Franchise Group, Inc. - Annual Report: 2016 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended April 30, 2016 | ||
or | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to | ||
Commission File Number: 001-35588
Liberty Tax, Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 27-3561876 (I.R.S. Employer Identification No.) | |||
1716 Corporate Landing Parkway, Virginia Beach, Virginia (Address of principal executive offices) | 23454 (Zip Code) | |||
Registrant's telephone number, including area code: (757) 493-8855
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, par value $0.01 per share (Title of Class) | The NASDAQ Stock Market LLC (Name of Exchange on which registered) | |||
Securities to be registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. YES o NO ý
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 Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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.
Large accelerated filer o | Accelerated filer ý | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company 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 aggregate market value of the shares of Class A common stock held by non-affiliates of the registrant computed based on the last reported sale price of $23.09 on October 31, 2015 was $177,019,413.
The number of shares of the registrant's Class A common stock outstanding as of June 20, 2016 was 12,594,756.
The number of shares of the registrant's Class B common stock outstanding as of June 20, 2016 was 300,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the 2016 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.
Table of Contents
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements concerning our business, operations, and financial performance and condition as well as our plans, objectives, and expectations for our business operations and financial performance and condition. Any statements contained herein that are not of historical facts may be deemed to be forward-looking statements. You can identify these statements by words such as "aim," "anticipate," "assume," "believe," "could," "due," "estimate," "expect," "goal," "intend," "may," "objective," "plan," "predict," "potential," "positioned," "should," "target," "will," "would," and other similar expressions that are predictions of or indicate future events and future trends. These forward-looking statements are based on current expectations, estimates, forecasts, and projections about our business and the industry in which we operate and our management's beliefs and assumptions. They are not guarantees of future performance or development and involve known and unknown risks, uncertainties, and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this annual report may turn out to be inaccurate. Factors that may cause such differences include, but are not limited to, the risks described under "Item 1A—Risk Factors," including:
• | our inability to sustain growth at our historical pace; |
• | the seasonality of our business; |
• | the continued service of our senior management team and our ability to attract additional talent; |
• | our inability to secure reliable sources of the tax settlement products we make available to our customers; |
• | government regulation and oversight, including the regulation of our tax settlement products such as refund transfers and loan settlement products; |
• | government initiatives that simplify tax return preparation, improve the timing and efficiency of processing tax returns, limit payments to tax preparers, or decrease the number of tax returns filed or the size of the refunds; |
• | government initiatives to pre-populate income tax returns; |
• | the effect of regulation of the products and services that we offer, including changes in laws and regulations; |
• | the possible characterization of refund transfers as a form of loan or extension of credit; |
• | changes in the tax settlement products offered to our customers that make our services less attractive to customers or more costly to us; |
• | our ability to maintain relationships with our tax settlement product service providers; |
• | any potential non-compliance, fraud or other misconduct by our franchisees or employees; |
• | our ability and the ability of our franchisees to comply with legal and regulatory requirements; |
• | failures by our franchisees and their employees to comply with their contractual obligations to us and with laws and regulations, to the extent these failures affect our reputation or subject us to legal risk; |
• | the ability of our franchisees to open new territories and operate them successfully; |
• | the ability of our franchisees to generate sufficient revenue to repay their indebtedness to us; |
• | our ability to manage Company-owned offices; |
• | our exposure to litigation; |
• | our ability and our franchisees' ability to protect customers' personal information, including from a cyber-security incident; |
• | the impact of identity-theft concerns on customer attitudes toward our services; |
• | our ability to access the credit markets and satisfy our covenants to lenders; |
• | challenges in deploying accurate tax software in a timely way each tax season; |
• | delays in the commencement of the tax season attributable to Congressional action affecting tax matters and the resulting inability of federal and state tax agencies to accept tax returns on a timely basis, or other changes that have the effect of delaying the tax refund cycle; |
• | competition in the tax preparation market; |
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• | the effect of federal and state legislation that affects the demand for paid tax preparation, such as the Affordable Care Act and potential immigration reform; |
• | our reliance on technology systems and electronic communications; |
• | our ability to effectively deploy software in a timely manner and with all the features our customers require; |
• | the impact of any acquisitions or dispositions, including our ability to integrate acquisitions and capitalize on their anticipated synergies; and |
• | other factors, including the risk factors discussed in this annual report. |
Potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on the forward-looking statements. These forward-looking statements speak only as of the date of this annual report. Unless required by law, we do not intend to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise. A potential investor or other vendor should, however, review the factors and risks we describe in the reports we will file from time to time with the U.S. Securities and Exchange Commission ("SEC") after the date of this annual report.
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PART I
Item 1. Business.
Company Information
We were incorporated in Delaware in September 2010 as JTH Holding, Inc. In July 2014, our corporate name was changed to Liberty Tax, Inc. in order to better reflect our primary business and to eliminate confusion among stockholders and potential investors seeking information about us. We are the holding company for JTH Tax, Inc. d/b/a Liberty Tax Service, our largest subsidiary, which was incorporated in Delaware in October 1996. As an "emerging growth company" under applicable federal securities laws, we are subject to reduced public company reporting requirements.
References in this report to "years" are to our fiscal years, which end on April 30 unless otherwise noted, and all references to "tax season" refer to the period between January 1 and April 30 of the referenced 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. A complete list of our subsidiaries can be found in Exhibit 21.1 to this report.
Financial Information about Segments
The majority of our revenue is earned through our United States operations; however, during our fiscal years 2016, 2015, and 2014, we earned $7.0 million, $6.9 million, and $6.4 million, respectively, from our Canadian operations. Due to the similarity in the nature of products and services, production process, type of customer, distribution methods, future prospects, and regulatory environment, we combine our United States operations and our Canadian operations into one reportable segment.
Our Business
We are one of the leading providers of tax preparation services in the United States and Canada. As measured by the number of returns prepared, we believe we are the second largest national retail preparer of individual tax returns in both the United States and Canada. Although we operate a limited number of Company-owned offices each tax season, our tax preparation services and related tax settlement products are offered primarily through franchised locations. All of the offices are presently operated under the Liberty Tax Service or SiempreTax+ brands. We also provide an online digital Do-It-Yourself ("DIY") tax program in the United States.
Our business involves providing retail federal and state income tax preparation services and related tax settlement products in the United States and Canada. Our focus is on growing the number of Liberty Tax and SiempreTax+ offices, increasing the number of tax returns prepared by those offices, and enhancing profitability by offering services and products that continue to build both brands.
The tax return preparation market is divided into two primary distinct sectors: paid tax preparation and DIY preparation. Although recent years have seen growth in the relative portion of the DIY sector that has been captured by online and software-based tax products, the separate paid tax preparation sector, in which we and our franchisees primarily compete, has also continued to grow. Approximately 58% of e-filed returns during the 2016 tax season were prepared by paid preparers.
Through our franchise and Company-owned offices, we offer tax preparation services and related financial products to our tax customers. The services and products are designed to provide streamlined tax preparation services for taxpayers who, for reasons of complexity, convenience, or the need for prompt tax refunds, seek assisted tax preparation services.
In the 2016 tax season, we and our franchisees accounted for 1.8 million tax returns filed through our U.S. retail offices, 0.3 million through our Canadian retail offices, and $0.2 million through our online tax programs.
We expect to benefit from anticipated industry consolidation as we believe many independent tax preparers will look to exit the industry as they confront increased costs, regulatory requirements and demands to provide tax settlement products. We believe we will be a beneficiary of this consolidation because we are able to more efficiently address changing regulatory requirements due to our scale and also because we have succeeded in providing a fully competitive mix of financial products we believe to be attractive to our customers.
We believe the ACA presents an opportunity for potential growth in revenue and in number of returns. Because of the complexity of the ACA, we expect that taxpayers will seek assistance and we could see an increase in the number of filers in general and an increase in the number of filers who shift to a paid preparer from DIY. The ACA also requires additional forms and worksheets to be completed, which may produce more revenue.
We also believe that the growing Hispanic population in the United States presents an opportunity for additional growth for tax providers who are able to successfully target those potential customers with tax and related services that serve the
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unique needs of the Hispanic community. For that reason, during fiscal 2015 we launched a new franchised tax brand, SiempreTax+, and we and our franchisees operated 144 SiempreTax+ offices during the 2016 tax season. We expect this brand to continue to grow, and we are working with our franchisees to develop additional non-tax service offerings in these offices that will attract customers to the brand. Moreover, we anticipate that any immigration reform, whether enacted through executive action or by Congress, will necessarily have the effect of encouraging a substantial number of undocumented immigrants to prepare and file tax returns, perhaps from multiple years. For that reason, we believe that any immigration reform that is implemented will result in an increase in the number of filers utilizing a paid preparer to guide them through this important governmental interaction.
Our Franchise Model
We rely on a franchise model for our growth. Although our competitors rely on a mix of franchise locations and Company-owned offices or operate a majority of Company-owned offices, we have determined that we can best grow our Company by increasing our franchisee base, and the number of offices operated by our existing franchisees. Under our franchise model, we are able to focus on marketing, franchisee coaching and support, financial product development and other initiatives that drive our overall success. In addition, our franchise model allows us to grow our tax system with minimal capital expenditures or fixed cost investments.
We have included in our franchisee model the sale of area developer ("AD") areas. Under the AD model, we make large clusters of territories available to an AD who is responsible for marketing the available franchise territories within the larger AD area in order to help us fill gaps in our franchise system. As described below, when we utilize an AD to assist us in franchise sales, we receive revenue from the sale of the AD area but sacrifice a portion of the franchise fees and the royalty stream from the franchises within the AD area.
Franchise territories. We have divided the United States into approximately 10,000 potential franchise territories. We attempt to draw territory boundaries such that each territory has a target population of approximately 30,000 people. Franchisees are permitted to open more than one office in a territory.
Upon the launch of our new SiempreTax+ brand, we made clear to franchisees who owned existing territories that they would retain the rights to operate both brands within those territories, and that they would be permitted to open offices of both brands, in their existing territories, if they determine that the territory will support both a Liberty Tax office and a SiempreTax+ office. Our franchisees may also be permitted to sell rights to one brand in their territory while retaining rights to the other brand. During fiscal 2015, we also began to sell the rights to our two brands separately in undeveloped territories while we retained the territory boundaries that existed before the launch of our second brand.
Franchise sales process. We engage in an active marketing process, both directly and through our ADs, in order to sell additional franchise territories. Our sales process includes sales to new franchisees, as well as the sale of additional territories to existing franchisees willing to expand into additional territories. For new franchisees, the process includes multiple steps that culminate in a week-long training session that we call Effective Operations Training. In addition, from time to time, we offer special franchise purchase programs, which are designed to allow existing franchisees to acquire additional territories or to encourage independent tax preparers to become franchisees.
Our franchise agreements. Under the terms of our standard franchise agreement, each franchisee receives the right to operate a tax return preparation business under the Liberty Tax Service brand and/or SiempreTax+ brand within a designated geographic area. Similarly, our agreements with ADs permit ADs to market franchise territories within a designated multi-territory area. Franchise agreements have an initial term of five years and are renewable. The agreements impose various performance requirements on franchisees, require franchisees to use our proprietary software and equipment designated by us, and obligate our franchisees to operate in their offices in accordance with standards we establish. These standards include specified in-season and out-of-season opening hours, criteria for the location of franchise offices, requirements related to tax preparers and other office employees, and minimum performance standards. Our agreements also require our franchisees to comply with applicable state and federal legal requirements. Although we do not control and are not responsible for any compliance issues that could be caused by our franchisees or their tax preparers, we provide guidance to our franchisees regarding their compliance obligations, including the provision of standard advertising templates, training materials that include detailed compliance information, and systems that alert them to unusual activity. We also use a variety of means in an attempt to identify potential compliance issues and require franchisees to address any concerns, including the creation of a Compliance Task Force to examine and prevent non-compliance, fraud and other misconduct among our franchisees and employees.
Each year, as part of our active management of our franchise base, we terminate a number of franchisees, and other franchisees voluntarily relinquish their territories, sometimes in exchange for our forbearance on the remaining indebtedness owed to us in connection with the franchise territory. We generally intend to resell these territories to new or existing franchisees; however, we sometimes close office locations or retain office locations that we were not able to resell before the
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subsequent tax season as Company-owned offices. In order to protect our competitive position, we regularly take actions to enforce the non-competition obligations and restrictions regarding customer lists and our trademarks and service marks contained in our franchise agreements.
AD areas. We initiated our AD program in 2001 in order to accelerate the growth of our franchise system. We continue utilizing the AD program to focus on areas with large underdeveloped groups of territories we believe would benefit from the dedicated sales attention that an AD offers. Our fees for AD areas vary based on our assessment of the revenue potential of each AD area, and also depend on the performance of any existing franchisees within the AD area being sold. Our ADs generally receive 50% of both the franchise fee and royalties collected from franchises located in their AD areas and are required to provide marketing and operational support.
Company-owned offices. We intentionally operate relatively few Company-owned offices. During the 2016 tax season we operated 310 Company-owned offices in the U.S. and Canada, 27 of which were seasonal offices. We focus primarily on growing through the opening of new franchise locations, and most of the Company-owned offices we operate in a given tax season are offices that have been previously owned by former franchisees who have ceased operations or failed to meet our performance standards. Rather than close offices that we believe have the potential to be successful, we attempt to resell these offices, and when we fail to do so before the beginning of a tax season, we may operate them as Company-owned offices until we can resell them at a later time. From time to time, we may open clusters of Company-owned offices in selected areas to meet franchisee interest in purchasing turnkey locations. For this reason, the number of offices we operate as Company-owned offices changes substantially from season to season. During the fourth quarter of fiscal 2014, we began classifying assets associated with our U.S. Company-owned offices as assets held for sale because it is our intent to sell these offices within one year.
Franchise fees and royalties. Franchisees presently have several options for acquiring a new undeveloped territory. The franchise fee for a Liberty Tax franchise is $40,000 and the fee starts at $25,000 for the SiempreTax+ franchise. We often offer special financing programs.
Our franchise agreement requires franchisees to pay us a base royalty equal to 14% of the franchisee's tax preparation revenue, subject to certain specified minimums. Franchisees are also required to pay us an advertising fee of 5% of their tax preparation revenue. We have the ability to collect these amounts from our franchisees through a "fee intercept" mechanism. Our franchise agreement allows us to obtain repayment of amounts due to us from our franchisees through an electronic fee intercept program before our franchisees receive the net proceeds from tax preparation and other fees they have charged to their customers who have received a tax settlement product. Therefore, we are able to reduce the nonpayment risk associated with amounts outstanding from franchisees by obtaining direct electronic payment in the ordinary course throughout the tax season. Our credit risk associated with amounts outstanding from ADs is also mitigated by our electronic fee intercept program, which enables us to obtain repayments of amounts that would otherwise flow through to ADs as their share of franchise fee and royalty payments, to the extent of an AD's indebtedness to us.
Franchisee loans. We provide a substantial amount of lending to our franchisees and ADs. In addition to allowing franchisees to defer a portion of their franchise fees, which they pay over time, we offer our franchisees working capital loans to fund their operations between tax seasons and expenditures they need to make in order to prepare for the upcoming tax season.
This indebtedness generally takes one of the following forms:
• | The unpaid portion of franchise and AD fees, which does not represent a cash advance by us to the franchisee or AD, but a loan of the franchise or AD fee, generally payable over four years for territory franchise fees and six years for AD fees. |
• | Amounts due to us in connection with the purchase of a Company-owned office. The notes for these amounts are generally payable over five years following the acquisition. |
• | Annual working capital loans made available to qualified franchisees between May 1 and January 31 each year, which are repayable to us generally by the end of February. |
Tax software. Our current proprietary tax software programs offer an interactive question-and-answer format that is easy for our retail office tax preparers to use, facilitating tax preparer training. A substantial number of changes are made each year to tax laws, regulations, and forms that require us to expend substantial resources every year to develop and maintain tax preparation software, at both the federal level and for every state with income tax filing requirements, that will be ready to be deployed in every office before the beginning of the tax season. We also offer an online digital DIY tax program in the United States.
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Electronic filing. The LibTax software also allows tax customers to have their federal and state income tax returns filed electronically. Electronic filing permits taxpayers to receive tax refunds substantially sooner than when a tax return is filed on paper through the mail. Based on information made available by the IRS, we believe that an electronically-filed return for which a refund is direct deposited into a bank account takes fewer than 21 days after the IRS accepts the return for the refund to be made available to a taxpayer, while a refund associated with a mailed return will take 21 to 28 days after the IRS accepts the return if the refund is to be direct deposited and 6-8 weeks after IRS acceptance if the refund is to be mailed to the taxpayer using a government check. Although our software will permit a customer's return to be printed and filed as a paper return, substantially all of our customers utilize the electronic filing option available through our software.
Franchisee support. We provide substantial support to our franchisees in a variety of ways. Our franchise agreement requires our franchisees to adhere to certain minimum standards, including the use of tax preparation software we provide, the use of computers and other equipment that we select (but that we do not sell to them), training requirements, and other criteria. We make substantial training opportunities available to our franchisees and their prospective employees, and we require each franchisee to send representatives to a week-long Effective Operations Training seminar before they are allowed to operate a franchise location. We also make intermediate and advanced training available to our franchisees, offer "Tax School" classes for franchisees and prospective tax preparers, and provide substantial phone and internet-based support, particularly during the tax season. During the tax season, we maintain a fully-staffed operations center, with extended hours, at our corporate headquarters in Virginia Beach, Virginia. During the peak tax season, we hold daily conference calls in which we share and allow other franchisees to share recommendations and techniques for improving office performance, and in which we emphasize the importance of implementing the marketing plan that we recommend as part of our franchisee training.
Our Financial Products
We expend considerable effort to ensure that our franchisees are able to offer a complete range of tax settlement products to our customers, and to provide our customers choices in these products. We offer these products because we believe that a substantial portion of our prospective customer base places significant value on the ability to monetize their expected income tax refund more quickly than they would be able to do if they were to file their tax return without utilizing the services of a paid tax preparer. We offer two types of tax settlement products: refund transfer products and refund-based loans.
Refund transfer products. Many of our tax customers seek products that will enable them to obtain access to their tax refunds more quickly than they might otherwise be able to receive those funds. We believe that many of our customers are unbanked, in that they do not have access to a traditional banking account, and therefore, cannot make such an account available to the IRS and other tax authorities for the direct deposit of their tax refunds. Additionally, customers may have access to a traditional banking account, but for personal reasons, may prefer not to utilize that account for the deposit of their tax refunds.
A refund transfer product involves direct deposit of the customer's tax refund into a newly established temporary bank account in the customer's name that we establish with one of our banking partners that have contracted with one of our subsidiaries, JTH Financial, LLC ("JTH Financial"). The balance of the customer’s refund, after payment of tax preparation and other fees will be delivered to the customer by paper check, prepaid card or a direct deposit into a customer’s existing bank account. When the prepaid card option is elected, the card is issued through one of our financial product partners and is branded with the Liberty Tax logo. When we deliver a physical refund check to a customer, we are generally able to print the check in one of our retail tax offices on check stock paper within a matter of hours after the electronic deposit of the customer's refund has been made to the customer's temporary account. We also enter into check-cashing arrangements with a number of retail establishments, including Walmart, which facilitate the ability of our customers to monetize their check even when they do not have traditional banking relationships. Disbursements on prepaid cards represent a smaller percentage of our financial products than for some of our competitors, and we receive less income from this source than those competitors.
We believe the continued availability of refund transfers will enable us to continue to offer an adequate mix of tax settlement products to our customers. The number of customers in our U.S. offices receiving our refund transfer products, which we call our "attachment rate," has varied from 49.2% for the 2016 tax season compared to 49.7% for the 2015 tax season and 51.5% for the 2014 tax season.
Refund-based loans. During this past season, we partnered with two banks to make available a new refund-based loan to customers ("Refund Advance"). Approved customers were charged no fees or interest on the Refund Advance. There were no additional requirements for the customer to pay for any additional products, such as a refund transfer, to receive a Refund Advance.
Online Tax Preparation
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Although online tax preparation, through our digital online tax services, represents a small portion of tax returns prepared and associated revenue, we believe there is a substantial market for customers who wish to prepare their own tax returns using moderately priced online tax preparation products, and the continued availability of these products will be a part of our long-term growth, particularly if we are able to successfully integrate our online and retail tax services.
Intellectual Property
We regard our intellectual property as critical to our success and we rely on trademark, copyright, and trade secret laws in the United States to protect our proprietary rights. We pursue the protection of our service mark and trademarks by applying to register key trademarks in the United States. The initial duration of federal trademark registrations is 10 years. Most registrations can be renewed perpetually at 10-year intervals. In addition, we seek to protect our proprietary rights through the use of confidentiality agreements with employees, consultants, vendors, advisors, and others. The primary marks we believe to be of material importance to our business include our Lady Liberty logo and the brands "Liberty Tax," "Liberty Tax Service," "Liberty Income Tax," "Liberty Canada," and "SiempreTax+."
Seasonality
The tax return preparation business is highly seasonal, and we historically generate most of our revenues during the period from January 1 through April 30. For example, in fiscal 2016 and fiscal 2015, we earned 31% and 29% of our revenues during our fiscal third quarter ended January 31, respectively, and 91% and 90% of our revenues during the combined fiscal third and fourth quarters of 2016 and 2015, respectively. We generally operate at a loss during the period from May 1 through December 31, during which we incur costs associated with preparing for the upcoming tax season.
Available Financing
By building on steady growth since our founding and using our available financing to fund operations between tax seasons, we have avoided excess leverage while ensuring minimal outstanding indebtedness at the end of each tax season. At April 30, 2016 and 2015, for example, we had no outstanding balance under our revolving credit facility. Our term loan had outstanding balances of $19.0 million and $20.5 million at April 30, 2016 and 2015, respectively.
Competition
The paid tax preparation market is highly competitive. We compete with tens of thousands of paid tax return preparers, including H&R Block, Jackson Hewitt, regional and local tax return preparation companies, most of which are independent and some of which are franchised, regional and national accounting firms, and financial service institutions that prepare tax returns as part of their businesses.
We also face increased competitive challenges from the online and software self preparer market, including the Free File Alliance ("FFA"), a consortium of the IRS and online preparation services that provides free online tax return preparation, and from volunteer and certain state organizations that prepare tax returns at no cost for low-income taxpayers. Our ability to compete in the tax return preparation business depends on our product mix, price for services, customer service, the specific site locations of our offices, local economic conditions, quality of on-site office management, the ability to file tax returns electronically with the IRS, and the availability of tax settlement products to offer to our customers.
We also compete for the sale of tax return preparation franchises with H&R Block, Jackson Hewitt, and other regional franchisors. In addition, we compete with franchisors of other high-margin services outside of the tax preparation industry that attract entrepreneurs seeking to become franchisees. Our ability to continue to sell franchises is dependent on our brand image, the products and services to be provided through the network, the relative costs of financing and start-up costs, our reputation for quality, and our marketing and advertising support. However, we believe that there is no existing smaller competitor in the retail tax preparation market that could challenge our market position on a national scale due to the expense and length of time required to develop the infrastructure, systems and software necessary to create and support a nationwide network of tax preparation offices. As a result, we believe that it would be difficult for an additional national competitor to emerge in our market for the foreseeable future.
Our online tax business also competes with a number of companies. Intuit, Inc., the maker of Turbo Tax, is the largest supplier of tax preparation software for online tax preparation services. H&R Block and Blucora, Inc., the owner of TaxAct, also have substantial online and software-based products.
Although we acquired the customer lists of two other online tax providers before the 2013 and 2014 tax seasons, the substantial advertising resources of our largest online tax competitors places us at a substantial disadvantage in this very competitive segment of the tax preparation market. During fiscal 2015, we recognized a portion of the purchase prices of those previously acquired customer lists as impaired, and we do not have any present plans for further growth of our online business
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through acquisition, unless a compelling strategic opportunity presents itself. In fiscal 2016, we did not record an impairment related to the online tax preparation business.
Regulation
We and our franchisees must comply with laws and regulations relating to our businesses. Regulations and related regulatory matters specific to our businesses are described below.
Federal tax return preparation regulation. Federal law requires tax preparers to, among other things, set forth their signatures and identification numbers on all tax returns prepared by them and retain for three years all tax returns prepared. Federal laws also subject tax preparers to accuracy-related penalties in connection with the preparation of tax returns. Preparers may be enjoined from further acting as tax preparers if they continually or repeatedly engage in specified misconduct. Additionally, all authorized IRS e-file providers must adhere to IRS e-file rules and requirements to continue participation in IRS e-file. Adherence to all rules and regulations is expected of all providers regardless of where published and includes, but is not limited to, those described in IRS Publication 1345, Handbook for Authorized IRS e-file Providers. Various IRS regulations also require tax return preparers to comply with certain due diligence requirements to investigate factual matters in connection with the preparation of tax returns. The IRS conducts audit examinations of authorized IRS e-file providers and tax return preparers, reviewing samples of prepared tax returns to ensure compliance with regulations in connection with tax return preparation activities. From time to time, certain of our franchisees and Company-owned offices are the subject of IRS audits to review their tax return preparation activities.
We engage in significant efforts to enhance tax compliance by our franchisees and their preparers, including the use of a franchisee alert system that identifies anomalous patterns, compliance audits of selected offices and returns, additional training requirements and actions taken against problematic preparers (including blacklisting to prevent their hiring by other franchisees and reporting to the IRS).
The IRS published final regulations in 2010 that would have imposed mandatory tax return preparer regulations, but federal courts have ruled that the IRS did not have authority to implement those regulations. The IRS has created a voluntary tax preparer certification regime.
During fiscal 2016, the United States Department of Justice (“DOJ”) announced two suits against certain of our former franchisees and two lawsuits against then-existing franchisees. Allegations involved claims of fraudulent tax preparation. We were not named as a defendant in these suits. Further, in fiscal 2016, the state of Maryland, Office of the Comptroller suspended the processing of electronic and paper returns of 23 franchisee owned offices in that state. We retained outside counsel to conduct internal reviews (the “Internal Review”) of our compliance practices, policies and procedures in connection with tax return preparation activities. The Internal Review’s examination made certain recommendations, many of which have been implemented, to enhance compliance efforts including enhanced monitoring tools and increased training of franchisees and their preparers. We are cooperating with the applicable government authorities in connection with their investigations and we have created a Compliance Task Force to examine and prevent non-compliance, fraud and other misconduct among our franchisees and their employees.
State tax return preparation regulation. We are also subject to tax return preparation regulation at the state level. The scope and substance of these regulations vary from state to state, but states also conduct examinations and take enforcement action against tax return preparers. From time to time, certain of our franchisees and Company-owned offices are the subject of state-level audits to review their tax preparation activities. In addition, particularly in the absence of effective IRS regulations imposing mandatory tax return preparer requirements, several states have begun to fill this void by imposing state-level preparer regulatory requirements. We believe our in-house certification program exceeds these regulatory requirements.
Financial privacy regulation. The Gramm-Leach-Bliley Act and related FTC regulations require income tax return preparers to adopt and disclose customer privacy policies and provide customers a reasonable opportunity to opt-out of having personal information disclosed to unaffiliated third parties for marketing purposes. Some states have adopted or proposed stricter opt-in requirements in connection with use or disclosure of consumer information. Federal and state law also requires us and our franchisees to safeguard the privacy and security of our customers' data, including financial information, to prevent the compromise or breach of our security that would result in the unauthorized release of customer data. Breaches of information security that affect us or our franchisees require compliance with customer notification requirements imposed at the state and local level, and in addition, may subject us to regulatory review by the FTC and other federal and state agencies. For example, in connection with a burglary that occurred at a single franchise office in California in early 2015, both we and the affected franchisee have been required to respond to a document request issued by the FTC. Additional restrictions on disclosure are imposed by the IRS, which prohibits the use or disclosure by tax preparers of income tax return information without the prior written consent of the taxpayer. The IRS may continue to consider further regulations concerning disclosures or uses of tax return information.
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Financial product regulation. Federal and state statutes and regulations govern the facilitation of refund-based loans and other tax settlement financial products. These laws require us, among other things, to provide specific loan disclosures and advertise loans in a certain manner. In addition, we are subject to federal and state laws that prohibit deceptive claims and require that our marketing practices are fair and not misleading. Federal law also limits the annual percentage rate on loans for active duty service members and their dependents. There are also many states that have statutes regulating, through licensing and other requirements, the activities of brokering loans and offering credit repair services to consumers, as well as local usury laws which could be applicable to our business in certain circumstances. From time to time, we receive inquiries from various state regulators regarding our and our franchisees' facilitation of refund-based loans and other tax settlement products. We have in certain states paid fines, penalties, and other payments as well as agreed to injunctive relief, in connection with resolving these types of inquiries.
Potential regulation of refund transfer products or treatment of refund transfer products as loans or extensions of credit. Our refund transfer products may be subject to additional regulation because of potential regulatory changes as well as litigation asserting that refund transfer products constitute a loan or extension of credit because many customers who receive refund transfer products elect to defer paying their tax preparation fees until their tax refund is received. With respect to possible new regulation, the broad authority of the Consumer Financial Protection Bureau ("CFPB") may enable that agency to pursue initiatives that negatively impact our ability to offer tax settlement products by imposing disclosure requirements or other limitations that make the products more difficult to offer or reduce their acceptance by potential customers. See "Item 1A—Risk Factors—Risk Related to Regulation of Our Industry—Legislative and regulatory reforms may have a significant impact on our business, results of operations and financial condition" and "—Federal and state regulators may impose new regulations on non-loan tax settlement products that would make those products more expensive for us to offer or more difficult for our customers to obtain."
We have previously been subject to class action litigation asserting that the refund transfer product is a loan or extension of credit, and should therefore be subject to loan-related federal and state disclosure requirements, which litigation was settled in January 2016. We are also subject to an injunction in California that treats our refund transfer product as an extension of credit. If we are subject to an adverse decision in future litigation that affects our offering of refund transfer products in other states, our refund transfer products would be subject to additional regulatory requirements in those states, including federal truth-in-lending disclosure obligations, and possible compliance with statutes and regulations governing refund anticipation loans that have been adopted in numerous states. This additional regulation would not prohibit us from offering refund transfer products but might require us to make interest rate and other disclosures to customers because of the characterization of the refund transfer product as a loan or extension of credit that would make it more difficult to market the refund transfer product to potential customers or reduce their acceptance by potential customers, and might adversely affect fees charged related to refund transfer products because of limitations on fees imposed by state refund anticipation loans statutes and regulations. See "Item 1A—Risk Factors—Risks Related to Regulation of Our Industry—Federal and state regulators may impose new regulations on non-loan tax settlement products that would make those products more expensive for us to offer or more difficult for our customers to obtain" and "—We may be unsuccessful in litigation that characterizes refund transfer products as loans, which could subject us to damages and additional regulation, and which could adversely affect our ability to offer tax settlement products and have a material adverse effect on our operations and financial results."
Franchise regulations. Our franchising activities are subject to the rules and regulations of the FTC and various state agencies regulating the offer and sale of franchises. These laws require that we furnish to prospective franchisees a franchise disclosure document describing the requirements for purchasing and operating a Liberty Tax or a SiempreTax+ franchise. In a number of states in which we are currently franchising, we are required to be registered to sell franchises. Several states also regulate the franchisor/franchisee relationship particularly with respect to the duration and scope of non-competition provisions, the ability of a franchisor to terminate or refuse to renew a franchise, and the ability of a franchisor to designate sources of supply. Bills have been introduced in Congress from time to time that would provide for federal regulation of the franchisor/franchisee relationship in certain respects.
Telephone Consumer Protection Act. Maintaining contact with customers is an essential component of the efforts by our franchisees, and by us in Company-owned offices, to retain tax customers from year-to-year. In addition, we utilize a variety of contact methods to solicit new franchisees. The Telephone Consumer Protection Act ("TCPA") imposes substantial restrictions on the manner in which persons may be contacted, by telephone calls or text, on mobile telephones. We are required to comply with these restrictions in the telephone calls and text messages that we send, and we also make available tools intended to assist our franchisees in ensuring that telephone calls they make and text messages they send are compliant with the TCPA. Violations of the TCPA may result in per-call and per-message penalties of $500 to $1,500, and frequently result in class action litigation. The Federal Communications Commission ("FCC"), which is responsible for regulations relating to the TCPA, has been asked to clarify certain aspects of their regulations that have led to a substantial increase in TCPA litigation, but it is not clear that any significant changes to those regulations will be implemented in the foreseeable future.
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Tax course regulations. Our tax courses are subject to regulation under proprietary school laws and regulations in many states. Under these regulations, our tax courses may need to be registered and may be subject to other requirements relating to facilities, instructor qualifications, contributions to tuition guaranty funds, bonding, and advertising.
Foreign regulations. We are subject to a variety of other regulations in the Canadian markets, including anti-corruption laws and regulations. Foreign regulations and laws potentially affecting our business are evolving rapidly. We rely on external counsel in Canada to advise us regarding compliance with applicable laws and regulations.
Employees
As of April 30, 2016, we employed 1,332 employees, consisting of 430 employees in our corporate operations, primarily located in Virginia Beach, Virginia and 902 employees at our Company-owned offices. Many of our employees are seasonal and, by contrast, we had 695 corporate employees and 1,389 employees at our Company-owned offices as of February 29, 2016. As of May 31, 2016, we employed 433 corporate employees and 257 employees at our Company-owned offices. We consider our relationships with our employees to be good.
Available Information
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed with or furnished to the SEC are available, free of charge, through our website at www.libertytax.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC. The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference room by calling the SEC at 1-800-SEC-0030. The SEC maintains a website at www.sec.gov containing reports, proxy and information statements and other information regarding issuers who file electronically with the SEC.
Item 1A. Risk Factors.
In addition to the other information contained in this annual report, the following risk factors should be considered carefully in evaluating our business. If any of the risks or uncertainties described below were to occur, our business, financial condition, and results of operations may be materially and adversely affected. Additional risks not presently known to us or that we currently deem immaterial may also impair our business and operations.
Risks Related to Our Business
Because much of our growth has been achieved through rapidly establishing new offices, we may not achieve the same level of growth in revenues and profits in future years.
Historically our growth has been driven by selling franchises and entering into agreements with ADs who have assisted us in expanding our geographic reach. Our future viability, profitability, and growth will depend upon our ability to successfully operate and continue to expand our operations in the United States and Canada. Furthermore, our business has experienced rapid growth in the number of franchisees and office locations in large geographic markets, and our continued growth in those markets may not continue at the same pace. Our ability to continue to grow our business will be subject to a number of risks and uncertainties and will depend in large part on:
• | adding new customers and retaining existing customers; |
• | innovating new products and services to meet the needs of our customers; |
• | finding new opportunities in our existing and new markets; |
• | remaining competitive in the tax return preparation industry; |
• | our ability to offer directly and to facilitate through others the sale of tax settlement products; |
• | attracting and retaining capable franchisees and ADs; |
• | maintaining a reputation for quality tax preparation services sufficient to attract and retain customers and franchisees; |
• | our success in replacing independent preparers with franchisees; |
• | hiring, training, and retaining skilled managers and seasonal employees; and |
• | expanding and improving the efficiency of our operations and systems. |
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There can be no assurance that any of our efforts will prove successful or that we will continue to achieve growth in revenues and profits.
The highly seasonal nature of our business presents a number of financial risks and operational challenges which, if we fail to meet, could materially affect our business.
Our business is highly seasonal, with the substantial portion of our revenue earned in the January through April "tax season" in the United States and Canada each year. The concentration of our revenue-generating activity during this relatively short period presents a number of challenges for us and our franchisees, including:
• | cash and resource management during the first eight months of our fiscal year, when we generally operate at a loss and incur fixed costs and costs of preparing for the upcoming tax season; |
• | compliance with financial covenants under our credit facility, particularly if the timing of our revenue generation deviates from our typical revenue patterns; |
• | the availability of seasonal employees willing to work for our franchisees for little more than the minimum wage, with minimal benefits, for periods of less than a year; |
• | the success of our franchisees in hiring, training, and supervising these employees and dealing with turnover rates; |
• | accurate forecasting of revenues and expenses because we may have little or no time to respond to changes in competitive conditions, markets, pricing, and new product offerings by competitors, which could affect our position during the tax season; |
• | disruptions in one tax season, including any customer dissatisfaction issues, which may not be discovered until the following tax season; and |
• | ensuring optimal uninterrupted operations during peak season. |
If we experience significant business disruptions during the tax season or if we or our franchisees are unable to meet the challenges described above, we could experience a loss of business, which could have a material adverse effect on our business, financial condition, and results of operations.
Our future success will depend in part upon the continued services of our senior management, including our CEO, as well as our ability to attract and retain capable middle management.
Failure to maintain the continued services of senior management personnel or to attract and maintain capable middle management could have a material adverse effect on us. If our Chairman and CEO, John Hewitt, or other senior management were to leave the Company, it could be difficult to replace him or her, and our operations and ability to manage day-to-day aspects of our business as well as our ability to continue to grow our business may be materially adversely affected. Our future success will also depend in part upon our ability to attract and retain capable middle management, such as regional directors, consultants for franchised offices, training directors, tax advisors, and computer personnel, having the specific executive skills necessary to assist us and our franchisees. We face competition for personnel from numerous other entities, including competing tax return preparation firms, some of which have significantly greater resources than us.
Because we are not a financial institution, we can only facilitate the sale of financial products through our arrangements with financial institutions and other financial partners and, if these arrangements are terminated for any reason, we may not be able to replace them on acceptable terms or at all.
In the United States, 26% of our revenue during our 2016 fiscal year was directly derived from our facilitation of the sale of financial products provided to our customers by financial institutions and providers, and we believe that percentage may grow in future tax seasons. Our tax return preparation business is also, to some extent, dependent on our ability to facilitate the sale of these products, because our customers are often attracted to our business by the expectation that these products will be available. Financial products that monetize future tax refunds are specialized financial products, and if our arrangements with the financial institutions and other partners that provide our tax settlement products were to terminate and we were unable to enter into an alternative relationship on acceptable terms, or at all, our financial results could be materially adversely affected. In addition, any changes in our contractual terms with these financial institutions and other partners that result in a reduction in our fee income, if not offset by customer growth associated with lower fees, could adversely affect our profitability. See "—Risks Related to Regulation of Our Industry—We may be unsuccessful in litigation that characterizes refund transfer products as loans, which could subject us to damages and additional regulation, and which could adversely affect our ability to offer tax settlement products and have a material adverse effect on our operations and financial results."
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We may agree with our bank lenders to share in losses associated with our Refund Advance product, which could adversely affect our results of operations.
During recent tax seasons, we entered into a relationship with two bank lenders to offer a Refund Advance product to our customers. Because we may agree with our bank lenders to share in losses associated with the Refund Advance product, this could adversely affect our results of operations.
We face significant competition in the tax return preparation business and face a competitive threat from software providers and internet businesses that enable and encourage taxpayers to prepare their own tax returns.
The tax return preparation industry is characterized by intense competition. We compete with H&R Block, which is larger and more widely recognized than us, and with other national and regional tax services and smaller independent tax return preparation services, small franchisors, regional tax return preparation businesses, accounting firms, and financial service institutions that prepare tax returns as part of their business. Additionally, many taxpayers in our target market prepare their own returns. The availability of these alternative options may reduce demand for our products and limit the fees our franchisees can charge, and competitors may develop or offer more attractive or lower cost products and services than ours, which could erode our consumer base.
We also face increased competitive challenges from the online and software self-preparer market, including the FFA, a consortium of the IRS, online preparation services that provides free online tax return preparation, and assistance from volunteer organizations that prepare tax returns at no cost for low-income taxpayers. In addition, many of our direct competitors offer certain free online tax preparation and electronic filing options, and limited in-office promotions of free or nominal cost tax preparation services. Government tax authorities, volunteer organizations, and direct competitors may elect to expand free and reduced cost offerings in the future. Intense price competition, including offers of free service, could result in a loss of market share, lower revenues, or lower margins. Our ability to compete in the tax return preparation business depends on our product offerings, price for services, customer service, the specific site locations of our offices, local economic conditions, quality of on-site office management, the ability to file tax returns electronically with the IRS, and the availability of tax settlement products to our customers.
We rely on our own proprietary tax preparation software, and any difficulties in deploying or utilizing our software each tax season could adversely affect our business.
We utilize our own tax preparation software. However, tax changes made by the federal and state governments each year and changes in tax forms require us to make substantial changes to our software before the beginning of each tax season. Although we engage in extensive testing of our software before deploying it in our franchisees' tax preparation offices and online, any delays in the availability of IRS forms or instructions or problems with the rollout of the new software each season could delay the ability to file tax returns at the beginning of the tax season and could adversely affect our business.
Our Company-owned offices may not be as successful as our franchised offices.
Historically, almost all Liberty Tax offices have been owned by franchisees, and most of the Company-owned offices we have operated during a tax season have been offices previously operated by former franchisees. For the 2016 tax season, we operated a total of 310 Company-owned offices. Our Company-owned offices tend to be less successful than our typical franchisee-owned offices because they often represent offices transitioned from a less successful franchisee. For this reason, we are not able to obtain the continuity of staffing in Company-owned offices that we expect to experience in our franchisee-owned offices.
The provision of health insurance and other insurance products to customers by our franchisees and their preparers may subject us and our franchisees to additional claims from customers, as well as increased regulatory risk.
As part of our effort to make information about health insurance options available to tax office customers, we have encouraged our franchisees to make licensed insurance agents available in tax offices. A significant number of our franchisees have become or arranged for the availability of insurance agents, and participated in the writing of health insurance policies for customers. The provision of these insurance services subjects our franchisees to a complex regulatory environment, and to potential claims by customers who may become dissatisfied with the insurance products they obtain. Any failure by our franchisees or their employees to comply with applicable insurance laws and regulations could have an adverse effect on our business and subject our franchisees and us to regulatory complaints, and any failure by our franchisees to provide satisfactory insurance services to customers may adversely affect our customer relationships and our business.
Our failure to protect our intellectual property rights may harm our competitive position, and litigation to protect our intellectual property rights or defend against third-party allegations of infringement may be costly.
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We regard our intellectual property as critical to the success of our business. Third parties may infringe or misappropriate our trademarks or other intellectual property rights, which could have a material adverse effect on our business, financial condition, or operating results. The actions we take to protect our trademarks and other proprietary rights may not be adequate. Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets, or determine the validity and scope of the proprietary rights of others. There are no assurances that we will be able to prevent infringement of our intellectual property rights or misappropriation of our proprietary information. Any infringement or misappropriation could harm any competitive advantage we currently derive or may derive from our proprietary rights. In addition, third parties may assert infringement claims against us. Any claims and any resulting litigation could subject us to significant liability for damages. An adverse determination in any litigation of this type could require us to design around a third party's patent or to license alternative technology from another party. Litigation is time-consuming and expensive to defend and could result in the diversion of our time and resources. Any claims from third parties may also result in limitations on our ability to use the intellectual property subject to these claims.
Our business relies on technology systems and electronic communications, which, if disrupted, could significantly affect our business.
Our ability to file tax returns electronically and to facilitate tax settlement products depends on our ability to electronically communicate with all of our offices, the IRS, state tax agencies, and the financial institutions that provide the tax settlement products. Our electronic communications network is subject to disruptions of various magnitudes and durations. Any severe disruption of our network or electronic communications, especially during the tax season, could impair our ability to complete our customers' tax filings, to provide tax settlement products from financial institutions, or to maintain our operations, which, in turn, could have a material adverse effect on our business, financial condition, and results of operations.
We are dependent on our financing sources and any loss of financing could materially and adversely affect our operating results and our ability to expand our business.
We are dependent upon the continued availability of our credit facility, which consists of a term loan and a revolving loan, in order to fund our seasonal needs and for the further expansion of our business. Were we to default on our financing or otherwise lose access to our sources of credit, our ability to provide financing to our franchisees would be significantly impaired and may result in certain offices closing if our franchisees are not able to secure alternative financing for their working capital needs. In addition, our ability to expand our business would be impaired. We may need to obtain new credit arrangements and other sources of financing to continue to provide financing to our franchisees, to meet future obligations, and to fund our future growth. Our ability to maintain or refinance our debt and fund other obligations depends on our successful financial and operating performance and the availability of funds from credit markets. There is no assurance that when our credit facility matures in 2019, we will be able to renew or refinance our debt or enter into new credit arrangements on terms similar to those of our existing loans.
Our credit facility contains restrictive covenants and other requirements that may limit our business flexibility by imposing operating and financial restrictions on our operations.
Our credit facility is secured by substantially all of our assets, including the assets of our subsidiaries. We are subject to a number of covenants that could potentially restrict how we carry out our business or that require us to meet certain periodic tests in the form of financial covenants. The restrictions we consider to be material to our ongoing business include the following:
• | We must satisfy a "leverage ratio" test that is based on our outstanding indebtedness at the end of each fiscal quarter. |
• | We must satisfy a "fixed charge coverage ratio" test at the end of each fiscal quarter. |
• | We must reduce the outstanding balance under our revolving loan to zero for a period of at least 45 consecutive days each fiscal year. |
• | We must also maintain a minimum net worth requirement, measured at April 30 of each year. |
Our credit facility also contains customary affirmative and negative covenants, including limitations on indebtedness; limitations on liens and negative pledges; delivery of financial statements and other information requirements; limitations on investments, loans, and acquisitions; limitations on mergers, consolidations, liquidations, and dissolutions; limitations on sales of assets; limitations on certain restricted payments; and limitations on transactions with affiliates; among others. Our credit facility also includes change of control provisions that may result in our obligations under that facility accelerating if certain change of control events were to occur, including if John Hewitt, our Chairman and CEO, ceases to control our Company.
A breach of any of these covenants, tests, or mandatory payments could limit our ability to borrow funds under the revolving loan or result in a default under our loans. In addition, these covenants may prevent us from incurring additional
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indebtedness to expand our operations and execute our business strategy, including making acquisitions. We may also from time to time seek to refinance all or a portion of our debt or incur additional debt in the future. Any such future debt or other contracts could contain covenants more restrictive than those in our existing credit facility. Our ability to comply with the covenants, tests, or mandatory payments in our credit facility may be affected by events beyond our control, including prevailing economic, financial, and industry conditions or our ability to make tax settlement products available to our customers. See "Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Overview of factors affecting our liquidity—Credit facility."
We are dependent on the timing of the tax filing season, and disruptions in the opening of the tax season may have a material adverse effect on our results of operations and liquidity.
Historically, the federal tax filing season has begun in mid-January, and both we and our franchisees have begun to prepare tax returns in early January with the ability to electronically file those returns beginning in mid-January. For both the 2013 and 2014 tax seasons, the IRS postponed the first date on which it generally accepts electronic filings until the end of January, and in 2013, also delayed the availability of a significant number of tax forms. These delays at the beginning of the tax season were also replicated at the state level in 2013, because of the reliance of states on tax forms that are dependent upon or subject to changes in federal tax forms. The change in the start of the 2013 and 2014 tax filing seasons materially affected our revenue during the fiscal quarter ended January 31 of both years, and also required us to engage in additional borrowing to support both our operations and those of our franchisees because of the delay in receipt of revenue associated with tax filings. Similarly, Congress has announced that in the 2017 tax season, the IRS must wait until at least February 15, 2017 to issue refunds to taxpayers who claim the Earned Income Tax Credit or the Child Tax Credit. Substantial delays in the opening of the tax filing season or the funding of processed returns, in future years would likely have an adverse effect on our revenue and liquidity.
Our floating rate debt financing exposes us to interest rate risk.
We may borrow amounts under our credit facility that bear interest at rates that vary with prevailing market interest rates. Accordingly, if we do not adequately hedge our interest rate risk, a rise in market interest rates will adversely affect our financial results. We expect to draw most heavily on our revolving loan from July through January of each year and then repay substantially all of the borrowings by the end of each tax season. Therefore, a significant rise in interest rates during our off-season could have a disproportionate impact on our financial results during these months.
The lines of business in which we operate involve substantial litigation, and such litigation may damage our reputation or result in material liabilities and losses.
We have been named, from time to time, as a defendant in various legal actions, including arbitrations, class actions, and other litigation arising in connection with our various business activities. Adverse outcomes related to litigation could result in substantial damages and could cause our net income to decline or may require us to alter our business operations. Negative public opinion can also result from our actual or alleged conduct in such claims, possibly damaging our reputation, which could negatively impact our financial performance and could cause the value of our stock to decline. See "Item 3—Legal Proceedings."
If we fail to protect or fail to comply with laws and regulations related to our customers' personal information, we may face significant fines, penalties, or damages and our brand and reputation may be harmed.
Privacy concerns relating to the disclosure of consumer financial information have drawn increased attention from federal and state governments in the United States. The IRS generally prohibits the use or disclosure by tax return preparers of taxpayers' information without the prior written consent of the taxpayer. In addition, the Gramm-Leach-Bliley Act and other Federal Trade Commission ("FTC") regulations require financial service providers, including tax return preparers, to adopt and disclose consumer privacy policies and provide consumers with a reasonable opportunity to opt out of having personal information disclosed to unaffiliated third parties for advertising purposes. We and our franchisees manage highly sensitive client information in our operations, and although we have established security procedures to protect against identity theft and require our franchisees to do the same, a security incident resulting in breaches of our customers' privacy may occur. If the measures we have taken prove to be insufficient or inadequate or if our franchisees fail to meet their obligations in this area, we and our franchisees may become subject to litigation or administrative sanctions, which could result in significant fines, penalties, or damages and harm to our brand and reputation, which in turn could negatively impact our ability to retain our customers. Moreover, although we have some insurance that may defray the cost, the cost of remediating any breach resulting from a cybersecurity incident or other breach of the privacy of customer information would likely be substantial. Furthermore, we may be required to invest additional resources to protect us against damages caused by these actual or perceived disruptions or security breaches in the future. We could also suffer harm to our reputation from a security breach or inappropriate disclosure of customer information. Changes in these federal and state regulatory requirements could result in more stringent requirements
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and could result in a need to change business practices, including how information is disclosed. These changes could have a material adverse effect on our business, financial condition, and results of operations. Moreover, a significant security breach or disclosure of customer information could so damage our brand and reputation that demand for the services that are provided by us and our franchisees may be reduced.
If our business or the tax industry generally is perceived as a source of identity theft, our reputation may be harmed and our financial performance could be materially adversely affected.
Identity theft and privacy concerns relating to customer information disclosure has been the subject of attention in recent years, including the substantial publicity around identity theft problems involving at least one of our competitors. Further, in May 2015, the IRS announced a significant breach of its data security that resulted in the potential theft of personally identifiable tax information involving more than 100,000 taxpayers. If the use of electronic tax filing becomes perceived by customers as subjecting them to unacceptable identity theft risk, or if we experience a breach of security that subjects a number of our customers to potential identity theft, customers may eschew our services or assisted tax preparation generally, in favor of self-preparation and the avoidance of electronic filing. In such an event, our reputation may be harmed and we may experience a material adverse effect on our business, financial condition and results of operation.
If we or our franchisees fail to comply with the Telephone Consumer Protection Act, we may face significant damages.
The retention of customers by our franchisees, and our ability to attract additional franchisees, depends on the use of telephone calls and text messaging to contact customers and potential franchisees. However, the Telephone Consumer Protection Act (“TCPA”) imposes significant restrictions on the ability to utilize telephone calls and text messages to mobile telephone numbers as a means of communication, when the prior consent of the person being contacted has not been obtained. In fiscal 2015, we settled one lawsuit related to the manner in which a contractor for us previously contacted potential franchisees. Violations of the TCPA may be enforced by individual customers through class actions, and statutory penalties for TCPA violations range from $500 to $1,500 per violation. If we fail to ensure that our own telemarketing and telemarketing efforts are TCPA compliant, or if our franchisees fail to do so and we are held responsible for their behavior, we may incur significant damages.
If we and our franchisees are unable to attract and retain qualified employees, our financial performance could be materially adversely affected.
Both we and our franchisees depend on the ability to hire a substantial number of seasonal employees for each tax season. We require seasonal employees in order to staff our franchises and customer call centers and Company-owned offices, and our franchisees require employees to implement marketing programs, to act as tax preparers, and to otherwise staff their offices. The ability of our franchisees and us to meet our labor needs is subject to many external factors, including competition for qualified personnel, unemployment levels in each of the markets in which we have offices, prevailing wage rates, minimum wage laws, and workplace regulation. Our franchisees require a substantial number of employees who are willing to become trained as tax preparers, and who have the ability to engage in temporary, seasonal employment. Moreover, in addition to our seasonal employees, we hire a substantial number of full-time employees who are required to have the technical skills necessary to participate in software development, database management, and other highly technical tasks. If we and our franchisees are not able to hire a sufficient supply of qualified seasonal employees, or if we are not able to secure employees with the technical skills we require for other purposes, our ability to serve our customers in our offices, to deploy our marketing programs, and to maintain the services that our franchisees require may be compromised and have a material adverse effect on our business.
An increase in the minimum wage may adversely affect the operations of our franchisees.
Many of the seasonal employees hired by our franchisees for each tax season receive compensation at or near the minimum wage. If our franchisees experience increases in payroll expenses as a result of government-mandated increases in the minimum wage or overtime requirements, such as some of the federal, state and local minimum wage increases recently adopted, their costs of operation may increase at a rate greater than their ability to raise the prices of the services they offer. If this occurs, our franchisees may not be able to maintain seasonal employment at levels that will provide an optimal level of customer service and marketing support, their marketing and advertising programs may be less effective, and their results of operations may be adversely affected, which could, in turn, adversely affect our results of operations.
If credit market volatility affects our financial partners or franchisees, our business and financial performance could be adversely affected.
In recent years, the credit markets experienced unprecedented volatility and disruption, causing many lenders and institutional investors to cease providing funding to even the most creditworthy borrowers or to other financial institutions. If additional credit market volatility prevents our financial partners from providing tax settlement products to our customers,
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limits the products offered, or results in us having to incur further financial obligations to support our financial partners, our revenues or profitability could decline. The cost and availability of funds has also adversely impacted our franchisees' ability to grow and operate their businesses, which could cause our revenues or profitability to decline. In addition, future disruptions in the credit markets could adversely affect our ability to sell territories to new or existing franchisees, causing our revenues or profitability to decline.
Because the tax season is relatively short and straddles two quarters, our quarterly results may not be indicative of our performance.
We experience quarterly variations in revenues and operating income as a result of many factors, including the highly seasonal nature of the tax return preparation business, the timing of off-season activities, and the hiring of personnel. Due to the foregoing factors, our quarter-to-quarter results vary significantly. In addition, because our peak period straddles the third and fourth quarters, any delay or acceleration in the number of tax returns processed in January may make our year-to-year quarterly comparisons not as meaningful as year-to-year tax season comparisons. To the extent our quarterly results vary significantly from year to year, our stock value may be subject to significant volatility.
Risks Related to Our Franchise Business
Our success is tied to the growth and operations of our franchises, and their operations could adversely affect our business.
Our financial success depends on our franchisees and the manner in which they operate and develop their offices. We do not exercise direct control over the day-to-day operations of our franchises, and our franchisees may not operate their offices in a manner consistent with our philosophy and standards and may not increase the level of revenues generated compared to prior tax seasons. Our growth and revenues may, therefore, be adversely affected. There can be no assurance that the training programs and quality control procedures we have established will be effective in enabling franchisees to run profitable tax preparation businesses or that we will be able to identify problems or take corrective action quickly enough. In addition, failure by a franchisee to provide service at acceptable levels may result in adverse publicity that can materially adversely affect our reputation and ability to compete in the market in which the franchisee is located.
If our franchisees fail to open offices in new territories or if they are not successful in operating their new offices, our franchise-related revenue and results of operation will be adversely affected.
Each year, we anticipate adding offices to our franchise system but the opening of these offices depends on the purchase of additional territories by our franchisees and on the opening of offices in territories previously purchased and newly purchased. Many factors go into opening a new office, including obtaining a suitable office location, the availability of sufficient start-up capital, and the ability to recruit tax preparers and other personnel to work in new offices. If a significant number of offices that we expect to be open in a tax season fail to open, are delayed, or open in unsuitable locations or with insufficient personnel, the revenue we expect to receive from royalty payments and the repayment of indebtedness to us by our franchisees will be adversely affected. Because we utilize an almost exclusive franchise business model, we do not have the same flexibility to open new offices as our competitors who make greater use of Company-owned offices.
Our operating results may be adversely affected by the default of our franchisees and ADs on loans made by us or third parties.
We extend financing to certain franchisees for initial franchise fees as cash advances for their working capital needs and for other purposes. The financing is in the form of promissory notes payable to us. There can be no assurance that any franchisee will generate revenue sufficient to repay any amounts due nor is there any assurance that any franchisee will be able to repay any amounts due through other means. We also extend financing to ADs from time-to-time for a portion of their area development fees. At April 30, 2016, the aggregate amount due to us, including accrued interest, from franchisees and ADs for financing was $104.1 million, net of unrecognized revenue of $35.2 million, of which we considered $18.6 million to be impaired because the amounts due exceeded the fair value of the underlying franchise. Any failure by the franchisees and ADs to pay these amounts, if the amounts are not recoverable by us through other means, could have a material adverse effect on our financial performance.
Moreover, in some cases, we may be liable for office leases or other contractual obligations that have been assumed by purchasers of Company-owned offices and acquired tax practices. If the franchisees default on third-party obligations for which we continue to have liability, our operating results will be adversely affected.
We may be held responsible by third parties, regulators, or courts for the action of, or failure to act, by our franchisees and be exposed to possible fines, other liabilities, and bad publicity.
We grant our franchisees a limited license to use our registered service marks and, accordingly, there is risk that one or more of the franchisees may be identified as being controlled by us. Third parties, regulators, or courts may seek to hold us
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responsible for the actions or failures to act by our franchisees. The extent to which franchisors should be held responsible for the behavior of their franchisees has become a more significant issue in recent years, with some government agencies taking the position that the extent to which a franchise system establishes requirements for franchisees may justify treating the franchisor as if it “controls” the franchisee’s behavior. Thus, the failure of our franchisees to comply with laws and regulations may expose us to liability and damages that may have an adverse effect on our business.
The Liberty Tax brand could be impaired due to actions taken by our franchisees or otherwise.
We believe the Liberty Tax brand is one of our most valuable assets in that it provides us with a competitive advantage, particularly over our competitors that do not have a national presence. Our franchisees operate their businesses under our brand. Because our franchisees are independent third parties with their own financial objectives, actions taken by them, including breaches of their contractual obligations, and negative publicity associated with these actions, could adversely affect our reputation and brand more broadly. Any actions as a result of conduct by our franchisees or otherwise which negatively impacts our reputation and brand may result in fewer customers and lower revenues and profits for us.
Our tax return preparation compliance program may not be successful in detecting all problems in our franchisee network, and franchisee non-compliance, fraud and other misconduct and related enforcement action may damage our reputation and adversely affect our business.
Although our tax return preparation compliance program seeks to monitor the activities of our franchisees, it is unlikely to detect every problem. While we have implemented a variety of measures to enhance tax return preparation compliance as well as our monitoring of these activities, there can be no assurance that franchisees and tax preparers will follow these procedures. From time to time, the federal and/or state authorities may take adverse action against franchisees or preparers related to tax compliance issues, seeking injunctions, damages or even criminal sanctions with respect to such behavior. Failure to detect and prevent tax return preparation compliance issues could expose us to the risk of government investigation or litigation, result in bad publicity and reputational harm, and could subject us to remedies and loss of customers that could cause our revenues or profitability to decline.
In fiscal 2016, the DOJ announced two lawsuits against certain of our former franchisees and two lawsuits against then-existing franchisees. Allegations involved claims of fraudulent tax preparation. We were not named as a defendant in these suits. Further, in fiscal 2016, the state of Maryland, Office of the Comptroller suspended the processing of electronic and paper returns of 23 franchisee owned offices in that state. We are cooperating with the applicable governmental authorities in connection with their investigations. We have created a Compliance Task Force committed to examining and preventing non-compliance, fraud and other misconduct among our franchisees and their employees. Nonetheless, there can be no assurance that our Compliance Task Force, the tax return preparation compliance program, or other efforts will be effective in eliminating or reducing potential non-compliance, fraud and other misconduct among our franchisees and/or employees. Accordingly, any such non-compliance, fraud or other misconduct may have a material adverse effect on our reputation, financial condition and results of operations.
Disputes with our franchisees may have a material adverse effect on our business.
From time to time, we engage in disputes with some of our franchisees, and some of these disputes result in litigation or arbitration proceedings. Disputes with our franchisees may require us to incur significant legal fees, subject us to damages, and occupy a disproportionate amount of management's time. A material increase in the number of these disputes, or unfavorable outcomes in these disputes, may have a material adverse effect on our business. To the extent we have disputes with our franchisees, our relationships with our franchisees could be negatively impacted, which could hurt our growth prospects or negatively impact our financial performance.
Our operating results depend on the effectiveness of our marketing and advertising programs and franchisee support of these programs.
Our revenues are heavily influenced by brand marketing and advertising. If our marketing and advertising programs are unsuccessful, we may fail to retain existing customers and attract new customers, which could limit the growth of our revenues or profitability or result in a decline in our revenues or profitability. Moreover, because franchisees are required to pay us marketing and advertising fees based on a percentage of their revenues, our marketing fund expenditures are dependent upon sales volumes of our franchisees.
The support of our franchisees is critical for the success of our marketing programs and any new strategic initiatives we seek to undertake. While we can mandate certain strategic initiatives through enforcement of our franchise agreements, we need the active support of our franchisees if the implementation of our marketing programs and strategic initiatives is to be successful. Although certain actions are required of our franchisees under the franchise agreements, there can be no assurance that our franchisees will continue to support our marketing programs and strategic initiatives. The failure of our franchisees to
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support our marketing programs and strategic initiatives would adversely affect our ability to implement our business strategy and could have a material adverse effect on our business, financial condition, and results of operations.
Our launch of a new franchise brand may be unsuccessful and consume significant management and financial resources.
During fiscal 2015, we launched a new franchise brand, SiempreTax+, designed to enable our franchisees to better serve Hispanic customers and to assist us in building out our franchise network. Although franchisees opened a significant number of SiempreTax+ offices for the 2016 and 2015 tax seasons, the launch of a new nationwide brand involves substantial risks and uncertainties, and the interest of prospective franchisees and customers in the new brand may not be sufficient to permit us to grow the brand as rapidly as we hope. We expended significant management time and start-up expenses during the first year of this brand, and if the brand is not successful or falls short of anticipated growth, we may be adversely affected by continued expenses and the diversion of management time to this initiative at the expense of our core Liberty Tax brand.
Risks Related to Regulation of Our Industry
Federal and state regulators may impose new regulations on non-loan tax settlement products that would make those products more expensive for us to offer or more difficult for our customers to obtain.
Consumer advocacy organizations and some government officials have asserted that non-loan tax settlement products, such as the refund transfer products we offer, should be treated as loan products or otherwise be more heavily regulated. These groups assert that refund transfer products and similar products are loans because most customers complete the payment for their tax preparation and related fees at the time their refund is disbursed, and therefore, the customer has received an extension of credit because of a purported deferral of the tax preparation fees until the refund is received. We are subject to a judgment in the State of California that treats refund transfer product products that we provide in that state as if they were extensions of credit. In addition, certain litigation discussed below involving us and others in the tax industry include claims that refund transfer products and similar products constitute loans or extensions of credit. If other state or federal courts or agencies successfully require us to treat refund transfer products as if they are loans or extensions of credit, we may be subject to the cost of additional regulation, including disclosure requirements that could reduce the demand for these products by potential customers and may be subject to limitations on our ability to offer these products, which could materially adversely affect our operations. See "Item 3—Legal Proceedings" and "Item 1—Business—Regulation—Potential regulation of refund transfer products or treatment of refund transfer products as loans or extensions of credit."
We may be unsuccessful in litigation that characterizes refund transfer products as loans, which could subject us to damages and additional regulation, and which could adversely affect our ability to offer tax settlement products and have a material adverse effect on our operations and financial results.
We were sued in November 2011 in four states, and additional lawsuits have been filed in five other states since the initial filings. These cases have now been consolidated before a single judge in federal court in the Northern District of Illinois. The consolidated complaint alleges violations of state-specific refund anticipation loan and other consumer statutes alleging that a refund transfer product represents a form of refund anticipation loan because the taxpayer is "loaned" the tax preparation fee, and that a refund transfer product is, therefore, subject to federal truth-in-lending disclosure and state law requirements regulating refund anticipation loans. We are aware that virtually identical lawsuits were filed against three of our competitors. In June 2015, we entered into a settlement agreement in this case in order to minimize the expense of litigation and the risk attendant to the litigation. Although this case was resolved through a settlement, the underlying issue may be the subject of additional regulation and litigation. We may also become subject to existing state regulations governing refund anticipation loans (in the states that have such regulations) and the costs of additional regulation, including disclosure requirements, and we may be subject to limitations on our ability to offer these products. These additional disclosure requirements could reduce the demand for these products by potential customers, and the possible application of state lending and other refund anticipation loan-related statutes and regulations might adversely affect our fee income to the extent those statutes or regulations impose limitations on fees that we now charge in connection with refund transfer products. If it becomes more difficult for us and our franchisees to offer these products to taxpayers, or if we are subject to damages in future litigation, it could materially and adversely affect our operations and financial results. See "Item 1-Business-Regulation-Potential regulation of refund transfer products or treatment of refund transfer products as loans or extensions of credit."
The failure by us, our franchisees, the financial institutions, and other lenders that provide tax settlement products to our customers through us and our franchisees, to comply with legal and regulatory requirements, including with respect to tax return preparation or tax settlement products, could result in substantial sanctions against us or require changes to our business practices that could harm our profitability and reputation.
Our tax return preparation business, including our franchise operations and facilitation of tax settlement products, are subject to extensive regulation and oversight in the United States by the IRS, the FTC, and by federal and state regulatory and law enforcement agencies and similar entities in Canada. The profitability of our future operations will, therefore, depend in
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large part on our continued ability to comply with federal and state franchise regulations, and in Canada, on our continued ability to comply with Canadian and provincial franchise regulations. If governmental agencies with jurisdiction over our operations were to conclude that our business practices, the practices of our franchisees, or those of financial institutions and other lenders with which we conduct our business violate applicable laws, we could become subject to sanctions that could have a material adverse effect on our business, financial condition, and results of operations. These sanctions may include, without limitation:
• | civil monetary damages and penalties, |
• | criminal penalties, and |
• | injunctions or other restrictions on the manner in which we conduct our business. |
In addition, the financial institutions and other providers of tax settlement products to our customers are also subject to significant regulation and oversight by federal and state regulators, including banking regulators. The failure of these providers to comply with the regulatory requirements of federal and state government regulatory bodies, including banking and consumer protection laws, could affect their ability to continue to provide tax settlement products to our customers, which could have a material adverse effect on our business, financial condition, and results of operations.
Our customers' inability to obtain tax settlement products through our tax return preparation offices could cause our revenues or profitability to decline. We also may be required to change business practices, which could alter the way tax settlement products are facilitated and could cause our revenues or profitability to decline.
Federal and state legislators and regulators have increasingly taken an active role in regulating tax settlement products and, because our ability to offer these products in future tax seasons may be limited, demand for our services may be reduced, we may be exposed to additional credit risk, and our business may be harmed.
From time to time, government officials at the federal and state levels introduce and enact legislation and regulations proposing to regulate or prevent the facilitation of refund-based loans and other tax settlement products and take other actions that have the effect of restricting the availability of these products. Certain of the proposed legislation, regulations, and activities could increase costs to us, our franchisees, the financial institutions, and other parties that provide our tax settlement products or could negatively impact or eliminate the ability of financial institutions to provide or facilitate tax settlement products through tax return preparation offices.
The financial institutions that provide or otherwise facilitate tax settlement products are subject to significant regulation and oversight by federal and state regulators, including banking regulators. In December 2011, Republic Bank, the last bank continuing to offer refund anticipation loans in any significant number, reached a settlement with the FDIC that required Republic Bank to cease to offer refund anticipation loans after the 2012 tax season. For this reason, any refund-related loans (such as the ICA) made available to our customers are offered by non-bank lenders.
In August 2010, the IRS announced that, starting in 2011, it would no longer provide tax preparers or refund anticipation loan providers with the Debt Indicator ("DI"), which was used by financial institutions to determine whether to extend credit to a taxpayer in connection with the facilitation of a refund anticipation loan. In eliminating the DI, the IRS no longer discloses to financial institutions or tax preparers if a taxpayer owes the federal government any money that will be deducted from the taxpayer's expected income tax refund. The unavailability of the DI subjects a lender that originates refund-related loans to additional risks because those loans are more difficult for a lender to underwrite.
Even if we continue to develop relationships that allow our customers to obtain refund-related loans through non-bank lenders, the laws and regulations that apply to those lenders and us may make these products more expensive to offer or limit their availability to our customers. The loss of the DI has caused approval rates and loan amounts to be lower than in prior tax seasons, and lenders may issue ICAs and similar products that have a greater probability of not being repaid. We may experience a loss of customers because of this change, and to the extent our arrangements with financial institutions impose any of the risk of customer defaults upon us, our profitability may be reduced. In addition, many states have statutes regulating through licensing and other requirements the activities of brokering loans and providing credit services to consumers as well as payday loan laws and local usury laws. Some state regulators are interpreting these laws in a manner that could adversely affect the manner in which tax settlement products are facilitated, or permitted, or result in fines or penalties to us or our franchisees. Some states are introducing and enacting legislation that would seek to directly apply such laws to the facilitators of refund-based loans. Additional states may interpret these laws in a manner that is adverse to how we currently conduct our business or how we have conducted our business in the past, and we may be required to change business practices or otherwise comply with these statutes and could be subject to fines, penalties, or other payments related to past conduct.
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If our financial product service providers become unable or unwilling to enable us to offer refund transfer products, we may be unable to offer tax settlement products to our customers.
Our ability to offer refund transfer products (as well as other tax settlement products that require the creation of a customer bank account) is dependent on the ability and willingness of our financial product service providers to make available to our customers the bank accounts into which their tax refunds are deposited. If any of the federal or state regulatory authorities with the power to regulate these service providers prevents or makes it more difficult for our service providers to make these bank accounts available to our customers or if the service providers determine that they no longer wish to participate in these transactions, we may be unable to find alternative service providers that will be willing to provide the required number of bank accounts to our customers. If we are unable to make bank accounts available for refund transfer products, we will not be able to enable our customers to utilize these accounts for the direct deposit of their federal and state tax returns, which would materially affect our ability to offer tax settlement products to those customers.
Legislative and regulatory reforms may have a significant impact on our business, results of operations, and financial condition.
In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Reform Act"), which contains a comprehensive set of provisions designed to govern the practices and oversight of financial institutions and other participants in the financial markets, was signed into law. The full impact of the Reform Act is difficult to assess because many provisions require federal agencies to adopt regulations implementing provisions of the Reform Act. In addition, the Reform Act mandates multiple studies, which could result in additional legislative or regulatory action. The Reform Act as well as other legislative and regulatory changes could adversely affect our businesses. There is particular risk associated with the establishment of the CFPB with broad authority to implement new consumer protection regulations. For example, the CFPB may pursue initiatives that negatively impact our ability and the ability of others we contract with to offer tax settlement products, may impose regulations on the manner in which tax preparation services are offered, and may take action to invalidate the use of consumer arbitration as a means of resolving customer disputes in connection with tax settlement products and otherwise.
The effect of the Reform Act on our business and operations could be significant, depending upon final implementation of regulations, the initiatives pursued by the CFPB, the actions of our competitors, and the behavior of other marketplace participants. Moreover, the Reform Act expanded the authority of state regulators to enforce and promulgate consumer protection laws and regulations, and this expansion of state authority may result in new and broader consumer protection requirements that might be more comprehensive than those at the federal level. In addition, we may be required to invest significant management time and resources to address the various provisions of the Reform Act and the numerous regulations that are required to be issued under it. The Reform Act and any related federal or state legislation or regulations could have a material adverse effect on our business, results of operations, and financial condition.
Increased regulation of tax return preparers could make it more difficult to find qualified tax preparers and could harm our business.
From time to time, the federal government and various states consider regulations regarding the education, testing, licensing, certification, and registration of tax return preparers. Although the IRS’ effort to implement a new model for tax return preparer regulation has been declared invalid by a federal appeals court, Congressional action authorizing mandatory regulation may be adopted in the future, and various states have begun to fill the void created by the absence of federal tax return preparer regulation by proposing new or enhanced regulatory requirements at the state level. Although we believe that our training for preparers already exceeds the requirements the IRS had proposed and that states have adopted or have proposed, regulation of tax return preparers could impact our ability to find an adequate number of tax return preparers to meet the demands of our customers and impose additional costs on us and our franchisees to train tax return preparers, which could cause our revenues and profitability to decline.
Immigration reform may lead our customers to seek our assistance with matters related to immigration reform and may subject us to additional regulatory risk.
We believe that any material immigration reform, whether implemented by executive action or by Congress, will necessarily involve the use of prior tax returns as a means by which undocumented immigrants may demonstrate their presence in the United States and compliance with federal and state tax laws. We anticipate that any additional customers we might obtain because of this opportunity to prepare additional tax returns may also seek our assistance in their efforts to comply with whatever processes are implemented to enable undocumented immigrants to take advantage of the benefits of any immigration reform initiatives. We and our franchisees may be subject to state restrictions on the unauthorized practice of law, and other federal and state restrictions regarding who may advise individuals with respect to immigration matters, and failure to comply with these regulatory restrictions may subject us and our franchisees to enforcement action and adversely affect our business.
Risks Related to Changes in Tax Laws and Regulations
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Because demand for our products is related to the complexity of tax return preparation and the frequency of tax law changes, government initiatives that simplify tax return preparation, reduce the need for a third-party tax return preparer, or lower the number of returns required to be filed may decrease demand for our services and financial products.
Many taxpayers seek assistance from paid tax return preparers such as Liberty Tax Service because of the level of complexity involved in tax return preparation and filing and frequent changes in the tax laws. From time to time politicians and government officials propose measures seeking to simplify the preparation and filing of tax returns. The passage of any measures that significantly simplify tax return preparation or reduce the need for third-party tax return preparers may be highly detrimental to our business. In addition, any changes or other initiatives that result in a decrease in the number of tax returns filed or reduce the size of tax refunds could reduce demand for our products and services causing our revenues or profitability to decline.
For example, several members of Congress have proposed legislation that would authorize or require the IRS to allow taxpayers to access web-based tax preparation tools that would include "pre-populated" tax return forms that would presumably include data provided to the IRS from other government agencies, such as the Social Security Administration. If these or similar proposals that involve government encroachment on the tax preparation process are enacted, many tax customers might elect those services rather than paid tax preparation or the use of fee-based tax software or online tax preparation.
Initiatives that improve the timing and efficiency of processing tax returns could reduce the attractiveness of the tax settlement products offered to our customers and demand for our services.
Our performance depends on our ability to offer access to tax settlement products that increase the speed and efficiency by which our customers can receive their refunds. The federal government and various state and local municipalities have, from time to time, announced initiatives designed to modernize their operations and improve the timing and efficiency of processing tax returns. For example, during a prior tax season, the U.S. Department of Treasury introduced a prepaid debit card pilot program designed to facilitate the refund process. If tax authorities are able to significantly increase the speed and efficiency with which they process tax returns, the value and attractiveness of the tax settlement products offered to our customers and demand for our services could be reduced.
Delays in the passage of tax laws and their implementation by the federal or state governments could harm our business.
The enactment of tax legislation occurring late in the calendar year could result in the beginning of tax filing season being delayed or make it difficult for us to make necessary changes on a timely basis to the software used by our franchisees to prepare tax returns. Any such delays could impact our revenues and profitability in any given year.
Proposals to make fundamental changes in the way tax refunds are processed or to impose price limitations on tax preparation, if enacted, could result in substantial losses of customers and other risks.
Some regulators have suggested that it would be appropriate to allow taxpayers to "split" their tax refunds, in a manner that would separate the payment of tax preparation fees from the balance of a customer's refund. In describing these proposals, some advocates have called for a cap on tax preparation fees that would adversely affect the ability of tax preparers to charge market prices for tax services and could reduce income to our franchisees, and therefore, to us. Other proposals have been advanced that would attempt to reduce tax refund fraud by significantly postponing the speed with which refunds are processed, or even postponing the processing of refunds until after the April 15 federal tax filing deadline. Such a change would likely have the effect of devaluing services that allow tax customers in the early portion of the tax season to receive their refunds on a more expedited basis that is available when electronic filing is not used, and could therefore reduce the demand for the services we and our franchisees provide.
There can be no assurance that these proposals will be enacted at all or in their present form but if enacted, our growth and revenues could be adversely affected.
Our participation in government programs designed to speed access to tax refunds may result in customer loss when the IRS fails to perform.
The IRS has responded to the increase in electronic filing by developing programs designed to reduce a taxpayer's wait to receive a tax refund. In the past, we participated in some programs offered by the IRS that did not perform as expected, resulting in significant delays in processing refunds for some of our customers. Although we continue to seek to give our customers quicker access to their refunds, doing so involves the risk of customer dissatisfaction and injury to our reputation in the market if the IRS fails to perform, which is outside our control.
Risks Related to Our Class A Common Stock
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We are controlled by our Chairman and Chief Executive Officer, whose interests in our business may be different from those of our stockholders.
John Hewitt, our Chairman and Chief Executive Officer, currently owns all outstanding shares of our Class B common stock. Our Class B common stock has the power to elect, voting as a separate class, the minimum number of directors that constitute a majority of the Board of Directors. As a result, Mr. Hewitt will, for the foreseeable future, have significant influence over our management and affairs, given the Board's authority to appoint or replace our senior management, cause us to issue additional shares of our Class A common stock or repurchase Class A common stock, declare dividends, or take other actions. Upon Mr. Hewitt’s death, pending the effectiveness of a provision of our certificate of incorporation that will become effective only after we have conducted an initial public offering or certain other triggering events occur, Mr. Hewitt’s estate would succeed to these special voting rights. Mr. Hewitt may make decisions regarding our Company and business that are opposed to other stockholders' interests or with which they disagree. Mr. Hewitt's ability to elect a majority of the Board of Directors may also delay or prevent a change of control of us, even if that change of control would benefit our stockholders, which could deprive an investor of the opportunity to receive a premium for your Class A common stock. The power to elect a majority of the directors may adversely affect the value of our Class A common stock due to investors' perception that conflicts of interest may exist or arise. To the extent that the interests of our other stockholders are harmed by the actions of Mr. Hewitt, the price of our Class A common stock may be harmed. For information regarding the ownership of our outstanding stock, please see the section titled "Item 12-Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters."
Because we are not required to comply with certain NASDAQ corporate governance requirements, our stockholders may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NASDAQ.
Because Mr. Hewitt owns all of the outstanding shares of our Class B common stock, and therefore, has the ability to elect a majority of our directors, we have elected to be a "controlled company" for the purposes of the NASDAQ listing requirements. As such, we are exempt from certain corporate governance requirements, including the requirements that our Board of Directors be comprised of a majority of directors who are independent under NASDAQ rules and that we have nominating and compensation committees with members meeting the NASDAQ independence requirements. We currently are voluntarily complying with the NASDAQ's corporate governance standards but may choose not to in the future. If we choose not to comply with certain of the requirements, our Board of Directors may have more directors who do not meet the NASDAQ independence standards than they would if those standards were to apply. We may also elect not to maintain formal nominating/corporate governance and compensation committees or, if we maintain those committees, they may not be comprised of independent directors. In such circumstances, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NASDAQ, and circumstances may occur in which the interests of Mr. Hewitt could conflict with the interests of our other stockholders.
Our stock price has been extremely volatile, and investors may be unable to resell their shares at or above their acquisition price or at all.
Our stock price has been, and may continue to be, subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:
• | actual or anticipated variations in our operating results from quarter to quarter; |
• | actual or anticipated variations in our operating results from the expectations of securities analysts and investors; |
• | actual or anticipated variations in our operating results from our competitors; |
• | fluctuations in the valuation of companies perceived by investors to be comparable to us; |
• | sales of Class A common stock or other securities by us or our stockholders in the future; |
• | changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors; |
• | certain non-compliance, fraud and other misconduct by our franchisees and/or employees; |
• | departures of key executives or directors; |
• | announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, financing efforts or capital commitments; |
• | delays or other changes in our expansion plans; |
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• | involvement in litigation or governmental investigations or enforcement activity; |
• | stock price and volume fluctuations attributable to inconsistent trading volume levels of our shares; |
• | general market conditions in our industry and the industries of our customers; |
• | general economic and stock market conditions; |
• | regulatory or political developments; and |
• | terrorist attacks or natural disasters. |
Furthermore, the capital markets experience extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political, and market conditions such as recessions, interest rate changes, or international currency fluctuations may negatively impact our stock price. Trading price fluctuations may also make it more difficult for us to use our Class A common stock as a means to make acquisitions or to use options to purchase our Class A common stock to attract and retain employees. If our stock price does not exceed the price at which stockholders acquired their shares, investors may not realize any return on their investment. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management's attention from other business concerns, which could materially adversely affect our business, results of operations, and financial position.
A significant portion of our outstanding shares of Class A common stock may be sold into the market, which could adversely affect our stock price.
Sales of a substantial number of shares of our Class A common stock in the public market could occur at any time, subject to certain securities law restrictions. Sales of shares of our Class A common stock or the perception in the market that the holders of a large number of shares of Class A common stock intend to sell shares could reduce our stock price. As of June 20, 2016, we have outstanding 12,594,756 shares of Class A common stock and 300,000 shares of Class B common stock, which are convertible into shares of Class A common stock on a one-for-one basis, assuming no exercise of our outstanding options.
At June 20, 2016, we also have approximately 1.4 million shares of our Class A common stock reserved for issuance in connection with options and restricted stock units granted under our 1998 Stock Option Plan and the 2011 Equity and Cash Incentive Plan. These shares may also be freely sold in the public market upon issuance and once vested.
The trading in our Class A Common Stock is limited.
Because of the number of shares of our Class A common stock held by affiliates, the volume of typical trading in our stock on the NASDAQ Stock Market has been limited. This limitation on the liquidity of our stock may impede the ability of our stockholders to sell shares at the time they wish to sell them at a price that they consider reasonable or at all, and could reduce our stock price and impede our ability to acquire other companies using our shares as consideration.
Our stock price and trading volume could decline if securities or industry analysts do not publish research or reports about our business or if they publish misleading or unfavorable research or reports about our business.
The trading market for our Class A common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. As of the date of this report, only two securities analysts engage in coverage of our Class A common stock, and if few securities or industry analysts commence or maintain such coverage, the trading price and liquidity for our shares could be adversely impacted. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who covers us downgrades our stock or publishes misleading or unfavorable research about our business, our stock price could decline. If one or more of these analysts ceases to cover us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price or trading volume to decline.
We incur increased costs and our management will face increased demands as a result of operating as a company with public equity.
As a company with public equity, we incur significant legal, accounting, and other expenses. In addition, the Sarbanes-Oxley Act as well as related rules implemented by the SEC and NASDAQ impose various requirements on companies with public equity. As a public company, we are required to:
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• | prepare and distribute periodic public reports and other stockholder communications in compliance with our obligations under the federal securities laws and NASDAQ rules, |
• | create or expand the roles and duties of our Board of Directors and committees of the Board of Directors, |
• | institute more comprehensive financial reporting and disclosure compliance functions, |
• | supplement our internal accounting and auditing function, |
• | enhance and formalize closing procedures at the end of our accounting periods, |
• | enhance our investor relations function, |
• | establish new or enhanced internal policies, including those relating to disclosure controls and procedures, and |
• | involve and retain to a greater degree outside counsel and accountants in the activities listed above. |
Our management and other personnel have devoted a substantial amount of time to these compliance matters. Also, these rules and regulations have increased our legal and financial compliance costs and have made some activities more time-consuming and costly than would be the case for a private company. For example, these rules and regulations have made it more expensive for us to maintain director and officer liability insurance. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our Board of Directors or as our executive officers.
In addition, as a result of being a public company, we are subject to financial reporting and other requirements including NASDAQ continued listing requirements that are burdensome and costly. Our failure to timely complete our analysis of these reporting requirements could adversely affect investor confidence in our Company and, as a result, the value of our common stock. Further, if we fail to implement these reporting requirements, our ability to report our results of operations on a timely and accurate basis could be impaired. In fact, in connection with restating our previously issued annual and quarterly consolidated financial statements, we recently were delinquent in filing our annual and quarterly reports. Consequently, we received two notices from NASDAQ in connection with the delinquent filings, and we may be subject to NASDAQ delisting procedures if we fail to comply with the NASDAQ continued listing requirements in the future.
We are an "emerging growth company" and our election to delay adoption of new or revised accounting standards applicable to public companies may result in our financial statements not being comparable to those of other public companies. As a result of this and other reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.
We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act") enacted in April 2012, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"); the same reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements that smaller reporting companies are permitted to provide; and exemptions from the requirements of holding a nonbinding advisory stockholder vote on executive compensation, frequency of approval of executive compensation, and of any golden parachute payments not previously approved. In addition, Section 107 of the JOBS Act also provides that an emerging growth company may take advantage of the extended transition period provided in the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act") for complying with new or revised accounting standards. In other words, an emerging growth company may delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are electing to delay such adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result of this election, our financial statements may not be comparable to the financial statements of other public companies. We cannot predict whether investors will find our common stock less attractive because we will rely on these exemptions. We will remain an "emerging growth company" until the earliest of (i) the last day of the fiscal year during which we have total annual gross revenue of $1 billion or more; (ii) the last day of the fiscal year following the fifth anniversary of the sale by us of common equity securities pursuant to an effective registration statement under the Securities Act; (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt; or (iv) the date on which we are deemed to be a "large accelerated filer," as defined under the Exchange Act.
Although we may desire to continue to pay dividends in the future, our financial condition, debt covenants, or Delaware law may prohibit us from doing so.
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Until our dividend paid in April 2015, we had never declared or paid a cash dividend on our common stock. Although we have announced a $0.16 per share quarterly cash dividend and may continue to pay cash dividends in the future, the payment of dividends will be at the discretion of our Board of Directors and will depend, among other things, on our earnings, capital requirements, and financial condition. Our ability to pay dividends will also be subject to compliance with financial covenants that are contained in our credit facility and may be restricted by any future indebtedness that we incur or issuances of preferred stock. In addition, applicable law requires our Board of Directors to determine that we have adequate surplus prior to the declaration of dividends. We cannot provide an assurance that we will continue to pay dividends at any specific level or at all.
Anti-takeover provisions in our charter documents, Delaware law, and our credit facility could make an acquisition of us more difficult, limit attempts by our stockholders to replace or remove our current management, and adversely affect the value of our Class A common stock.
Provisions in our amended and restated certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. We have two classes of common stock, one of which is entitled to elect a majority of our Board of Directors and is controlled by our Chairman and CEO as described above. Our amended and restated certificate of incorporation and bylaws also include provisions that:
• | authorize our Board of Directors to issue, without further action by the stockholders, up to approximately 3.0 million shares of undesignated preferred stock; |
• | specify that special meetings of our stockholders can be called only by our Board of Directors, the Chair of our Board of Directors, or holders of at least 20% of the shares that will be entitled to vote on the matters presented at such special meeting; |
• | establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our Board of Directors; and |
• | do not provide for cumulative voting in the election of directors. |
In addition, our credit facility contains covenants that may impede, discourage, or prevent a takeover of us. For instance, upon a change of control, we would default on our credit facility. As a result, a potential takeover may not occur unless sufficient funds are available to repay our outstanding debt.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors, which is responsible for appointing the members of our management. Any provision of our amended and restated certificate of incorporation and bylaws or our debt documents that has the effect of delaying or deterring a change of control could limit the opportunity for our stockholders to receive a premium for their shares of our Class A common stock. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect our stock value if they are viewed as discouraging takeover attempts in the future.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We own our corporate headquarters, located in five buildings, totaling approximately 106 thousand square feet. Our principal executive office is located at 1716 Corporate Landing Parkway, Virginia Beach, Virginia 23454. We also own additional properties in Ohio, New York, Tennessee, and Virginia which are used as Company-owned offices or leased to franchisees. The remainder of our Company-owned offices are operated under leases. We believe that our offices are in good repair and sufficient to meet our present and anticipated future needs.
Item 3. Legal Proceedings.
In the ordinary course of operations, we may become a party to legal proceedings. Based upon information currently available, management believes that such legal proceedings, in the aggregate, will not have a material adverse effect on our business, financial condition, cash flows, or results of operations except as provided below.
TCPA class action litigation. We were sued in September 2013 in federal court in Illinois in connection with alleged violations of the Telephone Consumer Protection Act. Plaintiff alleges that we inappropriately made auto dialed telephone calls to cellular telephones, seeks the certification of a nationwide class action, and claims statutory damages of $500-$1,500 per violation. We tendered the defense of this litigation to a third party entity that had contracted with us to solicit potential
28
franchisees, and that third party entity acknowledged its defense and indemnification obligations to us. However, because the third party did not have the financial resources to satisfy its defense and indemnity obligations, we concluded that we could not rely upon the fulfillment of those obligations. In September 2014, the Company and the plaintiffs reached a final settlement of this litigation pursuant to which we funded the establishment of a settlement fund of $3.0 million, inclusive of settlement administration costs and plaintiffs’ counsel fees, which the court approved. We accrued the settlement amount during fiscal 2015.
We are also party to claims and lawsuits that are considered to be ordinary, routine litigation incidental to the business, including claims and lawsuits concerning the preparation of customers' income tax returns, the fees charged to customers for various products and services, relationships with franchisees, intellectual property disputes, employment matters, and contract disputes. Although we cannot provide assurance that it will ultimately prevail in each instance, it believes the amount, if any, it will be required to pay in the discharge of liabilities or settlements in these claims will not have a material adverse impact on its consolidated results of operations or financial position.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
Market and Stock Information
Our Class A common stock has been listed on The NASDAQ Global Market under the symbol "TAX" since July 2, 2012. We traded on the over-the-counter bulletin board from June 14, 2012 until that date. Prior to that time, there was no public market for our Class A common stock. The following table sets forth for the periods indicated the high and low sale prices of our Class A common stock on The NASDAQ Global Market.
2016 | 2015 | ||||||||||||||||
Sales Price | Sales Price | ||||||||||||||||
High | Low | High | Low | ||||||||||||||
First Quarter | $ | 27.72 | $ | 19.93 | $ | 35.20 | $ | 26.19 | |||||||||
Second Quarter | 26.01 | 21.84 | 39.19 | 31.31 | |||||||||||||
Third Quarter | 24.22 | 17.04 | 39.60 | 31.64 | |||||||||||||
Fourth Quarter | 21.25 | 11.78 | 37.03 | 25.69 | |||||||||||||
As of April 30, 2016, our stockholders' equity consisted of the following: 11,993,292 shares of Class A common stock, 900,000 shares of Class B common stock, and 10 shares of special voting preferred stock. We treat as common stock equivalents exchangeable shares that may be exchanged for 1,000,000 shares of Class A common stock. As of April 30, 2016, options to acquire 1,264,562 shares of Class A common stock were outstanding, 875,509 of which were immediately exercisable.
Holders of Record
As of June 20, 2016, we had approximately169 registered record holders of our Class A common stock and one holder of our Class B common stock. The reported closing price of our Class A common stock on June 20, 2016 was $12.34. Wells Fargo Shareowner Services is the transfer agent and registrar for our Class A common stock. We have no established public trading market for our Class B common stock.
Dividends
Until our dividend paid in April 2015, we had never declared or paid a cash dividend on our common stock. Although we have announced a $0.16 per share quarterly cash dividend and may continue to pay cash dividends in the future, the payment of dividends will be at the discretion of our Board of Directors and will depend, among other things, on our earnings, capital requirements, and financial condition. Our ability to pay dividends will also be subject to compliance with financial covenants that are contained in our credit facility and may be restricted by any future indebtedness that we incur or issuances of preferred stock. In addition, applicable law requires our Board of Directors to determine that we have adequate surplus prior to the declaration of dividends. We cannot provide an assurance that we will continue to pay dividends at any specific level or at all.
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Share Repurchases
Our Board of Directors has approved $10.0 million of authorizations for share repurchases, of which $6.6 million remained at April 30, 2016. On June 10, 2016 the Board approved an additional $3.4 million for share repurchases, bringing the total available at that time to $10.0 million. These authorizations have no specific expiration date and cash proceeds from stock option exercises increase the amount of the authorizations. Shares repurchased from option exercises that are net-share settled by us and shares repurchased in privately negotiated transactions are not considered share repurchases under these authorizations. During the three months ended April 30, 2016, we did not repurchase any shares.
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan | Remaining Maximum Value of Shares that may be Purchased Under the Plan | ||||||||||
February 1 through February 29, 2016 | — | $ | — | — | $ | 6,273 | ||||||||
March 1 through March 31, 2016 | — | — | — | 6,285 | ||||||||||
April 1 through April 30, 2016 | — | — | — | 6,551 | ||||||||||
Total | — | — | ||||||||||||
During fiscal 2016, we repurchased 82,355 shares of our Class A common stock as shown in the table below:
Period | Total Number of Shares Purchased | Average Price Paid per Share | |||||
First quarter | 51,609 | $ | 24.67 | ||||
Second quarter | 19,026 | 23.07 | |||||
Third quarter | 11,720 | 22.72 | |||||
Fourth quarter | — | — | |||||
Total | 82,355 | 24.02 | |||||
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Stock Performance Graph
The graph below compares the cumulative total return provided stockholders on the Company's Class A common stock relative to the cumulative total returns of the Russell 2000 index and the S&P Diversified Commercial & Professional Services index. Returns assume an initial investment of $100 at the market close on June 14, 2012, which was the first day our stock was traded on the over-the-counter bulletin board, and then for the periods ended April 30, 2013, 2014, 2015, and 2016. Dividends, if any, are assumed to have been reinvested.
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Item 6. Selected Financial Data.
The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 below and our Consolidated Financial Statements and related notes included in Item 15. We derived the consolidated statements of income data for the years ended April 30, 2016, 2015, and 2014 and the consolidated balance sheet data as of April 30, 2016 and 2015 from our audited consolidated financial statements included in Item 8. The consolidated statements of income data for the years ended April 30, 2013 and 2012 and the consolidated balance sheet data as of April 30, 2013 and 2012 are derived from our audited consolidated financial statements and restated unaudited consolidated financial statements for such periods, respectively, not included in this annual report. Our historical results are not necessarily indicative of the results that may be expected in the future.
Fiscal Years Ended and as of April 30, | ||||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
(amounts in thousands, except per share, franchisees, offices, per franchisee amounts, fee per tax return, and per office amounts) | ||||||||||||||||||||
Consolidated Statements of Income Data: | ||||||||||||||||||||
Revenue: | ||||||||||||||||||||
Franchise fees | $ | 5,038 | $ | 6,246 | $ | 7,844 | $ | 8,721 | $ | 7,996 | ||||||||||
AD fees | 6,008 | 6,901 | 6,680 | 7,699 | 6,702 | |||||||||||||||
Royalties and advertising fees | 80,274 | 80,469 | 78,426 | 73,129 | 70,016 | |||||||||||||||
Financial Products | 45,327 | 37,058 | 34,512 | 30,345 | 22,903 | |||||||||||||||
Tax preparation fees, net of discounts | 19,292 | 13,877 | 14,295 | 10,148 | 7,026 | |||||||||||||||
Other revenue | 17,490 | 17,621 | 17,939 | 17,571 | 16,582 | |||||||||||||||
Total revenue | 173,429 | 162,172 | 159,696 | 147,613 | 131,225 | |||||||||||||||
Total operating expenses | (140,941 | ) | (146,780 | ) | (124,875 | ) | (116,777 | ) | (103,245 | ) | ||||||||||
Income from operations | 32,488 | 15,392 | 34,821 | 30,836 | 27,980 | |||||||||||||||
Foreign currency translation gain (loss) | 29 | (2 | ) | (13 | ) | — | 4 | |||||||||||||
Gain on sale of available-for-sale securities | — | — | 2,183 | — | — | |||||||||||||||
Interest expense | (2,039 | ) | (1,889 | ) | (1,355 | ) | (2,039 | ) | (1,854 | ) | ||||||||||
Income before income taxes | 30,478 | 13,501 | 35,636 | 28,797 | 26,130 | |||||||||||||||
Income tax expense | (11,058 | ) | (4,811 | ) | (13,654 | ) | (11,170 | ) | (9,747 | ) | ||||||||||
Net income | $ | 19,420 | $ | 8,690 | $ | 21,982 | $ | 17,627 | $ | 16,383 | ||||||||||
Earnings per share of Class A common stock and Class B common stock | ||||||||||||||||||||
Basic | $ | 1.41 | $ | 0.63 | $ | 1.57 | $ | 1.26 | $ | 1.17 | ||||||||||
Diluted | $ | 1.38 | 0.61 | 1.51 | 1.25 | 1.16 | ||||||||||||||
Cash dividends declared per share of common stock and common stock equivalents | $ | 0.64 | $ | 0.16 | $ | — | $ | — | $ | — | ||||||||||
Consolidated Balance Sheet Data: | ||||||||||||||||||||
Amounts due from franchisees and ADs less unrecognized revenue, net of allowances | $ | 95,226 | $ | 86,680 | $ | 81,480 | $ | 85,658 | $ | 76,493 | ||||||||||
Property, equipment, and software, net | 40,957 | 36,232 | 38,343 | 33,037 | 23,948 | |||||||||||||||
Total assets | 193,331 | 184,146 | 198,763 | 169,530 | 152,196 | |||||||||||||||
Long-term debt, including current installments | 23,548 | 25,397 | 28,488 | 27,683 | 28,985 | |||||||||||||||
Total stockholders' equity | 111,501 | 98,862 | 110,185 | 81,836 | 67,065 | |||||||||||||||
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Fiscal Years Ended and as of April 30, | ||||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
(amounts in thousands, except per share, franchisees, offices, per franchisee amounts, fee per tax return, and per office amounts) | ||||||||||||||||||||
Other Financial and Operational Data: | ||||||||||||||||||||
Adjusted EBITDA(1) | $ | 43,208 | $ | 42,787 | $ | 44,734 | $ | 40,424 | $ | 35,331 | ||||||||||
Number of U.S. offices | 4,225 | 4,069 | 4,175 | 4,262 | 3,920 | |||||||||||||||
Number of Canadian offices | 262 | 259 | 263 | 258 | 263 | |||||||||||||||
Number of offices | 4,487 | 4,328 | 4,438 | 4,520 | 4,183 | |||||||||||||||
Number of U.S. franchisees | 1,856 | 1,907 | 1,959 | 2,073 | 1,959 | |||||||||||||||
Number of Canadian franchisees | 130 | 125 | 145 | 138 | 139 | |||||||||||||||
Number of franchisees | 1,986 | 2,032 | 2,104 | 2,211 | 2,098 | |||||||||||||||
Average number of offices per U.S. franchisee(2) | 2.14 | 2.07 | 2.04 | 1.94 | 1.96 | |||||||||||||||
Average number of offices per Canadian franchisee(2) | 1.62 | 1.62 | 1.57 | 1.67 | 1.76 | |||||||||||||||
Average number of offices per franchisee(2) | 2.10 | 2.04 | 2.01 | 1.93 | 1.95 | |||||||||||||||
Number of tax returns filed in U.S. offices | 1,832 | 1,907 | 1,890 | 1,805 | 1,790 | |||||||||||||||
Number of tax returns filed in Canadian offices | 330 | 340 | 311 | 311 | 285 | |||||||||||||||
Number of tax returns filed online(3) | 145 | 167 | 187 | 159 | 109 | |||||||||||||||
Number of tax returns filed | 2,307 | 2,414 | 2,388 | 2,275 | 2,184 | |||||||||||||||
Systemwide revenue from U.S. offices(4) | $ | 417,600 | $ | 413,200 | $ | 397,300 | $ | 358,000 | $ | 337,000 | ||||||||||
Systemwide revenue from Canadian offices (CN$)(4) | 27,400 | 26,400 | 23,900 | 23,200 | 22,100 | |||||||||||||||
Systemwide revenue from Canadian offices (US$)(4) | 21,200 | 21,800 | 21,800 | 22,800 | 22,300 | |||||||||||||||
Systemwide revenue per U.S. office(4)(5) | $ | 98,840 | $ | 101,548 | $ | 95,162 | $ | 83,998 | $ | 85,969 | ||||||||||
Systemwide revenue per Canadian office (CN$)(4)(5) | 104,580 | 101,931 | 90,875 | 89,922 | 84,030 | |||||||||||||||
Systemwide revenue per Canadian office (US$)(4)(5) | 80,916 | 84,170 | 82,890 | 88,372 | 84,791 | |||||||||||||||
Net average fee per U.S. tax return filed(5) | $ | 228 | $ | 217 | $ | 210 | $ | 198 | $ | 188 | ||||||||||
Net average fee per Canadian tax return filed (CN$)(5) | 83 | 78 | 77 | 75 | 78 | |||||||||||||||
Net average fee per Canadian tax return filed (US$)(5) | 64 | 64 | 70 | 73 | 78 | |||||||||||||||
______________________________________________________________________________
(1) We define Adjusted EBITDA as net income plus provision for income taxes, interest expense, certain other adjustments, depreciation, amortization, and impairment charges. Please see "Adjusted EBITDA" below for more information and for a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with GAAP.
(2) The calculation of the average number of offices per franchisee excludes Company-owned offices.
(3) Previously reported online return counts for fiscal years prior to 2015 have been restated to reflect accepted e-files only. No changes were made to previously reported returns for office counts.
(4) Our systemwide revenue represents the total tax preparation revenue generated by our franchised and Company-owned offices. It does not represent our revenue because our franchise royalties are derived from the operations of our franchisees. Because we maintain an infrastructure to support systemwide operations, we consider growth in systemwide revenue to be an important measurement.
(5) Systemwide revenue per office and the net average fee per tax return filed reflect amounts for our franchised and Company-owned offices.
Adjusted EBITDA
To provide additional information regarding our financial results, we have disclosed in the table above and within this annual report Adjusted EBITDA. Adjusted EBITDA represents net income, before income taxes, interest expense, depreciation
34
and amortization, and certain other items specified below. We have provided a reconciliation below of Adjusted EBITDA to net income, the most directly comparable GAAP financial measure.
We have included Adjusted EBITDA in this annual report because we seek to manage our business to achieve higher levels of Adjusted EBITDA and to improve the level of Adjusted EBITDA as a percentage of revenue. In addition, it is a key basis upon which we assess the performance of our operations and management. We also use Adjusted EBITDA for business planning and the evaluation of acquisition opportunities. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons. We believe the presentation of Adjusted EBITDA enhances an overall understanding of the financial performance of and prospects for our business. Adjusted EBITDA is not a recognized financial measure under GAAP and may not be comparable to similarly titled measures used by other companies in our industry. Adjusted EBITDA should not be considered in isolation from or as an alternative to net income, operating income (loss), or any other performance measures derived in accordance with GAAP.
The following table presents a reconciliation of Adjusted EBITDA for each of the periods indicated.
Fiscal Years Ended April 30, | ||||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Reconciliation of Adjusted EBITDA to Net Income: | ||||||||||||||||||||
Net income | $ | 19,420 | 8,690 | 21,982 | 17,627 | 16,383 | ||||||||||||||
Interest expense | 2,039 | 1,889 | 1,355 | 2,039 | 1,854 | |||||||||||||||
Income tax expense | 11,058 | 4,811 | 13,654 | 11,170 | 9,747 | |||||||||||||||
Depreciation, amortization, and impairment charges | 10,026 | 9,900 | 9,277 | 6,538 | 5,999 | |||||||||||||||
Impairment of online software and acquired customer lists | — | 8,392 | — | — | — | |||||||||||||||
Net gain on available-for-sale securities | — | — | (2,183 | ) | — | — | ||||||||||||||
Costs associated with postponed IPO | — | — | — | — | 1,348 | |||||||||||||||
Executive severance | 413 | 1,488 | 614 | — | — | |||||||||||||||
Restatement costs | — | — | 907 | — | — | |||||||||||||||
Restructuring charge | — | — | — | 425 | — | |||||||||||||||
Tentative settlements of class action litigation cases, net of estimated recoveries | — | 7,617 | — | — | — | |||||||||||||||
Compliance Task force and related costs | 252 | — | — | — | — | |||||||||||||||
Stock-based compensation expense (income) related to liability classified awards | — | — | (872 | ) | 2,625 | — | ||||||||||||||
Adjusted EBITDA | $ | 43,208 | $ | 42,787 | $ | 44,734 | $ | 40,424 | $ | 35,331 | ||||||||||
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Overview
We are one of the leading providers of tax preparation services in the United States and Canada. As measured by both the number of returns prepared, we believe we are the second largest retail preparer of individual tax returns in both the United States and Canada. Our tax preparation services and related tax settlement products are offered primarily through franchised locations, although we operate a limited number of Company-owned offices each tax season.
Approximately 53% of our revenue for fiscal year 2016 was derived from franchise fees, AD fees, royalties, and advertising fees, and for this reason, continued growth in and seasoning of our franchise locations is viewed by management as the key to our future performance.
Our revenue primarily consists of the following components:
• | Franchise Fees: Our standard franchise fee per territory is $40,000, and we offer our franchisees flexible structures and financing options for franchise fees. Franchise fee revenue is recognized when our obligations to prepare the franchisee for operation are substantially complete and as cash is received. |
• | AD Fees: Our fees for AD areas vary based on our assessment of the revenue potential of each AD area, and also depend on the performance of any existing franchisees within the AD area being sold. Our ADs generally receive 50% of franchise fees, royalties, and a portion of the interest income derived from territories located in their area. AD fees received are recognized as revenue on a straight-line basis over the initial contract term of each AD agreement, which has historically been ten years, with the cumulative amount of revenue recognized not to exceed the amount of cash received. We recently changed the term of new and renewal AD contracts to six years. |
• | Royalties: Our franchise agreements require franchisees to pay us a base royalty typically equal to 14% of the franchisee's tax preparation revenue, subject to certain specified minimums. |
• | Advertising Fees: Our franchise agreements require all franchisees to pay us an advertising fee of 5% of the franchisee's tax preparation revenue, which we use primarily to fund collective advertising efforts. |
• | Financial Products: We offer two types of tax settlement financial products: refund transfer products, which involve providing a means by which a customer may receive his or her refund more quickly and conveniently, and refund-based loans. We earn fees from the arranging of the sale of these financial products. |
• | Interest Income: We earn interest income from our franchisees and ADs related to both indebtedness for the unpaid portions of their franchise fees and AD territory fees, and for other loans we extend to our franchisees related to the operation of their territories. For franchise fees and AD loans upon which the underlying revenue has not been recognized, we recognize the interest income only to the extent of actual payment. We also earn interest on our accounts receivable. |
• | Tax Preparation Fees: We earn tax preparation fees, net of discounts, directly from both the operation of Company-owned offices and providing tax preparation services through our online tax return products. |
For purposes of this section and throughout this annual report, all references to "fiscal 2016," "fiscal 2015," and "fiscal 2014" refer to our fiscal years ended April 30, 2016, 2015, and 2014, respectively. For purposes of this section and throughout this annual report, all references to "year" or "years" are the respective fiscal year or years ended April 30 unless otherwise noted in this annual report, and all references to "tax season" refer to the period between January 1 and April 30 of the referenced year.
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Fiscal Years Ended and as of April 30, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
(amounts in thousands, except franchisees, per office amounts, and net average fees) | ||||||||||||
Results of Operations: | ||||||||||||
Total revenue | $ | 173,429 | $ | 162,172 | $ | 159,696 | ||||||
Income from operations | $ | 32,488 | $ | 15,392 | $ | 34,821 | ||||||
Net income | $ | 19,420 | $ | 8,690 | $ | 21,982 | ||||||
Other Financial and Operational Data: | ||||||||||||
Number of U.S. Offices | ||||||||||||
Permanent | 3,960 | 3,764 | 3,663 | |||||||||
Seasonal | 211 | 262 | 486 | |||||||||
Processing Centers | 54 | 43 | 26 | |||||||||
Total Number of U.S. offices | 4,225 | 4,069 | 4,175 | |||||||||
Number of Canadian offices | 262 | 259 | 263 | |||||||||
Number of offices | 4,487 | 4,328 | 4,438 | |||||||||
Number of U.S. franchisees | 1,856 | 1,907 | 1,959 | |||||||||
Number of Canadian franchisees | 130 | 125 | 145 | |||||||||
Number of franchisees | 1,986 | 2,032 | 2,104 | |||||||||
Number of tax returns filed in U.S. offices | 1,832 | 1,907 | 1,890 | |||||||||
Number of tax returns filed in Canadian offices | 330 | 340 | 311 | |||||||||
Number of tax returns filed online (1) | 145 | 167 | 187 | |||||||||
Number of tax returns filed | 2,307 | 2,414 | 2,388 | |||||||||
Systemwide revenue from U.S. offices (2) | $ | 417,600 | $ | 413,200 | $ | 397,300 | ||||||
Systemwide revenue from Canadian offices (CN$)(2) | 27,400 | 26,400 | 23,900 | |||||||||
Systemwide revenue from Canadian offices (US$)(2) | 21,200 | 21,800 | 21,800 | |||||||||
Number of U.S. refund transfer products funded | 901 | 949 | 973 | |||||||||
Net average fee per tax return filed in U.S. offices (3) | $ | 228 | $ | 217 | $ | 210 | ||||||
Net average fee per tax return filed in Canadian offices (CN$)(3) | 83 | 78 | 77 | |||||||||
Net average fee per tax return filed in Canadian offices (US$)(3) | 64 | 64 | 70 | |||||||||
______________________________________________________________________________
(1) Previously reported online return counts for fiscal years prior to 2015 have been restated to reflect accepted e-files only. No changes were made to previously reported returns for office counts.
(2) Our systemwide revenue represents the total tax preparation revenue generated by our franchised and Company-owned offices. It does not represent
our revenue because our franchise royalties are derived from the operations of our franchisees. Because we maintain an infrastructure to support
systemwide operations, we consider growth in systemwide revenue to be an important measurement.
(3) Net average fee per tax return filed reflect amounts for our franchised and Company-owned offices.
In evaluating our performance, management focuses on several metrics that we believe are key to our continued success:
• | Net growth in permanent office locations. The change in permanent office locations from year to year is a function of the opening of new offices, offset by locations that our franchisees or we close. Opening new permanent offices can be accomplished by the sale of new territories or the opening of permanent offices in previously sold territories. During the 2016 tax season, we stressed the importance to our franchisees of opening permanent locations in new territories. In fiscal 2016, on a net basis, our franchisees operated 196 more |
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permanent offices in the U.S., compared to operating 101 more permanent offices in fiscal 2015 compared to fiscal 2014. Prior to the 2015 tax season, Walmart substantially changed the way in which it charged rent to our franchisees for Walmart kiosk locations. As a result, our franchisees operated fewer such offices during the 2016 and 2015 tax seasons and we have deemphasized seasonal offices such as kiosks as part of our growth plans.
We utilize our AD program to focus on areas with large underdeveloped groups of territories we believe would benefit from the dedicated sales attention that an AD brings to our franchise sales process. Although we intend to grow our franchise network through the sale of new AD areas, opportunities often arise to acquire underperforming AD areas or AD areas in mature markets at favorable terms, offering us better future profitability from the associated franchise locations.
• | Continued growth of SiempreTax+ brand. During fiscal 2015, we launched our second brand, SiempreTax+. Given the demographic trends in the United States, the growing consumer purchasing power of the Hispanic community, and the prospect of immigration reform, whether through Congressional legislation or executive action, we believe serving the Hispanic community through a separate brand that engages with customers in their preferred language and provides ancillary services unique to their needs presents a significant office growth opportunity. For this reason, although we had a successful launch of this brand in fiscal 2015, our ability to grow this brand further should substantially contribute to our future ability to meet our growth goals. |
• | Number of returns prepared. We strive to provide our franchisees with the resources and training needed to grow their own revenue. One of the principal factors in that growth is growth in the number of returns prepared. We and our franchisees prepared a total of approximately 1.8 million returns in our U.S. offices in fiscal 2016, which was a decrease of 3.9% from fiscal 2015. Our new retail offices typically experience their most rapid growth during the first five years as they develop customer loyalty, operational experience and a referral base within their community. The seasoning of our U.S. offices shown in the following table highlights the relatively young age of our offices, with 1,749 offices of 4,225 operated during tax season 2016 having been operated for five or fewer years, including the 2016 tax season. |
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Tax Season 2016 Office Age in Years | |||||||||||||||||||||
1 | 2 | 3 | 4 | 5 | 6+ | Total | |||||||||||||||
United States: | |||||||||||||||||||||
Franchised permanent | 354 | 291 | 213 | 228 | 315 | 2,323 | 3,724 | ||||||||||||||
Franchised seasonal | 96 | 21 | 28 | 23 | 1 | 21 | 190 | ||||||||||||||
Total U.S. franchised offices | 450 | 312 | 241 | 251 | 316 | 2,344 | 3,914 | ||||||||||||||
Company-owned permanent | 72 | 8 | 6 | 13 | 14 | 123 | 236 | ||||||||||||||
Company-owned seasonal | 19 | — | — | — | — | 2 | 21 | ||||||||||||||
Total U.S. Company-owned offices | 91 | 8 | 6 | 13 | 14 | 125 | 257 | ||||||||||||||
Processing centers | 20 | 12 | 6 | 2 | 7 | 7 | 54 | ||||||||||||||
Total U.S. offices | 561 | 332 | 253 | 266 | 337 | 2,476 | 4,225 | ||||||||||||||
Canada: | |||||||||||||||||||||
Franchised permanent | 17 | 9 | 7 | 18 | 11 | 120 | 182 | ||||||||||||||
Franchised seasonal | 1 | — | 1 | 2 | 1 | 23 | 28 | ||||||||||||||
Total Canadian franchised offices | 18 | 9 | 8 | 20 | 12 | 143 | 210 | ||||||||||||||
Company-owned permanent | 1 | — | — | 1 | — | 44 | 46 | ||||||||||||||
Company-owned seasonal | — | 1 | — | — | 1 | 4 | 6 | ||||||||||||||
Total Canadian Company-owned offices | 1 | 1 | — | 1 | 1 | 48 | 52 | ||||||||||||||
Total Canadian offices | 19 | 10 | 8 | 21 | 13 | 191 | 262 | ||||||||||||||
Total offices | 580 | 342 | 261 | 287 | 350 | 2,667 | 4,487 | ||||||||||||||
• | Growth in systemwide revenue. Systemwide revenue, a non-GAAP financial measure, includes sales by both Company-owned and franchised offices. We believe systemwide revenue data is useful in assessing consumer demand for our services and products, the overall success of the Liberty Tax brand and, ultimately, the performance of the Company. Our royalty revenue is computed as a percentage of sales made by our franchised offices, less certain deductions. Accordingly, sales by our franchisees have a direct effect on the Company's royalty revenue and profitability. In addition, our systemwide revenue reflects the size of the Liberty Tax system, and because the size of our franchise system drives our management and infrastructure needs, systemwide revenue data helps us assess those needs in comparison to other companies in our industry and other franchise operators. |
• | Our systemwide revenue in the U.S. grew by 1.1% from fiscal 2015 to 2016 and 4.0% from fiscal 2014 to fiscal 2015. We experienced a 5.1% increase in average net fee per return filed in the U.S. from $217 in fiscal 2015 to $228 in fiscal 2016 and a decrease of 3.9% in number of tax returns filed in the U.S. processed from 1,907,000 in fiscal 2015 to 1,832,000 in fiscal 2016. |
• | Number of Company-owned offices. For the 2016 and 2015 tax seasons we operated a total of 310, which includes one processing center, and 182 Company-owned offices, respectively. During fiscal 2016 we opened 79 Company-owned offices in selected areas to meet franchisee interest in purchasing turnkey locations. |
• | Tax settlement products obtained by U.S. customers. The total percentage of our U.S. customers obtaining a refund transfer product decreased to 49.2% during fiscal 2016 compared to 49.7% during fiscal 2015. During fiscal 2016, the share of refund transfer products funded through JTH Financial was 100% of the total refund transfer products utilized by our customers, compared to 73.4% in fiscal 2015. As we have demonstrated our ability to offer products through JTH Financial, we have been successful in obtaining more favorable terms from |
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outside vendors. Each year we analyze available tax settlement product solutions to balance risk and maximize profit per product.
However, having grown the share of products funded through JTH Financial to 100% of our total financial products in fiscal 2016, we recognize that the prospects for continued growth through shifting away from externally-originated products may be limited, and that future growth of financial products revenue will largely depend on increasing the attachment rate, increasing the number of customers served and future fee increases.
Results of Operations
Fiscal year 2016 compared to fiscal year 2015
Revenues. The table below sets forth the components and changes in our revenue for the years ended April 30, 2016 and 2015.
Fiscal Years Ended April 30, | |||||||||||||||
Change | |||||||||||||||
2016 | 2015 | $ | % | ||||||||||||
(dollars in thousands) | |||||||||||||||
Franchise fees | $ | 5,038 | $ | 6,246 | $ | (1,208 | ) | (19 | )% | ||||||
AD fees | 6,008 | 6,901 | (893 | ) | (13 | )% | |||||||||
Royalties and advertising fees | 80,274 | 80,469 | (195 | ) | — | % | |||||||||
Financial products | 45,327 | 37,058 | 8,269 | 22 | % | ||||||||||
Interest income | 13,578 | 14,707 | (1,129 | ) | (8 | )% | |||||||||
Tax preparation fees, net of discounts | 19,292 | 13,877 | 5,415 | 39 | % | ||||||||||
Other | 3,912 | 2,914 | 998 | 34 | % | ||||||||||
Total revenue | $ | 173,429 | $ | 162,172 | $ | 11,257 | 7 | % | |||||||
Our total revenue increased by $11.3 million, or 7%, in fiscal 2016 over fiscal 2015. This increase was primarily due to the following:
• | A $8.3 million increase in financial products, due primarily to the success of our new refund-based advance product, improved pricing and our decision to process 100% of our refund transfers through JTH Financial this year, which allows us to recognize the full amount charged to the customer as revenue. |
• | A $5.4 million increase in tax preparation fees driven by an increase in the number of Company-owned offices in fiscal 2016 as compared to fiscal 2015. In fiscal 2016 we operated 310 Company-owned offices compared to 182 in fiscal 2015. |
• | Offset by a $1.2 million decrease in franchise fees primarily attributable to receiving lower cash down payments and lower cash payments on notes from our franchisees in fiscal 2016. Franchise fee revenue is recognized when our obligations to prepare the franchisee for operations are substantially complete and as cash is received. |
Operating expenses. The following table details the amounts and changes in our operating expenses in and from fiscal 2016 and fiscal 2015.
Fiscal Years Ended April 30, | |||||||||||||||
Change | |||||||||||||||
2016 | 2015 | $ | % | ||||||||||||
(dollars in thousands) | |||||||||||||||
Employee compensation and benefits | $ | 42,882 | $ | 41,079 | $ | 1,803 | 4 | % | |||||||
Selling, general, and administrative | 43,927 | 40,604 | 3,323 | 8 | % | ||||||||||
AD expense | 27,686 | 28,497 | (811 | ) | (3 | )% | |||||||||
Advertising | 16,420 | 18,308 | (1,888 | ) | (10 | )% | |||||||||
Depreciation, amortization, and impairment charges | 10,026 | 9,900 | 126 | 1 | % | ||||||||||
Impairment of online software and acquired customer lists | — | 8,392 | (8,392 | ) | NA | ||||||||||
Total operating expenses | $ | 140,941 | $ | 146,780 | $ | (5,839 | ) | (4 | )% | ||||||
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Our total operating expenses decreased by $5.8 million, or 4%, in fiscal 2016 compared to fiscal 2015. The decrease was attributable to:
• | A decrease of $8.4 million due to the impairment of our online software and acquired customer lists related to our online business recorded in fiscal 2015 that did not recur in fiscal 2016. |
• | A $1.9 million decrease in advertising expense related to a $0.8 million decrease in on-line advertising and a $1.1 million decrease in new franchise advertising. |
The decreases were partially offset by a $3.3 million increase in selling, general, and administrative expenses during fiscal 2016 over fiscal 2015, caused primarily by:
• | An increase of $4.1 million in bank fees due to costs associated with our new refund-based advance product. |
• | An increase of $2.9 million in occupancy costs related to an increase in the number of Company-owned offices operating in fiscal 2016 including rent related to future rent payments on closed offices. |
• | An increase of $1.6 million in bad debt expense due to an increase in receivables. |
• | A decrease related to the settlement expenses of our class action litigation cases of $7.6 million, net of estimated recoveries, in fiscal 2015 that did not recur in fiscal 2016. |
Income Taxes. The following table sets forth certain information regarding our income taxes for the fiscal years ended April 30, 2016 and 2015.
Fiscal Years Ended April 30, | |||||||||||||||
Change | |||||||||||||||
2016 | 2015 | $ | % | ||||||||||||
(dollars in thousands) | |||||||||||||||
Income before income taxes | $ | 30,478 | $ | 13,501 | $ | 16,977 | 126 | % | |||||||
Income tax expense | 11,058 | 4,811 | 6,247 | 130 | % | ||||||||||
Effective tax rate | 36.3 | % | 35.6 | % | |||||||||||
The increase in our income tax expense from fiscal 2015 to fiscal 2016 relates primarily to the increase in our income before income taxes.
Net income. Our net income increased by 123% in fiscal 2016 over fiscal 2015, primarily as a result of lower operating expenses caused by an $8.4 million impairment charge related to our online software and acquired customer lists in fiscal 2015, and $7.6 million in tentative settlements of our class action litigation cases, net of estimated recoveries, both which occurred in fiscal 2015 that did not recur in fiscal 2016, along with an increase in financial product margin.
Fiscal year 2015 compared to fiscal year 2014
Revenues. The table below sets forth the components and changes in our revenue for the years ended April 30, 2015 and 2014.
Fiscal Years Ended April 30, | |||||||||||||||
Change | |||||||||||||||
2015 | 2014 | $ | % | ||||||||||||
(dollars in thousands) | |||||||||||||||
Franchise fees | $ | 6,246 | $ | 7,844 | $ | (1,598 | ) | (20 | )% | ||||||
AD fees | 6,901 | 6,680 | 221 | 3 | % | ||||||||||
Royalties and advertising fees | 80,469 | 78,426 | 2,043 | 3 | % | ||||||||||
Financial products | 37,058 | 34,512 | 2,546 | 7 | % | ||||||||||
Interest income | 14,707 | 14,231 | 476 | 3 | % | ||||||||||
Tax preparation fees, net of discounts | 13,877 | 14,295 | (418 | ) | (3 | )% | |||||||||
Other | 2,914 | 3,708 | (794 | ) | (21 | )% | |||||||||
Total revenue | $ | 162,172 | $ | 159,696 | $ | 2,476 | 2 | % | |||||||
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Our total revenue increased by $2.5 million, or 1.6%, in fiscal 2015 over fiscal 2014. This increase was primarily due to the following:
• | A $2.5 million increase in financial products, due to our decision to originate a larger portion of financial products through our in-house financial subsidiary, JTH Financial. In fiscal 2015 we processed 73% of our financial products in-house, versus 48% in fiscal 2014. We receive more revenue on financial products that are originated in-house than we do on those originated by third parties. This increase in revenue was partially offset by a lower attachment rate. Our attachment rate was 49.7% of funded returns in fiscal 2015 compared to 51.5% in fiscal 2014, partially because a lower percentage of customers received refunds this year. |
• | The $2.0 million, or 2.6% increase in royalties and advertising fees driven by a 3.1% increase in the average net fee and a 0.9% increase in the number of returns filed by our franchised offices. This was partially offset by a decline in Canadian royalties because 20 previously franchised Canadian locations were operated as Company-owned offices. |
These increases in revenue were partially offset by:
• | A $1.6 million decrease in franchise fees primarily attributable to receiving lower cash payments on notes from our franchisees in fiscal 2015. Franchise fee revenue is recognized when our obligations to prepare the franchisee for operations are substantially complete and as cash is received. We believe the reason we received less cash payments was largely due to franchisees borrowing more during the offseason to fund their preparations for the Affordable Care Act, which impacted their ability to make franchise note payments. |
• | A $0.8 million decrease in other revenue due to lower gains on the sale of assets to franchisees. The largest portion of the gains on the sale of assets to franchisees are deferred and recognized as cash is received on notes. Because our franchisees incurred higher operating expenses during tax season, this impacted their ability to make these note payments. Since we received lower note payments on these notes in fiscal 2015 than we did in fiscal 2014, the deferred gains recognized were less. |
• | A $0.4 million decrease in tax preparation fees primarily driven by a $1.3 million decrease in online revenue caused by increased competition in the online market. This was partially offset by a $0.9 million increase in Canadian tax preparation revenue because we operated a larger number of Company-owned offices in Canada, which would have resulted in a larger offset but for a negative impact of the exchange rate of $0.3 million. |
Operating expenses. The following table details the amounts and changes in our operating expenses in and from fiscal 2015 and fiscal 2014.
Fiscal Years Ended April 30, | |||||||||||||||
Change | |||||||||||||||
2015 | 2014 | $ | % | ||||||||||||
(dollars in thousands) | |||||||||||||||
Employee compensation and benefits | $ | 41,079 | $ | 38,399 | $ | 2,680 | 7 | % | |||||||
Selling, general, and administrative expenses | 40,604 | 34,756 | 5,848 | 17 | % | ||||||||||
AD expense | 28,497 | 27,319 | 1,178 | 4 | % | ||||||||||
Advertising expense | 18,308 | 15,124 | 3,184 | 21 | % | ||||||||||
Depreciation, amortization, and impairment charges | 9,900 | 9,277 | 623 | 7 | % | ||||||||||
Impairment of online software and acquired customer lists | 8,392 | — | 8,392 | N/A | |||||||||||
Total operating expenses | $ | 146,780 | $ | 124,875 | $ | 21,905 | 18 | % | |||||||
Our total operating expenses increased by $21.9 million, or 18%, in fiscal 2015 compared to fiscal 2014. The largest components of this increase were as follows:
• | A $2.7 million increase in employee compensation and benefit expenses during fiscal 2015 over fiscal 2014 caused primarily by the following: |
◦ | A $2.1 million increase in salary and related expenses to support growth initiatives. |
◦ | A $0.9 million increase in executive severance costs. |
◦ | A $0.9 million reduction in stock compensation expense in fiscal 2014 related to a change from liability classified awards to equity classified awards that did not recur in fiscal 2015. |
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• | A $5.8 million increase in selling, general, and administrative expenses during fiscal 2015 over fiscal 2014, caused primarily by the following: |
◦ | An increase of $7.6 million related to the tentative settlements of our class action litigation cases, net of estimated recoveries. |
◦ | An increase of $1.4 million in expenses related to our investment in SiempreTax+ and our ACA initiatives. |
◦ | An increase of $1.1 million in bank fees due to our decision to originate a larger portion of financial products through our in-house financial subsidiary. |
The increases were partially offset by the following:
◦ | A $2.9 million reduction in bad debt expense due to fewer franchisee terminations occurring in fiscal 2015 compared to fiscal 2014. |
◦ | A reduction of $0.9 million in restatement costs that occurred in fiscal 2014, but not in fiscal 2015. |
◦ | A reduction in professional fees of $0.9 million for advertising-related expenses that occurred in fiscal 2014, but not in fiscal 2015. |
• | A $3.2 million increase in advertising expense caused primarily by the following: |
◦ | A $1.0 million in spending on advertising above the amount required to utilize the advertising fund established by franchisee advertising fees. |
◦ | A $1.0 million increase related to launching the SiempreTax+ brand and advertising designed to attract new franchisees. |
◦ | A $0.9 million increase in expenses that were spent in professional fees in fiscal 2014 but that were spent in advertising in fiscal 2015. |
• | An increase of $0.6 million in depreciation and amortization consisting of a $2.1 million depreciation expense related to placing a portion of LibPro software program into service, offset by a decrease in amortization expense on Company-owned offices, which is now recorded as assets held for sale and no longer amortized. |
• | An $8.4 million impairment charge related to our online software and acquired customer lists. The online market is increasingly competitive due to aggressive pricing actions and increased advertising by significantly larger competitors. These factors have adversely affected our ability to recover the carrying value of our online software and acquired customer lists. The impairment charge was measured by the amount in which the carrying value exceeded the estimated fair value of the online software and acquired customer lists. See Note 5 of the Notes to our Consolidated Financial Statements for a description of the impairment related to the Company's online software and acquired online customer lists. |
Income Taxes. The following table sets forth certain information regarding our income taxes for the fiscal years ended April 30, 2015 and 2014.
Fiscal Years Ended April 30, | |||||||||||||||
Change | |||||||||||||||
2015 | 2014 | $ | % | ||||||||||||
(dollars in thousands) | |||||||||||||||
Income before income taxes | $ | 13,501 | $ | 35,636 | $ | (22,135 | ) | (62 | )% | ||||||
Income tax expense | 4,811 | 13,654 | (8,843 | ) | (65 | )% | |||||||||
Effective tax rate | 35.6 | % | 38.3 | % | |||||||||||
The decrease in our income tax rate from fiscal 2014 to fiscal 2015 relates primarily to higher tax deductions for stock option expense coupled with the decline in income before income taxes.
Net income. Our net income decreased by 60% in fiscal 2015 over fiscal 2014, primarily as a result of higher operating expenses associated with our growth initiatives, an $8.4 million impairment charge related to our online software and acquired customer lists, and $7.6 million in tentative settlements of our class action litigation cases, net of estimated recoveries.
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Liquidity and Capital Resources
Overview of factors affecting our liquidity
Seasonality of cash flow. Our tax return preparation business is seasonal, and most of our revenues and cash flow are generated during the period from late January through April 30. Following each tax season, from May 1 through late January of the following year, we rely significantly on excess operating cash flow from the previous season, from cash payments made by franchisees and ADs who purchase new territories and areas prior to the next tax season, and on the use of our credit facility to fund our operating expenses and invest in the future growth of our business. Our business has historically generated a strong operating cash flow from operations on an annual basis. We devote a significant portion of our cash resources during the off season to finance the working capital needs of our franchisees, and expenditures for property, equipment and software.
Credit facility. Our amended credit facility consists of a $21.2 million term loan and a revolving credit facility that currently allows borrowing of up to $203.8 million with an accordion feature that permits the Company to request an increase in availability of up to an additional $50.0 million. Outstanding borrowings accrue interest, which is paid monthly, at a rate of the one-month London Interbank Offered Rate ("LIBOR") plus a margin ranging from 1.50% to 2.25% depending on the Company's leverage ratio. At April 30, 2016 and 2015, the interest rate was 2.06% and 1.8%, respectively, and the average interest rate paid during the fiscal year ended April 30, 2016 was 1.89%. A commitment fee that varies from 0.25% to 0.50% depending on the Company's leverage ratio on the unused portion of the credit facility is paid monthly. 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 under the revolving credit facility, which mature on September 30, 2017).
Under our credit facility, we are subject to a number of covenants that could potentially restrict how we carry out our business, or that require us to meet certain periodic tests in the form of financial covenants. The restrictions we consider to be material to our ongoing business include the following:
• | We must satisfy a "leverage ratio" test that is based on our outstanding indebtedness at the end of each fiscal quarter. |
• | We must satisfy a "fixed charge coverage ratio" test at the end of each fiscal quarter. |
• | We must reduce the outstanding balance under our revolving loan to zero for a period of at least 45 consecutive days each fiscal year. |
• | We must also maintain a minimum net worth requirement, measured at April 30 of each year. |
In addition, were we to experience certain types of changes in control affecting Mr. Hewitt's continuing control of us, or certain changes to the composition of our Board of Directors, we might become subject to an event of default under our credit facility, which could result in the acceleration of our obligations under that facility.
Our credit facility also contains customary affirmative and negative covenants, including limitations on indebtedness, limitations on liens and negative pledges, limitations on investments, loans and acquisitions, limitations on mergers, consolidations, liquidations and dissolutions, limitations on sales of assets, limitations on certain restricted payments and limitations on transactions with affiliates, among others.
Franchisee lending and potential exposure to credit loss. A substantial portion of our cash flow during the year is utilized to provide funding to our franchisees and ADs. At April 30, 2016, our total balance of loans to franchisees for working capital and equipment loans, representing cash we had advanced to the franchisees, was $13.5 million. In addition, at that date, our franchisees and ADs together owed us an additional $90.6 million, less unrecognized revenue of $35.2 million, for amounts representing the unpaid purchase price for franchise territories, or areas comprising clusters of territories, and other amounts owed to us for royalties and other amounts for which our franchisees and ADs had outstanding payment obligations.
Our actual exposure to potential credit loss associated with franchisee loans is less than the aggregate amount of those loans because a significant portion of those loans are to franchisees located within AD areas, where our AD is ultimately entitled to a substantial portion of the franchise fee and royalty revenues represented by some of these loans. For this reason, the amount of indebtedness of franchisees to us is effectively offset in part by our related payable obligation to ADs in respect of franchise fees and royalties. As of April 30, 2016, the total indebtedness of franchisees to us where the franchisee is located in an AD area was $66.3 million but $25.0 million of that total indebtedness represents amounts ultimately payable to ADs as their share of franchise fees and royalties.
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Our franchisees make electronic return filings for their customers utilizing our facilities. Our franchise agreements allow us to obtain repayment of amounts due to us from our franchisees through an electronic fee intercept program before our franchisees receive the net proceeds from tax preparation and other fees they have charged to their customers on tax returns associated with tax settlement products. Therefore, we are able to minimize the nonpayment risk associated with amounts outstanding from franchisees by obtaining direct electronic payment in the ordinary course throughout the tax season. Our credit risk associated with amounts outstanding to ADs is also mitigated by our electronic fee intercept program, which enables us to obtain repayments of amounts that would otherwise flow through to ADs as their share of franchise fee and royalty payments, to the extent of an AD's indebtedness to us.
The unpaid amounts owed to us from our franchisees and ADs are collateralized by the underlying franchise or area and, when the franchise or area owner is an entity, are generally guaranteed by the owners of the respective entity. Accordingly, to the extent a franchisee or AD does not satisfy its payment obligations to us, we may repossess the underlying franchise or area in order to resell it in the future. At April 30, 2016, we had an investment in impaired accounts and notes receivable and related interest receivable of approximately $18.6 million. We consider accounts and notes receivable to be impaired if the amounts due exceed the fair value of the underlying franchise and estimate an allowance for doubtful accounts based on that excess. Amounts due include the recorded value of the accounts and notes receivable reduced by the allowance for uncollected interest, amounts due to ADs for their portion of franchisee receivables, any related unrecognized revenue and amounts owed to the franchisee or AD by us. In establishing the fair value of the underlying franchise, we consider net fees of open territories and the number of unopened territories. At April 30, 2016, our allowance for doubtful accounts for impaired accounts and notes receivable was $7.8 million. There were no significant concentrations of credit risk with any individual franchisee or AD as of April 30, 2016, and we believe that our allowance for doubtful accounts as of April 30, 2016 is adequate for our existing loss exposure. We closely monitor the performance of our franchisees and ADs, and will adjust our allowances as appropriate if we determine that the existing allowances are inadequate to cover estimated losses.
Dividends. Until our dividend paid in April 2015, we had never declared or paid a cash dividend on our common stock. Although we have now announced a $0.16 per share quarterly cash dividend and may continue to pay cash dividends in the future, the payment of dividends will be at the discretion of our Board of Directors and will depend, among other things, on our earnings, capital requirements, and financial condition. Our ability to pay dividends will also be subject to compliance with financial covenants that are contained in our credit facility and may be restricted by any future indebtedness that we incur or issuances of preferred stock. In addition, applicable law requires our Board of Directors to determine that we have adequate surplus prior to the declaration of dividends. We cannot provide an assurance that we will continue to pay dividends at any specific level or at all. See "Item 5—Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities."
Sources and uses of cash
Operating activities
In fiscal 2016, our cash provided from operating activities increased $5.3 million from the cash provided in fiscal 2015. This increase was driven by:
• | A $10.1 million decrease in cash tax payments in fiscal 2016 compared to fiscal 2015. |
• | A $3.9 million increase in income taxes payable, resulting from less excess tax benefits recognized during the year for stock option exercises. There was a corresponding decrease in cash flows from financing activities as a result of such excess tax benefits, offset by an $8.3 million increase in payments related to the settlement of our class action litigation cases. |
• | Offset by higher revenues with only a slight increase in collections from franchisees and the payments of certain expenses that were delayed into fiscal 2016 from fiscal 2015. |
In fiscal 2015, our cash provided from operating activities declined $19.0 million from cash provided in fiscal 2014. This reduction was driven by:
• | A $4.8 million reduction in income taxes payable, resulting from excess tax benefits recognized during the year for stock option exercises. There is a corresponding increase in cash flows from financing activities as a result of such excess tax benefits. These excess tax benefits will reduce the amount of income taxes we would otherwise owe and pay in cash in fiscal 2016. |
• | A $4.1 million increase in cash tax payments in fiscal 2015 compared to fiscal 2014. |
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• | Higher operating expenses associated with investments we made to drive growth, including SiempreTax+ and our ACA initiatives. |
• | Lower collections from franchisees partially offset by delayed payments of certain expenses typically paid by year end. |
Investing activities
In fiscal 2016, we used $8.7 million more in investing activities than in fiscal 2015 due to:
• | A $7.2 million increase in net cash used in operating loans to franchisees resulting from an increase in lending of $8.2 million with only a slight increase in payments received from franchisees and an increase in loans applied in the acquisition of certain assets from franchisees. |
• | A $5.0 million purchase of available-for-sale securities. |
• | Offset by, a $2.7 million decrease in payments for purchases of Company-owned offices and AD rights, net of sales. |
In fiscal 2015, we utilized $6.6 million more for investing activities compared to fiscal 2014. This increase was driven by:
• | $5.2 million in proceeds from the sale of available-for-sale securities received in fiscal 2014 that did not recur in fiscal 2015, |
• | A $2.3 million increase in cash paid in fiscal 2015 for the purchase of property, equipment and software, primarily land and two buildings in Virginia Beach, Virginia. |
• | Offset by, a $0.8 million increase in cash received in fiscal 2015 from the sales of Company-owned offices and AD rights. |
Financing activities
In fiscal 2016, we used $16.7 million less cash for financing activities compared to fiscal 2015 largely due to:
• | A $24.6 million decrease in cash used for common stock repurchases, net of proceeds from stock option exercises; offset by, |
• | A $6.6 million increase in dividends paid in fiscal 2016. In fiscal 2016 we paid four quarterly dividends compared to one quarterly dividend in fiscal 2015, and |
• | A $3.9 million decrease in the tax benefit of stock options exercises. |
In fiscal 2015, we used $26.3 million more cash from financing activities compared to fiscal 2014 largely due to:
• | A $25.0 million increase in cash used for common stock repurchases, net of proceeds from stock option exercises. |
• | Dividends paid of $2.2 million in fiscal 2015. |
• | A $3.4 million increase in payments related to our long-term debt in fiscal 2015 compared to fiscal 2014. |
• | These uses of cash were partially offset by a $4.5 million benefit related to excess tax benefit of stock option exercises, which result when the intrinsic value of exercised stock-based awards exceeds the amount previously recognized as compensation expense. |
Future cash needs and capital requirements
Operating cash flow needs. We believe that our credit facility entered into on April 30, 2012 and subsequently amended in October 2014, will be sufficient to support our cash flow needs for the foreseeable future.
The maximum balance of our revolving credit facility during fiscal 2016 was $157.4 million on February 2, 2016. By April 25, 2016, we paid the entire balance of our revolving credit facility. At April 30, 2016, using the leverage ratio
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applicable under our loan covenants at the end of each fiscal year, our maximum unused borrowing capacity was $111.2 million.
Our credit facility also contains a requirement that we reduce the balance of our revolving loan to zero for a period of at least 45 consecutive days each fiscal year. However, because our term loan will remain outstanding during that 45 day period, and given our historic cash flow experience at the beginning and end of each fiscal year, we do not anticipate that the unavailability of our revolving loan during that 45 day period each fiscal year will adversely affect our cash flow. As of June 14, 2016, we had maintained a zero balance on our revolver for the required 45 days and thus have already met the requirement for fiscal 2017.
Several factors could affect our cash flow in future periods, including the following:
• | The delay by the IRS until at least February 15, 2017 to issue refunds to taxpayers who claim the Earned Income Tax Credit or the Child Tax Credit. |
• | The extent to which we extend additional operating financing to our franchisees and ADs, beyond the levels of prior periods. |
• | The extent and timing of capital expenditures. |
• | The cash flow effect of stock option exercises and the extent to which we engage in stock repurchases. |
• | Our ability to generate fee and other income related to tax settlement products in light of regulatory pressures on us and our business partners. |
• | The extent to which we repurchase AD areas, which will involve the use of cash in the short-term, but improve cash receipts in future periods from what would have been the AD's share of royalties and franchise fees. |
• | The extent, if any, to which our Board of Directors elects to continue to declare dividends on our common stock. |
Effect of our credit facility covenants on our future performance. Our credit facility, which matures on April 30, 2019, imposes several restrictive covenants, including a covenant that requires us to maintain a "leverage ratio" of not more than 4.5:1 at the end of each fiscal quarter ending January 31 and a ratio of not more than 3:1 at the end of each other fiscal quarter. The higher permitted leverage ratio at the end of the January 31 quarter reflects the fact that as of that date, we have typically extended significant credit to our franchisees for working capital and other needs that is not reflected in revenue that we receive from our franchisees until the period beginning in February each year. At January 31, 2016 and April 30, 2016, we had a leverage ratio of 3.9:1 and 0.52:1, respectively.
Our leverage ratio at April 30, 2016 reflected the fact that we had no balance outstanding on our revolving credit facility at that date and a $19.0 million balance under our term loan. The leverage ratio is measured only at the end of each fiscal quarter, and so there may be times at which we exceed the quarter-end leverage ratio during the quarter, which we are permitted to do provided that our leverage ratio is within the allowable ratio at quarter-end.
We continue to be obligated under our credit facility to satisfy a fixed charge coverage ratio test which requires that ratio to be not less than 1.50:1 at the end of every fiscal quarter. At January 31, 2016 and April 30, 2016, our fixed charge coverage ratios were 5.50:1 and 5.35:1, respectively.
We were in compliance with the ratio tests described in this section as of April 30, 2016. We expect to be able to manage our cash flow and our operating activities in such a manner that we will continue to be able to satisfy our obligations under the credit facility for the remainder of the term of that facility.
As noted above, although we are subject under our credit facility to a requirement that we reduce the balance of our revolving loan to zero for a period of at least 45 consecutive days each fiscal year, we do not believe that requirement will affect our cash flow or future performance.
Seasonality of Operations
Given the seasonal nature of the tax return preparation business, we have historically generated and expect to continue to generate most of our revenues during the period from January 1 through April 30. For example, in fiscal 2016 and fiscal 2015, we earned 31% and 29% of our revenues during our fiscal third quarter ended January 31, respectively, and 91% and 90% of our revenues during the combined fiscal third and fourth quarters, respectively. We historically operate at a loss through the first eight months of each fiscal year, during which we incur costs associated with preparing for the upcoming tax season.
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Off Balance Sheet Arrangements
From time to time, we have been party to interest rate swap agreements. These swaps effectively changed the variable-rate of our credit facility into a fixed rate credit facility. Under the swaps, we received a variable interest rate based on the one month LIBOR and paid a fixed interest rate. Our most recent interest rate swap agreements expired in March 2013, and none were outstanding at April 30, 2016 or 2015. We may enter into interest rate swap agreements in the future if we determine that it is appropriate to hedge our interest rate risk.
We also enter into forward contracts to eliminate exposure related to foreign currency fluctuations in connection with the short-term advances we make to our Canadian subsidiary in order to fund personal income tax refund discounting for our Canadian operations. At April 30, 2016 and 2015, there were no forward contracts outstanding, but we expect to enter into forward contracts in the future during the Canadian tax season.
Commitments and Contingencies
The following table sets forth certain of our contractual obligations as of April 30, 2016.
Contractual Obligations | ||||||||||||||||||||
Total | Less than 1 Year | 1 - 3 Years | 3 - 5 Years | More than 5 Years | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Long-term debt obligations(1) | $ | 24,721 | $ | 6,348 | $ | 18,373 | $ | — | $ | — | ||||||||||
Capital lease obligations | 9 | 9 | — | — | — | |||||||||||||||
Operating lease obligations(2) | 17,999 | 8,012 | 7,929 | 1,811 | 247 | |||||||||||||||
Purchase obligations(3) | 9,750 | 6,406 | 2,663 | 681 | — | |||||||||||||||
Net lease payments on closed offices | 1,000 | 471 | 369 | 107 | 53 | |||||||||||||||
Total contractual obligations | $ | 53,479 | $ | 21,246 | $ | 29,334 | $ | 2,599 | $ | 300 | ||||||||||
_______________________________________________________________________________
(1) Amounts include mandatory principal payments on long-term debt as well as estimated interest of $410, $772, $0, and $0 for less than 1 year, 1-3 years, 3-5 years, and more than 5 years, respectively. Interest calculated for future periods was based on the interest rate at April 30, 2016. The actual interest rate will vary based on LIBOR and our leverage ratio.
(2) We sublease most of the office spaces represented by this line item and anticipate sublease receipts from franchisees of $3,281, $3,193, $729, and $0 for less than 1 year, 1-3 years, 3-5 years, and more than 5 years, respectively.
(3) Amounts are primarily for advertising expense and for software licenses, maintenance, and development.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. The following critical accounting policies may affect reported results.
Revenue Recognition. We recognize franchise fees when our obligations to prepare the franchise for operation have been substantially completed and cash has been received.
AD rights have historically been granted for a term of ten years. We have changed future terms of new and renewal AD contracts to six years. AD fees are 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. Amounts due to ADs for their services under an area development agreement are expensed as the related franchise fees and royalty revenues are recognized.
Royalties and advertising fees are recognized as franchise territories generate sales.
Tax return preparation fees and financial products revenue are recognized as revenue in the period the related tax return is filed for the customer. Discounts for promotional programs are recorded at the time the return is filed and are recorded as reductions to revenues.
Interest income is recognized when cash is received for notes associated with franchise fees, AD fees, and customer lists. For all other notes, interest income is recognized when earned, and is recorded net of an allowance.
Gains on sales of Company-owned offices are recognized when cash is received. Losses on sales of Company-owned offices are recognized immediately.
Long-Lived Assets. We review our long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying
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value of an asset may not be recoverable. We measure recoverability by comparison of the carrying value of an asset to its estimated undiscounted future cash flows expected to be generated by the asset. We recognize and measure potential impairment at the lowest level where cash flows are individually identifiable. If the carrying amount of an asset exceeds its estimated future cash flows, we recognize an impairment charge equal to the amount by which the carrying value of the asset exceeds the fair value of the asset. We determine fair value through various valuation techniques, including discounted cash flow models, quoted market values, and third-party independent appraisals. If assets are to be disposed of, we separately present these assets in the balance sheet and report them at the lower of the carrying amount or fair value less selling costs, and no longer depreciate them. When we have assets classified as held for sale, we present them separately in the appropriate asset sections of the balance sheet.
Allowance for Doubtful Accounts. Our allowance for doubtful accounts represents our best estimate of the amount of probable credit losses in our existing accounts receivable and notes receivable. Because the repayment of accounts receivable and notes receivable are dependent on the performance of the underlying franchises, at the end of each reporting period we estimate the amount of the allowance for uncollectible accounts based on a comparison of amounts due to the estimated fair value of the underlying franchise which collateralize such receivables.
Office Closing Costs. We provide for closed office liabilities on the basis of the present value of estimated remaining non-cancellable lease payments, net of estimated subtenant income. We estimate the net lease liability using a discount rate to calculate the present value of the remaining net rent payments on closed offices. We usually pay closed office lease liabilities over the lease terms associated with the closed offices, which generally have remaining terms ranging from one to seven years.
Stock Compensation Expense. For equity classified employee stock-based compensation, we record costs of our employee stock-based compensation based on the grant-date fair value of awards using the Black-Scholes-Merton option pricing model. For liability classified awards we record costs based on the fair value at the reporting date. We recognize compensation costs for an award that has a graded vesting schedule on a straight-line basis over the service period for the entire length of the stock option award.
Potential effect of JOBS Act. The JOBS Act contains provisions that, among other things, relax certain reporting requirements for qualifying public companies. We are an "emerging growth company" and under the JOBS Act will be allowed to comply with new or revised accounting pronouncements based on the effective date for private (i.e., not publicly traded) companies. We are electing the ability to delay the adoption of new or revised accounting standards, and as a result, we may not elect to comply with new or revised accounting standards on the relevant dates on which adoption of those standards is required for non-emerging growth companies.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. We base our assumptions, estimates, and judgments on historical experience, current trends, and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates, and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 1 of the Notes to our Consolidated Financial Statements. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective, or complex judgments resulting from the need to make estimates about the effect of matters that are inherently uncertain. We have reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors.
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Description | Judgments and Uncertainties | Effect if Actual Results Differ From Assumptions | ||
Allowance for doubtful accounts | ||||
We establish our allowance for doubtful accounts for our trade accounts receivable and notes receivable based on a comparison of the amount due to the estimated fair value of the underlying franchise. In establishing the fair value of the underlying franchise, management considers net fees of open offices and the number of unopened offices. | Our calculation of the allowance requires management to make assumptions regarding the fair value of the franchise to which the account relates. | A 10% decrease in the fair value of franchise territories at April 30, 2016 would have increased our allowance for doubtful accounts by approximately $1.1 million at that date. | ||
Long-lived assets | ||||
Long-lived assets other than goodwill and indefinite-lived intangible assets, which are separately tested for impairment, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to the asset's estimated future cash flows (undiscounted and without interest charges). If the estimated future cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset's estimated fair value, which may be based on estimated future cash flows (discounted and with interest charges). We recognize an impairment loss if the amount of the asset's carrying value exceeds the asset's estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated (amortized) over the remaining useful life of that asset. | Our calculation of impairment, if any, requires management to make assumptions regarding the fair value of the long-lived asset. | We have not made any material changes in the accounting methodology we use to assess impairment loss during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment losses. However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material. For AD rights, a 10% decrease in the estimated future cash flows would not result in any incremental loss. For assets acquired from franchisees, a 10% decrease in the fair value would result in an impairment loss of less than $0.1 million. For assets held for sale, a 10% decrease in the fair value would increase our impairment by approximately $0.4 million. | ||
Recently Issued Accounting Standards
Refer to Note 1 - Description of Business and Summary of Significant Accounting Policies, in our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Foreign exchange risk
We are subject to inherent risks attributed to operating in more than one country. Most of our revenues, expenses, and borrowings are denominated in U.S. dollars. Our operations in Canada, including the advances we make to our Canadian subsidiary, are denominated in Canadian dollars, and are, therefore, subject to foreign currency fluctuations. For fiscal 2016, a 5% change in the exchange rate of the Canadian dollar relative to the U.S. dollar would have had less than a $0.1 million impact on our net income and a $0.5 million impact on our total assets at April 30, 2016. We use, and may continue to use in the future, derivative financial instruments, such as forward contracts, to manage foreign currency exchange rate risks. See
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"Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Off Balance Sheet Arrangements."
Interest rate risk
We are subject to interest rate risk in connection with our credit facility, which provides for borrowings of up to a total of $225.0 million and bears interest at variable rates. Assuming our revolving loan is fully drawn and including the full balance of our term loan, each eighth of a percentage point change in interest rates would result in a $0.3 million change in annual interest expense on our credit facility. From time to time, we have entered into hedging instruments involving the exchange of floating for fixed rate interest payments to reduce interest rate volatility. See " Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Off Balance Sheet Arrangements."
Item 8. Financial Statements and Supplementary Data.
Our financial statements and supplementary financial information required by this Item 8 are contained in this report beginning on page F-1 and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the Company’s reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, including, without limitation, that such information is accumulated and communicated to Company management, including the Company’s principal executive and financial officer, as appropriate, to allow timely decisions regarding required disclosures.
Evaluation of Disclosure Controls and Procedures
The Company, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of April 30, 2016. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of April 30, 2016, the Company’s disclosure controls and procedures were effective in providing reasonable assurance that material information is recorded, processed, summarized, and reported by management of the Company on a timely basis in order to comply with the Company’s disclosure obligations under the Exchange Act and the rules and regulations promulgated thereunder.
Management’s Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of April 30, 2016. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). Based on this assessment, management believes that, as of April 30, 2016, the Company’s internal control over financial reporting was effective based on those criteria.
Changes in Internal Control over Financial Reporting
During the quarter ended April 30, 2016, there were no changes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
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PART III
Item 10. Directors, Executive Officers, and Corporate Governance.
The information required by this item will be provided by being incorporated herein by reference to the Company’s definitive proxy statement for the 2016 Annual Meeting of Stockholders.
Item 11. Executive Compensation.
The information required by this item will be provided by being incorporated herein by reference to the Company’s definitive proxy statement for the 2016 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management And Related Stockholder Matters.
The information required by this item will be provided by being incorporated herein by reference to the Company’s definitive proxy statement for the 2016 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item will be provided by being incorporated herein by reference to the Company’s definitive proxy statement for the 2016 Annual Meeting of Stockholders.
Item 14. Principal Accounting Fees and Services.
The information required by this item will be provided by being incorporated herein by reference to the Company’s definitive proxy statement for the 2016 Annual Meeting of Stockholders.
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PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) | Financial Statements. |
The following financial statements of the Company are included in Item 8 of this Annual Report on Form 10-K:
Audited Financial Statements for the Years Ended April 30, 2016, 2015, and 2014
Page | ||
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(b) | Exhibits. |
Exhibit Number | Exhibit Description | ||
3.1 | Amended and Restated Certificate of Incorporation of JTH Holding, Inc. (incorporated by reference to Exhibit 3.1 to Form S-1, File No. 333-176655 filed on September 2, 2011). | ||
3.2 | Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Form 8-K, File No. 001-35588 filed on July 15, 2014). | ||
3.3 | Second Amended and Restated Bylaws of Liberty Tax, Inc. (incorporated by reference to Exhibit 3.2 to Form 8-K, File No. 001-35588 filed on July 15, 2014). | ||
4.1 | Share Exchange Agreement among DataTax Business Services Limited, Liberty Tax Holding Corporation, Liberty Tax Service Inc. and JTH Tax, Inc. dated as of October 16, 2001 (incorporated by reference to Exhibit 4.3 to Form S-1, File No. 333-176655 filed on September 2, 2011). | ||
4.2 | Support Agreement between JTH Tax, Inc. and Liberty Tax Holding Corporation dated as of October 16, 2001(incorporated by reference to Exhibit 4.4 to Form S-1, File No. 333-176655 filed on September 2, 2011). | ||
4.3 | Specimen Common Stock Certificate of Liberty Tax, Inc. (Incorporated by reference to Exhibit 4.6 to Form 8-K, File No. 001-35588 filed on September 3, 2014). | ||
4.4 | Form of Indenture with respect to Senior Debt Securities (incorporated by reference to Exhibit 4.2 to Form S-3, File No. 333-199579 filed on October 23, 2014). | ||
4.5 | Form of Indenture with respect to Subordinated Debt Securities (incorporated by reference to Exhibit 4.4 to Form S-3, File No. 333-199579 filed on October 23, 2014). | ||
10.1# | JTH Holding, Inc. 2011 Equity and Cash Incentive Plan (incorporated by reference to Exhibit 10.1 to Amendment No. 3 to Form S-1, File No. 333-176655 filed on February 3, 2012). | ||
10.2# | JTH Tax, Inc. Stock Option Plan dated as of May 1, 1998 (incorporated by reference to Exhibit 10.2 to Form S-1, File No. 333-176655 filed on September 2, 2011). | ||
10.3# | Form of Stock Option Agreement under Stock Option Plan (incorporated by reference to Exhibit 10.3 to Form S-1, File No. 333-176655 filed on September 2, 2011). | ||
10.4# | Form of Incentive Stock Option Agreement for Employees via JTH Holding, Inc. 2011 Equity and Cash Incentive Plan (incorporated by reference to Exhibit 10.7 to Amendment No. 5 to Form S-1, File No. 333-176655 filed on October 15, 2012). | ||
10.5# | Form of Restricted Stock Unit Agreement for Employees via JTH Holding, Inc. 2011 Equity and Cash Incentive Plan (incorporated by reference to Exhibit 10.5 to Form 10-K, File No. 001-35588 filed on October 1, 2013). | ||
10.6 | Revolving Credit and Term Loan Agreement dated as of April 30, 2012 among JTH Holding, Inc. and SunTrust Bank (incorporated by reference to Exhibit 10.7 to Amendment No. 1 to Form 10, File No. 000-54660 filed on May 18, 2012). | ||
10.7 | Security Agreement among JTH Holding, Inc. and certain of its subsidiaries and SunTrust Bank dated as of April 30, 2012 (incorporated by reference to Exhibit 10.8 to Amendment No. 1 to Form 10, File No. 000-54660 filed on May 18, 2012). | ||
10.8 | Pledge Agreement among JTH Holding, Inc. and certain of its subsidiaries and SunTrust Bank dated as of April 30, 2012 (incorporated by reference to Exhibit 10.9 to Amendment No. 1 to Form 10, File No. 000-54660 filed on May 18, 2012). | ||
10.9 | Subsidiary Guaranty Agreement among certain subsidiaries of JTH Holding, Inc. and SunTrust Bank dated April 30, 2012 (incorporated by reference to Exhibit 10.10 to Amendment No. 1 to Form 10, File No. 000-54660 filed on May 18, 2012). | ||
10.10 | Waiver and Amendment to Revolving Credit and Term Loan Agreement dated as of December 19, 2012 among JTH Holding, Inc. and SunTrust Bank (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 001-35588 filed on December 26, 2012). | ||
10.11 | Supplement and Joinder Agreement dated as of December 28, 2012 among JTH Holding, Inc. and SunTrust Bank (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 001-35588 filed on December 28, 2012). | ||
10.12 | Waiver to Revolving Credit and Term Loan Agreement with SunTrust Bank as Administrative Agent (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 001-35588 filed on March 12, 2013). | ||
10.13 | Standstill Agreement between JTH Holding, Inc., SunTrust Bank and certain of JTH Holding, Inc.'s subsidiaries dated as of August 5, 2013 (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 001-35588 filed on August 6, 2013). | ||
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Exhibit Number | Exhibit Description | ||
10.14 | Waiver to Revolving Credit and Term Loan Agreement with SunTrust Bank as Administrative Agent dated as of August 29, 2013 (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 001-35588 filed on August 29, 2013). | ||
10.15 | Third Amendment to Revolving Credit and Term Loan Agreement dated as of September 2, 2015 among Liberty Tax, Inc. SunTrust Bank and other parties thereto (incorporated by reference to Exhibit 10.1 to Form 10-Q, File No. 001-35588 filed on September 3, 2015). | ||
10.16 | Supplement and Joinder Agreement dated October 3, 2014 (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 001-35588 filed on October 6, 2014). | ||
10.17 | Second Amendment to Revolving Credit and Term Loan Agreement dated October 3, 2014 (incorporated by reference to Exhibit 10.2 to Form 8-K, File No. 001-35588 filed on October 6, 2014). | ||
10.18 | Form of Franchise Agreement for United States Franchisees (incorporated by reference to Exhibit 10.17 to Form 10-K, File No., 001-35588 filed on July 1, 2015). | ||
10.19 | Form of Area Developer Agreement for United States Area Developers (incorporated by reference to Exhibit 10.18 to Form 10-K, File No., 001-35588 filed on July 1, 2015). | ||
10.20# | Amended and Restated Employment Agreement for John T. Hewitt dated June 12, 2015 (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 001-35588 filed on June 12, 2015). | ||
10.21# | Amended and Restated Employment Agreement for James J. Wheaton dated June 1, 2012 (incorporated by reference to Exhibit 10.4 to Form 8-K, File No. 000-54660 filed on June 14, 2012). | ||
10.22# | Employment Agreement for Kathleen Donovan dated February 1, 2014 (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 001-35588 filed on January 24, 2014). | ||
10.23# | Employment Agreement for Richard G. Artese dated May 1, 2014 (incorporated by reference to Exhibit 10.4 to Form 10-K, File No. 001-35588 filed on June 26, 2014). | ||
10.24# | Employment Agreement for Mark F. Baumgartner dated June 1, 2012 (incorporated by reference to Exhibit 10.2 to Form 8-K, File No. 000-54660 filed on June 14, 2012). | ||
10.25# | Employment Agreement for Robert J. Lougen, Jr. dated October 10, 2014 (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 001-35588 filed on October 14, 2014). | ||
10.26# | Employment Agreement for Michael S. Piper dated July 31, 2015 (incorporated by reference to Exhibit 10.1 to Form 8-K, File No., 001-35588 filed on August 6, 2015). | ||
10.27# | Employment Agreement for Vanessa M. Szajnoga dated November 23, 2015 (incorporated by reference to Exhibit 10.1 to Form 10-Q, File No., 001-35588 filed on December 9, 2015). | ||
21.1* | Subsidiaries of Liberty Tax, Inc. | ||
23.1* | Consent of KPMG LLP | ||
31.1** | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 | ||
31.2** | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 | ||
32.1** | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002 | ||
32.2** | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002 | ||
* Filed herewith.
** Furnished herewith.
# Indicates management contract or compensatory plan
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LIBERTY TAX, INC. (Registrant) | ||||
Date: June 29, 2016 | By: | /s/ JOHN T. HEWITT | ||
John T. Hewitt Chief Executive Officer and Chairman of the Board (Principal Executive Officer) | ||||
Date: June 29, 2016 | By: | /s/ KATHLEEN E. DONOVAN | ||
Kathleen E. Donovan Chief Financial Officer (Principal Financial Officer) | ||||
Date: June 29, 2016 | By: | /s/ THOMAS S. DANIELS | ||
Thomas S. Daniels Chief Accounting Officer (Principal Accounting Officer) | ||||
KNOW ALL MEN BY THESE PRESENTS that each of the undersigned whose signature appears below constitutes and appoints John T. Hewitt and Kathleen E. Donovan, his true and lawful attorneys-in-fact, with full power of substitution and resubstitution for him and on his behalf, and in his name, place, and stead, in any and all capacities to execute and sign any and all amendments to this Annual Report on Form 10-K and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof and the registrant hereby confers like authority on its behalf.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: June 29, 2016 | By: | /s/ JOHN T. HEWITT | ||
John T. Hewitt Chief Executive Officer and Chairman of the Board (Principal Executive Officer) | ||||
Date: June 29, 2016 | By: | /s/ KATHLEEN E. DONOVAN | ||
Kathleen E. Donovan Chief Financial Officer (Principal Financial Officer) | ||||
Date: June 29, 2016 | By: | /s/ THOMAS S. DANIELS | ||
Thomas S. Daniels Chief Accounting Officer (Principal Accounting Officer) | ||||
Date: June 29, 2016 | By: | /s/ GORDON D'ANGELO | ||
Gordon D'Angelo Director | ||||
Date: June 29, 2016 | By: | /s/ JOHN R. GAREL | ||
John R. Garel Director | ||||
Date: June 29, 2016 | By: | /s/ STEVEN IBBOTSON | ||
Steven Ibbotson Director | ||||
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Date: June 29, 2016 | By: | /s/ ROSS LONGFIELD | ||
Ross Longfield Director | ||||
Date: June 29, 2016 | By: | /s/ ELLEN MCDOWELL | ||
Ellen McDowell Director | ||||
Date: June 29, 2016 | By: | /s/ GEORGE T. ROBSON | ||
George T. Robson Director | ||||
Date: June 29, 2016 | By: | /s/ THOMAS HERSKOVITS | ||
Thomas Herskovits Director | ||||
Date: June 29, 2016 | By: | /s/ ROBERT M. HOWARD | ||
Robert M. Howard Director | ||||
57
LIBERTY TAX, INC. AND SUBSIDIARIES
Consolidated Financial Statements
As of April 30, 2016 and 2015 and for the fiscal years ended April 30, 2016, 2015, and 2014
(With Report of Independent Registered Public Accounting Firm Thereon)
58
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Liberty Tax, Inc.:
We have audited the accompanying consolidated balance sheets of Liberty Tax, Inc. and subsidiaries (the Company) as of April 30, 2016 and 2015, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the three‑year period ended April 30, 2016. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Liberty Tax, Inc. and subsidiaries as of April 30, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three‑year period ended April 30, 2016, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Norfolk, Virginia
June 29, 2016
F-1
LIBERTY TAX, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
April 30, 2016 and 2015
(In thousands, except share data)
2016 | 2015 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 9,906 | $ | 21,387 | ||||
Receivables: | ||||||||
Accounts receivable | 49,908 | 46,121 | ||||||
Notes receivable - current | 26,710 | 24,465 | ||||||
Interest receivable, net of uncollectible amounts | 1,944 | 1,033 | ||||||
Allowance for doubtful accounts - current | (6,840 | ) | (5,692 | ) | ||||
Total current receivables, net | 71,722 | 65,927 | ||||||
Assets held for sale | 9,886 | 5,160 | ||||||
Deferred income tax asset | 3,496 | 6,921 | ||||||
Other current assets | 5,838 | 6,470 | ||||||
Total current assets | 100,848 | 105,865 | ||||||
Property, equipment, and software, net | 40,957 | 36,232 | ||||||
Notes receivable - non-current | 25,514 | 22,416 | ||||||
Allowance for doubtful accounts - non-current | (2,010 | ) | (1,663 | ) | ||||
Total non-current notes receivables, net | 23,504 | 20,753 | ||||||
Goodwill | 4,228 | 3,377 | ||||||
Other intangible assets, net | 16,270 | 14,672 | ||||||
Other assets | 7,524 | 3,247 | ||||||
Total assets | $ | 193,331 | $ | 184,146 | ||||
Liabilities and Stockholders' Equity | ||||||||
Current liabilities: | ||||||||
Current installments of long-term debt | $ | 5,947 | $ | 3,934 | ||||
Accounts payable and accrued expenses | 11,664 | 17,321 | ||||||
Due to Area Developers (ADs) | 24,977 | 24,340 | ||||||
Income taxes payable | 3,581 | 2,147 | ||||||
Deferred revenue - current | 4,682 | 6,076 | ||||||
Total current liabilities | 50,851 | 53,818 | ||||||
Long-term debt, excluding current installments | 17,601 | 21,463 | ||||||
Deferred revenue - non-current | 7,056 | 7,640 | ||||||
Deferred income tax liability | 6,322 | 2,363 | ||||||
Total liabilities | 81,830 | 85,284 | ||||||
Commitments and contingencies | ||||||||
Stockholders' equity: | ||||||||
Special voting preferred stock, $0.01 par value per share, 10 shares authorized, issued, and outstanding | — | — | ||||||
Class A common stock, $0.01 par value per share, 21,200,000 shares authorized, 11,993,292 and 11,905,156 shares issued and outstanding at April 30, 2016 and 2015, respectively | 120 | 119 | ||||||
Class B common stock, $0.01 par value per share, 1,000,000 shares authorized, 900,000 shares issued and outstanding | 9 | 9 | ||||||
Exchangeable shares, $0.01 par value, 1,000,000 shares issued and outstanding | 10 | 10 | ||||||
Additional paid-in capital | 7,153 | 4,082 | ||||||
Accumulated other comprehensive loss, net of taxes | (1,698 | ) | (697 | ) | ||||
Retained earnings | 105,907 | 95,339 | ||||||
Total stockholders' equity | 111,501 | 98,862 | ||||||
Total liabilities and stockholders' equity | $ | 193,331 | $ | 184,146 | ||||
See accompanying notes to consolidated financial statements.
F-2
LIBERTY TAX, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended April 30, 2016, 2015, and 2014
(In thousands, except per share data)
2016 | 2015 | 2014 | ||||||||||
Revenues: | ||||||||||||
Franchise fees | $ | 5,038 | $ | 6,246 | $ | 7,844 | ||||||
AD fees | 6,008 | 6,901 | 6,680 | |||||||||
Royalties and advertising fees | 80,274 | 80,469 | 78,426 | |||||||||
Financial products | 45,327 | 37,058 | 34,512 | |||||||||
Interest income | 13,578 | 14,707 | 14,231 | |||||||||
Tax preparation fees, net of discounts | 19,292 | 13,877 | 14,295 | |||||||||
Other revenue | 3,912 | 2,914 | 3,708 | |||||||||
Total revenues | 173,429 | 162,172 | 159,696 | |||||||||
Operating expenses: | ||||||||||||
Employee compensation and benefits | 42,882 | 41,079 | 38,399 | |||||||||
Selling, general, and administrative expenses | 43,927 | 40,604 | 34,756 | |||||||||
AD expense | 27,686 | 28,497 | 27,319 | |||||||||
Advertising expense | 16,420 | 18,308 | 15,124 | |||||||||
Depreciation, amortization, and impairment charges | 10,026 | 9,900 | 9,277 | |||||||||
Impairment of online software and acquired customer lists | — | 8,392 | — | |||||||||
Total operating expenses | 140,941 | 146,780 | 124,875 | |||||||||
Income from operations | 32,488 | 15,392 | 34,821 | |||||||||
Other income (expense): | ||||||||||||
Foreign currency transaction gain (loss) | 29 | (2 | ) | (13 | ) | |||||||
Gain on sale of available-for-sale securities | — | — | 2,183 | |||||||||
Interest expense | (2,039 | ) | (1,889 | ) | (1,355 | ) | ||||||
Income before income taxes | 30,478 | 13,501 | 35,636 | |||||||||
Income tax expense | 11,058 | 4,811 | 13,654 | |||||||||
Net income | 19,420 | 8,690 | 21,982 | |||||||||
Less: Net income attributable to participating securities | (1,406 | ) | (633 | ) | (1,571 | ) | ||||||
Net income attributable to Class A and Class B common stockholders | $ | 18,014 | $ | 8,057 | $ | 20,411 | ||||||
Net income per share attributable to Class A and Class B common stockholders: | ||||||||||||
Basic | $ | 1.41 | $ | 0.63 | $ | 1.57 | ||||||
Diluted | 1.38 | 0.61 | 1.51 | |||||||||
Weighted-average shares used to compute net income per share attributable to Class A and Class B common stockholders: | ||||||||||||
Basic | 12,814,775 | 12,738,887 | 12,990,522 | |||||||||
Diluted | 14,024,671 | 14,294,773 | 14,536,971 | |||||||||
Cash dividends declared per share of common stock and common stock equivalents | $ | 0.64 | $ | 0.16 | $ | — | ||||||
See accompanying notes to consolidated financial statements.
F-3
LIBERTY TAX, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years ended April 30, 2016, 2015, and 2014
(In thousands)
2016 | 2015 | 2014 | |||||||||
Net income | $ | 19,420 | $ | 8,690 | $ | 21,982 | |||||
Unrealized (loss) gain on available-for-sale securities, net of taxes of $326, $-, and $608, respectively | (550 | ) | — | 975 | |||||||
Reclassified gain on sale of available-for-sale securities included in income, net of taxes of $-, $-, and $821, respectively | — | — | (1,362 | ) | |||||||
Foreign currency translation adjustment | (451 | ) | (763 | ) | (741 | ) | |||||
Comprehensive income | $ | 18,419 | $ | 7,927 | $ | 20,854 | |||||
See accompanying notes to consolidated financial statements.
F-4
LIBERTY TAX, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Year ended April 30, 2016
(In thousands)
Class A | Class B | Class A | Special voting preferred stock | |||||||||||||||||||||||||
Common stock | Common stock | Preferred stock | ||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||
Balance at May 1, 2015 | 11,905 | $ | 119 | 900 | $ | 9 | — | $ | — | — | $ | — | ||||||||||||||||
Exercise of stock options | 155 | 2 | — | — | — | — | — | — | ||||||||||||||||||||
Shares issued | 2 | — | — | — | — | — | — | — | ||||||||||||||||||||
Repurchase of common stock | (82 | ) | (1 | ) | — | — | — | — | — | — | ||||||||||||||||||
Vesting of restricted stock | 13 | — | — | — | — | — | — | — | ||||||||||||||||||||
Balance at April 30, 2016 | 11,993 | $ | 120 | 900 | $ | 9 | — | $ | — | — | $ | — | ||||||||||||||||
Exchangeable shares | Additional paid-in capital | Accumulated other comprehensive income (loss), net | Retained earnings | ||||||||||||||||||||
Shares | Amount | Total | |||||||||||||||||||||
Balance at May 1, 2015 | 1,000 | $ | 10 | $ | 4,082 | $ | (697 | ) | $ | 95,339 | $ | 98,862 | |||||||||||
Exercise of stock options | — | — | 2,284 | — | — | 2,286 | |||||||||||||||||
Repurchase of common stock | — | — | (1,976 | ) | — | — | (1,977 | ) | |||||||||||||||
Stock-based compensation expense | — | — | 1,863 | — | — | 1,863 | |||||||||||||||||
Tax benefit of stock option exercises | — | — | 900 | — | — | 900 | |||||||||||||||||
Net income | — | — | — | — | 19,420 | 19,420 | |||||||||||||||||
Cash dividends ($0.16 per share) | — | — | — | — | (8,852 | ) | (8,852 | ) | |||||||||||||||
Foreign currency translation adjustment | — | — | — | (451 | ) | — | (451 | ) | |||||||||||||||
Unrealized loss on available-for-sale securities, net of taxes | — | — | — | (550 | ) | — | (550 | ) | |||||||||||||||
Balance at April 30, 2016 | 1,000 | $ | 10 | $ | 7,153 | $ | (1,698 | ) | $ | 105,907 | $ | 111,501 | |||||||||||
See accompanying notes to consolidated financial statements.
F-5
LIBERTY TAX, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Year ended April 30, 2015
(In thousands)
Class A | Class B | Class A | Special voting preferred stock | |||||||||||||||||||||||||
Common stock | Common stock | Preferred stock | ||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||
Balance at May 1, 2014 | 12,409 | $ | 124 | 900 | $ | 9 | — | $ | — | — | $ | — | ||||||||||||||||
Exercise of stock options | 762 | 8 | — | — | — | — | — | — | ||||||||||||||||||||
Shares issued | 3 | — | — | — | — | — | — | — | ||||||||||||||||||||
Repurchase of common stock | (1,284 | ) | (13 | ) | — | — | — | — | — | — | ||||||||||||||||||
Vesting of restricted stock | 15 | — | — | — | — | — | — | — | ||||||||||||||||||||
Balance at April 30, 2015 | 11,905 | $ | 119 | 900 | $ | 9 | — | $ | — | — | $ | — | ||||||||||||||||
Exchangeable shares | Additional paid-in capital | Accumulated other comprehensive income, net | Retained earnings | ||||||||||||||||||||
Shares | Amount | Total | |||||||||||||||||||||
Balance at May 1, 2014 | 1,000 | $ | 10 | $ | 9,402 | $ | 66 | $ | 100,574 | $ | 110,185 | ||||||||||||
Exercise of stock options | — | — | 11,975 | — | — | 11,983 | |||||||||||||||||
Repurchase of common stock | — | — | (24,575 | ) | — | (11,720 | ) | (36,308 | ) | ||||||||||||||
Stock-based compensation expense | — | — | 2,477 | — | — | 2,477 | |||||||||||||||||
Conversion of stock-based compensation awards from liability to equity classification | — | — | — | — | — | — | |||||||||||||||||
Tax benefit of stock option exercises | — | — | 4,803 | — | — | 4,803 | |||||||||||||||||
Net income | — | — | — | — | 8,690 | 8,690 | |||||||||||||||||
Cash dividends ($0.16 per share) | — | — | — | — | (2,205 | ) | (2,205 | ) | |||||||||||||||
Foreign currency translation adjustment | — | — | — | (763 | ) | — | (763 | ) | |||||||||||||||
Balance at April 30, 2015 | 1,000 | $ | 10 | $ | 4,082 | $ | (697 | ) | $ | 95,339 | $ | 98,862 | |||||||||||
See accompanying notes to consolidated financial statements.
F-6
LIBERTY TAX, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Year ended April 30, 2014
(In thousands)
Class A | Class B | Class A | Special voting preferred stock | |||||||||||||||||||||||||
Common stock | Common stock | Preferred stock | ||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||
Balance at May 1, 2013 | 11,975 | $ | 120 | 900 | $ | 9 | — | $ | — | — | $ | — | ||||||||||||||||
Exercise of stock options | 956 | 9 | — | — | — | — | — | — | ||||||||||||||||||||
Shares issued | 1 | — | — | — | — | — | — | — | ||||||||||||||||||||
Repurchase of common stock | (538 | ) | (5 | ) | — | — | — | — | — | — | ||||||||||||||||||
Vesting of restricted stock | 15 | — | — | — | — | — | — | — | ||||||||||||||||||||
Balance at April 30, 2014 | 12,409 | $ | 124 | 900 | $ | 9 | — | $ | — | — | $ | — | ||||||||||||||||
Exchangeable shares | Additional paid-in capital | Accumulated other comprehensive income, net | Retained earnings | ||||||||||||||||||||
Shares | Amount | Total | |||||||||||||||||||||
Balance at May 1, 2013 | 1,000 | $ | 10 | $ | 1,911 | $ | 1,194 | $ | 78,592 | $ | 81,836 | ||||||||||||
Exercise of stock options | — | — | 13,970 | — | — | 13,979 | |||||||||||||||||
Repurchase of common stock | — | — | (13,074 | ) | — | — | (13,079 | ) | |||||||||||||||
Stock-based compensation expense | — | — | 2,074 | — | — | 2,074 | |||||||||||||||||
Conversion of stock-based compensation awards from liability to equity classification | — | — | 4,238 | — | — | 4,238 | |||||||||||||||||
Tax benefit of stock option exercises | — | — | 283 | — | — | 283 | |||||||||||||||||
Net income | — | — | — | — | 21,982 | 21,982 | |||||||||||||||||
Foreign currency translation adjustment | — | — | — | (741 | ) | — | (741 | ) | |||||||||||||||
Unrealized gain on available-for-sale securities, net of taxes | — | — | — | (387 | ) | — | (387 | ) | |||||||||||||||
Balance at April 30, 2014 | 1,000 | $ | 10 | $ | 9,402 | $ | 66 | $ | 100,574 | $ | 110,185 | ||||||||||||
See accompanying notes to consolidated financial statements.
F-7
LIBERTY TAX, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended April 30, 2016, 2015, and 2014
(In thousands)
2016 | 2015 | 2014 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 19,420 | $ | 8,690 | $ | 21,982 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Provision for doubtful accounts | 7,282 | 5,726 | 8,692 | |||||||||
Depreciation and amortization | 6,872 | 8,499 | 7,836 | |||||||||
Amortization of deferred financing costs | 477 | 547 | 334 | |||||||||
Impairment of goodwill and other assets | 3,154 | 9,793 | 1,441 | |||||||||
Loss on sale of property, equipment, and software | 14 | 246 | 75 | |||||||||
Stock-based compensation expense related to equity classified awards | 1,863 | 2,477 | 2,074 | |||||||||
Stock-based compensation expense (income) related to liability classified awards | — | — | (872 | ) | ||||||||
Gain on bargain purchases and sales of Company-owned offices | (855 | ) | (414 | ) | (1,143 | ) | ||||||
Gain on sale of available-for-sale securities | — | — | (2,183 | ) | ||||||||
Equity in loss of affiliate | 73 | 160 | 214 | |||||||||
Deferred tax expense | 7,384 | (3,545 | ) | 2,605 | ||||||||
Changes in: | ||||||||||||
Accounts, notes, and interest receivable and deferred revenue | (14,228 | ) | (8,869 | ) | (7,708 | ) | ||||||
Prepaid expenses and other assets | 210 | (2,911 | ) | (573 | ) | |||||||
Accounts payable and accrued expenses | (6,238 | ) | 2,685 | 2,643 | ||||||||
Due to ADs | 2,631 | 8,924 | 4,284 | |||||||||
Income taxes payable (receivable) | 1,758 | (7,491 | ) | 3,781 | ||||||||
Net cash provided by operating activities | 29,817 | 24,517 | 43,482 | |||||||||
Cash flows from investing activities: | ||||||||||||
Issuance of operating loans to franchisees | (101,552 | ) | (93,365 | ) | (76,013 | ) | ||||||
Payments received on operating loans to franchisees | 89,786 | 88,776 | 71,722 | |||||||||
Purchases of Company-owned offices, AD rights, and acquired customer lists | (4,787 | ) | (8,246 | ) | (8,706 | ) | ||||||
Proceeds from sale of Company-owned offices and AD rights | 2,934 | 3,687 | 2,879 | |||||||||
Purchase of available-for-sale securities | (4,999 | ) | — | — | ||||||||
Proceeds from sale of available-for-sale securities | — | — | 5,163 | |||||||||
Purchases of property, equipment, and software | (10,692 | ) | (11,463 | ) | (9,149 | ) | ||||||
Proceeds from sale of property, equipment, and software | — | — | 59 | |||||||||
Net cash used in investing activities | (29,310 | ) | (20,611 | ) | (14,045 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from the exercise of stock options | 2,286 | 11,983 | 13,979 | |||||||||
Repurchase of common stock | (1,977 | ) | (36,308 | ) | (13,079 | ) | ||||||
Dividends paid | (8,852 | ) | (2,205 | ) | — | |||||||
Repayment of debt | (4,171 | ) | (5,850 | ) | (3,398 | ) | ||||||
Borrowings under revolving credit facility | 166,232 | 154,633 | 137,391 | |||||||||
Repayments under revolving credit facility | (166,232 | ) | (154,633 | ) | (137,391 | ) | ||||||
Payment for debt issue costs | — | (917 | ) | — | ||||||||
Tax benefit of stock option exercises | 900 | 4,803 | 283 | |||||||||
Net cash used in financing activities | (11,814 | ) | (28,494 | ) | (2,215 | ) | ||||||
Effect of exchange rate changes on cash, net | (174 | ) | (105 | ) | (155 | ) | ||||||
Net increase (decrease) in cash and cash equivalents | (11,481 | ) | (24,693 | ) | 27,067 | |||||||
Cash and cash equivalents at beginning of year | 21,387 | 46,080 | 19,013 | |||||||||
Cash and cash equivalents at end of year | $ | 9,906 | $ | 21,387 | $ | 46,080 | ||||||
See accompanying notes to consolidated financial statements.
F-8
LIBERTY TAX, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Years ended April 30, 2016, 2015, and 2014
(In thousands)
2016 | 2015 | 2014 | ||||||||||
Cash paid for interest, net of capitalized interest of $325, $200, and $378 | $ | 1,628 | $ | 1,467 | $ | 1,179 | ||||||
Cash paid for taxes, net of refunds | 1,025 | 11,160 | 7,022 | |||||||||
Accrued capitalized software costs included in accounts payable | 407 | 168 | 149 | |||||||||
Transfer from goodwill and other intangible assets to assets held for sale | — | — | 4,413 | |||||||||
Conversion of stock-based compensation awards from liability to equity classification | — | — | 4,238 | |||||||||
During the years ended April 30, 2016, 2015, and 2014, the Company acquired certain assets from franchisees, ADs, and third parties as follows: | ||||||||||||
Fair value of assets purchased | $ | 19,726 | $ | 18,310 | $ | 18,740 | ||||||
Receivables applied, net of amounts written-off, due ADs and related deferred revenue | (12,050 | ) | (6,931 | ) | (5,336 | ) | ||||||
Bargain purchase gains | (552 | ) | (367 | ) | (487 | ) | ||||||
Notes and accounts payable issued | (2,337 | ) | (2,766 | ) | (4,211 | ) | ||||||
Cash paid to franchisees, ADs, and third parties | $ | 4,787 | $ | 8,246 | $ | 8,706 | ||||||
During the years ended April 30, 2016, 2015, and 2014, the Company sold certain assets to franchisees and ADs as follows: | ||||||||||||
Book value of assets sold | $ | 9,585 | $ | 11,469 | $ | 8,135 | ||||||
Loss on sale - loss recognized | (131 | ) | (298 | ) | (160 | ) | ||||||
Gain on sale - revenue deferred | 1,688 | 2,000 | 1,872 | |||||||||
Notes received | (8,208 | ) | (9,484 | ) | (6,968 | ) | ||||||
Cash received from franchisees and ADs | $ | 2,934 | $ | 3,687 | $ | 2,879 | ||||||
See accompanying notes to consolidated financial statements.
F-9
LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2016 and 2015
(1) Description of Business and Summary of 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. The Company also offers online tax preparation services. Effective July 15, 2014, the Company changed its name from JTH Holding, Inc. to Liberty Tax, Inc.
The Company provides a substantial amount of lending to its franchisees and area developers ("ADs"). The Company allows franchisees and ADs to defer a portion of the initial 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.
Basis of Presentation
The 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 year. Revenues and expenses have been translated using the average exchange rates in effect each month of the year. 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 interest 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 audited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). In the opinion of management, all adjustments necessary for a fair presentation of such financial statements in accordance with GAAP have been recorded.
F-10
LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2016 and 2015
Office Count
The following table shows the U.S. office activity, the number of processing centers and Canadian offices, and a breakdown of Company-owned and franchised offices for the 2016, 2015, and 2014 tax seasons.
Tax Season | |||||||||
2016 | 2015 | 2014 | |||||||
U.S. Office Locations: | |||||||||
Permanent Office Locations: | |||||||||
Operated during the prior tax season | 3,764 | 3,663 | 3,816 | ||||||
Offices opened | 453 | 397 | 289 | ||||||
Offices closed | (257 | ) | (296 | ) | (442 | ) | |||
Operated during the current tax season | 3,960 | 3,764 | 3,663 | ||||||
Seasonal Office Locations: | |||||||||
Operated during the prior tax season | 262 | 486 | 427 | ||||||
Offices opened | 127 | 118 | 334 | ||||||
Offices closed | (178 | ) | (342 | ) | (275 | ) | |||
Operated during the current tax season | 211 | 262 | 486 | ||||||
Processing Centers | 54 | 43 | 26 | ||||||
Total U.S. Office Locations | 4,225 | 4,069 | 4,175 | ||||||
Canada Office Locations | 262 | 259 | 263 | ||||||
Total Office Locations | 4,487 | 4,328 | 4,438 | ||||||
Additional Office Information: | |||||||||
Company-owned offices | 310 | 182 | 216 | ||||||
Franchised offices | 4,177 | 4,146 | 4,222 | ||||||
Total office locations | 4,487 | 4,328 | 4,438 | ||||||
SiempreTax+, operated 144 offices during the 2016 tax season compared to 57 during the 2015 season. These offices consist of second offices opened by current franchisees in territories they already owned, conversions of existing Liberty Tax offices, and offices opened in new territories.
Territory Sales
During fiscal 2016, the Company sold 184 new territories, compared to 212 during fiscal 2015, and 225 during fiscal 2014. New territories include territories sold to new franchisees and additional territories sold to existing franchisees.
Significant Accounting Policies
Cash and Cash Equivalents - The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents are maintained in bank deposit accounts, which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on its cash and cash equivalents balances.
Accounts Receivable - Accounts receivable are recorded at the invoiced amount less an allowance for doubtful accounts and accrue finance charges at a 12% annual rate, compounded monthly, if unpaid after 30 days. Account balances are charged off against the allowance after all possible means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its accounts receivable.
F-11
LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2016 and 2015
Notes Receivable - Notes receivable are recorded less unrecognized revenue, net of an allowance for doubtful accounts. Unrecognized revenue relates to the financed portion of franchise fees and AD fees and, in the case of sales of Company-owned offices, the financed portion of gains related to such sales in each case where revenue has not yet been recognized. Interest income is accrued on the unpaid principal balance. The Company provides an allowance against accrued interest on a delinquent note when a scheduled payment becomes 90 days past due. Notes are written off against the allowance when all possible means of collection have been exhausted and the potential for recovery is considered remote.
Concentrations of credit risk - Financial instruments that could potentially subject the Company to concentrations of credit risk consist of accounts and notes receivable with its franchisees. The Company manages such risk by evaluating the financial position and value of the franchisees as well as obtaining the personal guarantee of the individual franchisees. At April 30, 2016 and 2015, there were no significant concentrations of credit risk associated with any individual franchisee or group of franchisees.
Allowance for Doubtful Accounts - The allowance for doubtful accounts includes the Company's best estimate of the amount of probable credit losses in the Company's existing accounts and notes receivable. Because the repayment of accounts and notes receivable is dependent on the performance of the underlying franchises, management estimates the amount of the allowance for doubtful accounts based on a comparison of amounts due to the estimated fair value of the underlying franchises which collateralize such receivables. Management believes the allowance is adequate to cover the Company's credit loss exposure. If the carrying amount exceeds the fair value, the receivable is considered impaired.
Available-for-sale Securities - From time to time, the Company purchases corporate equity securities that are classified as available -for-sale; changes in fair value of such securities are recognized, net of tax, in accumulated other comprehensive income in the stockholders' equity section of the balance sheet. Cash flows for the purchase and sale of these investments are classified as investing activities.
Assets Held for Sale - Assets held for sale consist of Company-owned offices that the Company intends to sell to a new or existing franchisee within one year. Assets held for sale are recorded at the lower of the carrying value or the estimated sales price, less costs to sell, and are evaluated for impairment at least annually.
Property, Equipment, and Software - Property, equipment, and software are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets, generally three to five years for computer equipment, three to seven years for software, five to seven years for furniture and fixtures, and twenty to thirty years for buildings. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful lives of the assets. Certain allowable costs of software developed or obtained for internal use are capitalized and typically amortized over the estimated useful life of the software.
Goodwill - Goodwill represents the excess of costs over fair value of assets of businesses acquired. The reporting unit for the acquisition of assets from various franchisees is considered to be the franchise territory, and these assets are operated as Company-owned offices. Goodwill is not amortized, but instead tested for impairment at least annually. Goodwill is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it with its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. Fair value of the reporting unit is determined using a discounted cash flow analysis. Fair value of the reporting unit for Company-owned offices is determined using the net fees of the offices in the franchise territory. If the fair value of the reporting unit exceeds its carrying value, step two does not need to be performed.
Revenue Recognition - The Company earns revenue from the sales of franchises and granting of AD rights. Additionally, the Company earns revenue from royalties and advertising fees and other products. Typically, franchise rights are granted to franchisees for a term of five years with an option to renew at no additional cost. In exchange for franchise fees and 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. Franchise fee revenue for the sales of individual territories is recognized when the obligations of the Company to prepare the franchisee for operation are substantially complete, up to the amount of cash received.
F-12
LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2016 and 2015
AD rights have historically been granted for a term of ten years. The Company changed the term of new and renewal AD contracts to six years in fiscal 2015. AD fees are 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. Amounts due to ADs for their services under an AD agreement are expensed as the related franchise fees and royalty revenues are recognized.
Royalties and advertising fees are recognized as franchise territories generate sales. Tax return preparation fees and financial products revenue are recognized as revenue in the period the related tax return is filed for the customer. Discounts for promotional programs are recorded at the time the return is filed and are recorded as reductions to revenues.
Interest income is recognized when cash is received for notes associated with franchise fees or AD fees. For all other notes and accounts receivable, interest income is recognized when earned, and is recorded net of an allowance.
Gains on sales of Company-owned offices are recognized when cash is received. Losses on sales of Company-owned offices are recognized immediately.
Deferred Revenue - Deferred revenue represents the amount of cash received for AD fees in excess of the revenue recognized.
Derivative Instruments and Hedging Activities - The Company recognizes all derivative instruments as either assets or liabilities in the balance sheet at their respective fair values. For derivatives designated in hedging relationships, changes in fair value are either offset through earnings against the change in fair value of the hedged item attributable to the risk being hedged or recognized in accumulated other comprehensive income to the extent the derivative is effective at offsetting the changes in cash flows being hedged until the hedged item affects earnings.
The Company only enters into a derivative contract when it intends to designate the contract as a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). For all hedging relationships, the Company formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged transaction, the nature of the risk being hedged, how the hedging instrument's effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method used to measure ineffectiveness. The Company also formally assesses, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives that are used in hedging relationships are highly effective in offsetting changes in cash flows of hedged transactions. For derivative instruments that are designated and qualify as part of a cash flow hedging relationship, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.
The Company discontinues hedge accounting prospectively when it determines that the derivative is no longer effective in offsetting cash flows attributable to the hedged risk; the derivative expires or is sold, terminated, or exercised; the cash flow hedge is de-designated because a forecasted transaction is not probable of occurring; or management determines to remove the designation of the cash flow hedge.
In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company continues to carry the derivative at its fair value on the balance sheet and recognizes any subsequent changes in its fair value in earnings. When it is no longer probable that a forecasted transaction will occur, the Company discontinues hedge accounting and recognizes immediately in earnings gains and losses that were accumulated in other comprehensive income related to the hedging relationship.
The Company did not have any outstanding derivative instruments or hedging activities as of April 30, 2016 and 2015.
Deferred Income Taxes - Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities, which are shown on our consolidated balance sheets, are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company has elected to classify interest charged on a tax settlement in interest expense, and accrued penalties, if any, in selling, general, and administrative expenses.
F-13
LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2016 and 2015
Intangible Assets and Other Long-Lived Assets - Amortization on intangible assets is calculated using the straight-line method over the estimated useful lives of the assets, generally from two to ten years. Long-lived assets, such as property, equipment, and software, and other purchased intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. Recognition and measurement of a potential impairment is performed for these assets at the lowest level where cash flows are individually identifiable. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary. Assets to be disposed of are no longer depreciated or amortized. These assets are classified as held-for-sale and are presented separately in the appropriate section of the consolidated balance sheets at the lower of their carrying amount or fair value less estimated cost to sell.
Comprehensive Income - Comprehensive income consists of net income, foreign currency translation adjustments, reclassified gain on sale of available-for-sale securities, net of taxes, and the unrealized gain or loss on equity securities available for sale, net of taxes.
Advertising Expenses - Advertising costs are expensed in the period incurred.
Office Closing Costs - Closed office liabilities are provided on the basis of the present value of estimated remaining non-cancellable lease payments, net of estimated subtenant income. An estimate the net lease liability using a discount rate to calculate the present value of the remaining net rent payments on closed offices. Closed office lease liabilities are paid over the lease terms associated with the closed offices, which generally have remaining terms ranging from one to seven years.
Stock-Based Compensation - The Company records the cost of its employee stock-based compensation as compensation expense in its consolidated statements of income based on the grant-date fair value of awards using the Black-Scholes-Merton option pricing model and considering forfeitures. For liability classified awards the Company records costs based on the fair value at the reporting date. The Company recognizes compensation costs for an equity-classified award that has a graded vesting schedule on a straight-line basis over the requisite service period for the entire award; changes in the fair value liability-classified awards are recognized as they occur. The Company considers forfeitures in its computation of fair value. The Company reflects the excess tax benefits related to stock option exercises as additional paid-in capital on its consolidated balance sheets and as financing cash flows on its consolidated statements of cash flows.
Compensation costs related to restricted stock units are based on the grant-date fair value and are amortized on a straight-line basis to compensation expense over the vesting period.
Use of Estimates
Management has made a number of estimates and assumptions related to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period to prepare these consolidated financial statements and accompanying notes in conformity with GAAP. Actual results could differ from those estimates.
Accounting Pronouncements
In September 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.” ASU 2015-16 eliminates the requirement for an acquirer to retrospectively adjust provisional amounts recorded in a business combination to reflect new information about the facts and circumstances that existed as of the acquisition date and that, if known, would have affected measurement or recognition of amounts initially recognized. As an alternative, the amendment requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the financial statements of the period in which adjustments to provisional amounts are determined, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. ASU 2015-16 is effective prospectively for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, which means that it will be effective for the Company in the first quarter of fiscal year beginning May 1, 2016. Early adoption is permitted. The Company is currently evaluating the impact of our pending adoption of ASU 2015-16 on its consolidated financial statements.
F-14
LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2016 and 2015
In May 2014 the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” and in August 2015 the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which defers the effective date of ASU 2014-09 by one year. ASU 2014-09 supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible that more judgment and estimates may be required within the revenue recognition process than are required under present U.S. GAAP. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation. The new standard also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. ASU 2014-09 is effective for reporting periods beginning after December 15, 2017, which means that it will be effective for the Company in the first quarter of its fiscal year beginning May 1, 2018. Early adoption of one year prior to the required effective date is permitted. ASU 2014-09 allows adoption using either of two methods: (i) retrospective to each prior reporting period presented, with the option to elect certain practical expedients; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures. The Company is currently evaluating the impact of its pending adoption of ASU 2014-09 on its consolidated financial statements.
In November 2015 the FASB issued ASU 2015-17, "Balance Sheet Classification of Deferred Taxes (Topic 740)," which requires entities with a classified balance sheet to present all deferred tax assets and liabilities as non-current. This ASU is effective for interim and annual periods in fiscal years beginning after December 15, 2016, which means that it will be effective for the Company in the first quarter of its fiscal year beginning May 1, 2017. The Company is currently evaluating the impact of its pending adoption of ASU 2015-17 on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases," which requires recognition of lease assets and lease liabilities on the balance sheet of lessees. ASU 2016-02 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2018, which for the Company is the first quarter of its fiscal year beginning May 1, 2019. Early adoption is permitted. ASU 2016-02 requires a modified retrospective transition approach and provides certain optional transition relief. The Company is currently evaluating the effect the adoption of this guidance will have on its consolidated results of operations, financial position and cash flows.
In April 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. ASU 2015-03 is effective for the Company on May 1, 2016.
In August 2015, the FASB issued ASU No. 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. This update allows for debt issuance costs related to line-of-credit arrangements to be presented as an asset and subsequent amortization of the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit. The standard is effective for financial statements issued for fiscal years beginning after December 31, 2015, for interim periods within those fiscal years and early adoption is permitted. ASU 2015-15 is effective for the Company on May 1, 2016.
Segment Reporting
Management has identified two operating segments, U.S. operations and Canadian operations. Although there are two operating segments, each segment is engaged in providing tax return preparation and related services and products. These two operating segments, which have similar gross margin and sales trends, have been aggregated into a single reporting segment because both segments are similar in the nature of services offered, production process, type of customer, the distribution methods, and the regulatory environment in which they operate. Canadian operations contributed $7.0 million, $6.9 million, and $6.4 million in revenues for the years ended April 30, 2016, 2015, and 2014, respectively.
F-15
LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2016 and 2015
(2) Notes and Accounts Receivable
The Company provides financing to franchisees and ADs for the purchase of franchises, areas and Company-owned offices, and operating loans for working capital and equipment needs. The franchise-related notes generally are payable over five years and the operating loans generally are due within one year. Most notes bear interest at 12%.
Notes and interest receivable, net of unrecognized revenue, as of April 30, 2016 and 2015 are presented in the consolidated balance sheets as follows:
2016 | 2015 | |||||||
(In thousands) | ||||||||
Notes receivable - current | $ | 26,710 | $ | 24,465 | ||||
Notes receivable - non-current | 25,514 | 22,416 | ||||||
Interest receivable, net of uncollectible amounts | 1,944 | 1,033 | ||||||
Total notes and interest receivable, net of unrecognized revenue | $ | 54,168 | $ | 47,914 | ||||
Most of the notes receivable are due from the Company's franchisees and ADs and are collateralized by the underlying franchise and, when the franchise or AD is an entity, are guaranteed by the owners of the respective entity. The debtors' ability to repay the notes is dependent upon both the performance of the tax preparation industry as a whole and the individual franchisees' or ADs' areas.
The table above does not include unrecognized revenue. Unrecognized revenue relates to the financed portion of franchise fees and AD fees and, in the case of sales of Company-owned offices, the financed portion of gains related to these sales in each case where revenue has not yet been recognized. For franchise fees and gains related to the sale of Company-owned offices, revenue is recorded as note payments are received by the Company. Payments on AD fee notes receivable generate a corresponding increase in deferred revenue, which is amortized into revenue over the life of the AD contract. In fiscal 2015 the Company changed the term of new and renewal AD contracts to six years from ten years and the revenue for these contracts will be recognized over that period, subject to the receipt of cash. Unrecognized revenue was $35.2 million and $38.6 million at April 30, 2016 and 2015, respectively.
Allowance for Doubtful Accounts
The adequacy of the allowance for doubtful accounts is assessed on a quarterly basis and adjusted as deemed necessary. Management believes the recorded allowance is adequate based upon its consideration of the estimated value of the franchises and AD areas, which collateralize the receivables. Any adverse change in the tax preparation industry or the individual franchisees' or ADs' areas could affect the Company's estimate of the allowance.
Activity in the allowance for doubtful accounts for the years ended April 30, 2016, 2015, and 2014 was as follows.
2016 | 2015 | 2014 | ||||||||||
(In thousands) | ||||||||||||
Balance at beginning of year | $ | 7,355 | $ | 6,850 | $ | 6,684 | ||||||
Provision for doubtful accounts | 7,282 | 5,726 | 8,692 | |||||||||
Write-offs | (5,737 | ) | (5,122 | ) | (8,460 | ) | ||||||
Foreign currency adjustment | (50 | ) | (99 | ) | (66 | ) | ||||||
Balance at end of year | $ | 8,850 | $ | 7,355 | $ | 6,850 | ||||||
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 and estimates an allowance for doubtful accounts based on that excess. While not specifically identifiable as of the balance sheet date, the Company's experience also indicates that a portion of other accounts and notes receivable are also impaired, because management does not expect to collect all principal and interest due under the current contractual terms. Net amounts due include contractually obligated accounts and notes receivable plus accrued interest, net of unrecognized revenue, reduced by the allowance for uncollected interest, amounts due ADs, related deferred revenue, and amounts owed to the franchisee by the Company. In establishing the fair value of the underlying
F-16
LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2016 and 2015
franchise, management considers a variety of factors including recent sales between franchisees, 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 April 30, 2016 and 2015 was allocated as follows.
2016 | 2015 | |||||||
(In thousands) | ||||||||
Impaired: | ||||||||
Accounts receivable | $ | 7,083 | $ | 7,634 | ||||
Notes and interest receivable, net of unrecognized revenue | 12,960 | 10,921 | ||||||
Less amounts due to ADs and franchisees | (1,426 | ) | (1,535 | ) | ||||
Amounts receivable less amounts due to ADs and franchisees | $ | 18,617 | $ | 17,020 | ||||
Allowance for doubtful accounts for impaired accounts and notes receivable | $ | 7,787 | $ | 6,594 | ||||
Non-impaired: | ||||||||
Accounts receivable | $ | 42,825 | $ | 38,487 | ||||
Notes and interest receivable, net of unrecognized revenue | 41,208 | 36,993 | ||||||
Less amounts due to ADs and franchisees | (26,183 | ) | (25,150 | ) | ||||
Amounts receivable less amounts due to ADs and franchisees | $ | 57,850 | $ | 50,330 | ||||
Allowance for doubtful accounts for non-impaired accounts and notes receivable | $ | 1,063 | $ | 761 | ||||
Total: | ||||||||
Accounts receivable | $ | 49,908 | $ | 46,121 | ||||
Notes and interest receivable, net of unrecognized revenue | 54,168 | 47,914 | ||||||
Less amounts due to ADs and franchisees | (27,609 | ) | (26,685 | ) | ||||
Amounts receivable less amounts due to ADs and franchisees | $ | 76,467 | $ | 67,350 | ||||
Total allowance for doubtful accounts | $ | 8,850 | $ | 7,355 | ||||
The Company's average investment in impaired notes receivable during the fiscal years ended April 30, 2016, 2015, and 2014 was $9.0 million, $7.9 million, and $8.5 million, respectively. Interest income recognized related to performing impaired notes was $0.9 million, $0.7 million, and $0.9 million for the fiscal years ended April 30, 2016, 2015, and 2014, respectively.
F-17
LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2016 and 2015
Analysis of Past Due Receivables
The breakdown of accounts and notes receivable past due at April 30, 2016 and 2015 was as follows.
2016 | ||||||||||||||||
Past due | Allowance for uncollectible interest | Current | Total receivables | |||||||||||||
(In thousands) | ||||||||||||||||
Accounts receivable | $ | 25,329 | $ | (617 | ) | $ | 25,196 | $ | 49,908 | |||||||
Notes and interest receivable, net | 6,891 | (1,057 | ) | 48,334 | 54,168 | |||||||||||
Total accounts, notes, and interest receivable, net | $ | 32,220 | $ | (1,674 | ) | $ | 73,530 | $ | 104,076 | |||||||
2015 | ||||||||||||||||
Past due | Allowance for uncollectible interest | Current | Total receivables | |||||||||||||
(In thousands) | ||||||||||||||||
Accounts receivable | $ | 22,115 | $ | (938 | ) | $ | 24,944 | $ | 46,121 | |||||||
Notes and interest receivable, net | 8,168 | (1,165 | ) | 40,911 | 47,914 | |||||||||||
Total accounts, notes, and interest receivable, net | $ | 30,283 | $ | (2,103 | ) | $ | 65,855 | $ | 94,035 | |||||||
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 due date, at which time the notes are put on nonaccrual status. The Company's investment in notes receivable on nonaccrual status at April 30, 2016 and 2015 was $5.5 million and $9.3 million, respectively. Payments received on notes in nonaccrual status are applied to interest income first until the note is current and then to the principal note balance. Nonaccrual notes that are paid current are moved back into accrual status during the next annual review.
(3) Investments
During the year ended April 30, 2016, the Company purchased a corporate equity security for $5.0 million, which was classified as available-for-sale and reported in other non-current assets. The Company recorded an unrealized loss at April 30, 2016 of $0.5 million, net of taxes, which was reported in the Company's Consolidated Statement of Comprehensive Income. The Company had no such transactions during the year ended April 30, 2015. During the year ended April 30, 2014, the Company sold equity securities for a realized gain of $2.2 million, which was reclassified out of accumulated other comprehensive income and recorded as other income in the consolidated statements of income. The Company periodically reviews our investment portfolios to determine whether any investment is other-than-temporarily impaired due to changes in credit risk or other potential valuation concerns. The Company did not record any other-than-temporary impairments of available-for-sale securities during fiscal years 2016, 2015 or 2014.
F-18
LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2016 and 2015
(4) Property, Equipment, and Software, Net
Property, equipment, and software at April 30, 2016 and 2015 was as follows:
2016 | 2015 | |||||||
(In thousands) | ||||||||
Land and land improvements | $ | 2,413 | $ | 2,259 | ||||
Buildings and building improvements | 8,730 | 8,481 | ||||||
Leasehold improvements | 138 | 143 | ||||||
Furniture, fixtures, and equipment | 6,307 | 6,013 | ||||||
Software | 44,418 | 37,894 | ||||||
Construction in progress | 3 | 393 | ||||||
Property, equipment, and software, gross | 62,009 | 55,183 | ||||||
Less accumulated depreciation and amortization | 21,052 | 18,951 | ||||||
Property, equipment, and software, net | $ | 40,957 | $ | 36,232 | ||||
Total depreciation and amortization expense on property, equipment, and software was $4.7 million, $5.5 million, and $3.8 million for the years ended April 30, 2016, 2015, and 2014, respectively.
The software included above includes both internally developed software and purchased software. Included in software are $19.9 million and $12.9 million of assets that had not been placed into service at April 30, 2016 and 2015, respectively. See Note 5 for a description of the impairment related to the Company's online software and acquired online customer lists in the year ended April 30, 2015.
The Company is obligated under various operating leases for office space that expire at various dates. At April 30, 2016, future minimum lease payments under non-cancelable operating leases with initial or remaining lease terms in excess of one year, together with amounts due from franchisees under subleases, were as follows:
Lease payments | Sublease receipts | |||||||
(In thousands) | ||||||||
Year ending April 30: | ||||||||
2017 | $ | 8,012 | $ | 3,281 | ||||
2018 | 5,493 | 2,203 | ||||||
2019 | 2,436 | 990 | ||||||
2020 | 1,211 | 527 | ||||||
2021 | 600 | 202 | ||||||
Thereafter | 247 | — | ||||||
Total minimum lease payments | $ | 17,999 | $ | 7,203 | ||||
Total rent expense for operating leases, net of subleases, was $4.7 million, $3.2 million, and $3.4 million for the years ended April 30, 2016, 2015, and 2014, respectively.
F-19
LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2016 and 2015
(5) Goodwill and Intangible Assets
At the end of the fourth quarter of fiscal 2014, assets associated with tax offices acquired from U.S. franchisees were transferred out of goodwill and intangible assets and classified as assets held for sale.
Changes in the carrying amount of goodwill for the years ended April 30, 2016 and 2015 were as follows:
2016 | 2015 | |||||||
(In thousands) | ||||||||
Balance at beginning of year | $ | 3,377 | $ | 2,997 | ||||
Acquisitions of assets from franchisees and third parties | 960 | 1,107 | ||||||
Disposals and foreign currency changes, net | (52 | ) | (465 | ) | ||||
Impairments | (57 | ) | (262 | ) | ||||
Balance at end of year | $ | 4,228 | $ | 3,377 | ||||
The Company performed its annual impairment review of goodwill and recorded impairment of $0.1 million and $0.3 million for the years ended April 30, 2016 and 2015, respectively.
During fiscal 2014, the Company purchased certain assets of an online tax preparation software provider for $3.2 million and allocated the purchase price to identifiable intangible assets.
As of April 30, 2015, the Company reviewed for impairment the assets related to its online tax preparation business as a result of changes in the pricing environment in the online tax preparation market, a significant decline in the number of returns prepared online and a decline in the related revenues experienced in fiscal 2015. The Company believed that these changes indicated that the carrying amount of assets related to its online tax preparation business may not be recoverable. Accordingly, the undiscounted future cash flows generated by its online software and acquired online customer lists were estimated and the Company concluded that the carrying value of those assets was not recoverable. An impairment loss of $8.4 million was recorded equal to the excess of the carrying amount of those assets over their fair value. The fair value of those assets was determined using a discounted cash flow model. The Company did not record an impairment related to the online tax preparation business in fiscal year 2016.
The impairment loss was allocated as follows at April 30, 2015:
April 30, 2015 | ||||
(In thousands) | ||||
Software | $ | 6,882 | ||
Acquired customer lists | 1,510 | |||
Impairment of online software and acquired customer lists | $ | 8,392 | ||
F-20
LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2016 and 2015
Components of amortizable intangible assets as of April 30, 2016 and 2015 were as follows:
April 30, 2016 | ||||||||||||||
Weighted average amortization period | Gross carrying amount | Accumulated amortization | Net carrying amount | |||||||||||
(In thousands) | ||||||||||||||
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 | |||||||
April 30, 2015 | ||||||||||||||
Weighted average amortization period | Gross carrying amount | Accumulated amortization | Net carrying amount | |||||||||||
(In thousands) | ||||||||||||||
Customer lists acquired from unrelated third parties | 4 years | $ | 1,027 | $ | — | $ | 1,027 | |||||||
Assets acquired from franchisees: | ||||||||||||||
Customer lists | 4 years | 759 | (441 | ) | 318 | |||||||||
Reacquired rights | 2 years | 559 | (473 | ) | 86 | |||||||||
AD rights | 10 years | 17,345 | (4,104 | ) | 13,241 | |||||||||
Total intangible assets | $ | 19,690 | $ | (5,018 | ) | $ | 14,672 | |||||||
For the years ended April 30, 2016, 2015, and 2014 the Company recorded as intangible assets $1.8 million, $1.7 million, and $9.0 million, respectively, from acquisitions of various franchises and third parties. During fiscal 2014 and 2013, both U.S. and Canadian franchise acquisitions were recorded an intangible assets; however, during fiscal 2015, the majority of U.S. franchise acquisitions were recorded as assets held for sale, while Canadian franchise acquisitions continued to be recorded as intangible assets. These acquisitions were accounted for as business combinations.
The purchase price of assets acquired from franchisees and third parties and recorded as customer lists, reacquired rights, and goodwill during fiscal 2016, 2015, and 2014 was allocated as follows.
2016 | 2015 | 2014 | ||||||||||
(In thousands) | ||||||||||||
Customer lists | $ | 728 | $ | 435 | $ | 2,372 | ||||||
Reacquired rights | 39 | 284 | 1,806 | |||||||||
Goodwill | 1,048 | 975 | 4,855 | |||||||||
Purchase price of assets acquired from franchisees, not held for sale | $ | 1,815 | $ | 1,694 | $ | 9,033 | ||||||
The Company expects that assets associated with Company-owned offices will be sold before the end of their estimated useful life. During the years ended April 30, 2016, 2015, and 2014, impairment analyses were performed for amortizable intangible assets. Write-downs of assets acquired from franchisees relate to Company-owned offices that were subsequently closed and impairment of the fair value of existing Company-owned offices based on the impairment analysis. As a result, the carrying values of assets acquired from franchisees were reduced by less than $0.1 million for the fiscal year ended April 30, 2016, $0.5 million for 2015, and $0.9 million for 2014. These amounts were expensed to impairment charges on the consolidated statements of income. The Company estimated the fair value of assets associated with Company-owned offices based on various models, including data and input from a third-party.
F-21
LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2016 and 2015
For the years ended April 30, 2016, 2015, and 2014, amortization expense was $2.3 million, $3.6 million, and $4.1 million, respectively. Annual amortization expense for the next five years is estimated to be as follows (in thousands):
Year ending April 30: | |||
2017 | $ | 2,733 | |
2018 | 2,535 | ||
2019 | 2,313 | ||
2020 | 1,878 | ||
2021 | 1,670 | ||
Total estimated amortization expense | $ | 11,129 | |
(6) Assets Held for Sale
During fiscal 2016, the Company acquired $13.3 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 $6.1 million and goodwill of $7.2 million prior to being recorded as assets held for sale. During fiscal 2015, the Company acquired $8.7 million in assets from U.S. franchisees and third parties that were first accounted for as business combinations, with the value allocated to customer lists and reacquired rights of $4.4 million and goodwill of $4.3 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 amounts of assets held for sale for the fiscal years ended April 30, 2016 and 2015 were as follows:
2016 | 2015 | |||||||
(In thousands) | ||||||||
Balance at beginning of year | $ | 5,160 | $ | 4,413 | ||||
Reacquired, acquired from third parties, and other | 13,309 | 8,517 | ||||||
Dispositions | (6,526 | ) | (7,014 | ) | ||||
Impairment | (2,057 | ) | (756 | ) | ||||
Balance at end of year | $ | 9,886 | $ | 5,160 | ||||
(7) Debt
The Company has an amended credit facility that consists of a $21.2 million term loan and a revolving credit facility that currently allows borrowing of up to $203.8 million with an accordion feature that permits the Company to request an increase in availability of up to an additional $50.0 million. Outstanding borrowings accrue interest, which is paid monthly, at a rate of the one-month London Interbank Offered Rate ("LIBOR") plus a margin ranging from 1.50% to 2.25% depending on the Company's leverage ratio. At April 30, 2016 and 2015, the interest rate was 2.06% and 1.8%, respectively, and the average interest rate paid during the fiscal year ended April 30, 2016 was 1.89%. A commitment fee is paid monthly that varies from 0.25% to 0.50% depending on the Company's leverage ratio on the unused portion of the credit facility. 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 under the revolving credit facility, which mature on September 30, 2017).
The credit facility contains certain financial covenants that the Company must meet, including leverage and fixed-charge coverage ratios as well as minimum net worth requirements. In addition, the Company must reduce the outstanding balance under its revolving loan to zero for a period of at least 45 consecutive days each fiscal year. The Company's borrowing availability on the credit facility at April 30, 2016 was $111.2 million. At April 30, 2016 and 2015, the Company had no outstanding borrowings under its revolving credit facility. The Company was in compliance with the financial covenants of its credit facility at April 30, 2016.
F-22
The credit facility also contains certain events of default that may cause the bank syndicate to terminate the credit facility and declare amounts owed to become immediately payable if they occur. At April 30, 2016, the Company has not incurred an event of default.
Debt at April 30, 2016 and 2015 was as follows:
2016 | 2015 | |||||||
(In thousands) | ||||||||
Term loan payable in quarterly principal installments of 2.5%, 2.5%, and 3.125% of the original amount borrowed for the years ending April 30, 2017, 2018 and 2019, respectively; at that time a balloon payment of $14,875 is payable. | $ | 18,992 | $ | 20,453 | ||||
Mortgage note payable to a bank in monthly installments of $16 including interest at 6.06% through September 2016; at that time a balloon payment of $2,213 is payable; subject to a prepayment penalty; collateralized by land and building. | 2,230 | 2,279 | ||||||
Amounts due to former ADs and others at zero percent interest; due May 2016 through June 2018. | 2,317 | 2,626 | ||||||
Other debt | 9 | 39 | ||||||
Total long-term debt | 23,548 | 25,397 | ||||||
Less current installments | 5,947 | 3,934 | ||||||
Total long-term debt, less current installments | $ | 17,601 | $ | 21,463 | ||||
Aggregate maturities of long-term debt at April 30, 2016 are as follows (in thousands):
Year ending April 30: | ||||
2017 | $ | 5,947 | ||
2018 | 2,706 | |||
2019 | 14,895 | |||
2020 | — | |||
Total long-term debt | $ | 23,548 | ||
(8) Derivative Instruments and Hedging Activities
From time to time, the Company uses interest-rate-related derivative financial instruments to manage its exposure related to changes in interest rates on its variable-rate line of credit and forward contracts to manage its exposure to foreign currency fluctuation related to short-term advances made to its Canadian subsidiary. The Company does not speculate using derivative instruments nor does it enter into derivative instruments for any purpose other than cash flow hedging.
By using derivative financial instruments to hedge exposures to changes in interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company money, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty money, and therefore, the Company is not exposed to the counterparty's credit risk in those circumstances. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties. The derivative instruments entered into by the Company do not contain credit-risk-related contingent features.
Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates. The market risk associated with interest rates is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
The Company assesses interest rate risk by continually identifying and monitoring changes in interest rates that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company maintains risk management control systems to monitor interest rate risk attributable to both the Company's outstanding or forecasted debt obligations and forecasted revenues as well as the Company's offsetting hedge positions. The risk management control systems
F-23
LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2016 and 2015
involve the use of analytical techniques, including cash flow sensitivity analysis, to estimate the expected impact of changes in interest rates and foreign currency rates on the Company's future cash flows.
It is the policy of the Company to enter into forward contracts at the time short-term advances are made to its Canadian subsidiary.
Interest rate swap agreements. None.
Forward contracts related to foreign currency exchange rates. In connection with short-term advances made to its Canadian subsidiary related to personal income tax refund discounting, the Company enters into forward contracts to eliminate the exposure related to foreign currency fluctuations. Under the terms of the forward currency contracts, the exchange rate for repayments is fixed at the time advance is made and the advances are repaid prior to April 30 of each year. These forward contracts are designated as cash flow hedges. At April 30, 2016 and 2015, there were no remaining forward contracts outstanding. During the years ended April 30, 2016, 2015, and 2014, these foreign currency hedges were effective and, therefore, no amounts were recognized in the consolidated statements of income.
At April 30, 2016, there were no deferred gains on derivative instruments accumulated in other comprehensive income.
(9) Stockholders' Equity
Preferred Stock and Exchangeable Shares
The Company has 190,000 shares of authorized Class A preferred stock with a par value of $0.01, of which none were issued and outstanding at April 30, 2016 and 2015.
The Company also has 10 shares of special voting preferred stock authorized, issued and outstanding with a par value of $0.01 and no liquidation value. Each share of special voting preferred stock entitles the holder to vote as if it represents 100,000 shares of Class A common stock. In conjunction with the special voting preferred stock, there are 1,000,000 exchangeable shares that are exchangeable at any time into Class A common stock of the Company. The special voting preferred stock will be canceled at the time the holder exchanges the exchangeable shares.
Common Stock
The Company is authorized to issue 21,200,000 shares of Class A common stock, par value $0.01 per share, and 1,000,000 shares of Class B common stock, par value $0.01 per share. Class A common stock and Class B common stock entitle the holders to the same rights and privileges and are identical in all respects as to all matters, except the holders of Class B common stock are entitled to elect one more director than the number of directors elected by holders of all other classes of stock combined. Additionally, a holder of Class B common stock may, at the holder's option, elect to convert the Class B common stock into an equal number of fully paid and non-assessable shares of Class A common stock.
Accumulated Other Comprehensive Income (loss)
The components of accumulated other comprehensive loss at April 30, 2016 and 2015 are as follows.
2016 | 2015 | |||||||
(In thousands) | ||||||||
Foreign currency adjustment | $ | (1,148 | ) | $ | (697 | ) | ||
Unrealized loss on equity securities available for sale, net of taxes | (550 | ) | — | |||||
Total accumulated other comprehensive loss | $ | (1,698 | ) | $ | (697 | ) | ||
Net Income per Share
Net income per share of Class A and Class B common stock is computed using the two-class method. Basic net income per share is computed by allocating undistributed earnings to common shares and participating securities (Class A preferred stock and exchangeable shares) and using the weighted-average number of common shares outstanding during the period. Undistributed losses are not allocated to participating securities because they do not meet the required criteria for such allocation.
F-24
LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2016 and 2015
Diluted net income per share is computed using the weighted-average number of common shares and, if dilutive, the potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and vesting of restricted stock units. The dilutive effect of outstanding stock options and restricted stock units is reflected in dilutive earnings per share by application of the treasury stock method. Additionally, the computation of diluted net income per share of Class A common stock assumes the conversion of Class B common stock and exchangeable shares, if dilutive, while the diluted net income 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 per share for the years ended April 30, 2016, 2015, and 2014 is as follows.
2016 | ||||||||
Class A common stock | Class B common stock | |||||||
(In thousands, except for share and per share amounts) | ||||||||
Basic net income per share: | ||||||||
Numerator: | ||||||||
Allocation of undistributed earnings | $ | 18,056 | $ | 1,364 | ||||
Amounts allocated to participating securities: | ||||||||
Exchangeable shares | (1,307 | ) | (99 | ) | ||||
Net income attributable to common stockholders | $ | 16,749 | $ | 1,265 | ||||
Denominator: | ||||||||
Weighted-average common shares outstanding | 11,914,775 | 900,000 | ||||||
Basic net income per share | $ | 1.41 | $ | 1.41 | ||||
Diluted net income per share: | ||||||||
Numerator: | ||||||||
Allocation of undistributed earnings for basic computation | $ | 16,749 | $ | 1,265 | ||||
Reallocation of undistributed earnings as a result of assumed conversion of: | ||||||||
Class B common stock to Class A common stock | 1,265 | — | ||||||
Exchangeable shares to Class A common stock | 1,406 | — | ||||||
Net income attributable to stockholders | $ | 19,420 | $ | 1,265 | ||||
Denominator: | ||||||||
Number of shares used in basic computation | 11,914,775 | 900,000 | ||||||
Weighted-average effect of dilutive securities: | ||||||||
Class B common stock to Class A common stock | 900,000 | — | ||||||
Exchangeable shares to Class A common stock | 1,000,000 | — | ||||||
Employee stock options and restricted stock units | 209,896 | 13,674 | ||||||
Weighted-average diluted shares outstanding | 14,024,671 | 913,674 | ||||||
Diluted net income per share | $ | 1.38 | $ | 1.38 | ||||
F-25
LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2016 and 2015
2015 | ||||||||
Class A common stock | Class B common stock | |||||||
(In thousands, except for share and per share amounts) | ||||||||
Basic net income per share: | ||||||||
Numerator: | ||||||||
Allocation of undistributed earnings | $ | 8,076 | $ | 614 | ||||
Amounts allocated to participating securities: | ||||||||
Exchangeable shares | (588 | ) | (45 | ) | ||||
Net income attributable to common stockholders | $ | 7,488 | $ | 569 | ||||
Denominator: | ||||||||
Weighted-average common shares outstanding | 11,838,887 | 900,000 | ||||||
Basic net income per share | $ | 0.63 | $ | 0.63 | ||||
Diluted net income per share: | ||||||||
Numerator: | ||||||||
Allocation of undistributed earnings for basic computation | $ | 7,488 | $ | 569 | ||||
Reallocation of undistributed earnings as a result of assumed conversion of: | ||||||||
Class B common stock to Class A common stock | 569 | — | ||||||
Exchangeable shares to Class A common stock | 633 | — | ||||||
Net income attributable to stockholders | $ | 8,690 | $ | 569 | ||||
Denominator: | ||||||||
Number of shares used in basic computation | 11,838,887 | 900,000 | ||||||
Weighted-average effect of dilutive securities: | ||||||||
Class B common stock to Class A common stock | 900,000 | — | ||||||
Exchangeable shares to Class A common stock | 1,000,000 | — | ||||||
Employee stock options and restricted stock units | 555,886 | 36,415 | ||||||
Weighted-average diluted shares outstanding | 14,294,773 | 936,415 | ||||||
Diluted net income per share | $ | 0.61 | $ | 0.61 | ||||
F-26
LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2016 and 2015
2014 | ||||||||
Class A common stock | Class B common stock | |||||||
(In thousands, except for share and per share amounts) | ||||||||
Basic net income per share: | ||||||||
Numerator: | ||||||||
Allocation of undistributed earnings | $ | 20,459 | $ | 1,523 | ||||
Amounts allocated to participating securities: | ||||||||
Exchangeable shares | (1,462 | ) | (109 | ) | ||||
Net income attributable to common stockholders | $ | 18,997 | $ | 1,414 | ||||
Denominator: | ||||||||
Weighted-average common shares outstanding | 12,090,522 | 900,000 | ||||||
Basic net income per share | $ | 1.57 | $ | 1.57 | ||||
Diluted net income per share: | ||||||||
Numerator: | ||||||||
Allocation of undistributed earnings for basic computation | $ | 18,997 | $ | 1,414 | ||||
Reallocation of undistributed earnings as a result of assumed conversion of: | ||||||||
Class B common stock to Class A common stock | 1,414 | — | ||||||
Class A preferred stock to Class A common stock | — | — | ||||||
Exchangeable shares to Class A common stock | 1,571 | — | ||||||
Net income attributable to stockholders | $ | 21,982 | $ | 1,414 | ||||
Denominator: | ||||||||
Number of shares used in basic computation | 12,090,522 | 900,000 | ||||||
Weighted-average effect of dilutive securities: | ||||||||
Class B common stock to Class A common stock | 900,000 | — | ||||||
Exchangeable shares to Class A common stock | 1,000,000 | — | ||||||
Employee stock options and restricted stock units | 546,449 | 35,153 | ||||||
Weighted-average diluted shares outstanding | 14,536,971 | 935,153 | ||||||
Diluted net income per share | $ | 1.51 | $ | 1.51 | ||||
Diluted net income per share excludes the impact of shares of potential common stock from the exercise of options and vesting of restricted stock units to purchase 429,644, 210,416 and 483,397 shares for the years ended April 30, 2016, 2015, and 2014, respectively, because the effect would be anti-dilutive.
(10) Stock Compensation Plan
Stock Options
In August 2011, the Board of Directors approved the JTH Holding, Inc. 2011 Equity and Cash Incentive Plan. Employees and outside directors are eligible to receive awards and a total of 2,500,000 shares of Class A common stock were authorized for grant under the plan. At April 30, 2016, 1,355,903 shares of Class A common stock remained available for grant.
F-27
LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2016 and 2015
The following table summarizes the information for options granted in the years ended April 30, 2016, 2015, and 2014.
2016 | 2015 | 2014 | ||||
Weighted-average fair value of options granted | $5.05 | $9.59 | $6.87 | |||
Dividend yield | 2.8% - 3.7% | 0.0% - 2.2% | —% | |||
Expected volatility | 32.4% - 35.6% | 31.1% - 31.7% | 34.1% - 37.0% | |||
Expected terms | 4 - 6 years | 5 years | 4 - 5 years | |||
Risk-free interest rates | 1.4% - 1.7% | 1.6% - 1.9% | 0.8% - 1.6% | |||
The Company does not have enough public trading history to calculate volatility for the term of the granted options, therefore, it used a 50/50 weighted-average volatility, equally weighing our public trading history and that of other public companies in the tax preparation industry.
The grants made prior to June 2012 were made prior to our becoming a public company; therefore, we considered appropriate accounting literature regarding the valuation of privately-held company equity securities and determined that the values established in private transactions provided a reasonable basis for establishing the fair value for stock compensation expense purposes. On this basis, we did not obtain any third party valuation or utilize other valuation methods. Any grants made after we became a public company were valued using the closing market price of the preceding business day.
Stock option activity during the years ended April 30, 2016, 2015, and 2014 was as follows:
Number of options | Weighted average exercise price | ||||||
Outstanding at April 30, 2013 | 2,534,683 | $ | 14.81 | ||||
Granted | 628,374 | 20.42 | |||||
Exercised | (955,592 | ) | 14.63 | ||||
Canceled | (267,059 | ) | 15.03 | ||||
Outstanding at April 30, 2014 | 1,940,406 | 16.68 | |||||
Granted | 170,416 | 32.87 | |||||
Exercised | (761,913 | ) | 15.73 | ||||
Canceled | (5,350 | ) | 15.00 | ||||
Outstanding at April 30, 2015 | 1,343,559 | 19.28 | |||||
Granted | 227,387 | 22.30 | |||||
Exercised | (154,594 | ) | 14.79 | ||||
Canceled | (151,790 | ) | 24.31 | ||||
Outstanding at April 30, 2016 | 1,264,562 | $ | 19.77 | ||||
Intrinsic value is defined as the fair value of the stock less the cost to exercise. The total intrinsic value of options exercised was $0.9 million, $13.3 million, and $9.4 million during the years ended April 30, 2016, 2015, and 2014, respectively. The total intrinsic value of stock options outstanding at April 30, 2016 was zero. Outstanding options have vesting terms that range from six months to six years from the date of grant and expire from four to five years after the vesting date.
F-28
LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2016 and 2015
Nonvested stock options (options that had not vested in the period reported) activity during the years ended April 30, 2016, 2015, and 2014 was as follows:
Nonvested options | Weighted average exercise price | ||||||
Outstanding at April 30, 2013 | 132,500 | $ | 15.00 | ||||
Granted | 628,374 | 20.42 | |||||
Vested | (275,874 | ) | 16.93 | ||||
Canceled | — | — | |||||
Outstanding at April 30, 2014 | 485,000 | 20.92 | |||||
Granted | 170,416 | 32.87 | |||||
Vested | (270,000 | ) | 18.99 | ||||
Canceled | — | — | |||||
Outstanding at April 30, 2015 | 385,416 | 27.56 | |||||
Granted | 227,387 | 22.30 | |||||
Vested | (173,750 | ) | 25.16 | ||||
Canceled | (50,000 | ) | 33.79 | ||||
Outstanding at April 30, 2016 | 389,053 | $ | 24.76 | ||||
At April 30, 2016, unrecognized compensation cost related to non-vested stock options was $2.1 million. These costs are expected to be expensed through fiscal 2021.
The following table summarizes information about stock options outstanding and exercisable at April 30, 2016.
Options outstanding | Options exercisable | ||||||||||||||||
Range of Exercise Prices | Number of options outstanding | Weighted average exercise price | Weighted average remaining contractual life (in years) | Number of options exercisable | Weighted average exercise price | ||||||||||||
15.00 | 501,883 | 15.00 | 1.6 | 501,883 | 15.00 | ||||||||||||
16.38 - 19.75 | 291,876 | 17.90 | 4.0 | 264,876 | 17.94 | ||||||||||||
22.18 - 29.48 | 405,387 | 24.83 | 5.7 | 80,000 | 26.59 | ||||||||||||
33.38 - 33.79 | 65,416 | 33.38 | 5.5 | 28,750 | 33.38 | ||||||||||||
1,264,562 | $ | 19.77 | 875,509 | $ | 17.55 | ||||||||||||
Restricted Stock Units
The Company has awarded restricted stock units to its non-employee directors and certain employees. Restricted stock units are valued at the closing stock price the day preceding the grant date. Compensation costs associated with these restricted shares are amortized on a straight-line basis over the vesting period and recognized as an increase in additional paid-in capital. At April 30, 2016, unrecognized compensation cost related to restricted stock units was $0.6 million. These costs are expected to be recognized through fiscal 2019.
F-29
LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2016 and 2015
Restricted stock activity during the years ended April 30, 2016, 2015 and 2014 was as follows. The Company did not issue restricted stock units prior to fiscal year 2013.
Number of RSUs | Weighted Average Fair Value at Grant Date | ||||||
Balance at April 30, 2013 | 15,971 | $ | 13.50 | ||||
Granted | 23,565 | 16.86 | |||||
Vested | (14,598 | ) | 13.36 | ||||
Canceled | (3,493 | ) | 16.07 | ||||
Balance at April 30, 2014 | 21,445 | 16.87 | |||||
Granted | 25,691 | 33.38 | |||||
Vested | (14,746 | ) | 16.38 | ||||
Canceled | (3,461 | ) | 26.47 | ||||
Balance at April 30, 2015 | 28,929 | 30.63 | |||||
Granted | 32,056 | 23.06 | |||||
Vested | (13,394 | ) | 27.99 | ||||
Canceled | (4,799 | ) | 27.89 | ||||
Balance at April 30, 2016 | 42,792 | $ | 26.10 | ||||
(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 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 adjustment in certain circumstances, such as when there is evidence of impairment.
F-30
LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2016 and 2015
The following tables present, for each of the fair value hierarchy levels, the assets and liabilities that are measured at fair value on a recurring and nonrecurring basis at April 30, 2016 and 2015.
April 30, 2016 Fair value measurements using | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
(In thousands) | ||||||||||||||||
Recurring assets: | ||||||||||||||||
Cash equivalents | $ | 7,140 | $ | 7,140 | $ | — | $ | — | ||||||||
Available-for-sale-securities | 4,123 | 4,123 | — | — | ||||||||||||
Total recurring assets | 11,263 | 11,263 | — | — | ||||||||||||
Nonrecurring assets: | ||||||||||||||||
Impaired accounts and notes receivable, net of unearned revenue | 12,256 | — | — | 12,256 | ||||||||||||
Impaired goodwill | 63 | — | — | 63 | ||||||||||||
Impaired reacquired rights | 28 | — | — | 28 | ||||||||||||
Impaired customer lists | 34 | — | — | 34 | ||||||||||||
Assets held for sale | 9,886 | — | — | 9,886 | ||||||||||||
Total nonrecurring assets | 22,267 | — | — | 22,267 | ||||||||||||
Total recurring and nonrecurring assets | $ | 33,530 | $ | 11,263 | $ | — | $ | 22,267 | ||||||||
April 30, 2015 Fair value measurements using | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
(In thousands) | ||||||||||||||||
Recurring assets: | ||||||||||||||||
Cash equivalents | $ | 16,975 | $ | 16,975 | $ | — | $ | — | ||||||||
Total recurring assets | 16,975 | 16,975 | — | — | ||||||||||||
Nonrecurring assets: | ||||||||||||||||
Impaired accounts and notes receivable, net of unearned revenue | 11,961 | — | — | 11,961 | ||||||||||||
Impaired online software | 1,253 | — | — | 1,253 | ||||||||||||
Impaired acquired online customer lists | 1,027 | — | — | 1,027 | ||||||||||||
Impaired goodwill | 224 | — | — | 224 | ||||||||||||
Impaired reacquired rights | 79 | — | — | 79 | ||||||||||||
Impaired customer lists | 126 | — | — | 126 | ||||||||||||
Assets held for sale | 5,160 | — | — | 5,160 | ||||||||||||
Total nonrecurring assets | 19,830 | — | — | 19,830 | ||||||||||||
Total recurring and nonrecurring assets | $ | 36,805 | $ | 16,975 | $ | — | $ | 19,830 | ||||||||
The Company's policy is to recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. There were no transfers into or out of Level 1 or 2 recurring fair value measurements for the years ended April 30, 2016 and 2015.
The following methods and assumptions are used to estimate the fair value of our financial instruments.
Cash equivalents: The carrying amounts approximate fair value because of the short maturity of these instruments. Cash equivalent financial instruments consist of money market accounts.
Impaired accounts and notes receivable: Accounts and notes receivable are considered to be impaired if the net amounts due exceed the fair value of the underlying franchise or if management considers it probable that all principal and interest will
F-31
LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2016 and 2015
not be collected when contractually due. In establishing the estimated fair value of the underlying franchise, consideration is given to a variety of factors, including, recent sales between franchisees, the net fees of open offices, and the number of unopened offices.
Impaired goodwill, reacquired rights, and customer lists: Goodwill, reacquired rights, and customer lists associated with a Company-owned office are considered to be impaired if the net carrying amount exceeds the fair value of the underlying office. In establishing the fair value of the underlying office, consideration is given to the related net fees, subjected to a floor of the value of a new franchise.
Assets held for sale: Assets held for sale are recorded at the lower of the carrying value or the sales price, less costs to sell, which approximates fair value. The sales price is generally calculated as a percentage of the prior year's net fees.
Impaired online software and acquired online customer lists: The online software and acquired online customer lists are considered to be impaired if the net carrying amount of these assets exceeds the fair value of these assets. The fair value of these assets was determined using a discounted cash flow model.
Other Fair Value Measurements
Accounting standards require the disclosure of the estimated fair value of financial instruments that are not recorded at fair value. For the financial instruments not recorded at fair value, estimates of fair value are made at a point in time based on relevant market data and information about the financial instrument. No readily available market exists for a significant portion of the Company's financial instruments. Fair value estimates for these instruments are based on current economic conditions, interest rate risk characteristics, and other factors. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision. Therefore, the calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. In addition, changes in assumptions could significantly affect these fair value estimates. The following methods and assumptions were used by the Company in estimating the fair value of these financial instruments.
Receivables other than notes, other current assets, accounts payable and accrued expenses, and due to ADs: The carrying amounts approximate fair value because of the short maturity of these instruments (Level 1).
Notes receivable: The carrying amount approximates fair value because the interest rate charged by the Company on these notes approximates rates currently offered by local lending institutions for loans of similar terms to individuals/entities with comparable credit risk (Level 3).
Long-term debt: The carrying amount approximates fair value because the interest rate paid has a variable component (Level 2).
(12) Employee 401(k) Plan
The Company sponsors a defined-contribution 401(k) profit sharing plan. Under the plan, employees who are 18 years of age and have completed 90 days of service are eligible to make voluntary contributions to the plan. The Company matches 50% of each employee's contribution up to 3% of the employee's salary. Total compensation expense related to these contributions was $0.5 million for each of the three years ended April 30, 2016, 2015, and 2014.
(13) Income Taxes
The Company computes its expense or benefit from income taxes by applying the estimated annual effective tax rate to income or loss from recurring operations and adding the effects of any discrete income tax items specific to the period.
Congress extended the federal research and development (“R&D”) credit indefinitely. During the three months ended January 31, 2015, we recorded a discrete tax benefit of approximately $0.2 million for the retroactive effect. We also recorded a discrete tax benefit of approximately $0.3 million for the 2016 fiscal year.
Interest incurred from income taxes is recognized as incurred and recorded as income tax expense on the consolidated statements of income. Penalties are recognized as incurred and recorded as nondeductible penalties expense and included in general and administrative expense on the consolidated statements of income.
F-32
LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2016 and 2015
Total income taxes were calculated for the years ended April 30, 2016, 2015, and 2014 as follows.
2016 | 2015 | 2014 | ||||||||||
(In thousands) | ||||||||||||
Income tax expense | $ | 11,058 | $ | 4,811 | $ | 13,654 | ||||||
Tax benefit of stock option exercises | (900 | ) | (4,803 | ) | (283 | ) | ||||||
Unrealized loss on available-for-sale securities | (326 | ) | — | (252 | ) | |||||||
Total income taxes | $ | 9,832 | $ | 8 | $ | 13,119 | ||||||
Components of income tax expense for the years ended April 30, 2016, 2015, and 2014 were as follows.
2016 | 2015 | 2014 | ||||||||||
(In thousands) | ||||||||||||
Current: | ||||||||||||
Federal | $ | 2,748 | $ | 5,973 | $ | 8,632 | ||||||
State | 598 | 2,157 | 2,036 | |||||||||
Foreign | 328 | 226 | 381 | |||||||||
Current tax expense | 3,674 | 8,356 | 11,049 | |||||||||
Deferred: | ||||||||||||
Federal | 6,079 | (2,629 | ) | 2,192 | ||||||||
State | 1,322 | (950 | ) | 517 | ||||||||
Foreign | (17 | ) | 34 | (104 | ) | |||||||
Deferred tax expense (benefit) | 7,384 | (3,545 | ) | 2,605 | ||||||||
Total income tax expense | $ | 11,058 | $ | 4,811 | $ | 13,654 | ||||||
For the years ended April 30, 2016, 2015, and 2014, income before taxes consisted of the following.
2016 | 2015 | 2014 | ||||||||||
(In thousands) | ||||||||||||
U.S. operations | $ | 28,954 | $ | 12,459 | $ | 34,746 | ||||||
Foreign operations | 1,524 | 1,042 | 890 | |||||||||
Income before income taxes | $ | 30,478 | $ | 13,501 | $ | 35,636 | ||||||
Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 35% to pretax income from continuing operations as a result of the following for the years ended April 30, 2016, 2015, and 2014.
2016 | 2015 | 2014 | ||||||||||
(In thousands) | ||||||||||||
Computed "expected" income tax expense | $ | 10,667 | $ | 4,725 | $ | 12,473 | ||||||
Increase (decrease) in income taxes resulting from: | ||||||||||||
State income taxes, net of federal benefit | 1,126 | 1,034 | 1,819 | |||||||||
Nondeductible expenses | 246 | 308 | 143 | |||||||||
Tax credits | (370 | ) | (251 | ) | (555 | ) | ||||||
Domestic production deduction | (538 | ) | (466 | ) | (40 | ) | ||||||
Stock compensation expense | 31 | (378 | ) | 78 | ||||||||
Foreign tax rate differential | (222 | ) | (104 | ) | (36 | ) | ||||||
Other | 118 | (57 | ) | (228 | ) | |||||||
Total income tax expense | $ | 11,058 | $ | 4,811 | $ | 13,654 | ||||||
F-33
LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2016 and 2015
The tax effect of temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities that give rise to significant portions of deferred tax assets and liabilities at April 30, 2016 and 2015 are as follows:
2016 | 2015 | |||||||
(In thousands) | ||||||||
Deferred tax assets: | ||||||||
Unexercised nonqualified stock options | $ | 2,292 | $ | 1,954 | ||||
Allowance for doubtful accounts | 3,707 | 3,124 | ||||||
Deferred revenue | 1,236 | 4,096 | ||||||
Accounts payable and accrued expense | 594 | 3,209 | ||||||
Total deferred tax assets | 7,829 | 12,383 | ||||||
Deferred tax liabilities: | ||||||||
Property, equipment, software, and other intangible assets | 10,285 | 7,247 | ||||||
Other current assets | 370 | 578 | ||||||
Total deferred tax liabilities | 10,655 | 7,825 | ||||||
Net deferred tax asset (liability) | $ | (2,826 | ) | $ | 4,558 | |||
In assessing the realizability of the gross deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the benefits of these deductible differences will be realized.
The Company has adopted the accounting and disclosure requirements for uncertain tax positions, which require a two-step approach to evaluate tax positions. This approach involves recognizing any tax positions that are more likely than not to occur and then measuring those positions to determine the amounts to be recognized in the financial statements. The Company has determined no reserves for uncertain tax positions were required at April 30, 2016 or 2015.
Foreign subsidiary net earnings that were considered permanently reinvested were $1.2 million, $0.8 million, and $0.6 million for the fiscal years ended April 30, 2016, 2015, and 2014, respectively. Because these foreign subsidiary net earnings are considered permanently reinvested, the amount of deferred tax liability that would need to be provided if these earnings were not reinvested is not reasonably determinable.
At April 30, 2016, the tax years that remain subject to examination by the Internal Revenue Service and other major taxing jurisdictions relate to the fiscal years ended April 30, 2015, 2014, and 2013.
(14) Related-Party Transactions
The Company considers directors and their affiliated companies as well as executive officers and their immediate family to be related parties. For the years ended April 30, 2016, 2015, and 2014, the Company repurchased common stock from related parties as follows.
2016 | 2015 | 2014 | ||||||||||
(In thousands) | ||||||||||||
Common stock: | ||||||||||||
Shares repurchased | — | 1,007 | 316 | |||||||||
Amount | $ | — | $ | 26,954 | $ | 7,449 | ||||||
The Company has entered into a multi-year contract to purchase a license for the use of Canadian tax software at a price of $0.7 million from a company in which it has an investment accounted for under the equity method. One of the members of the Company's Board of Directors is affiliated with the company providing this service.
F-34
LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2016 and 2015
(15) Commitments and Contingencies
In the ordinary course of operations, the Company may become a party to legal proceedings. Based upon information currently available, management believes that such legal proceedings, in the aggregate, will not have a material adverse effect on the Company's business, financial condition, cash flows, or results of operations except as provided below.
TCPA class action litigation. The Company was sued in September 2013 in federal court in Illinois in connection with alleged violations of the Telephone Consumer Protection Act. Plaintiff alleges that the Company inappropriately made auto dialed telephone calls to cellular telephones, seeks the certification of a nationwide class action, and claims statutory damages of $500-$1,500 per violation. The Company tendered the defense of this litigation to a third party entity that had contracted with it to solicit potential franchisees, and that third party entity acknowledged its defense and indemnification obligations to the Company. However, because the third party did not have the financial resources to satisfy its defense and indemnity obligations, the Company concluded that it could not rely upon the fulfillment of those obligations. In September 2014, the Company and the plaintiffs reached a final settlement of this litigation pursuant to which we funded the establishment of a settlement fund of $3.0 million, inclusive of settlement administration costs and plaintiffs’ counsel fees, which the court approved. The Company accrued the settlement amount during fiscal 2015.
The Company is also party to claims and lawsuits that are considered to be ordinary, routine litigation incidental to the business, including claims and lawsuits concerning the preparation of customers' income tax returns, the fees charged to customers for various products and services, relationships with franchisees, intellectual property disputes, employment matters, and contract disputes. Although the Company cannot provide assurance that it will ultimately prevail in each instance, it believes the amount, if any, it will be required to pay in the discharge of liabilities or settlements in these claims will not have a material adverse impact on its consolidated results of operations or financial position.
F-35
LIBERTY TAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 2016 and 2015
(16) Quarterly Financial Data (Unaudited)
Three Months Ended | ||||||||||||||||
April 30, 2016 | January 31, 2016 | October 31, 2015 | July 31, 2015 | |||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||
Revenue | $ | 104,414 | $ | 53,621 | $ | 7,871 | $ | 7,523 | ||||||||
Net income (loss) | $ | 32,288 | $ | 4,738 | $ | (9,070 | ) | $ | (8,536 | ) | ||||||
Weighted-average basic shares outstanding | 12,877,919 | 12,795,367 | 12,775,565 | 12,811,621 | ||||||||||||
Weighted-average dilutive shares outstanding | 13,967,568 | 14,002,356 | 12,775,565 | 12,811,621 | ||||||||||||
Net income (loss) per share of Class A and Class B common stock: | ||||||||||||||||
Basic | $ | 2.33 | $ | 0.34 | $ | (0.71 | ) | $ | (0.67 | ) | ||||||
Diluted | $ | 2.31 | $ | 0.34 | $ | (0.71 | ) | $ | (0.67 | ) | ||||||
Cash dividends declared per share of common stock and common stock equivalents | $ | 0.16 | $ | 0.16 | $ | 0.16 | $ | 0.16 | ||||||||
Three Months Ended | ||||||||||||||||
April 30, 2015 | January 31, 2015 | October 31, 2014 | July 31, 2014 | |||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||
Revenue | $ | 98,919 | $ | 47,680 | $ | 7,734 | $ | 7,839 | ||||||||
Impairment of online software and acquired customer lists | 8,392 | — | — | — | ||||||||||||
Tentative settlements of class action litigation cases, net of estimated recoveries | 1,421 | 4,066 | 2,130 | — | ||||||||||||
Net income (loss) | $ | 26,743 | $ | 1,919 | $ | (11,328 | ) | $ | (8,644 | ) | ||||||
Weighted-average basic shares outstanding | 12,728,341 | 12,679,286 | 12,680,306 | 12,867,273 | ||||||||||||
Weighted-average dilutive shares outstanding | 14,155,818 | 14,227,163 | 12,680,306 | 12,867,273 | ||||||||||||
Net income (loss) per share of Class A and Class B common stock: | ||||||||||||||||
Basic | $ | 1.95 | $ | 0.14 | $ | (0.89 | ) | $ | (0.67 | ) | ||||||
Diluted | $ | 1.89 | $ | 0.13 | $ | (0.89 | ) | $ | (0.67 | ) | ||||||
Cash dividends declared per share of common stock and common stock equivalents | $ | 0.16 | $ | — | $ | — | $ | — | ||||||||
Because most of the Company's customers file their tax returns during the period from January through April of each year, most of the Company's revenues are earned during this period. As a result, the Company generally operates at a loss through the first eight months of the fiscal year.
(17) Subsequent Events
On June 10, 2016, the Company's Board of Directors approved a cash dividend of $0.16 per share payable on July 22, 2016 to holders of record of common stock and common stock equivalents on July 12, 2016.
On June 10, 2016, the Company's Board of Directors approved an increase of $3.4 million to the amount available for the repurchase of the Company's common stock, for a total amount authorized of $10.0 million.
In May of 2016, the holder of the Company's Class B Common stock converted 600,000 of those shares to the Company's Class A common stock on a one-for-one basis and for no additional consideration.
F-36