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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 September 26, 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)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
Common stock, par value $.01 per share
 
FRG
 
NASDAQ Global Market
7.50% Series A Cumulative Preferred Stock, par value $0.01 per share and liquidation preference of $25.00 per share
 
FRGAP
 
NASDAQ Global Market
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.  Yes No

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

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

The number of shares outstanding of the registrant's common stock, par value $0.01 value per share, as of November 2, 2020 was 40,087,792 shares.





FRANCHISE GROUP, INC. AND SUBSIDIARIES
 
Form 10-Q for the Quarterly Period Ended September 26, 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)
 
September 26, 2020
 
December 28, 2019
Assets
 
(Unaudited)
 
(Audited)
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
179,932

 
$
39,581

Current receivables, net
 
84,277

 
79,693

Inventories, net
 
319,545

 
300,312

Other current assets
 
22,845

 
20,267

Total current assets
 
606,599

 
439,853

Property, equipment, and software, net
 
143,512

 
150,147

Non-current receivables, net
 
16,095

 
18,638

Goodwill
 
469,788

 
134,301

Intangible assets, net
 
145,478

 
77,590

Operating lease right-of-use assets
 
516,398

 
462,610

Other non-current assets
 
14,634

 
15,406

Total assets
 
$
1,912,504

 
$
1,298,545

Liabilities and Stockholders' Equity
 
 
 
 
Current liabilities:
 
 
 
 
Current installments of long-term obligations
 
$
112,374

 
$
218,384

Current operating lease liabilities
 
131,685

 
107,680

Accounts payable and accrued expenses
 
257,387

 
158,995

Other current liabilities
 
36,461

 
16,409

Total current liabilities
 
537,907

 
501,468

Long-term obligations, excluding current installments
 
516,353

 
245,236

Non-current operating lease liabilities
 
412,613

 
394,307

Other non-current liabilities
 
37,099

 
5,773

Total liabilities
 
1,503,972

 
1,146,784

 
 
 
 
 
Stockholders' equity:
 
 
 
 
Common stock, $0.01 par value per share, 180,000,000 and 180,000,000 shares authorized, 40,056,665 and 18,250,225 shares issued and outstanding at September 26, 2020 and December 28, 2019, respectively
 
401

 
183

Preferred Stock, $0.01 par value per share, 20,000,000 and 20,000,000 shares authorized, 1,200,000 and 1,886,667 shares issued and outstanding at September 26, 2020 and December 28, 2019, respectively
 
12

 
19

Additional paid-in capital
 
386,030

 
108,339

Accumulated other comprehensive loss, net of taxes
 
(1,838
)
 
(1,538
)
Retained earnings
 
23,927

 
18,388

Total equity attributable to Franchise Group, Inc.
 
408,532

 
125,391

Non-controlling interest
 

 
26,370

Total equity
 
408,532

 
151,761

Total liabilities and equity
 
$
1,912,504

 
$
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
 
Nine Months Ended
 (In thousands, except share count and per share data)
 
September 26, 2020
 
September 30, 2019
 
September 26, 2020
 
September 30, 2019
Revenues:
 
 
 
 

 
 

 
 

Product
 
$
500,462

 
$
557

 
$
1,440,677

 
$
557

Service and other
 
33,126

 
10,284

 
164,508

 
129,942

Rental
 
17,404

 
8,079

 
51,000

 
8,079

Total revenues
 
550,992

 
18,920

 
1,656,185

 
138,578

Operating expenses:
 
 

 
 

 
 
 
 

Cost of revenue:
 
 
 
 
 
 
 
 
   Product
 
296,920

 
438

 
862,320

 
438

   Service and other
 
678

 

 
2,135

 

   Rental
 
5,877

 
3,048

 
17,327

 
3,048

Total cost of revenue
 
303,475

 
3,486

 
881,782

 
3,486

Selling, general, and administrative expenses
 
228,194

 
40,481

 
697,670

 
110,928

Total operating expenses
 
531,669

 
43,967

 
1,579,452

 
114,414

Income (loss) from operations
 
19,323

 
(25,047
)
 
76,733

 
24,164

Other expense:
 
 

 
 

 
 

 
 

Other
 
(1,229
)
 
(1
)
 
(5,293
)
 
(101
)
Interest expense, net
 
(26,264
)
 
(2,755
)
 
(83,642
)
 
(4,225
)
Income (loss) before income taxes
 
(8,170
)
 
(27,803
)
 
(12,202
)
 
19,838

Income tax expense (benefit)
 
427

 
(4,339
)
 
(43,561
)
 
10,367

Net income (loss)
 
(8,597
)
 
(23,464
)
 
31,359

 
9,471

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

 
8,578

 
(2,090
)
 
8,578

Net income (loss) attributable to Franchise Group, Inc.
 
$
(8,597
)
 
$
(14,886
)
 
$
29,269

 
$
18,049

 
 
 
 
 
 
 
 
 
Net income (loss) per share of common stock:
 
 

 
 

 
 

 
 

Basic
 
$
(0.22
)
 
$
(0.93
)
 
$
0.89

 
$
1.23

Diluted
 
(0.22
)
 
(0.93
)
 
0.88

 
1.22

 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
39,692,384

 
15,997,041

 
32,679,576

 
14,712,297

Diluted
 
39,692,384

 
15,997,041

 
32,961,905

 
14,770,973


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
 
Nine Months Ended
(In thousands)
 
September 26, 2020
 
September 30, 2019
 
September 26, 2020
 
September 30, 2019
Net income (loss)
 
$
(8,597
)
 
$
(23,464
)
 
$
31,359

 
$
9,471

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Unrealized loss on interest rate swap agreement, net of taxes of $2, $(8), $(29) and $(29), respectively
 
(39
)
 
(21
)
 
(119
)
 
(75
)
Foreign currency translation adjustment
 
303

 
41

 
(188
)
 
382

Forward contracts related to foreign currency exchange rates
 
1

 

 
7

 

Other comprehensive income (loss)
 
265

 
20

 
(300
)
 
307

Comprehensive income (loss)
 
(8,332
)
 
(23,444
)
 
31,059

 
9,778

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

 
8,569

 
(1,915
)
 
8,569

Comprehensive income (loss) attributable to Franchise Group, Inc.
 
$
(8,332
)
 
$
(14,875
)
 
$
29,144

 
$
18,347

 
 See accompanying notes to condensed consolidated financial statements.

4



FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
 
 
Three Months Ended September 26, 2020
(In thousands)
Common stock shares
 
Common stock
 
Preferred stock shares
 
Preferred stock
 
Additional paid-in-capital
 
Accumulated other comprehensive loss
 
Retained earnings
 
Total Franchise Group equity
 
Non-controlling interest
 
Total equity
Balance at June 28, 2020
35,186

 
$
352

 

 
$

 
$
249,525

 
$
(2,103
)
 
$
42,935

 
$
290,709

 
$

 
$
290,709

Net loss

 

 

 

 

 

 
(8,597
)
 
(8,597
)
 

 
(8,597
)
Total other comprehensive income

 

 

 

 

 
265

 

 
265

 

 
265

Exercise of stock options
28

 
1

 

 

 
333

 

 

 
334

 

 
334

Stock-based compensation expense, net
13

 

 

 

 
1,945

 

 

 
1,945

 

 
1,945

Issuance of common stock
4,830

 
48

 

 

 
105,873

 

 

 
105,921

 

 
105,921

Issuance of Series A Preferred Stock

 

 
1,200

 
12

 
28,354

 

 

 
28,366

 

 
28,366

Common dividend declared ($0.25 per share)

 

 

 

 

 

 
(10,242
)
 
(10,242
)
 

 
(10,242
)
Preferred dividend declared ($0.14 per share)

 

 

 

 

 

 
(169
)
 
(169
)
 

 
(169
)
Balance at September 26, 2020
40,057

 
$
401

 
1,200

 
$
12

 
$
386,030

 
$
(1,838
)
 
$
23,927

 
$
408,532

 
$

 
$
408,532

 
Nine Months Ended September 26, 2020
(In thousands)
Common stock shares
 
Common stock
 
Preferred stock shares
 
Preferred stock
 
Additional paid-in-capital
 
Accumulated other comprehensive loss
 
Retained earnings
 
Total Franchise Group equity
 
Non-controlling interest
 
Total equity
Balance at December 29, 2019
18,250

 
$
183

 
1,887

 
$
19

 
$
108,339

 
$
(1,538
)
 
$
18,388

 
$
125,391

 
$
26,370

 
$
151,761

Changes and distributions of non-controlling interest in New Holdco

 

 

 

 
23,744

 
(175
)
 

 
23,569

 
(25,927
)
 
(2,358
)
Net income

 

 

 

 

 

 
29,269

 
29,269

 
2,090

 
31,359

Total other comprehensive loss

 

 

 

 

 
(125
)
 

 
(125
)
 
(175
)
 
(300
)
Exercise of stock options
50

 
1

 

 

 
520

 

 

 
521

 

 
521

Stock-based compensation expense, net
31

 

 

 

 
6,209

 

 

 
6,209

 

 
6,209

Issuance of common stock
12,292

 
123

 

 

 
228,892

 

 

 
229,015

 

 
229,015

Issuance of Series A Preferred Stock

 

 
1,200

 
12

 
28,354

 

 

 
28,366

 

 
28,366

Conversion of preferred to common stock
9,434

 
94

 
(1,887
)
 
(19
)
 
(10,028
)
 

 

 
(9,953
)
 

 
(9,953
)
Common dividend declared ($0.25 per share)

 

 

 

 

 

 
(25,919
)
 
(25,919
)
 

 
(25,919
)
Preferred dividend declared ($0.14 per share)

 

 

 

 

 

 
(169
)
 
(169
)
 

 
(169
)
Adjustment

 

 

 

 

 

 
2,358

 
2,358

 
(2,358
)
 

Balance at September 26, 2020
40,057

 
$
401

 
1,200

 
$
12

 
$
386,030

 
$
(1,838
)
 
$
23,927

 
$
408,532

 
$

 
$
408,532


See accompanying notes to condensed consolidated financial statements.


5



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

 
Three Months Ended September 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 July 1, 2019
14,100

 
$
141

 

 
$

 
$
13,183

 
$
(1,732
)
 
$
85,290

 
$
96,882

 
$

 
$
96,882

Cumulative effect of adopted accounting standards, net

 

 

 

 

 

 

 

 

 

Changes and distributions of non-controlling interest in New Holdco LLC

 

 

 

 
(64,142
)
 

 

 
(64,142
)
 
64,142

 

Net loss

 

 

 

 

 

 
(14,886
)
 
(14,886
)
 
(8,578
)
 
(23,464
)
Buddy's Acquisition - issuance of Preferred Stock and New Holdco LLC units

 

 
1,617

 
16

 
96,984

 

 

 
97,000

 

 
97,000

Buddy's Partners Asset Acquisition - issuance of Preferred Stock and New Holdco LLC units

 

 
270

 
3

 
16,197

 

 

 
16,200

 

 
16,200

Total other comprehensive income

 

 

 

 

 
11

 

 
11

 
9

 
20

Exercise of stock options
100

 
1

 

 

 
1,060

 

 

 
1,061

 

 
1,061

Stock-based compensation, net

 

 

 

 
292

 

 

 
292

 

 
292

Issuance of common stock
2,083

 
21

 

 

 
24,979

 

 

 
25,000

 

 
25,000

Balance at September 30, 2019
16,283

 
$
163

 
1,887

 
$
19

 
$
88,553

 
$
(1,721
)
 
$
70,404

 
$
157,418

 
$
55,573

 
$
212,991

 
Nine Months Ended September 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

Changes and distributions of non-controlling interest in New Holdco LLC

 

 

 

 
(64,142
)
 

 

 
(64,142
)
 
64,142

 

Net income

 

 

 

 

 

 
18,049

 
18,049

 
(8,578
)
 
9,471

Buddy's Acquisition - issuance of Preferred Stock and New Holdco LLC units

 

 
1,617

 
16

 
96,984

 

 

 
97,000

 

 
97,000

Buddy's Partners Asset Acquisition - issuance of Preferred Stock and New Holdco LLC units

 

 
270

 
3

 
16,197

 

 

 
16,200

 

 
16,200

Total other comprehensive income

 

 

 

 

 
298

 

 
298

 
9

 
307

Cancellation of common stock
(9
)
 

 

 

 
(88
)
 

 

 
(88
)
 

 
(88
)
Exercise of stock options
114

 
1

 

 

 
1,213

 

 

 
1,214

 

 
1,214

Stock-based compensation, net
51

 
1

 

 

 
1,319

 

 

 
1,320

 

 
1,320

Issuance of common stock
2,083

 
21

 

 

 
24,979

 

 

 
25,000

 

 
25,000

RSU dividend accrual

 

 

 

 

 

 
4

 
4

 

 
4

Balance at September 30, 2019
16,283

 
$
163

 
1,887

 
$
19

 
$
88,553

 
$
(1,721
)
 
$
70,404

 
$
157,418

 
$
55,573

 
$
212,991


See accompanying notes to condensed consolidated financial statements.

6



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