10-Q 1 tax-0731201910q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  
FORM 10-Q
 
ý      Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended July 31, 2019
 
OR
 
o         Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from             to            
 
Commission File Number 001-35588
 
Liberty Tax, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
27-3561876
(State of incorporation)
 
(IRS employer identification no.)
 
1716 Corporate Landing Parkway
Virginia Beach, Virginia 23454
(Address of principal executive offices)
 (757) 493-8855
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None.
 
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ý No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 o
Accelerated filer
x
Non-accelerated filer
 o
Smaller reporting company
x
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No ý

The number of shares outstanding of the registrant's common stock, par value $0.01 value per share, as of September 3, 2019 was 16,211,564 shares.





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




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

1



LIBERTY TAX, INC. AND SUBSIDIARIES

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

 
(unaudited)
Current assets:
 

 
 

 
 
Cash and cash equivalents
$
90,570

 
$
22,983

 
$
6,186

Receivables:
 
 
 

 
 

Accounts receivable
47,355

 
47,011

 
41,224

Notes receivable - current
25,163

 
21,097

 
29,402

Interest receivable, net of uncollectible amounts
1,826

 
1,718

 
2,023

Allowance for doubtful accounts - current
(10,344
)
 
(11,183
)
 
(11,917
)
Total current receivables, net
64,000

 
58,643

 
60,732

Bank products receivable
3,136

 
7,277

 
1,738

Assets held for sale

 

 
5,231

Income taxes receivable
6,917

 
1,784

 
4,989

Inventories, net
9,586

 

 

Other current assets
3,160

 
2,405

 
1,463

Total current assets
177,369

 
93,092

 
80,339

Property, equipment, and software, net
31,336

 
32,676

 
37,091

Notes receivable, non-current
6,887

 
7,445

 
9,882

  Allowance for doubtful accounts, non-current
(1,114
)
 
(633
)
 
(1,642
)
Total non-current notes receivables, net
5,773

 
6,812

 
8,240

Goodwill
94,553

 
6,566

 
7,997

Lease right-of-use assets
20,588

 

 

Other intangible assets, net
49,086

 
19,161

 
22,765

Deferred income taxes
323

 
315

 
1,272

Other assets
3,697

 
1,379

 
2,056

Total assets
$
382,725

 
$
160,001

 
$
159,760

Liabilities and Equity
 

 
 

 
 
Current liabilities:
 

 
 

 
 
Current installments of long-term obligations
$
4,450

 
$
13,108

 
$
16,923

Current portion of operating lease liabilities
6,373

 

 

Current portion of financing lease liabilities
408

 

 

Accounts payable and accrued expenses
20,025

 
13,672

 
21,213

Due to Area Developers (ADs)
5,830

 
17,282

 
7,186

Income taxes payable
361

 
447

 

Revolving credit facility
20,000

 

 
12,590

Deferred revenue - current
4,204

 
3,679

 
4,018

Total current liabilities
61,651

 
48,188

 
61,930

Long-term obligations, excluding current installments, net
78,188

 
1,940

 
1,895

Deferred revenue and other - non-current
4,799

 
5,622

 
7,870

Operating lease liabilities - non-current
17,986

 

 

Financing lease liabilities - non-current
627

 

 

Deferred income tax liability
11,247

 
537

 
919

Long-term income taxes payable

 

 
1,070

Total liabilities
174,498

 
56,287

 
73,684

Commitments and contingencies
 

 
 

 
 
Equity:
 

 
 
 
 

Common stock, $0.01 par value per share, 22,000,000, 22,000,000 and 21,200,000 shares authorized, 16,211,564, 14,048,528 and 14,024,111 shares issued and outstanding, respectively
162

 
140

 
140

Voting, non-economic preferred stock, $0.01 par value per share, 1,616,667, 0 and 0 shares authorized, issued and outstanding, respectively
16

 

 

Additional paid-in capital
66,264

 
12,552

 
11,769

Accumulated other comprehensive loss, net of taxes
(1,605
)
 
(1,910
)
 
(1,539
)
Retained earnings
77,348

 
92,932

 
75,706

Total equity attributable to Liberty Tax, Inc.
142,185

 
103,714

 
86,076

Non-controlling interest
66,042

 

 

Total equity
208,227

 
103,714

 
86,076

Total liabilities and equity
$
382,725

 
$
160,001

 
$
159,760


See accompanying notes to condensed consolidated financial statements.

2



LIBERTY TAX, INC. AND SUBSIDIARIES

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

 
 

Franchise fees
 
$
332

 
$
557

Area Developer fees
 
1,110

 
1,028

Royalties and advertising fees
 
1,450

 
1,562

Financial products
 
740

 
579

Interest income
 
1,656

 
1,656

Assisted tax preparation fees, net of discounts
 
597

 
1,518

Electronic filing fees
 
49

 
28

Agreement, club and damage waiver fees
 
282

 

Lease revenue, net
 
1,334

 

Retail sales, net
 
118

 

Other revenues
 
527

 
235

Total revenues
 
8,195

 
7,163

Operating expenses:
 
 

 
 

Employee compensation and benefits
 
8,243

 
10,769

Selling, general, and administrative expenses
 
17,155

 
11,304

Area Developer expense
 
136

 
304

Advertising expense
 
1,349

 
1,685

Cost of sales - leasing
 
540

 

Cost of sales - retail
 
93

 

Depreciation, amortization, and impairment charges
 
3,986

 
3,194

Restructuring expense
 

 
8,266

Total operating expenses
 
31,502

 
35,522

Loss from operations
 
(23,307
)
 
(28,359
)
Other income (expense):
 
 
 
 
Foreign currency transaction gain
 
1

 
2

Interest expense
 
(964
)
 
(530
)
Loss before income taxes
 
(24,270
)
 
(28,887
)
Income tax benefit
 
(5,132
)
 
(9,516
)
Net loss
 
(19,138
)
 
(19,371
)
Less: Net loss attributable to non-controlling interest
 
3,235

 

Net loss attributable to Liberty Tax, Inc.
 
$
(15,903
)
 
$
(19,371
)
 
 
 
 
 
Net loss per share of common stock:
 
 
 
 
Basic and diluted
 
$
(1.09
)
 
$
(1.48
)
 
 
 
 
 
Weighted-average shares outstanding basic and diluted
 
14,555,330

 
13,078,091


See accompanying notes to condensed consolidated financial statements.


3



LIBERTY TAX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Operations
Three Months Ended July 31, 2019 (unaudited) and 2018 (unaudited)
(In thousands)
 
 
 
Three Months Ended July 31,
 
 
2019
 
2018
Net loss
 
$
(19,138
)
 
$
(19,371
)
Other comprehensive loss
 
 
 
 
Unrealized (loss) gain on interest rate swap agreement, net of taxes of $(15) and $17, respectively
 
(38
)
 
10

Foreign currency translation adjustment
 
343

 
(202
)
Other comprehensive gain (loss)
 
305

 
(192
)
Comprehensive loss
 
(18,833
)
 
(19,563
)
Less: comprehensive loss attributable to non-controlling interest
 
3,160

 

Comprehensive loss attributable to Liberty Tax, Inc.
 
$
(15,673
)
 
$
(19,563
)

 See accompanying notes to condensed consolidated financial statements.


4



LIBERTY TAX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders' Equity
Three Months Ended July 31, 2019 (unaudited) and 2018 (unaudited)
(In thousands)
 
 
Shares
 
Common stock
 
Shares
 
Preferred stock
 
Additional paid-in-capital
 
Accumulated other comprehensive loss
 
Retained earnings
 
Total Liberty Tax Equity
 
Non-controlling interest
 
Total Equity
Balance at May 1, 2019
14,049

 
$
140

 

 
$

 
$
12,552

 
$
(1,910
)
 
$
92,932

 
$
103,714

 

 
$
103,714

Cumulative effect of adopted accounting standards, net

 

 

 

 

 

 
319

 
319

 

 
319

Buddy's Acquisition - issuance of Preferred Stock and New Holdco LLC units

 

 
1,617

 
16

 
96,984

 

 

 
97,000

 

 
97,000

Buddy's Acquisition - non-controlling interest in New Holdco LLC

 

 

 

 
(69,277
)
 

 

 
(69,277
)
 
69,277

 

Net loss

 

 

 

 

 

 
(15,903
)
 
(15,903
)
 
(3,235
)
 
(19,138
)
Total other comprehensive loss

 

 

 

 

 
305

 

 
305

 

 
305

Exercise of stock options
29

 

 

 

 
306

 

 

 
306

 

 
306

Stock-based compensation, net of taxes
51

 
1

 

 

 
720

 

 

 
721

 

 
721

Issuance of common stock related to Buddy's
2,083

 
21

 

 

 
24,979

 

 

 
25,000

 

 
25,000

Balance at July 31, 2019
16,212

 
$
162

 
1,617

 
$
16

 
$
66,264

 
$
(1,605
)
 
$
77,348

 
$
142,185

 
$
66,042

 
$
208,227



 
Shares
 
Class A common stock
 
Shares
 
Class B common stock
 
Shares
 
Special voting preferred stock
 
Shares
 
Exchangeable stock
 
Additional paid-in-capital
 
Accumulated other comprehensive loss
 
Retained earnings
 
Total Equity
Balance at May 1, 2018
12,823

 
$
128

 
200

 
$
2

 

 
$

 
1,000

 
$
10

 
$
11,570

 
$
(1,347
)
 
$
101,138

 
$
111,501

Cumulative effect of adopted accounting standards, net

 

 

 

 

 

 

 

 

 

 
(3,794
)
 
(3,794
)
Net loss

 

 

 

 

 

 

 

 

 

 
(19,371
)
 
(19,371
)
Total other comprehensive loss

 

 

 

 

 

 

 

 

 
(192
)
 

 
(192
)
Stock-based compensation, net of taxes
1

 

 

 

 

 

 

 

 
199

 

 

 
199

Conversion of Class B shares to Class A shares
1,200

 
12

 
(200
)
 
(2
)
 

 

 

 

 

 

 

 
10

Conversion of preferred stock to common stock

 

 

 

 

 

 
(1,000
)
 
(10
)
 

 

 

 
(10
)
Cash Dividends

 

 

 

 

 

 

 

 

 

 
(2,267
)
 
(2,267
)
Balance at July 31, 2018
14,024

 
$
140

 

 
$

 

 
$

 

 
$

 
$
11,769

 
$
(1,539
)
 
$
75,706

 
$
86,076


See accompanying notes to condensed consolidated financial statements.

5



LIBERTY TAX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
Three Months Ended July 31, 2019 (unaudited) and 2018 (unaudited)
(In thousands)

 
 
 
Three Months Ended July 31,
 
 
2019
 
2018
Cash flows from operating activities:
 
 

 
 

Net loss
 
(19,138
)
 
$
(19,371
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 

 
 

Provision for doubtful accounts
 
1,725

 
1,939

Depreciation, amortization, and impairment charges
 
3,986

 
3,194

Amortization of deferred financing costs
 
676

 
102

Loss on disposal of fixed and intangible assets
 
548

 
4,083

Stock-based compensation expense
 
741

 
205

Gain on sale of available-for-sale securities
 
(127
)
 

Gain on bargain purchases and sales of Company-owned offices
 

 
55

Equity in gain (loss) of affiliate
 
74

 
(8
)
Deferred tax expense
 

 
45

Changes in accrued income taxes
 
(5,190
)
 
(9,489
)
Changes in other assets and liabilities
 
6,651

 
5,587

Net cash used in operating activities
 
(10,054
)
 
(13,658
)
Cash flows from investing activities:
 
 

 
 

Issuance of operating loans to franchisees and ADs
 
(7,247
)
 
(8,850
)
Payments received on operating loans to franchisees
 
749

 
1,390

Purchases of AD rights, Company-owned offices and acquired customer lists
 
(646
)
 
(58
)
Purchases of property, equipment and software
 
(337
)
 
(769
)
Net cash used in investing activities
 
(7,481
)
 
(8,287
)
Cash flows from financing activities:
 
 
 
 

Proceeds from the exercise of stock options
 
306

 

Issuance of common stock
 
25,000

 

Repayment of long-term obligations
 
(12,911
)
 
(2,901
)
Borrowings under revolving credit facility
 
20,000

 
12,717

Repayments under revolving credit facility
 
(24,971
)
 
(127
)
Issuance of debt
 
82,000

 

Payment of debt issuance costs
 
(4,423
)
 

Cash paid for taxes on exercises/vesting of stock-based compensation
 
(21
)
 
(6
)
Net cash provided by financing activities
 
84,980

 
9,683

Effect of exchange rate changes on cash, net
 
142

 
(74
)
Net increase (decrease) in cash and cash equivalents
 
67,587

 
(12,336
)
Cash and cash equivalents at beginning of period
 
22,983

 
18,522

Cash and cash equivalents at end of period
 
$
90,570

 
$
6,186


See accompanying notes to condensed consolidated financial statements.


6



LIBERTY TAX, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
Three Months Ended July 31, 2019 (unaudited) and 2018 (unaudited)
(In thousands)
 
 
 
Three Months Ended July 31,
 
 
2019
 
2018
Supplemental disclosures of cash flow information:
 
 

 
 

Cash paid for interest, net of capitalized interest of $4 and $3, respectively
 
$
251

 
$
522

Cash paid for taxes, net of refunds
 
(72
)
 
(16
)
Accrued capitalized software costs included in accounts payable
 
36

 
117

During the three months ended July 31, 2019 and 2018, the Company acquired certain assets from ADs, franchisees, and third parties as follows:
 
 
 
 
Fair value of assets purchased
 
$
3,696

 
$
1,840

Receivables applied, net of amounts written off, due ADs and related deferred revenue
 
(2,132
)
 
(289
)
Bargain purchase gains
 
(124
)
 
(191
)
Long-term obligations and accounts payable issued to seller
 
(794
)
 
(1,302
)
Cash paid to ADs, franchisees and third parties
 
$
646

 
$
58

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

 
 

Book value of assets sold
 
$

 
$
1,163

Gain (loss) on sale - gain (loss) recognized
 

 
(72
)
Notes received
 

 
(312
)
Restructuring
 

 
(779
)
Cash received from ADs and franchisees
 
$

 
$


See accompanying notes to condensed consolidated financial statements.


7



LIBERTY TAX, INC. AND SUBSIDIARIES
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
July 31, 2019 and 2018
 
(1) Organization and Significant Accounting Policies
 
Description of Business
Liberty Tax, Inc. (the "Company"), a Delaware corporation, franchises and, to a lesser degree, operates a system of tax preparation and rent-to-own stores. On July 10, 2019, the Company formed Franchise Group New Holdco, LLC (“New Holdco”), which completed the acquisition of Buddy's Newco, LLC ("Buddy's") as described in "Note 2. Acquisition" in exchange for units of New Holdco ("New Holdco units") and voting non-economic preferred stock ("Preferred Stock") in the Company. New Holdco holds all of the Company’s operating subsidiaries.

The Company currently operates in two reportable segments: Liberty Tax and Buddy’s. The Company provides income tax services in the United States of America (the "U.S.") and Canada through its Liberty Tax segment and its Buddy's segment leases and sells electronics, residential furniture, appliances and household accessories.

The Company’s operating revenues are seasonal in nature, particularly as related to the Liberty Tax segment, which has peak revenues occurring in the months of January through April.  Therefore, results for interim periods are not indicative of results to be expected for the full year.
 
Basis of Presentation
 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 is the sole managing member of New Holdco and possesses ownership of more than 50 percent of the outstanding voting shares. As a result, the Company consolidates the financial results of New Holdco and reports a non-controlling interest that represents the economic interest held by the former equity holders of Buddy's (the "Buddy's Members"). The assets and liabilities of New Holdco reflect substantially all of the Company’s consolidated assets and liabilities with the exception of certain cash balances and deferred tax liabilities. As of July 31, 2019, the Company had an ownership interest of 63.6% in New Holdco and reported a non-controlling interest equal to 36.4%.

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 variable interest entity ("VIE"). Based on the results of management's analysis of potential VIEs, the Company has not consolidated any franchisee entities. The Company's maximum exposure to loss resulting from involvement with potential VIEs is attributable to accounts and notes receivables and future lease payments due from franchisees. When the Company does not have a controlling interest in an entity but has the ability to exert significant influence over the entity, the Company applies the equity method of accounting. Intercompany balances and transactions have been eliminated in consolidation.

Inventory primarily consists of new, previously rented or currently rented consumer electronics and household goods and is recorded at cost, including shipping and handling fees. All lease merchandise is available for lease or sale. On a weekly basis, all damaged, lost, stolen, or unsalable merchandise identified is written off. Maintenance and repairs of lease merchandise are charged to operations as incurred.

Assets and liabilities of the Company's Canadian operations have been translated into U.S. dollars using the exchange rate in effect at the end of the period. Revenues and expenses have been translated using the average exchange rates in effect each month of the period. Foreign exchange transaction gains and losses are recognized when incurred. The Company reclassifies to accounts payable checks issued in excess of funds available and reports them as cash flow from operating activities.

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information.  The condensed consolidated financial statements, including these notes, are unaudited and exclude some of the disclosures required only in

8



annual financial statements.  The consolidated balance sheet data as of April 30, 2019 was derived from the Company’s April 30, 2019 Annual Report on Form 10-K filed on June 27, 2019.
 
In the opinion of management, all adjustments necessary for a fair presentation of such condensed consolidated financial statements in accordance with GAAP have been recorded.  These adjustments consisted only of normal recurring items.  The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in its April 30, 2019 Annual Report on Form 10-K filed on June 27, 2019.

Use of Estimates

Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period, to prepare these condensed consolidated financial statements and accompanying notes in conformity with GAAP. Actual results could differ from those estimates.

Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, "Leases (Topic 842)" and subsequent amendments, which replaced previous lease accounting guidance in GAAP and require lessees to recognize right-of-use assets and corresponding lease liabilities on the consolidated balance sheets for all in-scope leases with a term of greater than 12 months and require disclosure of certain quantitative and qualitative information pertaining to an entity's leasing arrangements. The Company adopted the requirements of the standard in the first quarter of fiscal 2020, using the optional effective transition method provided by accounting pronouncement, ASU No. 2018-11, "Leases (Topic 842): Targeted Improvements." ASU 2018-11 allows entities to initially apply ASU 2016-02 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, the Company's reporting for comparative periods presented in the year of adoption will continue to be in according with ASC 840, "Leases (Topic 840)" ("ASC 840"). The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, permitted the Company to carry forward the historical lease classification for leases that commenced before the effective date of the new standard. The Company elected to not separate non-lease components from lease components for all classes of underlying assets, as a lessee and as a lessor. The Company did not elect the hindsight practical expedient, which permits the use of hindsight when determining lease term and impairment of right-of-use assets. Adoption of the standard resulted in the recognition of lease right-of use assets of $8.4 million, lease liabilities of $8.6 million and a reduction to retained earnings of $0.3 million, net of tax, as of April 30, 2019. The adoption of the standard did not have a material impact on the Company's condensed consolidated statements of operations or condensed consolidated statements of cash flows. Refer to "Note 8. Leases" for additional information related to the Company's accounting for leases.

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

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


9



(2) Acquisition

On July 10, 2019 (the "Buddy's Acquisition Date"), the Company entered into and completed certain transactions contemplated by an Agreement of Merger and Business Combination Agreement with Buddy's, New Holdco, a wholly-owned direct subsidiary of the Company, Franchise Group B Merger Sub, LLC, a wholly-owned indirect subsidiary of New Holdco and Vintage RTO, L.P., solely in its capacity as the representative of the Buddy's Members, to acquire Buddy's in a stock transaction (the "Buddy's Acquisition"). At the Buddy's Acquisition Date, each outstanding unit of Buddy's was converted into the right to receive 0.459315 New Holdco units and 0.091863 shares of Preferred Stock. The Buddy's Members may elect, following an initial six-month lockup period, to cause New Holdco and the Company to redeem one New Holdco Unit and one-fifth of a share of Preferred Stock in exchange for one share of common stock of the Company. As of the Buddy's Acquisition Date, on an as-converted basis, the Buddy's Members' aggregate ownership of New Holdco units and shares of Preferred Stock represent approximately 36.44% of the Company's outstanding common stock, which implies an enterprise value for Buddy's of approximately $122 million and an equity value of $12.00 per share of common stock. The Company is the sole managing member of New Holdco which will be consolidated for financial reporting purposes. New Holdco units held by the Buddy's Members will be recorded as a non-controlling interest on the consolidated financial statements. The assets acquired and the liabilities assumed in the business combination are recorded at fair value in accordance with ASC 805, "Business Combinations."

The Company and the Buddy's Members also entered into an income tax receivable agreement (the "TRA") pursuant to which, subject to certain exceptions set forth in the TRA, the Company will pay the Buddy's Members 40% of the cash savings, if any, in federal, state and local taxes that the Company realizes or is deemed to realize as a result of any increases in tax basis of the assets of New Holdco resulting from future redemptions or exchanges of New Holdco units held by the Buddy's Members. In connection with the Buddy's Acquisition, none of the New Holdco units were to be purchased or exchanged by the Company and the Buddy's Members. Accordingly, the Company is not obligated to make any TRA payments to the Buddy's Members and therefore has not recorded an initial TRA or contingent consideration liability. In future periods, to the extent that Buddy’s Members exchange their New Holdco units that results in an increase in tax basis of the assets of New Holdco, the Company will initially record an estimated TRA liability equal to the portion of realizable tax benefits that are probable to the Buddy’s Members as an adjustment to additional paid-in capital.

The purchase price is calculated as follows:
 
 
(In thousands except per share)
Number of New Holdco units issued to Buddy’s Members that are exchanged into Company common stock
 
8,083

Estimated fair value per unit issued to Buddy’s (a)
 
$
12.00

Equity consideration
 
$
97,000


(a) The fair value per unit of $12.00 was determined based on the estimated enterprise value of Buddy’s negotiated and agreed in connection with the Buddy's Acquisition. This price also approximates the estimated fair value of the Company's common stock.

The table below summarizes the preliminary estimates of the fair values of the identifiable assets acquired and liabilities assumed in the Buddy's Acquisition as of the Buddy's Acquisition Date. The preliminary estimates of the fair value of identifiable assets acquired and liabilities assumed are subject to revisions, which may result in adjustment to the preliminary values presented below, when management's appraisals and estimates are finalized. The Company is awaiting additional information to finalize the valuation of various balances, which include the acquired intangible assets, measurement of the lease right-of-use assets, and certain tax-related balances.

10



 
 
(In thousands)
Cash and cash equivalents
 
$
181

Accounts receivable
 
13,658

Other current assets
 
10,911

Property, equipment, and software, net
 
1,613

Goodwill
 
86,147

Other intangible assets, net
 
28,900

Lease right-of-use assets
 
13,428

Other assets
 
857

Total Assets
 
155,695

Current portion of operating lease liabilities
 
1,939

Current portion of financing lease liabilities
 
442

Accounts payable and accrued expenses
 
5,354

Revolving credit facility
 
24,971

Deferred revenue - current and non-current
 
819

Operating lease liabilities - non-current
 
13,834

Financing lease liabilities - non-current
 
627

Deferred income tax liability
 
10,709

Total Liabilities
 
58,695

Consideration transferred
 
$
97,000


Goodwill is calculated as the excess of the purchase price over the fair value of the net assets acquired. The goodwill recognized is attributable to operational synergies in the expected franchise models and growth opportunities.

Intangible assets, net consist of two separately identified assets. The Company identified the Buddy's tradename as an indefinite-lived intangible asset with a fair value of $11.1 million. The tradename is not subject to amortization but will be evaluated annually for impairment. The Company also recognized an asset of $10.1 million for franchise agreements and $7.7 million for customer contracts. The allocation of the purchase price to intangible assets as well as their estimated useful lives is preliminary and may be adjusted.

Lease right-of-use assets and lease liabilities consists of leases for retail store locations and also leases for vehicles and office equipment. The lease right of use assets incorporate an adjustment of $2.3 million, net for favorable and unfavorable Buddy's leases (as compared to prevailing market rates) which will be amortized over the remaining lease terms.

The results of operations of Buddy's are included in the Company's results of operations beginning July 11, 2019. From July 11, 2019 through July 31, 2019, Buddy's generated net revenues of $2.6 million and net income of less than $0.1 million.

The following unaudited consolidated pro forma summary has been prepared by adjusting the Company's historical data to give effect to the Buddy's Acquisition as if it had occurred on May 1, 2018:

 
 
Pro Forma - Unaudited
 
 
3 Months Ended
 
 
July 31, 2019
 
July 31, 2018
 
 
(In thousands)
Revenues
 
$
18,626

 
$
20,490

Net loss
 
$
(13,340
)
 
$
(20,548
)

The unaudited consolidated pro forma financial information was prepared in accordance with existing standards and is not necessarily indicative of the results of operations that would have occurred if the Buddy's Acquisition had been completed on the date indicated, nor is it indicative of the future operating results of the Company.

11



The unaudited pro forma results do not reflect events that either have occurred or may occur after the Buddy's Acquisition, including, but not limited to, the anticipated realization of operating synergies in subsequent periods. They also do not give effect to certain charges that the Company expects to incur in connection with the Buddy's Acquisition, including, but not limited to, additional professional fees, employee integration, potential asset impairments and amortization charges.


(3) Accounts and Notes Receivable
 
The Company provides select financing to the Liberty Tax segment, area developers ("ADs") and franchisees for the purchase of franchises, areas, Company-owned offices, and operating loans for working capital and equipment needs. The franchise-related notes generally are payable over five years and the operating loans generally are due within one year. Most notes bear interest at an annual rate of 12%

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

At July 31, 2019, the Company had an unfunded lending commitment for working capital loans to franchisees and ADs of $15.4 million through the end of the current fiscal year.

Analysis of Past Due Receivables

The breakdown of accounts and notes receivable past due at July 31, 2019 was as follows:
 
 
Past due
 
Current
 
Interest receivable, net
 
Total
receivables
 
 
(In thousands)
Accounts receivable
 
$
40,197

 
$
7,158

 
$

 
$
47,355

Notes and interest receivable, net (1)
 
12,253

 
19,797

 
1,826

 
33,876

Total accounts, notes and interest receivable
 
$
52,450

 
$
26,955

 
$
1,826

 
$
81,231


(1) Interest receivable is shown net of an allowance for uncollectible interest of $2.5 million.

Accounts receivable are considered to be past due if unpaid 30 days after billing, and notes receivable are considered past due if unpaid 90 days after the due date. If it is determined the likelihood of collecting substantially all of the notes and accrued interest is not probable, the notes are put on non-accrual status. The Company’s investment in notes receivable on non-accrual status was $12.3 million, $15.6 million and $13.4 million at July 31, 2019, April 30, 2019, and July 31, 2018, respectively. Payments received on notes in non-accrual status are applied to the principal until the note is current and then to interest income. Non-accrual notes that are paid current and expected to remain current are moved back into accrual status during the next annual review.

Allowance for Doubtful Accounts

The adequacy of the allowance for doubtful accounts is assessed on a quarterly basis and adjusted as deemed necessary. Management believes the recorded allowance is adequate based upon its consideration of the estimated fair value of the franchises and AD areas collateralizing the receivables. Any adverse change in the tax preparation industry or the individual franchise or AD areas could affect the Company's estimate of the allowance.


12



Activity in the allowance for doubtful accounts for the three months ended July 31, 2019 and 2018 was as follows: 
 
 
Three Months Ended July 31,
 
 
2019
 
2018
 
 
(In thousands)
Balance at beginning of period
 
$
11,816

 
$
12,487

Provision for doubtful accounts
 
1,725

 
1,939

Write-offs
 
(2,121
)
 
(840
)
Foreign currency adjustment
 
38

 
(27
)
Balance at end of period
 
$
11,458

 
$
13,559


Management considers specific accounts and notes receivable to be impaired if the net amounts due exceed the fair value of the underlying franchise at the time of the annual valuation performed as of April 30 of each year and estimates an allowance for doubtful accounts based on that excess. At the end of each fiscal quarter, the Company considers the activity during the period for accounts and notes receivable impaired at each prior fiscal year end and adjusts the allowance for doubtful accounts accordingly. While not specifically identifiable as of the balance sheet date, the Company's analysis of its experience also indicates that a portion of other accounts and notes receivable may not be collectible. Net amounts due include contractually obligated accounts and notes receivable plus accrued interest, reduced by unrecognized revenue, the allowance for uncollected interest, amounts due ADs, and amounts owed to the franchisee by the Company.


(4) Restructuring Expense

In fiscal 2018, the Company began restructuring initiatives involving a review of Liberty Tax-owned stores and service providers to improve the Company's overall long-term profitability. The Company incurred $8.3 million of expenses in the three months ended July 31, 2018 related to these initiatives. The expenses incurred are presented in the Restructuring expense line item in the accompanying consolidated statements of operations. The restructuring initiatives were completed in October 2018. The composition of the restructuring expenses incurred for the three months ended July 31, 2018 were as follows:

Expense
 
Cash
 
Accrued Expenses
 
Non-cash
 
Total Expense
 
 
(In thousands)
Property and intangible impairments and exit costs
 
193

 
3,859

 
4,214

 
8,266

Total
 
$
193

 
$
3,859

 
$
4,214

 
$
8,266


The property and intangible impairments and exit costs, which were primarily recorded in assets held for sale, were comprised of expenses related to lease obligations and non-cash charges associated with intangible write-downs. The accrued restructuring expenses of $3.9 million are included in "Accounts payable and accrued expenses" in the accompanying consolidated balance sheets.

A summary of the activity in accrued expenses related to restructuring initiatives for the three months ended July 31, 2019 and 2018 is as follows:

 
 
Three Months Ended July 31, 2019
 
 
Contract termination costs
 
Property and intangible impairments and exit costs
 
Total accrued expenses
 
 
(In thousands)
Balance at beginning of period
 
$
690

 
$
1,467

 
$
2,157

Cash payments
 

 
(190
)
 
(190
)
Balance at end of period
 
$
690

 
$
1,277

 
$
1,967



13



 
 
Three Months Ended July 31, 2018
 
 
Contract termination costs
 
Property and intangible impairments and exit costs
 
Total accrued expenses
 
 
(In thousands)
Balance at beginning of period
 
$
1,359

 
$

 
$
1,359

Additions accrued against the liability
 

 
3,859

 
3,859

Balance at end of period
 
$
1,359

 
3,859

 
$
5,218



(5) Goodwill and Intangible Assets 

Changes in the carrying amount of goodwill for the three months ended July 31, 2019 and 2018 were as follows:
 
 
July 31, 2019
 
July 31, 2018
 
 
(In thousands)
Balance at beginning of period
 
$
6,566

 
$
8,640

Acquisitions of assets from franchisees and others
 
1,822

 

Buddy's Acquisition
 
86,147

 

Disposals and foreign currency changes, net
 
18

 
(643
)
Balance at end of period
 
$
94,553

 
$
7,997

Components of intangible assets were as follows as of July 31, 2019, April 30, 2019 and July 31, 2018:
 
 
July 31, 2019
 
 
Weighted average amortization period
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
 
 
(In thousands)
Tradenames (1)
 
3 years
 
11,425

 
(55
)
 
11,370

Franchise agreements acquired in Buddy's Acquisition
 
10 years
 
10,100

 
(56
)
 
10,044

Customer contracts acquired in Buddy's Acquisition
 
6 years
 
7,700

 
(71
)
 
7,629

Non-compete agreements
 
2 years
 
64

 

 
64

Assets acquired from franchisees:
 
 
 
 
 
 
 
 
Customer lists
 
4 years
 
2,712

 
(1,361
)
 
1,351

Reacquired rights
 
2 years
 
1,925

 
(1,462
)
 
463

AD rights
 
9 years
 
33,136

 
(14,971
)
 
18,165

Total intangible assets
 
 
 
$
67,062

 
$
(17,976
)
 
$
49,086


(1) $11.1 million of tradenames was acquired in the Buddy's Acquisition which have an indefinite life. It is tested for impairment on an annual basis.

14



 
 
April 30, 2019
 
 
Weighted average amortization period
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
 
 
(In thousands)
Customer lists acquired from unrelated third parties
 
5 years
 
$
1,027

 
$
(1,027
)
 
$

Tradenames
 
3 years
 
108

 
(52
)
 
56

Assets acquired from franchisees:
 
 
 
 
 
 
 
 
Customer lists
 
4 years
 
2,015

 
(1,288
)
 
727

Reacquired rights
 
2 years
 
1,660

 
(1,380
)
 
280

AD rights
 
9 years
 
32,271

 
(14,173
)
 
18,098

Total intangible assets
 
 
 
$
37,081

 
$
(17,920
)
 
$
19,161


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

 
$
(1,700
)
 
$
1,487

Tradenames
 
3 years
 
539

 
(252
)
 
287

Non-compete agreements
 
2 years
 
241

 
(175
)
 
66

Assets acquired from franchisees:
 
 
 
 
 
 
 
 
Customer lists
 
4 years
 
1,459

 
(1,220
)
 
239

Reacquired rights
 
2 years
 
1,157

 
(1,122
)
 
35

AD rights
 
10 years
 
32,002

 
(11,351
)
 
20,651

Total intangible assets
 
 
 
$
38,585

 
$
(15,820
)
 
$
22,765


The Company acquired $0.9 million and $1.3 million of AD rights during the three months ended July 31, 2019 and 2018, respectively.
During the three months ended July 31, 2019 and 2018, the Company recorded intangible assets of $32.9 million, and $1.9 million, respectively, from various acquisitions. During the three months ended July 31, 2019, $28.9 million of the assets acquired pertained to the Buddy’s Acquisition and the remaining intangible assets were acquired from franchisees and other third parties. During the three months ended July 31, 2018, the majority of assets acquired from franchisees and third parties in the U.S. were recorded as assets held for sale, while assets acquired in Canada were recorded as intangible assets.

(6) Assets Held For Sale

In the third quarter of fiscal 2019, the Company reclassified all assets associated with its U.S. Liberty Tax-owned offices from assets held for sale to reacquired rights, customer lists and goodwill. Prior to the third quarter of fiscal 2019, assets acquired from U.S. franchisees were classified as assets held for sale. During the three months ended July 31, 2018, the Company acquired less than $0.1 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 less than $0.1 million and goodwill of less than $0.1 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.


15



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

 
$
8,941

Reacquired and acquired from third parties

 
37

Sold or terminated, impairments and other

 
(3,747
)
Balance at end of period
$

 
$
5,231



(7) Revenue

For detail regarding the principal activities from which the Liberty Tax segment generates its revenue, see "Note 1. Description of Business and Summary of Significant Accounting Policies" in the Company’s April 30, 2019 Annual Report on Form 10-K filed on June 27, 2019. The following is a description of the principal activities from which the Buddy's segment generates its revenues. For more detailed information regarding reportable segments, see "Note 16. Segments."

Rental-Purchase Agreements: The Company provides merchandise, consisting of consumer electronics, computers, residential furniture, appliances, and household accessories to its customers pursuant to rental purchase agreement which provide for weekly, semi-monthly or monthly rental terms with non-refundable rental payments. At the expiration of each rental term customers renew the rental agreement by pre-paying for the next rental term. Customers have the option to purchase the leased goods at any point in the lease term. Customers can terminate the agreement at the end of any rental term without penalty. Therefore, rental transactions are accounted for as operating leases and rental revenue is recognized over the rental term. Cash received prior to beginning of the lease term is recorded as deferred revenue. Revenue related to various payment, reinstatement or late fees are recognized when paid by the customer at the point service is provided. The Company offers additional product plans along with rental agreements which provide customers with liability protection against significant damage or loss of a product, and club membership benefits, including various discounts programs and product service and replacement benefits in the event merchandise is damaged or lost. Customers renew product plans in conjunction with their rental term renewals and can cancel the plans at any time. Revenue for product plans is recognized over the term of the plan.

Merchandise Sales: Merchandise sales include payments received for the exercise of the early purchase option offered through rental purchase agreements or merchandise sold through point of sale transactions. Revenue for merchandise sales is recognized when payment is received, and ownership of the merchandise passes to the customer. The remaining net value of merchandise sold is recorded to cost of sales at the time of the transaction.

Contract Balances

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

 
 
July 31, 2019
 
April 30, 2019
 
July 31, 2018
 
 
(In thousands)
Notes receivable
 
$
32,050

 
$
28,542

 
$
39,284

Deferred revenue
 
8,553

 
8,654

 
10,938



16



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

 
 
Three Months Ended
 
 
July 31, 2019
 
 
(In thousands)
Deferred franchise and AD fees at beginning of period
 
$
8,654

Revenue recognized during the period
 
(1,451
)
Deferred revenue assumed from the Buddy's Acquisition
 
819

New deferrals (terminations) of franchise and AD fees
 
531

Deferred franchise and AD fees at end of period
 
$
8,553


Anticipated Future Recognition of Deferred Revenue

The following table reflects the estimated deferred revenue expected to be recognized in the future related to performance obligations that are unsatisfied at the end of the period:

 
 
Estimate for Fiscal Year
 
 
(In thousands)
2020 (1)
 
$
1,781

2021
 
2,769

2022
 
1,743

2023
 
1,012

2024
 
358

Thereafter
 
890

Total
 
$
8,553


(1) Represents franchise and AD fees expected to be recognized for the remainder of fiscal 2020. The amount does not include $1.5 million of franchise and AD fee revenues recognized for the three months ended July 31, 2019.


(8) Leases

The Company's lease portfolio primarily consists of leases for its retail store locations and vehicles. The Company also leases certain office equipment under finance leases. The Company subleases some of its real estate and equipment leases. The Company determines if an arrangement is a lease at inception by evaluating whether the arrangement conveys the right to use an identified asset and whether the Company obtains substantially all of the economic benefits from and has the ability to direct the use of the asset. Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheets; the Company recognizes expense for these leases on a straight-line basis over the lease term. For leases with an initial term in excess of 12 months, lease right-of-use assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the committed lease term at the lease commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate and the information available at the lease commencement date in determining the present value of future lease payments. Most leases include one or more options to renew and the exercise of renewal options is at the Company’s sole discretion. The Company does not include renewal options in its determination of the lease term unless the renewals are deemed to be reasonably assured at lease commencement. Operating lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Lease right-of-use assets are periodically reviewed for impairment losses. The Company uses the long-lived assets impairment guidance in ASC Subtopic 360-10, “Property, Plant, and Equipment - Overall,” to determine whether a right-of-use asset is impaired, and if so, the amount of the impairment loss to recognize.

The Company has lease agreements with lease and non-lease components, which the Company elects to combine as one lease component for all classes of underlying assets. Non-lease components include variable costs based on actual costs incurred by the lessor related to the payment of real estate taxes, common area maintenance, and insurance. These variable payments are expensed as incurred as variable lease costs.

17




The lease cost for leases that was recognized in the accompanying unaudited condensed statement of operations for the three months ended July 31, 2019 was as follows:
 
 
(In thousands)
Operating lease costs
 
$
1,496

Short-term operating lease costs
 
4

Variable operating lease cost
 
19

Sublease income
 
(645
)
Total operating lease cost
 
$
874

 
 
 
Finance lease cost
 
 
Amortization of right-of-use assets
 
$
29

Interest on lease liabilities
 
3

Total finance lease cost
 
$
32


As of July 31, 2019, maturities of lease liabilities were as follows:

 
 
Operating leases
 
Finance leases
 
 
(In thousands)
2020
 
$
5,977

 
$
328

2021
 
5,563

 
437

2022
 
3,702

 
261

2023
 
2,382

 
56

2024
 
1,947

 

Thereafter
 
8,741

 

Total undiscounted lease payments
 
28,312

 
1,082

Less interest
 
3,953

 
47

Present value of lease liabilities
 
$
24,359

 
$
1,035


Information regarding the weighted-average remaining lease term and the weighted-average discount rate for leases as of July 31, 2019 included a weighted-average remaining lease term of 6.2 years for operating leases and 2.6 years for finance leases and a weighted-average discount rate of 4.8% for operating leases and 3.7% for finance leases.

The right-of-use asset for finance leases as of July 31, 2019 amounts to $1.0 million and is included in property, equipment, and software, net.

The following represents other information pertaining to the Company's lease arrangements for the three months ended July 31, 2019:

 
 
(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
 
$
1,575

Operating cash flows from finance leases
 
3

Financing cash flows from finance leases
 
38


As previously disclosed in the Company's Annual Report on Form 10-K for the year ended April 30, 2019 and in accordance with ASC 840, future minimum lease payments under non-cancellable operating leases with initial lease terms in excess of one year, together with amounts due from franchisees under subleases, were as follows as of April 30, 2019:

18



 
 
Lease payments
 
Sublease receipts
 
 
(In thousands)
Year ending April 30:
 
 
 
 
   2020
 
$
5,164

 
$
1,593

   2021
 
2,387

 
673

   2022
 
1,166

 
320

   2023
 
352

 
180

   2024
 
32

 
24

   Thereafter
 
51

 
77

       Total minimum lease payments
 
$
9,152

 
$
2,867



(9) Long-Term Obligations
 
Buddy's Credit Agreement

On July 10, 2019 as part of the Buddy's Acquisition, the Company, through a wholly owned subsidiary, entered into a Credit Agreement (the "Buddy's Credit Agreement") that provides for an $82.0 million first priority senior secured term loan which matures on July 10, 2024. The term loan will bear interest, at the option of the Company, at either (i) a rate per annum based on London Interbank Offered Rate ("LIBOR") for an interest period of one, two, three or six months (a "LIBOR Loan"), plus an interest rate margin of 8.0% with a 1.50% LIBOR floor, payable in arrears at the end of each applicable interest period or (ii) an alternate base rate determined as provided in the Buddy's Credit Agreement, plus an interest rate margin of 7.0% (an "ABR Loan") with a 2.50% alternate base rate floor, payable in arrears on the first day of each fiscal quarter. If the consolidated leverage ratio exceeds certain thresholds set forth in the Buddy's Credit Agreement, the Company will also be required to pay an additional 2.0% interest to be paid in-kind. The obligation under the Buddy's Credit Agreement are guaranteed by certain subsidiaries of the Company and secured on a first priority basis by the assets of Buddy's. A portion of the proceeds of the Buddy's Credit Agreement were used to terminate the outstanding revolving credit facility of Buddy's.

The Company is required to repay the Buddy's Credit Agreement in equal quarterly installments of $1,025,000 on the first day of each calendar quarter, commencing on October 1, 2019. The Company is required to prepay the term loan with 75% of consolidated excess cash flow on an annual basis and with the net cash proceeds of certain other customary events. All voluntary and certain mandatory prepayments are subject to a prepayment penalty. The Buddy's Credit Agreement includes customary affirmative, negative and financial covenants binding on the Company. The negative financial covenants limit the ability of the Company to incur debt, incur liens, make investments, sell assets, pay dividends on its capital stock and enter into transactions with affiliates. The financial covenants include a maximum consolidated leverage ratio and a minimum fixed charge coverage ratio to be tested at the end of each fiscal quarter and a requirement that the minimum consolidated liquidity of certain subsidiaries must not be less than $1.0 million at any time. In addition, the Buddy’s Credit Agreement includes customary events of default, the occurrence of certain of which may require that the Company to pay an additional 2.0% interest on the term loan to be paid in-kind. The Company was in compliance with all covenants of the Buddy’s Credit Agreement as of July 31, 2019.

Liberty Tax Credit Agreement

On May 16, 2019, the Company entered into a new Credit Agreement (the "Credit Agreement") that provides for a $135.0 million senior revolving credit facility (the "Revolving Credit Facility"), with a $10.0 million sub-facility for the issuance of letters of credit, and a $20.0 million swingline loan sub-facility. The Company’s obligations under the Credit Agreement are guaranteed by each of the Company’s direct and indirect domestic wholly-owned subsidiaries. None of the Company’s direct or indirect foreign subsidiaries has guaranteed the Revolving Credit Facility. The Company’s obligations under the Credit Agreement are secured by substantially all of the assets (other than existing real property) of the Liberty Tax segment and each guarantor (including all or a portion of the equity interests in certain of the Company’s domestic and foreign subsidiaries). The Credit Agreement replaces the Company’s prior credit facility.

The Revolving Credit Facility will mature on May 31, 2020. Borrowings under the Revolving Credit Facility will, at the option of the Company, bear interest at either (i) a LIBOR Loan, plus an applicable interest rate margin determined as provided in the Credit Agreement, or (ii) an ABR Loan, each as determined as provided in the Credit Agreement. The applicable interest rate margin varies from 3.0% per annum to 4.0% per annum for LIBOR Loans, and from 2.0% per annum to

19



3.0% per annum for ABR Loans, in each case depending on the Company’s consolidated leverage ratio and is determined in accordance with a pricing grid set forth in the Credit Agreement (the “Pricing Grid”). Interest on LIBOR Loans is payable in arrears at the end of each applicable interest period, and interest on ABR Loans is payable in arrears at the end of each calendar quarter. There are no prepayment penalties in the event the Company elects to prepay and terminate the Revolving Credit Facility prior to its scheduled maturity date, subject to LIBOR breakage and redeployment costs in certain limited circumstances. The Company agrees in the Credit Agreement to pay a fee on the average daily unused amount of the Revolving Credit Facility during the term thereof. Such unused fee is payable in arrears at the end of each calendar quarter and accrues at a rate which varies from 0.25% to 0.5% depending on the Company’s consolidated leverage ratio, as determined in accordance with the Pricing Grid. The Company also agrees to pay (x) a fee for each outstanding letter of credit at a rate per annum equal to the applicable interest rate margin for LIBOR Loans, as determined in accordance with the Pricing Grid, multiplied by the average daily amount available to be drawn under such letter of credit, and (y) to the letter-of-credit issuer, a fronting fee which shall accrue at a rate of 0.125% per annum on the average daily amount of the outstanding aggregate letter-of-credit obligations under the Credit Agreement. The average interest rate paid during the three months ended July 31, 2019 was 8.00%.

The Credit Agreement includes customary affirmative, negative, and financial covenants binding on the Company, including delivery of financial statements and other reports and maintenance of existence. The financial covenants set forth in the Credit Agreement include a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio, each of which will be tested at the end of each fiscal quarter of the Company, and a minimum consolidated net worth ratio tested at the end of each fiscal year of the Company. The Credit Agreement provides that, for a period of 30 consecutive days after May 16, 2019, our outstanding obligations under the Credit Agreement will not exceed $12.5 million. Additionally, from April 30, 2020 until the maturity date, our outstanding obligations must be reduced to $0. In addition, the Credit Agreement includes customary events of default. The Company was in compliance with all covenants of the Credit Agreement as of July 31, 2019.

Vintage Subordinated Note

On May 16, 2019, the Company also entered into a Subordinated Note (the “Subordinated Note”) payable to Vintage Capital Management LLC (“Vintage”). The aggregate principal amount of all loans to be made by Vintage under the Subordinated Note shall not exceed $10.0 million. Any indebtedness owed to Vintage under the Subordinated Note is subordinate to and subject in right and time of payment to the Revolving Credit Facility. The Company has not made any borrowings under the Subordinated Note at this time. The Subordinated Note will mature on August 31, 2020. Interest will accrue on the unpaid principal amount of the Subordinated Note outstanding from time to time at a rate per annum based on LIBOR for an interest period of one month, plus 4.0%. The Company also agrees in the Subordinated Note to pay Vintage a commitment fee, at a rate per annum equal to 0.50%, on the average daily amount in each month by which the stated amount of the Subordinated Note exceeds the aggregate amount of loans made thereunder and not repaid. Such accrued interest and commitment fee are payable in kind (rather than in cash or other consideration), quarterly in arrears, by being added to the outstanding principal balance of the Subordinated Note, with such amounts bearing interest thereafter in the same manner as the unpaid principal amount of the Subordinated Note.

Other Indebtedness

The Company previously had a credit facility that consisted of a term loan with an original principal amount of $21.2 million and a revolving credit facility that allowed borrowing of up to $170.0 million with an accordion feature that permitted the Company to request an increase in availability of up to an additional $50.0 million. Outstanding borrowings accrued interest, which was paid monthly at a rate of the one-month LIBOR plus a margin ranging from 1.50% to 2.25% depending on the Company’s leverage ratio.

The average interest rate paid during the three months ended July 31, 2018 was 3.74%. The indebtedness was collateralized by substantially all the assets of the Company, and both loans matured on April 30, 2019 (except as to the commitments of one smaller lender which matured on September 30, 2017). 

The former credit facility contained certain financial covenants that the Company was required to meet, including leverage and fixed-charge coverage ratios as well as minimum net worth requirements. In addition, the Company was required to reduce the outstanding balance under its revolving credit facility to zero for a period of at least 45 consecutive days each fiscal year.

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

20




In December 2016, in connection with obtaining a mortgage payable to a bank, the Company entered into an interest rate swap agreement that allows it to manage fluctuations in cash flow resulting from changes in the interest rate on the mortgage. This swap effectively changes the variable-rate of the Company's mortgage into a fixed rate of 4.12%. The Company has designated this swap agreement as a cash flow hedge. At July 31, 2019, the fair value of the interest rate swap is less than $0.1 million and is included in accounts payable and accrued expenses. The interest rate swap expires in December 2026.
Long-term obligations at July 31, 2019, April 30, 2019, and July 31, 2018 consisted of the following:
 
 
July 31, 2019
 
April 30, 2019
 
July 31, 2018
 
 
(In thousands)
Revolver
 
$
20,000

 
$

 
$
12,590

Term loan, net of debt issuance costs
 
79,837

 
11,958

 
14,334

   Due former ADs, franchisees and third parties
 
921

 
1,178

 
2,477

   Mortgages
 
1,880

 
1,912

 
2,007

 
 
102,638

 
15,048

 
31,408

   Less: current installments
 
(24,450
)
 
(13,108
)
 
(29,513
)
Long-term obligations, excluding current installments, net
 
$
78,188

 
$
1,940

 
$
1,895



(10) Income Taxes
Similar to prior years, pre-tax book income estimated in the fourth quarter of fiscal 2020 is expected to offset pre-tax book loss for the three months ended July 31, 2019, due to the established pattern of seasonality in our primary business operations. Management determined that it is at least more-likely-than-not that realization of tax benefits recorded in our financial statements will occur during fiscal 2020. The amount of tax benefit recorded for the three months ended July 31, 2019 reflects the Company’s estimated annual effective tax rate applied to the year-to-date loss from continuing operations adjusted for the tax impact of discrete items.
Our effective tax rate from continuing operations, including discrete income tax items, was 21.1% and 32.9% for the three months ended July 31, 2019 and 2018, respectively. The reduced effective tax rate results primarily from adjustments to deferred taxes as a result of remeasurement of tax rates in the prior year that did not recur in fiscal 2020, the permanent tax effect related to non-deductible acquisition-related costs for the Buddy’s Acquisition, and the establishment of New Holdco and the related non-controlling interests. As New Holdco is treated as a partnership for tax purposes, any net income or loss is passed through on pro rata basis to its members. Therefore, the effective tax rate reflects only the allocable share of income or loss of New Holdco related to Liberty Tax.

In addition, the impact of the Buddy’s Acquisition has been considered for the three months ended July 31, 2019. The Buddy’s Acquisition had no material impact to income tax expense for the quarter, and Buddy’s post-acquisition operations have been included in the tax expense calculation for the period. The Company recorded an additional $10.7 million deferred tax liability to account for cumulative temporary differences resulting from the Buddy’s Acquisition. These initial amounts recorded in connection with purchase accounting will be adjusted during the measurement period as the Company gathers information regarding facts and circumstances that exist as of the Buddy's Acquisition Date.


(11) Stockholders’ Equity

Stockholders' Equity Activity

Under the terms of the Buddy's Acquisition, the Company entered into a subscription agreement with Tributum (the “Closing Subscription Agreement”), pursuant to which Tributum purchased from the Company 2,083,333.33 shares of common stock at a purchase price of $12.00 per share for an aggregate purchase price of $25.0 million in cash. Also, under the terms of the Buddy's Acquisition, the Company entered into a second subscription agreement with Tributum (the “Post-Closing Subscription Agreement”), pursuant to which Tributum committed to purchase from the Company additional shares of common stock at a purchase price of $12.00 per share. The number of shares purchased pursuant to the Post-Closing Subscription Agreement will be determined based on the number of shares of common stock tendered in a tender offer, as described below,

21



(among other factors), and such amount will be equal to the amount of shares of common stock necessary for the aggregate purchase price received by the Company to be sufficient to complete the tender offer after applying the proceeds from the Closing Subscription Agreement, the Revolving Credit Facility and the Buddy’s Credit Agreement. The purchase price under the Post Closing Subscription Agreement will not exceed $40 million in the aggregate. We relied on an exemption from registration for the issuances and sales described above pursuant to Section 4(a)(2) and/or Rule 506 of Regulation D of the Securities Act because the foregoing issuances and sales did not and will not involve a public offering, Tributum is an “accredited investor” and/or had access to similar documentation and information as would be required in a registration statement under the Securities Act and Tributum acquired or will acquire the common stock for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof. The common stock was offered without any general solicitation by the Company or its representatives. No underwriters or agents were involved in the foregoing issuances and sales and we paid no underwriting discounts or commissions. The common stock issued and sold, or that will be issued and sold, is subject to transfer restrictions, and the certificates evidencing such common stock, if any, will contain an appropriate legend stating that such Common Stock has not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to an exemption therefrom. The common stock was not registered under the Securities Act and such Common Stock may not be offered or sold in the United States absent registration or an exemption from registration under the Securities Act and any applicable state securities laws.

Under the terms of the Buddy's Acquisition, on August 1, 2019, the Company commenced a tender offer (the “Tender Offer”) to purchase any and all of the outstanding shares of the Company's common stock for cash at a price of $12.00 per share, without interest. The Tender Offer is not subject to a minimum tender requirement, and certain large stockholders of the Company have agreed not to tender their shares in the Tender Offer. The Tender Offer will be financed through cash on hand and (i) the $25.0 million Closing Subscription Agreement, (ii) the proceeds of the Buddy’s Credit Agreement and (iii) to the extent that total tender offer acceptances exceed the available proceeds from the term loan financing and the initial Tributum equity investment, Tributum has entered into a binding commitment to finance the remainder of the financing needs, if applicable, by entering into the Post-Closing Subscription Agreement with the Company to purchase a number of the Company's common stock at a purchase price of $12.00 per share to finance the Tender Offer.

Under terms of the Buddy's Acquisition, the Company issued the Buddy's Members 1,616,667 shares of Preferred Stock. One-fifth of a share of Preferred Stock along with one New Holdco unit can be exchanged for one share of the Company's common stock.

Under the terms of the Buddy's Acquisition, the Company filed with the U.S. Securities and Exchange Commission (the "SEC") an information statement regarding certain amendments to the Company's Second Amended and Restated Certificate of Incorporation, including an amendment to increase the number of authorized shares of the Company to 200,000,000, comprised of 180,000,000 shares of common stock and 20,000,000 shares of Preferred Stock.

During the three months ended July 31, 2018, the sole holder of the Company's Class B common stock entered into a stock purchase agreement to sell all of his outstanding shares of the Company's Class A common stock and Class B common stock owned directly and indirectly by him. In connection with the sale, the shares of the Company’s Class B common stock converted into shares of the Company’s Class A common stock on a one-for-one basis and for no additional consideration. As of July 31, 2019, no shares of the Company’s Class B common stock remained outstanding. In addition, an agreement was reached which converted the 10 shares of special voting preferred stock to 1,000,000 shares of Common Stock. Pursuant to the Company’s Second Amended and Restated Certificate of Incorporation, as approved by stockholders on December 13, 2018, the Company currently has only one class of common stock.

Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss at July 31, 2019, April 30, 2019 and July 31, 2018 were as follows.
 
 
July 31, 2019
 
April 30, 2019
 
July 31, 2018
 
 
(In thousands)
Foreign currency adjustment
 
$
(1,565
)
 
$
(1,908
)
 
$
(1,583
)
Unrealized gain on interest rate swap agreement, net of taxes
 
(40
)
 
(2
)
 
44

Total accumulated other comprehensive loss
 
$
(1,605
)
 
$
(1,910
)
 
$
(1,539
)

22



Non-controlling interest

We are the sole managing member of New Holdco LLC and, as a result, consolidate the financial results of New Holdco. We report a non-controlling interest representing the economic interest in New Holdco held by the Buddy’s Members. The New Holdco LLC Agreement provides that the Buddy’s Members may, from time to time, require the Company to redeem all or a portion of their New Holdco units for newly-issued shares of common stock on a basis of one New Holdco Unit and one-fifth of a share of Preferred Stock of the Company for one share of common stock of the Company. In connection with any redemption or exchange, we will receive a corresponding number of New Holdco units, increasing our total ownership interest in New Holdco. Changes in our ownership interest in New Holdco while we retain our controlling interest in New Holdco will be accounted for as equity transactions. As such, future redemptions or direct exchanges of New Holdco units by the Buddy’s Members will result in a change in ownership and reduce the amount recorded as non-controlling interest and increase additional paid-in capital. As of July 31, 2019, the Company had an ownership interest of 63.6% in New Holdco and reported a non-controlling interest equal to 36.4% and there were no exchanges of New Holdco units.

Net Loss per Share
 
Prior to 2019, due to the Company having Class A and Class B common stock, net income (loss) was computed using the two-class method. Basic net income (loss) per share was computed by allocating undistributed earnings to common stock and participating securities (exchangeable shares) and using the weighted-average number of common stock outstanding during the period.  Undistributed losses were not allocated to participating securities because they do not meet the required criteria for such allocation. The rights, including liquidation and dividend rights, of the holders of Class A and Class B common stock were identical, with the exception of the election of directors. As a result, the undistributed earnings were 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 had dividend rights that were identical to Class A and Class B common stock.

At July 31, 2019, the Company no longer had any outstanding Class B common stock or exchangeable shares. In addition, the Preferred Stock of the Company does not share in any income or loss and therefore is not a participating security but is a potentially dilutive security upon exchange to common stock.
 
Diluted net income (loss) per share is computed using the weighted-average number of common stock and, if dilutive, the potential common stock outstanding during the period. Potential common stock consists of the incremental common stock issuable upon the exercise of stock options and vesting of restricted stock units. The dilutive effect of outstanding stock options and restricted stock units is reflected in diluted earnings per share by application of the treasury stock method. Additionally, the computation of the diluted net income (loss) per share of Class A common stock assumed the conversion of Class B common stock, exchangeable shares, and Preferred Stock, if dilutive, while the diluted net loss per share of Class B common stock did not assume conversion of those shares.
The computation of basic and diluted net loss per share for the three months ended July 31, 2019 and 2018 is as follows:
 
 
Three Months Ended 
 July 31, 2019
 
Three Months Ended 
 July 31, 2018
 
 
 
 
Class A
 
Class B
 
 
Common Stock
 
Common Stock
 
Common Stock
 
 
(In thousands, except for share and per
share amounts)
Basic and diluted net loss per share:
 
 

 
 

 
 

Numerator
 
 

 
 

 
 

Allocation of undistributed losses attributable to Liberty Tax
 
$
(15,903
)
 
$
(19,081
)
 
$
(290
)
Denominator
 
 
 
 
 
 
Weighted-average common stock outstanding
 
14,555,330

 
12,882,439

 
195,652

 
 
 
 
 
 
 
Basic and diluted net loss per share
 
$
(1.09
)
 
$
(1.48
)
 
$
(1.48
)
 
 
 
 
 
 
 


23



As a result of the net losses for the periods shown, diluted net loss per share excludes the impact of shares of potential common stock from the exercise of options to purchase 497,166 and 692,205 shares for the three months ended July 31, 2019 and 2018, respectively, and the conversion or exchange of all Class B common stock, exchangeable shares and Preferred Stock because the effect would be anti-dilutive.


(12) Stock Compensation Plans
 
Stock Options
 
The Company has an equity and cash incentive plan, for the issuance of up to 2,500,000 shares of common stock in which employees and outside directors are eligible to receive awards. At July 31, 2019, 1,557,254 shares of common stock remain available for grant.
Stock option activity during the three months ended July 31, 2019 was as follows:
 
 
Number of
options
 
Weighted
average
exercise price
Balance at beginning of period
 
796,244

 
$
10.88

Exercised
 
(28,138
)
 
10.90

Expired or forfeited
 
(91,743
)
 
10.55

Balance at end of period
 
676,363

 
$
10.93


Intrinsic value is defined as the fair value of the stock less the cost to exercise. The total intrinsic value of options exercised during the three months ended July 31, 2019 was less than $0.1 million. The total intrinsic value of stock options outstanding at July 31, 2019 was $1.1 million. Stock options vest from the date of grant to five years after the date of grant and expire from four to seven years after the vesting date.
Nonvested stock options activity during the three months ended July 31, 2019 was as follows: 
 
 
Nonvested
options
 
Weighted
average
exercise price
Balance at beginning of period
 
654,514

 
$
10.35

Vested
 
(242,997
)
 
10.10

Forfeited
 
(91,743
)
 
10.55

Balance at end of period
 
319,774

 
$
10.47

 
At July 31, 2019, unrecognized compensation costs related to nonvested stock options were $0.5 million. These costs are expected to be recognized through fiscal 2022.
The following table summarizes information about stock options outstanding and exercisable at July 31, 2019:
 
 
Options Outstanding
 
Options Exercisable
Range of exercise prices
 
Number of shares outstanding
 
Weighted average exercise price
 
Weighted average remaining contractual life (in years)
 
Number of options exercisable
 
Weighted average exercise price
 
 
 
 
 
$0.00 - $10.89
 
480,826

 
$
9.64

 
5.7
 
292,997

 
$
9.80

$10.90 - $16.38
 
168,207

 
12.18

 
3.9
 
36,262

 
12.79

$16.39 - $26.17
 
18,858

 
22.57

 
1.0
 
18,858

 
22.57

$26.18 - $33.38
 
8,472

 
33.38

 
0.1
 
8,472

 
33.38


 
676,363

 
$
10.93

 

 
356,589

 
$
11.34



24



Restricted Stock Units
 
Restricted stock activity during the three months ended July 31, 2019 was as follows:
 
 
Number of restricted stock units
 
Weighted average fair value at grant date
Balance at beginning of period
 
168,792

 
$
10.56

Granted
 

 

Vested
 
(53,550
)
 
10.19

Forfeited
 
(22,870
)
 
10.78

Balance at end of period
 
92,372

 
$
10.72

 
At July 31, 2019, unrecognized compensation costs related to restricted stock units were $0.7 million. These costs are expected to be recognized through fiscal 2022.


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

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

The Company measures or monitors certain of its assets and liabilities on a fair value basis. Fair value is used on a recurring basis for those assets and liabilities for which fair value is the primary basis of accounting. Other assets and liabilities are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. The following tables present, at July 31, 2019, April 30, 2019 and July 31, 2018, for each of the fair value hierarchy levels, the assets and liabilities that are measured at fair value on a recurring and nonrecurring basis (In thousands):

25



 
 
July 31, 2019
 
 
 
 
Fair value measurements using
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 

 
 

 
 

Nonrecurring assets:
 
 

 
 

 
 

 
 

Impaired accounts and notes receivable, net of unrecognized revenue and allowance
 
$
9,550

 
$

 
$

 
9,550

Total nonrecurring assets
 
$
9,550

 
$

 
$

 
$
9,550

 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 
Recurring liabilities:
 
 

 
 

 
 

 
 

Contingent consideration included in obligations due former ADs, franchisees and others
 
$
478

 
$

 
$

 
$
478

Interest rate swap agreement
 
55

 

 
55

 

Total recurring liabilities
 
$
533

 
$

 
$
55

 
$
478

 
 
April 30, 2019
 
 
 
 
Fair value measurements using
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Recurring assets:
 
 

 
 

 
 

 
 

Cash equivalents
 
$
15,772

 
$
15,772

 
$

 
$

Total recurring assets