SEC Filing | Franchise Group, Inc.

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frg-20210925

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 September 25, 2021

☐ 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 class

Trading symbol(s)

Name of each exchange on which registered

Common stock, par value $.01 per share

FRG

NASDAQ Global Market

7.50% Series A Cumulative Preferred Stock, par value $0.01 per share and liquidation preference of $25.00 per share

FRGAP

NASDAQ 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 October 29, 2021 was 40,295,469 shares.

FRANCHISE GROUP, INC. AND SUBSIDIARIES

Form 10-Q for the Quarterly Period Ended September 25, 2021

Table of Contents


		Page
		Number

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of September 2 5 , 2021 and December 26, 2020	2
	Condensed Consolidated Statements of Operations for the three and nine months ended September 2 5 , 2021 and September 2 6 , 2020	3
	Condensed Consolidated Statements of Comprehensive Operations for the three and nine months ended September 2 5 , 2021 and September 2 6 , 2020	4
	Condensed Consolidated Statements of Stockholders' Equity for the three and ni ne months ended September 2 5 , 2021 and September 2 6 , 2020	5
	Condensed Consolidated Statements of Cash Flows for the ni ne months ended September 2 5 , 2021 and September 2 6 , 2020	7
	Notes to Unaudited Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	37

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Mine Safety Disclosures	38
Item 5.	Other Information	38
Item 6.	Exhibits	39
Signatures		42

PART I. FINANCIAL INFORMATION

ITEM 1

FINANCIAL STATEMENTS (UNAUDITED)

FRANCHISE GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets


(In thousands, except share count and per share data)	September 25, 2021		December 26, 2020
Assets	(Unaudited)		(Audited)
Current assets:
Cash and cash equivalents	$	159,972	$	148,780
Current receivables, net	95,686		67,335
Inventories, net	533,552		302,307
Current assets held for sale	—		43,023
Other current assets	18,643		13,997
Total current assets	807,853		575,442
Property, equipment, and software, net	202,968		135,872
Non-current receivables, net	12,000		12,800
Goodwill	787,441		448,258
Intangible assets, net	308,905		109,892
Operating lease right-of-use assets	656,561		502,104
Non-current assets held for sale	—		55,116
Other non-current assets	55,856		8,428
Total assets	$	2,831,584	$	1,847,912
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term obligations	$	1,420	$	104,053
Current operating lease liabilities	158,577		127,032
Accounts payable and accrued expenses	360,274		252,389
Current liabilities held for sale	—		40,576
Other current liabilities	34,095		25,174
Total current liabilities	554,366		549,224
Long-term obligations, excluding current installments	1,072,909		466,944
Non-current operating lease liabilities	513,461		402,276
Non-current liabilities held for sale	—		8,779
Other non-current liabilities	51,366		35,522
Total liabilities	2,192,102		1,462,745

Stockholders' equity:
Common stock, $0.01 par value per share, 180,000,000 and 180,000,000 shares authorized, 40,237,297 and 40,092,260 shares issued and outstanding at September 25, 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 September 25, 2021 and December 26, 2020, respectively	45		13
Additional paid-in capital	471,405		382,383
Accumulated other comprehensive loss, net of taxes	—		(1,399)
Retained earnings	167,630		3,769
Total equity attributable to Franchise Group, Inc.	639,482		385,167
Non-controlling interest	—		—
Total equity	639,482		385,167
Total liabilities and equity	$	2,831,584	$	1,847,912

See accompanying notes to condensed consolidated financial statements.

FRANCHISE GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)


	Three Months Ended				Nine Months Ended
(In thousands, except share count and per share data)	September 25, 2021		September 26, 2020		September 25, 2021		September 26, 2020
Revenues:
Product	$	782,608	$	500,462	$	2,172,193	$	1,440,677
Service and other	37,891		19,826		114,659		46,516
Rental	8,327		17,404		26,077		51,000
Total revenues	828,826		537,692		2,312,929		1,538,193
Operating expenses:
Cost of revenue:
Product	485,682		296,920		1,347,673		862,320
Service and other	8,737		678		10,076		2,135
Rental	2,930		5,877		8,869		17,327
Total cost of revenue	497,349		303,475		1,366,618		881,782
Selling, general, and administrative expenses	276,714		209,537		780,416		619,799
Total operating expenses	774,063		513,012		2,147,034		1,501,581
Income from operations	54,763		24,680		165,895		36,612
Other expense:
Other	(13,090)		(1,246)		(49,816)		(5,295)
Interest expense, net	(21,194)		(26,269)		(91,494)		(78,658)
Income (loss) from continuing operations before income taxes	20,479		(2,835)		24,585		(47,341)
Income tax expense (benefit)	(15,519)		1,891		(15,600)		(50,217)
Income (loss) from continuing operations	35,998		(4,726)		40,185		2,876
Income (loss) from discontinued operations, net of tax	128,072		(3,871)		176,434		28,483
Net income (loss)	164,070		(8,597)		216,619		31,359
Less: Net (income) attributable to non-controlling interest	—		—		—		(2,090)
Net income (loss) attributable to Franchise Group, Inc.	$	164,070	$	(8,597)	$	216,619	$	29,269

Amounts attributable to Franchise Group, Inc.:
Net income (loss) from continuing operations	$	35,998	$	(4,726)	$	40,185	$	(11,005)
Net income (loss) from discontinued operations	128,072		(3,871)		176,434		40,274
Net income attributable to Franchise Group, Inc.	$	164,070	$	(8,597)	$	216,619	$	29,269

Basic earnings (loss) per share:
Continuing operations	$	0.84	$	(0.12)	$	0.84	$	(0.34)
Discontinued operations	3.18		(0.10)		4.39		1.23
Total basic earnings per share	$	4.02	$	(0.22)	$	5.23	$	0.89

Diluted earnings (loss) per share:
Continuing operations	$	0.83	$	(0.12)	$	0.83	$	(0.34)
Discontinued operations	3.13		(0.10)		4.31		1.23
Total diluted earnings per share	$	3.96	$	(0.22)	$	5.14	$	0.89

Weighted-average shares outstanding:
Basic	40,229,232		39,692,384		40,171,458		32,679,576
Diluted	40,973,736		39,692,384		40,931,423		32,679,576

See accompanying notes to condensed consolidated financial statements.

FRANCHISE GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)


	Three Months Ended				Nine Months Ended
(In thousands)	September 25, 2021		September 26, 2020		September 25, 2021		September 26, 2020
Net income (loss)	$	164,070	$	(8,597)	$	216,619	$	31,359
Other comprehensive income (loss)
Unrealized (gain) loss on interest rate swap agreement, net of taxes of $—, $2, $13, and $(29), respectively	—		(39)		45		(119)
Foreign currency translation adjustment	—		303		381		(188)
Forward contracts related to foreign currency exchange rates	—		1		—		7
Reclassification of unrealized loss on interest rate swap agreement and foreign currency translation adjustments realized upon disposal of business	973		—		973		—
Other comprehensive income (loss)	973		265		1,399		(300)
Comprehensive income (loss)	165,043		(8,332)		218,018		31,059
Less: comprehensive (income) attributable to non-controlling interest	—		—		—		(1,915)
Comprehensive income (loss) attributable to Franchise Group, Inc.	$	165,043	$	(8,332)	$	218,018	$	29,144

See accompanying notes to condensed consolidated financial statements.

FRANCHISE GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders' Equity (Unaudited)


	Three Months Ended September 25, 2021
(In thousands)	Common stock shares	Common stock		Preferred stock shares	Preferred stock		Additional paid-in-capital		Accumulated other comprehensive loss		Retained earnings		Total Franchise Group equity
Balance at June 26, 2021	40,208	$	402	4,541	$	45	$	467,351	$	(973)	$	21,170	$	487,995
Net income	—	—		—	—		—		—		164,070		164,070
Total other comprehensive income	—	—		—	—		—		973		—		973
Exercise of stock options	—	—		—	—		—		—		—		—
Stock-based compensation expense, net	29	—		—	—		4,054		—		—		4,054

Issuance of Series A Preferred Stock	—	—		—	—		—		—		—		—
Common dividend declared ($0.375 per share)	—	—		—	—		—		—		(15,482)		(15,482)
Preferred dividend declared ($0.469 per share)	—	—		—	—		—		—		(2,128)		(2,128)
Balance at September 25, 2021	40,237	$	402	4,541	$	45	$	471,405	$	—	$	167,630	$	639,482


	Nine Months Ended September 25, 2021
(In thousands)	Common stock shares	Common stock		Preferred stock shares	Preferred stock		Additional paid-in-capital		Accumulated other comprehensive loss		Retained earnings		Total Franchise Group equity
Balance at December 26, 2020	40,092	$	401	1,250	$	13	$	382,383	$	(1,399)	$	3,769	$	385,167
Net income	—	—		—	—		—		—		216,619		216,619
Total other comprehensive income	—	—		—	—		—		1,399		—		1,399
Exercise of stock options	36	—		—	—		385		—		—		385
Stock-based compensation expense, net	109	1		—	—		9,127		—		—		9,128

Issuance of Series A Preferred Stock	—	—		3,291	32		79,510		—		—		79,542
Common dividend declared ($0.375 per share)	—	—		—	—		—		—		(46,372)		(46,372)
Preferred dividend declared ($0.469 per share)	—	—		—	—		—		—		(6,386)		(6,386)
Balance at September 25, 2021	40,237	$	402	4,541	$	45	$	471,405	$	—	$	167,630	$	639,482

FRANCHISE GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders' Equity (Unaudited)


	Three Months Ended September 26, 2020
(In thousands)	Common stock shares	Common stock		Preferred stock shares	Preferred stock		Additional paid-in-capital		Accumulated other comprehensive loss		Retained earnings		Total Franchise Group equity		Non-controlling interest		Total equity
Balance at June 28, 2020	35,186	$	352	—	$	—	$	249,525	$	(2,103)	$	42,935	$	290,709	$	—	$	290,709

Net loss	—	—		—	—		—		—		(8,597)		(8,597)		—		(8,597)
Total other comprehensive income	—	—		—	—		—		265		—		265		—		265
Exercise of stock options	28	1		—	—		333		—		—		334		—		334
Stock-based compensation expense, net	13	—		—	—		1,945		—		—		1,945		—		1,945
Issuance of common stock	4,830	48		—	—		105,873		—		—		105,921		—		105,921
Issuance of Series A Preferred Stock	—	—		1,200	12		28,354		—		—		28,366		—		28,366
Common dividend declared ($0.25 per share)	—	—		—	—		—		—		(10,242)		(10,242)		—		(10,242)
Preferred dividend declared ($0.14 per share)	—	—		—	—		—		—		(169)		(169)		—		(169)
Balance at September 26, 2020	40,057	$	401	1,200	$	12	$	386,030	$	(1,838)	$	23,927	$	408,532	$	—	$	408,532


	Nine Months Ended September 26, 2020
(In thousands)	Common stock shares	Common stock		Preferred stock shares	Preferred stock		Additional paid-in-capital		Accumulated other comprehensive loss		Retained earnings		Total Franchise Group equity		Non-controlling interest		Total equity
Balance at December 29, 2019	18,250	$	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	—	—		—	—		—		—		29,269		29,269		2,090		31,359
Total other comprehensive loss	—	—		—	—		—		(125)		—		(125)		(175)		(300)
Exercise of stock options	50	1		—	—		520		—		—		521		—		521
Stock-based compensation expense, net	31	—		—	—		6,209		—		—		6,209		—		6,209
Issuance of common stock	12,292	123		—	—		228,892		—		—		229,015		—		229,015
Issuance of Series A Preferred Stock	—	—		1,200	12		28,354		—		—		28,366		—		28,366
Conversion of preferred to common stock	9,434	94		(1,887)	(19)		(10,028)		—		—		(9,953)		—		(9,953)
Common dividend declared ($0.25 per share)	—	—		—	—		—		—		(25,919)		(25,919)		—		(25,919)
Preferred dividend declared ($0.14 per share)	—	—		—	—		—		—		(169)		(169)		—		(169)
Adjustment	—	—		—	—		—		—		2,358		2,358		(2,358)		—
Balance at September 26, 2020	40,057	$	401	1,200	$	12	$	386,030	$	(1,838)	$	23,927	$	408,532	$	—	$	408,532

See accompanying notes to condensed consolidated financial statements.

FRANCHISE GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)


	Nine Months Ended
(In thousands)	September 25, 2021		September 26, 2020
Operating Activities
Net income	$	216,619	$	31,359
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for doubtful accounts	2,010		3,412
Depreciation, amortization and impairment charges	50,127		51,254
Amortization of deferred financing costs	35,590		28,703
Loss (gain) on disposal of other	(374)		75
Stock-based compensation expense - equity awards	9,561		6,294
(Gain) on bargain purchases and sales of Company-owned offices	(3,368)		(1,761)
Deferred tax (income) expense	(17)		7,851
Prepayment penalty for early debt extinguishment	36,726		—
Gain on divestiture of Liberty Tax	(173,699)		—
Change in
Accounts, notes, and interest receivable	5,748		(2,223)
Income taxes receivable	(13,473)		(23,721)
Other assets	26,026		3,971
Accounts payable and accrued expenses	21,959		38,884
Inventory	(108,947)		79,967
Deferred revenue	10,952		5,649
Net cash provided by operating activities	115,440		229,714
Investing Activities
Issuance of operating loans to franchisees	(17,749)		(30,368)
Payments received on operating loans to franchisees	23,103		50,064
Purchases of Company-owned offices and acquired customer lists	(1,086)		(4,830)
Proceeds from sale of Company-owned offices	3,189		1,118
Acquisition of business, net of cash and restricted cash acquired	(462,821)		(353,423)
Divestiture of business, net of cash and restricted cash sold	179,471		—
Purchases of property, equipment, and software	(36,871)		(26,702)
Proceeds from sale of property, equipment, and software	195		1,474
Net cash (used in) in investing activities	(312,569)		(362,667)
Financing Activities
Proceeds from the exercise of stock options	386		520
Dividends paid	(50,016)		(19,167)
Non-controlling interest distribution	—		(4,716)
Repayment of other long-term obligations	(957,382)		(455,811)
Borrowings under revolving credit facility	6,724		174,665
Repayments under revolving credit facility	(84,874)		(218,260)
Issuance of common stock	—		198,003
Issuance of preferred stock	79,542		28,366
Payment for debt issue costs and original issuance discounts	(51,288)		(16,673)
Prepayment penalty for early debt extinguishment	(36,726)		—
Issuance of debt	1,300,000		586,000
Cash paid for taxes on exercises/vesting of stock-based compensation	(433)		(85)
Net cash provided by financing activities	205,933		272,842
Effect of exchange rate changes on cash, net	34		(142)
Net increase in cash equivalents and restricted cash	8,838		139,747
Cash, cash equivalents and restricted cash at beginning of period	151,502		45,146
Cash, cash equivalents and restricted cash at end of period	$	160,340	$	184,893
Supplemental Cash Flow Disclosure
Cash paid for taxes, net of refunds	$	39,618	$	944
Cash paid for interest	$	79,074	$	41,226
Accrued capital expenditures	$	3,496	$	3,633
Non-cash proceeds from divestiture of Liberty Tax	$	59,680	$	—
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.

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)	September 25, 2021		September 26, 2020
Cash and cash equivalents	$	159,972	$