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TAX > SEC Filings for TAX > Form 10-Q/A on 31-Jan-2014All Recent SEC Filings

Show all filings for JTH HOLDING, INC.

Form 10-Q/A for JTH HOLDING, INC.


31-Jan-2014

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Special Note Regarding Forward-Looking Statements

This quarterly 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 and 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 quarterly 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" in our Annual Report on Form 10-K for the year ended April 30, 2013 and risks described in all other filings with the Securities and Exchange Commission, including:

our possible inability to sustain growth at our historical pace;

the seasonality of our business;

our inability to secure reliable sources of the tax settlement products we make available to our customers;

the continued service of our senior management team and our ability to attract additional talent;

government regulation and oversight, including the regulation of our tax settlement products such as electronic refund checks ("ERCs") 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;

increased regulation of the products and services that we offer;

the possible characterization of ERCs 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;

our ability and the ability of our franchisees to comply with regulatory requirements;

changes in our franchise sale model that may reduce our revenue;

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 an increasing number of company-owned offices and tax kiosks;


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our exposure to litigation;

our ability and our franchisees' ability to protect customers' personal information, including from a cyber-security incident;

an 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;

competition in the tax preparation market;

our reliance on technology systems, including the deployment of our NextGen project and electronic communications;

our ability to deploy our NextGen software in time for the 2014 tax season;

the impact of any acquisitions or dispositions, including our ability to integrate acquisitions and capitalize on their anticipated synergies;

potential shareholder litigation as a result of the restatement of our previously issued consolidated financial statements;

risks relating to our management's determination that there was a material weakness in our internal control over financial reporting, and as a result that our disclosure controls and procedures were not effective, as of periods at and prior to January 31, 2013; and

other factors, including the risk factors discussed in this quarterly 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 quarterly 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 Securities and Exchange Commission, or SEC, after the date of this quarterly report.

See Note 19 to our Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended April 30, 2013 for a description of the restatement of our financial statements and a summary of the impact of the restatement on the applicable unaudited quarterly financial information for the three months ended January 31, 2012 and January 31, 2013 presented in this Quarterly Report (See Note 14).

Restatement

As described in our Annual Report on Form 10-K for the fiscal year ended April 30, 2013, we have restated our financial statements and other information. For further discussion of the effects of the restatement, see Part 1, Item1 "Financial Statements," Note 14 "Restatement of Previously Issued Financial Statements" to our Condensed Consolidated Financial Statements and Part 1, Item
4 "Controls and Procedures."

The restatement has had the following effect applicable to this report:

The Condensed Consolidated Statements of Operations, Statements of Comprehensive Income (Loss) and the Condensed Consolidated Statements of Cash Flows for the three and nine months ended January 31, 2013 and January 31, 2012 and the Condensed Consolidated Balance Sheet at January 31, 2013, have been restated.

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 and the number of retail offices, we are the third largest and fastest growing national retail preparer of individual tax returns in the United States and the second largest retail preparer of individual tax returns in Canada. From 2001 through 2012, we have grown the number of U.S. tax returns prepared in our offices from approximately 137,000 to nearly 1.8 million. Our tax preparation services and related financial products are offered primarily through franchised locations, although we operate a limited number of company-owned offices each tax season. All of the offices are operated under the Liberty Tax Service brand.

From 2001 through 2013, we grew our number of tax offices from 508 to more than 4,500. For the 2013 tax season, we and our franchisees operated 4,262 offices in the United States, a 8.7% increase over the 2012 tax season, when we operated 3,920 offices, which was itself a 9.2% increase over the number of offices operated in the 2011 tax season. Approximately 65% of our revenue for fiscal year 2012 was derived from franchise fees, area developer fees, royalties and advertising fees, and for this reason, continued growth in our franchise locations is viewed by management as the key to our future performance.

Historically, most income tax filings in the United States take place between January and mid-April, our results of operation are highly seasonal, with most revenues generated in our fiscal fourth quarter beginning February 1 each year but with significant revenue also earned during the second half of January during our fiscal third quarter, after the tax season begins in mid-January. As described further in this report, our fiscal 2013 third quarter was materially adversely affected by the significant delay in the 2013 tax filing season attributable to the delays in Congress' adoption of the fiscal cliff legislation, which in turn resulted in an IRS announcement on January 8, 2013 that the IRS would not begin allowing tax filings until January 30, 2013, and that because of the unavailability of certain tax forms, the ability to file many tax returns would be delayed even further into February and March. In addition, many of the changes required to be made in state tax forms because of changes in federal tax law and forms caused additional delays in the commencement of tax filings in many states. As described in this report, these delays are expected to shift a significant portion of our royalty income and other revenue from our fiscal third quarter into our fiscal fourth quarter and affected our utilization of cash during the fiscal third quarter as we assisted our franchisees with their liquidity issues caused by the delay of their receipt of tax preparation revenue.

Our revenue primarily consists of the following components:

Franchise Fees: Our standard franchise fee per territory is currently $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. However, in 2011 we introduced a franchise fee option that forgoes the initial franchise fee payment in favor of a higher royalty rate.

The franchise fee revenue we report includes the portion of franchise fees received by us from franchisees but contractually due to area developers. The amount of franchise fees due to area developers is recorded as an expense.


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In October 2012, we announced that we would have the opportunity to offer tax preparation services in more than 300 Walmart stores beginning in the 2013 tax season. Many of our expanding franchisees chose our "rent to own" option for Walmart locations, and we expect this trend to delay the recognition of these territory sales to the fourth quarter of fiscal 2013, if the franchisee elects to purchase the territory at that time. Moreover, because many of the Walmart stores were in rural areas that were more difficult to sell, we operated more company offices in the 2013 tax season than in prior years. Of the 264 company offices we operated in the United States and Canada at January 31, 2013, 154 were tax kiosks located in Walmart stores. However, from a longer term perspective, we believe that opening and operating these Walmart stores in hard to sell areas will give us the opportunity to sell these territories earlier than would otherwise have been possible and allow us to expand our footprint into these rural areas more quickly.

Area Developer 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 both the franchise fees and royalties derived from territories located in their area. Area developer fees received are recognized as revenue on a straight-line basis over the initial contract term of each Area Developer agreement with the cumulative amount of revenue recognized not to exceed the amount of cash received.

As with our franchise sales, we have recently revised our policies for the way in which we account for the sales of area developer territories. Because we have determined that area developer agreements are not franchise transactions for accounting purposes, we amortize our revenue from area developer sales over the length of our area developer agreements, which are typically ten years. For this reason, significant year-to-year trends in our area developer sales activity are apparent from our comparative financial results only to the extent that the most recent year is so anomalous as to result in a significant variation in recognized area developer revenue. We will identify trends in these sales even where they do not represent a material year-to-year difference for purposes of area developer revenue recognition.

We expect new area developer sales to become a less significant source of new revenue as we continue to build out our franchise network and have less need to utilize ADs to support that effort.

Royalties: We earn royalty revenue from our franchisees. 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 acquiring territories under our "zero franchise fee" alternative are required to pay us franchise royalties of 25% through their first five tax seasons, and thereafter 14% of their tax preparation revenue. Over time, as our offices continue to "season," we expect that our growth in revenue from royalties will continue to outpace our growth in revenue from franchise fees. We also expect to see steadier growth from our royalty revenue, but our franchise fee revenue may decrease if franchisees choose our zero franchise fee alternative.

Our reported royalties revenue includes the portion of royalties that is paid to us by franchisees but that is contractually due to ADs under our area developer agreements. The amount of royalties due to area developers is recorded as an expense.

The delay in the opening of the 2013 tax filing season and the additional delay of certain forms as described above adversely affected our revenue during our third fiscal quarter because the royalty income we receive is based on our franchisees' tax preparation revenue. Because our franchisees do not earn their tax preparation revenue until returns are filed with the IRS (and often do not receive the related cash until the refund is processed, for which the IRS establishes a typical timeframe of 8-21 days following filing), a significant portion of our royalty income and related cash flow has been deferred from our fiscal third quarter to our fiscal fourth quarter because the IRS filing system was open for only two days in January 2013.

Advertising Fees: We earn advertising fee revenue from our franchisees. Our franchise agreement requires 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. As noted above with respect to royalty income, the delay in electronic filing for the 2013 tax season has affected the timing of our income and cash flow from advertising fees, deferring a significant portion of that revenue from the fiscal third quarter to the fiscal fourth quarter.

Financial Products: We offer two types of financial products:
"refund transfer" products, such as electronic refund checks ("ERCs"), which involve providing a means by which a customer may receive his or her refund more quickly and conveniently, and other tax settlement products, such as refund anticipation loans ("RALs") and instant cash advances ("ICAs"). We earn fees from the use of these financial products. Because the remaining bank that offered RALs ceased to do so after the end of the 2012 tax season, we no longer offer refund-based loans through banks and other federally-insured financial institutions, and our ability to offer refund-based loans is therefore more limited than in the past. However, we believe the negative effect of fewer refund-based loans will be offset by three factors. First, we offered our ICA loan in 27 states during the 2013 tax season. Second, we believe that most customers who previously would have obtained loans will elect to purchase an ERC, and that the continued availability of these products will enable us to experience similar financial product "attachment rates" as in prior years. Third, as we continue to offer more of our financial products through our JTH Financial subsidiary, we expect to be able to realize more of the fee income associated with financial products (although we will also incur greater expenses in connection with offering these products). As with our royalty and advertising fee revenue, a substantial portion of our income and cash flow associated with the offering of financial products was delayed to our fiscal fourth quarter because of the delay in the tax filing season.

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.

Tax Preparation Fees: We also earn tax preparation revenue directly from both the operation of company-owned offices and the provision of tax preparation services through our eSmartTax online product.


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For purposes of this section and throughout this quarterly report, all references to "fiscal 2013" and "fiscal 2012" refer to our fiscal years ended April 30, 2013 and 2012, respectively, and corresponding references to fiscal quarters are references to quarters within those fiscal years. For purposes of this section and throughout this quarterly report, all references to "year" or "years" are the respective fiscal year or years ended April 30 unless otherwise noted in this quarterly report, and all references to "tax season" refer to the period between January 1 and April 30 of the referenced year.

Results of Operations



The table below shows results of operations for the three and nine months ended
January 31, 2013 and 2012.



                             Three Months Ended January 31,               Nine Months Ended January 31,
                                                     Change                                      Change
                          2013        2012        $          %        2013        2012        $          %
                                                       (dollars in thousands)
Results of
Operations
Total revenues         $   37,620   $ 44,008   $ (6,388 )    -15%   $  54,202   $ 58,472   $ (4,270 )     -7%
Income (loss) from
operations                  3,553      9,073     (5,520 )    -61%     (16,026 )   (5,907 )  (10,119 )    171%
Net income (loss)           1,673      5,266     (3,593 )    -68%     (10,801 )   (4,651 )   (6,150 )    132%

Revenues. The table below sets forth the components and changes in our revenues for the three and nine months ended January 31, 2013 and 2012.

                              Three Months Ended January 31,                Nine Months Ended January 31,
                                                       Change                                      Change
                          2013         2012         $          %        2013        2012        $          %
                                                        (dollars in thousands)

Franchise fees         $    1,698    $   1,577   $    121        8%   $   4,503   $  4,558   $    (55 )     -1%
Area developer fees         1,741        1,464        277       19%       5,742      4,619      1,123       24%
Royalties                  15,660       18,175     (2,515 )    -14%      17,457     19,977     (2,520 )    -13%
Advertising fees            4,528        5,717     (1,189 )    -21%       5,104      6,288     (1,184 )    -19%
Financial products          8,039       11,158     (3,119 )    -28%       8,510     11,449     (2,939 )    -26%
Interest income             3,140        2,653        487       18%       8,339      6,548      1,791       27%
Tax preparation
fees, net of
discounts                   1,445        1,909       (464 )    -24%       1,886      2,154       (268 )    -12%
Net gain on sale of
company-owned
offices and other
revenue                     1,369        1,355         14        1%       2,661      2,879       (218 )     -8%
Total revenues         $   37,620    $  44,008   $ (6,388 )    -15%   $  54,202   $ 58,472   $ (4,270 )     -7%

Our total revenues decreased by 15% and 7% in the first three months and nine months of fiscal 2013, respectively, compared to fiscal 2012, due to the following factors:

A 28% and 26% decrease, respectively, in financial products revenue primarily attributable to the delay in the IRS acceptance of tax returns. However, the effect of the decrease in volume of ERCs due to the IRS delays was offset in part by increased revenue per product because we processed more ERCs through JTH Financial rather than through third-party partners, and because we shared fee revenue with the ERCs for which we used third-party partners. Additionally, due to a difference in this year's contract with the non-bank lender for the ICA program, the program is accounted for on a net basis instead of on a gross basis, as in prior years.

A 14% and 13% decrease, respectively, in royalties and a 21% and 19% decrease, respectively, in advertising fees, primarily due to the delay in the tax filing season.

A 24% and 12% decrease, respectively, in tax preparation fees primarily due to the delay in the 2013 tax filing season, offset in part by an increase in the number of company-owned offices, including tax kiosks in Walmart stores. At January 31, 2013, we operated 264 company offices, an increase from 93 company offices operated at the same date in 2012. Of these company-owned offices, 154 were kiosks located at Walmart stores.

The decreases in financial products revenue, royalties, advertising fees, and tax preparation fees were partially offset by:

A 19% and 24% increase, respectively, in area developer fees reflecting increased area developer sales in fiscal 2013 for which we recognized fee revenue, as well as the fact that because we recognize our area developer fee revenue over ten years, earlier years in that ten-year period had fewer area developer sales than the most recent year that replaced the oldest year in the prior year's ten-year period.

An 18% and 27% increase, respectively, in interest income, reflecting additional lending we made to our franchisees and ADS for the acquisition of territories and areas and to our franchisees for working capital purposes.


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Operating expenses. The table below details the amounts and changes in our operating expenses for the three and nine months ended January 31, 2013 and 2012.

                             Three Months Ended January 31,                 Nine Months Ended January 31,
                                                      Change                                         Change
                          2013         2012        $          %         2013         2012         $          %
                                                         (dollars in thousands)

Employee
compensation and
benefits               $   10,285    $  7,902   $  2,383       30%   $   24,566    $  20,111   $  4,455       22%
General and
administrative              7,857       9,055     (1,198 )    -13%       19,783       18,113      1,670        9%
Area developer
expense                     6,814       7,832     (1,018 )    -13%        8,646        9,567       (921 )    -10%
Advertising                 7,687       8,770     (1,083 )    -12%       12,786       12,389        397        3%
Depreciation,
amortization and
impairment charges          1,424       1,376         48        3%        4,447        4,199        248        6%
Total operating
expenses               $   34,067    $ 34,935   $   (868 )     -2%   $   70,228    $  64,379   $  5,849        9%

Our total operating expenses decreased by 2% in the three months ended January 31, 2013. The largest components of this decrease were:

A 13% decrease in general and administrative expenses, caused primarily by a decrease of $2.4 million in expense because we restructured our financial products program for the 2013 tax season to eliminate a franchisee rebate on ERCs (rebate expense was recorded in fiscal 2012) and because of a difference in the 2013 tax season contract with the non-bank lender for the ICA program, the program is accounted for on a net basis instead of on a gross basis, as in prior years, offset in part by:

A $422,000 increase in rent and utilities expense, due to an increase in the number of company-owned offices.

A $220,000 increase in bad debt expense based on our assessment of the appropriate level of allowance for doubtful accounts.

A $215,000 increase in travel and entertainment expense for costs primarily related to attracting new franchisees and training existing and new franchisees as well as travel to support the increased number of company-owned offices.

A $203,000 increase in computer supply and software expense for subscriptions to software as a service related to the use of electronic signatures for customer documents and due to outfitting an additional 171 company-owned offices with the required supplies.

A 13% decrease in area developer expense primarily caused by the decline in the ADs' portion of royalties, which declined because of our decrease in royalties revenue described above.

A 12% decrease in advertising because we incurred a larger part of our advertising spending during the first two quarters of fiscal 2013, as compared to fiscal 2012.

The decreases in general and administrative expenses, area developer expense, and advertising were partially offset by a 30% increase in employee compensation and benefits primarily attributable to the addition of corporate personnel to support the anticipated growth in the number of offices and our becoming a public company.

Our total operating expenses increased by 9% in the nine months ended January 31, 2013, compared to the same period of fiscal 2012. The largest components of this increase were:

A 22% increase in employee compensation and benefits primarily attributable to the addition of corporate personnel to support the anticipated growth in the number of offices and our becoming a public company, as well as the additional personnel hired to run 171 additional company-owned offices.

A 9% increase in general and administrative expenses, caused primarily by the following:

A $1.1 million increase in bad debt expense based on our assessment of the appropriate level of allowance for doubtful accounts. The percentage of note balances reserved was 5% at January 31, 2013, compared to 4% at January 31, 2012.

A $1.0 million increase in rent and utilities expense, largely related to an increase in the number of company-owned offices.

A $647,000 increase in professional fees due to additional costs associated with becoming a public company and increased litigation costs related to current litigation.

A $515,000 increase in travel and entertainment expense for costs primarily related to attracting new franchisees and training existing and new . . .

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