Mr. Miller to serve as a member of each of the Nominating and Corporate Governance Committee, the Compensation Committee and the Risk Committee of the Board, and designated him as Chairman of the Risk Committee.

On May 29, 2018, Mr. Hewitt, the Chairman of the Board and the sole holder of the Company’s Class B common stock, elected Nicole Ossenfort to serve on the Board. The appointment of Ms. Ossenfort by Mr. Hewitt filled a vacancy created by the Board’s reduction of the total number of directors constituting the entire Board of Directors from eleven to nine and the subsequent election of two former Class B Director designees as Class A Directors. The Amended and Restated Certificate of Incorporation of the Company permitted Mr. Hewitt, as the sole owner of all of the Class B common stock, to elect the Class B Director designees. The Board appointed Ms. Ossenfort to serve as a member of the Risk Committee and Strategic Planning Committee of the Board.

On June 5, 2018, CRI provided notice of its resignation as the independent registered public accounting firm of the Company, effective as of the same date. CRI’s decision to resign was not recommended or approved by either the Audit Committee or the Board of Directors of the Company. CRI did not complete any audits of the Company’s financial statements, and, therefore, CRI did not issue an adverse opinion or disclaimer of opinion, and no report was qualified or modified as to uncertainty, audit scope or accounting principles.

On June 28, 2018, the Audit Committee of the Board of Directors of the Company engaged Cherry Bekaert LLP as its independent registered public accounting firm for the fiscal year ended April 30, 2018.

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On July 5, 2018, the Company's Board of Directors approved a cash dividend of $0.16 per share payable on August 10, 2018 to holders of record of common stock and common stock equivalents on July 27, 2018.

On July 18, 2018, the Company entered into a Sixth Amendment to the Revolving Credit and Term Loan Agreement with the lenders and SunTrust Bank, as administrative agent, dated as of April 30, 2012. The Sixth Amendment reduces the Aggregate Revolving Commitment Amount from $193,750,000 to $170,000,000.

On July 24, 2018, the Company announced that Mr. Hewitt entered into a stock purchase agreement, dated July 19, 2018, to sell all of the shares of the Company’s Class A common stock and Class B common stock owned directly and indirectly by him to an unaffiliated third party, Vintage Tributum LP, an affiliate of Vintage Capital Management, LLC (“Vintage”). In connection with the Sale, the shares of the Company’s Class B common stock converted into shares of the Company’s Class A common stock, and no shares of the Company’s Class B common stock remained outstanding. In addition to the Stock Purchase Agreement, Vintage also entered into a stock purchase agreement with other stockholders of the Company to purchase additional shares of Class A common stock of the Company.    

On July 31, 2018, the Company received formal notice from the Nasdaq indicating that the Nasdaq Hearings Panel (the "Panel") had determined to delist the Company’s securities from Nasdaq based upon the Company’s non-compliance with the filing requirements set forth in Nasdaq Listing Rule 5250(c)(1). As a result of the Panel’s decision, Nasdaq suspended trading in the Company’s securities effective at the open of business on Thursday, August 2, 2018, and indicated that it intended to file a Form 25 NSE Notification of Delisting with the SEC once all applicable appeal and review periods have expired in order to effect the formal delisting of the Company’s securities from Nasdaq.

On August 3, 2018, in connection with the Sale, Mr. Hewitt agreed to tender his resignation to the Board and agreed to cause the following members of the Board previously elected to the Board by Mr. Hewitt to tender their resignations to the Board, in each case, effective upon the closing of the Sale: Gordon D’Angelo, Ellen M. McDowell, Nicole Ossenfort and John Seal. Ms. Ossenfort continues to serve as the Company’s President and Chief Executive Officer following her resignation from the Board. Following the Sale, the Company decreased the size of the Board to five members with one vacancy. Also in connection with the Sale and at the request of Vintage, the Company agreed that the Board would take all necessary action to increase the size of the Board to nine directors, resulting in five vacancies. Vintage indicated to the Company its intent to fill the five vacancies in the near term by the written consent of at least a majority of the outstanding shares of the Company’s Class A common stock (the “Written Consent”) and agreed that at least three of the individuals elected to fill the vacancies would, in Vintage’s reasonable judgment, meet the standards necessary for the Board to reasonably determine they are “independent” for purposes of the Nasdaq Listing Rules. The Company’s action to increase the size of the Board to nine directors would become effective on the date immediately prior to the effective date of the Written Consent.
    
On August 9, 2018, the Company received the Written Consent executed by stockholders representing a majority of the outstanding shares of the Company’s Class A common stock electing Brian R. Kahn, Andrew M. Laurence, Matthew Avril, Bryant R. Riley, and Kenneth M. Young as directors of the Company to serve until the Company’s next annual meeting of stockholders and until their successors are duly elected and qualified.

On September 5, 2018, the Company has submitted its appeal of the Panel’s determination to delist the Company’s Class A common stock to the Nasdaq Listing and Review Council. Pending the outcome of the appeal, the Company’s Class A common stock will continue to be quoted on the OTC Market under the symbol “TAXA”.

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ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Special Note Regarding Forward-Looking Statements
 
This quarterly report contains forward-looking statements concerning our business, operations, financial performance, and condition as well as our plans, objectives, and expectations for our business operations and financial performance and condition. Any statements contained herein that are not of historical facts may be deemed to be forward-looking statements. You can identify these statements by words such as “aim,” “anticipate,” “assume,” “believe,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “positioned,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends. These forward-looking statements are based on current expectations, estimates, forecasts, projections about our business and the industry in which we operate, and our management’s beliefs and assumptions. They are not guarantees of future performance or development and involve known and unknown risks, uncertainties, and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this quarterly report may turn out to be inaccurate. Factors that may cause such differences include, but are not limited to, the risks described under "Item 1A—Risk Factors," including:
our inability to grow on a sustainable basis;
the seasonality of our business;
departures of key executives or directors;
our ability to attract additional talent to our senior management team;