TAX 10-Q
Cambria Tax Aware ETF (TAX)
10-Q
2023-05-10
For: 2023-04-01
View Original
Added on
August 12, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended April 1, 2023
OR
For the transition period from to
Commission File Number 001-35588
(Exact name of registrant as specified in its charter)
| (State of incorporation) | (IRS employer identification no.) | |||||||
(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 | ||||||
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.
| ☒ | 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 May 5, 2023 was 35,172,623 shares.
FRANCHISE GROUP, INC. AND SUBSIDIARIES
Form 10-Q for the Quarterly Period Ended April 1, 2023
Table of Contents
| Page Number | ||||||||
PART I. FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS (UNAUDITED)
1
FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
| Three Months Ended | ||||||||||||||
| (In thousands, except share count and per share data) | April 1, 2023 | March 26, 2022 | ||||||||||||
| Revenues: | ||||||||||||||
| Product | $ | $ | ||||||||||||
| Service and other | ||||||||||||||
| Rental | ||||||||||||||
| Total revenues | ||||||||||||||
| Operating expenses: | ||||||||||||||
| Cost of revenue: | ||||||||||||||
| Product | ||||||||||||||
| Service and other | ||||||||||||||
| Rental | ||||||||||||||
| Total cost of revenue | ||||||||||||||
| Selling, general, and administrative expenses | ||||||||||||||
| Goodwill impairment | ||||||||||||||
| Total operating expenses | ||||||||||||||
| Income (loss) from operations | ( | |||||||||||||
| Other expense: | ||||||||||||||
| Bargain purchase gain | ( | |||||||||||||
| Other, net | ( | ( | ||||||||||||
| Interest expense, net | ( | ( | ||||||||||||
| Income (loss) from operations before income taxes | ( | |||||||||||||
| Income tax expense (benefit) | ( | |||||||||||||
| Net income (loss) attributable to Franchise Group, Inc. | ( | |||||||||||||
| Other comprehensive income (loss) | ||||||||||||||
| Comprehensive income (loss) | $ | ( | $ | |||||||||||
| Net income (loss) per share: | ||||||||||||||
| Basic | $ | ( | $ | |||||||||||
| Diluted | ( | |||||||||||||
| Weighted-average shares outstanding: | ||||||||||||||
| Basic | ||||||||||||||
| Diluted | ||||||||||||||
See accompanying notes to condensed consolidated financial statements.
2
FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
| (In thousands, except share count and per share data) | April 1, 2023 | December 31, 2022 | ||||||||||||
| Assets | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
Current receivables, net of allowance for credit losses of $( | ||||||||||||||
Current securitized receivables, net of allowance for credit losses of $( | ||||||||||||||
| Inventories, net | ||||||||||||||
| Current assets held for sale | ||||||||||||||
| Other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| Property, plant, and equipment, net | ||||||||||||||
Non-current receivables, net of allowance for credit losses of $( | ||||||||||||||
Non-current securitized receivables, net of allowance for credit losses of $( | ||||||||||||||
| Goodwill | ||||||||||||||
| Intangible assets, net | ||||||||||||||
| Tradenames | ||||||||||||||
| Operating lease right-of-use assets | ||||||||||||||
| Investment in equity securities | ||||||||||||||
| Other non-current assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Current installments of long-term obligations, net | $ | $ | ||||||||||||
| Current installments of debt secured by accounts receivable, net | ||||||||||||||
| Current operating lease liabilities | ||||||||||||||
| Accounts payable and accrued expenses | ||||||||||||||
| Other current liabilities | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term obligations, excluding current installments | ||||||||||||||
| Non-current liabilities debt secured by accounts receivable, net | ||||||||||||||
| Non-current operating lease liabilities | ||||||||||||||
| Other non-current liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Stockholders’ equity: | ||||||||||||||
Common stock, $ | ||||||||||||||
Preferred stock, $ | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
| Retained earnings (deficit) | ( | |||||||||||||
| Total equity | ||||||||||||||
| Total liabilities and equity | $ | $ | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
3
FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
| Three Months Ended April 1, 2023 | |||||||||||||||||||||||||||||||||||||||||
| (In thousands) | Common stock shares | Common stock | Preferred stock shares | Preferred stock | Additional paid-in-capital | Retained earnings (deficit) | Total Franchise Group equity | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
| Cumulative effect of adopted accounting standards, net | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Exercise of stock options | 1 | — | — | — | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation, net | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||
| Common dividend declared ($0.625 per share) | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Preferred dividend declared ($0.469 per share) | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Balance at April 1, 2023 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||
| Three Months Ended March 26, 2022 | |||||||||||||||||||||||||||||||||||||||||
| (In thousands) | Common stock shares | Common stock | Preferred stock shares | Preferred stock | Additional paid-in-capital | Retained earnings | Total Franchise Group equity | ||||||||||||||||||||||||||||||||||
| Balance at December 25, 2021 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation, net | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Common dividend declared ($0.625 per share) | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Preferred dividend declared ($0.469 per share) | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Balance at March 26, 2022 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
4
FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
| Three Months Ended | ||||||||||||||
| (In thousands) | April 1, 2023 | March 26, 2022 | ||||||||||||
| Operating Activities | ||||||||||||||
| Net income (loss) | $ | ( | $ | |||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
| Provision for credit losses for accounts receivable | ||||||||||||||
| Depreciation, amortization, and impairment charges | ||||||||||||||
| Goodwill impairment | ||||||||||||||
| Amortization of deferred financing costs | ||||||||||||||
| Securitized financing costs | ||||||||||||||
| Stock-based compensation expense | ||||||||||||||
| Change in fair value of investment | ||||||||||||||
| Gain on bargain purchases and sales of Company-owned stores | ( | |||||||||||||
| Other non-cash items | ( | ( | ||||||||||||
| Changes in operating assets and liabilities | ( | ( | ||||||||||||
| Net cash provided by operating activities | ||||||||||||||
| Investing Activities | ||||||||||||||
| Purchases of property, plant, and equipment | ( | ( | ||||||||||||
| Proceeds from sale of property, plant, and equipment | ||||||||||||||
| Acquisition of business, net of cash and restricted cash acquired | ( | ( | ||||||||||||
| Net cash (used in) investing activities | ( | ( | ||||||||||||
| Financing Activities | ||||||||||||||
| Dividends paid | ( | ( | ||||||||||||
| Issuance of long-term debt and other obligations | ||||||||||||||
| Repayment of long-term debt and other obligations | ( | ( | ||||||||||||
| Proceeds from secured debt obligations | ||||||||||||||
| Repayment of secured debt obligations | ( | ( | ||||||||||||
| Principal payments of finance lease obligations | ( | ( | ||||||||||||
| Payment for debt issue costs | ( | |||||||||||||
| Cash paid for taxes on exercises/vesting of stock-based compensation, net | ( | ( | ||||||||||||
| Net cash provided by (used in) financing activities | ( | |||||||||||||
| Net increase (decrease) in cash equivalents and restricted cash | ( | |||||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | ||||||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | ||||||||||||
| Supplemental Cash Flow Disclosure | ||||||||||||||
| Cash paid for taxes, net of refunds | $ | $ | ||||||||||||
| Cash paid for interest | ||||||||||||||
| Cash paid for interest on secured debt | ||||||||||||||
| Accrued capital expenditures | ||||||||||||||
| Capital expenditures funded by finance lease liabilities | ||||||||||||||
See accompanying notes to condensed consolidated financial statements.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Statements of Cash Flows.
| (In thousands) | April 1, 2023 | March 26, 2022 | ||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Restricted cash included in other non-current assets | ||||||||||||||
| Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows | $ | $ | ||||||||||||
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.
5
FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
(1) Basis of Presentation
Unless otherwise stated, references to the “Company,” “we,“ “us,” and “our” in this Quarterly Report on Form 10-Q (this “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 the Company’s Form 10-K for the year ended December 31, 2022 that was filed with the Securities and Exchange Commission (“SEC”) on February 28, 2023 (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 31, 2022 balance sheet information was derived from the audited financial statements as of that date.
Reclassifications
Recent Accounting Pronouncements Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which changes how companies measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard replaces the “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost (which generally will result in the earlier recognition of allowances for losses) and requires companies to record allowances for available-for-sale debt securities, rather than reduce the carrying amount. In addition, companies will have to disclose significantly more information, including information used to track credit quality by year of origination, for most financing receivables.
Effective January 1, 2023, the Company adopted ASU 2016-13 and applied a cumulative-effect adjustment to retained earnings. The Company has reviewed its entire portfolio of assets recognized on the balance sheet as of December 31, 2022 and identified customer receivables and securitized receivables as the materially impacted assets within the scope of ASC 326. Upon adoption of ASC 326 the Company recorded a net decrease to retained earnings of $10.0 million as of January 1, 2023. Prior period amounts were not adjusted and will continue to be reported under the previous accounting standards.
The cumulative effect of the changes made to the Company’s Condensed Consolidated Balance Sheet as a result of the adoption of ASC 326 were as follows:
| Impact of Adoption of ASC 326 | ||||||||||||||||||||
| (In thousands) | Balance at December 31, 2022 | Adjustments due to ASC 326 | Balance at January 1, 2023 | |||||||||||||||||
| Assets | ||||||||||||||||||||
| Current receivables, net | $ | $ | ( | $ | ||||||||||||||||
| Current securitized receivables, net | ( | |||||||||||||||||||
| Non-current securitized receivables, net | ( | |||||||||||||||||||
| Deferred income taxes | ||||||||||||||||||||
| Stockholders’ Equity | ||||||||||||||||||||
| Retained earnings | $ | $ | ( | $ | ||||||||||||||||
6
(2) Acquisitions
The Company continually looks to diversify and grow its portfolio of brands through acquisitions. On February 28, 2023, the Company’s Pet Supplies Plus segment acquired 20 stores through bankruptcy proceedings of a third party for approximately $3.7 million. The components of the preliminary purchase price allocation are not presented herein due to the immateriality of the transaction to the Company overall. The Company’s Pet Supplies Plus segment subsequently franchised 12 of the 20 acquired stores.
(3) Accounts and Notes Receivable
Current and non-current receivables as of April 1, 2023 and December 31, 2022 are presented in the Condensed Consolidated Balance Sheets as follows:
| (In thousands) | April 1, 2023 | December 31, 2022 | ||||||||||||
| Trade accounts receivable | $ | $ | ||||||||||||
| Customer accounts receivable | ||||||||||||||
| Franchisee accounts receivable | ||||||||||||||
| Notes receivable | ||||||||||||||
| Income tax receivable | ||||||||||||||
| Allowance for credit losses | ( | ( | ||||||||||||
| Current receivables, net | ||||||||||||||
| Notes receivable, non-current | ||||||||||||||
| Allowance for credit losses, non-current | ( | ( | ||||||||||||
| Non-current receivables, net | ||||||||||||||
| Total receivables | $ | $ | ||||||||||||
Allowance for Credit Losses
The adequacy of the allowance for credit losses is assessed on a quarterly basis and adjusted as deemed necessary. Receivables that are ultimately deemed to be uncollectible, and for which collection efforts have been exhausted, are written off against the allowance for credit losses. Expected credit losses for trade and franchisee accounts receivable are immaterial. Notes receivable are due from the Company’s franchisees and are collateralized by the underlying franchise. The debtors’ ability to repay the notes is dependent upon both the performance of the franchisee’s industry as a whole and the individual franchise areas.
Activity in the allowance for credit losses for trade, customer, and franchisee accounts receivable and notes receivable for the three months ended April 1, 2023 and March 26, 2022 were as follows:
| Three Months Ended | ||||||||||||||
| (In thousands) | April 1, 2023 | March 26, 2022 | ||||||||||||
| Balance at beginning of period | $ | $ | ||||||||||||
| Cumulative effect of adopted accounting standards | — | |||||||||||||
| Provision for credit loss expense (benefit) | ( | ( | ||||||||||||
| Write-offs, net of recoveries | ( | — | ||||||||||||
| Balance at end of period | $ | $ | ||||||||||||
7
Past due amounts are primarily attributable to trade and franchisee accounts receivable that have been generated over the past year and are past due by 1-30 days. The delinquency distribution of accounts and notes receivable past due at April 1, 2023 were as follows:
| April 1, 2023 | ||||||||||||||||||||
| (In thousands) | Past due | Current | Total receivables | |||||||||||||||||
| Accounts receivable | $ | $ | $ | |||||||||||||||||
| Notes receivable | ||||||||||||||||||||
| Total accounts and notes receivable | $ | $ | $ | |||||||||||||||||
(4) Securitized Accounts Receivable
In order to monetize its customer credit receivables portfolio, the Company's Badcock Home Furniture & more (“Badcock”) segment sells beneficial interests in customer revolving lines of credit pursuant to securitization transactions. The Company securitized an additional $133.4 million of its customer credit receivables portfolio during the three months ended April 1, 2023. For additional details regarding these securitizations, refer to “Note 5 – Securitized Accounts Receivable” in the Form 10-K.
When securitized receivables are delinquent for approximately one year, the estimated uncollectible amount from the customer is written off and the corresponding securitized accounts receivable is reduced. Financial instruments that could potentially subject the Company to concentrations of credit risk consist of accounts receivable with its customers. The Company manages such risk by managing the customer accounts receivable portfolio using delinquency as a key credit quality indicator. Management believes the allowance is adequate to cover the Company’s credit loss exposure. Due to their non-recourse nature, the Company will record a gain on extinguishment for any debt secured by uncollectible accounts receivable in the future when the debt meets the extinguishment requirements in accordance with ASC 470, “Debt”.
Activity in the allowance for credit losses on securitized accounts for the three months ended April 1, 2023 and March 26, 2022 was as follows:
| Three Months Ended | ||||||||||||||
| (In thousands) | April 1, 2023 | March 26, 2022 | ||||||||||||
| Balance at beginning of period | $ | $ | ||||||||||||
| Cumulative effect of adopted accounting standards | — | |||||||||||||
| Provision for credit loss expense | ||||||||||||||
| Write-offs, net of recoveries | ( | ( | ||||||||||||
| Balance at end of period | $ | $ | ||||||||||||
Current amounts include receivables for customers who have made a payment in the past 30 days. Any customers who have not made a required payment within the last 30 days are considered past due. The following table presents the delinquency distribution of the carrying value of customer accounts receivable by year of origination as of April 1, 2023:
| Delinquency Bucket | 2023 | 2022 | 2021 | Prior | Total | |||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| Current | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| 1-30 | ||||||||||||||||||||||||||||||||
| 31-60 | ||||||||||||||||||||||||||||||||
| 61-90 | ||||||||||||||||||||||||||||||||
| 91+ | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
8
Servicing revenue, interest income and interest expense generated from securitized receivables for the three months ended April 1, 2023 and March 26, 2022 were as follows:
| (In thousands) | April 1, 2023 | March 26, 2022 | ||||||||||||
| Securitization servicing revenue | $ | $ | ||||||||||||
Interest income from securitization1 | ||||||||||||||
| Interest expense, debt secured by accounts receivable | ( | ( | ||||||||||||
1 Includes interest income from Badcock customer receivables (refer to “Note 3 – Accounts and Notes Receivable”) and securitized receivables.
(5) Goodwill and Intangible Assets
The Company performs impairment tests for goodwill as of the end of July of each fiscal year and between annual impairment tests if an event occurs or circumstances change that would more likely than not reduce the fair values of the Company’s reporting units below their carrying values. As a result of the Company’s American Freight segment’s underperformance compared to projections for the three months ended April 1, 2023, as well as current macroeconomic conditions, the Company updated its long-term forecasts. The Company performed an interim goodwill impairment quantitative assessment as of April 1, 2023, and based on the results of the analysis, the Company recorded a non-cash goodwill impairment charge of $75.0 million, which was recorded in “Goodwill impairment” in the accompanying Condensed Consolidated Statements of Operations. Other than the American Freight segment’s accumulated goodwill impairment of $70.0 million as of December 31, 2022, no other reporting units had accumulated goodwill impairment losses recorded.
The estimated fair value of the Company’s American Freight reporting unit was calculated using a weighted-average of values determined from an income approach and a market approach. The income approach involves estimating the fair value of each reporting unit by discounting its estimated future cash flows using a discount rate that would be consistent with a market participant’s assumption. The market approach bases the fair value measurement on information obtained from observed stock prices of public companies and recent merger and acquisition transaction data of comparable entities. In order to estimate the fair value of goodwill, management must make certain estimates and assumptions that affect the total fair value of the reporting unit including, among other things, an assessment of market conditions, projected cash flows, discount rates and growth rates. Management’s estimates of projected cash flows related to the reporting unit include, but are not limited to, future earnings of the reporting unit, assumptions about the use or disposition of assets included in the reporting unit, estimated remaining lives of those assets, and future expenditures necessary to maintain the assets’ existing service potential. The assumptions in the fair value measurement reflect the current market environment, industry-specific factors and company-specific factors.
Changes in the carrying amount of goodwill for the three months ended April 1, 2023 are as follows:
| Vitamin Shoppe | Pet Supplies Plus | American Freight | Buddy’s | Sylvan | Total | |||||||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Acquisitions | ||||||||||||||||||||||||||||||||||||||
| Goodwill impairment | ( | ( | ||||||||||||||||||||||||||||||||||||
| Disposals and purchase accounting adjustments | ( | ( | ||||||||||||||||||||||||||||||||||||
| Balance as of April 1, 2023 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
9
Components of intangible assets as of April 1, 2023 and December 31, 2022 were as follows:
| April 1, 2023 | ||||||||||||||||||||
| (In thousands) | Gross carrying amount | Accumulated amortization | Net carrying amount | |||||||||||||||||
| Indefinite lived tradenames | $ | $ | — | $ | ||||||||||||||||
| Intangible assets: | ||||||||||||||||||||
| Franchise and dealer agreements | $ | $ | ( | $ | ||||||||||||||||
| Customer contracts | ( | |||||||||||||||||||
| Other intangible assets | ( | |||||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | ||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||
| (In thousands) | Gross carrying amount | Accumulated amortization | Net carrying amount | |||||||||||||||||
| Indefinite lived tradenames | $ | $ | — | $ | ||||||||||||||||
| Intangible assets: | ||||||||||||||||||||
| Franchise and dealer agreements | $ | $ | ( | $ | ||||||||||||||||
| Customer contracts | ( | |||||||||||||||||||
| Other intangible assets | ( | |||||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | ||||||||||||||||
(6) Revenue
For details regarding the principal activities from which the Company generates its revenue, refer to “Note 1 – Description of Business and Summary of Significant Accounting Policies Presentation” in the Form 10-K. For more detailed information regarding reportable segments, refer to “Note 13 – Segments” in this Quarterly Report. The following represents the disaggregated revenue by reportable segments for the three months ended April 1, 2023:
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||
| April 1, 2023 | ||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | Vitamin Shoppe | Pet Supplies Plus | Badcock | American Freight | Buddy’s | Sylvan | Consolidated | |||||||||||||||||||||||||||||||||||||
| Retail sales | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Wholesale sales | ||||||||||||||||||||||||||||||||||||||||||||
| Total product revenue | ||||||||||||||||||||||||||||||||||||||||||||
Royalties and advertising fees | ||||||||||||||||||||||||||||||||||||||||||||
| Financing revenue | ||||||||||||||||||||||||||||||||||||||||||||
| Interest income | ||||||||||||||||||||||||||||||||||||||||||||
| Interest income from amortization of original purchase discount | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Warranty and damage revenue | ||||||||||||||||||||||||||||||||||||||||||||
| Other revenues | ||||||||||||||||||||||||||||||||||||||||||||
| Total service revenue | ||||||||||||||||||||||||||||||||||||||||||||
| Rental revenue, net | ||||||||||||||||||||||||||||||||||||||||||||
| Total rental revenue | ||||||||||||||||||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
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The following represents the disaggregated revenue by reportable segments for the three months ended March 26, 2022:
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||
| March 26, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | Vitamin Shoppe | Pet Supplies Plus | Badcock | American Freight | Buddy’s | Sylvan | Consolidated | |||||||||||||||||||||||||||||||||||||
| Retail sales | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Wholesale sales | ||||||||||||||||||||||||||||||||||||||||||||
| Total product revenue | ||||||||||||||||||||||||||||||||||||||||||||
| Royalties and advertising fees | ||||||||||||||||||||||||||||||||||||||||||||
| Financing revenue | ||||||||||||||||||||||||||||||||||||||||||||
| Interest income | ||||||||||||||||||||||||||||||||||||||||||||
| Interest income from amortization of original purchase discount | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Warranty and damage revenue | ||||||||||||||||||||||||||||||||||||||||||||
| Other revenues | ||||||||||||||||||||||||||||||||||||||||||||
| Total service revenue | ||||||||||||||||||||||||||||||||||||||||||||
| Rental revenue, net | ||||||||||||||||||||||||||||||||||||||||||||
| Total rental revenue | ||||||||||||||||||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
Contract Balances
The following table provides information about receivables and contract liabilities (deferred revenue) from contracts with customers as of April 1, 2023 and December 31, 2022:
| (In thousands) | April 1, 2023 | December 31, 2022 | ||||||||||||
| Accounts receivable | $ | $ | ||||||||||||
| Notes receivable | ||||||||||||||
| Customer deposits | $ | $ | ||||||||||||
| Gift cards and loyalty programs | ||||||||||||||
| Deferred franchise fee revenue | ||||||||||||||
| Other deferred revenue | ||||||||||||||
| Total deferred revenue | $ | $ | ||||||||||||
Deferred revenue consists of (1) amounts received for merchandise of which customers have not yet taken possession, (2) gift card or store credits outstanding, and (3) loyalty reward program credits which are primarily recognized within one year following the revenue deferral. Deferred franchise fee revenue is recognized over the term of the agreement, which is between five and twenty years. The amount of revenue recognized in the period that was included in the contract liability balance at the beginning of the period is immaterial to the condensed consolidated financial statements.
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(7) Long-Term Obligations
For details regarding the Company’s long-term debt obligations, refer to “Note 10 – Long-Term Obligations” in the Form 10-K.
Long-term obligations at April 1, 2023 and December 31, 2022 were as follows:
| (In thousands) | April 1, 2023 | December 31, 2022 | ||||||||||||
| Term loans, net of debt issuance costs | ||||||||||||||
| First lien term loan, due March 10, 2026 | $ | $ | ||||||||||||
| Second lien term loan, due September 10, 2026 | ||||||||||||||
| Total term loans, net of debt issuance costs | ||||||||||||||
| ABL Revolver | ||||||||||||||
| Other long-term obligations | ||||||||||||||
| Finance lease liabilities | ||||||||||||||
| Total long-term obligations | ||||||||||||||
| Less current installments | ||||||||||||||
| Total long-term obligations, net | $ | $ | ||||||||||||
First Lien Credit Agreement
On February 2, 2023, the Company entered into the Third Amendment to the First Lien Credit Agreement, which amends the First Lien Credit Agreement dated as of March 10, 2021 to provide for an incremental term loan facility in the principal amount of $300.0 million and change the reference rate under the First Lien Credit Agreement from LIBOR to SOFR. The net proceeds were used to repay certain amounts outstanding under the Company’s ABL Credit Agreement.
Compliance with Debt Covenants
The Company's revolving credit and long-term debt agreements impose restrictive covenants on it, including requirements to meet certain ratios. As of April 1, 2023, the Company was in compliance with all covenants under these agreements and, based on a continuation of current operating results, the Company expects to be in compliance for the next twelve months.
(8) Income Taxes
Overview
For the three months ended April 1, 2023 and March 26, 2022, the Company had an effective tax rate of 6.2 % and 23.0 %, respectively. The changes in the effective tax rate compared to the prior year are due to a current year projected pre-tax loss compared to prior year pre-tax income and a current year non-cash goodwill impairment charge that is nondeductible for tax purposes.
Tax Receivable Agreement
On July 10, 2019, the Company entered into a tax receivable agreement (the “Tax Receivable Agreement”) with the then-existing non-controlling interest holders (the “Buddy’s Members”) that provides for the payment by the Company to the Buddy’s Members of 40 % of the cash savings, if any, in federal, state and local taxes that the Company realizes or is deemed to realize as a result of any increases in tax basis of the assets of Franchise Group New Holdco, LLC (“New Holdco”) resulting from future redemptions or exchanges of New Holdco units.
Payments will be made when such Tax Receivable Agreement related deductions actually reduce the Company’s income tax liability. No payments were made to the Buddy’s Members pursuant to the Tax Receivable Agreement during the three months ended April 1, 2023. Total amounts due under the Tax Receivable Agreement to the Buddy’s Members as of April 1, 2023 were $15.4 million, with $1.0 million in “Other current liabilities” and the remaining amount recorded in “Other non-current liabilities” in the accompanying Condensed Consolidated Balance Sheets. Pursuant to the Company’s election under Section 754 of the Internal Revenue Code (the “Code”), the Company has obtained an increase in its share of the tax basis in
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(9) Net Income (Loss) Per Share
Diluted net income (loss) per share is computed using the weighted-average number of common stock and, if dilutive, the potential common stock outstanding during the period. Potential common stock consists of the incremental common stock issuable upon the exercise of stock options and vesting of restricted stock units. The dilutive effect of outstanding stock options and restricted stock units is reflected in diluted earnings per share by application of the treasury stock method.
| Three Months Ended | ||||||||||||||
| (In thousands, except for share and per share amounts) | April 1, 2023 | March 26, 2022 | ||||||||||||
| Net income (loss) attributable to Franchise Group | $ | ( | $ | |||||||||||
| Less: Preferred dividend declared | ( | ( | ||||||||||||
| Adjusted net income (loss) available to Common Stockholders | $ | ( | $ | |||||||||||
| Weighted-average common stock outstanding | ||||||||||||||
| Net dilutive effect of stock options and restricted stock | ||||||||||||||
| Weighted-average diluted shares outstanding | ||||||||||||||
| Net income (loss) per share: | ||||||||||||||
| Basic net income per share | $ | ( | $ | |||||||||||
| Diluted net income per share | ( | |||||||||||||
(10) Equity & Stock Compensation Plans
For a discussion of our stock-based compensation plans, refer to “Note 12 – Stock Compensation Plans” in the Form 10-K.
Restricted Stock Units
The Company has awarded service-based restricted stock units (the “RSUs”) to its non-employee directors, officers and certain employees. The Company recognizes expense based on the estimated fair value of the RSUs granted over the vesting period on a straight-line basis. The fair value of RSUs is determined using the Company’s closing stock price on the date of the grant. At April 1, 2023, unrecognized compensation costs related to the RSUs were $11.7 million. These costs are expected to be recognized through fiscal year 2024.
The following table summarizes the status of the RSUs as of and changes during the three months ended April 1, 2023:
| Number of RSUs | Weighted average fair value at grant date | |||||||||||||
| Balance as of December 31, 2022 | $ | |||||||||||||
| Granted | ||||||||||||||
| Vested | ( | |||||||||||||
| Canceled | ( | |||||||||||||
| Balance as of April 1, 2023 | $ | |||||||||||||
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Performance Restricted Stock Units
The Company has awarded performance restricted stock units (the “PRSUs”) to its officers and certain employees. The Company recognizes expense based on the estimated fair value of the PRSUs granted over the vesting period on a straight-line basis. The fair value of PRSUs is determined using the Company’s closing stock price on the date of the grant. At April 1, 2023, unrecognized compensation costs related to the PRSUs were $5.9 million. These costs are expected to be recognized through fiscal year 2025.
The following table summarizes the status of the PRSUs as of and changes during the three months ended April 1, 2023:
| Number of PRSUs | Weighted average fair value at grant date | |||||||||||||
| Balance as of December 31, 2022 | $ | |||||||||||||
| Granted | ||||||||||||||
Adjusted for performance results achieved(1) | ||||||||||||||
| Vested | ( | |||||||||||||
| Canceled | ( | |||||||||||||
| Balance as of April 1, 2023 | $ | |||||||||||||
(1) Represents an adjustment for performance results achieved related to outstanding 2020 PRSU shares that reached 200% achievement in March 2023.
Market-Based Performance Restricted Stock Units
The Company has awarded market-based performance restricted stock units (the “MPRSUs”) to its officers and certain employees. The Company recognizes expense based on the estimated fair value of the MPRSUs granted over the vesting period on a straight-line basis. The fair value of MPRSUs is determined using a Monte Carlo simulation valuation model to calculate grant date fair value. Compensation expense is recognized over the requisite service period using the proportionate amount of the award’s fair value that has been earned through service to date. Under GAAP, compensation expense is not reversed if the award target is not achieved. At April 1, 2023, unrecognized compensation costs related to the MPRSUs were $8.0 million. These costs are expected to be recognized through fiscal year 2024.
The following table summarizes the status of the MPRSUs as of and changes during the three months ended April 1, 2023:
| Number of MPRSUs | Weighted average fair value at grant date | |||||||||||||
| Balance as of December 31, 2022 | $ | |||||||||||||
| Granted | ||||||||||||||
| Vested | ||||||||||||||
| Canceled | ( | |||||||||||||
| Balance as of April 1, 2023 | $ | |||||||||||||
Stock Options
The Company has awarded stock options to its non-employee directors and officers. As of April 1, 2023, there were 239,564 stock options outstanding. During the three months ended April 1, 2023, there were no stock options granted, 15,000 stock options exercised, and no stock options forfeited. The weighted-average exercise price of stock options outstanding was $9.54 per share as of April 1, 2023. All outstanding stock options will expire in fiscal years 2023 and 2024.
At April 1, 2023, there were zero non-vested stock options outstanding and there was no remaining unrecognized compensation cost related to vested stock options.
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The following table summarizes information about stock options outstanding and exercisable at April 1, 2023:
| Options Outstanding and Exercisable | ||||||||||||||||||||
| Range of exercise prices | Number | Weighted average exercise price | Weighted average remaining contractual life (in years) | |||||||||||||||||
| $0.00 - $10.89 | $ | |||||||||||||||||||
| $10.90 - $12.01 | ||||||||||||||||||||
| $ | ||||||||||||||||||||
Stock Compensation Expense
The Company recorded $2.7 million and $5.4 million in stock-based compensation expense during the three months ended April 1, 2023 and March 26, 2022, respectively.
Long-Term Incentive Plans
The Company has long-term incentive plans at various operating companies which are recorded as liabilities. Upon vesting, the awards granted under these plans may be settled in cash or shares of the Company’s stock at the Company’s discretion. The total aggregate liability for these plans as of April 1, 2023 is $9.8 million, recorded in “Other non-current liabilities” on the Condensed Consolidated Balance Sheets. During the three months ended April 1, 2023, total expense recognized related to these plans was $1.8 million.
(11) Related Party Transactions
The Company considers any of its directors, executive officers or beneficial owners of more than 5% of its common stock, or any member of the immediate family of the foregoing persons, to be related parties.
Messrs. Kahn and Laurence
Brian Kahn and Vintage Capital Management, LLC and its affiliates (“Vintage”), in aggregate, held approximately 40.2 % of the aggregate voting power of the Company through their ownership of common stock as of April 1, 2023. Brian Kahn and Andrew Laurence are principals of Vintage. Mr. Kahn is a member of the Board of Directors, President and Chief Executive Officer of the Company. Mr. Laurence is an Executive Vice President of the Company and served as a member of the Company’s Board of Directors until May 2021.
Buddy’s Franchises. Mr. Kahn’s brother-in-law owns eight Buddy’s franchises. All transactions between the Company’s Buddy’s segment and Mr. Kahn’s brother-in-law are conducted on a basis consistent with other franchisees.
Tax Receivable Agreement
Refer to “Note 8 – Income Taxes” for detail regarding the amounts due under the Tax Receivable Agreement to the Buddy’s Members.
(12) Commitments and Contingencies
In the ordinary course of operations, the Company may become a party to legal proceedings. Based upon information currently available, management believes that such legal proceedings, individually or in the aggregate, will not have a material adverse effect on the Company’s business, financial condition, cash flows, or results of operations.
The Company is party to claims and lawsuits that are considered to be ordinary, routine litigation incidental to the business, including claims and lawsuits concerning the fees charged to customers for various products and services, relationships with franchisees, intellectual property disputes, employment matters, and contract disputes. Although the Company cannot provide assurance that it will ultimately prevail in each instance, it believes the amount, if any, it will be required to pay in the discharge of liabilities or settlements in these claims will not have a material adverse impact on its consolidated results of operations, financial position, or cash flows.
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Guarantees
The Company remains secondarily liable under various real estate leases that were assigned to franchisees who acquired Pet Supplies Plus or Vitamin Shoppe stores from the Company. In the event of the failure of an acquirer to pay lease payments, the Company could be obligated to pay the remaining lease payments which extend through 2033 and in aggregate are $30.3 million and $30.2 million as of April 1, 2023 and December 31, 2022, respectively. In certain cases, the Company could attempt to recover from the franchisees’ personal assets should the Company be required to pay remaining lease obligations.
If the Company is required to make payments under any of these guarantees, the Company could seek to recover those amounts from the franchisees or in some cases their affiliates. The Company believes that payment under any of these guarantees is remote as of April 1, 2023.
(13) Segments
The Company’s operations are conducted in six reportable business segments: Vitamin Shoppe, Pet Supplies Plus, Badcock, American Freight, Buddy’s, and Sylvan. The Company defines its segments as those operations which results its chief operating decision maker (“CODM”) regularly reviews to analyze performance and allocate resources.
The Vitamin Shoppe segment is an omnichannel specialty retailer and wellness lifestyle company with the mission of providing customers with the most trusted products, guidance, and services to help them become their best selves, however they define it. The Vitamin Shoppe segment offers one of the largest varieties of products among vitamin, mineral and supplement retailers. The broad product offering enables the company to provide 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. The Vitamin Shoppe continues to focus on improving the customer experience through the roll-out of initiatives including increasing customer engagement and personalization, redesigning the omnichannel experience (including in stores as well as through the internet and mobile devices), growing private brands and improving the effectiveness of pricing and promotions. Vitamin Shoppe is headquartered in Secaucus, New Jersey.
The Pet Supplies Plus segment is a leading omnichannel retail chain and franchisor of pet supplies and services. Pet Supplies Plus has a diversified revenue model comprised of Company-owned store revenue, franchise royalties and revenue generated by the wholesale distribution of products to its franchisees. Pet Supplies Plus offers a curated selection of premium brands, proprietary private labels and specialty products with retail price parity with online players. Additionally, Pet Supplies Plus offers grooming, pet wash and other services in most of its locations. The Pet Supplies Plus segment operates under the “Pet Supplies Plus” brand and is headquartered in Livonia, Michigan.
The Badcock segment is a retailer of furniture, appliances, bedding, electronics, home office equipment, accessories and seasonal items in a showroom format. Additionally, Badcock offers multiple and flexible payment solutions and credit options through its consumer financing services. The Badcock segment operates under the “Badcock Home Furniture & More” brand and is headquartered in Mulberry, Florida.
The 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-box 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. The American Freight segment operates under the “American Freight” brand and is headquartered in Delaware, Ohio.
The 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 customers the opportunity to benefit from the use of high-quality products under flexible rental purchase agreements without long-term obligations. The Buddy’s segment operates under the “Buddy’s” brand and is headquartered in Orlando, Florida.
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The Sylvan segment is an established and growing franchisor of supplemental education for Pre-K-12 students and families. Sylvan addresses the full range of student needs with a broad variety of academic curriculums delivered in an omnichannel format. The Sylvan platform provides franchisees with the ability to provide a range of services, including on premises, virtually, at a satellite location, and in the home. Sylvan is headquartered in Hunt Valley, Maryland.
Refer to “Note 6 – Revenue” for total revenues by segment. Operating income (loss) by segment were as follows:
| Three Months Ended | ||||||||||||||
| (In thousands) | April 1, 2023 | March 26, 2022 | ||||||||||||
| Income (loss) from operations: | ||||||||||||||
| Vitamin Shoppe | $ | $ | ||||||||||||
| Pet Supplies Plus | ||||||||||||||
| Badcock | ||||||||||||||
| American Freight | ( | |||||||||||||
| Buddy’s | ||||||||||||||
| Sylvan | ||||||||||||||
| Total Segments | ( | |||||||||||||
| Corporate | ( | ( | ||||||||||||
| Consolidated income (loss) from operations | $ | ( | $ | |||||||||||
Total assets by segment were as follows:
| (In thousands) | April 1, 2023 | December 31, 2022 | ||||||||||||
| Total assets: | ||||||||||||||
| Vitamin Shoppe | $ | $ | ||||||||||||
| Pet Supplies Plus | ||||||||||||||
| Badcock | ||||||||||||||
| American Freight | ||||||||||||||
| Buddy’s | ||||||||||||||
| Sylvan | ||||||||||||||
| Total Segments | ||||||||||||||
| Corporate | ||||||||||||||
| Consolidated total assets | $ | $ | ||||||||||||
(14) Subsequent Events
On May 9, 2023, the Board declared quarterly dividends of $0.46875 per share of Series A Preferred Stock. The dividends will be paid in cash on or about July 17, 2023 to holders of record of the Company's Series A Preferred Stock on the close of business on July 3, 2023.
On May 10, 2023, the Company announced that it has entered into a definitive agreement and plan of merger (the “Merger Agreement”) pursuant to which members of the senior management team of the Company led by Brian Kahn, the Company’s Chief Executive Officer (collectively with affiliates and related parties of the senior management team, the “Management Group”), have agreed to acquire approximately 64% of the Company’s issued and outstanding common stock that the Management Group does not presently own or control. Under the terms of the proposed merger, the Company’s common stockholders, other than the Management Group (the “Public Stockholders”), will receive $30.00 in cash for each share of the Company’s common stock they hold.
The proposed merger is anticipated to close in the second half of 2023, subject to satisfaction or waiver of the closing conditions, including approval by regulatory authorities and the Company’s stockholders, including approval by a majority of the shares of common stock of the Company not owned or controlled by the Management Group. Upon completion of the proposed merger, the Company will become a private company and will no longer be publicly listed or traded on NASDAQ.
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ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
This Quarterly Report contains forward-looking statements concerning our business, operations, and financial performance and condition as well as our plans, objectives, and expectations for our business operations and financial performance and condition. Any statements contained herein that are not of historical facts may be deemed to be forward-looking statements. You can identify these statements by words such as “aim,” “anticipate,” “assume,” “believe,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “positioned,” “should,” “target,” “will,” “would,” and other similar expressions that are predictions of or indicate future events and future trends. These forward-looking statements are based on current expectations, estimates, forecasts, and projections about our business and the industry in which we operate and our management’s beliefs and assumptions. They are not guarantees of future performance or development and involve known and unknown risks, uncertainties, and other factors that are in some cases beyond our control. Additionally, other factors may cause actual results to differ materially from historical results or from any results expressed or implied by such forward-looking statements. Factors that may cause such differences include, but are not limited to, the risks described under “Item 1A-Risk Factors,” including:
•the risk that natural disasters, public health crises, political uprisings, uncertainty or unrest, or other catastrophic events could adversely affect our operations and financial results, including the impact of the COVID-19 pandemic on manufacturing operations and our supply chain, customer traffic and our operations in general;
•the possibility that any of the anticipated benefits of our acquisitions or dispositions will not be realized or will not be realized within the expected time period, our businesses and our acquisitions may not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected, or revenues following our acquisitions may be lower than expected or we are unable to sell non-core assets;
•our ability to identify and consummate attractive acquisitions on favorable terms;
•additional leverage incurred in connection with acquisitions or other capital expenditure initiatives;
•our inability to grow on a sustainable basis;
•changes in operating costs, including employee compensation and benefits and increased transportation costs and delays attributed to global supply chain challenges;
•higher inflation rates, which may result in reduced customer traffic or impact discretionary consumer spending;
•the seasonality of the products and services we provide in certain of our business segments;
•departures of key executives, senior management members or directors;
•our ability to attract additional talent to our teams;
•our ability to maintain an active trading market for our common stock on The Nasdaq Global Market (“Nasdaq”);
•the effect of regulation of the products and services that we offer, including changes in laws and regulations and the costs and administrative burdens associated with complying with such laws and regulations;
•our ability to develop and maintain relationships with our third-party product and service providers;
•our ability to offer merchandise and services that our customers demand;
•our ability to successfully manage our inventory levels and implement initiatives to improve inventory management and other capabilities;
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•competitive conditions in the retail industry and consumer services markets;
•the performance of our products within the prevailing industry;
•worldwide economic conditions and business uncertainty, the availability of consumer and commercial credit, higher debt capital costs, change in consumer confidence, tastes, preferences and spending, and changes in vendor relationships;
•the uncertainty of the future impact of the COVID-19 pandemic and public health measures on our business and results of operations;
•potential regulatory actions relating to the COVID-19 pandemic and the related government mitigation efforts on our business and our financial results;
•disruption of manufacturing, warehouse or distribution facilities or information systems;
•the continued reduction of our competitors promotional pricing on new-in-box appliances, potentially adversely impacting our sales of out-of-box appliances and associated margin;
•any potential non-compliance, fraud or other misconduct by our franchisees, dealers, or employees;
•our ability and the ability of our franchisees and dealers to comply with legal and regulatory requirements;
•failures by our franchisees, the franchisees’ employees, and our dealers to comply with their contractual obligations to us and with laws and regulations, to the extent these failures affect our reputation or subject us to legal risk;
•our ability to attract and retain new franchisees and dealers and the ability of our franchisees and dealers to open new stores and territories and operate them successfully;
•the availability of suitable store locations at appropriate lease terms;
•the ability of our franchisees and dealers to generate sufficient revenue to pay us royalties and fees;
•our ability to manage Company-owned stores;
•our exposure to litigation and any governmental investigations;
•our ability and our franchisees’ and dealers’ ability to protect customers’ personal information, including from a cyber-security incident;
•the impact of identity-theft concerns on customer attitudes toward our services;
•our ability to access the credit markets and satisfy our covenants to lenders;
•our operating subsidiary’s potential repurchase of certain finance receivables if certain representations and warranties about the quality and nature of such receivables are breached, which may negatively impact our results of operations, financial condition, and liquidity;
•a decline in the credit quality of our customers, a decrease in our credit sales, or other factors outside of our control, which could lead to a decrease in our product sales and profitability;
•our reliance on technology systems and electronic communications; and
•other factors, including the risk factors discussed in this Quarterly Report.
Potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on the forward-looking statements. These forward-looking statements speak only as of the date of this quarterly report. Unless required by law, we do not intend to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise. A potential investor or other vendor
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should, however, review the factors and risks we describe in the reports we will file from time to time with the U.S. Securities and Exchange Commission (“SEC”) after the date of this Quarterly Report.
Overview
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. 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 The Vitamin Shoppe (“Vitamin Shoppe”), Pet Supplies Plus, Badcock Home Furniture & more (“Badcock”), American Freight, Buddy’s Home Furnishings (“Buddy’s”), and Sylvan Learning (“Sylvan”). Refer to “Note 13 – Segments” in this Quarterly Report for additional information.
Our revenue is primarily derived from merchandise sales, rental revenue, and service revenues comprised of royalties and other required fees from our franchisees, dealers and financing programs.
In evaluating our performance, management focuses on Adjusted EBITDA as a measure of the cash flow from recurring operations from the businesses. Adjusted EBITDA represents net income (loss), before income taxes, interest expense, depreciation and amortization, and certain other items.
Impact of COVID-19
As of the date of this Quarterly Report, we have experienced some supply chain delays and disruptions, including adverse consequences to our supply chain function from decreased procurement volumes in connection with the COVID-19 pandemic. We believe that the lingering effects of the COVID-19 pandemic could negatively impact our business and financial results by weakening demand for our products and services, further disrupting our supply chain or affecting our ability to raise capital from financial institutions. As events continue to change, 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 impact of new subvariants and the public's or governments' response to the outbreak; however, we are actively managing our business to respond to the impact.
Results of Operations
The table below shows results of operations for the three months ended April 1, 2023 and March 26, 2022.
| Three Months Ended | ||||||||||||||||||||||||||
| Change | ||||||||||||||||||||||||||
| (In thousands) | April 1, 2023 | March 26, 2022 | $ | % | ||||||||||||||||||||||
| Total revenues | $ | 1,104,821 | $ | 1,135,470 | $ | (30,649) | (2.7) | % | ||||||||||||||||||
| Income from operations | (26,529) | 130,366 | (156,895) | (120.3) | % | |||||||||||||||||||||
| Net income | $ | (108,317) | $ | 12,317 | $ | (120,634) | (979.4) | % | ||||||||||||||||||
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Revenues. The table below sets forth the components and changes in our revenues for the three months ended April 1, 2023 and March 26, 2022.
| Three Months Ended | ||||||||||||||||||||||||||
| Change | ||||||||||||||||||||||||||
| (In thousands) | April 1, 2023 | March 26, 2022 | $ | % | ||||||||||||||||||||||
| Product | $ | 976,808 | $ | 979,164 | $ | (2,356) | (0.2) | % | ||||||||||||||||||
| Service and other | 120,567 | 148,282 | (27,715) | (18.7) | % | |||||||||||||||||||||
| Rental | 7,446 | 8,024 | (578) | (7.2) | % | |||||||||||||||||||||
| Total revenue | $ | 1,104,821 | $ | 1,135,470 | $ | (30,649) | (2.7) | % | ||||||||||||||||||
For the three months ended April 1, 2023, total revenues decreased $30.6 million, or (2.7)%, to $1,104.8 million compared to $1,135.5 million in the same period last year. This decrease was primarily due to a $69.0 million decrease in revenue at our Badcock segment and a $4.9 million decrease in revenue at our American Freight segment. These decreases were partially offset by a $32.9 million increase in revenue at our Pet Supplies Plus segment and a $10.7 million increase in revenue at our Vitamin Shoppe segment.
Operating expenses. The following table details the amounts and changes in our operating expenses for the three months ended April 1, 2023 and March 26, 2022.
| Three Months Ended | ||||||||||||||||||||||||||
| Change | ||||||||||||||||||||||||||
| (In thousands) | April 1, 2023 | March 26, 2022 | $ | % | ||||||||||||||||||||||
| Cost of revenue: | ||||||||||||||||||||||||||
| Product | $ | 656,904 | $ | 616,585 | $ | 40,319 | 6.5 | % | ||||||||||||||||||
| Service and other | 9,579 | 8,663 | 916 | 10.6 | % | |||||||||||||||||||||
| Rental | 2,626 | 2,861 | (235) | (8.2) | % | |||||||||||||||||||||
| Total cost of revenue | 669,109 | 628,109 | 41,000 | 6.5 | % | |||||||||||||||||||||
| Selling, general, and administrative expenses | 387,241 | 376,995 | 10,246 | 2.7 | % | |||||||||||||||||||||
| Goodwill impairment expense | 75,000 | — | 75,000 | 100.0 | % | |||||||||||||||||||||
| Total operating expenses | $ | 1,131,350 | $ | 1,005,104 | $ | 126,246 | 12.6 | % | ||||||||||||||||||
For the three months ended April 1, 2023, total operating expenses were $1,131.4 million compared to $1,005.1 million in the same period last year, representing an increase of $126.2 million, or 12.6%. This increase was primarily due to a $75.0 million non-cash goodwill impairment charge related to our American Freight segment, as further discussed in “Note 5 - Goodwill and Intangible Assets” in the Notes to the Consolidated Financial Statements in this Quarterly Report, a $30.5 million increase in operating expenses at our Pet Supplies Plus segment, an $18.9 million increase in operating expenses at our Vitamin Shoppe segment, and an $18.0 million increase in operating expenses at our American Freight segment. These increases were partially offset by a $13.5 million decrease in operating expenses at our Badcock segment.
Non-operating income (expense) increased $25.3 million for the three months ended April 1, 2023 due to the following:
Other. Other expense decreased $20.1 million for the three months ended April 1, 2023 compared to the same period last year primarily due to a $21.9 million decrease in the loss related to our investment in NextPoint Acquisition Corp. compared to the prior period.
Interest expense, net. Interest expense, net decreased $5.2 million for the three months ended April 1, 2023 due to a decrease of $17.2 million of interest expense related to the Badcock securitized receivables portfolio, partially offset by $11.1 million in additional interest expense related to the First and Second Lien Term Loans and revolving credit facility (the “ABL Revolver”).
Income tax benefit. Our effective tax rate, including discrete income tax items, was 6.2% and 23.0% for the three months ended April 1, 2023 and March 26, 2022, respectively. The changes in the effective tax rate for the three months ended April 1,
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2023 compared to the same period in the prior year are due to a current year projected pre-tax loss compared to prior year pre-tax income and a current year non-cash goodwill impairment charge that is nondeductible for tax purposes.
Segment Information
We, through our franchisees and Company-owned stores, operate a system of point of sale retail and rent-to-own locations. Our operations are conducted in six reporting business segments: Vitamin Shoppe, Badcock, Pet Supplies Plus, American Freight, Buddy’s, and Sylvan. Refer to “Note 13 – Segments” in this Quarterly Report for additional information.
Vitamin Shoppe
The following table summarizes the operating results of our Vitamin Shoppe segment:
| Three Months Ended | ||||||||||||||||||||||||||
| Change | ||||||||||||||||||||||||||
| (In thousands) | April 1, 2023 | March 26, 2022 | $ | % | ||||||||||||||||||||||
| Total revenues | $ | 321,702 | $ | 310,953 | $ | 10,749 | 3.5 | % | ||||||||||||||||||
| Operating expenses | 294,508 | 275,599 | 18,909 | 6.9 | % | |||||||||||||||||||||
| Segment income | $ | 27,194 | $ | 35,354 | $ | (8,160) | (23.1) | % | ||||||||||||||||||
Total revenue for the three months ended April 1, 2023 for our Vitamin Shoppe segment increased $10.7 million, or 3.5%, primarily attributable to higher average transaction values and increased store traffic compared to the prior year period.
Operating expenses for our Vitamin Shoppe segment increased $18.9 million, or 6.9%, for the three months ended April 1, 2023 as compared to the same period in the prior year. Cost of goods sold increased $13.8 million, primarily due to increased sales and higher merchandise costs associated with a shift in merchandise mix.
Pet Supplies Plus
The following table summarizes the operating results of our Pet Supplies Plus segment:
| Three Months Ended | ||||||||||||||||||||||||||
| Change | ||||||||||||||||||||||||||
| (In thousands) | April 1, 2023 | March 26, 2022 | $ | % | ||||||||||||||||||||||
| Total revenues | $ | 334,071 | $ | 301,214 | $ | 32,857 | 10.9 | % | ||||||||||||||||||
| Operating expenses | 314,704 | 284,193 | 30,511 | 10.7 | % | |||||||||||||||||||||
| Segment income | $ | 19,367 | $ | 17,021 | $ | 2,346 | 13.8 | % | ||||||||||||||||||
Total revenue for our Pet Supplies Plus segment increased $32.9 million, or 10.9%, for the three months ended April 1, 2023 as compared to the same period last year. Our Pet Supplies Plus segment opened 75 new stores since the prior year period, resulting in a $28.7 million increase in wholesale revenue.
Operating expenses for our Pet Supplies Plus segment increased $30.5 million, or 10.7%, for the three months ended April 1, 2023 as compared to the same period last year as cost of revenue increased at a rate comparable to revenue and higher merchandise costs.
Badcock
The following table summarizes the operating results of our Badcock segment:
| Three Months Ended | ||||||||||||||||||||||||||
| Change | ||||||||||||||||||||||||||
| (In thousands) | April 1, 2023 | March 26, 2022 | $ | % | ||||||||||||||||||||||
| Total revenues | $ | 187,287 | $ | 256,259 | $ | (68,972) | (26.9) | % | ||||||||||||||||||
| Operating expenses | 172,545 | 186,029 | (13,484) | (7.2) | % | |||||||||||||||||||||
| Segment income | $ | 14,742 | $ | 70,230 | $ | (55,488) | (79.0) | % | ||||||||||||||||||
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Total revenue for our Badcock segment decreased $69.0 million, or (26.9)%, for the three months ended April 1, 2023 as compared to the same period last year. The decrease was attributable to:
•A $34.4 million decrease in product revenue due to a weaker tax refund season than the prior year period, which resulted in decreased customer traffic.
•A $34.6 million decrease in service revenue, as the amortization of the accounts receivable discount included in service revenue was less than the prior year period ($8.2 million in the three months ended April 1, 2023 compared to $37.6 million in the three months ended March 26, 2022). The remaining decrease is due to the declining securitized accounts receivable balance.
Operating expenses for our Badcock segment decreased $13.5 million, or (7.2)%, for the three months ended April 1, 2023 as compared to the same period last year primarily due to the decrease in revenue partially offset by higher merchandise costs.
American Freight
The following table summarizes the operating results of our American Freight segment:
| Three Months Ended | ||||||||||||||||||||||||||
| Change | ||||||||||||||||||||||||||
| (In thousands) | April 1, 2023 | March 26, 2022 | $ | % | ||||||||||||||||||||||
| Total revenues | $ | 236,561 | $ | 241,416 | $ | (4,855) | (2.0) | % | ||||||||||||||||||
| Operating expenses | 323,191 | 230,203 | 92,988 | 40.4 | % | |||||||||||||||||||||
| Segment income | $ | (86,630) | $ | 11,213 | $ | (97,843) | (872.6) | % | ||||||||||||||||||
Total revenue for our American Freight segment decreased $4.9 million, or 2.0%, for the three months ended April 1, 2023 as compared to the same period last year. The decrease was attributable to lower demand for furniture, mattresses, and appliances driven by a weaker tax refund season than the prior year period, in addition to the inflationary environment which resulted in reduced customer traffic.
Operating expenses for our American Freight segment increased $93.0 million, or 40.4%, for the three months ended April 1, 2023 as compared to the same period in the prior year. The increase in operating expense was primarily due to a $75.0 million non-cash goodwill impairment charge, as further discussed in “Note 5 - Goodwill and Intangible Assets” in the Notes to the Consolidated Financial Statements in this Quarterly Report. The increase was also due to higher merchandise costs from orders placed in the prior year, which includes higher inbound freight costs.
Buddy’s
The following table summarizes the operating results of our Buddy’s segment:
| Three Months Ended | ||||||||||||||||||||||||||
| Change | ||||||||||||||||||||||||||
| (In thousands) | April 1, 2023 | March 26, 2022 | $ | % | ||||||||||||||||||||||
| Total revenues | $ | 14,968 | $ | 15,585 | $ | (617) | (4.0) | % | ||||||||||||||||||
| Operating expenses | 11,228 | 11,520 | (292) | (2.5) | % | |||||||||||||||||||||
| Segment income | $ | 3,740 | $ | 4,065 | $ | (325) | (8.0) | % | ||||||||||||||||||
Total revenue for our Buddy’s segment decreased $0.6 million, or (4.0)%, for the three months ended April 1, 2023 as compared to the same period last year. The decrease in revenue was primarily attributable to a weaker tax refund season than the prior year.
Operating expenses for our Buddy’s segment decreased $0.3 million, or (2.5)% for the three months ended April 1, 2023, as compared to the same period last year as cost of revenue decreased at a rate comparable to revenue.
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Sylvan
The following table summarizes the operating results of our Sylvan segment:
| Three Months Ended | ||||||||||||||||||||||||||
| Change | ||||||||||||||||||||||||||
| (In thousands) | April 1, 2023 | March 26, 2022 | $ | % | ||||||||||||||||||||||
| Total revenues | $ | 10,232 | $ | 10,043 | $ | 189 | 1.9 | % | ||||||||||||||||||
| Operating expenses | 9,081 | 9,095 | (14) | (0.2) | % | |||||||||||||||||||||
| Segment income | $ | 1,151 | $ | 948 | $ | 203 | 21.4 | % | ||||||||||||||||||
Total revenue for our Sylvan segment increased $0.2 million, or 1.9%, for the three months ended April 1, 2023 as compared to the same period last year. The increase was attributable to an increase in franchise revenue.
Adjusted EBITDA
To provide additional information regarding our financial results, we have disclosed Adjusted EBITDA in the table below and within this Quarterly Report. Adjusted EBITDA represents net income (loss), before income taxes, interest expense, depreciation and amortization, and certain other items specified below. Additionally, acquisition costs include adjusting for costs of potential acquisitions and final costs of completed acquisitions. We have provided a reconciliation below of Adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure.
We have included Adjusted EBITDA in this Quarterly Report because we believe the presentation of this measure is useful to investors as a supplemental measure in evaluating the aggregate performance of our operating businesses and in comparing our results from period to period because it excludes items that we do not believe are reflective of our core or ongoing operating results. In the Adjusted EBITDA table below, we have removed all revenues and expenses related to our Badcock segment’s in-house financing operations. This includes all amounts related to accounts receivables and securitized receivables. We believe this provides investors a more accurate representation of ongoing operations as we intend to cease in-house financing operations within a year. This measure is 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 our credit facilities. 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.
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The following table presents a reconciliation of Adjusted EBITDA for each of the periods indicated.
| Reconciliation of Net Income to Adjusted EBITDA | ||||||||||||||
| Three Months Ended | ||||||||||||||
| (In thousands) | April 1, 2023 | March 26, 2022 | ||||||||||||
| Net income (loss) | $ | (108,317) | $ | 12,317 | ||||||||||
| Add back: | ||||||||||||||
| Interest expense | 87,129 | 92,327 | ||||||||||||
| Income tax expense (benefit) | (7,175) | 3,678 | ||||||||||||
| Depreciation and amortization charges | 21,624 | 22,033 | ||||||||||||
| Total Adjustments | 101,578 | 118,038 | ||||||||||||
| EBITDA | (6,739) | 130,355 | ||||||||||||
| Adjustments to EBITDA | ||||||||||||||
| Executive severance and related costs | 1,569 | 96 | ||||||||||||
| Stock-based and long term executive compensation | 4,450 | 6,626 | ||||||||||||
| Litigation costs and settlements | 94 | 230 | ||||||||||||
| Corporate compliance costs | (4) | 51 | ||||||||||||
| Store closures | 18 | 933 | ||||||||||||
| Securitized accounts receivable interest income | (30,584) | (65,026) | ||||||||||||
| Securitized accounts receivable allowance for credit losses | 21,995 | 16,413 | ||||||||||||
| W.S. Badcock financing operations | (3,121) | (2,258) | ||||||||||||
| Right-of-use and long-term asset impairment | 544 | 375 | ||||||||||||
| Goodwill impairment | 75,000 | — | ||||||||||||
| Integration costs | 649 | 464 | ||||||||||||
| Divestiture costs | 198 | (337) | ||||||||||||
| Acquisition costs | 101 | 626 | ||||||||||||
| Loss on investment in equity securities | 1,830 | 23,723 | ||||||||||||
| Acquisition bargain purchase gain | — | 67 | ||||||||||||
| Total Adjustments to EBITDA | 72,739 | (18,017) | ||||||||||||
| Adjusted EBITDA | $ | 66,000 | $ | 112,338 | ||||||||||
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 for the next twelve months. 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 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 and the effects of changes in end markets.
As of April 1, 2023, we have current installments of long-term obligations of $11.8 million, of which $5.1 million is finance leases and $6.7 million is the current portion of our senior secured revolving loan facility We expect these obligations can be serviced from our cash and cash equivalents, which were $98.3 million as of April 1, 2023.
During the three months ended April 1, 2023, we executed the following substantial transaction that will affect our liquidity and capital resources in future periods:
•On February 2, 2023, we entered into the Third Amendment to the First Lien Credit Agreement to provide for an incremental term loan facility in the principal amount of $300.0 million. The net proceeds of $281.5 million were used to make repayments on our senior secured revolving loan facility.
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Sources and uses of cash
Operating activities. In the three months ended April 1, 2023, net cash provided by operating activities increased $10.5 million compared to the same period in the prior year primarily due to an $83.2 million decrease in cash used for inventory compared to the prior year period and a $16.1 million decrease in receivables. These increases were partially offset by $21.9 decrease in accounts payable and a $67.2 million decrease in cash income from operations. Cash net income represents net income adjusted for non-cash or non-operating activities such as goodwill impairment, gains on the sale of Company assets, depreciation and amortization, deferred financing cost amortization and the change in fair value of investment.
Investing activities. In the three months ended April 1, 2023, cash used in investing activities increased $5.6 million compared to the same period in the prior year. This increase was primarily due to an increase of $4.5 million in cash used for the purchase of property, plant, and equipment and a $1.4 million decrease in cash proceeds from the sale of property, plant and equipment.
Financing activities. In the three months ended April 1, 2023, cash provided by financing activities was $14.4 million, compared to cash used by financing activities of $141.1 million in the three months ended March 26, 2022. The increase in cash provided by financing activities was primarily due to proceeds received from the issuance of long-term debt, which increased $348.0 million in the current year period. Net cash inflows from secured debt obligations also increased $32.7 million. These inflows of cash were offset by a $205.5 million increase in repayments of long-term obligations and a $17.4 million increase in payments for debt issuance costs.
Long-term debt borrowings
For a description of our long-term debt borrowing refer to “Note 7 – Long-Term Obligations” in this Quarterly Report.
Other factors affecting our liquidity
Tax Receivable Agreement. We may be required to make payments under the Tax Receivable Agreement (“TRA Payments”) to the former equity holders of Buddy’s (the “Buddy’s Members”). Under the terms of the Tax Receivable Agreement, 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 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 April 1, 2023, we have TRA Payments due to the Buddy's Members of $15.4 million.
Dividends. On May 9, 2023, the Board declared quarterly dividends of $0.46875 per share of Series A Preferred Stock. The dividends will be paid in cash on or about July 17, 2023 to holders of record of the Company's Series A Preferred Stock on the close of business on July 3, 2023. The payment of dividends is at the discretion of our Board of Directors and depends, among other things, on our earnings, capital requirements, and financial condition. Our ability to pay dividends is also subject to compliance with financial covenants that are contained in our credit facility and may be restricted by any future indebtedness that we incur or issuances of our preferred stock. In addition, applicable law requires our Board of Directors to determine that we have adequate surplus prior to the declaration of dividends. We cannot provide an assurance that we will pay dividends at any specific level or at all.
Future cash needs and capital requirements
Operating and financing cash flow needs. 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 the 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:
26
•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; and
•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 April 1, 2023, we were in compliance with all covenants under these agreements and, based on a continuation of current operating results, we expect to be in compliance for the remainder of fiscal 2023.
Off Balance Sheet Arrangements
For off balance sheet arrangements and guarantees to which the Company remains secondarily liable, refer to “Note 12 – Commitments and Contingencies” in this Quarterly Report.
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ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various types of market risk in the normal course of our business, including the impact of interest rate changes. We may enter into interest rate swaps to manage exposure to interest rate changes. We do not enter into derivative instruments for any purpose other than cash flow hedging and we do not hold derivative instruments for trading purposes.
Our exposure to interest rate risk relates to our long-term debt obligations, as they bear interest at LIBOR and SOFR, reset periodically and have an interest rate margin. Assuming our revolving credit facility was fully drawn, a ten basis point change in the interest rates would change our annual interest expense by $1.9 million.
ITEM 4
CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of April 1, 2023. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of April 1, 2023 because of the material weakness in our internal control over financial reporting described below.
During the fiscal quarter ended September 24, 2022, the Company identified a material weakness in its controls over financial reporting involving the preparation of its Statement of Cash Flows. As a result of this deficiency, there was a misclassification of cash flows associated with interest payments on the Company’s secured borrowing resulting in an overstatement of cash flows provided by operating activities of $100.9 million and an overstatement of cash flows used in financing activities of $100.9 million in the Company’s 10-Q for the period ended June 25, 2022 and an overstatement of cash flows provided by operating activities of $53.0 million and an overstatement of cash used in financing activities of $53.0 million for the period ended March 26, 2022.
Management, with oversight from the Audit Committee, initiated several steps to design and implement new controls to remediate this material weakness. These steps included (i) implementing changes to the cash flow statement to segregate material non-recurring transactions, such as securitizations, to allow for better visibility of the presentation of the transactions, and (ii) enhancements to processes to identify any new non-recurring transactions that occurred during the period. While management has designed and implemented new controls to remediate this material weakness, the controls have not been in operation for a sufficient period of time to demonstrate that the material weakness has been remediated. These actions and planned actions are subject to ongoing evaluation by management and will require testing and validation of design and operating effectiveness of internal controls over financial reporting over future periods. Management is committed to the continuous improvement of internal control over financial reporting.
Notwithstanding the identified material weakness, management believes that the Condensed Consolidated Financial Statements and related financial information included in this 10-Q fairly present, in all material respects, our balance sheets, statements of operations, comprehensive income and cash flows as of and for the periods presented.
Changes in Internal Control over Financial Reporting
Other than the ongoing remediation efforts of the material weakness disclosed above, there were no changes in our internal control over financial reporting during the three months ended April 1, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
For information regarding legal proceedings, refer to “Note 12 – Commitments and Contingencies” in the Notes to the Consolidated Financial Statements in this Quarterly Report, which information is incorporated herein by reference.
ITEM 1A
RISK FACTORS
There are no additional risk factors that should be considered in addition to the risk factors described in Part I, Item 1A, in the Form 10-K.
ITEM 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no sales of our equity securities for the period covered by this Quarterly Report.
SHARE REPURCHASES
On May 18, 2022, our Board of Directors approved a stock repurchase program under which we may repurchase up to $500.0 million of our outstanding shares of common stock over the next three years. The repurchase program authorizes shares to be repurchased from time to time in open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The actual timing, number and value of shares, if any, repurchased under the program will be determined by management in its discretion and will depend on a number of factors, including, among others, the availability of stock, general market and business conditions, the trading price of our common stock and applicable legal requirements. This plan supersedes our previous stock repurchase programs. There was no share repurchase activity during the three months ended April 1, 2023.
As of April 1, 2023, we had approximately $327.5 million remaining under the stock repurchase program approved by our Board of Directors.
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4
MINE SAFETY DISCLOSURES
None.
ITEM 5
OTHER INFORMATION
None.
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ITEM 6
EXHIBITS
We have filed the following exhibits as part of this Quarterly Report:
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| X | ||||||||||||||||||||
| X | ||||||||||||||||||||
| 101 | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended April 1, 2023, formatted in Inline XBRL, filed herewith: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations (unaudited), (iii) the Condensed Consolidated Statements of Stockholders’ Equity (unaudited), (iv) the Condensed Consolidated Statements of Cash Flows (unaudited) and (v) the Notes to Unaudited Condensed Consolidated Financial Statements | X | ||||||||||||||||||
| 104 | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended April 1, 2023, formatted in Inline XBRL (included with Exhibit 101) | X | ||||||||||||||||||
*All schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish the omitted disclosure schedules to the SEC upon request by the SEC; provided, however, that the Company reserves the right to request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any schedule or exhibit so furnished. | ||||||||||||||||||||
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| FRANCHISE GROUP, INC. (Registrant) | |||||||||||
| May 10, 2023 | By: | /s/ Brian R. Kahn | |||||||||
| Brian R. Kahn Chief Executive Officer and Director (Principal Executive Officer) | |||||||||||
| May 10, 2023 | By: | /s/ Eric F. Seeton | |||||||||
| Eric F. Seeton Chief Financial Officer (Principal Financial and Accounting Officer) | |||||||||||
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