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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 26, 2021
 
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 001-35588
 
Franchise Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 27-3561876
(State of incorporation) (IRS employer identification no.)
 
109 Innovation Court, Suite J
Delaware, Ohio 43015
(Address of principal executive offices)
(740) 363-2222
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common stock, par value $.01 per shareFRGNASDAQ Global Market
7.50% Series A Cumulative Preferred Stock, par value $0.01 per share and liquidation preference of $25.00 per shareFRGAPNASDAQ Global Market
 
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 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes 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 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

The number of shares outstanding of the registrant's common stock, par value $0.01 value per share, as of July 30, 2021 was 40,228,467 shares.




FRANCHISE GROUP, INC. AND SUBSIDIARIES
 
Form 10-Q for the Quarterly Period Ended June 26, 2021
 
Table of Contents
 
  Page
  Number
   
   
 
 
 
 
 
   
   



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


FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets

(In thousands, except share count and per share data)June 26, 2021December 26, 2020
Assets(Unaudited)(Audited)
Current assets:
Cash and cash equivalents$165,432 $148,780 
Current receivables, net 81,075 67,335 
Inventories, net504,726 302,307 
Current assets held for sale113,671 43,023 
Other current assets21,558 13,997 
Total current assets886,462 575,442 
Property, equipment, and software, net208,499 135,872 
Non-current receivables, net12,200 12,800 
Goodwill787,241 448,258 
Intangible assets, net312,180 109,892 
Operating lease right-of-use assets666,537 502,104 
Non-current assets held for sale 55,116 
Other non-current assets14,332 8,428 
Total assets$2,887,451 $1,847,912 
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term obligations$11,544 $104,053 
Current operating lease liabilities158,801 127,032 
Accounts payable and accrued expenses 351,096 252,389 
Current liabilities held for sale33,422 40,576 
Other current liabilities30,261 25,174 
Total current liabilities585,124 549,224 
Long-term obligations, excluding current installments1,245,377 466,944 
Non-current operating lease liabilities 522,005 402,276 
Non-current liabilities held for sale 8,779 
Other non-current liabilities 46,950 35,522 
Total liabilities2,399,456 1,462,745 
Stockholders' equity:
Common stock, $0.01 par value per share, 180,000,000 and 180,000,000 shares authorized, 40,208,564 and 40,092,260 shares issued and outstanding at June 26, 2021 and December 26, 2020, respectively
402 401 
Preferred stock, $0.01 par value per share, 20,000,000 and 20,000,000 shares authorized, 4,541,125 and 1,250,000 shares issued and outstanding at June 26, 2021 and December 26, 2020, respectively
45 13 
Additional paid-in capital467,351 382,383 
Accumulated other comprehensive loss, net of taxes(973)(1,399)
Retained earnings21,170 3,769 
Total equity attributable to Franchise Group, Inc.487,995 385,167 
Non-controlling interest  
Total equity487,995 385,167 
Total liabilities and equity$2,887,451 $1,847,912 


See accompanying notes to condensed consolidated financial statements.
2


FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)

 Three Months EndedSix Months Ended
 (In thousands, except share count and per share data)June 26, 2021June 27, 2020June 26, 2021June 27, 2020
Revenues: 
Product$805,768 $466,709 $1,389,585 $940,214 
Service and other48,193 13,669 76,768 26,691 
Rental8,797 17,176 17,750 33,596 
Total revenues862,758 497,554 1,484,103 1,000,501 
Operating expenses:  
Cost of revenue:
   Product522,576 277,582 861,991 565,400 
   Service and other934 701 1,339 1,457 
   Rental2,935 5,508 5,940 11,450 
Total cost of revenue526,445 283,791 869,270 578,307 
Selling, general, and administrative expenses278,157 198,986 503,702 410,262 
Total operating expenses804,602 482,777 1,372,972 988,569 
Income from operations58,156 14,777 111,131 11,932 
Other expense:  
Other (28)(36,726)(4,048)
Interest expense, net(22,865)(27,877)(70,300)(52,389)
Income (loss) from continuing operations before income taxes35,291 (13,128)4,105 (44,505)
Income tax expense (benefit)2,770 3,510 (81)(52,108)
Income (loss) from continuing operations32,521 (16,638)4,186 7,603 
Income (loss) from discontinued operations, net of tax6,215 (5,304)48,363 32,353 
Net income (loss)38,736 (21,942)52,549 39,956 
Less: Net loss (income) attributable to non-controlling interest 269  (2,090)
Net income (loss) attributable to Franchise Group, Inc.$38,736 $(21,673)$52,549 $37,866 
Amounts attributable to Franchise Group, Inc.:
Net income (loss) from continuing operations$32,521 $(16,361)$4,186 $(6,278)
Net income (loss) from discontinued operations6,215 (5,312)48,363 44,144 
Net income attributable to Franchise Group, Inc.$38,736 $(21,673)$52,549 $37,866 
Basic earnings (loss) per share:
Continuing operations$0.76 $(0.47)$ $(0.22)
Discontinued operations0.15 (0.15)1.20 1.51 
Total basic earnings per share$0.91 $(0.62)$1.20 $1.29 
Diluted earnings (loss) per share:  
Continuing operations$0.74 $(0.47)$ $(0.22)
Discontinued operations0.15 (0.15)1.20 1.51 
Total diluted earnings per share$0.89 $(0.62)$1.20 $1.29 
Weighted-average shares outstanding:
Basic40,175,058 34,972,364 40,142,571 29,173,172 
Diluted40,905,567 34,972,364 40,142,571 29,173,172 

See accompanying notes to condensed consolidated financial statements.
3


FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

 Three Months EndedSix Months Ended
(In thousands)June 26, 2021June 27, 2020June 26, 2021June 27, 2020
Net income (loss)$38,736 $(21,942)$52,549 $39,956 
Other comprehensive income (loss)
Unrealized (gain) loss on interest rate swap agreement, net of taxes of $(1), $(3), $13, and $(31), respectively
(2)(7)45 (80)
Foreign currency translation adjustment158 381 381 (491)
Forward contracts related to foreign currency exchange rates(17)4  6 
Other comprehensive income (loss)139 378 426 (565)
Comprehensive income (loss)38,875 (21,564)52,975 39,391 
Less: comprehensive loss (income) attributable to non-controlling interest 269  (1,915)
Comprehensive income (loss) attributable to Franchise Group, Inc.$38,875 $(21,295)$52,975 $37,476 
 
 See accompanying notes to condensed consolidated financial statements.
4


FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
 
Three Months Ended June 26, 2021
(In thousands)Common stock sharesCommon stockPreferred stock sharesPreferred stockAdditional paid-in-capitalAccumulated other comprehensive lossRetained earningsTotal Franchise Group equityNon-controlling interestTotal equity
Balance at March 27, 202140,157 $402 4,541 $45 $464,106 $(1,112)$19 $463,460 $ $463,460 
Net income— — — — — — 38,736 38,736 — 38,736 
Total other comprehensive income— — — — — 139 — 139  139 
Exercise of stock options33  — — 360 — — 360 — 360 
Stock-based compensation expense, net18  — — 2,884 — — 2,884 — 2,884 
Issuance of common stock— — — — — — — — — — 
Issuance of Series A Preferred Stock— —   1 — — 1 — 1 
Common dividend declared ($0.375 per share)— — — — — — (15,457)(15,457)— (15,457)
Preferred dividend declared ($0.469 per share)— — — — — — (2,128)(2,128)— (2,128)
Balance at June 26, 202140,208 $402 4,541 $45 $467,351 $(973)$21,170 $487,995 $ $487,995 

Six Months Ended June 26, 2021
(In thousands)Common stock sharesCommon stockPreferred stock sharesPreferred stockAdditional paid-in-capitalAccumulated other comprehensive lossRetained earningsTotal Franchise Group equityNon-controlling interestTotal equity
Balance at December 26, 202040,092 $401 1,250 $13 $382,383 $(1,399)$3,769 $385,167 $ $385,167 
Net income— — — — — — 52,549 52,549 — 52,549 
Total other comprehensive income— — — — — 426 — 426  426 
Exercise of stock options36 — — — 385 —  385 — 385 
Stock-based compensation expense, net80 1 — — 5,073  — 5,074  5,074 
Issuance of common stock  — — — — — — — — 
Issuance of Series A Preferred Stock—  3,291 32 79,510 — — 79,542 — 79,542 
Common dividend declared ($0.375 per share)— — — — — — (30,891)(30,891)— (30,891)
Preferred dividend declared ($0.469 per share)— — — — — — (4,257)(4,257)— (4,257)
Balance at June 26, 202140,208 $402 4,541 $45 $467,351 $(973)$21,170 $487,995 $ $487,995 
5


FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)

Three Months Ended June 27, 2020
(In thousands)Common stock sharesCommon stockPreferred stock sharesPreferred stockAdditional paid-in-capitalAccumulated other comprehensive lossRetained earningsTotal Franchise Group equityNon-controlling interestTotal equity
Balance at March 29, 202029,653 $297 1,099 $11 $237,354 $(2,306)$73,652 $309,008 $20,013 $329,021 
Changes and distributions of non-controlling interest in New Holdco— — — — 19,919 (175)— 19,744 (19,744)— 
Net loss— — — — — — (21,673)(21,673)(269)(21,942)
Total other comprehensive income— — — — — 378 — 378 — 378 
Exercise of stock options23 — — — 186 — — 186 — 186 
Stock-based compensation expense, net15 — — — 1,817 — — 1,817 — 1,817 
Conversion of preferred to common stock5,496 55 (1,099)(11)(9,751)— — (9,707)— (9,707)
Dividend declared ($0.25 per share)— — — — — — (9,044)(9,044)— (9,044)
Balance at June 27, 202035,187 $352  $ $249,525 $(2,103)$42,935 $290,709 $ $290,709 


Six Months Ended June 27, 2020
(In thousands)Common stock sharesCommon stockPreferred stock sharesPreferred stockAdditional paid-in-capitalAccumulated other comprehensive lossRetained earningsTotal Franchise Group equityNon-controlling interestTotal equity
Balance at December 29, 201918,250 $183 1,887 $19 $108,339 $(1,538)$18,388 $125,391 $26,370 $151,761 
Changes and distributions of non-controlling interest in New Holdco— — — — 23,744 (175)— 23,569 (25,927)(2,358)
Net income— — — — — — 37,866 37,866 2,090 39,956 
Total other comprehensive loss— — — — — (390)— (390)(175)(565)
Exercise of stock options23 — — — 186 — — 186 — 186 
Stock-based compensation expense, net18 — — — 4,265 — — 4,265 — 4,265 
Issuance of common stock7,462 75   123,019 — — 123,094 — 123,094 
Conversion of preferred to common stock9,434 94 (1,887)(19)(10,028)— — (9,953)— (9,953)
Dividend declared ($0.25 per share)— — — — — — (15,677)(15,677)— (15,677)
Adjustment— — — — — — 2,358 2,358 (2,358)— 
Balance at June 27, 202035,187 $352  $ $249,525 $(2,103)$42,935 $290,709 $ $290,709 

See accompanying notes to condensed consolidated financial statements.
6


FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)

Six Months Ended
(In thousands)June 26, 2021June 27, 2020
Operating Activities 
Net income$52,549 $39,956 
Adjustments to reconcile net income to net cash provided by operating activities: 
Provision for doubtful accounts1,910 3,403 
Depreciation, amortization and impairment charges31,157 33,792 
Amortization of deferred financing costs33,197 21,554 
Loss (gain) on disposal of fixed assets645 (166)
Stock-based compensation expense - equity awards5,478 4,339 
(Gain) on bargain purchases and sales of Company-owned offices(731)(1,258)
Equity in loss of affiliate 15 
Deferred tax expense  7,739 
Prepayment penalty for early debt extinguishment36,726  
Change in
Accounts, notes, and interest receivable 3,832 (1,784)
Income taxes receivable2,215 (53,156)
Other assets3,867 1,015 
Accounts payable and accrued expenses9,089 134 
Inventory(77,410)84,434 
Deferred revenue3,102 8,938 
Net cash provided by operating activities105,626 148,955 
Investing Activities 
Issuance of operating loans to franchisees and Area Developers ("ADs")(17,612)(28,876)
Payments received on operating loans to franchisees and ADs23,013 49,612 
Purchases of Company-owned offices, AD rights, and acquired customer lists(401)(2,299)
Proceeds from sale of Company-owned offices and AD rights293 989 
Acquisition of business, net of cash and restricted cash acquired(462,821)(353,423)
Purchases of property, equipment, and software(24,627)(16,212)
Net cash (used in) in investing activities(482,155)(350,209)
Financing Activities 
Proceeds from the exercise of stock options386 187 
Dividends paid(32,808)(10,406)
Non-controlling interest distribution (4,716)
Repayment of other long-term obligations(771,511)(410,798)
Borrowings under revolving credit facility6,724 142,000 
Repayments under revolving credit facility(84,874)(112,760)
Issuance of common stock 92,082 
Issuance of preferred stock79,542  
Payment for debt issue costs and original issuance discounts(50,776)(14,604)
Prepayment penalty for early debt extinguishment(36,726) 
Issuance of debt1,300,000 586,000 
Cash paid for taxes on exercises/vesting of stock-based compensation(404)(73)
Net cash provided by financing activities409,553 266,912 
Effect of exchange rate changes on cash, net142 (234)
Net increase in cash equivalents and restricted cash33,166 65,424 
Cash, cash equivalents and restricted cash at beginning of period151,502 45,146 
Cash, cash equivalents and restricted cash at end of period$184,668 $110,570 
Supplemental Cash Flow Disclosure 
Cash paid for taxes, net of refunds$1,284 $493 
Cash paid for interest$61,249 $26,857 
Accrued capital expenditures $3,406 $2,608 
Deferred financing costs from issuance of common stock$ $31,013 
Capital expenditures funded by finance lease liabilities$1,211 $ 
Tax receivable agreement included in other long-term liabilities$ $17,156 
See accompanying notes to condensed consolidated financial statements.

7


The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows.
(In thousands)June 26, 2021June 27, 2020
Cash and cash equivalents$165,432 $92,407 
Restricted cash included in other non-current assets367 5,097 
Cash and cash equivalents for discontinued operations18,869 13,066 
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows$184,668 $110,570 

Amounts included in other non-current assets represent those required to be set aside by a contractual agreement with an insurer for the payment of specific workers’ compensation claims.



8


FRANCHISE GROUP, INC. AND SUBSIDIARIES
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
June 26, 2021 and June 27, 2020
 
(1) Basis of Presentation
 

Unless otherwise stated, references to the "Company," "we," "us," and "our" in this Quarterly Report on Form 10-Q (the "Quarterly Report") refer to Franchise Group, Inc. and its direct and indirect subsidiaries on a consolidated basis. The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and pursuant to the requirements of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. The unaudited condensed consolidated financial statements should be read in conjunction with Exhibit 99.1 of Form 8-K filed on June 25, 2021, to reflect certain retrospective revisions for discontinued operations and changes in reportable segments in the consolidated financial statements of the Company in its 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 (the “Form 10-K”).

In the opinion of management, all adjustments (including those of a normal recurring nature) necessary for a fair presentation of such condensed consolidated financial statements in accordance with GAAP have been recorded. The December 26, 2020 balance sheet information was derived from the audited financial statements as of that date.

Discontinued Operations

As previously disclosed, on February 21, 2021 the Company entered into a purchase agreement (the " Purchase Agreement") to sell its Liberty Tax business to NextPoint Acquisition Corp ("NextPoint"), a special purpose acquisition corporation incorporated under the laws of the Province of British Columbia (the "Transaction"). On July 2, 2021 the Company completed the Transaction and received total consideration of approximately $249 million consisting of approximately $182 million in cash and approximately $67 m