10-Q


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, 2016
 
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 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 x
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(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 Class A common stock as of March 1, 2016 was 11,971,808 shares.

The number of shares outstanding of the registrant's Class B common stock as of March 1, 2016 was 900,000 shares.



LIBERTY TAX, INC.
 
Form 10-Q for the Quarterly Period Ended January 31, 2016
 
Table of Contents
 
 
 
Page
 
 
Number
 
 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheets as of January 31, 2016, April 30, 2015 and January 31, 2015
 
 
 
 
Consolidated Statements of Operations for the three and nine months ended January 31, 2016 and 2015
 
 
 
 
Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended January 31, 2016 and 2015
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the nine months ended January 31, 2016 and 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I 

ITEM 1
FINANCIAL STATEMENTS 

3


LIBERTY TAX, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
January 31, 2016, April 30, 2015 and January 31, 2015
(In thousands, except share data)
 
 
January 31, 2016
 
April 30, 2015
 
January 31, 2015
Assets
 
(unaudited)
 
 

 
(unaudited)
Current assets:
 
 

 
 

 
 
Cash and cash equivalents
 
$
1,787

 
$
21,387

 
$
3,150

Receivables:
 
 
 
 

 
 

Accounts receivable
 
59,865

 
46,121

 
50,020

Notes receivable - current
 
90,858

 
24,465

 
76,233

Interest receivable
 
5,156

 
1,033

 
3,989

Allowance for doubtful accounts - current
 
(5,993
)
 
(5,692
)
 
(5,760
)
Total current receivables, net
 
149,886

 
65,927

 
124,482

Assets held for sale
 
11,164

 
5,160

 
5,613

Income taxes receivable
 
16,303

 
—

 
17,434

Deferred income tax asset
 
3,354

 
6,921

 
7,574

Other current assets
 
21,188

 
6,470

 
18,371

Total current assets
 
203,682

 
105,865

 
176,624

Property, equipment, and software, net of accumulated depreciation of $19,825, $18,951 and $12,467, respectively
 
41,216

 
36,232

 
42,615

Notes receivable, non-current
 
34,374

 
22,416

 
29,389

  Allowance for doubtful accounts, non-current
 
(1,338
)
 
(1,663
)
 
(1,339
)
Total notes receivables, non-current, net
 
33,036

 
20,753

 
28,050

Goodwill
 
4,069

 
3,377

 
3,185

Other intangible assets, net
 
13,217

 
14,672

 
17,358

Other assets
 
8,580

 
3,247

 
3,973

Total assets
 
$
303,800

 
$
184,146

 
$
271,805

Liabilities and Stockholders’ Equity
 
 

 
 

 
 
Current liabilities:
 
 

 
 

 
 
Current installments of long-term debt
 
$
5,220

 
$
3,934

 
$
4,107

Accounts payable and accrued expenses
 
15,506

 
17,321

 
27,787

Due to area developers ("ADs")
 
16,258

 
24,340

 
14,980

Income taxes payable
 
—

 
2,147

 
—

Deferred revenue - current
 
4,413

 
6,076

 
6,094

Total current liabilities
 
41,397

 
53,818

 
52,968

Long-term debt, excluding current installments
 
18,532

 
21,463

 
21,778

Revolving credit facility
 
150,682

 
—

 
110,762

Deferred revenue - non-current
 
7,206

 
7,640

 
7,777

Deferred income tax liability
 
6,049

 
2,363

 
6,705

Total liabilities
 
223,866

 
85,284

 
199,990

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, 11,969,604, 11,905,156 and 11,785,705 shares issued and outstanding, respectively
 
120

 
119

 
118

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, 1,000,000 shares issued and outstanding
 
10

 
10

 
10

Additional paid-in capital
 
6,385

 
4,082

 
2,049

Accumulated other comprehensive loss, net of taxes
 
(2,430
)
 
(697
)
 
(1,171
)
Retained earnings
 
75,840

 
95,339

 
70,800

Total stockholders’ equity
 
79,934

 
98,862

 
71,815

Total liabilities and stockholders’ equity
 
$
303,800

 
$
184,146

 
$
271,805


See accompanying notes to condensed consolidated financial statements.

4


LIBERTY TAX, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three and Nine Months Ended January 31, 2016 and 2015 (unaudited)
(In thousands, except share count and per share data)
 
 
 
Three Months Ended January 31,
 
Nine Months Ended January 31,
 
 
2016
 
2015
 
2016
 
2015
Revenue:
 
 

 
 

 
 

 
 

Franchise fees
 
$
1,011

 
$
968

 
$
2,526

 
$
2,996

AD fees
 
1,363

 
1,592

 
4,491

 
5,066

Royalties and advertising fees
 
25,571

 
25,457

 
28,589

 
28,350

Financial products
 
17,266

 
13,370

 
17,781

 
14,027

Interest income
 
3,188

 
3,222

 
7,503

 
7,200

Tax preparation fees, net of discounts
 
3,843

 
1,942

 
4,805

 
2,848

Other revenue
 
1,379

 
1,129

 
3,320

 
2,766

Total revenue
 
53,621

 
47,680

 
69,015

 
63,253

Operating expenses:
 
 

 
 

 
 

 
 

Employee compensation and benefits
 
11,638

 
10,686

 
28,454

 
28,736

Selling, general, and administrative expenses
 
12,585

 
12,834

 
29,097

 
30,809

AD expense
 
9,340

 
9,178

 
10,722

 
10,776

Advertising expense
 
8,972

 
8,161

 
14,072

 
14,022

Depreciation, amortization, and impairment charges
 
2,118

 
2,527

 
5,626

 
6,855

Total operating expenses
 
44,653

 
43,386

 
87,971

 
91,198

Income (loss) from operations
 
8,968

 
4,294

 
(18,956
)
 
(27,945
)
Other expense:
 
 
 
 
 
 
 
 
Foreign currency transaction loss
 
(14
)
 
(35
)
 
(39
)
 
(45
)
Interest expense
 
(705
)
 
(683
)
 
(1,592
)
 
(1,550
)
Income (loss) before income taxes
 
8,249

 
3,576

 
(20,587
)

(29,540
)
Income tax expense (benefit)
 
3,511

 
1,657

 
(7,717
)
 
(11,487
)
Net Income (loss)
 
4,738

 
1,919

 
(12,870
)
 
(18,053
)
Less: Net income attributable to participating securities
 
(343
)
 
(140
)
 
—

 
—

Net income (loss) attributable to Class A and Class B common stockholders
 
$
4,395

 
$
1,779

 
$
(12,870
)
 
$
(18,053
)
Earnings (loss) per share of Class A and Class B common stock:
 
 
 
 
 
 
 
 
Basic
 
$
0.34

 
$
0.14

 
$
(1.01
)
 
$
(1.42
)
Diluted
 
0.34

 
$
0.13

 
(1.01
)
 
(1.42
)
 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding basic
 
12,795,367

 
12,679,286

 
12,794,185

 
12,742,288

Weighted-average shares outstanding diluted
 
14,002,356

 
14,227,163

 
12,794,185

 
12,742,288

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

 
$
—

 
$
0.48

 
$
—


See accompanying notes to condensed consolidated financial statements.

5


LIBERTY TAX, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
Three and Nine Months Ended January 31, 2016 and 2015 (unaudited)
(In thousands)
 
 
 
Three Months Ended January 31,
 
Nine Months Ended January 31,
 
 
2016
 
2015
 
2016
 
2015
Net Income (loss)
 
$
4,738

 
$
1,919

 
$
(12,870
)
 
$
(18,053
)
Unrealized loss on available-for-sale securities, net of taxes of $208, $-, $208 and $-, respectively
 
(347
)
 
—

 
(347
)
 
—

Foreign currency translation adjustment
 
(488
)
 
(1,339
)
 
(1,362
)
 
(1,508
)
Forward contracts related to foreign currency exchange rates
 
(23
)
 
271

 
(23
)
 
271

Comprehensive income (loss)
 
$
3,880

 
$
851

 
$
(14,602
)
 
$
(19,290
)

 See accompanying notes to condensed consolidated financial statements.

6


LIBERTY TAX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine Months Ended January 31, 2016 and 2015 (unaudited)
(In thousands)
 
 
 
2016
 
2015
Cash flows from operating activities:
 
 

 
 

Net loss
 
$
(12,870
)
 
$
(18,053
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 

 
 

Provision for doubtful accounts
 
4,589

 
4,453

Depreciation, amortization, and impairment charges
 
5,626

 
6,855

Stock-based compensation expense
 
1,348

 
2,002

Gain on bargain purchases and sales of Company-owned offices
 
(470
)
 
(310
)
Deferred tax expense
 
7,253

 
144

Changes in accrued income taxes
 
(18,283
)
 
(27,110
)
Changes in other assets and liabilities
 
(55,476
)
 
(22,202
)
Net cash used in operating activities
 
(68,283
)
 
(54,221
)
Cash flows from investing activities:
 
 

 
 

Issuance of operating loans to franchisees
 
(81,364
)
 
(74,298
)
Payments received on operating loans to franchisees
 
3,077

 
16,410

Purchases of AD rights and Company-owned offices
 
(3,713
)
 
(8,218
)
Proceeds from sale of Company-owned offices and AD rights
 
2,851

 
3,690

Purchase of available-for-sale securities
 
(4,999
)
 
—

Purchases of property, equipment and software
 
(8,685
)
 
(9,532
)
Net cash used in investing activities
 
(92,833
)
 
(71,948
)
Cash flows from financing activities:
 
 

 
 

Proceeds from the exercise of stock options
 
1,998

 
10,053

Repurchase of common stock
 
(1,977
)
 
(35,910
)
Dividends paid
 
(6,629
)
 
—

Repayment of amounts due to former ADs
 
(2,429
)
 
(4,211
)
Repayment of debt
 
(726
)
 
(949
)
Borrowings under revolving credit facility
 
151,225

 
136,565

Repayments under revolving credit facility
 
(543
)
 
(25,803
)
Payment for debt issue costs
 
—

 
(917
)
Tax benefit of stock option exercises
 
933

 
4,776

Net cash provided by financing activities
 
141,852

 
83,604

Effect of exchange rate changes on cash, net
 
(336
)
 
(365
)
Net decrease in cash and cash equivalents
 
(19,600
)
 
(42,930
)
Cash and cash equivalents at beginning of period
 
21,387

 
46,080

Cash and cash equivalents at end of period
 
$
1,787

 
$
3,150


  See accompanying notes to condensed consolidated financial statements.






7


LIBERTY TAX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine Months Ended January 31, 2016 and 2015 (unaudited)
(In thousands)
 
 
 
2016
 
2015
Supplemental disclosures of cash flow information:
 
 

 
 

Cash paid for interest, net of capitalized interest of $225 and $135, respectively
 
$
974

 
$
948

Cash paid for taxes, net of refunds
 
2,374

 
10,849

Accrued capitalized software costs included in accounts payable
 
292

 
252

During the nine months ended January 31, 2016 and 2015, the Company acquired certain assets from franchisees, ADs and third parties as follows:
 
 

 
 

Fair value of assets purchased
 
$
15,087

 
$
16,531

Receivables applied, net of amounts due ADs and related deferred revenue
 
(9,391
)
 
(5,472
)
Bargain purchase gains
 
(451
)
 
(275
)
Notes and accounts payable issued
 
(1,532
)
 
(2,566
)
Cash paid to franchisees and ADs
 
$
3,713

 
$
8,218

During the nine months ended January 31, 2016 and 2015, the Company sold certain assets to franchisees and ADs as follows:
 
 

 
 

Book value of assets sold
 
$
8,505

 
$
9,868

Gain on sale-revenue deferred
 
1,688

 
2,000

Loss on sale - loss recognized
 
(156
)
 
(125
)
Notes received
 
(7,186
)
 
(8,053
)
Cash received from franchisees and ADs
 
$
2,851

 
$
3,690


See accompanying notes to condensed consolidated financial statements.

8


LIBERTY TAX, INC. AND SUBSIDIARIES
 
Notes to Condensed Consolidated Financial Statements
 
January 31, 2016 and 2015 (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 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 United States and personal income tax refund discounting in Canada. The Company also offers online tax preparation services. All of the offices are operated under the Liberty Tax Service and SiempreTax+ brands. Effective July 15, 2014, 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 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 fund 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 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 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 ("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.  Consolidated balance sheet data as of April 30, 2015 was derived from the Company’s April 30, 2015 Annual Report on Form 10-K filed on July 1, 2015.
 
In the opinion of management, all adjustments necessary for a fair presentation of such financial statements in accordance with GAAP have been recorded.  These adjustments consisted only of normal recurring items.  The accompanying consolidated financial statements should be read in conjunction with the Company’s financial statements and notes thereto included in its April 30, 2015 Annual Report on Form 10-K filed on July 1, 2015.

9


 
Office Count
The following table shows the U. S. office activity and the number of Canadian and Company-owned offices for the 2016, 2015 and 2014 tax seasons:

 
 
Tax Season
 
 
 
2016
 
2015
 
2014
 
 
 
 
 
 
 
 
 
U.S. Office Locations:
 
 
 
 
 
 
 
Permanent Office Locations:
 
 
 
 
 
 
 
Operated during the prior tax season
 
3,764

 
3,663

 
3,816

 
Offices opened
 
453

 
397

 
289

 
Offices closed
 
(257
)
 
(296
)
 
(442
)
 
Operated during the current tax season
 
3,960

 
3,764

 
3,663

 
 
 
 
 
 
 
 
 
Seasonal Office Locations:
 
 
 
 
 
 
 
Operated during the prior tax season
 
262

 
486

 
427

 
Offices opened
 
127

 
118

 
334

 
Offices closed
 
(178
)
 
(342
)
 
(275
)
 
Operated during the current tax season
 
211

 
262

 
486

 
 
 
 
 
 
 
 
 
Processing Centers
 
54

 
43

 
26

 
Total U.S. Office locations
 
4,225

 
4,069

 
4,175

 
 
 
 
 
 
 
 
 
Canada office locations
 
262

 
259

 
263

 
 
 
 
 
 
 
 
 
Total office locations
 
4,487

 
4,328

 
4,438

 
 
 
 
 
 
 
 
 
Additional office information:
 
 
 
 
 
 
 
Company-owned offices
 
310

 
182

 
216

 
Franchised offices
 
4,177

 
4,146

 
4,222

 
Total office locations
 
4,487

 
4,328

 
4,438

 

SiempreTax+ is operating 144 offices during the 2016 tax season compared to 57 during the 2015 season. These offices consist of second offices opened by current franchisees in territories they already owned, conversions of existing Liberty Tax offices and offices opened in new territories.

Territory Sales
During the first nine months of fiscal 2016, we sold approximately 180 new territories, compared to approximately 160 during the same period in fiscal 2015 and 132 in 2014. New territories include territories sold to new franchisees and additional territories sold to existing franchisees.
 


10


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.
Accounting Pronouncements
In September 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.” ASU 2015-16 eliminates the requirement for an acquirer to retrospectively adjust provisional amounts recorded in a business combination to reflect new information about the facts and circumstances that existed as of the acquisition date and that, if known, would have affected measurement or recognition of amounts initially recognized. As an alternative, the amendment requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the financial statements of the period in which adjustments to provisional amounts are determined, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. ASU 2015-16 is effective prospectively for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, which means that it will be effective for us in the first quarter of our fiscal year beginning May 1, 2016. Early adoption is permitted. The Company is currently evaluating the impact of our pending adoption of ASU 2015-16 on our consolidated financial statements.

In May 2014 the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” and in August 2015 the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which defers the effective date of ASU 2014-09 by one year. ASU 2014-09 supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible that more judgment and estimates may be required within the revenue recognition process than are required under present U.S. GAAP. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation. The new standard also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. ASU 2014-09 is effective for reporting periods beginning after December 15, 2017, which means that it will be effective for us in the first quarter of our fiscal year beginning May 1, 2018. Early adoption of one year prior to the required effective date is permitted. ASU 2014-09 allows adoption using either of two methods: (i) retrospective to each prior reporting period presented, with the option to elect certain practical expedients; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures. The Company is currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements.

In November 2015 the FASB issued ASU 2015-17, "Balance Sheet Classification of Deferred Taxes (Topic 740)," which requires entities with a classified balance sheet to present all deferred tax assets and liabilities as non-current. This ASU is effective for interim and annual periods in fiscal years beginning after December 15, 2016, which means that it will be effective for us in the first quarter of our fiscal year beginning May 1, 2017. The Company is currently evaluating the impact of our pending adoption of ASU 2015-17 on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases," which requires recognition of lease assets and lease liabilities on the balance sheet of lessees. ASU 2016-02 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2018, which for us is the first quarter of our fiscal year beginning May 1, 2019. Early adoption is permitted. ASU 2016-02 requires a modified retrospective transition approach and provides certain optional transition relief. The Company is currently evaluating the effect the adoption of this guidance will have on its consolidated results of operations, financial position and cash flows.

 

11


Foreign Operations
 
Canadian operations contributed $0.3 million and $0.2 million in revenues for the three months ended January 31, 2016 and 2015, respectively and $1.6 million and $1.4 million in revenues for the nine months ended January 31, 2016 and 2015, respectively.
 
(2) Accounts and Notes Receivable
 
The Company provides financing to franchisees and ADs 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 12%. 

Notes and interest receivable are presented in the consolidated balance sheets as follows:

 
 
January 31, 2016
 
April 30, 2015
 
January 31, 2015
 
 
(In thousands)
Notes receivable - current
 
$
90,858

 
$
24,465

 
$
76,233

Notes receivable - non-current
 
34,374

 
22,416

 
29,389

Interest
 
5,156

 
1,033

 
3,989

  Total notes and interest receivable
 
$
130,388

 
$
47,914

 
$
109,611


 
Most of the notes receivable are due from the Company's franchisees and ADs and are collateralized by the underlying franchise or AD and, when the franchise or AD 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.
Accounts and notes receivable include royalties billed that relate to territories operated by franchisees located in AD territories and a portion of those accounts and notes receivable are payable to the AD. The Company has recorded amounts payable to ADs for their share of these receivables of $16.3 million, $24.3 million, and $15.0 million at January 31, 2016, April 30, 2015 and January 31, 2015, respectively.
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 recognized as note payments are received by the Company. Payments received on AD fee notes receivable generate a corresponding increase in deferred revenue, which is amortized into revenue over the life of the AD contract, historically ten years. The Company recently changed the term of new and renewal AD contracts to six years from ten years and the revenue for new AD contracts will be recognized over that shorter period, subject to the receipt of cash. Unrecognized revenue was $40.7 million, $38.6 million and $42.0 million at January 31, 2016, April 30, 2015 and January 31, 2015, respectively.
At January 31, 2016, the Company had unfunded lending commitments for working capital loans to franchisees and ADs of $10.2 million.

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 value of the franchises and AD areas supporting the receivables. Any adverse change in the tax preparation industry or the individual franchise or AD areas could affect the Company's estimate of the allowance.
Activity in the allowance for doubtful accounts for the three and nine months ended January 31, 2016 and 2015 was as follows: 

12


 
 
Three Months Ended January 31,
 
Nine Months Ended January 31,
 
 
2016
 
2015
 
2016
 
2015
 
 
(In thousands)
Balance at beginning of period
 
$
8,075

 
$
7,145

 
$
7,355

 
$
6,850

Provision for doubtful accounts
 
1,192

 
1,245

 
4,589

 
4,453

Write-offs
 
(1,883
)
 
(1,131
)
 
(4,461
)
 
(4,024
)
Foreign currency adjustment
 
(53
)
 
(160
)
 
(152
)
 
(180
)
Balance at end of period
 
$
7,331

 
$
7,099

 
$
7,331

 
$
7,099



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. We perform our impairment analysis annually due to the seasonal nature of our operations. While not specifically identifiable as of the balance sheet date, the Company's experience also indicates that a portion of other accounts and notes receivable are also impaired, because management does not expect to collect all principal and interest due under the current contractual terms. Net amounts due include contractually obligated accounts and notes receivable plus accrued interest, reduced by unrecognized revenue, the allowance for uncollected interest, amounts due ADs, and amounts owed to the franchisee by the Company. In establishing the fair value of the underlying franchise, management considers recent sales between franchisees, net fees of open offices earned during the most recently completed tax season, and the number of unopened offices.


13


The allowance for doubtful accounts at January 31, 2016, April 30, 2015 and January 31, 2015, was allocated as follows:
 
 
January 31, 2016
 
April 30, 2015
 
January 31, 2015
 
 
(In thousands)
Impaired:
 
 

 
 
 
 

Notes and interest receivable, net of unrecognized revenue
 
$
6,466

 
$
10,921

 
$
6,128

Accounts receivable
 
4,274

 
7,634

 
3,478

Less amounts due to ADs and franchisees
 
(727
)
 
(1,535
)
 
(416
)
Amounts receivable less amounts due to ADs and franchisees
 
$
10,013

 
$
17,020

 
$
9,190

 
 
 
 
 
 
 
Allowance for doubtful accounts for impaired notes and accounts receivable
 
$
3,693

 
$
6,594

 
$
4,709

 
 
 
 
 
 
 
Non-impaired:
 
 

 
 
 
 

Notes and interest receivable, net of unrecognized revenue
 
$
123,922

 
$
36,993

 
$
103,483

Accounts receivable
 
55,591

 
38,487

 
46,542

Less amounts due to ADs and franchisees
 
(16,170
)
 
(25,150
)
 
(15,186
)
Amounts receivable less amounts due to ADs and franchisees
 
$
163,343

 
$
50,330

 
$
134,839

 
 
 
 
 
 
 
Allowance for doubtful accounts for non-impaired notes and accounts receivable
 
$
3,638

 
$
761

 
$
2,390

 
 
 
 
 
 
 
Total:
 
 
 
 
 
 
Notes and interest receivable, net of unrecognized revenue
 
$
130,388

 
$
47,914

 
$
109,611

Accounts receivable
 
59,865

 
46,121

 
50,020

Less amounts due to ADs and franchisees
 
(16,897
)
 
(26,685
)
 
(15,602
)
Amounts receivable less amounts due to ADs and franchisees
 
$
173,356

 
$
67,350

 
$
144,029

 
 
 
 
 
 
 
Total allowance for doubtful accounts
 
$
7,331

 
$
7,355

 
$
7,099


The Company’s average investment in impaired notes receivable during the nine months ended January 31, 2016 and 2015 was $8.7 million and $7.3 million, respectively.
 
Analysis of Past Due Receivables
The breakdown of accounts and notes receivable past due at January 31, 2016 was as follows:
 
 
Past due
 
Current
 
Total
receivables
 
 
(In thousands)
Accounts receivable
 
$
26,359

 
$
33,506

 
$
59,865

Notes and interest receivable, net of unrecognized revenue
 
5,988

 
124,400

 
130,388

Total accounts, notes and interest receivable
 
$
32,347

 
$
157,906

 
$
190,253

 
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, at which time the notes are put on nonaccrual status. The Company’s investment in notes receivable on nonaccrual status was $6.0 million, $9.3 million, and $6.7 million at January 31, 2016, April 30, 2015, and January 31, 2015, respectively. Payments received on notes in non-accrual status are applied to interest income first until the note is current and then to the principal note balance. Accounts receivables unpaid as of April 30 each year often remain

14


unpaid until the following tax season due to the seasonal nature of our operations and franchisees' cash flows. Non-accrual notes that are paid current and expected to remain current are moved back into accrual status during the next annual review.


(3) Investments

During the third quarter of fiscal 2016, the Company purchased a corporate equity security for $5.0 million, which was classified as available-for-sale and reported in other non-current assets. The Company recorded an unrealized loss at January 31, 2016, of $0.3 million, net of taxes, which was reported in the Company's Consolidated Statement of Comprehensive Loss.

(4) Goodwill and Intangible Assets 
Changes in the carrying amount of goodwill for the nine months ended January 31, 2016 and 2015 were as follows:

 
 
January 31, 2016
 
January 31, 2015
 
 
(In thousands)
Balance at beginning of period
 
$
3,377

 
$
2,978

Acquisitions of assets from franchisees
 
975

 
330

Disposals and foreign currency changes, net
 
(283
)
 
(123
)
Impairments
 
—

 
—

Balance at end of period
 
$
4,069

 
$
3,185

Components of intangible assets were as follows as of January 31, 2016, April 30, 2015 and January 31, 2015:
 
 
January 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

 
$
(254
)
 
$
773

Assets acquired from franchisees:
 
 
 
 
 
 
 
 
Customer lists
 
4 years
 
1,394

 
(634
)
 
760

Reacquired rights
 
2 years
 
441

 
(407
)
 
34

AD rights
 
10 years
 
16,694

 
(5,044
)
 
11,650

Total intangible assets
 
 
 
$
19,556

 
$
(6,339
)
 
$
13,217


 
 
April 30, 2015
 
 
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

 
$
—

 
$
1,027

Assets acquired from franchisees:
 
 
 
 
 
 
 
 
Customer lists
 
4 years
 
759

 
(441
)
 
318

Reacquired rights
 
2 years
 
559

 
(473
)
 
86

AD rights
 
10 years
 
17,345

 
(4,104
)
 
13,241

Total intangible assets
 
 
 
$
19,690

 
$
(5,018
)
 
$
14,672



15


 
 
January 31, 2015
 
 
Weighted average amortization period
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
 
 
(In thousands)
Amortizable intangible assets:
 
 
 
 
 
 
 
 
Customer lists acquired from unrelated third parties
 
6 years
 
$
4,816

 
$
(2,038
)
 
$
2,778

Assets acquired from franchisees:
 
 
 
 
 
 
 
 
Customer lists
 
4 years
 
968

 
(450
)
 
518

Reacquired rights
 
2 years
 
785

 
(397
)
 
388

AD rights
 
10 years
 
17,345

 
(3,671
)
 
13,674

Total intangible assets
 
 
 
$
23,914

 
$
(6,556
)
 
$
17,358


During the nine months ended January 31, 2016, the Company acquired the assets of U.S. and Canadian franchisees and third parties for $2.2 million. During the nine months ended January 31, 2015, the Company acquired the assets of U.S. and Canadian franchisees for $1.5 million. These acquisitions were accounted for as business combinations. The allocation of the purchase price of assets acquired from franchisees and third parties to intangible assets during the nine months ended January 31, 2016 and 2015 was as follows:
 
 
Nine Months Ended January 31,
 
 
2016
 
2015
 
 
(In thousands)
Customer lists and reacquired rights
 
$
822

 
$
1,169

Accounts receivable
 
320

 
—

Property, equipment, and software
 
40

 
—

Goodwill
 
975

 
330

Total
 
$
2,157

 
$
1,499


(5) Assets Held For Sale
At the end of the third quarter of fiscal 2016 and 2015, assets acquired from U.S. franchisees were classified as assets held for sale. During the nine months ended January 31, 2016, the Company acquired $11.5 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 $5.2 million and goodwill of $6.3 million prior to being recorded as assets held for sale. During the nine months ended January 31, 2015, the Company acquired $6.7 million in assets from U.S. franchisees and third parties that were first accounted for as business combinations, with the value allocated to customer lists and reacquired rights of $3.2 million and goodwill of $3.5 million prior to being recorded as assets held for sale. The acquired businesses are operated as Company-owned offices until a buyer is located and a new franchise agreement is entered into.

Changes in the carrying amount of assets held for sale for the nine months ended January 31, 2016 and 2015 were as follows:

 
Nine Months Ended January 31,
 
2016
 
2015
 
(In thousands)
Balance at beginning of period
$
5,160

 
$
4,413

Reacquired, acquired from third parties, and other
11,820

 
6,656

Dispositions
(5,816
)
 
(5,456
)
Balance at end of period
$
11,164

 
$
5,613



16


(6) Debt
 
The Company has an amended credit facility that consists of a $21.2 million term loan 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. At January 31, 2016 and 2015, the interest rate was 2.05% and 1.79%, respectively and the average interest rate paid during the nine months ended January 31, 2016 and 2015 was 1.84% and 1.78%, respectively. The indebtedness is collateralized by substantially all the assets of the Company and both loans mature on April 30, 2019 (except as to the commitments of one lender that has a small balance under the revolving credit facility, which mature on September 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. In addition, the Company must reduce the outstanding balance under its revolving loan to zero for a period of at least 45 consecutive days each fiscal year. The Company was in compliance with the financial covenants at January 31, 2016. 
Debt at January 31, 2016, April 30, 2015, and January 31, 2015 consisted of the following:
 
 
January 31, 2016
 
April 30, 2015
 
January 31, 2015
 
 
(In thousands)
Credit Facility:
 
 

 
 
 
 

Revolver
 
$
150,682

 
$
—

 
$
110,762

Term loan
 
19,789

 
20,453

 
20,984

 
 
170,471

 
20,453

 
131,746

Amounts due to former ADs and mortgages
 
3,963

 
4,944

 
4,901

 
 
174,434

 
25,397

 
136,647

Less: current portion
 
(5,220
)
 
(3,934
)
 
(4,107
)
Long-term debt
 
$
169,214

 
$
21,463

 
$
132,540

 
(7) 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, 2016, the fair value of foreign currency contracts included in other liabilities was $23 thousand and at January 31, 2015, the fair value of foreign currency contracts included in other assets was $271 thousand. The Company had no outstanding forward contracts at April 30, 2015.

(8) 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.


17


(9) Stockholders’ Equity

Stockholders' Equity Activity
During the nine months ended January 31, 2016 and 2015, activity in stockholders’ equity was as follows:
 
 
Nine Months Ended January 31,
 
 
2016
 
2015
 
 
(in thousands, except for share amounts)
Class A common shares issued from the exercise of stock options
 
132,510

 
629,633

Class A common shares issued from the vesting of restricted stock and as Board of Directors compensation
 
14,293

 
17,495

Proceeds from exercise of stock options
 
$
1,998

 
$
10,053

Stock-based compensation expense
 
$
1,348

 
$
2,002

Class A common shares repurchased
 
82,355

 
1,270,661

Payments for repurchased shares
 
$
1,977

 
$
35,910

Tax benefit of stock option exercises
 
$
933

 
$
4,776

Dividends declared
 
$
6,629

 
$
—




Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss at January 31, 2016, April 30, 2015 and January 31, 2015 were as follows.
 
 
January 31, 2016
 
April 30, 2015
 
January 31, 2015
 
 
(In thousands)
Foreign currency adjustment
 
$
(2,060
)
 
$
(697
)
 
$
(1,442
)
Unrealized loss on available-for-sale securities, net of taxes of $208, $-, and $-, respectively
 
(347
)
 
—

 
—

Forward contracts related to foreign currency exchange rates
 
(23
)
 
—

 
271

Total accumulated other comprehensive loss
 
$
(2,430
)
 
$
(697
)
 
$
(1,171
)

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

18


The computation of basic and diluted net income (loss) per share for the three and nine months ended January 31, 2016 and 2015 is as follows:
 
 
Three Months Ended 
 January 31, 2016
 
Three Months Ended 
 January 31, 2015
 
 
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)
 
(in thousands, except for share and per
share amounts)
Basic net income per share:
 
 

 
 

 
 

 
 

Numerator
 
 

 
 

 
 

 
 

Allocation of undistributed income
 
$
4,405

 
$
333

 
$
1,783

 
$
136

Amounts allocated to participating securities:
 
 

 
 

 
 

 
 

Exchangeable shares
 
(319
)
 
(24
)
 
(130
)
 
(10
)
Net income attributable to common stockholders
 
$
4,086

 
$
309

 
$
1,653

 
$
126

Denominator
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 
11,895,367

 
900,000

 
11,779,286

 
900,000

 
 
 
 
 
 
 
 
 
Basic net income per share
 
$
0.34

 
$
0.34

 
$
0.14

 
$
0.14

 
 
 
 
 
 
 
 
 
Diluted net income per share:
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
Allocation of undistributed earnings for basic computation
 
$
4,086

 
$
309

 
$
1,653

 
$
126

Reallocation of undistributed earnings as a result of assumed conversion of:
 
 
 
 
 
 
 
 
Class B common stock to Class A common stock
 
309

 
—

 
126

 
—

Exchangeable shares to Class A common stock
 
343

 
—

 
140

 
—

 
 
$
4,738

 
$
309

 
$
1,919

 
$
126

Denominator
 
 

 
 

 
 

 
 

Number of shares used in basic computation
 
11,895,367

 
900,000

 
11,779,286

 
900,000

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

 
—

 
900,000

 
—

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

 
—

 
1,000,000

 
—

Employee stock options
 
206,989

 
13,504

 
547,877

 
36,046

 
 
14,002,356

 
913,504

 
14,227,163

 
936,046

 
 
 
 
 
 
 
 
 
Diluted net income per share
 
$
0.34

 
$
0.34

 
$
0.13

 
$
0.13


Diluted net income per share above excludes the impact of shares of potential common stock from the exercise of options to purchase 492,611 and 140,416 shares for the three months ended January 31, 2016 and 2015, respectively, because the effect would be anti-dilutive. These options are excluded because their exercise price exceeds the average market price of the Company's stock for each respective period.



19




Nine Months Ended 
 January 31, 2016
 
Nine Months Ended 
 January 31, 2015
 

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)
 
(in thousands, except for share and per share amounts)
Basic and diluted net loss per share:
 
 

 
 

 
 

 
 

Numerator
 
 

 
 

 
 

 
 

Allocation of undistributed losses
 
$
(11,965
)
 
$
(905
)
 
$
(16,778
)
 
$
(1,275
)
Denominator
 
 

 
 

 
 

 
 

Weighted-average common shares outstanding
 
11,894,185

 
900,000

 
11,842,288

 
900,000

 
 
 
 
 
 
 
 
 
Basic and diluted net loss per share
 
$
(1.01
)
 
$
(1.01
)
 
$
(1.42
)
 
$
(1.42
)
 
Diluted net loss per share above excludes the impact of shares of potential common stock from the exercise of options to purchase 1,073,332 and 1,160,106 shares for the nine months ended January 31, 2016 and 2015, respectively, because the effect would be anti-dilutive. These options are excluded because the Company has a net loss for each respective periods.

(10) Stock Compensation Plans
 
Stock Options
 
The Company has an equity and cash incentive plan, for the issuance of up to 2,500,000 shares of Class A common stock in which employees and outside directors are eligible to receive awards. At January 31, 2016, 1,380,602 shares of Class A common stock remain available for grant. There were 200,387 options granted during the nine months ended January 31, 2016.
Stock option activity during the nine months ended January 31, 2016 was as follows:
 
 
Number of
options
 
Weighted
average
exercise price
Balance at beginning of period
 
1,343,559

 
$
19.28

Granted
 
200,387

 
22.95

Exercised
 
(132,510
)
 
15.09

Expired or forfeited
 
(150,490
)
 
24.39

Balance at end of period
 
1,260,946

 
19.70


Intrinsic value is defined as the market value of the stock less the cost to exercise. The total intrinsic value of options exercised during the nine months ended January 31, 2016 was $0.7 million. The total intrinsic value of stock options outstanding at January 31, 2016 was $4.4 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 nine months ended January 31, 2016 was as follows: 
 
 
Nonvested
options
 
Weighted
average
exercise price
Balance at beginning of period
 
385,416

 
$
27.56

Granted
 
200,387

 
22.95

Vested
 
(53,750
)
 
33.57

Forfeited
 
(50,000
)
 
33.79

Balance at end of period
 
482,053

 
24.33

 

20


At January 31, 2016, unrecognized compensation costs related to nonvested stock options were $2.4 million. These costs are expected to be recognized through fiscal 2021.
The following table summarizes information about stock options outstanding and exercisable at January 31, 2016:
 
 
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
 
9,650

 
$
10.50

 
0.2
 
9,650

 
$
10.50

15.00
 
515,617

 
15.00

 
1.8
 
515,617

 
15.00

16.38 - 19.75
 
264,876

 
17.94

 
3.9
 
189,876

 
17.89

22.18 - 29.48
 
405,387

 
24.83

 
5.9
 
35,000

 
26.18

33.38 - 33.79
 
65,416

 
33.38

 
5.8
 
28,750

 
33.38


 
1,260,946

 
19.70

 

 
778,893

 
16.83




Restricted Stock Units
 
Restricted stock activity during the nine months ended January 31, 2016 was as follows:
 
 
Number of
Restricted stock units
 
Weighted
average fair value at grant date
Balance at beginning of period
 
28,929

 
$
30.63

Granted
 
32,056

 
23.06

Vested
 
(13,394
)
 
27.99

Forfeited
 
(3,798
)
 
28.46

Balance at end of period
 
43,793

 
26.09

 
At January 31, 2016, unrecognized compensation costs related to restricted stock units were $0.7 million. These costs are expected to be recognized through fiscal 2019.

(11) Fair Value of Financial Instruments
 
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities subject to fair value measurements on a recurring basis are classified according to a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. Valuation methodologies for the fair value hierarchy are as follows:
 
•
Level 1 — Quoted prices for identical assets and liabilities in active markets.
 
•
Level 2 — Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-based valuations in which all significant inputs are observable in the market.

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

The Company measures or monitors certain of its assets and liabilities on a fair value basis. Fair value is used on a recurring basis for those assets and liabilities for which fair value is the primary basis of accounting. Other assets and liabilities are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. The following tables present, at January 31, 2016, April 30, 2015 and January 31, 2015, for each of the fair value hierarchy levels, the assets and liabilities that are measured at fair value on a recurring and nonrecurring basis (in thousands):

21


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

 
 

 
 

 
 

Recurring:
 
 

 
 

 
 

 
 

Available-for-sale equity security
 
$
4,444

 
$
4,444

 
$
—

 
$
—

Forward contract related to foreign currency exchange rates
 
23

 
—

 
23

 
—

Nonrecurring:
 
 

 
 

 
 

 
 

Impaired accounts and notes receivable
 
8,525

 
—

 
—

 
8,525

Total recurring and nonrecurring assets
 
$
12,992

 
$
4,444

 
$
23

 
$
8,525


 
 
April 30, 2015
 
 
 
 
Fair value measurements using
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 

 
 

 
 

Recurring:
 
 

 
 

 
 

 
 

Cash equivalents
 
$
16,975

 
$
16,975

 
$
—

 
$
—

Nonrecurring:
 
 

 
 

 
 

 
 

Impaired accounts and notes receivable
 
11,961

 
—

 
—

 
11,961

Impaired online software
 
1,253

 
—

 
—

 
1,253

Impaired acquired online customer lists
 
1,027

 
—

 
—

 
1,027

Impaired goodwill
 
224

 
—

 
—

 
224

Impaired reacquired rights
 
79

 
—

 
—

 
79

Impaired customer lists
 
126

 
—

 
—

 
126

Assets held for sale
 
5,160

 
—

 
—

 
5,160

Total nonrecurring assets
 
19,830

 
—

 
—

 
19,830

Total recurring and nonrecurring assets
 
$
36,805

 
$
16,975

 
$
—

 
$
19,830



 
 
January 31, 2015
 
 
 
 
Fair value measurements using
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 

 
 

 
 

Recurring:
 
 

 
 

 
 

 
 

Forward contracts related to foreign currency exchange rates
 
$
271

 
$
—

 
$
271

 
$
—

Nonrecurring:
 
 

 
 

 
 

 
 

Impaired accounts and notes receivable
 
4,897

 
—

 
—

 
4,897

Total recurring and nonrecurring assets
 
$
5,168

 
$
—

 
$
271

 
$
4,897



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 nine months ended January 31, 2016 and 2015.