Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 8-K/A
(Amendment No. 1)
 
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
Date of Report (date of earliest event reported):  February 14, 2020
 
FRANCHISE GROUP, INC.
(Exact name of registrant as specified in charter)
 
Delaware
(State or other jurisdiction of incorporation)
001-35588
(Commission File Number)
27-3561876
(I.R.S. Employer
Identification Number)
 
1716 Corporate Landing Parkway, Virginia Beach, Virginia 23454
(Address of Principal Executive Offices)  (Zip Code)
 
(757) 493-8855
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
 
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
Common Stock, $0.01 par value
 
FRG
 
NASDAQ Global Market
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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.  ☐ 





Explanatory Note

This Current Report on Form 8-K/A amends the Current Report on Form 8-K previously filed by Franchise Group, Inc. (the “Company”) on February 18, 2020. This Current Report on Form 8-K/A includes the financial statements that had been omitted from the previously filed Current Report on Form 8-K as permitted by Item 9.01(a)(4) of Form 8-K.

On February 14, 2020, the Company completed its acquisition (which was previously announced in the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on December 30, 2019) of American Freight Group, Inc. (“American Freight”), pursuant to the terms of that certain Agreement and Plan of Merger (as amended, the “Merger Agreement”) by and among Franchise Group Newco Intermediate AF, LLC (“Parent”), American Freight, Franchise Group Merger Sub AF, Inc., a Delaware limited liability company and a subsidiary of Parent (“Merger Sub”), and The Jordan Company, L.P., a Delaware limited partnership, solely in its capacity as representative for the Fully-Diluted Stockholders (as defined in the Merger Agreement), pursuant to which, among other things, Merger Sub merged with and into American Freight, with American Freight surviving as a wholly owned subsidiary of Parent (the “Merger”).

The Company is filing this Current Report on Form 8-K/A to provide certain financial statements of American Freight and unaudited pro forma financial information of American Freight and the Company required by Item 9.01 of Form 8-K and should be read in conjunction with the Company’s Current Report on Form 8-K previously filed on February 18, 2020.

Item 9.01.  Financial Statements and Exhibits

(a)    Financial Statements of Business Acquired

The audited consolidated financial statements of American Freight as of and for the years ended December 29, 2019 and December 30, 2018, including the notes to such financial statements and the report of PricewaterhouseCoopers LLP, are filed with this Current Report on Form 8-K/A as Exhibit 99.1 and are incorporated by reference herein.

(b)    Pro forma Financial Information

The unaudited pro forma financial information included with this Current Report on Form 8-K/A has been prepared to illustrate the pro forma effects of the Merger, the Company’s previously announced merger with Buddy’s Newco, LLC, the Company’s previously announced acquisition of the Sears Outlet segment and Buddy’s Home Furnishing Stores businesses of Sears Hometown and Outlet Stores, Inc. (“SHOS”), the Company’s previously announced acquisition of Vitamin Shoppe, Inc. and the completion of the Company’s previously announced tender offer to purchase certain of its outstanding shares of common stock and the related debt and equity financings (collectively, the “Transactions”).  The unaudited pro forma combined balance sheet as of December 28, 2019 and the unaudited pro forma combined statement of operations for the eight months ended December 28, 2019 and year ended April 30, 2019 are filed with this Current Report on Form 8-K/A as Exhibit 99.2 and are incorporated by reference herein. The unaudited pro forma combined balance sheet as of December 28, 2019 gives effect to the Transactions as if they had occurred as of December 28, 2019. The unaudited pro forma combined statements of operations for the eight months ended December 28, 2019 and year ended April 30, 2019 gives effect to the Transactions as if they had occurred as of May 1, 2018. All pro forma information in this Current Report on Form 8-K/A has been prepared for informational purposes only and is not necessarily indicative of the past or future results of operations or financial position of American Freight or the Company.





(d) Exhibits

The following exhibits are filed herewith:
 
Exhibit No.
Description of Exhibits




EXHIBIT INDEX 
Exhibit No.
Description of Exhibits








SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
FRANCHISE GROUP, INC.
 
 
 
 
 
 
Date: May 4, 2020
By: 
/s/ Eric Seeton        
 
 
Eric Seeton
 
 
Chief Financial Officer


Exhibit


Exhibit 23.1

CONSENT OF INDEPENDENT AUDITORS

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-236211) and S-8 (No. 333-236209 and No. 333-182585) of Franchise Group, Inc. of our report dated May 4, 2020 relating to the financial statements of American Freight Group, Inc., which appears in this Current Report on Form 8-K/A.

/s/PricewaterhouseCoopers LLP

Columbus, Ohio
May 4, 2020


Exhibit



Exhibit 99.1





American Freight
Group, Inc. and Subsidiaries
Consolidated Financial Statements
December 29, 2019 and December 30, 2018

1




American Freight Group, Inc. and Subsidiaries
Index
December 29, 2019 and December 30, 2018
 
Page(s)

 
 
Report of Independent Auditors
3
 
 
Consolidated Financial Statements



 
 
Balance Sheets
4
 
 
Statements of Operations
5
 
 
Statements of Changes in Mezzanine and Stockholders’ Equity      
6
 
 
Statements of Cash Flows
7
 
 
Notes to Financial Statements    
8-16


2



Report of Independent Auditors


To the Management of American Freight Group, Inc.


We have audited the accompanying consolidated financial statements of American Freight Group, Inc. and its subsidiaries, which comprise the consolidated balance sheets as of December 29, 2019 and December 30, 2018, and the related consolidated statements of operations, of changes in mezzanine and stockholders’ equity, and of cash flows for the years then ended.

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Freight Group, Inc. and its subsidiaries as of December 29, 2019 and December 30, 2018, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Emphasis of Matter

As discussed in Note 12 to the consolidated financial statements, in connection with the acquisition of the Company by a subsidiary of Franchise Group, Inc., the acquirer entered into a $675,000,000 credit facility under which the Company is a named borrower along with other Franchise Group, Inc. subsidiaries. Without the support of Franchise Group, Inc., the Company does not expect to have the liquidity needed to pay the full amount coming due under the credit facility within the year from when the consolidated financial statements were available to be issued. The Company obtained a support letter from Franchise Group, Inc. under which Franchise Group, Inc. will fully support the operating, investing, and financing activities of the Company until at least May 5, 2021. Our opinion is not modified with respect to this matter.

/s/ PricewaterhouseCoopers LLP


Columbus, Ohio
May 4, 2020

3



American Freight Group, Inc. and Subsidiaries
Consolidated Balance Sheets
December 29, 2019 and December 30, 2018
 
2019
 
2018
Assets
 
 
 
Current Assets
 
 
 
     Cash and cash equivalents
$
16,384,157

 
$
11,195,563

     Prepaid expenses and other assets
5,006,839

 
3,809,599

     Inventory
54,795,696

 
48,895,542

          Total current assets
76,186,692

 
63,900,704

Property and equipment, net
9,258,392

 
7,971,939

Goodwill
229,209,580

 
229,209,580

Intangible assets
56,000,000

 
56,000,000

Deposits and other assets
1,658,903

 
1,536,184

          Total assets
$
372,313,567

 
$
358,618,407

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Current liabilities
 
 
 
     Accounts payable
$
21,004,231

 
$
13,666,683

     Accounts payable - related parties
4,291,746

 
3,196,715

     Layaway deposits and deferred rent
10,178,956

 
11,815,176

     Accrued salaries and related benefits
2,316,744

 
3,261,579

     Accrued expenses and other current liabilities
10,310,236

 
9,163,205

     Term debt - current portion
3,210,000

 
3,210,000

          Total current liabilities
51,311,913

 
44,313,358

Long-term liabilities
 
 
 
     Term debt
98,690,345

 
101,566,595

     Deferred rent obligation
2,335,053

 
1,819,049

     Deferred tax liabilities
21,605,460

 
17,146,561

          Total long-term liabilities
122,630,858

 
120,532,205

          Total liabilities
173,942,771

 
164,845,563

 
 
 
 
Mezzanine Equity
 
 
 
     Redeemable Series A preferred stock $0.001 par value 200,000 shares
authorized, 114,400 issued and outstanding
114,400,000

 
114,400,000

Stockholders' Equity
 
 
 
     Common stock $0.001 par value: 100,000 shares authorized, 28,663 issued and 28,600 outstanding
29

 
29

          Additional paid-in capital
30,985,978

 
30,586,442

          Retained earnings
52,984,789

 
48,786,373

          Total stockholders' equity
83,970,796

 
79,372,844

          Total liabilities, mezzanine equity and stockholders' equity
$
372,313,567

 
$
358,618,407


The accompanying notes are an integral part of these consolidated financial statements

4



American Freight Group, Inc. and Subsidiaries
Consolidated Statements of Operations
Years Ended December 29, 2019 and December 30, 2018
 
2019
 
2018
Revenue
$
462,339,607

 
$
419,095,139

 
 
 
 
Cost of sales
 
 
 
   Merchandise
232,198,304

 
208,147,083

   Freight
22,211,158

 
20,811,682

        Total cost of sales (exclusive of depreciation shown separately below)
254,409,462

 
228,958,765

Depreciation expense
2,451,245

 
1,698,503

Operating and selling expenses
161,062,105

 
147,830,407

        Operating income
44,416,795

 
40,607,464

Interest expense, net
5,487,581

 
9,028,710

        Pretax income
38,929,214

 
31,578,754

Income tax expense
9,730,798

 
8,168,051

        Net income
$
29,198,416

 
$
23,410,703



The accompanying notes are an integral part of these consolidated financial statements

5



American Freight Group, Inc. and Subsidiaries
Consolidated Statements of Changes in Mezzanine and Stockholders’ Equity
Years Ended December 29, 2019 and December 30, 2018
 
Redeemable Series A Preferred Stock
 
Common Stock
 
Additional
 
Retained
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Paid-In Capital
 
Earnings
 
Total
Balances at December 31, 2017
114,400

 
$
114,400,000

 
28,600

 
$
29

 
$
29,878,709

 
$
44,712,220

 
$
74,590,958

Cash dividends

 

 

 

 

 
(19,336,550
)
 
(19,336,550
)
Share-based compensation

 

 

 

 
707,733

 

 
707,733

Net income

 

 

 

 

 
23,410,703

 
23,410,703

Balances at December 30, 2018
114,400

 
114,400,000

 
28,600

 
29

 
30,586,442

 
48,786,373

 
79,372,844

Cash dividends

 

 

 

 

 
(25,000,000
)
 
(25,000,000
)
Share-based compensation

 

 

 

 
399,536

 

 
399,536

Net income

 

 

 

 

 
29,198,416

 
29,198,416

Balances at December 29, 2019
114,400

 
$
114,400,000

 
28,600

 
$
29

 
$
30,985,978

 
$
52,984,789

 
$
83,970,796



The accompanying notes are an integral part of these consolidated financial statements

6



American Freight Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 29, 2019 and December 30, 2018
 
 
2019
 
2018
Cash flow from operating activities
 
 
 
 
Net income
 
$
29,198,416

 
$
23,410,703

Adjustments to reconcile net income to cash provided by operating activities
 
 
 
 
   Depreciation expense
 
2,451,245

 
1,698,503

   Share-based compensation
 
399,536

 
707,733

   Amortization of deferred rent obligation
 
516,004

 
322,427

   Amortization of debt issue costs
 
356,855

 
1,399,945

   Loss on disposal of property and equipment
 
17,512

 
16,237

   Changes in assets and liabilities
 
 
 
 
      Prepaid expenses and other assets
 
(1,343,486
)
 
2,525,651

      Inventory
 
(5,900,154
)
 
(6,064,076
)
      Accounts payable
 
7,337,548

 
2,205,928

      Accounts payable - related parties
 
1,095,031

 
(867,500
)
      Layaway deposits and deferred revenue
 
(1,636,220
)
 
(4,284,789
)
      Accrued salaries and related benefits
 
(944,835
)
 
1,589,012

      Accrued expenses and other liabilities
 
1,147,031

 
3,975,216

      Deferred income taxes
 
4,458,899

 
4,648,468

          Cash provided by operating activities
 
37,153,382

 
31,283,458

Cash flows from investing activities
 
 
 
 
Purchase of property and equipment
 
(3,754,788
)
 
(2,417,402
)
          Cash used in investing activities
 
(3,754,788
)
 
(2,417,402
)
Cash flows from financing activities
 
 
 
 
Borrowings on revolving credit facility
 
10,000,000

 
10,000,000

Payments on revolving credit facility
 
(10,000,000
)
 
(10,000,000
)
Cash dividends
 
(25,000,000
)
 
(19,336,550
)
Borrowings of term debt
 

 
49,458,825

Payments of term debt
 
(3,210,000
)
 
(79,760,974
)
Payments of debt issue costs
 

 
(1,247,663
)
          Cash used in financing activities
 
(28,210,000
)
 
(50,886,362
)
          Net change in cash and cash equivalents
 
5,188,594

 
(22,020,306
)
Cash and cash equivalents
 
 
 
 
Beginning of year
 
11,195,563

 
33,215,869

End of period
 
$
16,384,157

 
$
11,195,563

Supplemental disclosure for cash flow information
 
 
 
 
Cash paid for interest
 
$
5,448,388

 
$
7,426,147

Cash paid for income taxes
 
6,450,164

 
30,960



The accompanying notes are an integral part of these consolidated financial statements

7



American Freight Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 29, 2019 and December 30, 2018
1.
The Company

American Freight Group, Inc. (the “Company”) was formed on August 7, 2014 as a Delaware corporation. The Company, through its operating subsidiaries, operates discount retail furniture stores in the United States of America.
2.
Summary of Significant Accounting Policies

Principles of Consolidation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of our wholly owned subsidiaries. All significant intercompany balances or transactions have been eliminated in consolidation.
Fiscal Year
The Company’s fiscal year ends on the Sunday closest to December 31. The fiscal years 2019 and 2018 refer to the period from December 30, 2018 through December 29, 2019 and January 1, 2018 through December 30, 2018, respectively.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Subsequent to year-end, the Company has been negatively affected by actions taken by state and local governments in response to COVID-19 which has required certain temporary store closures, and the duration and total impact cannot be reasonably estimated at this time.  The Company’s liquidity needs have been affected by events occurring subsequent to year-end. Refer to further discussion in Note 12 Subsequent Events.
Revenue Recognition and Layaway Deposits
Furniture revenue is recognized when the furniture has been paid in full and has been delivered to or collected by the customer from the store. Incremental costs of obtaining sales in the form of commissions paid to employees are expensed as incurred. Cash received from customers is recorded as layaway deposits and deferred revenue until the order is paid in full and delivery or pickup of the furniture occurs. All delivered sales are considered final. After six months of inactivity, delinquent layaway deposits are charged a monthly service fee, unless prohibited by state law. The Company reports revenue net of sales and use taxes collected from customers and remitted to governmental taxing authorities. The customer may choose to finance purchases through a third-party finance company. The Company earns a commission from the finance company for offering this service. The commission is recorded in revenue and recognized at the same point in time as the related furniture sale is recognized.
The Company has disaggregated revenue by geographical region for the year ending December 29, 2019 as follows:
Northeast
$
36,109,642

Midwest
151,926,682

South
259,856,425

West
14,446,858

 
$
462,339,607

Concentration of Risk
The Company is a retailer of furniture and sells primarily to customers in surrounding communities. The Company believes they are not exposed to any significant credit risk on customer sales. The Company maintains cash deposits in banks which, from time to time, exceed the amount of deposit insurance available by the Federal Deposit Insurance Corporation. Management periodically assesses the financial condition of the institutions and believes that any potential credit loss is minimal.

8



The Company purchases inventory from a small number of vendors. Approximately 59% and 66% of merchandise purchases were from five vendors in the aggregate during the years ended December 29, 2019 and December 30, 2018, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, and deposits with financial institutions. The Company considers all highly liquid financial instruments purchased with an original maturity of three months or less, which are not subject to withdrawal restrictions or penalties, to be cash and cash equivalents.
Cash and cash equivalents as of December 29, 2019 and December 30, 2018 also includes $5,044,237 and $3,702,883, respectively, of accounts receivable from credit card and financing companies because they are highly liquid in nature and typically converted to cash within a few days of the sales transaction.
Inventory
Inventories, which are comprised of finished goods, are valued at the lower of cost or market, with cost determined by the first-in, first out method. The Company writes down inventory, the impact of which is reflected in cost of sales in the Consolidated Statements of Operations, if the cost of specific inventory items on hand exceeds the amount they expect to be realized from the ultimate sale or disposal of the inventory. These estimates are based on management’s judgment regarding future demand and market conditions and analysis of historical experience. At December 29, 2019 and December 30, 2018, inventory reserves for excess and obsolete inventory totaled $1,336,048 and $784,303, respectively.
Property and Equipment
Property and equipment are recorded at cost. Expenditures for maintenance, repairs and minor renewals are charged to expense as incurred. Major renewals and improvements are capitalized. The cost and accumulated depreciation of disposed assets are eliminated from the accounts and resulting gain or loss is reflected in earnings. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the asset. Depreciation is computed using the straight-line method over the following estimated useful lives:
Leasehold improvements
1-15 years (not to exceed the lease term)
Machinery and equipment
5-10 years
Furniture and fixtures
3-15 years
Vehicles
5-10 years
Computer software and equipment
3-5 years
The Company assesses the recoverability of property and equipment and other amortizable long-lived assets whenever events and circumstances indicate that the carrying value of the asset may not be recoverable from its undiscounted cash flows. If it is determined an impairment has occurred, an impairment loss is recognized by the amount by which the carrying amount of the asset exceeds its estimated fair value.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of net assets acquired. The Company has concluded it has one reporting unit. Goodwill is not amortized and is tested for impairment at least annually and also when a triggering event occurs that indicates that the fair value of the reporting unit may be below its carrying amount. The Company first assesses qualitative factors to determine whether the quantitative impairment test is necessary. If that qualitative assessment indicates that it is more likely than not goodwill is impaired, the Company performs the quantitative test to compare the entity’s fair value with its carrying amount. The goodwill impairment loss, if any, represents the excess of the carrying amount of the reporting unit over its fair value. The Company did not record any impairment charges related to goodwill for the years ended December 29, 2019 and December 30, 2018.
Intangible Assets
The Company has intangible assets, primarily its tradename. The Company concluded that its tradename has an indefinite useful life. The Company plans to use the American Freight Furniture name for an indefinite period of time and plans to continue to make investments to enhance the value of the brand into the future. There are no legal, regulatory, contractual, competitive, economic or other factors that the Company is aware of or that the Company believes would limit the useful life of the trade name.

9



Intangible assets with indefinite lives are reviewed for impairment annually in the fourth quarter, or more frequently if indicators of impairment are present, by comparing the carrying value to the estimated fair value, determined using a relief from royalty methodology. Factors used in the valuation of the intangible asset include, but are not limited to, estimated growth rates, royalty rates, risk adjusted discount rates, and future economic and market conditions. The Company did not record any impairment charges for the years ended December 29, 2019 and December 30, 2018.
Leases and Rent Expense
The Company has leases that contain pre-determined fixed escalations of minimum rentals and/or rent abatements subsequent to taking possession of the leased property. The related rent expense is recognized on a straight-line basis commencing upon possession date. The Company records the difference between the recognized rent expense and amounts payable under the leases as deferred or prepaid rent obligations.
Shipping and Handling Costs
Warehousing and distribution costs, including costs associated with delivering product to customers, are included in operating and selling expenses in the Consolidated Statements of Operations.
Advertising Costs
Advertising costs are expensed as they are delivered to the public and included in operating and selling expenses in the Consolidated Statements of Operations. Advertising costs were $41,243,170 and $37,850,499 for the years ended December 29, 2019 and December 30, 2018, respectively.
Income Taxes
Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets and liabilities at the applicable enacted tax rates. Deferred tax assets and liabilities are presented on a net basis, by jurisdiction, as noncurrent in the Consolidated Balance Sheets. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company evaluates the realizability of its deferred tax assets by assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization include the Company’s forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. Failure to achieve forecasted taxable income in applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company’s effective tax rate on future earnings.
The Company recognizes the tax benefit from uncertain tax positions only if it is more likely than not that the tax positions will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The Company recognizes interest and penalties related to income tax matters in income tax expense.
Debt Issuance Costs
Debt issuance costs are capitalized and amortized using the effective interest method over the term of the respective term debt and straight-line over the term of the line of credit facility. Debt issuance costs related to term debt are recorded as a reduction to the debt proceeds as a debt discount. Debt issuance costs related to the line of credit are recorded as a deferred financing cost and included in Deposits and other assets in the Consolidated Balance Sheets. Accretion of the debt discount and amortization of deferred financing costs are recorded as a component of interest expense in the Consolidated Statements of Operations and totaled $356,855 and $1,399,945 for the years ended December 29, 2019 and December 30, 2018, respectively.
Share-Based Compensation
The Company grants share-based compensation awards to certain directors and key employees of the Company. The fair values of stock option grants are determined as of the grant date using the Black-Scholes option pricing method. This method incorporates the fair value of the Company’s common stock at the date of each grant and various assumptions such as the risk-free interest rate, expected volatility based on the Company’s analysis of historical volatility of similar companies in the retail industry, expected dividend yield, and expected term of the options. The fair values of the stock-based awards, including the effect of estimated forfeitures, are then expensed using the straight-line method over the requisite service period, which is generally the award’s vesting period. The Company records and classifies share-based compensation expense in the Consolidated Statements of Operations in the same manner in which the respective award recipient’s payroll costs are classified.

10



Recently Issued Accounting Standards
The following accounting standards applicable to the Company were recently issued by the Financial Accounting Standards Board (“FASB”).
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This guidance requires companies to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. It also results in enhanced disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. On December 31, 2018, the Company adopted the revenue standard using the modified retrospective approach. However, there was no material adjustment to our Consolidated Balance Sheet or Statement of Operations.
Accounting Standards not yet Effective
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which, for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. This ASU is effective for interim and annual periods beginning after December 15, 2020. Early adoption is permitted. The Company is currently assessing the impact of this ASU and anticipates the new guidance will have a material impact to its consolidated financial statements.
3.
Property and Equipment

The components of property and equipment at December 29, 2019 and December 30, 2018 are as follows:
 
2019
 
2018
Leasehold improvements
$
9,363,919

 
$
6,827,878

Machinery and equipment
2,543,670

 
2,387,160

Furniture and fixtures
1,884,886

 
1,302,823

Vehicles
62,692

 
62,692

Computer software and equipment
1,948,248

 
1,543,939

Construction in progress
412,631

 
377,186

 
16,216,046

 
12,501,678

Less: Accumulated depreciation
(6,957,654
)
 
(4,529,739
)
     Property and equipment, net
$
9,258,392

 
$
7,971,939

The Company recorded depreciation expense for the years ended December 29, 2019 and December 30, 2018 of $2,451,245 and $1,684,547, respectively.
4.
Related Party Transactions

The Company purchases inventory from related parties. The Company purchased inventory from related parties totaling $48,697,000 and $52,336,000 during the years ended December 29, 2019 and December 30, 2018, respectively. Amounts due to the related companies, related to purchases of inventory, as of December 29, 2019 and December 30, 2018 were $3,886,276 and $2,744,638, respectively.
The Company is a party to a management consulting and advisory agreement with The Jordan Company, L.P., the management company for The Resolute Fund Ill, L.P., which is an affiliate of the majority stockholder. The related parties are referred to herein as The Jordan Company. This consulting and advisory agreement provides for the payment of fees based upon the Company’s consolidated earnings before interest, tax, depreciation, and amortization (“EBITDA”). An estimate is paid quarterly and adjusted to actual after the completion of each audited fiscal year. For the years ended December 29, 2019 and December 30, 2018, the Company incurred fees of $1,371,418 and $1,354,181, respectively, pursuant to this agreement. As of December 29, 2019, and December 30, 2018, there was $405,470 and $452,077 due to The Jordan Company, respectively. The consulting and advisory agreement also provides for fees to be paid to The Jordan Company for their assistance with various transactions, including acquisitions made by the Company, a sale of the Company or the Company’s subsidiaries, and debt and equity financing obtained with assistance from The

11



Jordan Company. The Company is also obligated to reimburse out-of-pocket expenses incurred by The Jordan Company in connection with providing the above services. The Company reimbursed The Jordan Company for $16,830 and $14,669 of out-of-pocket expenses during the years ended December 29, 2019 and December 30, 2018, respectively.
5.
Leases

The Company leases certain buildings under long-term noncancelable operating leases. The leases require the Company to pay taxes, maintenance, insurance and certain operating expenses applicable to leased facilities. Rent expense to third parties was $19,616,152 and $16,986,785 for the years ended December 29, 2019 and December 30, 2018, respectively. Rent expense to related parties was $3,483,395 and $3,549,702 for the years ended December 29, 2019 and December 30, 2018, respectively.
Future minimum lease payments are as follows as of December 29, 2019:
 
Operating Leases
 
Third Parties
 
Related Parties
2020
$
20,414,779

 
$
3,482,836

2021
18,293,697

 
3,517,657

2022
14,843,050

 
3,507,811

2023
11,507,526

 
2,506,569

2024
8,203,973

 
1,888,548

All years after 2024
12,054,053

 
606,592

     Total minimum lease payments
$
85,317,078

 
$
15,510,013

6.
Debt

On October 31, 2014, the Company executed a credit agreement with financial institutions that provided a revolving credit facility for maximum available borrowings of $20,000,000, a Tranche A Term Loan for $75,000,000 and a Tranche B Term Loan for $75,000,000.
On July 25, 2018 the Company entered into Amendment No. 1 to its credit agreement (the “Amendment”). In connection with the Amendment, the Company repaid all principal outstanding under its Tranche B Term Loan, totaling $67,291,175. The Company also borrowed an incremental $49,458,825 under its Tranche A Term Loan, bringing the new closing principal balance outstanding on the Company’s Tranche A Term Loan to $107,000,000. The maturity date on the Tranche A Term Loan was extended from April 30, 2020 to April 30, 2023, with principal payments of $802,500 due quarterly beginning on September 30, 2018 and any remaining outstanding principal balance due upon maturity. With the Amendment, the interest rate on Tranche A borrowings decreased from LIBOR plus 3.5% to LIBOR plus 3.25% subject to a step-down to LIBOR plus 3.00% or LIBOR plus 2.75% based on the Net Leverage Ratio, as defined in the credit agreement.
The Amendment also reduced the interest rate on the Company’s revolving credit facility from LIBOR plus 3.5% to LIBOR plus 3.25% subject to a step-down to LIBOR plus 3.00% or LIBOR plus 2.75% based on the Net Leverage Ratio, as defined in the credit agreement, and extended the expiration date of the Revolver from October 31, 2019 to October 31, 2022. The interest rate on the Term Loan was 4.45% and 5.34% at December 29, 2019 and December 30, 2018, respectively.

12



The term debt consisted of the following at December 29, 2019 and December 30, 2018:
 
2019
 
2018
Tranche A Term Loan
$
102,987,500

 
$
106,197,500

Less: Debt discount
(1,087,155
)
 
(1,420,905
)
 
101,900,345

 
104,776,595

Less: Current maturities
(3,210,000
)
 
(3,210,000
)
     Total noncurrent term debt
$
98,690,345

 
$
101,566,595

 
 
 
 
Aggregate maturities of long-term debt are as follows:
 
 
 
2020
 
 
$
3,210,000

2021
 
 
3,210,000

2022
 
 
3,210,000

2023
 
 
93,357,500

 
 
 
$
102,987,500

The credit agreement is collateralized by substantially all of the Company’s assets.
The Company’s credit agreement contains certain covenants that requires the maintenance of certain financial measures. The financial covenants specify a maximum net leverage ratio of debt to EBITDA. The nonfinancial covenants include restrictions on indebtedness, liens and dividends.
Annually the credit agreement requires the Company to determine if any additional payments are required based on an excess cash flow calculation as defined by the credit agreement. No payments are required if the Company meets certain net leverage ratio requirements.
7.
Redeemable Preferred Stock and Stockholders’ Equity

The Company is authorized to issue 400,000 shares of stock consisting of: 100,000 shares of Common Stock and 300,000 shares of Preferred Stock of which 200,000 shares are designated Series A Preferred Stock.
Holders of the Series A Preferred Stock are entitled to accrue and receive, when, as and if declared by the Board of Directors, cumulative annual dividends per share in an amount equal to 10% of the issued and outstanding Series A Preferred Stock. The preferred dividends accrue and compound semi-annually and are payable in full and in cash upon the declaration of a dividend payment by the Board of Directors, or upon the closing of any merger, combination, sale or similar business transaction of the Company. The Board of Directors approved, and the Company paid cash dividend payments of $25,000,000 on September 20, 2019 and $19,336,550 on July 18, 2018.
As of December 29, 2019, and December 30, 2018, cumulative preferred dividends of $27,112,850 and $37,282,159, respectively, were outstanding. The cumulative preferred dividends were not accrued on the Company’s Consolidated Balance Sheets as of December 29, 2019 and December 30, 2018, since the Board of Directors had not declared dividend payments and the Company had not closed upon any merger, combination, sale or similar business transaction as of those dates.
The Company has 1,504 stock warrants outstanding. Holders of the stock warrants have the right to purchase 1,504 shares of common stock of the Company for an exercise price of $1,000 per share. Holders of the stock warrants may exercise their rights upon the closing of any merger, combination, sale or similar business transaction of the Company as long as the proceeds exceed a specified rate of return on preferred and common shares. The value assigned to the stock warrants at issuance was immaterial and therefore not presented on the Consolidated Balance Sheets.
8.
Share-Based Compensation Plans

The Company established the 2015 Nonqualified Stock Option Plan (“2015 Plan”) to award nonqualified stock options of common stock to certain directors, consultants, advisors, and key employees. The aggregate number of options of the Company’s common shares that may be granted under the 2015 Plan may not exceed 3,175 shares. All option grants

13



have an exercise price equal to the fair market value of the underlying stock on the grant date. All of the options issued are subject to time vesting conditions and vest ratably and become exercisable over a period of five years from grant date. As defined by the 2015 Plan upon a change of control 100% of any unvested options shall vest and become exercisable.
The vesting schedule of the common shares is based on the anniversary date of the option grant and is as follows:
Year 2                                                40%
Year 3                                                20%
Year 4                                                20%
Year 5                                                20%

For the years ended December 29, 2019 and December 30, 2018, the Company recorded a total of $399,536 and $707,733, respectively, of share-based compensation expense which is included as operating and selling expenses in the accompanying Consolidated Statements of Operations; resulting in $767,123 and $1,580,627 of unrecognized share-based compensation expense as of December 29, 2019 and December 30, 2018.
The following table summarizes the activity for stock options for the years ended December 29, 2019 and December 30, 2018, respectively:
 
2019
 
2018
 
Shares
 
Weighted Average Exercise Price per Share
 
Shares
 
Weighted Average Exercise Price per Share
Outstanding - beginning of year
2,858

 
$
2,345

 
2,333

 
$
1,988

Granted

 

 
525

 
3,935

Exercised

 

 

 

Forfeited
(175
)
 
(3,935
)
 

 

Outstanding - end of year
2,683

 
$
2,242

 
2,858

 
$
2,345

Exercisable - end of year
1,717

 
$
1,805

 
1,251

 
$
1,737

The weighted-average grant-date fair value of stock options granted during the year ended December 30, 2018 was $1,743.
9.
Intangible Assets

 
December 29, 2019
 
Estimated Useful Lives
 
 
 
Accumulated
 
 
 
Years
 
Cost
 
Amortization
 
Net
Trade name
 
 
$
56,000,000

 

 
$
56,000,000

     Total intangible assets
 
 
$
56,000,000

 

 
$
56,000,000

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 30, 2018
 
Estimated Useful Lives
 
 
 
Accumulated
 
 
 
Years
 
Cost
 
Amortization
 
Net
Trade name
 
 
$
56,000,000

 

 
$
56,000,000

     Total intangible assets
 
 
$
56,000,000

 

 
$
56,000,000



14



10.
Income Taxes

The income tax expense is summarized as follows:
 
2019
 
2018
Current income tax (benefit) expense
 
 
 
Federal
$
4,076,824

 
$
2,617,538

State and local
1,195,075

 
902,045

     Total current income tax expense
$
5,271,899

 
$
3,519,583

Deferred income tax (benefit) expense
 
 
 
Federal
$
3,651,510

 
$
3,613,876

State and local
807,389

 
1,034,592

     Total deferred income tax expense
$
4,458,899

 
$
4,648,468

Total income tax expense (benefit)
 
 
 
Federal
$
7,728,334

 
$
6,231,414

State and local
2,002,464

 
1,936,637

     Total income tax expense
$
9,730,798

 
$
8,168,051


The tax effect of temporary differences that give rise to deferred tax assets (liabilities) is as follows:
 
2019
 
2018
Deferred tax assets
 
 
 
Inventories
$
553,700

 
$
363,487

Accrued expenses
547,691

 
847,049

Deferred rent obligation
584,580

 
459,055

Stock options
518,477

 
421,813

Other
89,526

 
41,693

     Total deferred tax assets
2,293,974

 
2,133,097

Deferred tax liabilities
 
 
 
Goodwill and intangible assets
(23,132,046
)
 
(18,371,696
)
Depreciation
(537,469
)
 
(701,562
)
Other
(229,919
)
 
(206,400
)
     Total deferred tax liabilities
(23,899,434
)
 
(19,279,658
)
     Net deferred tax asset (liability)
$
(21,605,460
)
 
$
(17,146,561
)
The differences between income taxes determined based on statutory federal tax rate and the effective tax rate is as follows:
 
2019
 
2018
Federal income tax at the statutory rate
$
8,223,519

 
$
6,653,713

State and local taxes net of federal benefit
1,581,946

 
1,529,943

Permanent items
16,097

 
14,823

Other
(90,764
)
 
(30,428
)
 
$
9,730,798

 
$
8,168,051

The Company did not have any unrecognized tax benefits in 2019 or 2018 and does not expect unrecognized tax positions to change significantly over the next 12 months. During the years ended December 29, 2019 and December 30, 2018, the Company did not record any expenses for penalties and interest.

15



11.
Retirement Plan

The Company maintains a Profit Sharing and 401(k) Savings Retirement Plan (the “Plan”) which covers all employees who meet certain eligibility requirements. The Plan does not have a matching contribution. The Company reserves the right to terminate or amend the Plan at any time. The Company did not make any discretionary contributions for the years ended December 29, 2019 and December 30, 2018.
12.
Subsequent Events

On February 12, 2020, the Company elected to make an optional prepayment of $5,000,000 on its term debt.
On December 28, 2019, the Company entered into a merger agreement with a subsidiary of Franchise Group, Inc. In consideration of the merger, the stockholders will receive $450,000,000 less outstanding debt and transaction related expenses. The merger closed on February 14, 2020, and all term debt of the Company was paid in full and all Company stock redeemed, including $28,880,253 in accumulated Series A preferred dividends, which became due and payable at the time of the merger.
On February 14, 2020 in connection with the acquisition of the Company by a subsidiary of Franchise Group, Inc., the acquirer entered into a $675,000,000 credit facility, which was used, in part, to fund the acquisition.  The Company is a named borrower on the credit facility along with other Franchise Group, Inc. subsidiaries. Without the support of Franchise Group, Inc., the Company does not expect to have the liquidity required to pay the full amount coming due under the credit facility within the year from when the consolidated financial statements were available to be issued.  The Company obtained a support letter from Franchise Group, Inc. under which Franchise Group, Inc. will fully support the operating, investing, and financing activities of the Company until at least May 5, 2021.
In March 2020, the COVID-19 outbreak was declared to be a global pandemic by the World Health Organization. The Company operates stores in 30 states in the U.S., some of which have implemented various degrees of mandatory retail store closures in response to COVID-19. Beginning in late March 2020 and continuing into April 2020, the Company temporarily closed a number of its stores, based on the orders from state and local governments.  The Company is currently not able to predict when these stores will reopen, which may occur on a location-by-location basis. The Company has realized material reductions in revenue during the first three weeks of April 2020 as a result of the COVID-19 closures. Although not anticipated at this time, the Company could experience other material impacts as a result of COVID-19, including, but not limited to, charges from potential adjustments of the carrying amount of inventory, and asset impairment charges. The current circumstances are dynamic and the impacts of COVID-19 on the Company’s business operations, including the duration and impact on overall customer demand, cannot be reasonably estimated at this time.
The Company considered subsequent events through May 4, 2020, the date the consolidated financial statements were available to be issued.





16
Exhibit


Exhibit 99.2

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF
THE COMBINED COMPANY AND RELATED NOTES
Introduction
The following unaudited pro forma combined statement of operations for the eight months ended December 28, 2019 (the “Transition Period’) and for the year ended April 30, 2019 and the pro forma combined balance sheet as of December 28, 2019 are based on the historical financial statements of Franchise Group, Buddy’s Newco, LLC (“Buddy’s”), the Sears Outlet segment and Buddy’s Home Furnishing Stores businesses, each as described in Sears Hometown and Outlet Stores, Inc’s (“SHOS”) annual report on Form 10-K for the fiscal year ended February 2, 2019 ( “Sears Outlet”), Vitamin Shoppe, Inc. (“VSI”), and American Freight Group, Inc. (“American Freight”).
The unaudited pro forma combined financial statements give effect to the acquisitions of Buddy’s, Sears Outlet, VSI and American Freight, and the completion of the offer to acquire any and all outstanding shares of Franchise Group common stock other than shares of Franchise Group common stock held by the Vintage Group and B. Riley and certain of its affiliates, who agreed not to tender their shares of Franchise Group common stock in the offer, for a purchase price of $12.00 per share in cash, and the related debt and equity financings (collectively, the “Transactions”). On October 1, 2019, the Company changed its fiscal year end from April 30 to the Saturday closest to December 31 and filed a transition report on Form 10-K/T for the eight months ended December 28, 2019 on April 24, 2020. The unaudited pro forma combined financial statements are based on the assumptions, adjustments and eliminations described in the accompanying notes to the unaudited pro forma combined financial statements.
The unaudited pro forma combined statement of operations for the fiscal year ended April 30, 2019 and eight months ended December 28, 2019 give effect to the Transactions as if they had occurred on the first day of the fiscal year May 1, 2018. Prior to October 1, 2019, Franchise Group had a fiscal year ending on April 30 while Buddy’s reported its results of operations on a calendar year basis, Sears Outlet had a fiscal year ending on February 2, VSI had a fiscal year ending on the last Saturday in December and American Freight had a fiscal year ending on the last Sunday in December. As a result:
the historical statement of operations for the fiscal year ended December 31, 2018 of Buddy’s, the historical statement of operations for the fiscal year ended December 29, 2018 of VSI, and the historical statement of operations for the fiscal year ended December 30, 2018 of American Freight have been adjusted to reflect a trailing twelve months ended March 31, 2019 by adding Buddy’s, VSI’s and American Freight’s statement of operations for the three months ended March 31, 2019, March 30, 2019, and March 31, 2019, respectively, and subtracting their statement of operations for the three months ended March 31, 2018; and
the historical combined statement of operations for the fiscal year ended February 2, 2019 of Sears Outlet has been adjusted to reflect a trailing twelve months ended May 4, 2019 by adding Sears Outlet’s statement of operations for the three months ended May 4, 2019 and subtracting Sears Outlet’s statement of operations for the three months ended May 5, 2018.
The unaudited pro forma combined statement of operations for the eight months ended December 28, 2019 combines the historical consolidated statement of operations for the eight months ended December 28, 2019 of Franchise Group (that includes certain post-acquisition financial information of Buddy’s, VSI and Sears Outlet), the historical consolidated statement of operations for the three months ended June 30, 2019 of Buddy’s, the historical combined statement of operations for the six months ended August 3, 2019 of Sears Outlet, the historical consolidated statement of operations for the eight months ended November 30, 2019 of VSI, and the historical consolidated statement of operations for the eight months ended December 29, 2019 of American Freight.
The unaudited pro forma combined balance sheet as of December 28, 2019 combines the historical consolidated balance sheet of Franchise Group as of December 28, 2019, which includes Buddy’s, Sears Outlet and VSI, and the historical consolidated balance sheet of American Freight as of December 29, 2019, giving effect to the Transactions as if they had occurred on December 28, 2019. On November 12, 2019, Franchise Group completed its previously announced tender offer with 3.94 million shares tendered for an aggregate purchase price of approximately $47.2 million. As result of the offer,

1



including additional equity contributions made by the Vintage Group or other members of Buddy’s, and ultimate financing to consummate all of the Transactions, the pre-closing Franchise Group stockholders had an ownership interest of 68.31% in the Franchise Group and the pre-closing members of Buddy’s held 31.69% of non-controlling interest in Franchise Group.
Under the acquisition method of accounting, the preliminary purchase price is allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair market values, with any excess purchase price allocated to goodwill. The pro forma purchase price allocation was based on an estimate of the fair market values of the tangible and intangible assets and liabilities related to Buddy’s, Sears Outlet, VSI, and American Freight. Franchise Group considered multiple factors in arriving at the estimated fair market values, which were based on a preliminary and limited review of the assets and liabilities related to Buddy’s, Sears Outlet, VSI and American Freight acquisitions. We expect to complete the purchase price allocation after considering Buddy’s, Sears Outlet’s, VSI’s, and American Freight’s assets and liabilities at the level of detail necessary to finalize the required purchase price allocation under the acquisition method of accounting. The final purchase price allocation may be different than that reflected in the pro forma purchase price allocation presented herein, and these differences may be material.
The unaudited pro forma combined financial statements contain only adjustments that are factually supportable and directly attributable to the Transactions and do not reflect the costs of any integration activities or benefits that may result from realization of future revenue growth or operational synergies expected to result from the Transactions.
The unaudited pro forma combined financial statements should be read in conjunction with:
the accompanying notes to the unaudited pro forma combined financial statements;
Franchise Group’s audited historical consolidated financial statements and related notes for the year ended April 30, 2019 and for the Transition Period ended December 28, 2019;
Buddy’s’ audited and unaudited historical consolidated financial statements and related notes for the fiscal year ended December 31, 2018 and for the three months ended June 30, 2019, March 31, 2019 and March 31, 2018;
Sears Outlet’s audited and unaudited historical combined financial statements and related notes for the fiscal year ended February 2, 2019 and for the six months ended August 3, 2019 and August 4, 2018;
VSI’s audited historical consolidated financial statements and related notes for the fiscal year ended December 29, 2018; and
American Freight’s audited historical consolidated financial statements and related notes for the fiscal year ended December 29, 2019.
Description of the Transactions
Buddy’s merger and the offer
Pursuant to a business combination agreement, Franchise Group and Buddy’s consummated a merger whereby Buddy’s became a wholly-owned subsidiary of Franchise Group New Holdco, LLC, a wholly-owned direct subsidiary of Franchise Group (“New Holdco”). In connection with the merger, Franchise Group formed New Holdco, which holds, directly or indirectly, all of Franchise Group’s and Buddy’s operating subsidiaries. In connection with the business combination agreement and the merger, Franchise Group designated its voting non-economic preferred stock pursuant to a certificate of designation. The certificate of designation, which was approved by the Company’s board of directors on July 10, 2019, and filed by Franchise Group with the Secretary of State of the State of Delaware on July 10, 2019, designates 1,616,667 shares of voting non-economic preferred stock, substantially all of which were issued to the Buddy’s equity holders as consideration in the merger along with approximately 8,083,333 New Holdco common units. Buddy’s equity holders had the option to exchange each New Holdco common unit and one-fifth (1/5) of a share of Franchise Group preferred stock, respectively, for one share of Franchise Group common stock beginning six months following the date of the merger. Following the merger, Franchise Group became the sole managing member of New Holdco and consolidates New Holdco for financial reporting purposes. The New Holdco common units held by Buddy’s equity holders were recorded as a non-controlling interest on the consolidated financial statements.

2



Concurrently with the execution of the business combination agreement, Franchise Group and the Buddy’s equity holders entered into a tax receivable agreement. Subject to certain exceptions set forth in the tax receivable agreement, the tax receivable agreement generally provides that Franchise Group will pay the Buddy’s equity holders 40% of the cash savings, if any, in federal, state and local taxes that Franchise Group realizes or is deemed to realize as a result of any increase in tax basis of the assets of New Holdco resulting from future redemptions or exchanges of New Holdco common units held by Buddy’s equity holders. In connection with the merger, none of the New Holdco common units were purchased or exchanged by Franchise Group and the Buddy’s equity holders and therefore an initial tax receivable liability was not recorded. However, subsequent to the merger, the effects of each purchase or exchange of New Holdco common units may result in adjustments to record a change in deferred tax balances, tax receivable liabilities equal to 40% of the estimated realizable tax benefits, and an increase to additional paid-in capital for the remainder. The total amount of future payments under the tax receivable agreement could be substantial. The timing and amount of these payments will depend on a number of factors, including, among other things, (1) the amount and timing of exchanges of New Holdco common units by the Buddy’s equity holders, and the extent to which these exchanges are taxable, (2) the price per share of the Franchise Group common stock at the time of exchange, (3) the amount and timing of future income against which to offset the potential tax benefits resulting from the exchange of New Holdco common units pursuant to the certificate of designation and (4) the tax laws then in effect. As of April 1, 2020, all New Holdco common units held by the Buddy’s equity holders were exchanged for shares of Franchise Group common stock. However, Franchise Group is not able to quantify the dollar amount of these payments at this time.
Following the merger, on August 1, 2019, Franchise Group commenced the offer to acquire any and all outstanding shares of its common stock other than shares of its common stock held by the Vintage Group and B. Riley and certain of its affiliates, who had agreed not to tender their shares of Franchise Group common stock in the offer, for a price per share of $12.00 in cash. The offer was subject to a minimum tender condition and was completed on November 13, 2019. The offer and transaction costs related to the Buddy’s merger were financed through both term loan financing and equity investments:
Term loan financing: Buddy’s executed the Buddy’s credit agreement with various lenders from time to time party thereto and Kayne Solutions Fund, L.P., as administrative agent and as collateral agent, with proceeds, net of financing costs, of approximately $80.2 million. The Buddy’s credit agreement was used to repay approximately $25.0 million of the existing line of credit financing of Buddy’s, $22.2 million towards the tender offer and the remaining amount of approximately $23.0 million was used towards the acquisition costs.
Equity investment from Tributum, L.P. (“Tributum”): Contemporaneously with the consummation of the merger and pursuant to the closing subscription agreement between Franchise Group and Tributum, an affiliate of Vintage Capital Management, LLC, Tributum purchased approximately 2,083,333 shares of Franchise Group common stock at a purchase price of $12.00 per share, for an aggregate purchase price of $25.0 million in cash. Such commitment financed the first $25.0 million of tender offer acceptances.
The unaudited pro forma combined financial information has been prepared based on Franchise Group’s final results of the offer completed on November 13, 2019. Franchise Group stockholders accepted the offer for 3.94 million shares of Franchise Group common stock, or approximately $47.2 million, financed by the closing subscription agreement of $25.0 million and $22.2 million cash from the Buddy’s term loan financing, all discussed above.
Sears Outlet Acquisition
On October 23, 2019, Franchise Group completed its acquisition of Sears Outlet pursuant to the terms of a purchase agreement dated as of August 27, 2019. Pursuant to the terms of the purchase agreement, Franchise Group paid SHOS an aggregate purchase price of $128.8 million including working capital adjustments. The acquisition costs related to the Sears Outlet acquisition were financed through the following term loan and equity contributions:
Term loan financing: Franchise Group Newco S, LLC, an indirect subsidiary of Franchise Group, executed a term loan agreement with Guggenheim Credit Services, LLC providing Franchise Group with a senior secured term loan facility in an amount equal to $105.0 million (the “Sears Outlet term loan”). The Sears Outlet term loan will mature on October 23, 2023 and bear interest at a rate per annum based on LIBOR for an interest period of one, two, three or six months, plus an interest margin of 6.5% with a 1.50% LIBOR floor.


3



Equity contributions from the Investors: On October 23, 2019, Stefac LP, an affiliate of Vintage Capital Management, LLC, Brian R. Kahn, Lauren Kahn, and B. Riley FBR, Inc. (collectively, the “Investors”) provided Franchise Group with an aggregate $40.0 million of equity financing to fund a portion of the Sears Outlet acquisition through the purchase of Franchise Group common stock at $12.00 per share.

VSI acquisition

On December 16, 2019, pursuant to the term of a merger agreement, Franchise Group completed the acquisition of VSI for an all-cash transaction valued at $161.8 million. The acquisition of VSI, including the related acquisition costs, were financed through a mix of a term loan, credit facility and equity contributions:

Term loan financing: On December 16, 2019, Vitamin Shoppe Industries, LLC, an indirect subsidiary of Franchise Group executed a term loan agreement with GACP Finance Co., LLC for an amount of $70.0 million (the “VSI term loan”). The VSI term loan will mature on December 16, 2022, unless the maturity is accelerated subject to the terms set forth in the VSI term loan. The VSI term loan will bear interest at a rate per annum based on LIBOR for an interest period of one month plus an interest rate margin of 9.0%.
Credit facility financing: On December 16, 2019, Franchise Group entered into a Second Amendment and Restated Loan and Security Agreement (the “ABL Agreement”) with JPMorgan Chase Bank, N.A. whereby JP Morgan Chase Bank, N.A. provided Franchise Group with a $100.0 million credit facility (the “VSI credit facility”). On December 16, 2019, Franchise Group borrowed $70.0 million on the VSI credit facility to finance the acquisition of VSI. The VSI credit facility will mature on December 16, 2022 unless the maturity is accelerated subject to the terms set forth in the ABL Agreement. The VSI credit facility bears interest at a rate per annum based on LIBOR for an interest period of one, two, three or six months, plus an interest rate margin that ranges from 1.25% to 1.75% depending on excess availability.
Equity contribution from Tributum: In addition, on December 16, 2019, Tributum, an affiliate of Vintage, purchased 2.5 million shares of common stock which provided Franchise Group with an aggregate of approximately $31.0 million of equity financing in order to partially fund the closing of the acquisition (the “VSI equity contribution”).
Equity contribution from Vintage in connection with the repurchase of VSI Convertible Notes: On January 3, 2020, Franchise Group entered into a subscription agreement with an affiliate of Vintage, pursuant to which the affiliate of Vintage purchased from the Company 2.4 million shares of common stock for an aggregate purchase price of $28.2 million in cash.
Equity contributions from certain other investors: On February 7, 2020, in connection with the Company’s repurchases of VSI’s outstanding 2.25% Convertible Senior Notes due 2020 (the “VSI Convertible Notes”), certain investors purchased approximately 3.9 million shares of the Company’s common stock for approximately $65.9 million. Franchise Group used the proceeds to complete the repurchase of approximately $60.4 million in aggregate principal amount of outstanding VSI Convertible Notes for a purchase price of approximately $60.6 million, which includes accrued interest.
American Freight acquisition and the refinancing of Buddy’s and Sears Outlet’s term loan

On February 14, 2020, pursuant to the term of a merger agreement, dated December 28, 2019, Franchise Group completed the acquisition of American Freight for $356.9 million in cash. The acquisition costs related to the American Freight acquisition were financed through a term loan and credit facility:

1.
Term loan financing: On February 14, 2020, Franchise Group Intermediate Holdco, LLC and Franchise Group New Holdco, LLC, an indirect subsidiary of Franchise Group executed a term loan agreement with GACP Finance Co., LLC for an amount of $575.0 million (the “New Holdco term loan”), which consists of a $375.0 million first out tranche (the “New Holdco Tranche A-1”) and a $200.0 million last out Tranche (the “New Holdco Tranche A-2”). The New Holdco term loan will mature on May 14, 2025, unless the maturity is accelerated subject to the terms set forth in the New Holdco term loan. The New Holdco term loan will bear interest at a rate per annum based on LIBOR for an interest period of one, two, three or six months plus an interest rate margin of 8.0% for the New Holdco Tranche A-1 and 12.5% for the New Holdco Tranche A-2.

4



2.
ABL credit facility financing: On February 14, 2020, Franchise Group entered into an ABL credit agreement with various lenders which provided Franchise Group with a $100.0 million credit facility (the “New Holdco credit facility”). On February 14, 2020, Franchise Group borrowed $100.0 million on the New Holdco credit facility to finance the acquisition of American Freight. The New Holdco credit facility will mature on September 30, 2020 and it bears interest at a rate per annum based on LIBOR for an interest period of one, two, three or six months, plus an interest rate margin of 7.5%, as amended on April 3, 2020.
In addition to financing the American Freight acquisition and its related acquisition costs, a portion of the proceeds from the New Holdco term loan and the New Holdco credit facility were used to repay the Buddy’s and Sears Outlet’s term loan discussed above for an outstanding amount of $104.6 million and $106.6 million including accrued interest, respectively.
Other transactions
On August 23, 2019, the Buddy’s segment of Franchise Group entered into an asset purchase agreement with A-Team Leasing, LLC pursuant to which Buddy’s completed the acquisition of 41 Buddy’s Home Furnishings stores from A-Team for total consideration of $26.6 million. To finance the acquisition, Buddy’s entered into a first amendment to the Buddy’s credit agreement which provided for an additional term loan in an amount of $23.0 million. The additional term loan was used to consummate the acquisition, including to repay certain existing indebtedness of A-Team and secure the release of liens on the assets acquired in connection with the acquisition and to pay fees and expenses in connection with the acquisition.
On September 30, 2019, the Buddy’s segment of Franchise Group entered into and completed an asset purchase agreement with various parties to acquire certain Buddy’s stores previously franchised in exchange for 1.35 million shares of New Holdco common units and 0.27 million share of Franchise Group voting non-economic preferred stock for an estimated fair value of $16.2 million.

While these other transactions are included in Franchise Group’s historical financial statements, the pro forma statement of operations was not adjusted to give effect to these other transactions as they were not deemed significant pursuant to Rule 3-05 of Regulation S-X.
The unaudited pro forma combined financial statements are provided for illustrative purposes only and do not purport to represent what the actual consolidated results of operations or financial position of the Combined Company (as defined below) would have been had the Transactions occurred on the dates assumed, nor are they necessarily indicative of future consolidated results of operations or financial position of the Combined Company on a standalone basis.

5



Unaudited Pro Forma Combined Statement of Operations
Year Ended April 30, 2019
 
 
Adjusted Franchise Group
 
Adjusted Buddy's
 
Adjusted Sears Outlet
 
Adjusted VSI
 
Adjusted American Freight
 
 
 
 
 
 
 
 
(Note 2)
 
(Note 2b)
 
(Note 2c)
 
(Note 2d)
 
(Note 2e)
 
 
 
 
 
 
 
 
Year Ended
 
Year Ended
 
Year Ended
 
Year Ended
 
Year Ended
 
Acquisition and related Pro Forma Adjustments
 
Financing and offer Pro Forma Adjustments
 
Pro Forma Combined Year Ended
(Dollars in thousands except per share amounts)
 
April 30, 2019
 
March 31, 2019
 
May 4, 2019
 
March 30, 2019
 
March 30, 2019
 
(Note 3)
 
(Note 4)
 
April 30, 2019
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Product
 
$

 
$
2,592

 
$
448,573

 
$
1,101,528

 
$
443,954

 
$

 
$

 
$
1,996,647

   Service and other
 
132,546

 
23,005

 
41,626

 

 

 
(177
)
 

 
197,000

   Rental
 

 
26,504

 

 

 

 

 

 
26,504

      Total Revenues
 
132,546

 
52,101

 
490,199

 
1,101,528

 
443,954

 
(177
)
 

 
2,220,151

Operating Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Cost of revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

   Product
 

 
1,844

 
334,068

 
745,028

 
243,548

 

 

 
1,324,488

   Service and other
 

 

 
20,428

 

 

 
(177
)
 

 
20,251

   Rental
 

 
9,230

 

 

 

 

 

 
9,230

Total cost of revenue
 

 
11,074

 
354,496

 
745,028

 
243,548

 
(177
)
 

 
1,353,969

   Selling, general, and administrative expenses
 
124,060

 
29,098

 
133,364

 
347,191

 
155,810

 
1,012

 

 
790,535

   Restructuring Costs
 
9,345

 

 

 

 

 

 

 
9,345

      Total operating expenses
 
133,405

 
40,172

 
487,860

 
1,092,219

 
399,358

 
835

 

 
2,153,849

      Gain (loss) from operations
 
(859
)
 
11,929

 
2,339

 
9,309

 
44,596

 
(1,012
)
 

 
66,302

Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

   Interest expense, net
 
(3,023
)
 
(1,412
)
 
(6,410
)
 
(5,227
)
 
(8,161
)
 

 
(75,723
)
 
(99,956
)
   Other
 
(113
)
 
259

 
1,440

 
4,400

 

 

 

 
5,986

      Income (loss) before income taxes
 
(3,995
)
 
10,776

 
(2,631
)
 
8,482

 
36,435

 
(1,012
)
 
(75,723
)
 
(27,668
)
   Income tax (benefit) expense
 
(1,839
)
 

 
271

 
1,101

 
9,399

 

 
(14,456
)
 
(5,524
)
   Net (loss) income
 
(2,156
)
 
10,776

 
(2,902
)
 
7,381

 
27,036

 
(1,012
)
 
(61,267
)
 
(22,144
)
   Less: Income/ (Loss) attributable to noncontrolling interests
 

 

 

 

 

 

 
(7,481
)
 
(7,481
)
Net (loss) income attributable to common stockholders
 
$
(2,156
)
 
$
10,776

 
$
(2,902
)
 
$
7,381

 
$
27,036

 
$
(1,012
)
 
$
(53,786
)
 
$
(14,663
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per common share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Basic (a)
 
$
(0.16
)
 
 
 
 
 
 
 
 
 
 
 
 
 
$
(0.57
)
   Diluted (b)
 
(0.16
)
 
 
 
 
 
 
 
 
 
 
 
 
 
(0.57
)
Weighted average common share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Basic (a)
 
13,800,884

 
 
 
 
 
 
 
 
 
 
 
 
 
25,565,373

   Diluted (b)
 
13,800,884

 
 
 
 
 
 
 
 
 
 
 
 
 
25,565,373


See accompanying notes to the unaudited pro forma combined financial statements

6



Unaudited Pro Forma Combined Statement of Operations
for the eight months ended December 28, 2019

 
 
Adjusted Franchise Group
 
Adjusted Buddy's
 
Adjusted Sears Outlet
 
Adjusted VSI
 
Adjusted American Freight
 
 
 
 
 
 
 
 
(Note 2a)
 
(Note 2b)
 
(Note 2c)
 
(Note 2d)
 
(Note 2e)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


(Dollars in thousands except per share amounts)
 
Eight Months Ended,
December 28, 2019
 
Three Months Ended,
June 30, 2019
 
Six Months Ended,
August 3, 2019
 
Eight Months Ended,
November 30, 2019
 
Eight Months Ended,
November 30, 2019
 
Acquisition and related Pro Forma Adjustments
 
Financing and offer
Pro Forma
Adjustments
 
Pro Forma
Combined
Eight Months Ended,
December 28, 2019
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Product
 
$
54,266

 
$
549

 
$
217,187

 
$
670,796

 
$
273,771

 
$

 
$

 
$
1,216,569

   Service and other
 
27,528

 
5,935

 
16,998

 

 

 
(261
)
 

 
50,200

   Rental
 
22,303

 
6,589

 

 

 

 

 

 
28,892

      Total Revenues
 
104,097

 
13,073

 
234,185

 
670,796

 
273,771

 
(261
)
 

 
1,295,661

Operating Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Cost of revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

   Product
 
44,684

 
441

 
161,350

 
425,839

 

 

 

 
632,314

   Service and other
 
(442
)
 

 
7,975

 

 

 
(261
)
 

 
7,272

   Rental
 
8,121

 
2,400

 

 

 
151,951

 

 

 
162,472

Total cost of revenue
 
52,363

 
2,841

 
169,325

 
425,839

 
151,951

 
(261
)
 

 
802,058

   Selling, general, and administrative expenses
 
142,488

 
8,466

 
53,695

 
257,659

 
100,220

 
(16,752
)
 

 
545,776

   Restructuring Costs
 

 

 

 

 

 
(895
)
 

 
(895
)
      Total operating expenses
 
194,851

 
11,307

 
223,020

 
683,498

 
252,171

 
(17,908
)
 

 
1,346,939

      Gain (loss) from operations
 
(90,754
)
 
1,766

 
11,165

 
(12,702
)
 
21,600

 
17,647

 

 
(51,278
)
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

   Interest expense, net
 
(7,960
)
 
(360
)
 
(1,786
)
 
(2,828
)
 
(3,503
)
 

 
(47,929
)
 
(64,366
)
   Other
 
37

 
11

 
2,883

 

 

 

 

 
2,931

      Income (loss) before income taxes
 
(98,677
)
 
1,417

 
12,262

 
(15,530
)
 
18,097

 
17,647

 
(47,929
)
 
(112,713
)
   Income tax (benefit) expense
 
(10,445
)
 

 
(290
)
 
(3,616
)
 
4,494

 

 
(12,648
)
 
(22,505
)
   Net (loss) income
 
(88,232
)
 
1,417

 
12,552

 
(11,914
)
 
13,603

 
17,647

 
(35,281
)
 
(90,208
)
   Less: Income/ (Loss) attributable to noncontrolling interests
 
(36,039
)
 

 

 

 

 

 
5,565

 
(30,474
)
Net (loss) income attributable to common stockholders
 
$
(52,193
)
 
$
1,417

 
$
12,552

 
$
(11,914
)
 
$
13,603

 
$
17,647

 
$
(40,846
)
 
$
(59,734
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per common share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Basic (a)
 
$
(3.13
)
 
 
 
 
 
 
 
 
 
 
 
 
 
$
(2.34
)
   Diluted (b)
 
(3.13
)
 
 
 
 
 
 
 
 
 
 
 
 
 
(2.34
)
Weighted average common share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Basic (a)
 
16,669,065

 
 
 
 
 
 
 
 
 
 
 
 
 
25,565,373

   Diluted (b)
 
16,669,065

 
 
 
 
 
 
 
 
 
 
 
 
 
25,565,373

See accompanying notes to the unaudited pro forma combined financial statements

7



(a)
Pro forma basic earnings per share and pro forma weighted average basic shares outstanding for the year ended April 30, 2019 and the eight months ended December 28, 2019 reflect the number of shares of the Company’s common stock that are outstanding upon completion of the Transactions. The following represents the pro forma adjustments to the basic and weighted average earnings per share:
 
Number of shares
Weighted average common share at April 30, 2019
13,800,884
Common stock repurchased as part of the offer
(3,935,738)
Common stock purchased by Tributum in connection with the offer
2,083,333
Common stock purchased by Stefac LP, Brian R. Kahn and Lauren Kahn, and B. Riley FBR, Inc. in connection with the Sears Outlet acquisition
3,333,333
Common stock purchased by Tributum/Stefac LP in connection with the VSI acquisition
2,438,748
Common stock purchased by Tributum/Stefac LP in connection with the repayment of VSI convertible note
2,354,000
Common stock purchased by certain investors, in connection with the repayment of VSI's convertible note
3,877,965
Common stock issued and sold to Kayne FRG Holdings, LP for the financing services rendered by Kayne FRG
1,250,000
Other
362,848
Pro Forma weighted average common share at April 30, 2019 
25,565,373

 
Number of shares
Weighted average common share at December 28, 2019
16,669,065
Additional weighted average impact of common stock repurchased as part of the offer
(2,113,437)
Additional weighted average impact of common stock purchased by Tributum in connection with the offer
399,543
Additional weighted average impact of common stock purchased by Stefac LP, Brian R. Kahn and Lauren Kahn, and B. Riley FBR, Inc. in connection with the Sears Outlet acquisition
1,598,173
Additional weighted average impact of common stock purchased by Tributum/Stefac LP in connection with the VSI acquisition
1,530,064
Common stock purchased by Tributum/Stefac LP in connection with the repayment of VSI convertible note
2,354,000
Common stock purchased by certain investors, in connection with the repayment of VSI's convertible note
3,877,965
Common stock issued and sold to Kayne FRG Holdings, LP for the financing services rendered by Kayne FRG
1,250,000
Pro Forma weighted average common share at December 28, 2019
25,565,373
(b)
Due to the pro forma combined net loss attributable to the Franchise Group common stockholders for the year ended April 30, 2019 and the eight months ended December 28, 2019, dilutive common share-equivalents, including the potential conversion of New Holdco common units to shares of Franchise Group common stock and the potential issuance of shares of Franchise Group common stock under equity plans in which Franchise Group employees participate, were excluded from diluted weighted average common shares outstanding as they would have been anti-dilutive.


8



Unaudited Pro Forma Combined Balance Sheet
as of December 28, 2019
 
 
Historical
 
 
 
 
 
 
 
 
Franchise Group
 
American Freight (Note 2e)
 
 
 
 
 
 
(Dollars in thousands, except per share amounts)
 
As of December 28, 2019
 
As of December 29, 2019
 
Acquisition and related
Pro Forma
Adjustments
(Note 3)
 
Financing and offer
Pro Forma
Adjustments
(Note 4)
 
Pro Forma
Combined
As of December 28, 2019
Assets
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
   Cash and cash equivalents
 
$
39,581

 
$
16,384

 
$
(359,951
)
(3h)
$
387,511

(4d)
$
83,525

   Current receivables, net
 
79,693

 

 

 

 
79,693

   Inventories, net
 
300,312

 
54,796

 
11,951

(3b)

 
367,059

   Other current assets
 
20,267

 
5,007

 
(1,128
)
(3d)

 
24,146

Total Current Assets
 
439,853

 
76,187

 
(349,128
)
 
387,511

 
554,423

   Operating lease right-of-use assets
 
462,610

 

 
91,236

(3d)

 
553,846

   Property, equipment, and software, net
 
150,147

 
9,258

 
2,074

(3b)

 
161,479

   Non-current receivable, net
 
18,638

 

 

 

 
18,638

   Goodwill
 
134,301

 
229,210

 
107,430

(3e)

 
470,941

   Intangible assets, net
 
77,590

 
56,000

 
14,200

(3b)

 
147,790

   Other non-current assets
 
15,406

 
1,659

 
(67
)
(3a)
9,117

(4d)
26,115

Total Assets
 
1,298,545

 
372,314

 
(134,255
)
 
396,628

 
1,933,232

Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
   Current installments of long-term obligations
 
218,384

 
3,210

 

 
(50,225
)
(4d)
171,369

   Revolving credit facility
 

 

 

 
100,000

(4d)
100,000

   Accounts payable and accrued expenses
 
158,995

 
33,631

 

 
(4,396
)
(4d)
188,230

   Current portion of operating lease liabilities
 
107,680

 

 
17,457

(3d)

 
125,137

   Accounts payable - related parties
 

 
4,292

 

 

 
4,292

   Layaway deposits and deferred revenue
 

 
10,179

 

 

 
10,179

   Other current liabilities
 
16,409

 

 

 

 
16,409

Total current Liabilities
 
501,468

 
51,312

 
17,457

 
45,379

 
615,616

   Long-term obligations, excluding current installments, net
 
245,236

 
98,690

 
1,087

(3a)
226,063

(4d)
571,076

   Operating Lease Liabilities - non-current
 
394,307

 

 
62,289

(3d)

 
456,596

   Other non-current liabilities
 
5,773

 
23,941

 
(14,491
)
(3c,d,i)

 
15,223

  Total Liabilities
 
$
1,146,784

 
$
173,943

 
$
66,342

 
$
271,442

 
$
1,658,511

 
 
 
 
 
 
 
 
 
 
 
Redeemable series A preferred stock $0.001 par value
 

 
114,400

 
(114,400
)
(3f)

 

Stockholders and Members' equity:
 
 
 
 
 
 
 
 
 

   Preferred stock, $0.01 par value per share,
 
19

 

 

 

 
19

   Common stock, $0.01 par value per share
 
183

 
28,600

 
(28,600
)
(3f)
75

(4d)
258

   Contributed capital
 

 
2,368

 
(2,368
)
(3f)

 

   Additional paid-in capital
 
108,339

 

 

 
125,111

(4d)
233,450

 
 
 
 
 
 
 
 
(47,905
)
(4e)
(47,905
)
   Accumulated other comprehensive loss, net of taxes
 
(1,538
)
 

 

 

 
(1,538
)
   Retained earnings
 
18,388

 
52,985

 
(55,211
)
(3f,j)

 
16,162

Total stockholders' equity attributable to Liberty
 
125,391

 
83,971

 
(86,197
)
 
77,281

 
200,446

Non-controlling interest
 
26,370

 

 

 
47,905

(4e)
74,275

Total stockholders' equity
 
151,761

 
83,971

 
(86,197
)
 
125,186

 
274,721

Total Liabilities, Mezzanine Equity and Equity
 
$
1,298,545

 
$
372,314

 
$
(134,255
)
 
$
396,628

 
$
1,933,232

See accompanying notes to the unaudited pro forma combined financial statements

9



Notes to the Unaudited Pro Forma Combined Financial Statements
(dollars in thousands, except share and per share data)
Note 1: Basis of Presentation
The accompanying pro forma financial statements were prepared in accordance with Article 11 of Regulation S-X and present the pro forma statements of operations and pro forma balance sheet of the combined company based on the historical financial statements of Franchise Group, Buddy’s, Sears Outlet, VSI, and American Freight (the “Combined Company”), after giving effect to the Transactions as described above. The historical financial statements of Franchise Group, Buddy’s, Sears Outlet, VSI, and American Freight have been adjusted in the accompanying pro forma financial statements to give effect to pro forma events that are (i) directly attributable to the Transactions, (ii) factually supportable and (iii) with respect to the statement of operations, expected to have a continuing impact on the combined results of operations of the Combined Company.
The accompanying pro forma financial statements are presented for illustrative purposes only and do not purport to be indicative of the actual results that would have been achieved by the Combined Company if the Transactions had been consummated for the periods presented or that will be achieved in the future. The pro forma financial statements do not reflect the costs of any integration activities or benefits that may result from realization of revenue growth or operational synergies expected to result from the Transactions.
In addition, the historical statement of operations for the fiscal year ended December 31, 2018 of Buddy’s, fiscal year ended December 29, 2018 of VSI, and the fiscal year ended December 30, 2018 of American Freight have been adjusted to reflect a trailing twelve months ended March 31, 2019 for Buddy’s and a trailing twelve months ended March 30, 2019 for VSI and American Freight by adding the statement of operations for the three months ended March 31, 2019 for Buddy’s and the statement of operations for the three months ended March 30, 2019 for VSI and American Freight, and subtracting the statement of operations for the three months ended March 31, 2018. Similarly, the historical combined statement of operations for the fiscal year ended February 2, 2019 of Sears Outlet has been adjusted to reflect a trailing twelve-months ended May 4, 2019 by adding Sears Outlet’s statement of operation for the three months ended May 4, 2019 and subtracting Sears Outlet’s statement of operations for the three months ended May 5, 2018.
Note 2: Adjustments to Franchise Group’s, Buddy’s, Sears Outlet’s, VSI’s and American Freight’s Historical Financial Statements
(2a) Adjustments and reclassifications to Franchise Group’s historical financial statements:
Certain reclassifications have been made to the historical presentation of the statement of operations for the fiscal year ended April 30, 2019 of Franchise Group to conform to its financial statement presentation for the eight months ended December 28, 2019. The pro forma combined statement of operations for the eight months ended December 28, 2019 was prepared by combining the historical consolidated statement of operations for the eight months ended December 28, 2019 of Franchise Group and the pre-merger historical consolidated statement of operations for the three months ended June 30, 2019 of Buddy’s, the pre-acquisition historical combined statement of operations for the six months ended August 3, 2019 of Sears Outlet, the pre-acquisition historical consolidated statement of operations for the eight months ended November 30, 2019 of VSI, and the pre-acquisition historical consolidated statement of operations for the eight months ended December 29, 2019 of American Freight and giving effect to the Transactions as if they had occurred on the first day of the fiscal year May 1, 2018.



10



Unaudited Pro Forma Combined Statement of Operations
for the year-ended April 30, 2019