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, 2019
 
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 Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer
 o
Accelerated filer
x

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No ý
 The number of shares outstanding of the registrant’s common stock as of March 4, 2019 was 14,057,941 shares.




LIBERTY TAX, INC.
 
Form 10-Q for the Quarterly Period Ended January 31, 2019
 
Table of Contents
 
 
 
Page
 
 
Number
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 



PART I. FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS (UNAUDITED)

1


LIBERTY TAX, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
January 31, 2019, April 30, 2018 and January 31, 2018
(In thousands, except share data)

 
January 31, 2019
 
April 30, 2018
 
January 31, 2018
Assets
(unaudited)
 
 

 
(unaudited)
Current assets:
 

 
 

 
 
Cash and cash equivalents
$
4,348

 
$
18,522

 
$
4,084

Receivables:
 
 
 

 
 

Accounts receivable
62,141

 
52,517

 
67,550

Notes receivable - current
69,513

 
24,295

 
69,015

Interest receivable, net of uncollectible amounts
3,480

 
1,526

 
4,476

Allowance for doubtful accounts - current
(10,878
)
 
(11,522
)
 
(7,987
)
Total current receivables, net
124,256

 
66,816

 
133,054

Assets held for sale
—

 
8,941

 
12,070

Income taxes receivable
16,329

 
—

 
14,820

Other current assets
16,782

 
5,429

 
19,473

Total current assets
161,715

 
99,708

 
183,501

Property, equipment, and software, net
34,648

 
38,636

 
40,050

Notes receivable, non-current
11,435

 
6,554

 
17,676

  Allowance for doubtful accounts, non-current
(946
)
 
(965
)
 
(1,006
)
Total non-current notes receivables, net
10,489

 
5,589

 
16,670

Goodwill
7,348

 
8,640

 
9,210

Intangible assets, net
20,602

 
22,837

 
23,068

Deferred income taxes
307

 
343

 
174

Other assets
1,975

 
2,250

 
2,535

Total assets
$
237,084

 
$
178,003

 
$
275,208

Liabilities and Stockholders’ Equity
 

 
 

 
 
Current liabilities:
 

 
 

 
 
Current installments of long-term obligations
$
13,763

 
$
18,113

 
$
5,223

Accounts payable and accrued expenses
17,566

 
14,521

 
22,027

Due to Area Developers (ADs)
9,818

 
17,906

 
11,742

Income taxes payable
34

 
4,511

 
—

Revolving credit facility
107,893

 
—

 
—

Deferred revenue - current
4,593

 
2,021

 
2,024

Total current liabilities
153,667

 
57,072

 
41,016

Long-term obligations, excluding current installments, net
1,946

 
2,270

 
16,421

Revolving credit facility
—

 
—

 
120,189

Deferred revenue and other - non-current
5,199

 
4,692

 
5,193

Deferred income tax liability
1,723

 
1,397

 
3,682

Long-term income taxes payable
1,208

 
1,070

 
—

Total liabilities
163,743

 
66,501

 
186,501

Commitments and contingencies
 

 
 

 
 
Stockholders’ equity:
 

 
 
 
 

Special voting preferred stock, $0.01 par value per share, 0, 10 and 10 shares authorized, issued and outstanding, respectively
—

 
—

 
—

Class A common stock, $0.01 par value per share, 21,200,000 shares authorized, 14,057,941, 12,823,020 and 12,750,057 shares issued and outstanding, respectively
141

 
128

 
127

Class B common stock, $0.01 par value per share, 1,000,000 shares authorized, 0, 200,000 and 200,000 shares issued and outstanding, respectively
—

 
2

 
2

Exchangeable shares, $0.01 par value per share, 1,000,000 shares authorized, 0, 1,000,000 and 1,000,000 shares issued and outstanding, respectively
—

 
10

 
10

Additional paid-in capital
12,374

 
11,570

 
10,689

Accumulated other comprehensive loss, net of taxes
(1,698
)
 
(1,347
)
 
(990
)
Retained earnings
62,524

 
101,139

 
78,869

Total stockholders’ equity
73,341

 
111,502

 
88,707

Total liabilities and stockholders’ equity
$
237,084

 
$
178,003

 
$
275,208


See accompanying notes to condensed consolidated financial statements.

2


LIBERTY TAX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations
Three and Nine Months Ended January 31, 2019 (unaudited) and 2018 (unaudited)
(In thousands, except share count and per share data)
 
 
 
Three Months Ended January 31,
 
Nine Months Ended January 31,
 
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 

 
 

 
 

 
 

Franchise fees
 
$
596

 
$
90

 
$
1,602

 
$
354

Area Developer fees
 
1,018

 
507

 
2,665

 
2,209

Royalties and advertising fees
 
16,060

 
17,610

 
19,095

 
20,598

Financial products
 
9,882

 
18,106

 
10,938

 
19,324

Interest income
 
2,049

 
2,612

 
5,253

 
7,009

Assisted tax preparation fees, net of discounts
 
2,719

 
5,225

 
5,620

 
8,413

Electronic filing fees
 
428

 
2,872

 
486

 
2,872

Other revenues
 
132

 
1,222

 
1,165

 
3,423

Total revenues
 
32,884

 
48,244

 
46,824

 
64,202

Operating expenses:
 
 

 
 

 
 

 
 

Employee compensation and benefits
 
9,795

 
11,574

 
29,770

 
32,277

Selling, general, and administrative expenses
 
6,294

 
22,366

 
27,649

 
41,120

Area Developer expense
 
4,384

 
4,890

 
5,089

 
5,658

Advertising expense
 
6,913

 
5,623

 
9,827

 
9,702

Depreciation, amortization, and impairment charges
 
3,991

 
3,995

 
10,350

 
8,526

Restructuring expense
 
—

 
(9
)
 
9,345

 
3,362

Total operating expenses
 
31,377

 
48,439

 
92,030

 
100,645

Income (loss) from operations
 
1,507

 
(195
)
 
(45,206
)
 
(36,443
)
Other income (expense):
 
 
 
 
 
 
 
 
Foreign currency transaction gain
 
—

 
57

 
—

 
128

Interest expense
 
(1,129
)
 
(829
)
 
(2,206
)
 
(1,618
)
Income (loss) before income taxes
 
378

 
(967
)
 
(47,412
)

(37,933
)
Income tax expense (benefit)
 
688

 
555

 
(14,858
)
 
(13,550
)
Net loss
 
(310
)
 
(1,522
)
 
(32,554
)
 
(24,383
)
Net loss per share of common stock:
 
 
 
 
 
 
 
 
Basic and diluted
 
(0.02
)
 
(0.11
)
 
(2.37
)
 
(1.89
)
 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding basic and diluted
 
14,043,218

 
12,934,941

 
13,718,401

 
12,907,039

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

 
$
0.16

 
$
0.16

 
$
0.48


See accompanying notes to condensed consolidated financial statements.


3


LIBERTY TAX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Loss
Three and Nine Months Ended January 31, 2019 (unaudited) and 2018 (unaudited)
(In thousands)
 
 
 
Three Months Ended January 31,
 
Nine Months Ended January 31,
 
 
2019
 
2018
 
2019
 
2018
Net loss
 
$
(310
)
 
$
(1,522
)
 
$
(32,554
)
 
$
(24,383
)
Unrealized gain (loss) on interest rate swap agreement, net of taxes of $(17), $11, $(18) and $11, respectively
 
(42
)
 
31

 
(23
)
 
41

Foreign currency translation adjustment
 
23

 
372

 
(304
)
 
1,052

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

 
(25
)
 
—

Comprehensive loss
 
$
(354
)
 
$
(1,119
)
 
$
(32,906
)
 
$
(23,290
)

 See accompanying notes to condensed consolidated financial statements.


4


LIBERTY TAX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders' Equity
Nine months ended January 31, 2019 (unaudited)
(In thousands)

 
 
Class A
 
Class B
 
Special voting preferred stock
 
 
Common stock
 
Common stock
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
Balance at May 1, 2018
 
12,823

 
$
129

 
200

 
$
2

 
—

 
$
—

Exercise of stock options
 
14

 
—

 
—

 
—

 
—

 
—

Vesting of restricted stock
 
21

 
—

 
—

 
—

 
—

 
—

Converted Class B shares to Class A shares
 
1,200

 
12

 
(200
)
 
(2
)
 
—

 
—

Balance at January 31, 2019
 
14,058

 
$
141

 
—

 
$
—

 
—

 
$
—


 
 
Exchangeable shares
 
Additional paid-in capital
 
Accumulated other comprehensive
loss
 
Retained earnings
 
 
 
 
Shares
 
Amount
 
Total
Balance at May 1, 2018
 
100

 
$
10

 
$
11,571

 
$
(1,346
)
 
$
101,139

 
$
111,505

Non-cash adjustments due to ASC 606
 
—

 
—

 
—

 
—

 
(3,794
)
 
(3,794
)
Exercise of stock options
 
—

 
—

 
153

 
—

 
—

 
153

Repurchase of common stock
 
—

 
—

 
(83
)
 
—

 
—

 
(83
)
Conversion of preferred stock to common stock
 
(100
)
 
(10
)
 
—

 
—

 
—

 
—

Stock-based compensation expense
 
—

 
—

 
733

 
—

 
—

 
733

Net loss
 
—

 
—

 
—

 
—

 
(32,554
)
 
(32,554
)
Cash dividends
 
—

 
—

 
—

 
—

 
(2,267
)
 
(2,267
)
Foreign currency translation adjustment
 
—

 
—

 
—

 
(304
)
 
—

 
(304
)
Forward contracts related to foreign currency exchange rates
 
—

 
—

 
—

 
(25
)
 
—

 
(25
)
Unrealized loss on interest rate swap agreement, net of taxes
 
—

 
—

 
—

 
(23
)
 
—

 
(23
)
Balance at January 31, 2019
 
—

 
$
—

 
$
12,374

 
$
(1,698
)
 
$
62,524

 
$
73,341


See accompanying notes to condensed consolidated financial statements.

5


LIBERTY TAX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders' Equity
Nine months ended January 31, 2018 (unaudited)
(In thousands)

 
 
Class A
 
Class B
 
Special voting preferred stock
 
 
Common stock
 
Common stock
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
Balance at May 1, 2017
 
12,683

 
$
127

 
200

 
$
2

 
—

 
$
—

Exercise of stock options
 
9

 
—

 
—

 
—

 
—

 
—

Vesting of restricted stock
 
59

 
—

 
—

 
—

 
—

 
—

Balance at January 31, 2018
 
12,751

 
$
127

 
200

 
$
2

 
—

 
$
—


 
 
Exchangeable shares
 
Additional paid-in capital
 
Accumulated other comprehensive
income
 
Retained earnings
 
 
 
 
Shares
 
Amount
 
Total
Balance at May 1, 2017
 
1,000

 
$
10

 
$
8,370

 
$
(2,083
)
 
$
110,028

 
$
116,454

Exercise of stock options
 
—

 
—

 
95

 
—

 
—

 
95

Repurchase of common stock
 
—

 
—

 
(299
)
 
—

 
—

 
(299
)
Stock-based compensation expense
 
—

 
—

 
2,523

 
—

 
—

 
2,523

Net loss
 
—

 
—

 
—

 
—

 
(24,383
)
 
(24,383
)
Cash dividends
 
—

 
—

 
—

 
—

 
(6,776
)
 
(6,776
)
Foreign currency translation adjustment
 
—

 
—

 
—

 
1,052

 
—

 
1,052

Unrealized gain on interest rate swap agreement, net of taxes
 
—

 
—

 
—

 
41

 
—

 
41

Balance at January 31, 2018
 
1,000

 
$
10

 
$
10,689

 
$
(990
)
 
$
78,869

 
$
88,707


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, 2019 (unaudited) and 2018 (unaudited)
(In thousands)
 
 
 
Nine Months Ended January 31,
 
 
2019
 
2018
Cash flows from operating activities:
 
 

 
 

Net loss
 
$
(32,554
)
 
$
(24,383
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 

 
 

Provision for doubtful accounts
 
5,798

 
7,865

Depreciation, amortization, and impairment charges
 
10,350

 
8,526

Amortization of deferred financing costs
 
184

 
116

Loss on disposal of fixed and intangible assets
 
5,814

 
2,370

Stock-based compensation expense
 
733

 
2,523

Loss (gain) on bargain purchases and sales of Company-owned offices
 
743

 
(1,626
)
Equity in gain (loss) of affiliate
 
65

 
(71
)
Deferred tax income
 
1,757

 
113

Changes in accrued income taxes
 
(20,639
)
 
(21,119
)
Changes in other assets and liabilities
 
(35,192
)
 
(36,709
)
Net cash used in operating activities
 
(62,941
)
 
(62,395
)
Cash flows from investing activities:
 
 

 
 

Issuance of operating loans to franchisees and ADs
 
(52,455
)
 
(57,839
)
Payments received on operating loans to franchisees
 
3,477

 
5,377

Purchases of AD rights, Company-owned offices and acquired customer lists
 
(230
)
 
(2,456
)
Proceeds from sale of Company-owned offices and AD rights
 
1,229

 
451

Purchases of property, equipment and software
 
(2,733
)
 
(3,980
)
Net cash used in investing activities
 
(50,712
)
 
(58,447
)
Cash flows from financing activities:
 
 
 
 

Proceeds from the exercise of stock options
 
153

 
95

Dividends paid
 
(2,244
)
 
(6,669
)
Repayment of amounts due to former ADs and franchisees
 
(3,130
)
 
(2,984
)
Repayment of long-term obligations
 
(2,995
)
 
(2,216
)
Borrowings under revolving credit facility
 
111,585

 
120,525

Repayments under revolving credit facility
 
(3,693
)
 
(336
)
Cash paid for taxes on exercises/vesting of stock-based compensation
 
(83
)
 
(299
)
Net cash provided by financing activities
 
99,593

 
108,116

Effect of exchange rate changes on cash, net
 
(114
)
 
383

Net decrease in cash and cash equivalents
 
(14,174
)
 
(12,343
)
Cash and cash equivalents at beginning of period
 
18,522

 
16,427

Cash and cash equivalents at end of period
 
$
4,348

 
$
4,084


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, 2019 (unaudited) and 2018 (unaudited)
(In thousands)
 
 
 
Nine Months Ended January 31,
 
 
2019
 
2018
Supplemental disclosures of cash flow information:
 
 

 
 

Cash paid for interest, net of capitalized interest of $27 and $425, respectively
 
$
2,124

 
$
1,563

Cash paid for taxes, net of refunds
 
4,031

 
7,344

During the nine months ended January 31, 2019 and 2018, the Company acquired certain assets from ADs, franchisees, and third parties as follows:
 
 
 
 
Fair value of assets purchased
 
$
2,476

 
$
11,082

Receivables applied, net of amounts written off, due ADs and related deferred revenue
 
(488
)
 
(6,668
)
Bargain purchase gains
 
(224
)
 
(1,100
)
Long-term obligations and accounts payable issued to seller
 
(1,534
)
 
(858
)
Cash paid to ADs, franchisees and third parties
 
$
230

 
$
2,456

During the nine months ended January 31, 2019 and 2018, the Company sold certain assets to ADs and franchisees as follows:
 
 

 
 

Book value of assets sold
 
$
5,105

 
$
1,129

Gain on sale - revenue deferred
 
—

 
18

Gain (loss) on sale - gain (loss) recognized
 
(1,013
)
 
88

Notes received
 
(2,863
)
 
(784
)
Cash received from ADs and franchisees
 
$
1,229

 
$
451


See accompanying notes to condensed consolidated financial statements.


8


LIBERTY TAX, INC. AND SUBSIDIARIES
 
Notes to Unaudited Condensed Consolidated Financial Statements (Unaudited)
 
January 31, 2019 and 2018
 
(1) Organization and Significant Accounting Policies
 
Description of Business
Liberty Tax, Inc. (the "Company"), a Delaware corporation, is a holding company engaged through its subsidiaries as a franchisor and, to a lesser degree, an operator of a system of income tax preparation offices located in the United States of America (the "U.S.") and Canada. The Company's principal operations are conducted through JTH Tax, Inc. (d/b/a Liberty Tax Service), the Company's largest subsidiary. Through this system of income tax preparation offices, the Company also facilitates refund-based tax settlement financial products, such as refund transfer products in the U.S. and personal income tax refund discounting products in Canada. The Company also offers online tax preparation services. In fiscal 2015, the Company changed its name from JTH Holding, Inc. to Liberty Tax, Inc.

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

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

Unless the context requires otherwise, the terms "Liberty Tax," "Liberty Tax Service," "we," the "Company," "us," and "our" refer to Liberty Tax, Inc. and its consolidated subsidiaries.
 
Basis of Presentation
 The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Assets and liabilities of the Company's Canadian operations have been translated into U.S. dollars using the exchange rate in effect at the end of the period. Revenues and expenses have been translated using the average exchange rates in effect each month of the period. Foreign exchange transaction gains and losses are recognized when incurred. The Company reclassifies to accounts payable checks issued in excess of funds available and reports them as cash flow from operating activities. The Company consolidates any entities in which it has a controlling interest, the usual condition of which is ownership of a majority voting interest. The Company also considers for consolidation an entity in which the Company has certain interests where a controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity ("VIE"), is required to be consolidated by its primary beneficiary. The Company does not possess any ownership interests in franchisee entities; however, the Company may provide financial support to franchisee entities. Because the Company's franchise arrangements provide franchisee entities the power to direct the activities that most significantly impact their economic performance, the Company does not consider itself the primary beneficiary of any such entity that might be a VIE. Based on the results of management's analysis of potential VIEs, the Company has not consolidated any franchisee entities. The Company's maximum exposure to loss resulting from involvement with potential VIEs is attributable to accounts and notes receivables and future lease payments due from franchisees. When the Company does not have a controlling interest in an entity but has the ability to exert significant influence over the entity, the Company applies the equity method of accounting. Intercompany balances and transactions have been eliminated in consolidation. Other current assets is comprised of prepaid expenses and bank product fees and discounting, net.
 
The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information.  The condensed consolidated financial statements, including these notes, are unaudited and exclude some of the disclosures required only in annual financial statements.  The consolidated balance sheet data as of April 30, 2018 was derived from the Company’s April 30, 2018 Annual Report on Form 10-K filed on October 5, 2018, as amended by Amendment No. 1 to the Annual Report on Form 10-K filed on October 10, 2018.
 
In the opinion of management, all adjustments necessary for a fair presentation of such condensed consolidated financial statements in accordance with GAAP have been recorded.  These adjustments consisted only of normal recurring items.  The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s

9


consolidated financial statements and notes thereto included in its April 30, 2018 Annual Report on Form 10-K filed on October 5, 2018, as amended by Amendment No. 1 to the Annual Report on Form 10-K filed on October 10, 2018.

Office Count

The following table shows the U.S. office activity and the number of Canadian and Company-owned offices for the 2019, 2018, and 2017 tax seasons:

 
 
Tax Season
 
 
2019
 
2018
 
2017
U.S. Office Locations:
 
 
 
 
 
 
Permanent Office Locations:
 
 
 
 
 
 
Operated during the prior tax season
 
3,282

 
3,710

 
3,960

Offices opened
 
56

 
65

 
172

Offices closed
 
(547
)
 
(493
)
 
(422
)
Operated during the current tax season
 
2,791

 
3,282

 
3,710

 
 
 
 
 
 
 
Seasonal Office Locations:
 
 
 
 
 
 
Operated during the prior tax season
 
24

 
67

 
211

Offices opened
 
1

 
2

 
37

Offices closed
 
(9
)
 
(45
)
 
(181
)
Operated during the current tax season
 
16

 
24

 
67

 
 
 
 
 
 
 
Processing Centers
 
29

 
37

 
46

Total U.S. Office Locations
 
2,836

 
3,343

 
3,823

 
 
 
 
 
 
 
Canada Office Locations
 
272

 
267

 
254

 
 
 
 
 
 
 
Total Office Locations
 
3,108

 
3,610

 
4,077

 
 
 
 
 
 
 
Additional Office Information:
 
 
 
 
 
 
Company-owned offices
 
140

 
344

 
362

Franchised offices
 
2,968

 
3,266

 
3,715

Total Office Locations
 
3,108

 
3,610

 
4,077


SiempreTax+ is operating 45 offices during the 2019 tax season compared to 77 during the 2018 tax season and 159 during the 2017 tax 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.

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.

10


Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, "Leases (Topic 842)." This update will replace existing lease guidance in GAAP and will require lessees to recognize lease assets and lease liabilities on the balance sheet for all leases and disclose key information about leasing arrangements, such as information about variable lease payments and options to renew and terminate leases. When implemented, lessees and lessors will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The update is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently finalizing its implementation plan and evaluating the impact of the new pronouncement on its consolidated financial statements. The Company expects the adoption of this pronouncement to result in a material increase in the assets and liabilities on its consolidated balance sheets, but does not expect it to have a material impact on its consolidated statements of operations.

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 adopted the update for all periods beginning on or after May 1, 2018.

In June 2016, the FASB issued ASU No. 2016-13, "Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", which changes how companies will measure credit losses for most financial assets and certain other instruments that aren't measured at fair value through net income. The standard replaces the "incurred loss" approach with an "expected loss" model for instruments measured at amortized cost (which generally will result in the earlier recognition of allowances for losses) and requires companies to record allowances for available-for-sale debt securities, rather than reduce the carrying amount. In addition, companies will have to disclose significantly more information, including information used to track credit quality by year of origination, for most financing receivables. The ASU should be applied as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the standard is effective. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for all entities for annual periods beginning after December 15, 2018, and interim periods therein. The ASU is effective for the Company beginning in the first quarter of fiscal year 2021. The Company is currently evaluating the impact of the adoption of this newly issued standard to its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business", which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. The ASU is effective for the Company beginning in the first quarter of fiscal year 2019. The Company adopted the update for all periods beginning on or after May 1, 2018, and it did not have a material impact on the Company's current accounting for business combinations.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This new standard eliminates Step 2 from the goodwill impairment test. Instead, an entity should compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The standard will be effective for the Company in the first quarter of fiscal year 2021. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this newly issued standard to its consolidated financial statements.
 
In May 2014, the FASB issued Accounting Standards Codification ("ASC") 606, “Revenues from Contracts with Customers” ("ASC 606") which amends the guidance in ASC 605, “Revenue Recognition.” The core principle of this new standard is to recognize revenue when control of the promised goods or services is transferred to customers in an amount that reflects the consideration expected to be received for those goods or services. ASC 606 also requires additional disclosures around the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
 
The adoption of this new standard did not materially impact the Company’s recognition of revenues generated from the following:

•
Assisted tax preparation fees, net of discounts, which are recorded at the time the return is filed. The related discounts are recorded as reductions to revenues.

11


•
Financial products, which are recorded at the time the return is filed. As a result of ASC 606, refund transfer products and refund-based loans revenues are now recorded net instead of gross.
•
Royalties and advertising fees, which are based on a percentage of the franchisees’ sales are recognized at the time the underlying sales occur. The Company has elected to use the right to invoice practical expedient for recognition of minimum royalties.
•
Interest income on notes receivable, which is recognized based on the outstanding principal note balance unless it is put on non-accrual status. Interest income on notes receivable that are placed on a non-accrual basis is recognized when cash is received. Interest income on accounts receivable is recognized based on the outstanding receivable balance over 30 days old, net of an allowance.
•
Gains on sales of Company-owned offices, which are recognized when cash is received. Losses on sales of Company-owned offices are recognized immediately.

The details of the significant changes in revenue recognition and quantitative impact of the changes are discussed below.
 
Initial Franchise Fees

Typically, franchise rights are granted to franchisees for an initial term of five years with an option to renew at no additional cost. In exchange for initial franchise fees, royalties and advertising fees, the Company is obligated by its franchise agreements to provide training, an operations manual, site selection guidance, tax preparation software, operational assistance, tax and technical support, the ability to perform electronic filing, and marketing and advertising. Under the previous revenue recognition guidance, revenues from initial franchise fees were recognized when the obligations of the Company to prepare the franchisee for operation were substantially complete, up to the amount of cash received.

Under the new guidance, the standard requires that the transaction price received from customers be allocated to each separate and distinct performance obligation. The transaction price attributable to each separate and distinct performance obligation is then recognized as the performance obligations are satisfied. The services that the Company provides related to the initial franchise fees the Company receives from franchisees do not contain separate and distinct performance obligations from the franchise right. Accordingly, under the new standard, initial franchise fees, as constrained for amounts the Company does not expect to collect, will be recognized over the initial term of the franchise agreement, which is generally five years.

AD Fees

Historically, the rights to develop a new territory were granted to an AD for an initial term of six or ten years with an option to renew at no additional cost. Under the previous revenue recognition guidance, AD fees were recognized as revenue on a straight-line basis over the initial contract term of each AD agreement with the cumulative amount of revenue recognized not to exceed the amount of cash received. Under the new guidance, the standard requires the Company to recognize AD fees, as constrained for amounts not expected to be collected, over the initial term of the AD agreement.

The Company also sells a developed territory and simultaneously grants the right to operate as the exclusive AD in such developed territory to a new AD for an initial term of six years or ten years. Under the previous revenue recognition guidance, gains on sales of developed territories were recognized as revenues over the initial term, with the cumulative amount of revenues recognized not to exceed the amount of cash received. Losses on sales of developed territories were recognized immediately. Such gains and losses represented the difference between the transaction price and the net book value of the intangible asset recorded upon the Company’s reacquisition of the developed territory as of the date of the sale. Under the new guidance, the transaction price, as constrained for amounts the Company does not expect to collect, is recognized as revenues over the initial term of the AD agreement. The net book value of the intangible asset is charged to operating expenses at the date of the sale.

Electronic Filing Fees

Electronic filing fees are recorded in the period the tax return is electronically filed. Under the previous revenue recognition guidance, the electronic filing fees and the franchisees’ share in such fees were recorded as revenues and expense in the consolidated income statement, respectively. Under the new guidance, the electronic filing fees, net of the franchisees’ share in such fees, will be recorded as revenues in the consolidated statements of operations.



12


Transition Method

The Company applied the new guidance on all contracts that were not completed as of May 1, 2018 using the modified retrospective method, whereby the cumulative effect of initially adopting the guidance was recognized as an adjustment to the opening balance of retained earnings at May 1, 2018 in the amount of $3.8 million, net of tax, with corresponding increases in deferred revenue and notes receivable. Therefore, the results of operations from the comparative period have not been adjusted and continue to be reported under the previous revenue recognition guidance.

Impacts on the Condensed Consolidated Financial Statements

The following tables summarize the impacts of adopting ASC 606 on the Company’s condensed consolidated financial statements as of and for the nine months ended January 31, 2019:

Condensed Consolidated Balance Sheet
 
As Reported
 
ASC 606 Adjustment
 
Balances Without Adoption of ASC 606
 
 
(In thousands)
Notes receivable, current
 
$
69,513

 
$
1,543

 
$
67,970

Allowance for doubtful accounts - current
 
(10,878
)
 
344

 
(11,222
)
Income taxes receivable
 
16,329

 
(914
)
 
17,243

Notes receivable, non-current
 
11,435

 
90

 
11,345

Intangible assets, net
 
20,602

 
(169
)
 
20,771

Deferred income taxes
 
307

 
307

 
—

Total assets
 
237,084

 
1,203

 
235,881

Deferred revenue, current
 
4,593

 
147

 
4,446

Deferred revenue and other, non-current
 
5,199

 
4,528

 
671

Deferred income tax liability
 
1,723

 
(1,260
)
 
2,983

Total liabilities
 
163,743

 
921

 
162,822

Retained earnings
 
62,524

 
282

 
62,242

Total stockholders' equity
 
73,341

 
282

 
73,059

Total liabilities and stockholders’ equity
 
$
237,084

 
$
1,203

 
$
235,881


Condensed Consolidated Statement of Operations
 
As Reported
 
ASC 606 Adjustment
 
Balances Without Adoption of ASC 606
 
 
(In thousands)
Franchise fees
 
$
1,602

 
$
1,129

 
$
473

Area Developer fees
 
2,665

 
1,070

 
1,595

Financial products
 
10,938

 
(2,732
)
 
13,670

Electronic filing fees
 
486

 
(3,280
)
 
3,766

Other revenues
 
1,165

 
132

 
1,033

Total revenues
 
46,824

 
(4,736
)
 
51,560

Selling, general, and administrative expenses
 
27,649

 
(7,069
)
 
34,718

Total operating expenses
 
92,030

 
(5,590
)
 
97,620

Loss from operations
 
(45,206
)
 
854

 
(46,060
)
Loss before income taxes
 
(47,412
)
 
2,332

 
(49,744
)
Income tax benefit
 
(14,858
)
 
749

 
(15,607
)
Net loss
 
$
(32,554
)
 
$
1,583

 
$
(34,137
)

There have been no other significant changes in the Company's condensed consolidated balance sheets or statements of operations and cash flows as a result of the adoption of ASC 606.


13


 Contract Balances

The following table provides information about receivables and contract liabilities (deferred revenue) from contracts with customers:

 
 
January 31, 2019
 
April 30, 2018
 
 
(In thousands)
Notes receivable (1)
 
$
80,948

 
$
30,849

Deferred revenue (2)
 
9,234

 
5,667


(1) Notes receivable increased by $1.7 million as of May 1, 2018 due to the change in the Company's revenue recognition policy for initial franchise and AD fees upon adoption of ASC 606.

(2) Deferred revenue increased $6.9 million as of May 1, 2018 due to the cumulative effect of adopting ASC 606.

Significant changes in deferred franchise and AD fees are as follows:

 
 
Nine Months Ended
 
 
January 31, 2019
 
 
(In thousands)
Deferred franchise and AD fees at beginning of period
 
$
5,667

ASC 606 deferred franchise and AD fees adoption
 
6,940

Revenue recognized during the period
 
(4,267
)
New deferrals of franchise and AD fees
 
894

Deferred franchise and AD fees at end of period
 
$
9,234


Anticipated Future Recognition of Deferred Franchise and AD Fees

The following table reflects the estimated franchise and AD fees expected to be recognized in the future related to performance obligations that are unsatisfied at the end of the period:

 
 
Estimate for Fiscal Year
 
 
(In thousands)
2019 (1)
 
$
938

2020
 
3,393

2021
 
2,488

2022
 
1,475

2023
 
667

Thereafter
 
273

Total
 
$
9,234


(1) Represents franchise and AD fees expected to be recognized for the remainder of fiscal 2019. The amount does not include $4.3 million of franchise and AD fee revenues recognized for the nine months ended January 31, 2019.

The Company has applied the optional exemption, as provided for under ASC 606, which allows the Company not to disclose the transaction price allocated to unsatisfied performance obligations when the transaction price is a sales-based royalty.


14


Foreign Operations 

Canadian operations contributed $0.7 million and $0.3 million in revenues for the three months ended January 31, 2019 and 2018, respectively, and $1.9 million and $1.7 million in revenues for the nine months ended January 31, 2019 and 2018, respectively.

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

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

At January 31, 2019, the Company had unfunded lending commitments for working capital loans to franchisees and ADs of $16.9 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, 2019 and 2018 was as follows: 

 
 
Three Months Ended January 31,
 
Nine Months Ended January 31,
 
 
2019
 
2018
 
2019
 
2018
 
 
(In thousands)
Balance at beginning of period
 
$
13,562

 
$
9,849

 
$
12,487

 
$
12,021

Provision for doubtful accounts
 
1,804

 
4,410

 
5,798

 
7,865

Write-offs
 
(3,517
)
 
(5,330
)
 
(6,398
)
 
(11,054
)
Foreign currency adjustment
 
(25
)
 
64

 
(63
)
 
161

Balance at end of period
 
$
11,824

 
$
8,993

 
$
11,824

 
$
8,993


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

15


The allowance for doubtful accounts at January 31, 2019, April 30, 2018 and January 31, 2018, was allocated as follows:
 
 
January 31, 2019
 
April 30, 2018
 
January 31, 2018
 
 
(In thousands)
Impaired:
 
 

 
 
 
 

Notes and interest receivable, net of unrecognized revenue
 
$
10,281

 
$
11,654

 
$
9,778

Accounts receivable
 
12,336

 
13,891

 
9,189

Less amounts due to ADs and franchisees
 
(905
)
 
(1,907
)
 
(817
)
Amounts receivable less amounts due to ADs and franchisees
 
$
21,712

 
$
23,638

 
$
18,150

 
 
 
 
 
 
 
Allowance for doubtful accounts for impaired notes and accounts receivable
 
$
10,341

 
$
10,322

 
$
8,013

 
 
 
 
 
 
 
Non-impaired:
 
 

 
 
 
 

Notes and interest receivable, net of unrecognized revenue
 
$
74,147

 
$
20,721

 
$
81,389

Accounts receivable
 
49,805

 
38,626

 
58,361

Less amounts due to ADs and franchisees
 
(9,055
)
 
(11,722
)
 
(11,213
)
Amounts receivable less amounts due to ADs and franchisees
 
$
114,897

 
$
47,625

 
$
128,537

 
 
 
 
 
 
 
Allowance for doubtful accounts for non-impaired notes and accounts receivable
 
$
1,483

 
$
2,165

 
$
980

 
 
 
 
 
 
 
Total:
 
 
 
 
 
 
Notes and interest receivable, net of unrecognized revenue
 
$
84,428

 
$
32,375

 
$
91,167

Accounts receivable
 
62,141

 
52,517

 
67,550

Less amounts due to ADs and franchisees
 
(9,960
)
 
(13,629
)
 
(12,030
)
Amounts receivable less amounts due to ADs and franchisees
 
$
136,609

 
$
71,263

 
$
146,687

 
 
 
 
 
 
 
Total allowance for doubtful accounts
 
$
11,824

 
$
12,487

 
$
8,993


The Company’s average investment in impaired receivables during the nine months ended January 31, 2019 and 2018 was $22.7 million and $21.2 million, respectively.
 
Analysis of Past Due Receivables

The breakdown of accounts and notes receivable past due at January 31, 2019 was as follows:
 
 
Past due
 
Current
 
Interest receivable, net
 
Total
receivables
 
 
(In thousands)
Accounts receivable
 
$
33,290

 
$
28,851

 
$
—

 
$
62,141

Notes and interest receivable, net (1)
 
11,251

 
69,698

 
3,479

 
84,428

Total accounts, notes and interest receivable
 
$
44,541

 
$
98,549

 
$
3,479

 
$
146,569


(1)    Interest receivable is shown net of an allowance for uncollectible interest of $2.9 million.


16


Accounts receivable are considered to be past due if unpaid 30 days after billing, and notes receivable are considered past due if unpaid 90 days after the due date. If it is determined the likelihood of collecting substantially all of the notes and accrued interest is not probable, the notes are put on non-accrual status. The Company’s investment in notes receivable on non-accrual status was $11.3 million, $13.6 million and $9.8 million at January 31, 2019, April 30, 2018, and January 31, 2018, respectively. Payments received on notes in non-accrual status are applied to the principal until the note is current and then to interest income. Non-accrual notes that are paid current and expected to remain current are moved back into accrual status during the next annual review.

(3) Restructuring Expense

In the nine months ended January 31, 2018, the Company began restructuring initiatives involving a review of Company-owned stores and service providers to improve the Company's overall long-term profitability. The Company incurred $9.3 million of expenses in the nine months ended January 31, 2019 related to these initiatives. The expenses incurred are presented in the Restructuring expense line item in the consolidated statements of operations. The composition of the restructuring expenses incurred for the nine months ended January 31, 2019 were as follows:

Expense
 
Cash
 
Accrued Expenses
 
Non-cash
 
Total Expense
 
 
(In thousands)
Contract termination costs - maintenance
 
$
37

 
$
—

 
$
—

 
$
37

Property and intangible impairments and exit costs
 
1,486

 
2,263

 
5,559

 
9,308

Total
 
$
1,523

 
$
2,263

 
$
5,559

 
$
9,345


The property and intangible impairments and exit costs, which were primarily recorded in assets held for sale, were comprised of expenses related to lease obligations and non-cash charges associated with intangible write-downs. The accrued restructuring expenses of $2.3 million are included in "Accounts payable and accrued expenses" in the accompanying consolidated balance sheets.

A summary of the activity in accrued expenses related to restructuring initiatives for the nine months ended January 31, 2019 is as follows:

 
 
Contract termination costs - maintenance
 
Property and intangible impairments and exit costs
 
Total accrued expenses
 
 
(In thousands)
Balance at beginning of period
 
$
1,359

 
$
—

 
$
1,359

Additions accrued against the liability
 
—

 
3,749

 
3,749

Cash payments
 
(669
)
 
(1,486
)
 
(2,155
)
Balance at end of period
 
$
690

 
2,263

 
$
2,953



(4) Goodwill and Intangible Assets 

Changes in the carrying amount of goodwill for the nine months ended January 31, 2019 and 2018 were as follows:
 
 
January 31, 2019
 
January 31, 2018
 
 
(In thousands)
Balance at beginning of period
 
$
8,640

 
$
8,576

Acquisitions of assets from franchisees and others
 
372

 
1,850

Disposals and foreign currency changes, net
 
(4,614
)
 
(184
)
Purchase price reallocation
 
—

 
(1,032
)
Transfers
 
2,950

 
—

Balance at end of period
 
$
7,348

 
$
9,210


17


Components of intangible assets were as follows as of January 31, 2019, April 30, 2018 and January 31, 2018:
 
 
January 31, 2019
 
 
Weighted average amortization period
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
 
 
(In thousands)
Customer lists acquired from unrelated third parties
 
5 years
 
$
1,373

 
$
(1,096
)
 
$
277

Trade names
 
3 years
 
216

 
(119
)
 
97

Non-compete agreements
 
2 years
 
54

 
(52
)
 
2

Assets acquired from franchisees:
 
 
 
 
 
 
 
 
Customer lists
 
4 years
 
2,091

 
(1,248
)
 
843

Reacquired rights
 
2 years
 
1,711

 
(1,323
)
 
388

AD rights
 
9 years
 
32,002

 
(13,007
)
 
18,995

Total intangible assets
 
 
 
$
37,447

 
$
(16,845
)
 
$
20,602


 
 
April 30, 2018
 
 
Weighted average amortization period
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
 
 
(In thousands)
Customer lists acquired from unrelated third parties
 
5 years
 
$
3,187

 
$
(1,555
)
 
$
1,632

Trade names
 
3 years
 
431

 
(172
)
 
259

Non-compete agreements
 
2 years
 
241

 
(145
)
 
96

Assets acquired from franchisees:
 
 
 
 
 
 
 
 
Customer lists
 
4 years
 
1,842

 
(1,427
)
 
415

Reacquired rights
 
2 years
 
1,436

 
(1,393
)
 
43

AD rights
 
9 years
 
30,907

 
(10,515
)
 
20,392

Total intangible assets
 
 
 
$
38,044

 
$
(15,207
)
 
$
22,837


 
 
January 31, 2018
 
 
Weighted average amortization period
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
 
 
(In thousands)
Customer lists acquired from unrelated third parties
 
5 years
 
$
3,187

 
$
(1,390
)
 
$
1,797

Trade names
 
3 years
 
431

 
(136
)
 
295

Non-compete agreements
 
2 years
 
241

 
(115
)
 
126

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

 
(1,642
)
 
551

Reacquired rights
 
2 years
 
1,712

 
(1,642
)
 
70

AD rights
 
9 years
 
29,932

 
(9,703
)
 
20,229

Total intangible assets
 
 
 
$
37,696

 
$
(14,628
)
 
$
23,068


The Company acquired $1.3 million and $3.5 million of AD rights during the nine months ended January 31, 2019 and 2018, respectively.


18


During the third quarter of fiscal 2019, the Company sold the assets of six unrelated offices of smaller regional or local accounting firms for $2.9 million of which $1.4 million is contingent and recorded a loss on sale of $1.1 million. In addition, the Company charged $0.2 million to impairment during the period, for the sale of the last remaining office subsequent to January 31, 2019. These offices performed year-round accounting services. The following table summarizes the assets that were sold as of January 31, 2019.
 
 
January 31, 2019
 
 
(In thousands)
Accounts Receivable
 
$
(111
)
Property, equipment and software, net
 
66

Customer lists
 
965

Trade names
 
130

Non-compete agreements
 
19

Goodwill
 
2,896

Total asset value
 
$
3,965

(5) Assets Held For Sale

In the third quarter of fiscal 2019, the Company reclassified all assets associated with its U.S. Company-owned offices from assets held for sale to reacquired rights, customer lists, and goodwill. Amortization expense was recorded on a cumulative basis for reacquired rights and customer lists. Prior to the third quarter of fiscal 2019, assets acquired from U.S. franchisees were classified as assets held for sale. During the nine months ended January 31, 2019, the Company acquired $1.0 million in assets from U.S. franchisees and third parties that were first accounted for as business combinations, with the value allocated to customer lists and reacquired rights of $0.5 million and goodwill of $0.5 million prior to being recorded as assets held for sale. During the nine months ended January 31, 2018, the Company acquired $7.0 million in assets from U.S. franchisees and third parties that were initially accounted for as business combinations, with the value allocated to customer lists and reacquired rights of $3.5 million and goodwill of $3.5 million prior to being recorded as assets held for sale. The acquired businesses are operated as Company-owned offices until a buyer is located and a new franchise agreement is entered into. During the nine months ended January 31, 2019, the Company sold, terminated, or impaired $4.9 million in assets from U.S. franchisees, of which $3.8 million was included in the Company's restructuring initiative.

Changes in the carrying amount of assets held for sale for the nine months ended January 31, 2019 and 2018 were as follows:
 
Nine Months Ended January 31,
 
2019
 
2018
 
(In thousands)
Balance at beginning of period
$
8,941

 
$
11,989

Reacquired and acquired from third parties
945

 
6,992

Sold or terminated, impairments and other
(4,886
)
 
(6,911
)
Reclassification to reacquired rights, customer lists, and goodwill
(5,000
)
 
—

Balance at end of period
$
—

 
$
12,070


(6) Long-Term Obligations
 
The Company has a credit facility that consists of a term loan with an original principal amount of $21.2 million and a revolving credit facility that currently allows borrowing of up to $170.0 million with an accordion feature that permits the Company to request an increase in availability of up to an additional $50.0 million. Outstanding borrowings accrue interest, which is paid monthly at a rate of the one-month London Interbank Offered Rate ("LIBOR") plus a margin ranging from 1.50% to 2.25% depending on the Company’s leverage ratio.

The average interest rate paid during the nine months ended January 31, 2019 and 2018 was 3.87% and 2.99%, respectively. The indebtedness is collateralized by substantially all the assets of the Company, and both loans mature on April 30, 2019. 

19


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, 2019. 

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

Long-term obligations at January 31, 2019, April 30, 2018, and January 31, 2018 consisted of the following:
 
 
January 31, 2019
 
April 30, 2018
 
January 31, 2018
 
 
(In thousands)
Credit Facility:
 
 

 
 
 
 

Revolver
 
$
107,893

 
$
—

 
$
120,189

Term loan, net of debt issuance costs
 
11,974

 
14,855

 
15,376

Total credit facility
 
119,867

 
14,855

 
135,565

 
 
 
 
 
 
 
Long-Term Obligations
 
 
 
 
 
 
Term loan, net of debt issuance costs
 
11,974

 
14,855

 
15,376

   Due former ADs, franchisees and third parties
 
1,791

 
3,490

 
4,198

   Mortgages
 
1,944

 
2,038

 
2,070

 
 
15,709

 
20,383

 
21,644

   Less: current installments
 
(13,763
)
 
(18,113
)
 
(5,223
)
Long-term obligations, excluding current installments, net
 
$
1,946

 
$
2,270

 
$
16,421


20



(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 less than$0.1 million are included in accounts payable and accrued expenses for the nine months ended January 31, 2019. The Company did not enter into any foreign currency contracts for the nine months ended January 31, 2018.

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, 2019, the fair value of the interest rate swap is less than $0.1 million and is included in other current assets. The interest rate swap expires in December 2026.

(8) Income Taxes
 
The Tax Cuts and Jobs Act (the “Tax Act”) was enacted in the U.S. on December 22, 2017. The Tax Act reduced the U.S. federal corporate income tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and created new taxes on certain foreign-sourced earnings. During the quarter ending January 31, 2018, the Company recorded provisional amounts related to the enactment-date effects of the Tax Act that included recording the one-time transition tax liability related to undistributed earnings of certain foreign subsidiaries that were not previously taxed and adjusting deferred tax assets and liabilities.

SAB 118 measurement period

The Company applied the guidance in SAB 118 when accounting for the enactment-date effects of the Tax Act throughout 2018. As of January 31, 2018, the Company recorded provision amounts for all of the enactment-date income tax effects of the Tax Act under ASC 740, Income Taxes, for the following aspects: remeasurement of deferred tax assets and liabilities, one-time transition tax, and tax on global intangible low-taxed income. As of January 31, 2019, the Company completed its accounting for all of the enactment-date income tax effects of the Tax Act. As further discussed below, during 2018 and the first month of 2019, the Company recognized adjustments to the provisional amounts recorded at January 31, 2018 and included these adjustments as a component of income tax expense from continuing operations.

One-time transition tax

The one-time transition tax is based on the Company’s total post-1986 earnings and profits, the tax on which the Company previously deferred from U.S. income taxes under U.S. law. The Company recorded a provisional amount for its one-time transition tax liability for each of its foreign subsidiaries, resulting in a transition tax liability of $1.2 million at January 31, 2018. Upon further analyses of the Tax Act and Notices and regulations issued and proposed by the U.S. Department of the Treasury and the Internal Revenue Service, the Company finalized its calculations of the transition tax liability during 2018. The Company increased its January 31, 2018 provisional amount by $0.2 million, which is included as a component of income tax expense from continuing operations. The Company elected to pay its transition tax over the eight-year period provided in the Tax Act. As of January 31, 2019, the remaining balance of the Company’s transition tax obligation is $1.2 million, which will be paid over the next seven years.

Deferred tax assets and liabilities

As of January 31, 2018, the Company remeasured certain deferred tax assets and liabilities based on the rates at which they were expected to reverse in the future (which was generally 21%), by recording a provisional income tax benefit of $1.6 million. Upon further analysis of certain aspects of the Tax Act and refinement of its calculations during the 12 months ended January 31, 2019, the Company adjusted its provisional amount by increasing the income tax benefit by $0.8 million, which is included as a component of income tax expense from continuing operations.

Global intangible low-taxed income (GILTI)

The Tax Act subjects a U.S. shareholder to tax on GILTI earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. Because the Company evaluated the

21


provision of GILTI as of January 31, 2018, the Company recorded no GILTI-related deferred amounts. After further consideration in the current year, the Company elected to account for GILTI in the year the tax is incurred as a period cost.

Similar to prior years, pre-tax book income estimated in the fourth quarter of fiscal 2019 is expected to offset pre-tax book loss for the nine months ended January 31, 2019 due to the established pattern of seasonality in the Company's primary business operations. Management has determined it is at least more-likely-than-not that realization of tax benefits recorded in the Company's financial statements will occur during fiscal 2019. The amount of tax benefit recorded for the nine months ended January 31, 2019 reflects the Company’s estimated annual effective tax rate applied to the year-to-date loss from continuing operations adjusted for the tax impact of discrete items.

The Company's effective tax rate from continuing operations, including discrete income tax items, was 182.0% and 31.3% for the three and nine months ended January 31, 2019, respectively and (57.4)% and 35.7% for the three and nine months ended January 31, 2018, respectively. The reduced effective tax rate results primarily from the decrease in the U.S. federal corporate income tax rate from 35% to 21%, effective after December 31, 2017.

(9) Stockholders’ Equity

Stockholders' Equity Activity
During the nine months ended January 31, 2019 and 2018, activity in stockholders’ equity was as follows:
 
 
Nine Months Ended January 31,
 
 
2019
 
2018
 
 
(In thousands, except for share amounts)
Class A common stock issued from the exercise of stock options
 
—

 
9,000

Class A common stock issued from the vesting of restricted stock and as director compensation
 
14,069

 
58,507

Class B common stock converted to Class A common stock
 
200,000

 
—

Exchangeable shares exchanged for Class A common stock
 
1,000,000

 
—

 
 
 
 
 
Proceeds from exercise of stock options
 
$
153

 
$
95

Stock-based compensation expense
 
$
733

 
$
2,523

Dividends declared
 
$
2,267

 
$
6,777


In July 2018, the holder of the Company's Class B common stock entered into a stock purchase agreement to sell all of his outstanding shares of the Company's Class A common stock and Class B common stock owned directly and indirectly by him. In connection with the sale, the shares of the Company’s Class B common stock converted into shares of the Company’s Class A common stock on a one-for-one basis and for no additional consideration. As of January 31, 2019, no shares of the Company’s Class B common stock remained outstanding. In addition, the sole holder of the Company’s exchangeable shares elected to exchange all of the exchangeable shares held by it for shares of the Company’s Class A common stock on a one-for-one basis and for no additional consideration. In connection with such exchange, the Company redeemed all ten of its outstanding shares of special voting preferred stock for a price of $1.00 per share. Pursuant to the Company’s Second Amended and Restated Certificate of Incorporation, as approved by stockholders on December 13, 2018, the Company currently has only one class of common stock. As of January 31, 2019, no shares of the Company’s exchangeable shares or special voting preferred stock remained outstanding or authorized to issue.


22


Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss at January 31, 2019, April 30, 2018 and January 31, 2018 were as follows.
 
 
January 31, 2019
 
April 30, 2018
 
January 31, 2018
 
 
(In thousands)
Foreign currency adjustment
 
$
(1,685
)
 
$
(1,381
)
 
$
(1,008
)
Unrealized gain on interest rate swap agreement, net of taxes
 
12

 
34

 
18

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