This Exhibit 99.1 (this "Exhibit 99.1") is being filed to reflect certain retrospective revisions for discontinued operations and changes in reportable segments described under the heading “Business” below that have been made to the consolidated financial statements of Franchise Group, Inc. (the “Company”) in its Annual Report on Form10-K for the year ended December 26, 2020 that was previously filed with the Securities and Exchange Commission (“SEC”) on March 10, 2021 (the “2020 Form 10-K”). In particular, this Exhibit 99.1 contains a revised description of the Company's “Business,” “Properties,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Financial Statements and Supplementary Data”.
Item 1. Business.
We are an owner and operator of franchised and franchisable businesses that continually looks to grow our portfolio of brands while utilizing our operating and capital allocation philosophies to generate strong cash flows. We have a diversified and growing portfolio of highly recognized brands that compete in the U.S. and Canada. Our asset-light business model is designed to generate consistent, recurring revenue and strong operating margins and requires limited maintenance capital expenditures. As a multi-brand operator, we continually look to diversify and grow our portfolio of brands either through acquisition or organic brand development. Our acquisition strategy typically targets businesses that are highly cash flow generative with compelling unit economics that can be scaled by adding franchise and company owned units, or that can be restructured to enhance performance and value to Franchise Group. We strive to create value for our stockholders by generating free cash flow and capital-efficient growth across economic cycles.
Our business lines include American Freight, The Vitamin Shoppe ("Vitamin Shoppe") and Buddy’s Home Furnishings ("Buddy's"). As of the year ended December 26, 2020, on a combined basis, we operated 1,329 locations, consisting of 253 franchised locations and 1,076 company run locations. Each of our companies has its own management team with significant experience in its respective industry. Additionally, we offer each of our brands a shared services platform that allows us to drive economies of scale and efficiencies. We believe our platform enables our portfolio of brands to be stronger together than they are apart.
On February 21, 2021 we entered into a purchase agreement (the "Purchase Agreement") to sell our Liberty Tax business to NextPoint Acquisition Corp ("NextPoint"), a special purpose acquisition corporation incorporated under the laws of the Province of British Columbia. The Liberty Tax business met the criteria to be reported as discontinued operations, therefore, we are reporting the historical financial position and results of operations of the Liberty Tax business as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. The accompanying Notes to the Consolidated Financial Statements and all prior year balances have been reclassified to conform to this presentation. Please refer to "Note 3. Discontinued Operations and Assets Disposition" of the Consolidated Financial Statements for additional information regarding discontinued operations. A more complete description of our business prior to the Purchase Agreement is included in Item 1. "Business" in Part I of the Annual Report on Form 10-K for the year ended December 26, 2020 that was previously filed with the Securities and Exchange Commission ("SEC") on March 10, 2021.
Our Liberty Tax business is one of the leading providers of tax preparation services in the United States and Canada. Tax preparation services and related tax settlement products are offered through approximately 2,490 franchised locations and approximately 204 Company-owned offices. The majority of offices are operated under the Liberty Tax Service brand. An online digital Do-It-Yourself tax program is also provided in the U.S. In addition to tax preparation services, related financial products are offered to our tax customers. The services and products are designed to provide streamlined tax preparation services for taxpayers who, for reasons of complexity, convenience, or the need for prompt tax refunds, seek assisted tax preparation services.
We believe our financial performance and business model have been resilient across economic cycles and recently during the COVID-19 pandemic. In addition, our franchised business model is designed to generate consistent, recurring revenue and predictable free cash flow in order to insulate us from the operating cost variability of our franchised locations. The operating costs of franchised locations are borne by the franchisees themselves.
We believe our success is driven in large part by our mutually beneficial relationships with our individual franchisees. Our franchise programs are designed to promote consistency and we are selective in granting franchises. We are focused on partnering with franchisees who have the commitment, capability and capitalization to grow our brands. Franchisees can range in size from individuals owning just one location to publicly-traded companies.
While the specific terms of our franchise agreements vary between brands, we utilize both store-level franchise and master franchise programs. Under both types of franchise programs, franchisees supply capital by purchasing or leasing the land, building, equipment, signs, inventory and supplies. Store-level franchise agreements typically require payment to us of certain upfront fees such as initial fees paid upon opening a store, fees paid to renew the term of the franchise agreement and fees paid in the event the franchise agreement is transferred to another franchisee. Franchisees also pay monthly continuing fees based on a percentage of their store sales and are required to spend a certain amount to advertise and promote the brand. Under master franchise arrangements, we enter into agreements that allow master franchisees to operate stores as well as sub-franchise stores within certain geographic territories. Master franchisees are typically responsible for overseeing development within their territories and performing certain other administrative duties with regard to the oversight of sub-franchisees. In exchange, master franchisees retain a certain percentage of fees payable by the sub-franchisees under their franchise agreements and typically pay lower fees for the stores they operate.
We seek to maintain healthy relationships with our franchisees and their representatives. We invest a significant amount of time working with the franchisee community on key aspects of the business, including products, equipment, operational improvements, standards and management techniques.
Our Vitamin Shoppe segment is an omni-channel specialty retailer of vitamins, minerals, herbs, specialty supplements, sports nutrition and other health and wellness products. We market approximately 700 nationally recognized brands as well as our own brands, which include The Vitamin Shoppe®, BodyTech®, True Athlete®, plnt®, ProBioCare®, Fitfactor Weight Management System® and Vthrive The Vitamin Shoppe®. We believe we offer one of the largest varieties of products among vitamin, mineral and supplement retailers, and we continue to refine our assortment with approximately 6,800 stock keeping units ("SKUs") offered in our typical store and approximately 7,200 additional SKUs available through e-commerce. Our broad product offering enables us to provide our customers with a depth of selection of products that may not be readily available at other specialty retailers or mass merchants, such as discount stores, supermarkets, drug stores and wholesale clubs. We believe our product offering and emphasis on product knowledge and customer service helps us meet the needs of our target customer and serves as a foundation for enhancing strong customer loyalty. We continue to focus on improving the customer experience through the roll-out of initiatives including increasing customer engagement and personalization, redesigning the omni-channel experience (including in stores as well as through the internet and mobile devices), growing our private brands and improving the effectiveness of pricing and promotions. At December 26, 2020, Vitamin Shoppe operated 719 stores in the U.S. under The Vitamin Shoppe and Super Supplements banners and is headquartered in Secaucus, New Jersey.
Our American Freight segment is a retail chain offering in-store and online access to furniture, mattresses, new and out-of-box home appliances and home accessories at discount prices. American Freight buys direct from manufacturers and sells direct in warehouse-style stores. By cutting out the middleman and keeping its overhead costs low, American Freight can offer quality products at low prices. American Freight provides customers with multiple payment options providing access to high-quality products and brand name appliances that may otherwise remain aspirational to some of its customers.
American Freight also serves as a liquidation channel for major appliance vendors. American Freight operates specialty distribution centers that test every out-of-carton appliance before it is offered for sale to customers. Customers typically are covered by the original manufacturer's warranty and are offered the opportunity to purchase a full suite of extended-service plans and services. At December 26, 2020, American Freight operated 318 stores in 40 states and Puerto Rico, of which 6 locations are operated by franchisees. American Freight is headquartered in Delaware, Ohio.
Our Buddy's segment is a specialty retailer of high quality, name brand consumer electronic, residential furniture, appliances and household accessories through rent-to-own agreements. The rental transaction allows our customers the opportunity to benefit from the use of high-quality products under flexible rental purchase agreements without long-term obligations. At December 26, 2020, Buddy’s operated 292 locations in the United States and Guam, of which 247 locations are operated by franchisees. Buddy's is headquartered in Orlando, Florida.
Each of our brands competes in the U.S. with many well-established companies on the basis of product choice, quality, affordability, service and location. Vitamin Shoppe competes in the highly competitive U.S. nutritional supplements retail industry. Competition is based primarily on quality, product assortment, price, customer service, convenience, marketing support and availability of new products. American Freight primarily competes with discount retailers of furniture and mattresses and with big box retailers and locally-owned appliance retailers that sell new-in-box and liquidations of their out-of-box or as-is appliances. Buddy’s competes with other national, regional and local rent-to-own businesses, including online only competitors, as well as with rental stores that do not offer their customers a purchase option.
Our strategy is to focus on the operation and acquisition of franchise and franchisable businesses. We strive to assemble a mix of businesses that we believe provide us balance and overall economic resiliency, while also benefiting from the scale of a single franchising platform.
As a multi-brand operator, we continually look to diversify and grow our portfolio of brands either through acquisition or organic brand development. Our acquisition strategy typically targets businesses that are highly cash flow generative with compelling unit economics that can be scaled by adding franchise and company owned units, or that can be restructured to enhance performance and value to Franchise Group.
We have established a corporate platform that enables us to deploy capital to acquire assets that may have few natural buyers but become more valuable as part of our Company. Across all businesses, we look to create operating efficiencies in order to drive incremental free cash flow while allowing the management teams of each brand to focus on growing their businesses. Furthermore, our aggregated platform of multiple brands and increased scale provides cost of capital advantages relative to financing each business alone.
We believe our portfolio of brands will allow us to offer franchisees a variety of platforms that will allow them to diversify their investment portfolio in a local area, optimize their geographic penetration and grow their businesses. We believe our investors will benefit from sustainable franchise royalties and opportunistic franchise sales. Furthermore, we expect our refranchising strategy to create significant cash inflows to opportunistically de-lever and acquire additional brands.
On December 27, 2020, we completed the acquisition of Furniture Factory Ultimate Holding, L.P. (“FFO”), a regional retailer of furniture and mattresses, for an all cash purchase price of $13.8 million (the "FFO Acquisition"). In connection with the FFO Acquisition, we acquired 31 operating locations which we intend to rebrand to our American Freight brand during the first quarter of 2021.
On January 15, 2021, we completed a public offering of approximately 3.3 million shares of our 7.50% Series A Cumulative Perpetual Preferred Stock, par value $0.01 per share and liquidation preference of $25.00 per share ("Series A Preferred Stock") with net cash proceeds to the Company of approximately $79.7 million, after deducting underwriting discounts, an advisory fee and estimated offering expenses totaling approximately $3.2 million.
On January 25, 2021, we entered into a definitive agreement to acquire Pet Supplies Plus (“PSP”), a leading omnichannel retail chain and franchisor of pet supplies and services, in an all cash transaction valued at approximately $700.0 million from affiliates of Sentinel Capital Partners (the "PSP Acquisition"). Additionally, we estimate that the net present value of the tax benefits related to the PSP acquisition are expected to be approximately $100.0 million. In connection with the signing of the definitive acquisition agreement, we entered into commitments with our lenders for $1.3 billion in new term loan credit facilities to refinance our existing term loan and provide PSP acquisition financing. The PSP Acquisition closed on March 10, 2021.
On February 21, 2021, we entered into a definitive agreement with NextPoint Acquisition Corp., a special purpose acquisition corporation incorporated under the laws of the Province of British Columbia ("Purchaser") to sell our Liberty Tax business for a total preliminary purchase price of at least $243.0 million, consisting of approximately $182.0 million in cash and an equity interest in the Purchaser worth an estimated $61 million at the time of signing. In connection with the transaction, we are expecting to enter into a transition service agreement with the Purchaser, pursuant to which each party will provide certain transition services to each other for a period not to exceed six months. We expect the transaction to close in the third quarter of 2021.
Impact of COVID-19
The COVID-19 pandemic has affected, and likely will continue to affect, our financial condition and results of operations for the foreseeable future. In most states, during 2020, our businesses were deemed essential and, therefore, the majority of our stores remained open during the pandemic. The highest number of temporary store closures we experienced due to the COVID-19 pandemic was approximately 240 stores during the second quarter of 2020. As of December 26, 2020, and March 5, 2021, none of our stores were closed due to the COVID-19 pandemic; however, we cannot predict whether our stores will remain open if the COVID-19 pandemic worsens and states and localities issue new restrictions.
While too early to fully quantify, we have not experienced a significant negative impact on our sales and profitability due to the COVID-19 pandemic. However, the COVID-19 pandemic could negatively impact our business and financial results by weakening demand for our products and services, interfering with our ability and our franchisees’ ability to operate store locations, disrupting our supply chain or affecting our ability to raise capital from financial institutions. As events are rapidly changing, we are unable to accurately predict the impact that the COVID-19 pandemic will have on our results of operations due to uncertainties including, but not limited to, the duration of shutdowns, quarantines and travel restrictions, the severity of the disease, the duration of the outbreak and the public’s response to the outbreak; however, we are actively managing our business to respond to the impact.
Change of Year-End
On October 1, 2019, our Board of Directors approved a change in our fiscal year-end from April 30th to the Saturday closest to December 31st of each year. The decision to change the fiscal year-end was related to our recent acquisitions to more
closely align our operations and internal controls with that of our subsidiaries. We refer to our financial results for the period from May 1, 2019 through December 28, 2019, as the "Transition Period" in this report.
Human Capital Resources
As of December 26, 2020, we employed 4,522 full-time and 3,132 part-time employees. Part-time employees work an average of fewer than 30 hours per work. The number of part-time employees fluctuates based on seasonal needs.
The success of our business relies on our ability to attract and retain talented employees. To attract and retain talent, we strive to create an inclusive, diverse and supportive workplace, with opportunities for our employees to develop and grow in their careers, supported by competitive compensation, benefits and health and wellness programs.
We are focused on creating a corporate culture of integrity and respect, with the goal of working together to drive our business to be innovative and competitive. We operate in a performance-based environment where results matter and financial discipline is enforced. We strive to create a highly collaborative culture in which employees feel that their input is sought after and valued. At the same time, we believe in holding individuals accountable and endeavor to create a culture in which employees do what they say they are going to do. We believe that our culture is a long-term competitive advantage for us, fuels our ability to execute our business strategy and is a critical component of our employee talent strategy.
Diversity and Inclusion
We believe that a diverse workforce is critical to our success. Our goal is to cultivate an inclusive environment where human differences are valued, respected, supported and amplified. We have taken actions to recruit, retain, develop and advance a diverse and talented workforce. We are an equal opportunity employer. We respect diversity and do not discriminate on the basis of race, color, creed, religion, national origin, ancestry, citizenship status, age, sex, gender, gender identity or expression (including transgender status), sexual orientation, marital status, veteran status, physical or mental disability, genetic information, or any other characteristic protected by applicable federal, state or local laws. Our management is dedicated to ensuring the fulfillment of this policy with respect to hiring, placement, promotion, transfer, demotion, layoff, separation, recruitment, pay and equity, access to facilities and programs, training and general treatment during employment.
Health Safety and Wellness
We are committed to the health, safety and wellness of our employees. We provide our employees and their families with access to a variety of health and wellness programs, including programs that support their physical and mental health.
In response to the COVID-19 pandemic, we implemented changes that we consider to be in the best interests of our employees, customers, business partners and communities in which we operate. We implemented changes from all federal, state and local government mandates and regulations, including providing all of our employees personal protective equipment if they chose to work on-site, adding extensive cleaning regiments to our stores and distribution centers, and encouraging the majority of our corporate employees to work from home. Additionally, for any employee that participates in our health insurance programs, we waived all premiums if they were furloughed due to the COVID-19 pandemic.
Compensation and Benefits
We provide competitive compensation and benefit programs for our employees. In addition to competitive salaries, these programs include, among other items, bonuses, stock awards, a 401(k) plan, health and wellness programs, health savings and flexible spending accounts, paid time off, paid parental leave, flexible work schedules and employee assistance programs.
Our Annual Report, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed with or furnished to the SEC are available, free of charge, through our website at www.franchisegrp.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC. The SEC maintains a website at www.sec.gov containing reports, proxy and information statements and other information regarding issuers who file electronically with the SEC.
Item 2. Properties.
As of December 26, 2020, we operated or franchised 1,329 stores in 47 states, Guam, Puerto Rico and the District of Columbia as detailed below:
|Buddy's ||American Freight||Vitamin Shoppe||Total|
|Alabama||— ||11 ||11 ||9 ||— ||9 ||6 ||26 |
|Arizona||— ||4 ||4 ||9 ||1 ||10 ||11 ||25 |
|Arkansas||— ||15 ||15 ||2 ||— ||2 ||2 ||19 |
|California||— ||— ||— ||18 ||— ||18 ||77 ||95 |
|Colorado||— ||— ||— ||1 ||— ||1 ||7 ||8 |
|Connecticut||— ||— ||— ||4 ||— ||4 ||10 ||14 |
|Delaware||— ||— ||— ||1 ||— ||1 ||3 ||4 |
|District of Columbia||— ||— ||— ||— ||— ||— ||1 ||1 |
|Florida||34 ||19 ||53 ||34 ||— ||34 ||81 ||168 |
|Guam||— ||2 ||2 ||— ||— ||— ||— ||2 |
|Georgia||— ||21 ||21 ||13 ||4 ||17 ||24 ||62 |
|Hawaii||— ||— ||— ||1 ||— ||1 ||7 ||8 |
|Idaho||— ||— ||— ||1 ||— ||1 ||3 ||4 |
|Illinois||— ||4 ||4 ||13 ||— ||13 ||37 ||54 |
|Indiana||1 ||— ||1 ||14 ||— ||14 ||11 ||26 |
|Iowa||— ||1 ||1 ||1 ||— ||1 ||2 ||4 |
|Kansas||— ||1 ||1 ||5 ||— ||5 ||2 ||8 |
|Kentucky||7 ||— ||7 ||5 ||— ||5 ||5 ||17 |
|Louisiana||— ||4 ||4 ||7 ||— ||7 ||6 ||17 |
|Maine||— ||— ||— ||— ||— ||— ||2 ||2 |
|Maryland||— ||— ||— ||4 ||— ||4 ||21 ||25 |
|Massachusetts||— ||— ||— ||2 ||— ||2 ||16 ||18 |
|Michigan||— ||— ||— ||12 ||— ||12 ||17 ||29 |
|Minnesota||— ||— ||— ||3 ||— ||3 ||7 ||10 |
|Mississippi||— ||9 ||9 ||3 ||— ||3 ||1 ||13 |
|Missouri||— ||2 ||2 ||8 ||— ||8 ||7 ||17 |
|Nebraska||— ||— ||— ||— ||— ||— ||2 ||2 |
|Nevada||— ||— ||— ||3 ||— ||3 ||8 ||11 |
|New Hampshire||— ||— ||— ||— ||— ||— ||4 ||4 |
|New Jersey||— ||— ||— ||4 ||— ||4 ||36 ||40 |
|New Mexico||— ||7 ||7 ||1 ||— ||1 ||3 ||11 |
|New York||— ||— ||— ||5 ||— ||5 ||66 ||71 |
|North Carolina||— ||10 ||10 ||11 ||— ||11 ||27 ||48 |
|Ohio||— ||— ||— ||26 ||— ||26 ||23 ||49 |
|Oklahoma||— ||11 ||11 ||5 ||— ||5 ||3 ||19 |
|Oregon||— ||— ||— ||2 ||— ||2 ||5 ||7 |
|Pennsylvania||— ||5 ||5 ||10 ||— ||10 ||28 ||43 |
|Buddy's ||American Freight||Vitamin Shoppe||Total|
|Puerto Rico||— ||— ||— ||1 ||— ||1 ||2 ||3 |
|Rhode Island||— ||— ||— ||1 ||— ||1 ||2 ||3 |
|South Carolina||— ||11 ||11 ||8 ||— ||8 ||17 ||36 |
|South Dakota||— ||— ||— ||— ||— ||— ||1 ||1 |
|Tennessee||— ||6 ||6 ||9 ||1 ||10 ||14 ||30 |
|Texas||3 ||80 ||83 ||35 ||— ||35 ||54 ||172 |
|Utah||— ||— ||— ||— ||— ||— ||1 ||1 |
|Vermont||— ||— ||— ||— ||— ||— ||1 ||1 |
|Virginia||— ||9 ||9 ||10 ||— ||10 ||25 ||44 |
|Washington||— ||15 ||15 ||2 ||— ||2 ||27 ||44 |
|West Virginia||— ||— ||— ||2 ||— ||2 ||— ||2 |
|Wisconsin||— ||— ||— ||7 ||— ||7 ||4 ||11 |
|Total||45 ||247 ||292 ||312 ||6 ||318 ||719 ||1,329 |
We lease the vast majority of our Company-owned stores. Our leases typically provide an initial term with options to extend. As current leases expire, we believe that we will be able to obtain lease renewals, if desired, for present store locations, or to obtain leases for equivalent or better locations in the same general area.
Our leased properties also include the following:
|Miami Lakes, Florida||Manufacturing Facilities|
|Ashland, Virginia||Distribution Center|
|Avondale, Arizona ||Distribution Center|
|Pearl City, Hawaii||Distribution Center|
|Cupey Bajo, Puerto Rico||Distribution Center|
|New Castle Delaware||Distribution Center|
|Livonia, Michigan||Distribution Center|
|Kansas City, Missouri||Distribution Center|
|Tucker, Georgia||Distribution Center|
|Winter Park, Florida||Distribution Center|
|Carrollton, Texas||Distribution Center|
|Houston, Texas||Distribution Center|
|Reno, Nevada||Distribution Center|
|Secaucus, New Jersey||Corporate Offices|
|Orlando, Florida||Corporate Offices|
|Hoffman Estates, Illinois||Corporate Offices|
|Delaware, Ohio||Corporate Offices|
|Hurst, Texas||Corporate Offices|
We own our corporate headquarters which are located in four buildings. Our principal executive office is located at 2387 Liberty Way, Virginia Beach, Virginia 23456.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
We are an owner and operator of franchised and franchisable businesses that continually looks to grow our portfolio of brands while utilizing our operating and capital allocation philosophy to generate strong cash flows. We currently operate three reportable segments: Buddy’s, American Freight, and Vitamin Shoppe.
Our Vitamin Shoppe segment is an omni-channel specialty retailer of vitamins, minerals, herbs, specialty supplements, sports nutrition and other health and wellness products. Our American Freight segment is a retail chain offering unbranded furniture, mattresses and home accessories at discount prices. On October 23, 2019, we completed the acquisition of the Sears Outlet business (“Sears Outlet”) from Sears Hometown and Outlet Stores, Inc. (the “Sears Outlet Acquisition”). Sears Outlet has been rebranded as American Freight Outlet and is included in our American Freight segment. Our Buddy's segment is a specialty retailer of high quality, name brand consumer electronic, residential furniture, appliances and household accessories through rent-to-own agreements.
Our revenue is primarily derived from merchandise sales, rental revenue, and service revenues comprised of royalties and other required fees from our franchisees and financial products.
In evaluating our performance, management focuses on several metrics that we believe are key to our success:
•Net change in retail and franchise locations. The change in retail and franchise locations from year to year is a function of the opening of new locations, offset by locations that we or our franchisees close. Please see "Item 2. Properties" in this Annual Report for the number of locations as of December 26, 2020.
•Systemwide revenue. Systemwide revenue, which is an operating measure not in accordance with GAAP, includes sales by both Company-owned and franchised locations. We believe systemwide revenue data is useful in assessing consumer demand for our products and services and our performance. In addition, systemwide revenue reflects the size of our business, and because the size of our business drives our management and infrastructure needs, systemwide revenue data helps us assess those needs in comparison to other companies in our industry and other franchise operators.
On February 14, 2020, we completed our acquisition of American Freight (the "American Freight Acquisition"). Additionally, we, through certain of our subsidiaries, entered into a new $675 million credit facility which funded the American Freight Acquisition and refinanced certain debt of our Buddy’s Home Furnishings and Sears Outlet businesses, refer to "Note 2 - Acquisitions" in the Notes to the Consolidated Financial Statements.
On December 16, 2019, we completed our acquisition of The Vitamin Shoppe (the "Vitamin Shoppe Acquisition"). For a complete description of the Vitamin Shoppe Acquisition, refer to "Note 2 - Acquisitions" in the Notes to the Consolidated Financial Statements.
On October 23, 2019, we completed the Sears Outlet Acquisition. For a complete description of the Sears Outlet Acquisition, refer to "Note 2 - Acquisitions" in the Notes to the Consolidated Financial Statements.
On September 30, 2019, we acquired 21 Buddy’s stores from a series of franchisees of Buddy’s New Holdco, a wholly-owned direct subsidiary of the Company. In connection with the acquisition, the sellers received, in aggregate, 1,350,000 New Holdco units (defined below) and 270,000 shares of our Voting Non-Economic Preferred Stock for a purchase price of $16.8 million.
On August 23, 2019, we acquired 41 Buddy’s Home Furnishing stores from A-Team Leasing LLC. (“A-Team”), a franchisee of our Buddy’s segment, for total consideration of $26.6 million.
On July 10, 2019 (the "Buddy’s Acquisition Date"), we formed Franchise Group New Holdco LLC ("New Holdco"), which completed the Buddy’s Acquisition. At the Buddy’s Acquisition Date, each outstanding unit of Buddy’s was converted into the right to receive 0.459315 units of New Holdco (“New Holdco units”) and 0.091863 shares of our Voting Non-Economic Preferred Stock. Each of the New Holdco units held by the former equity holders of Buddy's (the "Buddy's Members") was, together with one-fifth of a share of Voting Non-Economic Preferred Stock held by the Buddy's Members,
redeemable in exchange for one share of our common stock after an initial six-month lockup period following their issuance, which has expired. As of the Buddy’s Acquisition Date, on an as-converted basis, the Buddy's Members' aggregate ownership of New Holdco units and share of Preferred Stock represented approximately 36.44% of our outstanding common stock, which implied an enterprise value of Buddy's of approximately $122 million and an equity value of $12.00 per share of our common stock. We are the sole managing member of New Holdco and is consolidated for financial reporting purposes. We and the Buddy's Members also entered into an income tax receivable agreement (the "TRA"), pursuant to which, subject to certain exceptions set forth in the TRA, we agreed to pay the Buddy's Members 40% of the cash savings, if any, in federal, state and local taxes that we realize or are deemed to realize as a result of any increases in tax basis of the assets of New Holdco resulting from future redemptions or exchanges of New Holdco units and Voting Non-Economic Preferred Stock held by the Buddy's Members in exchange for our common stock. As of April 1, 2020, all shares of Voting Non-Economic Preferred Stock and New Holdco units (except for the New Holdco units held by us) were redeemed for shares of our common stock and no shares of Voting Non-Economic Preferred Stock or New Holdco units remained outstanding (except for the New Holdco units held by us). Refer to the liquidity section below for further discussion. For a complete description of the Buddy’s Acquisition, refer to "Note 2 - Acquisitions" in the Notes to the Consolidated Financial Statements.
On February 21, 2021, we entered into the Purchase Agreement with NextPoint to sell our Liberty Tax business for a purchase price of at least $243 million. The purchase price consists of $182 million in cash and at least 51,000 proportional voting shares of NextPoint, which are convertible into NextPoint common shares at a ratio of 100 common shares to one proportional voting share. In connection with the Purchase Agreement, the parties also agreed to enter into a transition services agreement pursuant to which both parties will provide certain transition services to each other for a period not to exceed six months. The closing of the transaction is anticipated to occur in the third quarter of fiscal 2021.
Results of Operations
For the Year Ended December 26, 2020 as compared to the Year Ended April 30, 2019
As described above, our Liberty Tax business is reported as a discontinued operation and its results of operations are excluded from our results of operations. For the fiscal year ending April 30, 2019, Liberty Tax was our only business, therefore, no continuing operations existed for that fiscal year.
The following table sets forth the results of our operations for the years ended December 26, 2020 and April 30, 2019:
|Fiscal Years Ended||Change|
|Total revenues||$||2,029,727 ||$||— ||$||2,029,727 ||— ||%|
|Total operating expenses||1,977,216 ||— ||1,977,216 ||— ||%|
|Income (loss) from operations||52,511 ||— ||52,511 ||— ||%|
|Net income (loss)||$||10,944 ||$||— ||$||10,944 ||— ||%|
Revenues. The table below sets forth the components and changes in our revenue for the years ended December 26, 2020 and April 30, 2019:
|Fiscal Years Ended||Change|
|Product||$||1,899,662 ||$||—||$||1,899,662 ||— ||%|
|Service and other||65,798 ||— ||65,798 ||— ||%|
|Rental||64,267 ||— ||64,267 ||— ||%|
| Total revenue||$||2,029,727 ||$||— ||$||2,029,727 ||— ||%|
Our total revenue increased by $2.0 billion in the year ended December 26, 2020 compared to the year ended April 30, 2019. This increase was due to the Buddy's Acquisition on July 10, 2019, which increased revenue by $97.3 million, the Sears Outlet Acquisition on October 23, 2019, which increased revenue by $433.7 million, the Vitamin Shoppe Acquisition on December 19, 2019, which increased revenue by $1,036.0 million and the American Freight Acquisition on February 14, 2020, which increased revenue by $462.7 million.
Operating expenses. The following table details the amounts and changes in our operating expenses for the years ended December 26, 2020 and April 30, 2019:
|Fiscal Years Ended||Change|
|Cost of revenue:|
| Product||$||1,136,054 ||$||— ||$||1,136,054 ||— ||%|
| Service and other||2,149 ||— ||2,149 ||— ||%|
|Rental||21,905 ||— ||21,905 ||— ||%|
| Total cost of revenue||1,160,108 ||— ||1,160,108 ||— ||%|
|Selling, general and administrative expenses||817,108 ||— ||817,108 ||— ||%|
| Total operating expenses||$||1,977,216 ||$||— ||$||1,977,216 ||— ||%|
Total operating expenses increased $2.0 billion in the year ended December 26, 2020 compared to the year ended April 30, 2019. This increase was due to the Buddy's Acquisition on July 10, 2019, which increased operating expenses by $77.0 million, the Sears Outlet Acquisition on October 23, 2019, which increased operating expenses by $445.6 million, the Vitamin Shoppe Acquisition on December 19, 2019, which increased operating expenses by $1.0 billion, and the American Freight Acquisition on February 14, 2020, which increased operating expenses by $410.5 million.
Income Taxes. The following table sets forth certain information regarding our income taxes for the years ended December 26, 2020 and April 30, 2019:
|Fiscal Years Ended||Change|
|Loss before income taxes||$||(49,557)||$||— ||$||(49,557)||— ||%|
|Income tax benefit||(60,501)||— ||(60,501)||— ||%|
|Effective tax rate||122.1 ||%||— ||%|| |
The rate for the year ended December 26, 2020 increased from the statutory rate due to The Coronavirus Aid, Relief, and Economic Security (the "CARES Act") which was enacted on March 27, 2020. The CARES Act retroactively changed the eligibility of certain assets for expense treatment in the year placed in service, back to 2018, and permitted any net operating loss for the tax years 2018, 2019 and 2020 to be carried back for five years. The Company recorded an income tax benefit of $52.3 million as a result of the CARES Act in the year ended December 26, 2020.
Net income. In the year ended December 26, 2020, we had net income from continuing operations of $10.9 million compared to a net loss of $— in the year ended April 30, 2019, primarily as a result of the income tax benefit of $52.3 million related to the CARES Act partially offset by the operating loss.
For the Transition Period results of operations, the comparable unaudited period from May 1, 2018 to December 29, 2018 does not have financial results from continuing operations; therefore, a discussion of financial results from continuing operations for the Transition Period compared to the unaudited period from May 1, 2018 to December 29, 2018 is not provided as there is no comparative information.
The fiscal years ended April 30, 2019 and April 30, 2018 do not have financial results from continuing operations; therefore, a discussion of financial results from continuing operations for the fiscal year ended April 30, 2019 compared to the fiscal year ended April 30, 2018 is not provided.
Our operations are conducted in three reporting business segments: Vitamin Shoppe, American Freight and Buddy's. We define our segments as those operations whose results our chief operating decision maker ("CODM") regularly reviews to analyze performance and allocate resources.
We measure the results of our segments using, among other measures, each segment's net revenues, operating expenses and operating income (loss). We may revise the measurement of each segment's operating income, including the allocation of
overhead costs, as determined by the information regularly reviewed by the CODM. When the measurement of a segment changes, previous period amounts and balances are reclassified to be comparable to the current period's presentation. Because the American Freight Acquisition occurred in the year ended December 26, 2020, and the Buddy's Acquisition, Sears Outlet Acquisition, and Vitamin Shoppe Acquisition occurred in the Transition Period, comparable information is not available; therefore, Vitamin Shoppe, American Freight, and Buddy's segment information is not provided. Due to our Liberty Tax business being a discontinued operation, there is no comparative segment information to report.
To provide additional information regarding our financial results, we have disclosed Adjusted EBITDA in the table below and within this Annual Report. Adjusted EBITDA represents net income (loss), before income taxes, interest expense, depreciation and amortization, and certain other items specified below. We have provided a reconciliation below of Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure.
We have included Adjusted EBITDA in this Annual Report because we believe the presentation of these measures is useful to investors as supplemental measures in evaluating the aggregate performance of our operating businesses and in comparing our results from period to period because they exclude items that we do not believe are reflective of our core or ongoing operating results. These measures are used by our management to evaluate performance and make resource allocation decisions each period. Adjusted EBITDA is also the primary operating metric used in the determination of executive management’s compensation. In addition, a measure similar to Adjusted EBITDA is used in the Company’s credit facilities but is calculated differently. Adjusted EBITDA is not a recognized financial measure under GAAP and may not be comparable to similarly-titled measures used by other companies in our industry. Adjusted EBITDA should not be considered in isolation from or as an alternative to net income (loss), operating income (loss), or any other performance measures derived in accordance with GAAP.
The following table presents a reconciliation of Adjusted EBITDA from continuing operations for the fiscal year ended December 26, 2020. Amounts for the year ended April 30, 2019 are not provided as they are all attributable to discontinued operations.
|Fiscal Years Ended|
|Net income (loss)||$||10,944 |
|Interest expense||96,774 |
|Income tax benefit||(60,501)|
|Depreciation and amortization charges||52,152 |
|Total Adjustments||88,425 |
|Adjustments to EBITDA|
|Executive severance and related costs||5,643 |
|Stock based compensation||8,923 |
|Shareholder litigation costs||575 |
|Corporate compliance costs||543 |
|Accrued judgments and settlements||(1,645)|
|Store closures||592 |
|Rebranding costs||8,725 |
|Inventory fair value step up amortization||36,244 |
|Prepayment penalty on early debt repayment||8,752 |
|Right-of-use asset impairment||2,895 |
|Integration costs||2,703 |
|Acquisition costs||17,584 |
|Total Adjustments to EBITDA||91,534 |
|Adjusted EBITDA||$||190,903 |
Liquidity and Capital Resources
We believe that we have sufficient liquidity to support our ongoing operations and maintain a sufficient liquidity position to meet our obligations and commitments. Our liquidity plans are established as part of our financial and strategic planning processes and consider the liquidity necessary to fund our operating, capital expenditure and debt service needs.
We primarily fund our operations and acquisitions through operating cash flows and, as needed, a combination of borrowings under various credit agreements, availability under our revolving credit facilities and the issuance of equity securities. Cash generation can be subject to variability based on many factors, including seasonality, receipt of prepaid payments from area developers, timing of repayment of loans to franchisees and the effects of changes in end markets.
Subsequent to December 26, 2020, several transactions and events occurred that will or have the potential to affect our liquidity and capital resources in future periods as discussed in Part I, Item 1. Business.
Sources and uses of cash
In the year ended December 26, 2020, cash provided by operating activities increased $224.4 million compared to the year ended April 30, 2019. This increase is primarily due to:
•a $97.7 million increase in cash due to a decrease in inventory;
•a $104.0 million increase in cash income;
•a $24.2 million increase in accounts payable and accrued expenses; and
•a $24.4 million increase in deferred revenue, partially offset by a $22.8 million decrease to accounts, notes, and interest receivable.
In the Transition Period, cash used in operating activities decreased $10.3 million compared to the period from May 1, 2018 to December 29, 2018. This decrease is primarily due to:
•a $31.7 million increase in other assets due to an increase of $10.1 million in inventory, a $3.7 million increase in bank products receivable and a $5.6 million increase in restricted cash;
•a $24.0 million increase in depreciation and amortization primarily due to the impairment of internally developed software that is no longer in use;
•a $21.5 million decrease in income taxes receivable due to a valuation allowance related to the ability to utilize net operating loss carryforwards; and
•a $61.4 million decrease in net income.
In the fiscal year ended April 30, 2019, our cash provided from operating activities decreased $10.5 million from the cash provided in the fiscal year ended April 30, 2018. This decrease was primarily driven by:
•a decrease of $11.6 million in tax preparation fees received due to closures of Company-owned and year-round accounting stores, partially offset by;
•a $4.0 million reduction in executive severance and recruitment payments in fiscal 2019 compared to fiscal 2018.
In the year ended December 26, 2020, cash used for investing activities increased $338.5 million compared to the year ended April 30, 2019. This increase is primarily driven by:
•a $353.4 million increase in cash used for the American Freight Acquisition;
•a $17.3 million decrease in cash payments received on operating loans to franchisees and ADs;
•a $31.9 million increase in purchases of property, equipment and software; and
•partially offset by a $34.1 million decrease in cash used for operating loans to franchisees and ADs and a $35.1 million increase in the proceeds from the sales of Company-owned offices and area developer rights.
In the Transition Period, cash used for investing activities increased $315.0 million compared to the period from May 1, 2018 to December 29, 2018. This increase is primarily due to the Vitamin Shoppe Acquisition, the Sears Outlet Acquisition and the acquisition of franchisees from A-Team Leasing.
In the fiscal year ended April 30, 2019, we used $6.3 million less in investing activities than in the fiscal year ended April 30, 2018 due to:
•a $2.7 million decrease in net cash used to acquire Company-owned offices, AD rights and customer lists, net of sales; and
•a $2.4 million decrease in purchases of property, equipment and software.
In the year ended December 26, 2020, cash from financing activities increased $215.9 million compared to the year ended April 30, 2019. This increase is primarily driven by:
•an increase of $586.0 million in borrowings under the FGNH Credit Agreement;
•an increase of $227.5 million due to proceeds from share issuances;
•an increase of $61.1 million of borrowings under revolving credit facilities.
•partially offset by $498.0 million in repayments of long-term obligations including term loans used to acquire Buddy's, Sears Outlet, VSI, and American Freight; and
•a decrease of $112.0 million in repayments of borrowings under revolving credit facilities.
•an increase of $27.1 million in dividend payments.
In the Transition Period, cash from financing activities increased $341.0 million compared to the period from May 1, 2018 to December 29, 2018. The increase was driven by:
•a $333.3 million increase in cash raised from borrowings under debt agreements and revolving credit facilities, primarily under the Vitamin Shoppe Credit Agreement, Sears Outlet Credit Agreement and Buddy's Credit Agreement (defined below);
•a $96.1 million increase in cash raised from common stock issuances;
•an increase of $15.1 million in cash used for debt issuance costs;
•an increase of $30.5 million in cash used for repayments of term loans and the revolving credit facilities; and
•an increase of $47.2 million in cash used to repurchase shares of common stock in connection with a tender offer.
In the fiscal year ended April 30, 2019, we used $4.5 million less cash for financing activities compared to the fiscal year ended April 30, 2018 primarily due to a decrease of $6.7 million in dividends paid.
Long-term debt borrowings
Franchise Group New Holdco Term Loan and ABL Term Loan. On February 14, 2020, as part of the American Freight Acquisition, we, through direct and indirect subsidiaries, entered into a $675.0 million credit facility, which included a $575.0 million senior secured term loan (the “FGNH Term Loan”) and a $100.0 million senior secured asset based term loan (the “FGNH ABL Term Loan”), to finance the American Freight Acquisition and repay the existing Sears Outlet and Buddy’s term loans for an amount of $106.7 million and $101.6 million including accrued interest, respectively. The FGNH Term Loan will mature on February 14, 2025 and the FGNH ABL Term Loan matured on September 30, 2020. We are required to repay the FGNH Term Loan in equal quarterly installments of $6.3 million on the last day of each fiscal quarter, which commenced on June 27, 2020. On September 23, 2020, we repaid in full all amounts that were outstanding under the FGNH ABL Term Loan and terminated the FGNH ABL Credit Agreement. On September 23, 2020, the Company, through direct and indirect subsidiaries, entered into an ABL Credit Agreement (the “New ABL Credit Agreement”) with various lenders which provides for a senior secured revolving loan facility with commitments available to the Company of the lesser of (i) $125.0 million and (ii) a borrowing base based on the eligible credit card receivables, accounts, inventory and revenue due under certain rental agreements, less certain reserves. The New ABL Credit Agreement also includes a $15.0 million swingline subfacility and a $15.0 million letter of credit subfacility. The Company has borrowed approximately $30.3 million as of December 26, 2020.
Vitamin Shoppe Term Loan. On December 16, 2019 as part of the Vitamin Shoppe Acquisition, we, through direct and indirect subsidiaries, entered into a Loan and Security Agreement (the “Vitamin Shoppe Term Loan Agreement”) that provides for a $70.0 million senior secured term loan (the "Vitamin Shoppe Term Loan") which matures on December 16, 2022. On
August 13, 2020, we repaid in full all amounts that were outstanding under the Vitamin Shoppe Term Loan and terminated the Vitamin Shoppe Term Loan Agreement on August 25, 2020.
Vitamin Shoppe ABL Revolver. On December 16, 2019, we, through direct and indirect subsidiaries, entered into a Second Amended and Restated Loan and Security Agreement (the “Vitamin Shoppe ABL Agreement”) providing for a senior secured revolving loan facility (the “Vitamin Shoppe ABL Revolver”) with commitments available to us of the lesser of (i) $100.0 million and (ii) a specified borrowing base based on our eligible credit card receivables, accounts and inventory, less certain reserves, and as to each of clauses (i) and (ii), less a $10.0 million availability block. The Vitamin Shoppe ABL Revolver will mature on December 16, 2022. We borrowed $70.0 million on December 16, 2019, the proceeds of which were used to consummate the Vitamin Shoppe Acquisition. Subject to the Intercreditor Agreement, we are required to repay borrowings under the Vitamin Shoppe ABL Revolver with the net cash proceeds of certain customary events (subject to certain customary reinvestment rights). Further, if the outstanding principal amount of the borrowings under the Vitamin Shoppe ABL Revolver at any time exceeds the lesser of $100.0 million and the borrowing base, less, in each case, a $10.0 million availability block, we must prepay any such excess. In addition, the Vitamin Shoppe ABL Agreement includes customary affirmative and negative covenants binding on us and our subsidiaries, including delivery of financial statements, borrowing base certificates and other reports.
Sears Outlet Credit Agreement. On October 23, 2019 in connection with the Sears Outlet Acquisition, we, through indirect subsidiaries, entered into a credit agreement ("the Sears Outlet Credit Agreement") that provides for a $105.0 million first priority senior secured term loan (the "Sears Outlet Term Loan"), net of financing costs of $2.8 million, which matures on October 23, 2023. We repaid the Sears Outlet Term Loan on February 14, 2020 in connection with the financing of the American Freight Acquisition.
Buddy's Credit Agreement. On July 10, 2019, in connection with the Buddy's Acquisition, we, through an indirect subsidiary, entered into a credit agreement (the "Buddy's Credit Agreement") that provides for an $82.0 million first priority senior secured term loan which matures on July 10, 2024. On August 23, 2019 as part of the 41 stores acquisition from A-Team, the Buddy's Credit Agreement was amended. The amendment provides for a $23.0 million first priority senior secured loan (the “Buddy’s Additional Term Loan”), net of financing costs of $0.4 million. We repaid the amounts outstanding under the Buddy’s Credit Agreement on February 14, 2020 in connection with the financing of the American Freight Acquisition.
For more information on the long-term obligations, refer to "Note 9 - Long-Term Obligations”, to the Consolidated Financial Statements in Item 8.
Other factors affecting our liquidity
Tax Receivable Agreement. We may be required to make payments under the Tax Receivable Agreement ("TRA Payments") to the Buddy’s Members. Under the terms of the Tax Receivable Agreement, we will pay the Buddy's Members 40% of the cash savings, if any, in federal, state and local taxes that we realize or are deemed to realize as a result of any increases in tax basis of the assets of New Holdco resulting from future redemptions or exchanges of New Holdco units held by the Buddy's Members. Any future obligations and the timing of such payments under the Tax Receivable Agreement, however, are subject to several factors, including (i) the timing of subsequent exchanges of New Holdco units by the Buddy’s Members, (ii) the price of our common stock at the time of exchange, (iii) the extent to which such exchanges are taxable, (iv) the ability to generate sufficient future taxable income over the term of the Tax Receivable Agreement to realize the tax benefits and (v) any future changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the Tax Receivable Agreement to utilize the tax benefits, then we would not be required to make the related TRA Payments. Although the amount of the TRA Payments would reduce the total cash flow to us and New Holdco, we expect the cash tax savings we will realize from the utilization of the related tax benefits would be sufficient to fund the required payments. As of December 26, 2020, we had TRA Payments due to the Buddy's Members of $16.8 million.
Dividends. See "Item 5-Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities."
Future cash needs and capital requirements
Operating and financing cash flow needs. Following transactions completed subsequent to December 26, 2020, our primary cash needs are expected to include the payment of scheduled debt and interest payments, capital expenditures and normal operating activities. We believe that our revolving credit facilities along with cash from operating activities, will be sufficient to support our cash flow needs for at least the next twelve months.
Several factors could affect our cash flow in future periods, including the following:
•The extent to which we extend additional operating financing to our franchisees, beyond the levels of prior periods.
•The extent and timing of capital expenditures.
•The extent and timing of future acquisitions.
•Our ability to integrate our acquisitions and implement business and cost savings initiatives to improve profitability.
•The extent, if any, to which our Board of Directors elects to continue to declare dividends on our common stock.
Compliance with Debt Covenants. Our revolving credit and long-term debt agreements impose restrictive covenants on us, including requirements to meet certain ratios. As of December 26, 2020, we were in compliance with all covenants under these agreements.
Off Balance Sheet Arrangements
From time to time, we have been party to interest rate swap agreements. These swaps effectively changed the variable-rate of our credit facility into a fixed-rate credit facility. Under the swaps, we received a variable interest rate based on the one-month LIBOR and paid a fixed interest rate. We entered into an interest rate swap agreement in relation to our mortgage payable to a bank, during fiscal 2017.
We also enter into forward contracts to eliminate exposure related to foreign currency fluctuations in connection with the short-term advances we make to our Canadian subsidiary in order to fund personal income tax refund discounting for our Canadian operations. At December 26, 2020 there were no forward contracts outstanding, but our Liberty Tax business expects to enter into forward contracts in the future during the Canadian tax season.
Critical Accounting Policies
The preparation of financial statements requires the use of estimates. Certain of our estimates require a high level of judgment and have the potential to have a material effect on the financial statements if actual results vary significantly from those estimates. Following is a discussion of the estimates that we consider critical.
Inventory. Inventory for our Buddy's segment is recorded at cost, including shipping and handling fees. All lease merchandise is available for lease or sale. Upon purchase, merchandise is not initially depreciated until it is leased or three months after the purchase date. Non-leased merchandise is depreciated on a straight-line basis over a period of 24 months. Leased merchandise is depreciated over the lease term of the rental agreement. On a weekly basis, all damaged, lost, stolen, or unsalable merchandise identified is written off. Maintenance and repairs of lease merchandise are charged to operations as incurred.
Inventory for our American Freight banner is valued at the lower of cost or market, using the first-in, first-out method. We record adjustments to the value of inventory when the cost of the specific inventory items on hand exceeds the amount that we expect to realize from the sale or disposal of the inventory, based on our assumptions about future demand, market conditions and analysis of our historical performance. Inventory for our American Freight Outlet banner is recorded at the lower of cost or market using the weighted-average cost method. Inventory includes the purchase price of the inventory plus costs of freight for moving merchandise from vendors to distribution centers as well as from distribution centers to stores. We maintain a provision for estimated shrinkage based on the actual historical results of our physical inventories. We compare our estimates to the actual results of the physical inventory counts as they are taken and adjust the shrink estimates accordingly. We also record adjustments to the value of inventory equal to the difference between the carrying value and the estimated market value, based on assumptions about future demand or when a permanent markdown indicates that the net realizable value of the inventory is less than cost.
Inventory for our Vitamin Shoppe segment is recorded at the lower of cost or market value using the weighted-average cost method. Inventory includes costs directly incurred in bringing the product to its existing condition and location. In addition, the cost of inventory is reduced by purchase discounts and other allowances received from vendors. A markdown reserve is estimated based on a variety of factors, including, but not limited to, the amount of inventory on hand and its remaining shelf life, current and expected market conditions and product expiration dates. In addition, we have established a reserve for estimated inventory shrinkage based on the actual, historical shrinkage of our most recent physical inventories
adjusted, and if necessary, for current economic conditions and business trends. Physical inventories and cycle counts are taken on a regular basis. These adjustments are estimates, which could vary significantly from actual results if future economic conditions, customer demand or competition differ from management expectations.
Long-Lived Assets. We review our long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset group may not be recoverable. We measure recoverability by comparison of the carrying value of an asset to its estimated undiscounted future cash flows expected to be generated by the asset. We recognize and measure potential impairment at the lowest level where cash flows are individually identifiable. If the carrying amount of an asset exceeds its estimated future cash flows, we recognize an impairment charge equal to the amount by which the carrying value of the asset exceeds the fair value of the asset. We determine fair value through various valuation techniques, including discounted cash flow models, quoted market values, and third-party independent appraisals. If assets are to be disposed of, we separately present these assets in the balance sheet and report them at the lower of the carrying amount or fair value less selling costs, and no longer depreciate them. When we have assets classified as held for sale, we present them separately in the appropriate asset section of the balance sheet.
Business Combinations-Purchase Price Allocation. For acquisitions we allocated the purchase price to the various tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values, some of which are preliminary as of December 26, 2020. Determining the fair value of certain assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions, which are inherently uncertain. Many of the estimates and assumptions used to determine fair values, such as those used for intangible assets are made based on forecasted information and discount rates. In addition, the judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations.
Recently Issued Accounting Standards
Refer to "Note 1 - Organization and Significant Accounting Policies", in our consolidated financial statements.
Item 8. Financial Statements and Supplementary Data.
TABLE OF CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Franchise Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Franchise Group, Inc. and subsidiaries (the "Company") as of December 26, 2020 and December 28, 2019 and the related consolidated statement of operations, comprehensive income (loss), stockholders' equity, and cash flows, for the fiscal year ended December 26, 2020 and the transition period ended December 28, 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 26, 2020 and December 28, 2019 and the results of its operations and its cash flows for the fiscal year ended December 26, 2020 and the transition period ended December 28, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 26, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2021 (not presented herein), expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Acquisitions – Refer to Notes 1 and 2 to the financial statements
Critical Audit Matter Description
On February 14, 2020, the Company completed the acquisition of American Freight, Inc. (“American Freight”) for a purchase price of $357.3 million. The Company accounted for the acquisition under the acquisition method of accounting for business combinations. Accordingly, the purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. The method for determining fair value of certain assets and liabilities, such as intangible assets, is subjective in nature and involved management making significant estimates and assumptions, such as future cash flows and the selection of the discount rate.
We identified the American Freight assets and liabilities, including intangible assets, as a critical audit matter because of the significant judgments made by management to estimate the preliminary fair value. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to forecasts of future cash flows and selection of the discount rate, in determining the estimated fair value assigned to certain assets acquired and liabilities assumed, such as intangible assets.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the forecasted information, discount rates, and the estimated fair value assigned to certain assets acquired and liabilities assumed, such as intangible assets, for American Freight included the following, among others:
•We evaluated the reasonableness of management's revenue forecasts by comparing the forecasts to historical revenues.
•We evaluated the impact of actual results compared to management's forecasts from the February 14, 2020 acquisition date to December 26, 2020.
•With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodologies and (2) discount rate by:
•Testing the source information underlying the determination of the discount rate and the mathematical accuracy of the calculation.
•Developing a range of independent estimates and comparing those to the discount rate selected by management.
/s/ Deloitte & Touche LLP
March 10, 2021 (June 25, 2021 as to the effects of discontinued operations discussed in Note 3)
We have served as the Company's auditor since 2019.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Franchise Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Liberty Tax, Inc. and Subsidiaries (the “Company”) as of April 30, 2019 and 2018, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the two‑year period ended April 30, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of April 30, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two‑year period ended April 30, 2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of April 30, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organization of the Treadway Commission (COSO), and our report dated June 27, 2019, expressed an adverse opinion.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Adoption of New Accounting Standard
As discussed in Note 7 to the consolidated financial statements, the Company changed its method for accounting for revenue as a result of the adoption of the Financial Accounting Standards Board issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), effective May 1, 2018. Our opinion is not modified with respect to that matter.
/s/ Cherry Bekaert LLP
We served as the Company’s auditor from 2018 to 2019.
Virginia Beach, Virginia
June 27, 2019 (except for the effects of discontinued operations discussed in Note 3, as to which the date is June 25, 2021)
FRANCHISE GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 26, 2020 and December 28, 2019
|(In thousands, except share count and per share data)||12/26/2020||12/28/2019|
|Assets|| || |
|Current assets:|| || |
|Cash and cash equivalents||$||148,780 ||$||30,868 |
|Current receivables, net ||67,335 ||25,665 |
|Inventories, net||302,307 ||300,312 |
|Current assets held for sale||43,023 ||72,229 |
|Other current assets||13,997 ||18,447 |
|Total current assets||575,442 ||447,521 |
|Property, equipment, and software, net||135,872 ||142,515 |
|Non-current receivables, net||12,800 ||12,750 |
|Goodwill||448,258 ||124,521 |
|Intangible assets, net||109,892 ||53,534 |
|Operating lease right-of-use assets||502,104 ||455,328 |
|Non-current assets held for sale||55,116 ||59,015 |
|Other non-current assets||8,428 ||11,029 |
|Total assets||$||1,847,912 ||$||1,306,213 |
|Liabilities and Stockholders' Equity|| || |
|Current liabilities:|| || |
|Current installments of long-term obligations||$||104,053 ||$||157,638 |
|Current operating lease liabilities||127,032 ||103,298 |
|Accounts payable and accrued expenses ||252,389 ||149,672 |
|Current liabilities held for sale||40,576 ||88,595 |
|Other current liabilities||25,174 ||9,934 |
|Total current liabilities||549,224 ||509,137 |
|Long-term obligations, excluding current installments||466,944 ||243,200 |
|Non-current operating lease liabilities ||402,276 ||390,188 |
|Non-current liabilities held for sale||8,779 ||9,407 |
|Other non-current liabilities ||35,522 ||2,520 |
|Total liabilities||1,462,745 ||1,154,452 |
|Commitments and contingencies|
|Stockholders' equity:|| || |
Common stock, $0.01 par value per share, 180,000,000 and 180,000,000 shares authorized, 40,092,260 and 18,250,225 shares issued and outstanding at December 26, 2020 and December 28, 2019, respectively
|401 ||183 |
Preferred stock, $0.01 par value per share, 20,000,000 and 20,000,000 shares authorized, 1,250,000 and 1,886,667 shares issued and outstanding at December 26, 2020 and December 28, 2019, respectively
|13 ||19 |
|Additional paid-in capital||382,383 ||108,339 |
|Accumulated other comprehensive loss, net of taxes||(1,399)||(1,538)|
|Retained earnings||3,769 ||18,388 |
|Total equity attributable to Franchise Group, Inc.||385,167 ||125,391 |
|Non-controlling interest||— ||26,370 |
|Total equity||385,167 ||151,761 |
|Total liabilities and equity||$||1,847,912 ||$||1,306,213 |
See accompanying notes to consolidated financial statements.
FRANCHISE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Year Ended December 26, 2020, Transition Period Ended December 28, 2019, December 29, 2018 (Unaudited), and Years Ended April 30, 2019 and April 30, 2018
|Twelve Months Ended||Transition Period From 5/1/2019-||Period From 5/1/2018 - ||Twelve Months Ended|
|(In thousands, except per share data)||12/26/2020||12/28/2019||12/29/2018||4/30/2019||4/30/2018|
|Revenues:|| || |
|Product||$||1,899,662 ||$||96,139 ||$||— ||$||— ||$||— |
|Service and other||65,798 ||14,751 ||— ||— ||— |
|Rental||64,267 ||23,636 ||— ||— ||— |
|Total revenues||2,029,727 ||134,526 ||— ||— ||— |
|Operating expenses:|| |
|Cost of revenue:|
|Product||1,136,054 ||71,820 ||— ||— ||— |
|Service and other||2,149 ||768 ||— ||— ||— |
|Rental||21,905 ||8,661 ||— ||— ||— |
|Total cost of revenue||1,160,108 ||81,249 ||— ||— ||— |
|Selling, general, and administrative expenses||817,108 ||96,298 ||— ||— ||— |
|Total operating expenses||1,977,216 ||177,547 ||— ||— ||— |
|Income (loss) from operations||52,511 ||(43,021)||— ||— ||— |
|Other income (expense):|| |
|Other||(5,294)||— ||— ||— ||— |
|Interest expense, net||(96,774)||(6,998)||— ||— ||— |
|(Loss) from continuing operations before income taxes||(49,557)||(50,019)||— ||— ||— |
|Income tax expense (benefit)||(60,501)||(8,577)||— ||— ||— |
|Income (loss) from continuing operations||10,944 ||(41,442)||— ||— ||— |
|Income (loss) from discontinued operations, net of tax||16,210 ||(63,024)||(43,053)||(2,156)||135 |
|Net Income (Loss)||27,154 ||(104,466)||(43,053)||(2,156)||135 |
|Less: Net (income) loss attributable to non-controlling interest||(2,090)||36,039 ||— ||— ||(10)|
|Net income (loss) attributable to Franchise Group, Inc.||$||25,064 ||$||(68,427)||$||(43,053)||$||(2,156)||$||125 |
|Amounts attributable to Franchise Group, Inc.:|
|Net income (loss) from continuing operations||$||20,645 ||$||(22,614)||$||— ||$||— ||$||— |
|Net income (loss) from discontinued operations||4,419 ||(45,813)||(43,053)||(2,156)||125 |
|Net income (loss) attributable to Franchise Group, Inc.||$||25,064 ||$||(68,427)||$||(43,053)||$||(2,156)||$||125 |
|Basic earnings (loss) per share:|| |
|Continuing operations||$||0.57 ||$||(1.35)||$||— ||$||— ||$||— |
|Discontinued operations||0.13 ||(2.76)||(3.17)||(0.16)||0.01 |
|Total basic earnings per share||$||0.70 ||$||(4.11)||$||(3.17)||$||(0.16)||$||0.01 |
|Diluted earnings (loss) per share:|
|Continuing operations||$||0.57 ||$||(1.35)||$||— ||$||— ||$||— |
|Discontinued operations||0.13 ||(2.76)||(3.17)||(0.16)||0.01 |
|Total diluted earnings (loss) per share||$||0.70 ||$||(4.11)||$||(3.17)||$||(0.16)||$||0.01 |
|Weighted-average shares outstanding:|
|Basic ||34,531,362 ||16,669,065 ||13,602,774 ||13,800,884 ||12,928,762 |
|Diluted||34,971,935 ||16,669,065 ||13,602,774 ||13,800,884 ||13,977,748 |
See accompanying notes to consolidated financial statements.
FRANCHISE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
Year Ended December 26, 2020, Transition Period Ended December 28, 2019, December 29, 2018 (Unaudited) and Years Ended April 30, 2019 and April 30, 2018
|(In thousands)||Twelve Months Ended||Transition Period From 5/1/2019 - ||Period From 5/1/2018 - ||Twelve Months Ended|
|Net income (loss)||$||27,154 ||$||(104,466)||$||(43,053)||$||(2,156)||$||135 |
|Other comprehensive income (loss)|
|Foreign currency translation adjustment||242 ||412 ||(654)||(527)||679 |
Unrealized (loss) gain on interest rate swap agreement, net of taxes of ($24), ($15), ($16), ($