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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
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: 001-37537
 
Houlihan Lokey, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
95-2770395
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
10250 Constellation Blvd.
5th Floor
Los Angeles, California 90067
(Address of principal executive offices) (Zip Code)
(310) 788-5200
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Class A Common Stock, par value $0.001
 
HLI
 
New York Stock Exchange
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    x  No  ¨
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
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
x
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨  
Smaller reporting company
 
 
 
 
 
 
Emerging growth company
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. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No x
As of August 5, 2019, the registrant had 40,920,354 shares of Class A common stock, $0.001 par value per share, and 25,219,080 shares of Class B common stock, $0.001 par value per share, outstanding.
 



HOULIHAN LOKEY, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
          



PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements
HOULIHAN LOKEY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share data and par value)
June 30, 2019
 
March 31, 2019
Assets
 
 
 
Cash and cash equivalents
$
211,731

 
$
285,746

Restricted cash
371

 
369

Investment securities
33,040

 
125,258

Accounts receivable, net of allowance for doubtful accounts of $3,912 and $4,255, respectively
67,918

 
70,830

Unbilled work in process, net of allowance for doubtful accounts of $1,818 and $1,341, respectively
71,997

 
71,891

Receivable from affiliates

 
8,631

Property and equipment, net
36,450

 
31,034

Operating right-of-use assets
131,554

 

Goodwill and other intangibles, net
803,841

 
794,604

Other assets
35,998

 
34,695

Total assets
$
1,392,900

 
$
1,423,058

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Liabilities:
 
 
 
Accrued salaries and bonuses
$
232,532

 
$
404,717

Accounts payable and accrued expenses
41,414

 
55,048

Deferred income
29,219

 
27,812

Income taxes payable
3,410

 
7,759

Deferred income taxes
6,057

 
5,204

Loans payable to former shareholders
1,958

 
2,047

Loan payable to non-affiliate
15,447

 
6,610

Operating lease liabilities
147,426

 

Other liabilities
22,118

 
22,532

Total liabilities
499,581

 
531,729

 
 
 
 
Commitments and contingencies (Note 17)
 
 
 
 
 
 
 
Stockholders' equity:
 
 
 
Class A common stock, $0.001 par value. Authorized 1,000,000,000 shares; issued and outstanding 40,858,563 and 38,200,802 shares, respectively
41

 
38

Class B common stock, $0.001 par value. Authorized 1,000,000,000 shares; issued and outstanding 25,308,293 and 27,197,734 shares, respectively
25

 
27

Treasury stock, at cost: 55,164 and 0 shares, respectively
(2,502
)
 

Additional paid-in capital
631,189

 
645,090

Retained earnings
298,831

 
276,468

Accumulated other comprehensive (loss)
(34,265
)
 
(30,294
)
Total stockholders' equity
893,319

 
891,329

Total liabilities and stockholders' equity
$
1,392,900

 
$
1,423,058


See accompanying Notes to Consolidated Financial Statements
1


HOULIHAN LOKEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
Three Months Ended June 30,
(In thousands, except share and per share data)
2019
 
2018
Revenues
$
250,349

 
$
220,002

Operating expenses:
 
 
 
Employee compensation and benefits
163,311

 
139,181

Travel, meals, and entertainment
9,617

 
9,587

Rent
10,001

 
8,188

Depreciation and amortization
3,963

 
3,468

Information technology and communications
5,324

 
5,589

Professional fees
4,456

 
6,277

Other operating expenses, net
5,735

 
7,584

Total operating expenses
202,407

 
179,874

Operating income
47,942

 
40,128

Other (income)/expense, net
(1,483
)
 
(1,606
)
Income before provision for income taxes
49,425

 
41,734

Provision for income taxes
6,649

 
12,052

Net income
$
42,776

 
$
29,682

Other comprehensive income, net of tax:
 
 
 
Foreign currency translation adjustments
(3,971
)
 
(12,583
)
Comprehensive income
$
38,805

 
$
17,099

 
 
 
 
Attributable to Houlihan Lokey, Inc. common stockholders:
 
 
 
Weighted average shares of common stock outstanding:
 
 
 
Basic
61,670,617

 
62,985,084

Fully diluted
65,621,103

 
66,154,212

Earnings per share (Note 13)
 
 
 
Basic
$
0.69

 
$
0.47

Fully diluted
$
0.65

 
$
0.45




See accompanying Notes to Consolidated Financial Statements
2


HOULIHAN LOKEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands, except share data)
Class A common stock
 
Class B common
stock
 
Treasury Stock
 
 
 
 
 
 
 
 
 
Shares
 
$
 
Shares
 
$
 
Shares
 
$
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive loss
 
Total stockholders' equity
Balances – April 1, 2018
30,604,405

 
$
31

 
37,187,932

 
$
37

 
(2,000,000
)
 
$
(93,500
)
 
$
753,077

 
$
207,124

 
$
(13,956
)
 
$
852,813

Cumulative effect of the change in accounting principle related to revenue recognition from contracts with clients, net of tax

 

 

 

 

 

 

 
(17,687
)
 

 
(17,687
)
Shares issued

 

 
1,152,675

 
2

 

 

 
6,007

 

 

 
6,009

Stock compensation vesting (Note 14)

 

 

 

 

 

 
14,537

 

 

 
14,537

Dividends

 

 

 

 

 

 

 
(17,417
)
 

 
(17,417
)
Secondary offering
3,000,000

 
3

 
(3,000,000
)
 
(3
)
 

 

 

 

 

 

Retired shares upon settlement of forward purchase agreement

 

 
(2,000,000
)
 
(2
)
 
2,000,000

 
93,500

 
(93,498
)
 

 

 

Conversion of Class B to Class A shares
597,880

 
1

 
(597,880
)
 
(1
)
 

 

 

 

 

 

Shares issued to non-employee directors (Note 14)
4,212

 

 

 

 

 

 

 

 

 

Other shares repurchased/forfeited
(697,000
)
 
(1
)
 
(64,251
)
 

 

 

 
(35,998
)
 

 

 
(35,999
)
Net income

 

 

 

 

 

 

 
29,682

 

 
29,682

Change in unrealized translation

 

 

 

 

 

 

 

 
(12,583
)
 
(12,583
)
Total comprehensive income

 

 

 

 

 

 

 
29,682

 
(12,583
)
 
17,099

Balance - June 30, 2018
33,509,497

 
$
34

 
32,678,476

 
$
33

 

 
$

 
$
644,125

 
$
201,702

 
$
(26,539
)
 
$
819,355

(In thousands, except share data)
Class A common stock
 
Class B common
stock
 
Treasury Stock
 
 
 
 
 
 
 
 
 
Shares
 
$
 
Shares
 
$
 
Shares
 
$
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive loss
 
Total stockholders' equity
Balances – April 1, 2019
38,200,802

 
$
38

 
27,197,734

 
$
27

 

 
$

 
$
645,090

 
$
276,468

 
$
(30,294
)
 
$
891,329

Shares issued

 

 
1,491,860

 
1

 

 

 
6,456

 

 

 
6,457

Stock compensation vesting (Note 14)

 

 

 

 

 

 
10,910

 

 

 
10,910

Class B shares sold
414,071

 
1

 
(414,071
)
 

 

 

 

 

 

 
1

Dividends

 

 

 

 

 

 

 
(20,413
)
 

 
(20,413
)
Conversion of Class B to Class A shares
2,291,827

 
2

 
(2,291,827
)
 
(2
)
 

 

 

 

 

 

Shares issued to non-employee directors (Note 14)
7,027

 

 

 

 

 

 

 

 

 

Other shares repurchased/forfeited

 

 
(675,403
)
 
(1
)
 
(55,164
)
 
(2,502
)
 
(31,267
)
 

 

 
(33,770
)
Net income

 

 

 

 

 

 

 
42,776

 

 
42,776

Change in unrealized translation

 

 

 

 

 

 

 

 
(3,971
)
 
(3,971
)
Total comprehensive income

 

 

 

 

 

 

 
42,776

 
(3,971
)
 
38,805

Balance - June 30, 2019
40,913,727

 
$
41

 
25,308,293

 
$
25

 
(55,164
)
 
$
(2,502
)
 
$
631,189

 
$
298,831

 
$
(34,265
)
 
$
893,319


See accompanying Notes to Consolidated Financial Statements
3


HOULIHAN LOKEY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Three Months Ended June 30,
(In thousands, except share data)
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
42,776

 
$
29,682

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Deferred income taxes
2,527

 
594

Provision for bad debts
(21
)
 
384

Unrealized gains on investment securities
(164
)
 

Non-cash lease expense
6,106

 

Depreciation and amortization
3,963

 
3,468

Contingent consideration valuation

 
(719
)
Compensation expenses – restricted share grants (Note 14)
12,762

 
17,190

Changes in operating assets and liabilities:

 

Accounts receivable
3,407

 
11,751

Unbilled work in process
247

 
12,972

Other assets
(1,809
)
 
(4,626
)
Accrued salaries and bonuses
(171,003
)
 
(191,408
)
Accounts payable and accrued expenses and other
(4,915
)
 
(1,087
)
Deferred income
1,381

 
(4,279
)
Income taxes payable
(4,466
)
 
7,104

Net cash (used in) operating activities
(109,209
)
 
(118,974
)
Cash flows from investing activities:
 
 
 
Purchases of investment securities
(157,097
)
 
(6,418
)
Sales or maturities of investment securities
249,479

 
200,080

Acquisition of business, net of cash acquired
8,710

 
(71,407
)
Receivables from affiliates
(170
)
 
(30
)
Purchase of property and equipment, net
(7,441
)
 
(1,023
)
Net cash provided by investing activities
93,481

 
121,202

Cash flows from financing activities:
 
 
 
Dividends paid
(22,887
)
 
(16,843
)
Settlement of forward purchase contract

 
(93,500
)
Other share repurchases
(2,502
)
 
(34,230
)
Payments to settle employee tax obligations on share-based awards
(31,267
)
 
(1,768
)
Earnouts paid

 
(1,923
)
Loans payable to former shareholders redeemed
(90
)
 
(140
)
Net cash (used in) financing activities
(56,746
)
 
(148,404
)
Effects of exchange rate changes on cash, cash equivalents, and restricted cash
(1,539
)
 
(9,437
)
(Decrease) in cash, cash equivalents, and restricted cash
(74,013
)
 
(155,613
)
Cash, cash equivalents, and restricted cash – beginning of period
286,115

 
300,223

Cash, cash equivalents, and restricted cash – end of period
$
212,102

 
$
144,610

 
 
 
 
Supplemental disclosures of non-cash activities:
 
 
 
Shares issued via vesting of liability classified awards
$
6,457

 
$

Fully depreciated assets written off

 
157

Fully amortized intangibles written off

 
8,272

Cash acquired through acquisitions
$
10,506

 
$
16,141

Cash paid during the period:
 
 
 
Interest
$
193

 
$
249

Taxes
12,560

 
4,651


See accompanying Notes to Consolidated Financial Statements
4

Table of Contents
HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except share data or as otherwise stated)


Note 1 — Background
Houlihan Lokey, Inc. ("Houlihan Lokey," or "HL, Inc." also referred to as the "Company," "we," "our," or "us") is a Delaware corporation that controls the following primary subsidiaries:
Houlihan Lokey Capital, Inc., a California corporation ("HL Capital, Inc."), is a wholly owned direct subsidiary of HL, Inc. HL Capital, Inc. is registered as a broker-dealer under Section 15(b) of the Securities Exchange Act of 1934 and a member of Financial Industry Regulatory Authority, Inc.

Houlihan Lokey Financial Advisors, Inc., a California corporation ("HL FA, Inc."), is a wholly owned direct subsidiary of HL, Inc.

HL Finance, LLC ("HL Finance"), a syndicated leveraged finance platform established to arrange senior secured leveraged loans for financial sponsor-backed, privately-held, and public corporate entities. HL Finance acts as an arranger on syndicated loan transactions and has entered into an agreement with a third party as the initial strategic investor.

Houlihan Lokey EMEA, LLP, a limited liability partnership registered in England ("HL EMEA, LLP"), is an indirect subsidiary of HL, Inc. HL EMEA, LLP is regulated by the Financial Conduct Authority in the United Kingdom ("U.K.").

On August 18, 2015, the Company successfully completed an initial public offering ("IPO") of its Class A common stock. Expenses related to the corporate reorganization and IPO recorded in the Consolidated Statements of Comprehensive Income include the following:
$3,560 and $3,323 of compensation expenses associated with the amortization of restricted stock granted in connection with the IPO during the three months ended June 30, 2019 and 2018, respectively; amortization expense of restricted stock granted in connection with the IPO is being recognized over a four and one-half year vesting period; and

$2,552 and $2,753 of compensation expenses associated with the accrual of certain deferred cash payments granted in connection with the IPO during the three months ended June 30, 2019 and 2018, respectively; accrual expense of deferred cash payments granted in connection with the IPO is being recognized over a four and one-half year vesting period.

Prior to a corporate reorganization that was consummated immediately prior to the closing of the IPO, the Company was incorporated in California as Houlihan Lokey, Inc., a California corporation ("HL CA"), and was a wholly owned indirect subsidiary of Fram Holdings, Inc., a Delaware corporation ("Fram"), which, in turn, was a majority owned subsidiary of ORIX Corporation USA (formerly ORIX USA Corporation), a Delaware corporation ("ORIX USA"), with the remaining minority interest being held by Company employees ("HL Holders"). ORIX USA and the HL Holders held their interests in HL CA indirectly through their ownership of Fram. On July 24, 2015, HL CA merged with and into HL, Inc., with HL, Inc. as the surviving entity. In connection with the IPO, the HL Holders deposited their shares of HL, Inc. Class B common stock into a voting trust (the "HL Voting Trust") and own such common stock through the HL Voting Trust. Houlihan Lokey separated from Fram and as a result, HL, Inc. common stock is held by ORIX USA (through ORIX HLHZ Holding, LLC, its wholly owned subsidiary), the HL Voting Trust, for the benefit of the HL Holders, non-employee directors, and public shareholders.

In April 2018, the Company completed the acquisition of Quayle Munro Limited, an independent advisory firm that provides corporate finance advisory services to companies underpinned by data & analytics, content, software, and services. 

In May 2018, the Company completed the acquisition of BearTooth Advisors, an independent advisory business providing strategic advisory and placement agency services to alternative investment managers.

In June 2019, the Company exercised its option to acquire the remaining 51% of the shares of Lara (Italy Holdco) Limited ("Lara"). Lara's only operating subsidiary, Houlihan Lokey S.p.A., is an Italian-based company which provides corporate financial advisory services.
 

5

Table of Contents
HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except share data or as otherwise stated)

The Company offers financial services and financial advice to a broad clientele located throughout the United States of America ("U.S."), Europe, and the Middle East and Asia-Pacific regions. The Company has U.S. offices in Los Angeles, San Francisco, Chicago, New York City, Minneapolis, McLean (Virginia), Dallas, Houston, Miami, and Atlanta as well as foreign offices in London, Paris, Frankfurt, Madrid, Amsterdam, Dubai, Sydney, Tokyo, Hong Kong, Beijing and Singapore. Together, the Company and its subsidiaries form an organization that provides financial services to meet a wide variety of client needs. The Company concentrates its efforts toward the earning of professional fees with focused services across the following three business segments:

Corporate Finance ("CF") provides general financial advisory services in addition to advice on mergers and acquisitions and capital markets offerings. We advise public and private institutions on a wide variety of situations, including buy-side and sell-side transactions, as well as leveraged loans, private mezzanine debt, high-yield debt, initial public offerings, follow-ons, convertibles, equity private placements, private equity, and liability management transactions, and advise financial sponsors on all types of transactions. The majority of our CF revenues consists of fees paid upon the successful completion of the transaction or engagement ("Completion Fees"). A CF transaction can fail to be completed for many reasons that are outside of our control. In these instances, our fees are generally limited to the fees paid at the time an engagement letter is signed ("Retainer Fees") and in some cases fees paid during the course of the engagement ("Progress Fees") that may have been received.

Financial Restructuring ("FR") provides advice to debtors, creditors and other parties-in-interest in connection with recapitalization/deleveraging transactions implemented both through bankruptcy proceedings and though out-of-court exchanges, consent solicitations or other mechanisms, as well as in distressed mergers and acquisitions and capital markets activities. As part of these engagements, our FR business segment offers a wide range of advisory services to our clients, including: the structuring, negotiation, and confirmation of plans of reorganization; structuring and analysis of exchange offers; corporate viability assessment; dispute resolution and expert testimony; and procuring debtor-in-possession financing. Although atypical, a FR transaction can fail to be completed for many reasons that are outside of our control. In these instances, our fees are generally limited to the Retainer Fees and/or Progress Fees.

Financial Advisory Services ("FAS") primarily provides valuations of various assets, including: companies; illiquid debt and equity securities; and intellectual property (among other assets and liabilities). These valuations are used for financial reporting, tax reporting, and other purposes. In addition, our FAS business segment renders fairness opinions in connection with mergers and acquisitions and other transactions, and solvency opinions in connection with corporate spin-offs and dividend recapitalizations, and other types of financial opinions in connection with other transactions. Also, our FAS business segment provides dispute resolution services to clients where fees are usually based on the hourly rates of our financial professionals. Lastly, our FAS business segment provides strategic consulting services to clients where fees are either fixed or based on the hourly rates of our consulting professionals. Unlike our CF or FR segments, the fees generated in our FAS segment are generally not contingent on the successful completion of a transaction.
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S. ("GAAP"), pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC"), and include all information and footnotes required for consolidated financial statement presentation. The results of operations for the three months ended June 30, 2019 are not necessarily indicative of the results of operations to be expected for the fiscal year ending March 31, 2020. The unaudited interim consolidated financial statements and notes to consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2019 (the "2019 Annual Report").
Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries where it has a controlling financial interest. All intercompany balances and transactions have been eliminated in consolidation.
The Company carries its investments in unconsolidated entities over which it has significant influence but does not control using the equity method, and includes its ownership share of the income and losses in Other income/(expense), net in the Consolidated Statements of Comprehensive Income.

6

Table of Contents
HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except share data or as otherwise stated)

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements. Management estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period, and disclosure of contingent assets and liabilities at the reporting date. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Items subject to such estimates and assumptions include, but are not limited to: the allowance for doubtful accounts; the valuation of deferred tax assets, goodwill, accrued expenses, and share based compensation; the allocation of goodwill and other assets across the reporting units (segments); and reserves for income tax uncertainties and other contingencies.
Revenues

Revenues consist of fee revenues from advisory services and reimbursed costs incurred in fulfilling the contract. Revenues reflect fees generated from our CF, FR, and FAS business segments. See Note 3 for additional information.
Operating Expenses

The majority of the Company’s operating expenses are related to compensation for employees, which includes the amortization of the relevant portion of the Company’s share-based incentive plans (Note 14). Other types of operating expenses include: Travel, meals and entertainment, Rent, Depreciation and amortization, Information technology and communications, Professional fees, and Other operating expenses, net.
Translation of Foreign Currency Transactions

The reporting currency for the consolidated financial statements of the Company is the U.S. dollar. The assets and liabilities of subsidiaries whose functional currency is other than the U.S. dollar are included in the consolidation by translating the assets and liabilities at the reporting period-end exchange rates; however, revenues and expenses are translated using the applicable exchange rates determined on a monthly basis throughout the fiscal year. Resulting translation adjustments are reported as a separate component of accumulated other comprehensive loss, net of applicable taxes.
From time to time, we enter into transactions to hedge our exposure to certain foreign currency fluctuations through the use of derivative instruments or other methods. As of June 30, 2019, we entered into a foreign currency forward contract between the pound sterling and the U.S. dollar with an aggregate notional value of $20 million. As of June 30, 2018, we entered into a foreign currency forward contract between the euro and pound sterling with an aggregate notional value of EUR 5.7 million. The fair value of these contracts represented a loss included in Other operating expenses, net of $41 and $77 during the three months ended June 30, 2019 and 2018, respectively.

Cash and Cash Equivalents, and Restricted Cash

Cash and cash equivalents include cash held at banks and highly liquid investments with original maturities of three months or less. As of June 30, 2019 and March 31, 2019, the Company had cash balances with banks in excess of insured limits. The Company has not experienced any losses in its cash accounts and believes it is not exposed to any significant credit risk with respect to Cash and cash equivalents.
The following table provides a reconciliation of Cash and cash equivalents, and Restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Consolidated Statements of Cash Flows.     
 
June 30, 2019
 
March 31, 2019
Cash and cash equivalents
$
211,731

 
$
285,746

Restricted cash (1)
371

 
369

Total cash, cash equivalents, and restricted cash
$
212,102

 
$
286,115


(1)
Restricted cash as of June 30, 2019 and March 31, 2019 consisted of a cash secured letter of credit issued for our Frankfurt office.


7

Table of Contents
HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except share data or as otherwise stated)

Recent Accounting Pronouncements

The Financial Accounting Standards Board (the “FASB”) issued the following authoritative guidance amending the FASB Accounting Standards Codification (“ASC”).
On April 1, 2019, we adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), and all related amendments. See Note 16 for additional information.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting which clarifies when changes to the terms or conditions of share-based payment awards require an entity to apply modification accounting. The amended guidance states an entity should account for the effects of a modification unless certain criteria are met, which include that the modified award has the same fair value, vesting conditions and classification as the original award. The Company adopted guidance effective April 1, 2019 and its application did not have a material impact on the consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13 Financial Instruments-Credit Losses - Measurement of Credit Losses on Financial Instruments. The amended guidance involves several aspects of the accounting for credit losses related to certain financial assets that are not accounted for at fair value through net income and includes trade receivables and net investments in leases. The new guidance, and subsequent updates, broadens the information that an entity must consider in developing its estimated credit losses expected to occur over the remaining life of assets measured either collectively or individually to include historical experience, current conditions and reasonable and supportable forecasts, replacing the existing incurred credit loss model and other models with the Current Expected Credit Losses (“CECL”) model.  The new guidance expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating credit losses and requires new disclosures of the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. This new guidance is first effective for our fiscal year beginning on April 1, 2020 and will be adopted under a modified retrospective approach. We are evaluating the impact the adoption of this new guidance will have on our financial position and results of operations, which will depend on, among other things, the current and expected macroeconomic conditions and the nature and characteristics of financial assets held by us on the date of adoption.

In 2019, the following ASU became effective, but there was no quantitative or qualitative effect on our financial statements:
ASU 2019-01, Leases - Topic 842: Codification Improvements.
Note 3 — Revenue Recognition
The Company generates revenues from contractual advisory services and reimbursed costs incurred in fulfilling those contracts. Revenues for all three business segments (CF, FR, and FAS) are recognized upon satisfaction of the performance obligation, which may be satisfied over time or at a point in time. The amount and timing of the fees paid vary by the type of engagement.

The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for those promised services (i.e., the “transaction price”). In determining the transaction price, we consider multiple factors, including the effects of variable consideration. Variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved. In determining when to include variable consideration in the transaction price, we consider the range of possible outcomes, the predictive value of our past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of our influence, such as market volatility or the judgment and actions of third parties. The substantial majority of the Company’s advisory fees (i.e., Completion Fees) are considered variable and constrained as they are contingent upon future events, which include factors outside of our control (e.g., completion of a transaction or third party emergence from bankruptcy or approval by the court).

Revenues from CF engagements primarily consist of fees generated in connection with advisory services related to corporate finance, mergers and acquisitions, and capital markets offerings. Completion Fees from these engagements are recognized at a point in time when the related transaction has been effectively closed. At that time, the Company has transferred control of the promised service and the customer obtains control. CF contracts generally contain a variety of promised services that may be capable of being distinct, but they are not distinct within the context of the contract as the various services are inputs to the combined output of successfully brokering a specific transaction.


8

Table of Contents
HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except share data or as otherwise stated)

Revenues from FR engagements primarily consist of fees generated in connection with advisory services to debtors, creditors and other parties-in-interest involving recapitalization or deleveraging transactions implemented both through bankruptcy proceedings and through out-of-court exchanges, consent solicitations or other mechanisms, as well as in distressed mergers and acquisitions and capital markets activities. Retainer Fees and Progress Fees from restructuring engagements are recognized over time using a time elapsed measure of progress as our clients simultaneously receive and consume the benefits of those services as they are provided. Completion Fees from these engagements are recognized at a point in time when the related transaction has been effectively closed. At that time, the Company has transferred control of the promised service and the customer obtains control.

Revenues from FAS engagements primarily consist of fees generated in connection with valuation and diligence services and rendering fairness, solvency and other financial opinions. Revenues are recognized at a point in time as these engagements include a singular objective that does not transfer any notable value to the Company’s clients until the opinions have been rendered and delivered to the client. However, certain engagements consists of advisory services where fees are usually based on the hourly rates of our financial professionals. Such revenues are recognized over time as the benefits of these advisory services are transferred to the Company’s clients throughout the course of the engagement and as a practical expedient, the Company has elected to use the ‘as-invoiced’ approach to recognize revenue.

Taxes, including value added taxes, collected from customers and remitted to governmental authorities are accounted for on a net basis, and therefore, are excluded from revenue in the Consolidated Statements of Comprehensive Income.
Disaggregation of Revenues

The Company disaggregates revenues based on its business segment and geographical area results and believes that the same information provides a reasonable representation of how performance obligations relate to the nature, amount, timing and uncertainty of revenue and cash flows. See Note 18 for additional information.

Contract Balances

The timing of revenue recognition may differ from the timing of payment by customers. The Company records a receivable when revenue is recognized prior to payment and there is an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, the Company records deferred income (contract liability) until the performance obligations are satisfied.

Costs incurred in fulfilling advisory contracts with point-in-time revenue recognition are recorded as a contract asset when the costs (i) relate directly to a contract, (ii) generate or enhance resources of the Company that will be used in satisfying performance obligations, and (iii) are expected to be recovered. The Company amortizes the contract asset costs related to fulfilling a contract based on recognition of fee revenues for the corresponding contract. As the Company changed the presentation of costs incurred in fulfilling advisory contracts from a net presentation within non-compensation expenses to a gross basis in revenues, the Company records a contract liability for the reimbursable costs incurred until the fee revenue is recognized.

Costs incurred in fulfilling an advisory contract with over-time revenue recognition are expensed as incurred.

The change in the Company’s contract assets and liabilities during the period primarily reflects the timing difference between the Company’s performance and the customer’s payment. The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers:
 
April 1, 2019
 
Increase/(Decrease)
 
June 30, 2019
Receivables (1)
$
64,797

 
$
(3,507
)
 
$
61,290

Unbilled work in process, net of allowance for doubtful accounts
71,891

 
106

 
71,997

Contract Assets (1)
6,033

 
595

 
6,628

Contract Liabilities (2)
27,812

 
1,407

 
29,219

(1)
Included within Accounts receivable, net of allowance for doubtful accounts in the June 30, 2019 Consolidated Balance Sheets.
(2)
Included within Deferred income in the June 30, 2019 Consolidated Balance Sheets.

During the quarter ended June 30, 2019, $9,040 of Revenues were recognized that were included in the Deferred income balance at the beginning of the period.

9

Table of Contents
HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except share data or as otherwise stated)

As a practical expedient, the Company does not disclose information about remaining performance obligations pertaining to (i) contracts that have an original expected duration of one year or less, and/or (ii) contracts where the variable consideration is allocated entirely to a wholly unsatisfied promise to transfer a distinct service that is or forms part of a single performance obligation. The transaction price allocated to remaining unsatisfied or partially unsatisfied performance obligations with an original expected duration exceeding one year was not material at June 30, 2019.
Note 4 — Related Party Transactions
The Company provides financial advisory services to ORIX USA and its affiliates and certain other related parties, and received fees for these services totaling approximately $100 and $2,297 during the three months ended June 30, 2019 and 2018, respectively.
The Company provides certain management and administrative services for the Company's unconsolidated entities and receives fees for these services. These fees are offset with the compensation costs related to the administrative staffs. As a result, the Company received net fees of $126 and $0 during the three months ended June 30, 2019 and 2018, respectively.
On March 12, 2018, pursuant to a registered underwritten public offering, we issued and sold 2,000,000 shares of our Class A common stock and certain of our former and current employees and members of our management sold 2,000,000 shares of our Class A common stock, in each case, at a price to the public of $47.25 per share (the “March 2018 Follow-on Offering”). In connection with, and prior to, the March 2018 Follow-on Offering, on January 26, 2018, we entered into a Forward Share Purchase Agreement (the "January 2018 Forward Share Purchase Agreement"), with an indirect wholly owned subsidiary of ORIX USA pursuant to which we agreed to purchase from ORIX USA on April 5, 2018 the number of shares of our Class B common stock equal to the number of shares of our Class A common stock sold by us in the March 2018 Follow-on Offering for a purchase price per share equal to the public offering price in the March 2018 Follow-on Offering less underwriting discounts and commissions. On April 5, 2018, the Company settled the transaction provided for in the January 2018 Forward Share Purchase Agreement and acquired 2,000,000 shares of Class B common stock from ORIX USA using the net proceeds we received from the March 2018 Follow-on Offering and the shares were retired.  In accordance with the terms of the January 2018 Forward Share Purchase Agreement, the purchase price per share under the January 2018 Forward Share Purchase Agreement was reduced by the per share amount of the dividend paid to ORIX USA on the shares of our Class B common stock subject to the January 2018 Forward Share Purchase Agreement prior to the settlement of the transaction.

On June 4, 2018, pursuant to a registered underwritten public offering, ORIX USA sold 1,985,983 shares of our Class A common stock and certain of our former and current employees and members of our management sold 1,014,017 shares, in each case, at a price to the public of $49.15 per share (the "June 2018 Follow-on Offering"). Concurrently with the closing of the offering, the Company repurchased from ORIX USA 697,000 shares of Class A common stock at a price per share of $49.11.

On May 30, 2019, pursuant to a registered underwritten public offering, ORIX USA sold 3,000,000 shares of our Class A common stock to the public at a price of $45.80.

In the accompanying Consolidated Balance Sheets, the Company carried accounts receivable and unbilled work in progress from related parties totaling approximately $19 and $3 as of June 30, 2019 and March 31, 2019, respectively. The Company also deferred income from related parties for service fees totaling $0 and $34 as of June 30, 2019 and March 31, 2019, respectively.

Other assets in the accompanying Consolidated Balance Sheets includes loans receivable from certain employees of $14,062 and $15,228 as of June 30, 2019, and March 31, 2019, respectively.

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HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except share data or as otherwise stated)

Note 5 — Fair Value Measurements
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels in accordance with ASC Topic 820, Fair Value Measurement:
Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
For level 3 investments in which pricing inputs are unobservable and limited market activity exists, management's determination of fair value is based upon the best information available and may incorporate management's own assumptions or involve a significant degree of judgment.
The following methods and assumptions were used by the Company in estimating fair value disclosures:
Corporate debt securities: All fair value measurements are obtained from a third-party pricing service and are not adjusted by management.
U.S. treasury securities: Fair values for U.S. treasury securities are based on quoted prices from recent trading activity of identical or similar securities. All fair value measurements are obtained from a third-party pricing service and are not adjusted by management.
The following table presents information about the Company's financial assets, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair values:
 
June 30, 2019
 
Level I
 
Level II
 
Level III
 
Total
Corporate debt securities
$

 
$
16,800

 
$

 
$
16,800

U.S. treasury securities

 
16,240

 

 
16,240

Total asset measured at fair value
$

 
$
33,040

 
$

 
$
33,040



 
March 31, 2019
 
Level I
 
Level II
 
Level III
 
Total
Corporate debt securities
$

 
$
116,577

 
$

 
$
116,577

U.S. treasury securities

 
8,681

 

 
8,681

Total asset measured at fair value
$

 
$
125,258

 
$

 
$
125,258



In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given investment is based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the instrument.

The Company had no transfers between fair value levels during the three months ended June 30, 2019.

The fair values of the financial instruments represent the amounts that would be received to sell assets or that would be paid to transfer liabilities in an orderly transaction between market participants as of a specified date. Fair value measurements maximize the use of observable inputs; however, in situations where there is little, if any, market activity for the asset or liability at the

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HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except share data or as otherwise stated)

measurement date, the fair value measurement reflects the Company’s own judgments about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by the Company based on the best information available in the circumstances, including expected cash flows and appropriately risk-adjusted discount rates, as well as available observable and unobservable inputs.

The carrying value of Cash and cash equivalents, Restricted cash, Accounts receivable, Unbilled work in process, Receivables from affiliates, Accounts payable and accrued expenses, and Deferred income approximates fair value due to the short maturity of these instruments.

The carrying value of the loans to employees included in Other assets, Loans payable to former shareholders and an unsecured loan which is included in Loan payable to non-affiliate, approximates fair value due to the variable interest rate borne by those instruments.
Note 6Investment Securities
Investment securities consist of corporate debt and U.S. Treasury securities with original maturities over 90 days. As of June 30, 2018, the Company classified its investment securities as held-to-maturity. As of December 31, 2018, the Company has reclassified its investment securities from held-to-maturity to trading and measures them at fair value in the Consolidated Balance Sheets. Unrealized holding gains and losses for trading securities are included in Other operating expense, net in the accompanying Consolidated Statements of Comprehensive Income.     

The amortized cost, gross unrealized gains (losses), and fair value of trading securities were as follows:
 
June 30, 2019
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized (Losses)
 
Fair Value
Corporate debt securities
$
16,488

 
$
314

 
$
(2
)
 
$
16,800

U.S. treasury securities
15,959

 
281

 

 
16,240

Total securities with unrealized gains
$
32,447

 
$
595

 
$
(2
)
 
$
33,040


 
March 31, 2019
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized (Losses)
 
Fair Value
Corporate debt securities
$
116,220

 
$
372

 
$
(15
)
 
$
116,577

U.S. treasury securities
8,608

 
73

 

 
8,681

Total securities with unrealized gains
$
124,828

 
$
445

 
$
(15
)
 
$
125,258


Scheduled maturities of the Company's debt securities within the investment securities portfolio were as follows:
 
June 30, 2019
 
March 31, 2019
 
Amortized Cost
 
Estimated Fair Value
 
Amortized Cost
 
Estimated Fair Value
Due within one year
$
5,951

 
$
5,985

 
$
96,109

 
$
96,175

Due within years two through five
26,496

 
27,055

 
28,719

 
29,083

Total debt within the investment securities portfolio
$
32,447

 
$
33,040

 
$
124,828

 
$
125,258


Note 7Allowance for Doubtful Accounts
The allowance for doubtful accounts on receivables reflects management’s best estimate of probable inherent losses determined principally on the basis of historical experience and review of uncollected revenues and is recorded through provision for bad debts which is included in other operating expenses, net in the accompanying Consolidated Statements of Comprehensive Income. Amounts deemed to be uncollectible are written off against the allowance for doubtful accounts.

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HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except share data or as otherwise stated)

 
Three Months Ended June 30,
 
2019
 
2018
Beginning balance
$
5,596

 
$
11,391

Provision for bad debt
(21
)
 
384

Recovery/(write-off) of uncollectible accounts
155

 
(748
)
Ending balance
$
5,730

 
$
11,027


Note 8 — Property and Equipment
Property and equipment are stated at cost. Repair and maintenance charges are expensed as incurred and costs of renewals or improvements are capitalized at cost. Depreciation on furniture and office equipment is recognized on a straight-line basis over the estimated useful lives of the respective assets. Leasehold improvements are recorded as prepaid assets and included within fixed lease payments. See Note 16 for additional information.
Property and equipment, net of accumulated depreciation consist of the following:
 
Useful Lives
 
June 30, 2019
 
March 31, 2019
Equipment
5 Years
 
$
8,259

 
$
7,916

Furniture and fixtures
5 Years
 
19,738

 
19,445

Leasehold improvements
10 Years
 
39,699

 
34,370

Computers and software
3 Years
 
14,039

 
11,499

Other
N/A
 
1,115

 
1,117

Total cost
 
 
82,850

 
74,347

Less: accumulated depreciation
 
 
(46,400
)
 
(43,313
)
Total net book value
 
 
$
36,450

 
$
31,034


Additions to property and equipment during the three months ended June 30, 2019 were primarily related to leasehold improvement costs incurred.
Depreciation expense of approximately $2,409 and $2,147 was recognized during the three months ended June 30, 2019 and 2018, respectively.
Note 9 — Goodwill and Other Intangible Assets
Goodwill represents an acquired company’s acquisition cost over the fair value of acquired net tangible and intangible assets. Goodwill is the net asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Intangible assets identified and accounted for include tradenames and marks, backlog, developed technologies, and customer relationships. Those intangible assets with finite lives, including backlog and customer relationships, are amortized over their estimated useful lives.
Goodwill is reviewed annually for impairment and more frequently if potential impairment indicators exist. Goodwill is reviewed for impairment in accordance with Accounting Standards Update ("ASU") No. 2011-08, Testing Goodwill for Impairment, which permits management to make a qualitative assessment of whether it is more likely than not that one of its reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. If management concludes that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then management would not be required to perform the two-step impairment test for that reporting unit. If the assessment indicates that it is more likely than not that the reporting unit’s fair value is less than its carrying value, management must test further for impairment utilizing a two-step process. Step 1 compares the estimated fair value of the reporting unit with its carrying value, including goodwill. If the carrying value of the reporting unit exceeds the estimated fair value, an impairment exists and is measured in Step 2 as the excess of the recorded amount of goodwill over the implied fair value of goodwill resulting from the valuation of the reporting unit. Impairment testing of goodwill requires a significant amount of judgment in assessing qualitative factors and estimating the fair value of the reporting unit, if necessary. The fair value is determined using an estimated market value approach, which considers estimates of future after tax cash flows, including a terminal value based on market earnings multiples, discounted at an appropriate market rate. As of June 30, 2019 , management concluded that it was not more likely than not that the Company’s reporting units’ fair value was less than their carrying amount and no further impairment testing had been considered necessary.

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HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except share data or as otherwise stated)

Indefinite-lived intangible assets are reviewed annually for impairment in accordance with ASU 2012-02, Testing Indefinite-lived Intangible Assets for Impairment, which provides management the option to perform a qualitative assessment. If it is more likely than not that the asset is impaired, the amount that the carrying value exceeds the fair value is recorded as an impairment expense. As of June 30, 2019, management concluded that it was not more likely than not that the fair values were less than the carrying values.
Intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group (inclusive of other long-lived assets) be tested for possible impairment, management first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying amount exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. As of June 30, 2019, no events or changes in circumstances were identified that indicated that the carrying amount of the finite-lived intangible assets were not recoverable.
The following table provides a reconciliation of Goodwill and other intangibles, net reported on the Consolidated Balance Sheets.
 
Useful Lives
 
June 30, 2019
 
March 31, 2019
Goodwill (1)
Indefinite
 
$
605,026

 
$
594,812

Tradename-Houlihan Lokey (1)
Indefinite
 
192,210

 
192,210

Other intangible assets
Varies
 
16,919

 
18,614

Total cost
 
 
814,155

 
805,636

Less: accumulated amortization
 
 
(10,314
)
 
(11,032
)
Goodwill and other intangibles, net
 
 
$
803,841

 
$
794,604

Deferred tax liability (1)
 
 
(51,676
)
 
(51,676
)
Total net book value, after taxes
 
 
$
752,165

 
$
742,928


(1)
When HL CA was acquired by Fram in January 2006, approximately $392,600 of goodwill and $192,210 of indefinite-lived intangible assets were generated and recognized. In accordance with ASC Topic 805, Business Combinations, since HL CA was wholly owned by Fram, this goodwill and all other purchase accounting-related adjustments were pushed down to the Company’s reporting level. Through both foreign and domestic acquisitions made directly by HL CA and the Company since 2006, additional goodwill of approximately $212,426, inclusive of foreign currency translations, has been recognized.

Amortization expense of approximately $1,553 and $1,321 was recognized for the three months ended June 30, 2019 and 2018, respectively. The estimated future amortization for amortizable intangible assets for each of the next five years are as follows:
 
Year Ended March 31,
Remainder of 2020
$
5,257

2021
776

2022
157

2023
7

2024
7


Note 10 — Loans Payable
In August 2015, the Company entered into a revolving line of credit with Bank of America, N.A., which allows for borrowings of up to $75.0 million and originally matured in August 2017. On July 28, 2017, the Company extended the maturity date of the revolving credit facility to August 18, 2019 (or if such date is not a business day, the immediately preceding business day). The agreement governing this facility provides that borrowings bear interest at an annual rate of LIBOR plus 1.00%, commitment fees apply to unused amounts, and contains debt covenants which require that the Company maintain certain financial ratios. As of June 30, 2019, no principal was outstanding under the line of credit. The Company paid interest and unused commitment fees of $57 each for the three months ended June 30, 2019 and 2018.


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HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except share data or as otherwise stated)

Prior to the IPO, Fram maintained certain loans payable to former shareholders consisting of unsecured notes payable which were transferred to the Company in conjunction with the IPO. The average interest rate on the individual notes was 3.75% and 3.49% as of June 30, 2019 and 2018, respectively, and the maturity dates range from 2019 to 2027. The Company incurred interest expense on these notes of $20 and $25 during the three months ended June 30, 2019 and 2018, respectively.

An acquisition made in January 2015 included non-contingent consideration with a carrying value of $226 as of each of June 30, 2019 and March 31, 2019, which is included in other liabilities in the accompanying Consolidated Balance Sheets.    
In November 2015, the Company acquired the investment banking operations of Leonardo & Co. NV ("Leonardo") in Germany, the Netherlands, and Spain, and made a 49% investment in Leonardo's operations in Italy. Total consideration included an unsecured loan of EUR 14 million payable on November 16, 2040. The loan bears interest at an annual rate of 1.50%. In each of January 2017, December 2017 and December 2018, we paid a portion of this loan in the amount of EUR 2.9 million. The company incurred interest expense on this loan of $24 and $37 during the three months ended June 30, 2019 and 2018, respectively.
As described in Note 1, the Company acquired the remaining 51% of Leonardo's Italy operations in June 2019. This step acquisition included the assumption of the entire amount of the unsecured loan payable due November 16, 2040, and is included in Loan payable to non-affiliate in the accompanying Consolidated Balance Sheets as of June 30, 2019.
An acquisition made in January 2017 included non-contingent consideration with a carrying value of $1,964 and $1,983 as of June 30, 2019 and March 31, 2019, respectively, which is included in Other liabilities in the accompanying Consolidated Balance Sheets.
In April 2018, the Company acquired Quayle Munro Limited. Total consideration included non-interest bearing unsecured convertible loans totaling GBP 10.5 million payable on May 31, 2022, which is included in Other liabilities in the accompanying Consolidated Balance Sheets. Under certain circumstances, the notes may be exchanged for Company stock over a three year period in equal annual installments starting on May 31, 2020. The Company incurred imputed interest expense on these notes of $36 and $108 for the three months ended June 30, 2019 and 2018, respectively.
In May 2018, the Company acquired BearTooth Advisors. Total consideration included an unsecured note of $2.8 million bearing interest at an annual rate of 2.88% and payable on May 21, 2048. The Company incurred interest expense on these notes of $26 and $9 during the three months ended June 30, 2019 and 2018, respectively.
The scheduled aggregate repayments of our Loans payable to former shareholders, Other liabilities, and the Loan payable to non-affiliates in the accompanying Consolidated Balance Sheets are as follows:
 
Year Ended March 31,
Remaining 2020
$
606

2021
575

2022
1,248

2023
16,241

2024
337

2025 and thereafter
20,516

Total
$
39,523


Note 11 — Accumulated Other Comprehensive (Loss)
Other comprehensive (loss) is comprised of foreign currency translation adjustments of $(3,971) and $(12,583) for the three months ended June 30, 2019 and 2018, respectively. The change in foreign currency translation was impacted by the vote in the U.K. to withdraw from the European Union. We are currently in a period in which the terms of withdrawal are being negotiated and there may be impacts on our European business that are unknown at this time. We believe the change in foreign currency translation will become more volatile, but we do not expect this to have a material impact on our operating results and financial position.


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HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except share data or as otherwise stated)

Accumulated other comprehensive (loss) at June 30, 2019 was comprised of the following:
 
June 30, 2019
Balance, April 1, 2019
$
(30,294
)
Foreign currency translation adjustment
(3,971
)
Balance, June 30, 2019
$
(34,265
)


Note 12 — Income Taxes
Prior to the IPO, ORIX USA and its subsidiaries, including the Company, filed consolidated federal income tax returns and separate returns in state and local jurisdictions, and did so for fiscal 2016 through the date of the IPO. The Company reported income tax expense as if it filed separate returns in all jurisdictions. Following the IPO, the Company files a consolidated federal income tax return separate from ORIX USA, as well as consolidated and separate returns in state and local jurisdictions, and the Company reports income tax expense on this basis.
We account for income taxes in accordance with ASC Topic 740, Income Taxes, which requires the recognition of tax benefits or expenses on temporary differences between the financial reporting and tax basis of our assets and liabilities. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. The measurement of the deferred items is based on enacted tax laws and applicable tax rates. A valuation allowance related to a deferred tax asset is recorded if it is more likely than not that some portion or all of the deferred tax asset will not be realized.
The Company utilized a comprehensive model to recognize, measure, present, and disclose in its financial statements any uncertain tax positions that have been taken or are expected to be taken on a tax return. The impact of an uncertain tax position that is more likely than not to be sustained upon audit by the relevant taxing authority must be recognized at the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if the position has less than a 50% likelihood of being sustained. Interest expense and penalties related to income taxes are included in the provision for income taxes in the accompanying Consolidated Statements of Comprehensive Income.
The Global Intangible Low-Taxed Income tax (“GILTI inclusion”) can be recognized in the financial statements through an accounting policy election by either recording a period cost (permanent item) or providing deferred income taxes stemming from certain basis differences that are expected to result in GILTI inclusion. The Company has elected to account for the tax impacts of the GILTI inclusion as a period cost.
The Company’s provision for income taxes was $6,649 and $12,052 for three months ended June 30, 2019 and 2018, respectively. This represents effective tax rates of 13.5% and 28.9% for the three months ended June 30, 2019 and 2018, respectively. The decrease in the Company's tax rate during the three-month period ended June 30, 2019 relative to the same period in 2018 was primarily a result of the vesting of stock that occurred in April and May 2019.

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HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except share data or as otherwise stated)

Note 13Earnings Per Share
The calculations of basic and diluted earnings per share attributable to holders of shares of common stock are presented below.
 
Three Months Ended June 30,
 
2019
 
2018
Numerator:
 
 
 
Net income attributable to holders of shares of common stock—basic
$
42,776

 
$
29,682

Net income attributable to holders of shares of common stock—diluted
$
42,776

 
$
29,682

Denominator:
 
 
 
Weighted average shares of common stock outstanding—basic
61,670,617

 
62,985,084

Weighted average number of incremental shares issuable from unvested restricted stock and restricted stock units, as calculated using the treasury stock method
3,950,486

 
3,169,128

Weighted average shares of common stock outstanding—diluted
65,621,103

 
66,154,212

 
 
 
 
Basic earnings per share
$
0.69

 
$
0.47

Diluted earnings per share
$
0.65

 
$
0.45


Note 14 — Employee Benefit Plans
Defined Contribution Plans

The Company sponsors a 401(k) defined contribution savings plan for its domestic employees and defined contribution retirement plans for its international employees. The Company contributed approximately $779 and $768 during the three months ended June 30, 2019 and 2018, respectively, to these defined contribution plans.
Share-Based Incentive Plans

Following the IPO, additional awards of restricted shares have been and will be made under the Amended and Restated Houlihan Lokey, Inc. 2016 Incentive Award Plan (the "2016 Incentive Plan"), which became effective in August 2015 and was amended in October 2017. Under the 2016 Incentive Plan, it is anticipated that the Company will continue to grant cash and equity-based incentive awards to eligible service providers in order to attract, motivate and retain the talent necessary to operate the Company's business. Equity-based incentive awards issued under the 2016 Incentive Plan generally vest over a four-year period. An aggregate of 30,820 restricted shares of Class A common stock were granted under the 2016 Incentive Plan to (i) two independent directors in August 2015 at $21 per share, (ii) two independent directors in the first quarter of fiscal 2017 at $25.21 per share, (iii) one independent director in the first quarter of fiscal 2017 at $23.93 per share, (iv) three independent directors in the first quarters of fiscal 2018 and 2019 at $33.54 and $44.50 per share, respectively, and (v) one independent director in the third quarter of fiscal 2019 at $42.41 per share.
An excess tax benefit of $7,605 was recognized during the three months ended June 30, 2019 as a component of the provision for income taxes and an operating activity on the Consolidated Statements of Cash Flows, with no such benefit for the three months ended June 30, 2018. The June 30, 2019 excess tax benefit recognized is related to shares vested in April and May 2019. For the comparable period, vesting of shares scheduled to vest in April and May 2018 was accelerated on October 21, 2017 and the corresponding excess tax benefit was recognized in the fiscal year ended March 31, 2018. The Company recorded cash outflows of $31,267 and $1,768 related to the settlement of share-based awards in satisfaction of withholding tax requirements in financing activities on the Consolidated Statements of Cash Flows for the three-month periods ended June 30, 2019 and 2018, respectively.

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HOULIHAN LOKEY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except share data or as otherwise stated)

The share awards are classified as equity awards at the time of grant unless the number of shares granted is unknown. Awards that are settleable in shares based upon a future determinable stock price are classified as liabilities until the price is established and the resulting number of shares is known, at which time they are re-classified from liabilities to equity awards. Activity in equity classified share awards which relate to the Company's 2006 Incentive Award Plan (the "2006 Incentive Plan") and the 2016 Incentive Plan during the three months ended June 30, 2019 and 2018 is as follows:
Unvested Share Awards
 
Shares
 
Weighted Average
Grant Date
Fair Value
Balance at April 1, 2018
 
2,854,893

 
$
26.39

Granted
 
1,055,488

 
49.36

Vested
 
(74,504
)
 
49.43

Forfeited/Repurchased
 
(28,410
)
 
29.97

Balance at June 30, 2018
 
3,807,467

 
$
32.28

 
 
 
 
 
Balance at April 1, 2019
 
3,763,984

 
$
32.29

Granted
 
1,358,684

 
47.22

Vested
 
(1,490,286
)
 
29.26

Forfeited/Repurchased
 
(23,727
)
 
36.22

Balance at June 30, 2019
 
3,608,655

 
$
39.12


Activity in liability classified share awards during the