JTH - 1.31.2014 10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  
FORM 10-Q
 
ý      Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended January 31, 2014
 
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
 
JTH Holding, 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 ý  No o
 
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 ý  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company x
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No ý
 
The number of shares outstanding of the registrant’s Common Stock, $0.01 par value, at the close of business on March 10, 2014 was 12,155,628 shares.



JTH HOLDING, INC.
 
Form 10-Q for the Period Ended January 31, 2014
 
Table of Contents
 
 
 
Page
 
 
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I 

ITEM 1
FINANCIAL STATEMENTS 

3


JTH HOLDING, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
January 31, 2014 (unaudited), January 31, 2013 (unaudited), and April 30, 2013
(In thousands, except share data)
 
 
January 31, 2014
 
January 31, 2013
 
April 30, 2013
Assets
 
 

 
 
 
 

Current assets:
 
 

 
 
 
 

Cash and cash equivalents
 
$
3,742

 
$
849

 
$
19,013

Receivables (note 2):
 
 

 
 
 
 

Trade accounts
 
43,749

 
31,869

 
41,856

Notes
 
89,566

 
96,933

 
34,156

Interest, net
 
4,887

 
5,433

 
877

Allowance for doubtful accounts
 
(4,636
)
 
(4,649
)
 
(5,583
)
Total receivables, net
 
133,566

 
129,586

 
71,306

Available-for-sale securities (note 3)
 
—

 
—

 
3,619

Income tax receivable
 
8,449

 
12,611

 
3

Deferred income taxes
 
4,442

 
3,144

 
4,232

Other current assets
 
18,527

 
18,675

 
4,960

Total current assets
 
168,726

 
164,865

 
103,133

Property, equipment, and software, net of accumulated depreciation of $21,229, $18,286, and $19,006, respectively
 
37,553

 
31,978

 
33,037

Notes receivable, excluding current portion, net of allowance for uncollectible amounts (note 2)
 
23,645

 
21,356

 
14,352

Goodwill (note 4)
 
6,279

 
5,721

 
5,685

Other intangible assets, net of accumulated amortization of $5,777, $3,847, and $3,998, respectively (note 4)
 
17,645

 
11,620

 
10,921

Other assets, net
 
2,124

 
5,706

 
2,402

Total assets
 
$
255,972

 
$
241,246

 
$
169,530

Liabilities and Stockholders’ Equity
 
 

 
 
 
 

Current liabilities:
 
 

 
 
 
 

Current installments of long-term debt (note 5)
 
$
6,649

 
$
3,488

 
$
3,400

Accounts payable and accrued expenses
 
12,804

 
15,260

 
11,954

Due to area developers (note 2)
 
15,390

 
14,955

 
18,248

Income taxes payable
 
—

 
—

 
5,897

Deferred revenue - short-term portion
 
6,362

 
6,489

 
7,555

Total current liabilities
 
41,205

 
40,192

 
47,054

Long-term debt, excluding current installments (note 5)
 
22,337

 
24,775

 
24,283

Revolving credit facility (note 5)
 
104,592

 
108,105

 
—

Deferred revenue - long-term portion
 
8,510

 
9,935

 
10,381

Liability classified stock-based compensation awards (note 9)
 
—

 
—

 
5,111

Deferred income taxes
 
2,030

 
382

 
865

Total liabilities
 
178,674

 
183,389

 
87,694

Commitments and contingencies (note 12)
 
 

 
 
 
 

Stockholders’ equity (notes 8 and 9):
 
 

 
 
 
 

Class A preferred stock, $0.01 par value per share, 190,000 shares authorized, 0 shares issued and outstanding
 
—

 
—

 
—

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, 12,153,278, 12,078,854, and 11,975,128 shares issued and outstanding, respectively
 
122

 
121

 
120

Class B common stock, $0.01 par value per share, 1,000,000 shares authorized, 900,000 shares issued and outstanding
 
9

 
9

 
9

Exchangeable shares, $0.01 par value, 100,000 shares issued and outstanding
 
1

 
1

 
1

Additional paid-in capital
 
9,053

 
6,752

 
1,920

Accumulated other comprehensive income (loss), net of taxes
 
(129
)
 
810

 
1,194

Retained earnings
 
68,242

 
50,164

 
78,592

Total stockholders’ equity
 
77,298

 
57,857

 
81,836

Total liabilities and stockholders’ equity
 
$
255,972

 
$
241,246

 
$
169,530

See accompanying notes to condensed consolidated financial statements.

4


JTH HOLDING, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three months and nine months ended January 31, 2014 and 2013 (unaudited)
(In thousands, except per share data)
 
 
 
Three Months Ended January 31,
 
Nine Months Ended January 31,
 
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 

 
 

 
 

 
 

Franchise fees
 
$
1,247

 
$
1,698

 
$
3,172

 
$
4,503

Area developer fees
 
1,311

 
1,741

 
4,994

 
5,742

Royalties and advertising fees
 
22,081

 
20,188

 
24,710

 
22,561

Financial products
 
9,864

 
8,039

 
10,482

 
8,510

Interest income (note 2)
 
3,001

 
3,140

 
7,435

 
8,339

Tax preparation fees, net of discounts
 
2,054

 
1,445

 
2,682

 
1,886

Other revenue
 
1,182

 
1,369

 
2,647

 
2,661

Total revenues
 
40,740

 
37,620

 
56,122

 
54,202

Operating expenses:
 
 

 
 

 
 

 
 

Employee compensation and benefits
 
10,318

 
10,285

 
24,603

 
24,566

General and administrative expenses
 
9,121

 
7,857

 
23,131

 
19,783

Area developer expense
 
7,909

 
6,814

 
9,442

 
8,646

Advertising expense
 
5,860

 
7,687

 
11,051

 
12,786

Depreciation, amortization, and impairment charges
 
2,267

 
1,424

 
5,590

 
4,447

Total operating expenses
 
35,475

 
34,067

 
73,817

 
70,228

Income (loss) from operations
 
5,265

 
3,553

 
(17,695
)
 
(16,026
)
Other income (expense):
 
 
 
 
 
 
 
 
Foreign currency transaction gains (losses)
 
(3
)
 
(1
)
 
(15
)
 
3

Gain on sale of available-for-sale securities
 
1,995

 
—

 
2,183

 
—

Interest expense (note 5)
 
(464
)
 
(819
)
 
(1,066
)
 
(1,623
)
Income (loss) before income taxes
 
6,793

 
2,733

 
(16,593
)

(17,646
)
Income tax expense (benefit) (note 7)
 
2,737

 
1,060

 
(6,244
)
 
(6,845
)
Net income (loss)
 
$
4,056

 
$
1,673

 
$
(10,349
)
 
$
(10,801
)
Net income (loss) per share of Class A and Class B common stock:
 
 
 
 
 
 
 
 
Basic
 
$
0.29

 
$
0.12

 
$
(0.80
)
 
$
(0.85
)
Diluted
 
0.28

 
0.12

 
(0.80
)
 
(0.85
)
See accompanying notes to condensed consolidated financial statements.

5


JTH HOLDING, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
Three months and nine months ended January 31, 2014 and 2013 (unaudited)
(In thousands)
 
 
 
Three Months Ended January 31,
 
Nine Months Ended January 31,
 
 
2014
 
2013
 
2014
 
2013
Net income (loss)
 
$
4,056

 
$
1,673

 
$
(10,349
)
 
$
(10,801
)
Interest rate swap agreements, net of taxes of $-, $130, $-, and $225, respectively
 
—

 
213

 
—

 
368

Unrealized gain (loss) on equity securities available for sale, net of taxes of $26, $26, $608, and $67, respectively (note 3)
 
44

 
(42
)
 
975

 
110

Reclassified gain on sale of available-for-sale securities included in income, net of taxes of $803, $-, $821, and $-, respectively (note 3)
 
(1,192
)
 
—

 
(1,362
)
 
—

Foreign currency translation adjustment
 
(839
)
 
(197
)
 
(1,155
)
 
(390
)
Forward contracts related to foreign currency exchange rates (note 6)
 
220

 
46

 
220

 
46

Comprehensive income (loss)
 
$
2,289

 
$
1,693

 
$
(11,671
)
 
$
(10,667
)
 See accompanying notes to condensed consolidated financial statements.

6


JTH HOLDING, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine months ended January 31, 2014 and 2013 (unaudited)
(In thousands)
 
 
 
2014
 
2013
Cash flows from operating activities:
 
 

 
 

Net loss
 
$
(10,349
)
 
$
(10,801
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 

 
 

Provision for doubtful accounts
 
5,886

 
4,581

Depreciation, amortization, and impairment charges
 
5,590

 
4,447

Amortization of deferred financing costs
 
250

 
217

Stock-based compensation expense related to equity classified awards
 
1,394

 
1,232

Stock-based compensation expense related to liability classified awards
 
(872
)
 
—

Gain on bargain purchases and sales of company-owned offices
 
(629
)
 
(178
)
Equity in loss of affiliate
 
173

 
118

Deferred tax expense
 
955

 
4,952

Gain on sale of available-for-sale securities
 
(2,183
)
 
—

Changes in assets and liabilities decreasing cash flows from operating activities
 
(51,065
)
 
(56,383
)
Net cash used in operating activities
 
(50,850
)
 
(51,815
)
Cash flows from investing activities:
 
 

 
 

Issuance of operating loans to franchisees
 
(62,218
)
 
(60,875
)
Payments received on operating loans to franchisees
 
1,532

 
1,536

Purchases of area developer rights, company-owned offices, and acquired customer lists
 
(6,585
)
 
(3,741
)
Proceeds from sale of company-owned offices and area developer rights
 
2,368

 
2,252

Purchase of available-for-sale securities
 
—

 
(2,980
)
Proceeds from sale of available-for-sale securities
 
5,163

 
—

Purchase of property and equipment
 
(7,652
)
 
(9,177
)
Net cash used in investing activities
 
(67,392
)
 
(72,985
)
Cash flows from financing activities:
 
 

 
 

Proceeds from the exercise of stock options
 
6,122

 
1,592

Repurchase of common stock
 
(5,174
)
 
(1,634
)
Repayment of long-term debt
 
(2,897
)
 
(2,227
)
Borrowings under revolving credit facility
 
110,694

 
108,582

Repayments under revolving credit facility
 
(6,102
)
 
(478
)
Payment for debt issue costs
 
—

 
(281
)
Tax benefit of stock option exercises
 
554

 
269

Net cash provided by financing activities
 
103,197

 
105,823

Effect of exchange rate changes on cash, net
 
(226
)
 
(22
)
Net decrease in cash and cash equivalents
 
(15,271
)
 
(18,999
)
Cash and cash equivalents at beginning of period
 
19,013

 
19,848

Cash and cash equivalents at end of period
 
$
3,742

 
$
849

  See accompanying notes to condensed consolidated financial statements.






7


JTH HOLDING, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine months ended January 31, 2014 and 2013 (unaudited)
(In thousands)
 
 
 
2014
 
2013
Supplemental disclosures of cash flow information:
 
 

 
 

Cash paid for interest, net of capitalized interest
 
$
851

 
$
1,310

Cash paid for taxes, net of refunds
 
6,388

 
6,958

Accrued capitalized software costs included in accounts payable
 
182

 
1,657

During the nine months ended January 31, 2014 and 2013, the Company acquired certain assets from franchisees, area developers, and third parties as follows:
 
 

 
 

Fair value of assets purchased
 
$
16,444

 
$
9,265

Receivables applied, net of amounts due ADs and related deferred revenue
 
(3,543
)
 
(3,224
)
Notes and accounts payable issued
 
(6,316
)
 
(2,300
)
Cash paid to franchisees, area developers, and third parties
 
$
6,585

 
$
3,741

During the nine months ended January 31, 2014 and 2013, the Company sold certain assets to franchisees and area developers as follows:
 
 

 
 

Book value of assets sold
 
$
6,209

 
$
5,601

Loss on sale
 
(160
)
 
(351
)
Deferred gain on sale
 
1,080

 
1,252

Notes received
 
(4,761
)
 
(4,250
)
Cash received from franchisees and area developers
 
$
2,368

 
$
2,252

See accompanying notes to condensed consolidated financial statements.

8


JTH HOLDING, INC. AND SUBSIDIARIES
 
Notes to Condensed Consolidated Financial Statements
 
January 31, 2014 and 2013 (Unaudited)
 
(1) Organization and Significant Accounting Policies
 
(a)  Organization
 
JTH Holding, Inc. (the Company), a Delaware corporation, is a holding company engaged through its subsidiaries as a franchisor and operator of a system of income tax preparation offices located in the United States 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 instant cash advances, electronic refund checks, and personal income tax refund discounting, for its customers. The Company also offers online tax preparation services.

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 specifically noted otherwise, as used throughout these condensed consolidated financial statements, the term “Company” or “Liberty” refers to the consolidated entities of JTH Holding, Inc.
 
(b) Principles of Consolidation and Unaudited Financial Statements
 
The condensed consolidated financial statements include the accounts of JTH Holding, 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. Transaction gains and losses are recognized when incurred. The Company also consolidates any variable interest entities of which it is the primary beneficiary. When the Company does not have a controlling interest in an entity, but exerts 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 U.S. generally accepted accounting principles (US GAAP) for interim financial information.  The condensed consolidated financial statements, including these notes, are unaudited and exclude some of the disclosures only required in annual financial statements.  Consolidated balance sheet data as of April 30, 2013 was derived from the Company’s April 30, 2013 Annual Report on Form 10-K.
 
In the opinion of management, all adjustments necessary for a fair presentation of such financial statements in accordance with US 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 financial statements and notes thereto included in its April 30, 2013 Annual Report on Form 10-K.















 

9


(c) Office Count

The following table shows the U.S. office activity and the number of Canadian and company-owned offices for the 2014 and 2013 tax seasons:

 
 
Tax Season
 
 
2014
 
2013
Franchised U.S. offices, operated during the prior tax season
 
4,028

 
3,845

U.S. offices opened
 
558

 
596

U.S. offices purchased from the Company
 
66

 
60

U.S. offices acquired by the Company
 
(91
)
 
(64
)
U.S. offices closed
 
(566
)
 
(409
)
Franchised U.S. offices, operated during the tax season
 
3,995

 
4,028

 
 
 
 
 
Franchised Canadian offices, operated during the tax season
 
227

 
231

 
 
 
 
 
Total franchised offices, operated during the tax season
 
4,222

 
4,259

 
 
 
 
 
Company-owned offices, operated during the tax season:
 
 
 
 
U.S.
 
180

 
234

Canadian
 
36

 
27

Total
 
216

 
261

 
 
 
 
 
Total offices, operated during the tax season
 
4,438

 
4,520


(d) 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 US GAAP. Actual results could differ from those estimates.
 
(e) Foreign Operations
 
Canadian operations contributed $352,000 and $1,158,000 in revenues for the three and nine months ended January 31, 2014, respectively and $328,000 and $1,103,000 in revenues for the three and nine months ended January 31, 2013, respectively.
 
(2) Accounts and Notes Receivable
 
The Company provides financing to franchisees for the purchase of franchises, clusters of territories, company-owned offices, and for working capital and equipment needs. The franchise-related notes generally are payable over five years and the working capital and equipment notes generally are due within one year. Most notes bear interest at 12%.  Activity related to notes receivable for the nine months ended January 31, 2014 and January 31, 2013 and for the fiscal year ended April 30, 2013 was as follows:


10


 
 
January 31, 2014
 
January 31, 2013
 
April 30, 2013
 
 
(In thousands)
Balance at beginning of period
 
$
89,340

 
$
79,838

 
$
79,838

Notes received for:
 
 
 


 
 
Sales of franchises and clusters of territories
 
3,629

 
4,431

 
6,770

Sales of certain assets to franchisees
 
9,259

 
11,073

 
15,130

Franchisee to franchisee note assumptions
 
8,453

 
10,303

 
11,259

Working capital and equipment loans to franchisees
 
62,218

 
60,875

 
75,642

Refinancing of accounts receivable
 
7,140

 
18,486

 
18,527

 
 
90,699

 
105,168

 
127,328

Repayment of notes
 
(7,017
)
 
(6,515
)
 
(95,664
)
Notes canceled
 
(16,864
)
 
(18,806
)
 
(21,981
)
Foreign currency adjustment
 
(487
)
 
(127
)
 
(181
)
Balance at end of period
 
155,671

 
159,558

 
89,340

Unrecognized revenue portion of notes receivable
 
(41,686
)
 
(40,423
)
 
(39,731
)
Notes receivable less unrecognized revenue
 
$
113,985

 
$
119,135

 
$
49,609

 
Most of the notes receivable are due from the Company's franchisees and area developers (ADs) and are collateralized by the underlying franchise and, when the franchise or area owner is an entity, is generally 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 franchisees' or ADs' areas.
The refinancing of accounts receivable had resulted from a franchisee electing to deliver to the Company a promissory note for past-due royalties and advertising fees that had previously been recorded as accounts receivable in the condensed consolidated financial statements. Effective October 1, 2013, the Company reduced the interest rate on its past due accounts receivable from 18% to 12% and ceased its practice of refinancing accounts receivable into notes receivable. This is not expected to have a material effect on the Company's condensed consolidated financial statements.
Notes canceled are comprised of the cancellation of existing unpaid notes of selling franchisees in franchisee to franchisee sales that include the assumption of debt by the acquiring franchisee, and any unpaid notes receivable from a franchisee or AD related to specific territories or clusters of territories that the Company reacquires. In the latter transactions, the cancellation of notes is part of the consideration paid by the Company, and any excess of the consideration paid over the fair value of assets acquired is written off to the allowance for doubtful accounts. Each quarter, the adequacy of the allowance for doubtful accounts is assessed and additional provision for bad debt recorded as deemed necessary.
Unrecognized revenue relates to the financed portion of franchise fees and AD fees and, in the case of sales of company-owned offices, the financed portion of gains related to these sales, in each case where revenue has not yet been recognized. For franchise fees and gains related to the sale of company-owned offices, revenue is recorded as note payments are received by the Company. Payments on AD fee notes receivable generate a corresponding increase in deferred revenue, which is amortized into revenue over the life of the AD contract, generally 10 years.

Accounts and notes receivable include royalties billed that relate to territories operated by franchisees located in AD territories. The Company has recorded amounts payable to ADs for their share of these receivables of $15,390,000, $14,955,000, and $18,248,000 at January 31, 2014, January 31, 2013, and April 30, 2013, respectively.

At January 31, 2014, the Company had unfunded lending commitments for working capital loans to franchisees and area developers of $10,392,000.

Allowance for Doubtful Accounts
Management believes that the recorded allowance is adequate based upon its consideration of the estimated value of the franchises and AD areas supporting the receivables. Any adverse change in the tax preparation industry or the individual franchisees' or ADs' areas could affect the Company's estimate of the allowance. Activity in the allowance for doubtful accounts for the three and nine months ended January 31, 2014 and 2013 was as follows:
 

11


 
 
Three Months Ended January 31,
 
Nine Months Ended January 31,
 
 
2014
 
2013
 
2014
 
2013
 
 
(In thousands)
Balance at beginning of period
 
$
6,048

 
$
5,844

 
$
6,684

 
$
5,290

Provision for doubtful accounts
 
2,456

 
1,317

 
5,886

 
4,581

Write-offs
 
(3,039
)
 
(1,665
)
 
(7,067
)
 
(4,345
)
Foreign currency adjustment
 
(55
)
 
(1
)
 
(93
)
 
(31
)
Balance at end of period
 
$
5,410

 
$
5,495

 
$
5,410

 
$
5,495


The allocation of the allowance for doubtful accounts between long-term and short-term as of January 31, 2014, January 31, 2013, and April 30, 2013 was as follows:
  
 
 
January 31, 2014
 
January 31, 2013
 
April 30, 2013
 
 
(In thousands)
Short-term
 
$
4,636

 
$
4,649

 
$
5,583

Long-term
 
774

 
846

 
1,101

Total
 
$
5,410

 
$
5,495

 
$
6,684


Management considers accounts and notes receivable to be impaired if the amounts due exceed the fair value of the underlying franchise and estimates an allowance for doubtful accounts based on that excess. Amounts due include contractually obligated accounts and notes receivable plus accrued interest less unrecognized revenue, reduced by the allowance for uncollected interest, amounts due ADs, related deferred revenue, and amounts owed to the franchisee by the Company. In establishing the fair value of the underlying franchise, management considers net fees of open offices earned during the most recently completed tax season and the number of unopened offices.

The allowance for doubtful accounts at January 31, 2014, January 31, 2013, and April 30, 2013 was allocated as follows:
 
 
 
January 31, 2014
 
January 31, 2013
 
April 30, 2013
 
 
(In thousands)
Impaired:
 
 

 
 
 
 

Notes receivable, including interest, and less unrecognized revenue
 
$
7,633

 
$
6,351

 
$
9,399

Accounts receivable
 
3,481

 
3,023

 
5,907

Less allowance for uncollected interest, amounts due ADs, related deferred revenue and amounts due franchisees
 
(1,636
)
 
(1,678
)
 
(2,336
)
Net amount due
 
$
9,478

 
$
7,696

 
$
12,970

 
 
 
 
 
 
 
Allowance for doubtful accounts for impaired notes and accounts receivable
 
$
4,366

 
$
3,994

 
$
6,120

 
 
 
 
 
 
 
Nonimpaired:
 
 

 
 
 
 

Notes receivable, including interest, and less unrecognized revenue
 
$
112,233

 
$
119,787

 
$
42,459

Accounts receivable
 
42,776

 
30,659

 
37,650

Less allowance for uncollected interest, amounts due ADs, related deferred revenue and amounts due franchisees
 
(17,994
)
 
(17,537
)
 
(19,992
)
Net amount due
 
$
137,015

 
$
132,909

 
$
60,117

 
 
 
 
 
 
 
Allowance for doubtful accounts for non-impaired notes and accounts receivable
 
$
1,044

 
$
1,501

 
$
564

 
 
 
 
 
 
 
Total allowance for doubtful accounts
 
$
5,410

 
$
5,495

 
$
6,684



12



The Company’s average investment in impaired notes receivable during the nine months ended January 31, 2014 and 2013 was $8,515,000 and $6,539,000, respectively.  Interest income recognized related to performing impaired notes was $124,000 and $486,000 for the three and nine months ended January 31, 2014, respectively, and $107,000 and $352,000 for the three and nine months ended January 31, 2013, respectively.  The Company’s investment in notes receivable on nonaccrual status at January 31, 2014, January 31, 2013, and April 30, 2013 was $6,472,000, $4,286,000, and $8,375,000, respectively.
 
Age Analysis of Past Due Receivables

The aging of accounts and notes receivable at January 31, 2014 was as follows:
 
 
 
Total
Past Due
 
Allowance
for Uncollected
Interest
 
Current
 
Total
Receivables
 
 
(In thousands)
Accounts receivable
 
$
18,976

 
$
(2,508
)
 
$
27,281

 
$
43,749

Notes receivable
 
7,466

 
(994
)
 
112,400

 
118,872

Total
 
$
26,442

 
$
(3,502
)
 
$
139,681

 
$
162,621

 
Accounts receivable are considered to be past due if unpaid after 30 days and notes receivable are considered past due if unpaid after 90 days, at which time the notes are put on nonaccrual status.

(3) Investments
 
During fiscal 2013, the Company purchased corporate equity securities, as a strategic investment in a business partner, for $2,980,000.  These securities were sold during the nine months ended January 31, 2014. A gross gain on the sale of $2,183,000 was recognized and reclassified out of accumulated other comprehensive income and recorded as other income.
 
(4) Goodwill and Intangible Assets
 
Changes in the carrying amount of goodwill for the nine months ended January 31, 2014 and January 31, 2013 are as follows:

 
 
January 31, 2014
 
January 31, 2013
 
 
Goodwill
 
Accumulated impairment loss
 
Net
 
Goodwill
 
Accumulated impairment loss
 
Net
 
 
(In thousands)
Balance at beginning of period
 
$
6,457

 
$
(772
)
 
$
5,685

 
$
6,157

 
$
(757
)
 
$
5,400

Acquisitions of assets from franchisees
 
4,071

 
—

 
4,071

 
2,840

 
—

 
2,840

Disposals and foreign currency changes, net
 
(3,530
)
 
188

 
(3,342
)
 
(3,086
)
 
567

 
(2,519
)
Impairments
 
—

 
(135
)
 
(135
)
 
—

 
—

 
—

Balance at end of period
 
$
6,998

 
$
(719
)
 
$
6,279

 
$
5,911

 
$
(190
)
 
$
5,721















13



Components of intangible assets are as follows as of January 31, 2014, January 31, 2013, and April 30, 2013:

 
 
January 31, 2014
 
January 31, 2013
 
April 30, 2013
 
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
 
Gross
carrying
amount
 
Accumulated
amortization
 
Net
carrying
amount
 
(In thousands)
Amortizable other intangible assets:
 
 

 
 

 
 

 
 
 
 
 
 
 
 

 
 

 
 

Acquired customer lists
 
$
4,816

 
$
(634
)
 
$
4,182

 
$
1,587

 
$
(42
)
 
$
1,545

 
$
1,603

 
$
(171
)
 
$
1,432

Assets acquired from franchisees:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer lists and reacquired rights
 
4,163

 
(1,961
)
 
2,202

 
3,178

 
(1,287
)
 
1,891

 
3,474

 
(1,487
)
 
1,987

Area developer rights
 
14,443

 
(3,182
)
 
11,261

 
10,702

 
(2,518
)
 
8,184

 
9,842

 
(2,340
)
 
7,502

 
 
$
23,422

 
$
(5,777
)
 
$
17,645

 
$
15,467

 
$
(3,847
)
 
$
11,620

 
$
14,919

 
$
(3,998
)
 
$
10,921


Intangible assets are amortized over six years for acquired customer lists, four years for customer lists acquired from franchisees, two years for reacquired rights acquired from franchisees, and ten years for area developer rights.

In January 2014, the Company purchased certain assets of an online tax preparation software provider for $3,200,000, of which $1,600,000 was payable at the closing date with the remainder payable on April 30, 2014. The entire purchase price has been preliminarily allocated to the identifiable intangible assets.

During the nine months ended January 31, 2014, the Company acquired the assets of various franchisees for $7,517,000.  These acquisitions were accounted for as business combinations, with all value allocated to intangible assets.  The acquired businesses are operated as Company-owned offices until a buyer is located and a new franchise agreement is entered into. The purchase price of assets acquired from franchisees was allocated as follows:

 
 
Nine Months Ended January 31,
 
 
2014
 
2013
 
 
(In thousands)
Customer lists and reacquired rights
 
$
3,446

 
$
2,424

Goodwill
 
4,071

 
2,840

Total
 
$
7,517

 
$
5,264


(5) Debt
 
The Company has a credit facility that consists of a $25,000,000 term loan and a revolving credit facility that currently allows borrowing of up to $143,350,000.  Outstanding borrowings accrue interest at one-month London Inter-Bank Offered Rate (LIBOR) plus a margin ranging from 1.50% to 2.25% depending on the Company’s leverage ratio. At January 31, 2014, the interest rate was 1.92%, and the average interest rate paid was 1.90% during the nine months ended January 31, 2014. The indebtedness is collateralized by substantially all the assets of the Company and both loans mature on April 30, 2017.  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.  The Company was in compliance with the financial covenants at January 31, 2014.
 

14


Debt at January 31, 2014, January 31, 2013, and April 30, 2013 consisted of the following:

 
 
January 31, 2014
 
January 31, 2013
 
April 30, 2013
 
 
(In thousands)
Credit Facility:
 
 

 
 
 
 

Revolver
 
$
104,592

 
$
108,105

 
$
—

Term loan
 
22,344

 
24,063

 
23,750

 
 
126,936

 
132,168

 
23,750

Amounts due to former ADs and mortgages
 
6,642

 
4,200

 
3,933

 
 
133,578

 
136,368

 
27,683

Less: current portion
 
(6,649
)
 
(3,488
)
 
(3,400
)
Long-term debt
 
$
126,929

 
$
132,880

 
$
24,283

 
(6)    Forward Contracts Related to Foreign Currency Exchange Rates

In connection with short-term advances made to its Canadian subsidiary related to personal income tax refund discounting, the Company periodically enters into forward contracts to eliminate the exposure related to foreign currency fluctuations. Under the terms of the forward currency contracts, the exchange rate for repayments is fixed at the time an advance is made and the advances are repaid prior to April 30 of the fiscal year of the advance. These forward contracts are designated as cash flow hedges. At January 31, 2014 and 2013, the fair value of foreign currency contracts was an asset of $220,000, included in other assets, and a liability of $46,000, included accounts payable and accrued expenses, respectively. The Company had no outstanding forward contracts at April 30, 2013. During the nine months ended January 31, 2014 and 2013, these foreign currency hedges were effective and, therefore, no amounts were recognized in the consolidated statements of operations.

(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 adding the effects of any discrete income tax items specific to the period.

In January 2013 the American Taxpayer Relief Act of 2012 was signed into law. The Act includes a reinstatement of the federal research and experimentation credit through December 31, 2013 that was retroactive to January 1, 2012. We recorded a discrete tax benefit of approximately $395,000 for the retroactive effect during the three months ended January 31, 2013. Due to the expiration of the credit on December 31, 2013, we have reduced the projected tax benefit of our fiscal 2014 credit by $140,000, which represents a third of our fiscal year projected credit. Should the credit again be extended retroactively, we will reallocate the benefit in the quarter of enactment.

(8) Stockholders’ Equity
 
During the nine months ended January 31, 2014 and 2013, activity in stockholders’ equity was as follows:

 
 
2014
 
2013
 
 
(In thousands)
Class A common shares issued from the exercise of stock options
 
409

 
151

Class A common shares issued from the vesting of restricted stock
 
15

 
—

Proceeds from exercise of stock options
 
$
6,122

 
$
1,592

Class A common shares repurchased
 
246

 
119

Payments for repurchased shares
 
$
5,174

 
$
1,634

Tax benefit of stock option exercises
 
$
554

 
$
269

Class A common shares issued upon conversion of Class A preferred shares
 
—

 
1,703

 

15


The components of accumulated other comprehensive income at January 31, 2014 are a foreign currency translation adjustment of $(349,000) and a foreign currency forward contract of $220,000. The components of accumulated other comprehensive income at January 31, 2013 are a foreign currency translation adjustment of $723,000, an interest rate swap of $(69,000), a foreign currency forward contract of $46,000, and the unrealized gain on available-for-sale securities of $110,000. The components of accumulated other comprehensive income at April 30, 2013 are a foreign currency translation adjustment of $807,000 and the unrealized gain on available-for-sale securities of $387,000.

Net Income (Loss) per Share
 
Net income (loss) per share of Class A and Class B common stock is computed using the two-class method. Basic net income (loss) per share is computed by allocating undistributed earnings to common shares and participating securities (Class A preferred stock and exchangeable shares) and using the weighted-average number of common shares outstanding during the period.  Undistributed losses are not allocated to these participating securities because they do not meet the required criteria for such allocation.  During the nine months ended January 31, 2013, two of the Company’s major shareholders elected to convert 170,320 shares of the Class A preferred stock to 1,703,200 shares of Class A common stock.
 
Diluted net income (loss) per share is computed using the weighted-average number of common shares and, if dilutive, the potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options. The dilutive effect of outstanding stock options 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, Class A preferred stock and exchangeable shares, while the diluted net income (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.
 
































16


The computation of basic and diluted net income (loss) per share for the three and nine months ended January 31, 2014 and 2013 was as follows:

 
 
Three Months Ended 
 January 31, 2014
 
 
Class A
 
Class B
 
 
Common Stock
 
Common Stock
 
 
(in thousands, except for share and per
share amounts)
Basic net income per share:
 
 

 
 

Numerator
 
 

 
 

Allocation of undistributed earnings
 
$
3,775

 
$
281

Amounts allocated to participating securities:
 
 

 
 

Exchangeable shares
 
(270
)
 
(20
)
Net income attributable to common stockholders
 
$
3,505

 
$
261

Denominator
 
 
 
 
Weighted-average common shares outstanding
 
12,091,857

 
900,000

 
 
 
 
 
Basic net income per share
 
$
0.29

 
$
0.29

 
 
 
 
 
Diluted net income per share:
 
 
 
 
Numerator
 
 
 
 
Allocation of undistributed earnings for basic computation
 
$
3,505

 
$
261

Reallocation of undistributed earnings as a result of assumed conversion of:
 
 
 
 
Class B common stock to Class A common stock
 
261

 
 
Exchangeable shares to Class A common stock
 
290

 
 
 
 
$
4,056

 
$
261

Denominator
 
 

 
 

Number of shares used in basic computation
 
12,091,857

 
900,000

Weighted-average effect of dilutive securities
 
 
 
 
Class B common stock to Class A common stock
 
900,000

 
 
Exchangeable shares to Class A common stock
 
1,000,000

 
 
Employee stock options
 
662,809

 
42,634

 
 
14,654,666

 
942,634

 
 
 
 
 
Diluted net income per share
 
$
0.28

 
$
0.28




17




Nine Months Ended 
 January 31, 2014
 

Class A

Class B
 

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

$
(9,629
)

$
(720
)
Denominator

 


 

Weighted-average common shares outstanding

12,037,734


900,000

 






Basic and diluted net loss per share

$
(0.80
)

$
(0.80
)
 
Diluted net income (loss) per share excludes the impact of shares of potential common stock from the exercise of options to purchase 225,000 and 2,190,000 shares for the three and nine months ended January 31, 2014, respectively, because the effect would be antidilutive.

 
 
Three Months Ended 
 January 31, 2013
 
 
Class A
 
Class B
 
 
Common Stock
 
Common Stock
 
 
(in thousands, except for share and per
share amounts)
Basic net income per share:
 
 

 
 

Numerator
 
 

 
 

Allocation of undistributed earnings
 
$
1,557

 
$
116

Amounts allocated to participating securities:
 
 
 
 
Exchangeable shares
 
(111
)
 
(8
)
Net income attributable to common stockholders
 
$
1,446

 
$
108

Denominator
 
 

 
 

Weighted-average common shares outstanding
 
12,090,238

 
900,000

 
 
 
 
 
Basic net income per share
 
$
0.12

 
$
0.12

 
 
 
 
 
Diluted net income per share:
 
 
 
 
Numerator
 
 
 
 
Allocation of undistributed earnings for basic computation
 
$
1,446

 
$
108

Reallocation of undistributed earnings as a result of assumed conversion of:
 
 
 
 
Class B common stock to Class A common stock
 
108

 
—

Exchangeable shares to Class A common stock
 
119

 
—

 
 
$
1,673

 
$
108

Denominator
 
 

 
 

Number of shares used in basic computation
 
12,090,238

 
900,000

Weighted-average effect of dilutive securities:
 
 
 
 
Class B common stock to Class A common stock
 
900,000

 
—

Exchangeable shares to Class A common stock
 
1,000,000

 
—

Employee stock options
 
79,701

 
5,127

 
 
14,069,939

 
905,127

 
 
 
 
 
Diluted net income per share
 
$
0.12

 
$
0.12


18




 
 
Nine Months Ended 
 January 31, 2013
 
 
Class A
 
Class B
 
 
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
 
$
(10,037
)
 
$
(764
)
Denominator
 
 

 
 

Weighted-average common shares outstanding
 
11,831,496

 
900,000

 
 
 
 
 
Basic and diluted net loss per share
 
$
(0.85
)
 
$
(0.85
)
 
Diluted net income (loss) per share excludes the impact of shares of potential common stock from the exercise of options to purchase 2,546,000 and 2,745,000 shares for the three and nine months ended January 31, 2013, respectively, because the effect would be antidilutive.
 
(9) Stock Compensation Plans
 
Stock Options
 
At January 31, 2014, 1,818,936 shares of Class A common stock are available for grant under the 2011 Equity and Cash Incentive Plan.

The following table summarizes the information for options granted during the nine months ended January 31, 2014:
 
 
 
2014
Weighted average fair value of options granted
 
$
6.19

Dividend yield
 
0.0
%
Expected volatility
 
34.15% - 36.99%

Expected terms (in years)
 
3.7 - 5.3

Risk-free interest rates
 
0.79% - 1.49%


The Company does not have enough public trading history to calculate volatility for the term of the granted options, therefore, it used a 50/50 weighted average volatility, equally weighing our public trading history and that of other public companies in the tax preparation industry.
Stock option activity during the nine months ended January 31, 2014 was as follows:
 
 
 
Number of
options
 
Weighted
average
exercise price
Balance at beginning of period
 
2,534,683

 
$
14.81

Granted
 
452,374

 
18.20

Exercised
 
(408,798
)
 
14.98

Canceled
 
(264,461
)
 
15.02

Balance at end of period
 
2,313,798

 
15.42


The Company granted 452,374 stock options to certain directors and employees in the nine months ended January 31, 2014. The total intrinsic value of options exercised during the nine months ended January 31, 2014 was approximately $2,458,000. Stock options vest from six months to five years from the date of grant and expire five years after the vesting date.

19


 
Nonvested stock option (options that did not vest in the period in which granted) activity during the nine months ended January 31, 2014 was as follows:
 
 
 
Nonvested
options
 
Weighted
average
exercise price
Balance at beginning of period
 
132,500

 
$
15.00

Granted
 
452,374

 
18.20

Vested
 
(39,490
)
 
15.33

Canceled
 
—

 
—

Balance at end of period
 
545,384

 
17.63

 
At January 31, 2014, unrecognized compensation costs related to nonvested stock options were $2,372,000. These costs are expected to be recognized between fiscal 2014 and fiscal 2016.

The following table summarizes information about stock options outstanding and exercisable at January 31, 2014:
 
Number of options outstanding at
 
Range of exercise prices
 
Weighted average exercise price
 
Weighted average remaining contractual life (in years)
 
Number of options exercisable at
 
Weighted average exercise price
January 31, 2014
 
 
 
 
January 31, 2014
 
117,500

 
$
10.50

 
$
10.50

 
1.0
 
117,500

 
$
10.50

1,543,416

 
14.00-16.50

 
15.03

 
2.5
 
1,440,916

 
15.03

200,508

 
15.00

 
15.00

 
3.3
 
200,508

 
15.00

407,374

 
16.38 - 19.75

 
17.98

 
4.6
 
9,490

 
16.38

45,000

 
20.19

 
20.19

 
6.2
 
—

 
—

2,313,798

 
 
 
15.42

 

 
1,768,414

 
14.73


During the fiscal year ended April 30, 2013, the settlement of certain stock option transactions caused a change in the classification of the related outstanding stock options to liability instruments from equity instruments, which resulted in an increase in stock compensation expense of $2,625,000. At April 30, 2013, the value of the liability for the 997,824 options that changed classifications from equity to liability instruments was $5,111,000. On June 11, 2013, the Company's board of directors voted to prohibit those types of transactions, therefore, the Company reclassified the stock options back to equity instruments, resulting in a reduction to stock compensation expense of $872,000. The liability was removed and the remainder was reclassified to additional paid-in capital.
 
Restricted Stock Units
 
During the nine months ended January 31, 2014, the Company awarded restricted stock units (RSUs) to its non-employee directors and certain employees. The weighted average fair value at grant date was $16.86 and the weighted average
service period is 19 months. Compensation costs associated with these restricted shares are amortized over the service period and recognized as an increase in additional paid-in capital.

Restricted stock activity during the nine months ended January 31, 2014 was as follows:

 
 
Number of
RSUs
 
Weighted
average fair value at grant date
Balance at beginning of period
 
15,971

 
$
13.50

Granted
 
23,565

 
16.86

Vested
 
(14,598
)
 
13.36

Canceled
 
(2,975
)
 
15.74

Balance at end of period
 
21,963

 
16.90

 

20


At January 31, 2014, unrecognized compensation costs related to restricted stock units were $252,000. These costs are expected to be recognized during fiscal 2014 and fiscal 2015.

(10) Fair Value of Financial Instruments
 
The Company uses the following methods and assumptions to estimate the fair value of financial instruments.
 
Cash equivalents, accounts receivable, other current assets, accounts payable and accrued expenses, and due to area developers: The carrying amounts approximate fair value because of the short maturity of these instruments. Cash equivalent financial instruments consist of money market accounts.

     Notes receivable: The carrying amount of the Company’s notes receivable approximates fair value based upon the present value of expected future cash flows discounted at the interest rate currently offered by the Company, which approximates rates currently offered by local lending institutions for loans of similar terms to individuals/entities with comparable credit risk.

Available-for-sale securities: Fair values for equity securities available for sale are based on published market prices. Equity securities available for sale are carried at their aggregate fair value.

Nonfinancial assets and liabilities: The fair value of customer lists and reacquired rights is measured on a nonrecurring basis in the period that the Company deemed the assets impaired. Fair value is determined based on historical transactions involving sales of company-owned offices.
 
Long-term debt: Because the Company's long-term debt has a variable interest component, the carrying amount approximates fair value.
 
Fair value is 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.
 

21


At January 31, 2014, January 31, 2013, and April 30, 2013, the following tables present, 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):
 
 
 
January 31, 2014
 
 
 
 
Fair value measurements using
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 

 
 

 
 

Recurring:
 
 

 
 

 
 

 
 

Forward contract related to foreign currency exchange rates
 
$
220

 
$
—

 
$
220

 
$
—

Nonrecurring:
 
 

 
 

 
 

 
 

Impaired accounts and notes receivable
 
5,647

 
—

 
—

 
5,647

Total recurring and nonrecurring assets
 
$
5,867

 
$
—

 
$
220

 
$
5,647



 
 
January 31, 2013
 
 
 
 
Fair value measurements using
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 

 
 

 
 

Recurring:
 
 

 
 

 
 

 
 

Equity securities, available for sale
 
$
3,162

 
$
3,162

 
$
—

 
$
—

Nonrecurring:
 
 

 
 

 
 

 
 

Impaired accounts and notes receivable
 
4,399

 
—

 
—

 
4,399

Total recurring and nonrecurring assets
 
$
7,561

 
$
3,162

 
$
—

 
$
4,399

Liabilities:
 
 

 
 

 
 

 
 

Recurring:
 
 

 
 

 
 

 
 

Interest rate swap agreements
 
$
115

 
$
—

 
$
115

 
$
—

Forward contract related to foreign currency exchange rates
 
46

 
—

 
46

 
—

Total recurring liabilities
 
$
161

 
$
—

 
$
161

 
$
—




22


 
 
April 30, 2013
 
 
 
 
Fair value measurements using
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 

 
 

 
 

Recurring:
 
 

 
 

 
 

 
 

Cash equivalents
 
$
16,798

 
$
16,798

 
$
—

 
$
—

Equity securities, available for sale
 
3,619

 
3,619

 
—

 
—

Total recurring assets
 
20,417

 
20,417

 
—

 
—

Nonrecurring:
 
 

 
 

 
 

 
 

Impaired accounts and notes receivable
 
7,973

 
—

 
—

 
7,973

Impaired goodwill
 
1,254

 
—

 
—

 
1,254

Impaired reacquired rights
 
286

 
—

 
—

 
286

Impaired customer lists
 
453

 
—

 
—

 
453

Total nonrecurring assets
 
9,966

 
—

 
—

 
9,966

Total recurring and nonrecurring assets
 
$
30,383

 
$
20,417

 
$
—

 
$
9,966

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Recurring:
 
 
 
 
 
 
 
 
Liability classified share-based instrument
 
$
5,111

 
$
—

 
$
5,111

 
$
—


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 the nine months ended January 31, 2014.
 
Management considers accounts and notes receivable to be impaired if the amount due exceeds the fair value of the underlying franchise. In establishing the estimated fair value of the underlying franchise, consideration is given to the net fees of open offices earned during the most recently completed tax season and the number of unopened offices.

Management considers goodwill, reacquired rights, and customer lists, associated with a company-owned office, to be impaired if the net carrying amount exceeds the fair value of the underlying franchise. In establishing the fair value of the underlying franchise, consideration is given to historical transactions involving sales of company-owned offices and the net fees of the underlying franchise.

Concentrations of credit risks: Financial instruments that could potentially subject the Company to concentrations of credit risks consist of accounts and notes receivable with its franchisees.
 
The Company manages such risk by evaluating the financial position of the franchisee, value of the franchises, as well as the personal guarantee of the individual franchisees. At January 31, 2014, January 31, 2013, and