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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  
FORM 10-Q
 
   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended June 27, 2020
 
OR
 
         Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from             to            
 
Commission File Number 001-35588
 
Franchise Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
27-3561876
(State of incorporation)
 
(IRS employer identification no.)
 
2387 Liberty Way
Virginia Beach, Virginia 23456
(Address of principal executive offices)
(757) 493-8855
(Registrant's telephone number, including area code)

1716 Corporate Landing Parkway, Virginia Beach, Virginia 23454
Former name, former address and former fiscal year, if changed since last report

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
Common stock, par value $.01 per share
 
FRG
 
NASDAQ Global Market
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.  Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No

The number of shares outstanding of the registrant's common stock, par value $0.01 value per share, as of August 3, 2020 was 40,029,599 shares.





FRANCHISE GROUP, INC. AND SUBSIDIARIES
 
Form 10-Q for the Quarterly Period Ended June 27, 2020
 
Table of Contents
 
 
 
Page
 
 
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




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

1



FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
 
(In thousands, except share count and per share data)
 
June 27, 2020
 
December 28, 2019
Assets
 
(Unaudited)
 
(Audited)
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
105,473

 
$
39,581

Current receivables, net
 
111,857

 
79,693

Inventories, net
 
315,078

 
300,312

Other current assets
 
24,298

 
20,267

Total current assets
 
556,706

 
439,853

Property, equipment, and software, net
 
152,520

 
150,147

Non-current receivables, net
 
15,105

 
18,638

Goodwill
 
468,088

 
134,301

Intangible assets, net
 
145,887

 
77,590

Operating lease right-of-use assets
 
529,891

 
462,610

Other non-current assets
 
15,434

 
15,406

Total assets
 
$
1,883,631

 
$
1,298,545

Liabilities and Stockholders' Equity
 

 

Current liabilities:
 

 

Current installments of long-term obligations
 
$
203,490

 
$
218,384

Current operating lease liabilities
 
130,307

 
107,680

Accounts payable and accrued expenses
 
222,461

 
158,995

Other current liabilities
 
38,008

 
16,409

Total current liabilities
 
594,266

 
501,468

Long-term obligations, excluding current installments
 
537,148

 
245,236

Non-current operating lease liabilities
 
426,255

 
394,307

Other non-current liabilities
 
35,253

 
5,773

Total liabilities
 
1,592,922

 
1,146,784


 

 

Stockholders' equity:
 

 

Common stock, $0.01 par value per share, 180,000,000 and 180,000,000 shares authorized, 35,185,710 and 18,250,225 shares issued and outstanding at June 27, 2020 and December 28, 2019, respectively
 
352

 
183

Preferred stock, $0.01 par value per share, 20,000,000 and 20,000,000 shares authorized, 0 and 1,886,667 shares issued and outstanding at June 27, 2020 and December 28, 2019, respectively
 

 
19

Additional paid-in capital
 
249,525

 
108,339

Accumulated other comprehensive loss, net of taxes
 
(2,103
)
 
(1,538
)
Retained earnings
 
42,935

 
18,388

Total equity attributable to Franchise Group, Inc.
 
290,709

 
125,391

Non-controlling interest
 

 
26,370

Total equity
 
290,709

 
151,761

Total liabilities and equity
 
$
1,883,631

 
$
1,298,545



See accompanying notes to condensed consolidated financial statements.

2



FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
 
 
 
Three Months Ended
 
Six Months Ended
 (In thousands, except share count and per share data)
 
June 27, 2020
 
June 30, 2019
 
June 27, 2020
 
June 30, 2019
Revenues:
 
 
 
 

 
 

 
 

Product
 
$
466,709

 
$

 
$
940,214

 
$

Service and other
 
28,742

 
23,820

 
131,383

 
119,658

Rental
 
17,176

 

 
33,596

 

Total revenues
 
512,627

 
23,820

 
1,105,193

 
119,658

Operating expenses:
 
 

 
 

 
 
 
 

Cost of revenue:
 
 
 
 
 
 
 
 
   Product
 
277,582

 

 
565,400

 

   Service and other
 
701

 

 
1,456

 

   Rental
 
5,508

 

 
11,450

 

Total cost of revenue
 
283,791

 

 
578,306

 

Selling, general, and administrative expenses
 
217,264

 
29,482

 
469,476

 
70,447

Total operating expenses
 
501,055

 
29,482

 
1,047,782

 
70,447

Income (loss) from operations
 
11,572

 
(5,662
)
 
57,411

 
49,211

Other expense:
 
 

 
 

 
 

 
 

Other
 
(6
)
 
(106
)
 
(4,064
)
 
(99
)
Interest expense, net
 
(31,626
)
 
(415
)
 
(57,378
)
 
(1,470
)
Income (loss) before income taxes
 
(20,060
)
 
(6,183
)
 
(4,031
)
 
47,642

Income tax expense (benefit)
 
1,882

 
(928
)
 
(43,987
)
 
14,706

Net income (loss)
 
(21,942
)
 
(5,255
)
 
39,956

 
32,936

Less: Net (income) loss attributable to non-controlling interest
 
269

 

 
(2,090
)
 

Net income (loss) attributable to Franchise Group, Inc.
 
$
(21,673
)
 
$
(5,255
)
 
$
37,866

 
$
32,936

 
 
 
 
 
 
 
 
 
Net income (loss) per share of common stock:
 
 

 
 

 
 

 
 

Basic
 
$
(0.62
)
 
$
(0.37
)
 
$
1.30

 
$
2.34

Diluted
 
(0.62
)
 
(0.37
)
 
1.29

 
2.33

 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
34,972,364

 
14,062,766

 
29,173,172

 
14,059,279

Diluted
 
34,972,364

 
14,062,766

 
29,335,633

 
14,124,104


See accompanying notes to condensed consolidated financial statements.

3



FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
 
 
 
Three Months Ended
 
Six Months Ended
(In thousands)
 
June 27, 2020
 
June 30, 2019
 
June 27, 2020
 
June 30, 2019
Net income (loss)
 
$
(21,942
)
 
$
(5,255
)
 
$
39,956

 
$
32,936

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Unrealized loss on interest rate swap agreement, net of taxes of $(3), $(13), $(31) and $(21), respectively
 
(7
)
 
(34
)
 
(80
)
 
(55
)
Foreign currency translation adjustment
 
381

 
113

 
(491
)
 
341

Forward contracts related to foreign currency exchange rates
 
4

 
18

 
6

 

Other comprehensive income (loss)
 
378

 
97

 
(565
)
 
286

Comprehensive income (loss)
 
(21,564
)
 
(5,158
)
 
39,391

 
33,222

Less: comprehensive (income) loss attributable to non-controlling interest
 
269

 

 
(1,915
)
 

Comprehensive income (loss) attributable to Franchise Group, Inc.
 
$
(21,295
)
 
$
(5,158
)
 
$
37,476

 
$
33,222

 
 See accompanying notes to condensed consolidated financial statements.

4



FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
 
 
Three Months Ended June 27, 2020
(In thousands)
Common stock shares
 
Common stock
 
Preferred stock shares
 
Preferred stock
 
Additional paid-in-capital
 
Accumulated other comprehensive loss
 
Retained earnings
 
Total Franchise Group equity
 
Non-controlling interest
 
Total equity
Balance at March 29, 2020
29,653

 
$
297

 
1,099

 
$
11

 
$
237,354

 
$
(2,306
)
 
$
73,652

 
$
309,008

 
$
20,013

 
$
329,021

Changes and distributions of non-controlling interest in New Holdco

 

 

 

 
19,919

 
(175
)
 

 
19,744

 
(19,744
)
 

Net loss

 

 

 

 

 

 
(21,673
)
 
(21,673
)
 
(269
)
 
(21,942
)
Total other comprehensive income

 

 

 

 

 
378

 

 
378

 

 
378

Exercise of stock options
23

 

 

 

 
186

 

 

 
186

 

 
186

Stock-based compensation expense, net
15

 

 

 

 
1,817

 

 

 
1,817

 

 
1,817

Conversion of preferred to common stock
5,496

 
55

 
(1,099
)
 
(11
)
 
(9,751
)
 

 

 
(9,707
)
 

 
(9,707
)
Dividend declared ($0.25 per share)

 

 

 

 

 

 
(9,044
)
 
(9,044
)
 

 
(9,044
)
Balance at June 27, 2020
35,187

 
$
352

 

 
$

 
$
249,525

 
$
(2,103
)
 
$
42,935

 
$
290,709

 
$

 
$
290,709

 
Six Months Ended June 27, 2020
(In thousands)
Common stock shares
 
Common stock
 
Preferred stock shares
 
Preferred stock
 
Additional paid-in-capital
 
Accumulated other comprehensive loss
 
Retained earnings
 
Total Franchise Group equity
 
Non-controlling interest
 
Total equity
Balance at December 29, 2019
18,250

 
$
183

 
1,887

 
$
19

 
$
108,339

 
$
(1,538
)
 
$
18,388

 
$
125,391

 
$
26,370

 
$
151,761

Changes and distributions of non-controlling interest in New Holdco

 

 

 

 
23,744

 
(175
)
 

 
23,569

 
(25,927
)
 
(2,358
)
Net income

 

 

 

 

 

 
37,866

 
37,866

 
2,090

 
39,956

Total other comprehensive loss

 

 

 

 

 
(390
)
 

 
(390
)
 
(175
)
 
(565
)
Exercise of stock options
23

 

 

 

 
186

 

 

 
186

 

 
186

Stock-based compensation expense, net
18

 

 

 

 
4,265

 

 

 
4,265

 

 
4,265

Issuance of common stock
7,462

 
75

 

 

 
123,019

 

 

 
123,094

 

 
123,094

Conversion of preferred to common stock
9,434

 
94

 
(1,887
)
 
(19
)
 
(10,028
)
 

 

 
(9,953
)
 

 
(9,953
)
Dividend declared ($0.25 per share)

 

 

 

 

 

 
(15,677
)
 
(15,677
)
 

 
(15,677
)
Adjustment

 

 

 

 

 

 
2,358

 
2,358

 
(2,358
)
 

Balance at June 27, 2020
35,187

 
$
352

 

 
$

 
$
249,525

 
$
(2,103
)
 
$
42,935

 
$
290,709

 
$

 
$
290,709


See accompanying notes to condensed consolidated financial statements.


5



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

 
Three Months Ended June 30, 2019
(In thousands)
Common stock shares
 
Common stock
 
Preferred stock shares
 
Preferred stock
 
Additional paid-in-capital
 
Accumulated other comprehensive loss
 
Retained earnings
 
Total Franchise Group equity
 
Non-controlling interest
 
Total equity
Balance at April 1, 2019
14,058

 
$
141

 

 
$

 
$
12,632

 
$
(1,830
)
 
$
90,224

 
$
101,167

 
$

 
$
101,167

Cumulative effect of adopted accounting standards, net

 

 

 

 

 

 
322

 
322

 
 
 
322

Net loss

 

 

 

 

 

 
(5,255
)
 
(5,255
)
 

 
(5,255
)
Total other comprehensive income

 

 

 

 

 
97

 

 
97

 

 
97

Cancellation of common stock
(9
)
 

 

 

 
(88
)
 

 

 
(88
)
 
 
 
(88
)
Stock-based compensation, net
51

 

 

 

 
639

 

 

 
639

 

 
639

Balance at June 30, 2019
14,100

 
$
141

 

 
$

 
$
13,183

 
$
(1,733
)
 
$
85,291

 
$
96,882

 
$

 
$
96,882

 
Six Months Ended June 30, 2019
(In thousands)
Common stock shares
 
Common stock
 
Preferred stock shares
 
Preferred stock
 
Additional paid-in-capital
 
Accumulated other comprehensive loss
 
Retained earnings
 
Total Franchise Group equity
 
Non-controlling interest
 
Total equity
Balance at January 1, 2019
14,044

 
$
140

 

 
$

 
$
12,091

 
$
(2,019
)
 
$
52,029

 
$
62,241

 
$

 
$
62,241

Cumulative effect of adopted accounting standards, net

 

 

 

 

 

 
322

 
322

 

 
322

Net income

 

 

 

 

 

 
32,936

 
32,936

 

 
32,936

Total other comprehensive income

 

 

 

 

 
286

 

 
286

 

 
286

Cancellation of common stock
(9
)
 

 

 

 
(88
)
 

 

 
(88
)
 

 
(88
)
Exercise of stock options
14

 

 

 

 
153

 

 

 
153

 

 
153

Stock-based compensation, net
51

 
1

 

 

 
1,027

 

 

 
1,028

 

 
1,028

RSU dividend accrual

 

 

 

 

 

 
4

 
4

 

 
4

Balance at June 30, 2019
14,100

 
$
141

 

 
$

 
$
13,183

 
$
(1,733
)
 
$
85,291

 
$
96,882

 
$

 
$
96,882


See accompanying notes to condensed consolidated financial statements.

6



FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
<
 
 
Six Months Ended
(In thousands)
 
June 27, 2020
 
June 30, 2019
Operating Activities
 
 
 
 

Net income
 
$
39,956

 
$
32,936

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 

Provision for doubtful accounts
 
3,403

 
4,770

Depreciation, amortization and impairment charges
 
33,792

 
7,772

Amortization of deferred financing costs
 
21,554

 
358

Loss (gain) on disposal of fixed assets
 
(166
)
 
270

Stock-based compensation expense - equity awards
 
4,339

 
1,047

Loss (gain) on bargain purchases and sales of Company-owned offices
 
(1,258
)
 
424

Equity in loss of affiliate
 
15

 
1

Deferred tax expense
 
7,739

 
742

Change in
 


 


Accounts, notes, and interest receivable
 
(1,784
)
 
1,380

Income taxes receivable
 
(53,156
)
 
13,341

Other assets
 
1,015

 
1,870

Accounts payable and accrued expenses
 
134

 
222

Inventory
 
84,434

 

Deferred revenue
 
8,938

 
(1,538
)
Net cash provided by operating activities
 
148,955

 
63,595

Investing Activities
 
 
 
 

Issuance of operating loans to franchisees and ADs
 
(28,876
)
 
(44,346
)
Payments received on operating loans to franchisees and ADs
 
49,612

 
66,204

Purchases of Company-owned offices, AD rights, and acquired customer lists
 
(2,299
)
 
(404
)
Proceeds from sale of Company-owned offices and AD rights
 
989

 
22

Acquisition of business, net of cash acquired
 
(353,423
)
 

Purchases of property, equipment, and software
 
(16,212
)
 
(647
)
Net cash provided by (used in) in investing activities
 
(350,209
)
 
20,829

Financing Activities
 
 
 
 

Proceeds from the exercise of stock options
 
187

 
153

Dividends paid
 
(10,406
)
 

Non-controlling interest distribution
 
(4,716
)
 

Repayment of other long-term obligations
 
(410,798
)
 
(16,178
)
Borrowings under revolving credit facility
 
142,000

 
93,874

Repayments under revolving credit facility
 
(112,760
)
 
(161,128
)
Issuance of common stock
 
92,082

 

Payment for debt issue costs
 
(14,604
)
 
(2,260
)
Issuance of debt
 
586,000

 

Cash paid for taxes on exercises/vesting of stock-based compensation
 
(73
)
 
(21
)
Net cash provided by (used in) financing activities
 
266,912

 
(85,560
)
Effect of exchange rate changes on cash, net
 
(234
)
 
131

Net increase (decrease) in cash equivalents and restricted cash
 
65,424

 
(1,005
)
Cash, cash equivalents and restricted cash at beginning of period
 
45,146

 
3,981

Cash, cash equivalents and restricted cash at end of period
 
$
110,570

 
$
2,976

Supplemental Cash Flow Disclosure
 
 
 
 

Cash paid for taxes, net of refunds
 
$
493

 
$
70

Cash paid for interest
 
$
26,857

 
$
993

Accrued capital expenditures
 
$
2,608

 
$

Deferred financing costs from issuance of common stock
 
$
31,013

 
$

Tax receivable agreement included in other long-term liabilities