Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  
FORM 10-Q
 
ý      Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended January 31, 2017
 
OR
 
o         Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from             to            
 
Commission File Number 001-35588
 
Liberty Tax, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
27-3561876
(State of incorporation)
 
(IRS employer identification no.)
 
1716 Corporate Landing Parkway
Virginia Beach, Virginia 23454
(Address of principal executive offices)
 (757) 493-8855
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.  Yes 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 2, 2017 was 12,682,550 shares.

The number of shares outstanding of the registrant's Class B common stock as of March 2, 2017 was 200,000 shares.



LIBERTY TAX, INC.
 
Form 10-Q for the Quarterly Period Ended January 31, 2017
 
Table of Contents
 
 
 
Page
 
 
Number
 
 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheets as of January 31, 2017, April 30, 2016 and January 31, 2016
 
 
 
 
Consolidated Statements of Operations for the three and nine months ended January 31, 2017 and 2016
 
 
 
 
Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended January 31, 2017 and 2016
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the nine months ended January 31, 2017 and 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I. FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS 
LIBERTY TAX, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
January 31, 2017, April 30, 2016 and January 31, 2016
(In thousands, except share data)
 
 
January 31, 2017
 
April 30, 2016
 
January 31, 2016
Assets
 
(unaudited)
 
 

 
(unaudited)
Current assets:
 
 

 
 

 
 
Cash and cash equivalents
 
$
3,459

 
$
9,906

 
$
1,787

Receivables:
 
 
 
 

 
 

Accounts receivable
 
63,013

 
49,908

 
59,865

Notes receivable - current
 
79,122

 
26,710

 
90,858

Interest receivable, net
 
5,201

 
1,944

 
5,156

Allowance for doubtful accounts - current
 
(8,529
)
 
(6,840
)
 
(5,993
)
Total current receivables, net
 
138,807

 
71,722

 
149,886

Assets held for sale
 
17,549

 
9,886

 
11,164

Income taxes receivable
 
12,827

 
—

 
16,303

Deferred income tax asset
 
3,881

 
3,496

 
3,354

Other current assets
 
23,079

 
5,838

 
21,188

Total current assets
 
199,602

 
100,848

 
203,682

Property, equipment, and software, net of accumulated depreciation of $25,681, $21,052 and $19,825, respectively
 
41,734

 
40,957

 
41,216

Notes receivable, non-current
 
27,455

 
25,514

 
34,374

  Allowance for doubtful accounts, non-current
 
(1,713
)
 
(2,010
)
 
(1,338
)
Total notes receivables, non-current, net
 
25,742

 
23,504

 
33,036

Goodwill
 
4,811

 
4,228

 
4,069

Other intangible assets, net
 
22,648

 
16,270

 
13,217

Other assets
 
3,214

 
7,416

 
8,458

Total assets
 
$
297,751

 
$
193,223

 
$
303,678

Liabilities and Stockholders’ Equity
 
 

 
 

 
 
Current liabilities:
 
 

 
 

 
 
Current installments of long-term obligations
 
$
5,688

 
$
5,947

 
$
5,220

Accounts payable and accrued expenses
 
22,259

 
11,664

 
15,506

Due to Area Developers
 
13,157

 
24,977

 
16,258

Income taxes payable
 
—

 
3,581

 
—

Deferred revenue - current
 
3,436

 
4,682

 
4,413

Total current liabilities
 
44,540

 
50,851

 
41,397

Long-term obligations, excluding current installments, net of debt issuance costs of $70, $108 and $122, respectively
 
19,238

 
17,493

 
18,410

Revolving credit facility
 
131,215

 
—

 
150,682

Deferred revenue - non-current
 
5,307

 
7,056

 
7,206

Deferred income tax liability
 
8,203

 
6,322

 
6,049

Total liabilities
 
208,503

 
81,722

 
223,744

Commitments and contingencies
 
 

 
 

 
 
Stockholders’ equity:
 
 

 
 
 
 

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

 
—

 
—

Class A common stock, $0.01 par value per share, 21,200,000 shares authorized, 12,681,245, 11,993,292 and 11,969,604 shares issued and outstanding, respectively
 
127

 
120

 
120

Class B common stock, $0.01 par value per share, 1,000,000 shares authorized, 200,000, 900,000 and 900,000 shares issued and outstanding, respectively
 
2

 
9

 
9

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

 
10

 
10

Additional paid-in capital
 
7,862

 
7,153

 
6,385

Accumulated other comprehensive loss, net of taxes
 
(1,673
)
 
(1,698
)
 
(2,430
)
Retained earnings
 
82,920

 
105,907

 
75,840

Total stockholders’ equity
 
89,248

 
111,501

 
79,934

Total liabilities and stockholders’ equity
 
$
297,751

 
$
193,223

 
$
303,678


See accompanying notes to condensed consolidated financial statements.

1


LIBERTY TAX, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Three and Nine Months Ended January 31, 2017 and 2016 (unaudited)
(In thousands, except share count and per share data)
 
 
 
Three Months Ended January 31,
 
Nine Months Ended January 31,
 
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 

 
 

 
 

 
 

Franchise fees
 
$
522

 
$
1,011

 
$
1,126

 
$
2,526

Area Developer fees
 
1,001

 
1,363

 
3,118

 
4,491

Royalties and advertising fees
 
19,078

 
25,571

 
21,862

 
28,589

Financial products
 
18,745

 
17,266

 
19,528

 
17,781

Interest income
 
3,246

 
3,188

 
8,500

 
7,503

Tax preparation fees, net of discounts
 
3,883

 
3,843

 
5,803

 
4,805

Other revenue
 
1,948

 
1,379

 
2,869

 
3,320

Total revenue
 
48,423

 
53,621

 
62,806

 
69,015

Operating expenses:
 
 

 
 

 
 

 
 

Employee compensation and benefits
 
11,240

 
11,638

 
29,836

 
28,454

Selling, general, and administrative expenses
 
18,193

 
12,585

 
35,679

 
29,097

Area Developer expense
 
5,958

 
9,340

 
6,979

 
10,722

Advertising expense
 
5,424

 
8,972

 
8,838

 
14,072

Depreciation, amortization, and impairment charges
 
2,503

 
2,118

 
6,330

 
5,626

Total operating expenses
 
43,318

 
44,653

 
87,662

 
87,971

Income (loss) from operations
 
5,105

 
8,968

 
(24,856
)
 
(18,956
)
Other income (expense):
 
 
 
 
 
 
 
 
Foreign currency transaction gain (loss)
 
15

 
(14
)
 
(10
)
 
(39
)
Gain on sale of available-for-sale securities
 
—

 
—

 
50

 
—

Interest expense
 
(977
)
 
(705
)
 
(2,053
)
 
(1,592
)
Income (loss) before income taxes
 
4,143

 
8,249

 
(26,869
)

(20,587
)
Income tax expense (benefit)
 
1,688

 
3,511

 
(10,552
)
 
(7,717
)
Net income (loss)
 
2,455

 
4,738

 
(16,317
)
 
(12,870
)
Less: Net income attributable to participating securities
 
(177
)
 
(343
)
 
—

 
—

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

 
$
4,395

 
$
(16,317
)
 
$
(12,870
)
 
 
 
 
 
 
 
 
 
Basic
 
$
0.18

 
$
0.34

 
$
(1.26
)
 
$
(1.01
)
Diluted
 
$
0.18

 
$
0.34

 
$
(1.26
)
 
$
(1.01
)
 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding basic
 
12,902,577

 
12,795,367

 
12,899,757

 
12,794,185

Weighted-average shares outstanding diluted
 
13,924,210

 
14,002,356

 
12,899,757

 
12,794,185

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

 
$
0.16

 
$
0.48

 
$
0.48


See accompanying notes to condensed consolidated financial statements.

2


LIBERTY TAX, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
Three and Nine Months Ended January 31, 2017 and 2016 (unaudited)
(In thousands)
 
 
 
Three Months Ended January 31,
 
Nine Months Ended January 31,
 
 
2017
 
2016
 
2017
 
2016
Net income (loss)
 
$
2,455

 
$
4,738

 
$
(16,317
)
 
$
(12,870
)
Unrealized loss on interest rate swap agreement, net of taxes of $14, $-, $14, and $-, respectively
 
(22
)
 
—

 
(22
)
 
—

Unrealized (loss) gain on available-for-sale securities, net of taxes of $-, $208, $345 and $208, respectively
 
—

 
(347
)
 
580

 
(347
)
Reclassified gain on sale of available-for-sale securities included in income, net of taxes of $-, $-, $20 and $-, respectively
 
—

 
—

 
(30
)
 
—

Foreign currency translation adjustment
 
189

 
(488
)
 
(513
)
 
(1,362
)
Forward contracts related to foreign currency exchange rates
 
9

 
(23
)
 
9

 
(23
)
Comprehensive income (loss)
 
$
2,631

 
$
3,880

 
$
(16,293
)
 
$
(14,602
)

 See accompanying notes to condensed consolidated financial statements.

3


LIBERTY TAX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine Months Ended January 31, 2017 and 2016 (unaudited)
(In thousands)
 
 
 
Nine Months Ended January 31,
 
 
2017
 
2016
Cash flows from operating activities:
 
 

 
 

Net loss
 
$
(16,317
)
 
$
(12,870
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 

 
 

Provision for doubtful accounts
 
6,482

 
4,589

Depreciation, amortization, and impairment charges
 
6,330

 
5,626

Stock-based compensation expense
 
1,520

 
1,348

Gain on sale of available-for-sale securities
 
(50
)
 
—

Gain on bargain purchases and sales of Company-owned offices
 
(634
)
 
(470
)
Deferred tax expense
 
1,046

 
7,253

Changes in accrued income taxes
 
(16,728
)
 
(18,283
)
Changes in other assets and liabilities
 
(43,694
)
 
(55,476
)
Net cash used in operating activities
 
(62,045
)
 
(68,283
)
Cash flows from investing activities:
 
 

 
 

Issuance of operating loans to franchisees
 
(63,670
)
 
(81,364
)
Payments received on operating loans to franchisees
 
4,065

 
3,077

Purchases of AD rights and Company-owned offices
 
(8,141
)
 
(3,713
)
Proceeds from sale of Company-owned offices and AD rights
 
1,291

 
2,851

Purchase of available-for-sale securities
 
—

 
(4,999
)
Proceeds from sale of available-for-sale securities
 
5,049

 
—

Purchases of property, equipment and software
 
(4,303
)
 
(8,685
)
Net cash used in investing activities
 
(65,709
)
 
(92,833
)
Cash flows from financing activities:
 
 
 
 

Proceeds from the exercise of stock options
 
—

 
1,998

Repurchase of common stock
 
(417
)
 
(1,977
)
Dividends paid
 
(6,670
)
 
(6,629
)
Repayment of amounts due to former ADs and franchisees
 
(1,204
)
 
(2,429
)
Repayment of long-term obligations
 
(3,710
)
 
(726
)
Borrowings under revolving credit facility
 
132,531

 
151,225

Repayments under revolving credit facility
 
(1,316
)
 
(543
)
Proceeds from mortgage debt
 
2,200

 
—

Payment for debt issue costs
 
(35
)
 
—

Tax benefit of stock option exercises
 
60

 
933

Net cash provided by financing activities
 
121,439

 
141,852

Effect of exchange rate changes on cash, net
 
(132
)
 
(336
)
Net decrease in cash and cash equivalents
 
(6,447
)
 
(19,600
)
Cash and cash equivalents at beginning of period
 
9,906

 
21,387

Cash and cash equivalents at end of period
 
$
3,459

 
$
1,787


  See accompanying notes to condensed consolidated financial statements.



4


LIBERTY TAX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine Months Ended January 31, 2017 and 2016 (unaudited)
(In thousands)
 
 
 
Nine Months Ended January 31,
 
 
2017
 
2016
Supplemental disclosures of cash flow information:
 
 

 
 

Cash paid for interest, net of capitalized interest of $106 and $225, respectively
 
$
1,702

 
$
974

Cash paid for taxes, net of refunds
 
5,062

 
2,374

Accrued capitalized software costs included in accounts payable
 
7

 
292

During the nine months ended January 31, 2017 and 2016, the Company acquired certain assets from ADs, franchisees, and third parties as follows:
 
 
 
 
Fair value of assets purchased
 
$
27,016

 
$
15,087

Receivables applied, net of amounts due ADs and related deferred revenue
 
(11,656
)
 
(9,391
)
Bargain purchase gains
 
(513
)
 
(451
)
Notes and accounts payable issued
 
(6,706
)
 
(1,532
)
Cash paid to ADs, franchisees and third parties
 
$
8,141

 
$
3,713

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

 
 

Book value of assets sold
 
$
9,287

 
$
8,505

Gain on sale - revenue deferred
 
617

 
1,688

Loss on sale - loss recognized
 
(98
)
 
(156
)
Notes received
 
(6,552
)
 
(7,186
)
Notes and accounts payable assumed
 
(1,963
)
 
—

Cash received from ADs and franchisees
 
$
1,291

 
$
2,851


See accompanying notes to condensed consolidated financial statements.

5


LIBERTY TAX, INC. AND SUBSIDIARIES
 
Notes to Condensed Consolidated Financial Statements
 
January 31, 2017 and 2016 (Unaudited)
 
(1) Organization and Significant Accounting Policies
 
Description of Business

Liberty Tax, Inc. (the "Company"), a Delaware corporation, is a holding company engaged through its subsidiaries as a franchisor and, to a lesser degree, an operator of a system of income tax preparation offices located in the United States 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 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.

The Company provides a substantial amount of lending to its franchisees and Area Developers ("ADs"). The Company allows franchisees and ADs to defer a portion of the franchise fee and AD fee, which are paid over time. The Company also offers its franchisees working capital loans to 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, 2016 was derived from the Company’s April 30, 2016 Annual Report on Form 10-K filed on June 29, 2016.
 
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, 2016 Annual Report on Form 10-K filed on June 29, 2016.
 

6


Office Count

The following table shows the U.S. office activity and the number of Canadian and Company-owned offices for the 2017, 2016 and 2015 tax seasons:

 
 
Tax Season
 
 
2017
 
2016
 
2015
 
 
 
 
 
 
 
U.S. Office Locations:
 
 
 
 
 
 
Permanent Office Locations:
 
 
 
 
 
 
Operated during the prior tax season
 
3,960

 
3,764

 
3,663

Offices opened
 
172

 
453

 
397

Offices closed
 
(422
)
 
(257
)
 
(296
)
Operated during the current tax season
 
3,710

 
3,960

 
3,764

 
 
 
 
 
 
 
Seasonal Office Locations:
 
 
 
 
 
 
Operated during the prior tax season
 
211

 
262

 
486

Offices opened
 
37

 
127

 
118

Offices closed
 
(181
)
 
(178
)
 
(342
)
Operated during the current tax season
 
67

 
211

 
262

 
 
 
 
 
 
 
Processing Centers
 
46

 
54

 
43

Total U.S. Office Locations
 
3,823

 
4,225

 
4,069

 
 
 
 
 
 
 
Canada Office Locations
 
254

 
262

 
259

 
 
 
 
 
 
 
Total Office Locations
 
4,077

 
4,487

 
4,328

 
 
 
 
 
 
 
Additional Office Information:
 
 
 
 
 
 
Company-owned offices
 
362

 
310

 
182

Franchised offices
 
3,715

 
4,177

 
4,146

Total Office Locations
 
4,077

 
4,487

 
4,328

 
 
 
 
 
 
 

SiempreTax+ is operating 159 offices during the 2017 tax season compared to 144 during the 2016 season and 57 during the 2015 season. These offices include second locations opened by current franchisees in existing territories, conversions of existing Liberty Tax offices and offices opened in new territories.
Territory Sales
 
During the first nine months of fiscal 2017, we sold approximately 85 new territories, compared to approximately 180 during the same period in fiscal 2016 and 160 in fiscal 2015.


7


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 May 2016, the Company adopted Accounting Standards Update ("ASU") 2015-03, "Simplifying the Presentation of Debt Issuance Costs", which requires that debt issuance costs related to a recognized debt liability to be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt premiums and discounts, and ASU 2015-15, "Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements", which further clarifies the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. ASU 2015-03 and ASU 2015-15 applies retrospectively and does not change the recognition and measurement requirements for debt issuance costs. The adoption of ASU 2015-03 and ASU 2015-15 resulted in the reclassification of $0.1 million of unamortized debt issuance costs related to the Company's borrowings from other assets to long-term obligations within our consolidated balance sheet as of January 31, 2017, April 30, 2016 and January 31, 2016, respectively.

In May 2016, the Company adopted ASU 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis", which effectively eliminates the presumption that a general partner should consolidate a limited partnership, modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIE"s) or voting interest entities, and affects the consolidation analysis of reporting entities that are involved with VIEs (particularly those that have fee arrangements and related party relationships). The Company has completed its evaluation and has concluded there is no material impact from the adoption of the new standard on its consolidated financial statements.

In March 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-09, "Improvements to Employee Share Based Payment Accounting (Topic 718)", to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The standard will be effective for the Company beginning with its first quarterly filing in fiscal year 2018. Early adoption is permitted, including adoption in an interim period prior to fiscal 2018. The Company is currently evaluating the impact of the adoption of this newly issued standard to its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230)", which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. The update is intended to reduce the existing diversity in practice and is effective for the Company beginning with its first quarterly filing in fiscal year 2019. The Company is currently evaluating the impact of the adoption of this newly issued standard to its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, "Measurement of Credit Losses on Financial Instruments", which changes how companies will measure credit losses for most financial assets and certain other instruments that aren't measured at fair value through net income. The standard replaces the "incurred loss" approach with an "expected loss" model for instruments measured at amortized cost (which generally will result in the earlier recognition of allowances for losses) and requires companies to record allowances for available-for-sale debt securities, rather than reduce the carrying amount. In addition, companies will have to disclose significantly more information, including information used to track credit quality by year of origination, for most financing receivables. The ASU should be applied as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the standard is effective. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for all entities for annual periods beginning after December 15, 2018, and interim periods therein. The ASU is effective for the Company beginning in the first quarter of fiscal year 2021. The Company is currently evaluating the impact of the adoption of this newly issued standard to its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This new standard eliminates Step 2 from the goodwill impairment test. Instead, an entity should compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The standard will be effective for the Company in the first quarter of our fiscal year 2021. Early adoption is

8


permitted. The Company is currently evaluating the impact of the adoption of this newly issued standard to its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” This new standard clarifies the definition of a business in order to allow for the evaluation of whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard will be effective for the Company in the first quarter of our fiscal year 2019. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this newly issued standard to its consolidated financial statements.

 
Foreign Operations
 
Canadian operations contributed $0.5 million and $0.3 million in revenues for the three months ended January 31, 2017 and 2016, respectively and $1.7 million and $1.6 million in revenues for the nine months ended January 31, 2017 and 2016.
 
(2) Accounts and Notes Receivable
 
The Company provides financing to ADs and franchisees for the purchase of franchises, areas, Company-owned offices, and operating loans for working capital and equipment needs. The franchise-related notes generally are payable over five years and the operating loans generally are due within one year. Most notes bear interest at an annual rate of 12%. 

Most of the notes receivable are due from the Company's ADs and franchisees and are collateralized by the underlying AD or franchise and, when the AD or franchise is an entity, are guaranteed by the owners of the respective entity. The debtors' ability to repay the notes is dependent upon both the performance of the tax preparation industry as a whole and the individual franchise or AD areas.
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 $13.2 million, $25.0 million, and $16.3 million at January 31, 2017, April 30, 2016 and January 31, 2016, respectively.
At January 31, 2017, the Company had unfunded lending commitments for working capital loans to franchisees and ADs of $22.3 million through the end of the current fiscal year.

Allowance for Doubtful Accounts
The adequacy of the allowance for doubtful accounts is assessed on a quarterly basis and adjusted as deemed necessary. Management believes the recorded allowance is adequate based upon its consideration of the estimated fair value of the franchises and AD areas collateralizing the receivables. Any adverse change in the tax preparation industry or the individual franchise or AD areas could affect the Company's estimate of the allowance.
Activity in the allowance for doubtful accounts for the three and nine months ended January 31, 2017 and 2016 was as follows: 
 
 
Three Months Ended January 31,
 
Nine Months Ended January 31,
 
 
2017
 
2016
 
2017
 
2016
 
 
(In thousands)
Balance at beginning of period
 
$
8,991

 
$
8,075

 
$
8,850

 
$
7,355

Provision for doubtful accounts
 
3,195

 
1,192

 
6,482

 
4,589

Write-offs
 
(1,967
)
 
(1,883
)
 
(5,051
)
 
(4,461
)
Foreign currency adjustment
 
23

 
(53
)
 
(39
)
 
(152
)
Balance at end of period
 
$
10,242

 
$
7,331

 
$
10,242

 
$
7,331



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

9


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

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

 
 
 
 

Notes and interest receivable, net of unrecognized revenue
 
$
10,012

 
$
12,960

 
$
6,466

Accounts receivable
 
6,341

 
7,083

 
4,274

Less amounts due to ADs and franchisees
 
(589
)
 
(1,426
)
 
(727
)
Amounts receivable less amounts due to ADs and franchisees
 
$
15,764

 
$
18,617

 
$
10,013

 
 
 
 
 
 
 
Allowance for doubtful accounts for impaired notes and accounts receivable
 
$
6,814

 
$
7,787

 
$
3,693

 
 
 
 
 
 
 
Non-impaired:
 
 

 
 
 
 

Notes and interest receivable, net of unrecognized revenue
 
$
101,766

 
$
41,208

 
$
123,922

Accounts receivable
 
56,672

 
42,825

 
55,591

Less amounts due to ADs and franchisees
 
(12,994
)
 
(26,183
)
 
(16,170
)
Amounts receivable less amounts due to ADs and franchisees
 
$
145,444

 
$
57,850

 
$
163,343

 
 
 
 
 
 
 
Allowance for doubtful accounts for non-impaired notes and accounts receivable
 
$
3,428

 
$
1,063

 
$
3,638

 
 
 
 
 
 
 
Total:
 
 
 
 
 
 
Notes and interest receivable, net of unrecognized revenue
 
$
111,778

 
$
54,168

 
$
130,388

Accounts receivable
 
63,013

 
49,908

 
59,865

Less amounts due to ADs and franchisees
 
(13,583
)
 
(27,609
)
 
(16,897
)
Amounts receivable less amounts due to ADs and franchisees
 
$
161,208

 
$
76,467

 
$
173,356

 
 
 
 
 
 
 
Total allowance for doubtful accounts
 
$
10,242

 
$
8,850

 
$
7,331


The Company’s average investment in impaired notes receivable during the nine months ended January 31, 2017 and 2016 was $11.5 million and $8.7 million, respectively.
 

10


Analysis of Past Due Receivables
Accounts receivable are considered to be past due if unpaid 30 days after billing and notes receivable are considered past due if unpaid 90 days after the due date. If it is determined the likelihood of collecting substantially all of the note and accrued interest is not probable the notes are put on non-accrual status. Accounts receivables unpaid as of April 30 each year often remain unpaid until the following tax season due to the seasonal nature of the Company's 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.
The breakdown of accounts and notes receivable past due at January 31, 2017 was as follows:
 
 
Past due
 
Current
 
Interest receivable, net
 
Total
receivables
 
 
(In thousands)
Accounts receivable
 
$
34,288

 
$
28,725

 
$
—

 
$
63,013

Notes and interest receivable, net of unrecognized revenue (1)
 
10,253

 
96,324

 
5,201

 
111,778

Total accounts, notes and interest receivable
 
$
44,541

 
$
125,049

 
$
5,201

 
$
174,791

(1)    Interest receivable is shown net of an allowance for uncollectible interest of $1.8 million.
 
The Company’s investment in notes receivable on non-accrual status was $11.6 million, $5.5 million and $6.0 million at January 31, 2017, April 30, 2016, and January 31, 2016, respectively. Payments received on notes in non-accrual status are applied to the principal until the note is current then to interest income.


(3) Other Assets - Current and Non-current
Other current assets at January 31, 2017, April 30, 2016 and January 31, 2016 consists of the following:
 
January 31, 2017
 
April 30, 2016
 
January 31, 2016
 
(In thousands)
Financial products receivable
$
12,991

 
$
677

 
$
14,483

Other current assets
10,088

 
5,161

 
6,705

Total
$
23,079

 
$
5,838

 
$
21,188

During 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 security was sold during the first half of fiscal 2017. A gain on the sale of $50,000 was recognized and reclassified out of accumulated other comprehensive income, net of taxes and recorded as other income.

(4) Goodwill and Intangible Assets 
Changes in the carrying amount of goodwill for the nine months ended January 31, 2017 and 2016 were as follows:

 
 
January 31, 2017
 
January 31, 2016
 
 
(In thousands)
Balance at beginning of period
 
$
4,228

 
$
3,377

Acquisitions of assets from franchisees and others
 
858

 
975

Disposals and foreign currency changes, net
 
(185
)
 
(283
)
Impairments
 
(90
)
 
—

Balance at end of period
 
$
4,811

 
$
4,069


11


The impairment recorded for the nine months ended January 31, 2017 was determined using a discounted cash flow analysis.
Components of intangible assets were as follows as of January 31, 2017, April 30, 2016 and January 31, 2016:
 
 
January 31, 2017
 
 
Weighted average amortization period
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
 
 
(In thousands)
Amortizable intangible assets:
 
 
 
 
 
 
 
 
Customer lists acquired from unrelated third parties
 
4 years
 
$
1,027

 
$
(546
)
 
$
481

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

 
(667
)
 
888

Reacquired rights
 
2 years
 
430

 
(422
)
 
8

AD rights
 
10 years
 
26,521

 
(6,741
)
 
19,780

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

 
—

 
1,491

Total intangible assets
 
 
 
$
31,024

 
$
(8,376
)
 
$
22,648

(1) Represents recent business acquisitions for which final purchase price allocations have not yet been determined.
 
 
April 30, 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

 
$
(339
)
 
$
688

Assets acquired from franchisees:
 
 
 
 
 
 
 
 
Customer lists
 
4 years
 
1,380

 
(500
)
 
880

Reacquired rights
 
2 years
 
511

 
(482
)
 
29

AD rights
 
10 years
 
20,218

 
(5,545
)
 
14,673

Total intangible assets
 
 
 
$
23,136

 
$
(6,866
)
 
$
16,270


 
 
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


The Company acquired $8.1 million, and $1.9 million of AD rights during the nine months ended January 31, 2017 and 2016, respectively.
During the nine months ended January 31, 2017, the Company acquired the assets of U.S. or Canadian franchisees, or third parties for $2.6 million. During the nine months ended January 31, 2016, the Company acquired the assets of U.S. and Canadian franchisees for $2.2 million. The allocation of the purchase price of assets acquired from franchisees and third parties is as follows:

12


 
 
Nine Months Ended January 31,
 
 
2017
 
2016
 
 
(In thousands)
Customer lists and reacquired rights
 
$
277

 
$
822

Accounts receivable
 
—

 
320

Property, equipment, and software
 
20

 
40

Reacquired rights
 
—

 
—

Goodwill
 
858

 
975

Acquired assets pending final allocation
 
1,491

 
—

Total
 
$
2,646

 
$
2,157


(5) Assets Held For Sale
At the end of the third quarter of fiscal 2017 and 2016, assets acquired from U.S. franchisees were classified as assets held for sale. During the nine months ended January 31, 2017, the Company acquired $16.3 million in assets from U.S. franchisees and third parties that were first accounted for as business combinations, with the value allocated to customer lists and reacquired rights of $8.1 million and goodwill of $8.2 million prior to being recorded as assets held for sale. The value of assets acquired includes $2.1 million of estimated contingent consideration that is included in long-term obligations as due to former ADs and franchisees. During the nine months ended January 31, 2016, the Company acquired $11.8 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. 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, 2017 and 2016 were as follows:

 
Nine Months Ended January 31,
 
2017
 
2016
 
(In thousands)
Balance at beginning of period
$
9,886

 
$
5,160

Reacquired, acquired from third parties, and other
16,334

 
11,820

Dispositions and impairments
(8,671
)
 
(5,816
)
Balance at end of period
$
17,549

 
$
11,164



13


(6) Long-Term Obligations
 
The Company has a 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. On August 18, 2016, the Company amended its credit facility, to provide for a modification of certain loan covenants to increase the Company’s leverage ratio during the third quarter of each fiscal year. The amendment makes available additional funds due to an expected delay in our cash flows from the Internal Revenue Service until at least February 15, 2017 for taxpayers who claim certain refundable tax credits.

The average interest rate paid during the nine months ended January 31, 2017 and 2016 was 2.23% and 1.84%, 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 credit facility to zero for a period of at least 45 consecutive days each fiscal year. The Company was in compliance with the financial covenants at January 31, 2017. 

In December 2016, the Company obtained a mortgage payable to a bank in monthly installments of principle payments plus interest at the one-month LIBOR plus 1.85% through December 2026 with a balloon payment of $0.8 million due at maturity. The mortgage is collateralized by land and building.
Long-term obligations at January 31, 2017, April 30, 2016, and January 31, 2016 consisted of the following:
 
 
January 31, 2017
 
April 30, 2016
 
January 31, 2016
 
 
(In thousands)
Credit Facility:
 
 

 
 
 
 

Revolver
 
$
131,215

 
$
—

 
$
150,682

Term loan, net of debt issuance costs
 
17,391

 
18,884

 
19,667

 
 
148,606

 
18,884

 
170,349

Due former ADs, franchisees and third parties
 
5,345

 
2,317

 
1,720

Mortgages
 
2,190

 
2,239

 
2,243

 
 
156,141

 
23,440

 
174,312

Less: current installments
 
(5,688
)
 
(5,947
)
 
(5,220
)
Long-term obligations
 
$
150,453

 
$
17,493

 
$
169,092


As discussed in Note 1, the adoption of ASU 2015-03 and ASU 2015-15 resulted in the reclassification of $0.1 million of unamortized debt issuance costs related to the Company's borrowings from other assets to long-term obligations within our consolidated balance sheet for each period ended January 31, 2017, April 30, 2016 and January 31, 2016, respectively.
 
(7) Forward Contracts Related to Foreign Currency Exchange Rates and Cash Flow Hedge
 
The Company periodically enters into forward contracts to eliminate the exposure related to foreign currency fluctuations in connection with short-term advances made to its Canadian subsidiary. Foreign currency contracts with a fair value of $9,000 are included in other current assets at January 31, 2017. Foreign currency contracts with a fair value of $23,000 are included in accounts payable and accrued expenses at January 31, 2016.

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


14


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

(9) Stockholders’ Equity

Stockholders' Equity Activity
During the nine months ended January 31, 2017 and 2016, activity in stockholders’ equity was as follows:
 
 
Nine Months Ended January 31,
 
 
2017
 
2016
 
 
(in thousands, except for share amounts)
Class A common stock issued from the exercise of stock options
 
—

 
132,510

Class A common stock issued from the vesting of restricted stock and as director compensation
 
20,725

 
14,293

Class B common stock converted to Class A common shares
 
700,000

 
—

Class A common stock repurchased
 
33,153

 
82,355

 
 
 
 
 
Proceeds from exercise of stock options
 
$
—

 
$
1,998

Stock-based compensation expense
 
1,520

 
1,348

Repurchase of common stock
 
417

 
1,977

Tax effect of stock option exercises
 
(394
)
 
933

Dividends declared
 
6,670

 
6,629


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

Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss at January 31, 2017, April 30, 2016 and January 31, 2016 were as follows.
 
 
January 31, 2017
 
April 30, 2016
 
January 31, 2016
 
 
(In thousands)
Foreign currency adjustment
 
$
(1,660
)
 
$
(1,148
)
 
$
(2,060
)
Unrealized loss on available-for-sale securities, net of taxes of $-, $324, and $208, respectively
 
—

 
(550
)
 
(347
)
Forward contracts related to foreign currency exchange rates
 
9

 
—

 
(23
)
Unrealized loss on interest rate swap agreement, net of taxes
 
(22
)
 
—

 
—

Total accumulated other comprehensive loss
 
$
(1,673
)
 
$
(1,698
)
 
$
(2,430
)

Net Income (Loss) per Share
 
Net income (loss) per share of Class A and Class B common stock is computed using the two-class method. Basic net income (loss) per share is computed by allocating undistributed earnings to common stock and participating securities (exchangeable shares) and using the weighted-average number of common stock outstanding during the period.  Undistributed losses are not allocated to participating securities because they do not meet the required criteria for such allocation. 
 
Diluted net income (loss) per share is computed using the weighted-average number of common stock and, if dilutive, the potential common stock outstanding during the period. Potential common stock consist of the incremental common stock

15


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.
The computation of basic and diluted net income (loss) per share for the three and nine months ended January 31, 2017 and 2016 is as follows:
 
 
Three Months Ended 
 January 31, 2017
 
Three Months Ended 
 January 31, 2016
 
 
Class A
 
Class B
 
Class A
 
Class B
 
 
Common Stock
 
Common Stock
 
Common Stock
 
Common Stock
 
 
(in thousands, except for share and per
share amounts)
Basic and diluted net income per share:
 
 

 
 

 
 

 
 

Numerator
 
 

 
 

 
 

 
 

Allocation of undistributed losses
 
$
2,417

 
$
38

 
$
4,405

 
$
333

Amounts allocated to participating securities:
 
 

 
 

 
 

 
 

Exchangeable shares
 
(174
)
 
(3
)
 
(319
)
 
(24
)
Net income attributable to common stockholders
 
$
2,243

 
$
35

 
$
4,086

 
$
309

Denominator
 
 
 
 
 
 
 
 
Weighted-average common stock outstanding
 
12,702,577

 
200,000

 
11,895,367

 
900,000

 
 
 
 
 
 
 
 
 
Basic and diluted net income per share
 
$
0.18

 
$
0.18

 
$
0.34

 
$
0.34

 
 
 
 
 
 
 
 
 
Diluted net income per share:
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
 
 
 
Allocation of undistributed earnings for basic computation
 
$
2,243

 
$
35

 
$
4,086

 
$
309

Reallocation of undistributed earnings as a result of assumed conversion of:
 
 
 
 
 
 
 
 
Class B common stock to Class A common stock
 
35

 
—

 
309

 
—

Exchangeable shares to Class A common stock
 
177

 
—

 
343

 
—

 
 
$
2,455

 
$
35

 
$
4,738

 
$
309

Denominator
 
 

 
 

 
 

 
 

Number of shares used in basic computation
 
12,702,577

 
200,000

 
11,895,367

 
900,000

Weighted-average effect of dilutive securities
 
 
 
 
 
 
 
 
Class B common stock to Class A common stock
 
200,000

 
—

 
900,000

 
—

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

 
—

 
1,000,000

 
—

Employee stock options
 
21,633

 
311

 
206,989

 
13,504

 
 
13,924,210

 
200,311

 
14,002,356

 
913,504

 
 
 
 
 
 
 
 
 
Diluted net income per share
 
$
0.18

 
$
0.17

 
$
0.34

 
$
0.34


Diluted net income per share above excludes the impact of shares of potential common stock from the exercise of options to purchase 1,366,871 and 492,611 shares for the three months ended January 31, 2017 and 2016, respectively, because the effect would be anti-dilutive.

16



 
 
Nine Months Ended 
 January 31, 2017
 
Nine Months Ended 
 January 31, 2016
 
 
Class A
 
Class B
 
Class A
 
Class B
 
 
Common Stock
 
Common Stock
 
Common Stock
 
Common Stock
 
 
(in thousands, except for share and per
share amounts)
Basic and diluted net loss per share:
 
 

 
 

 
 

 
 

Numerator
 
 

 
 

 
 

 
 

Allocation of undistributed losses
 
$
(15,955
)
 
$
(362
)
 
$
(11,965
)
 
$
(905
)
Denominator
 
 
 
 
 
 
 
 
Weighted-average common stock outstanding
 
12,613,525

 
286,232

 
11,894,185

 
900,000

 
 
 
 
 
 
 
 
 
Basic and diluted net loss per share
 
$
(1.26
)
 
$
(1.26
)
 
$
(1.01
)
 
$
(1.01
)
 
 
 
 
 
 
 
 
 

As a result of the net losses for the periods shown, diluted net loss per share excludes the impact of shares of potential common stock from the exercise of options to purchase 1,277,479 and 1,073,332 shares for the nine months ended January 31, 2017 and 2016, respectively, because the effect would be anti-dilutive.


(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, 2017, 961,588 shares of Class A common stock remain available for grant.
Stock option activity during the nine months ended January 31, 2017 was as follows:
 
 
Number of
options
 
Weighted
average
exercise price
Balance at beginning of period
 
1,264,562

 
$
19.77

Granted
 
512,119

 
12.61

Exercised
 
—

 
—

Expired or forfeited
 
(274,150
)
 
17.22

Balance at end of period
 
1,502,531

 
17.80


Intrinsic value is defined as the market value of the stock less the cost to exercise. There were no options exercised during the nine months ended January 31, 2017. The total intrinsic value of stock options outstanding at January 31, 2017 was $0.4 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, 2017 was as follows: 
 
 
Nonvested
options
 
Weighted
average
exercise price
Balance at beginning of period
 
389,053

 
$
24.76

Granted
 
512,119

 
12.61

Vested
 
(179,054
)
 
23.75

Forfeited
 
—

 
—

Balance at end of period
 
722,118

 
16.40


17


 
At January 31, 2017, unrecognized compensation costs related to nonvested stock options were $2.2 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, 2017:
 
 
Options Outstanding
 
Options Exercisable
Range of exercise prices
 
Number of shares outstanding
 
Weighted average exercise price
 
Weighted average remaining contractual life (in years)
 
Number of options exercisable
 
Weighted average exercise price
 
 
 
 
 
$10.51 - $15.00
 
815,852

 
$
13.50

 
4.3
 
303,733

 
$
15.00

16.38 - 19.75
 
290,876

 
17.90

 
3.2
 
263,876

 
17.94

22.18 - 29.48
 
330,387

 
25.22

 
4.8
 
177,387

 
24.95

33.38
 
65,416

 
33.38

 
4.2
 
35,417

 
33.38


 
1,502,531

 
17.80

 

 
780,413

 
19.09



Restricted Stock Units
 
Restricted stock activity during the nine months ended January 31, 2017 was as follows:
 
 
Number of
Restricted stock units
 
Weighted
average fair value at grant date
Balance at beginning of period
 
42,792

 
$
26.10

Granted
 
165,454

 
12.62

Vested
 
(17,118
)
 
24.58

Forfeited
 
(9,108
)
 
31.53

Balance at end of period
 
182,020

 
13.71

 
At January 31, 2017, unrecognized compensation costs related to restricted stock units were $2.3 million. These costs are expected to be recognized through fiscal 2022.

(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, 2017, April 30, 2016 and January 31, 2016, for each of the fair value hierarchy levels, the assets and liabilities that are measured at fair value on a recurring and nonrecurring basis (in thousands):

18


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

 
 

 
 

 
 

Recurring:
 
 

 
 

 
 

 
 

Forward contract related to foreign currency exchange rates
 
$
9

 
$
—

 
$
—

 
$
9

Nonrecurring:
 
 

 
 

 
 

 
 

Impaired accounts and notes receivable
 
9,539

 
—

 
—

 
9,539

Impaired goodwill
 
870

 
—

 
—

 
870

Total nonrecurring assets
 
10,409

 
—

 
—

 
10,409

Total recurring and nonrecurring assets
 
$
10,418

 
$
—

 
$
—

 
$
10,418

 
 

 


 

 

Liabilities:
 
 

 
 

 
 

 
 

Recurring:
 
 

 
 

 
 

 
 

Obligations due former ADs and franchisees
 
$
2,052

 
$
—

 
$
—

 
$
2,052

Interest rate swap agreement
 
36

 
—

 
—

 
36

Total recurring liabilities
 
$
2,088

 
$
—

 
$
—

 
$
2,088

 
 

 


 

 


 
 
April 30, 2016
 
 
 
 
Fair value measurements using
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 

 
 

 
 

Recurring:
 
 

 
 

 
 

 
 

Cash equivalents
 
$
7,140

 
$
7,140

 
$
—

 
$
—

Available-for-sale securities
 
4,123

 
4,123

 
—

 
—

Total recurring assets
 
11,263

 
11,263</