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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 March 27, 2021
 
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 classTrading symbol(s)Name of each exchange on which registered
Common stock, par value $.01 per shareFRGNASDAQ Global Market
7.50% Series A Cumulative Preferred Stock, par value $0.01 per share and liquidation preference of $25.00 per shareFRGAPNASDAQ 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 May 3, 2021 was 40,167,102 shares.




FRANCHISE GROUP, INC. AND SUBSIDIARIES
 
Form 10-Q for the Quarterly Period Ended March 27, 2021
 
Table of Contents
 
  Page
  Number
   
   
 
 
 
 
 
   
   



PART I. FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS (UNAUDITED)
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FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets

(In thousands, except share count and per share data)March 27, 2021December 26, 2020
Assets(Unaudited)(Unaudited)
Current assets:
Cash and cash equivalents$164,858 $148,780 
Current receivables, net 88,263 67,335 
Inventories, net447,811 302,307 
Current assets held for sale138,319 43,023 
Other current assets22,357 13,997 
Total current assets861,608 575,442 
Property, equipment, and software, net212,983 135,872 
Non-current receivables, net11,706 12,800 
Goodwill786,685 448,258 
Intangible assets, net314,413 109,892 
Operating lease right-of-use assets659,482 502,104 
Non-current assets held for sale 55,116 
Other non-current assets15,060 8,428 
Total assets$2,861,937 $1,847,912 
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term obligations$12,014 $104,053 
Current operating lease liabilities155,949 127,032 
Accounts payable and accrued expenses 338,450 252,389 
Current liabilities held for sale47,515 40,576 
Other current liabilities37,635 25,174 
Total current liabilities591,563 549,224 
Long-term obligations, excluding current installments1,243,132 466,944 
Non-current operating lease liabilities 517,573 402,276 
Non-current liabilities held for sale 8,779 
Other non-current liabilities 46,209 35,522 
Total liabilities2,398,477 1,462,745 
Stockholders' equity:
Common stock, $0.01 par value per share, 180,000,000 and 180,000,000 shares authorized, 40,157,102 and 40,092,260 shares issued and outstanding at March 27, 2021 and December 26, 2020, respectively
402 401 
Preferred stock, $0.01 par value per share, 20,000,000 and 20,000,000 shares authorized, 4,541,125 and 1,250,000 shares issued and outstanding at March 27, 2021 and December 26, 2020, respectively
45 13 
Additional paid-in capital464,106 382,383 
Accumulated other comprehensive loss, net of taxes(1,112)(1,399)
Retained earnings19 3,769 
Total equity attributable to Franchise Group, Inc.463,460 385,167 
Non-controlling interest  
Total equity463,460 385,167 
Total liabilities and equity$2,861,937 $1,847,912 


See accompanying notes to condensed consolidated financial statements.
2


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

 Three Months Ended
 (In thousands, except share count and per share data)March 27, 2021March 28, 2020
Revenues: 
Product$583,816 $473,505 
Service and other28,576 13,022 
Rental8,953 16,420 
Total revenues621,345 502,947 
Operating expenses:  
Cost of revenue:
   Product339,414 287,818 
   Service and other405 756 
   Rental3,005 5,942 
Total cost of revenue342,824 294,516 
Selling, general, and administrative expenses225,545 211,276 
Total operating expenses568,369 505,792 
Income (loss) from operations52,976 (2,845)
Other expense:  
Other(36,726)(4,021)
Interest expense, net(47,435)(24,511)
(Loss) from continuing operations before income taxes(31,185)(31,377)
Income tax expense (benefit)(2,851)(55,921)
Income (loss) from continuing operations(28,334)24,544 
Income from discontinued operations, net of tax42,147 37,354 
Net income13,813 61,898 
Less: Net (income) attributable to non-controlling interest (2,359)
Net income attributable to Franchise Group, Inc.$13,813 $59,539 
Amounts attributable to Franchise Group, Inc.:
Net income (loss) from continuing operations$(28,334)$33,984 
Net income from discontinued operations42,147 25,555 
Net income attributable to Franchise Group, Inc.$13,813 $59,539 
Basic earnings (loss) per share:
Continuing operations$(0.76)$1.45 
Discontinued operations1.05 1.09 
Total basic earnings per share$0.29 $2.54 
Diluted earnings (loss) per share:  
Continuing operations$(0.76)$1.43 
Discontinued operations1.05 1.08 
Total diluted earnings per share$0.29 $2.51 
Weighted-average shares outstanding:
Basic40,110,084 23,373,980 
Diluted40,110,084 23,693,035 

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
(In thousands)March 27, 2021March 28, 2020
Net income$13,813 $61,898 
Other comprehensive income (loss)
Unrealized (gain) loss on interest rate swap agreement, net of taxes of $13 and $(29), respectively
48 (73)
Foreign currency translation adjustment223 (872)
Forward contracts related to foreign currency exchange rates16 2 
Other comprehensive income (loss)287 (943)
Comprehensive income14,100 60,955 
Less: comprehensive (income) attributable to non-controlling interest (2,184)
Comprehensive income attributable to Franchise Group, Inc.$14,100 $58,771 
 
 See accompanying notes to condensed consolidated financial statements.
4


FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
 
Three Months Ended March 27, 2021
(In thousands)Common stock sharesCommon stockPreferred stock sharesPreferred stockAdditional paid-in-capitalAccumulated other comprehensive lossRetained earningsTotal Franchise Group equityNon-controlling interestTotal equity
Balance at December 26, 202040,092 $401 1,250 $13 $382,383 $(1,399)$3,769 $385,167 $ $385,167 
Net income— — — — — — 13,813 13,813 — 13,813 
Total other comprehensive income— — — — — 287 — 287  287 
Exercise of stock options3  — — 25 — — 25 — 25 
Stock-based compensation expense, net62 1 — — 2,189 — — 2,190 — 2,190 
Issuance of Series A Preferred Stock— — 3,291 32 79,509 — — 79,541 — 79,541 
Common dividend declared ($0.375 per share)
— — — — — — (15,434)(15,434)— (15,434)
Preferred dividend declared (7.5% per share)
— — — — — — (2,129)(2,129)— (2,129)
Balance at March 27, 202140,157 $402 4,541 $45 $464,106 $(1,112)$19 $463,460 $ $463,460 

Three Months Ended March 28, 2020
(In thousands)Common stock sharesCommon stockPreferred stock sharesPreferred stockAdditional paid-in-capitalAccumulated other comprehensive lossRetained earningsTotal Franchise Group equityNon-controlling interestTotal equity
Balance at December 28, 201918,250 $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 LLC— — — — 3,826 — — 3,826 (2,358)
Net income— — — — — — 59,539 59,539 2,359 61,898 
Total other comprehensive loss— — — — — (768)— (768)(175)(943)
Stock-based compensation, net 3 — — — 2,449 — — 2,449 — 2,449 
Issuance of common stock7,462 75 — — 123,019 — — 123,094 — 123,094 
Conversion of preferred to common stock3,938 39 (788)(8)(279)— — (248)— (248)
Dividend declared ($0.25 per share)
— — — — — — (6,633)(6,633)— (6,633)
Adjustment— — — — — — 2,358 2,358 (2,358)— 
Balance at March 28, 202029,653 $297 1,099 $11 $237,354 $(2,306)$73,652 $309,008 $20,012 $329,020 

See accompanying notes to condensed consolidated financial statements.
5


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

Three Months Ended
(In thousands)March 27, 2021March 28, 2020
Operating Activities 
Net income$13,813 $61,898 
Adjustments to reconcile net income to net cash provided by operating activities: 
Provision for doubtful accounts710 1,672 
Depreciation, amortization and impairment charges14,176 15,927 
Amortization of deferred financing costs30,973 11,744 
Loss on disposal of fixed assets(62) 
Stock-based compensation expense - equity awards2,550 2,485 
(Gain) on bargain purchases and sales of Company-owned offices(623)(808)
Equity in loss of affiliate 88 
Deferred tax expense  5,010 
Prepayment penalty for early debt extinguishment36,726  
Change in
Accounts, notes, and interest receivable (7,648)(10,203)
Income taxes receivable(1,032)(51,857)
Other assets(6,271)(2,364)
Accounts payable and accrued expenses8,718 41,921 
Inventory(20,454)40,066 
Deferred revenue4,175 189 
Net cash provided by operating activities75,751 115,768 
Investing Activities 
Issuance of operating loans to franchisees and Area Developers ("ADs")(17,058)(28,212)
Payments received on operating loans to franchisees and ADs21,644 47,800 
Purchases of Company-owned offices, AD rights, and acquired customer lists(132)(2,251)
Proceeds from sale of Company-owned offices and AD rights277 950 
Acquisition of business, net of cash and restricted cash acquired(463,753)(357,263)
Purchases of property, equipment, and software(11,535)(6,184)
Net cash (used in) in investing activities(470,557)(345,160)
Financing Activities 
Proceeds from the exercise of stock options25  
Dividends paid(15,620)(3,943)
Non-controlling interest distribution (2,358)
Repayment of other long-term obligations(769,791)(370,503)
Borrowings under revolving credit facility6,724 142,000 
Repayments under revolving credit facility(84,874)(79,260)
Issuance of common stock 80,682 
Issuance of preferred stock79,541  
Payment for debt issue costs and original issuance discounts(50,764)(14,408)
Prepayment penalty for early debt extinguishment(36,726) 
Issuance of debt1,300,000 586,000 
Cash paid for taxes on exercises/vesting of stock-based compensation(361)(36)
Net cash provided by financing activities428,154 338,174 
Effect of exchange rate changes on cash, net56 (1,335)
Net increase in cash equivalents and restricted cash33,404 107,447 
Cash, cash equivalents and restricted cash at beginning of period151,502 45,146 
Cash, cash equivalents and restricted cash at end of period$184,906 $152,593 
Supplemental Cash Flow Disclosure 
Cash paid for taxes, net of refunds$65 $466 
Cash paid for interest$39,730 $15,332 
Accrued capital expenditures $3,019 $4,061 
Deferred financing costs from issuance of common stock$ $31,013 
Share issuance proceeds included in accounts receivable$ $11,385 
Tax receivable agreement included in other long-term liabilities$16,775 $7,449 
See accompanying notes to condensed consolidated financial statements.

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The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows.
(In thousands)March 27, 2021March 28, 2020
Cash and cash equivalents$164,858 $144,306 
Restricted cash included in other non-current assets368 5,565 
Cash and cash equivalents for discontinued operations19,680 2,722 
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows$184,906 $152,593 

Amounts included in other non-current assets represent those required to be set aside by a contractual agreement with an insurer for the payment of specific workers’ compensation claims.



7


FRANCHISE GROUP, INC. AND SUBSIDIARIES
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
March 27, 2021 and March 28, 2020
 
(1) Organization and Significant Accounting Policies
 
Description of Business

Franchise Group, Inc. (the "Company"), a Delaware corporation, is an owner and operator of franchised and franchisable businesses that continually looks to grow its portfolio of brands while utilizing its operating and capital allocation philosophies to generate strong cash flow for its stockholders. On February 14, 2020, the Company completed its acquisition of the American Freight Group, Inc. ("American Freight"). On February 21, 2021, the Company entered into an agreement to sell its' Liberty Tax business as described in "Note 3. Divestitures" and now accounts for Liberty Tax as a discontinued operation. On March 10, 2021, the Company completed its acquisition of PSP Midco, LLC ("Pet Supplies Plus") as described in “Note 2. Acquisitions.”

Segment Information

The Company currently operates in four reportable segments: Buddy’s, Vitamin Shoppe, American Freight and Pet Supplies Plus. The Buddy's segment is a specialty retailer of high quality, name-brand consumer electronics, residential furniture, appliances and household accessories through rent-to-own agreements. The Vitamin Shoppe segment is an omni-channel specialty retailer of vitamins, herbs, specialty supplements, sports nutrition and other health and wellness products. The American Freight segment is a retail chain offering in-store and online access to furniture, mattresses, new and out-of-box home appliances and home accessories at discount prices. The Pet Supplies Plus segment is a specialty retailer that offers a wide assortment of pet products (food, treats, hard good and other products) and services through Company-owned and franchised locations.

Principles of Consolidation

The Company consolidates any entities in which it has a controlling interest, the usual condition of which is ownership of a majority voting interest. Prior to April 1, 2020, the Company was the sole managing member of Franchise Group New Holdco LLC ("New Holdco") and possessed ownership of more than 50 percent of the outstanding voting units. As a result, the Company consolidated the financial results of New Holdco and reported a non-controlling interest that represented the interests of the New Holdco units not held by the Company. As of April 1, 2020, the Company redeemed all outstanding New Holdco units for shares of common stock of the Company and now has an 100% interest in New Holdco.

The Company does not possess any ownership interests in franchisee entities; however, the Company may provide financial support to franchisee entities. Because the Company's franchise arrangements provide franchisee entities the power to direct the activities that most significantly impact their economic performance, the Company does not consider itself the primary beneficiary of any such entity that meets the definition of a variable interest entity ("VIE"). Based on the results of management's analysis of potential VIEs, the Company has not consolidated any franchisee entities. The Company's maximum exposure to loss resulting from involvement with potential VIEs is attributable to accounts and notes receivables and future lease payments due from franchisees. When the Company does not have a controlling interest in an entity but has the ability to exert significant influence over the entity, the Company applies the equity method of accounting. All intercompany balances and transactions have been eliminated in consolidation.

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information.  The condensed consolidated financial statements, including these notes, are unaudited and exclude some of the disclosures required only in annual financial statements. The consolidated balance sheet data as of December 26, 2020 was derived from the Company’s Annual Report on Form 10-K (the "2020 Annual Report"), filed with the U.S. Securities and Exchange Commission (the "SEC") on March 10, 2021.
 
In the opinion of management, all adjustments necessary for a fair presentation of such condensed consolidated financial statements in accordance with GAAP have been recorded.  These adjustments consisted only of normal recurring items. The
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accompanying condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in its 2020 Annual Report.

Revenues have been classified into product, service and other and rental revenues as further discussed in "Note 6. Revenue." Costs of sales for product includes the cost of merchandise, transportation and warehousing costs. Service and other costs of sales include the direct costs of warranties. Rental cost of sales represents the amortization of inventory costs over the leased term. Other operating expenses, including employee costs, depreciation and amortization, and advertising expenses have been classified in selling, general and administrative expenses. The Company also includes occupancy costs in selling, general and administrative expenses.

Assets and liabilities of the Company's Canadian operations, which are included in discontinued operations, have been translated into U.S. dollars using the exchange rate in effect at the end of the period. Revenues and expenses have been translated using the average exchange rates in effect each month of the period. Foreign exchange transaction gains and losses are recognized when incurred.

The Company reclassifies to accounts payable checks issued in excess of funds available and reports them as cash flow from operating activities.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Merchandise Inventories
Inventory for the Buddy's segment is recorded at cost, including shipping and handling fees. Upon purchase, merchandise is not initially depreciated until it is leased or three months after the purchase date. Non-leased merchandise is depreciated on a straight-line basis over a period of 24 months. Leased merchandise is depreciated over the lease term of the rental agreement and recorded in rental cost of revenue. On a weekly basis, all damaged, lost, stolen, or unsalable merchandise identified is written off. Maintenance and repairs of lease merchandise are charged to operations as incurred.

Inventory for the American Freight segment is comprised mostly of finished goods and is 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 the Company expects 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. Inventory includes the purchase price of the inventory plus costs of freight for moving merchandise from vendors to distribution centers as well as from distribution centers to stores. A provision for estimated shrinkage is maintained based on the actual historical results of physical inventories. Estimates are compared to the actual results of the physical inventory counts as they are taken and adjusted accordingly.

Inventory for the Vitamin Shoppe segment is recorded at the lower of cost or market value using the weighted-average cost method. Inventory includes costs directly incurred in bringing the product to its existing condition and location. In addition, the cost of inventory is reduced by purchase discounts and other allowances received from vendors. A markdown reserve is estimated based on a variety of factors, including, but not limited to, the amount of inventory on hand and its remaining shelf life, current and expected market conditions and product expiration dates. In addition, the Company has established a reserve for estimated inventory shrinkage based on the actual, historical shrinkage of its most recent physical inventories adjusted, if necessary, for current economic conditions and business trends. Physical inventories and cycle counts are taken on a regular basis. These adjustments are estimates, which could vary significantly from actual results if future economic conditions, customer demand or competition differ from management expectations.

Inventory for the Pet Supplies Plus segment is recorded at the lower of cost or market value using the weighted-average cost method. In addition, the cost of inventory is reduced by purchase discounts and other allowances received from vendors. A markdown reserve is estimated based on a variety of factors, including, but not limited to, the amount of inventory on hand and its remaining shelf life, current and expected market conditions and product expiration dates. In addition, the Company has established a reserve for estimated inventory shrinkage based on the actual, historical shrinkage of its most recent physical inventories adjusted, if necessary, for current economic conditions and business trends. Physical inventories and cycle counts
9


are taken on a regular basis. These adjustments are estimates, which could vary significantly from actual results if future economic conditions, customer demand or competition differ from management expectations.

Goodwill and Non-amortizing Intangible Assets

Goodwill and non-amortizing intangible assets, including the Buddy's, Vitamin Shoppe, American Freight and Pet Supplies Plus tradenames, are not amortized, but rather tested for impairment at least annually. In addition, goodwill and non-amortizing intangible assets will be tested on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. The Company performs a qualitative and/or quantitative assessment to determine whether it is more likely than not that each reporting unit's fair value is less than its carrying value, including goodwill. If the Company determines that it is more likely than not that the fair value of the reporting unit is less than its carrying value, the Company then estimates the fair value. The Company uses a combination of a market multiple method and a discounted cash flow method to estimate the fair value of its reporting units and recognizes goodwill impairment for any excess of the carrying amount of a reporting unit’s goodwill over its estimated fair value. The Company evaluates each of the Buddy's, Vitamin Shoppe, American Freight and Pet Supplies Plus tradenames for impairment by comparing its fair value, based on an income approach using the relief-from-royalty method, to its carrying value. If the carrying value of the asset exceeds its estimated fair value, an impairment loss is recognized in an amount equal to that excess. The Company's reporting units are determined in accordance with the provisions of Accounting Standards Codification (“ASC”) 350, “Intangibles - Goodwill and Other (Topic 350).” The Company performs its annual impairment testing of goodwill and non-amortizing intangible assets on the last day of the first month of the Company's third quarter. Refer to “Note 5. Goodwill and Intangible Assets” for additional information on these balances.

Intangible and Long-Lived Assets Impairment

Amortization of intangible assets is calculated using the straight-line method over the estimated useful lives of the assets, generally from two to 15 years. Long-lived assets, such as property, equipment, and software, and other purchased intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. Recognition and measurement of a potential impairment is performed for these assets at the lowest level where cash flows are individually identifiable. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary.

Revenue Recognition

The following is a description of the principal activities from which the Company generates its revenues. For more detailed information regarding reportable segments, see "Note 14. Segments."

Product revenues: These include sales of merchandise at the stores, online and wholesale sales to franchisees. Revenue is measured based on the amount of fixed consideration that the Company expects to receive, reduced by estimates for variable consideration such as returns. Revenue also excludes any amounts collected from customers and remitted or payable to governmental authorities. In arrangements where the Company has multiple performance obligations, the transaction price is allocated to each performance obligation using the relative stand-alone selling price. The Company recognizes revenues from retail operations upon the transfer of control of goods to the customer. The Company satisfies its performance obligations at the point of sale for retail store transactions and upon delivery for online transactions and wholesale transactions. The Company recognizes revenue for retail store, online transactions and wholesale transactions when it transfers control of the goods to the customer. Merchandise sales also include payments received for the exercise of the early purchase option offered through rental-purchase agreements or merchandise sold through point of sale transactions. Revenue for merchandise sales associated with rental purchase agreements is recognized when payment is received, and ownership of the merchandise passes to the customer. The remaining net value of merchandise sold is recorded to cost of sales at the time of the transaction.

Service and other revenues: These include royalties and advertising fees from franchisees, fees from the sales of franchises and area developer territories, financial products, interest income from loans to franchisees, services and extended-service plans and financing programs. Commissions earned on services are presented net of related costs because the Company is acting as an agent in arranging the services for the customer and does not control the services being rendered. The Company recognizes revenue on the commissions on extended-service plans when it
10


transfers control of the related goods to the customer. The Company recognizes franchise fee revenue for the sales of individual territories on a straight-line basis over the initial contract term when the obligations of the Company to prepare the franchisee for operation are substantially complete, not to exceed the estimated amount of cash to be received. Royalties and advertising fees are recognized as franchise territories generate sales. Interest income on notes receivable is recognized based on the outstanding principal note balance less unrecognized revenue unless it is put on non-accrual status. Interest income on the unrecognized revenue portion of notes receivable is recognized when received. For accounts receivable, interest income is recognized based on the outstanding receivable balance over 30 days old, net of an allowance.

Rental revenues: The Company provides merchandise, consisting of consumer electronics, computers, residential furniture, appliances, and household accessories to its customers pursuant to rental-purchase agreements which provide for weekly, semi-monthly or monthly non-refundable rental payments. The average rental term is twelve to eighteen months and the Company maintains ownership of the lease merchandise until all payment obligations are satisfied under sales and lease ownership agreements. Customers have the option to purchase the leased goods at any point in the lease term. Customers can terminate the agreement at the end of any rental term without penalty. Therefore, rental transactions are accounted for as operating leases and rental revenue is recognized over the rental term. Cash received prior to the beginning of the lease term is recorded as deferred revenue. Revenue related to various payment, reinstatement or late fees are recognized when paid by the customer. The Company offers additional product plans along with rental agreements that provide customers with liability protection against significant damage or loss of a product, and club membership benefits, including various discount programs, product services and replacement benefits in the event merchandise is damaged or lost. Customers renew product plans in conjunction with their rental term renewals and can cancel the plans at any time. Revenue for product plans is recognized over the term of the plan.

Leases

The Company's lease portfolio primarily consists of leases for its retail store locations and office space. The Company also leases certain office equipment under finance or operating leases. The finance lease right of use assets are included in Property, equipment and software and the finance lease liabilities are included in current installments of long-term obligations, and long-term obligations. The finance leases are immaterial to the financial statements. The Company subleases some of its real estate and equipment leases. The Company determines if an arrangement is a lease at inception by evaluating whether the arrangement conveys the right to use an identified asset and whether the Company obtains substantially all of the economic benefits from and has the ability to direct the use of the asset. Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheets; the Company recognizes expense for these leases on a straight-line basis over the lease term. For leases with an initial term in excess of 12 months, lease right-of-use assets and lease liabilities are recognized based on the present value of the future lease payments over the committed lease term at the lease commencement date. The Company’s leases do not provide an implicit rate; therefore, the Company uses its incremental borrowing rate and the information available at the lease commencement date in determining the present value of future lease payments. Most leases include one or more options to renew and the exercise of renewal options is at the Company’s sole discretion. The Company does not include renewal options in its determination of the lease term unless the renewals are deemed to be reasonably certain at lease commencement. Operating lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company uses the long-lived assets impairment guidance in ASC Subtopic 360-10, “Property, Plant, and Equipment - Overall,” to determine whether a right-of-use asset is impaired, and if so, the amount of the impairment loss to recognize.

The Company has lease agreements with lease and non-lease components, which the Company elects to combine as one lease component for all classes of underlying assets. Non-lease components include variable costs based on actual costs incurred by the lessor related to the payment of real estate taxes, common area maintenance, and insurance. These variable payments are expensed as incurred as variable lease costs.

Due to the COVID-19 pandemic, the Company has been negotiating lease concessions with landlords. The lease concessions have been in the form of lease forgiveness, lease deferrals and lease deferrals with term extensions. If the total payments in the modified lease are substantially the same as or less than total payments in the original lease, the Company has elected to not evaluate whether the concession is a lease modification as defined in ASC 842 - "Leases".

Deferred Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities, which are shown on the condensed consolidated balance sheets, are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax
11


assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company has elected to classify interest charged on a tax settlement in interest expense, and accrued penalties, if any, in selling, general, and administrative expenses.

The determination of the Company's provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items. The Company records unrecognized tax benefit liabilities for known or anticipated tax issues based on an analysis of whether, and the extent to which, additional taxes will be due.

Discontinued Operations

As previously disclosed, on February 21, 2021 the Company entered into a purchase agreement (the " Purchase Agreement") to sell its Liberty Tax business to NextPoint Acquisition Corp ("NextPoint"), a special purpose acquisition corporation incorporated under the laws of the Province of British Columbia. As a result of this agreement, the financial position and results of operations of the Liberty Tax segment are presented as discontinued operations and, as such, have been excluded from continuing operations and segment results for all periods presented. The accompanying Notes to the Condensed Consolidated Financial Statements and all prior year balances have been reclassified to conform to this presentation. Please refer to "Note 3. Divestitures" for additional information regarding discontinued operations.

Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-13, "Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", which changes how companies will measure credit losses for most financial assets and certain other instruments that aren't measured at fair value through net income. The standard replaces the "incurred loss" approach with an "expected loss" model for instruments measured at amortized cost (which generally will result in the earlier recognition of allowances for losses) and requires companies to record allowances for available-for-sale debt securities, rather than reduce the carrying amount. In addition, companies will have to disclose significantly more information, including information used to track credit quality by year of origination, for most financing receivables. The ASU should be applied as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the standard is effective. The ASU is effective for the Company for the fiscal year beginning December 25, 2022. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This standard eliminates Step 2 from the goodwill impairment test. Instead, an entity should compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The ASU is effective for the Company for the fiscal year beginning December 25, 2022. The Company is currently evaluating the impact of the adoption of this standard to its consolidated financial statements.

The London Interbank Offered Rate (“LIBOR”) is scheduled to be discontinued on December 31, 2021. In an effort to address the various challenges created by such discontinuance, the FASB issued an amendment to existing guidance, ASU No. 2020-04, "Reference Rate Reform." The amended guidance is designed to provide relief from the accounting analysis and impacts that may otherwise be required for modifications to agreements (e.g., loans, debt securities, derivatives, borrowings) necessitated by the reference rate reform. It also provides optional expedients to enable companies to continue to apply hedge accounting to certain hedging relationships impacted by the reference rate reform. Application of the guidance in the amendment is optional, is only available in certain situations, and is only available for companies to apply until December 31, 2022. The Company is currently evaluating the impacts of reference rate reform and the new guidance on its consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which amends and simplifies the requirements for income taxes. The ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, with early adoption permitted. The adoption did not result in a material impact to the Company's financial results or disclosures.
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(2) Acquisitions

The assets acquired and liabilities assumed in the acquisitions below are recorded at fair value in accordance with ASC 805 - "Business Combinations." Goodwill is calculated as the excess of the purchase price over the fair value of the net assets acquired. The goodwill recognized is attributable to operational synergies in the expected franchise models and growth opportunities.

Pet Supplies Plus Acquisition

On March 10, 2021, the Company completed its acquisition of Pet Supplies Plus (the "Pet Supplies Plus Acquisition"). The preliminary fair value of the consideration transferred at the acquisition date was $452.4 million. As of March 27, 2021, $4.8 million of acquisition fees had been incurred that are recorded in selling, general and administrative expenses.

The table below summarizes the unaudited preliminary estimates of the fair values of the identifiable assets acquired and liabilities assumed in the Pet Supplies Plus Acquisition as of March 10, 2021. The preliminary estimates of the fair value of identifiable assets acquired and liabilities assumed are subject to revisions, which may result in an adjustment to the preliminary values presented below. The Company expects to complete the purchase price allocation as soon as reasonably possible but not to exceed one year from the Pet Supplies Plus Acquisition date.

(In thousands)Preliminary 3/10/2021
Cash and cash equivalents$2,131 
Other current assets41,214 
Inventories, net118,600 
Property, equipment and software, net75,607 
Goodwill335,134 
Operating lease right-of-use assets142,216 
Other intangible assets, net205,800 
Other non-current assets6,888 
Total assets927,590 
Current operating lease liabilities26,369 
Accounts payable and accrued expenses80,404 
Other current liabilities3,372 
Current installments of long-term obligations3,507 
Long-term obligations, excluding current installments247,458 
Non-current operating lease liabilities104,301 
Other long-term liabilities9,761 
Total liabilities475,172 
Consideration transferred$452,418 

Other intangible assets, net consists of the Pet Supplies Plus trade name as an indefinite-lived intangible asset with a fair value of $104.4 million. The trade name is not subject to amortization but will be evaluated annually for impairment. Also included are franchise agreements of $67.1 million and customer relationships of $34.3 million.

Lease right-of-use assets and lease liabilities consists of leases for retail store locations, warehouses and office equipment. The operating lease right-of-use assets incorporates a favorable adjustment of $12.4 million, net for favorable and unfavorable Pet Supplies Plus real estate leases (as compared to prevailing market rates) which will be amortized over the remaining lease terms.

The property and equipment consists of fixtures and equipment of $37.0 million, leasehold improvements of $33.5 million, construction in progress of $3.5 million and financing leases of $1.7 million.

Other non-current assets includes $0.4 million of restricted cash.
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Furniture Factory Outlet Acquisition

On December 27, 2020, the Company completed the acquisition of Furniture Factory Outlet ("FFO Home"), a regional retailer of furniture and mattresses, for an all cash purchase price of $13.8 million. The Company acquired 31 operating locations which were rebranded as American Freight stores and included into its American Freight segment. As of March 27, 2021, $0.1 million of acquisition fees had been incurred that are recorded in selling, general and administrative expenses.

(In thousands)Preliminary 12/27/2020
Cash and cash equivalents$6 
Other current assets96 
Inventories, net6,450 
Property, equipment and software, net2,934 
Goodwill3,293 
Operating lease right-of-use assets26,571 
Total assets39,350 
Current operating lease liabilities2,587 
Other current liabilities299 
Non-current operating lease liabilities22,624 
Total liabilities25,510 
Consideration transferred$13,840 

Lease right-of-use assets and lease liabilities consists of leases for retail store locations. The lease right of use assets incorporates a favorable adjustment of $1.4 million, net for favorable and unfavorable FFO Home leases (as compared to prevailing market rates) which will be amortized over the remaining lease terms.

The property and equipment consists of leasehold improvements of $2.5 million and fixtures and equipment of $0.4 million.

American Freight Acquisition

On February 14, 2020, the Company completed its acquisition of American Freight (the "American Freight Acquisition") for an aggregate purchase price of $357.3 million. The Company accounted for the transaction as a business combination using the acquisition method of accounting. In the three months ended March 27, 2021, there were no changes in the fair value of identifiable assets acquired and liabilities assumed.

Pro forma financial information

The following unaudited consolidated pro forma summary has been prepared by adjusting the Company's historical data to give effect to the Pet Supplies Plus and American Freight Acquisition as if they had occurred on December 28, 2019.
Pro forma (Unaudited)
Three Months Ended
(In thousands)March 27, 2021March 28, 2020
Revenue$891,415 $836,326 
Net income62,604 3,956 
Basic net income per share$1.56 $0.17 
Diluted net income per share$1.53 $0.17 

The unaudited consolidated pro forma financial information was prepared in accordance with accounting standards and is not necessarily indicative of the results of operations that would have occurred if the Pet Supplies Plus and American Freight Acquisition had been completed on the date indicated, nor is it indicative of the future operating results of the Company.
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The unaudited pro forma results do not reflect events that either have occurred or may occur after the acquisition, including, but not limited to, the anticipated realization of operating synergies in subsequent periods. They also do not give effect to certain charges that the Company expects to incur in connection with the acquisition, including, but not limited to, additional professional fees and employee integration.


(3) Divestitures

On February 21, 2021, the Company and NextPoint entered into the Purchase Agreement to sell its Liberty Tax business for a purchase price of at least $243 million. The purchase price consists of approximately $182 million in cash and at least 51,000 proportional voting shares of NextPoint, which are convertible into NextPoint common shares at a ratio of 100 common shares to one proportional voting share. In connection with the Purchase Agreement, the parties also agreed to enter into a transition services agreement pursuant to which both parties agreed to provide certain transition services to each other for a period not to exceed six months. The Company expects the sale to be completed in the second quarter of 2021.

The following is a summary of the major categories of assets and liabilities for the Liberty Tax business. The balances for all periods are included in assets and liabilities held for sale in the Condensed Consolidated Balance Sheet.

(In thousands)March 27, 2021December 26, 2020
Assets(Unaudited)(Unaudited)
Current assets:
Cash and cash equivalents$19,680 $2,722 
Current receivables, net50,524 33,525 
Other current assets13,878 6,776 
Total current assets84,082 43,023 
Property, equipment, and software, net9,160 7,634 
Non-current receivables, net3,077 3,889 
Goodwill9,063 8,719 
Intangible assets, net23,129 24,804 
Operating lease right-of-use assets8,620 8,771 
Other non-current assets1,188 1,299 
Total assets held for sale$138,319 $98,139 
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term obligations$436 $1,335 
Current operating lease liabilities4,639 4,658 
Accounts payable and accrued expenses19,344 20,200 
Other current liabilities14,542 14,383 
Total current liabilities38,961 40,576 
Long-term obligations, excluding current installments1,670 1,711 
Non-current operating lease liabilities4,699 4,738 
Other non-current liabilities2,185 2,330 
Total liabilities held for sale$47,515 $49,355 
The following is a Condensed Consolidated Statement of Operations for the Liberty Tax business. The amounts for all periods are included in "Income (loss) from discontinued operations, net of tax" in the Company's Condensed Consolidated Statements of Operations.

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 Three Months Ended
 (In thousands)March 27, 2021March 28, 2020
Revenue$76,480 $89,618 
Selling, general, and administrative expenses34,061 40,937 
Income from operations42,419 48,681 
Other expense: 
Other153 (35)
Interest expense, net(11)(1,240)
Income before income taxes42,561 47,406 
Income tax expense414 10,052 
Net Income42,147 37,354 
Less: Net (income) attributable to non-controlling interest (11,799)
Net income attributable to discontinued operations$42,147 $25,555 

The following is the operating and investing activities for the Liberty Tax business. These amounts are included in the Company's Condensed Consolidated Statement of Cash Flows.
Three Months Ended
(In thousands)March 27, 2021March 28, 2020
Cash flows provided by operating activities from discontinued operations15,787 39,809 
Cash flows provided by investing activities from discontinued operations2,058 17,662 

(4) Accounts and Notes Receivable
 
Current and non-current receivables as of March 27, 2021 and December 26, 2020 are presented in the condensed consolidated balance sheets as follows:
(In thousands)March 27, 2021December 26, 2020
Accounts receivable, net$71,489 $38,444 
Notes receivable1,600 15,440 
Interest receivable, net 84 
Income tax receivable15,505 13,649 
Allowance for doubtful accounts(331)(282)
   Current receivables, net88,263 67,335 
Notes receivable - non-current11,706 12,800 
Allowance for doubtful accounts - non-current  
   Non-current receivables, net11,706 12,800 
      Total receivables$99,969 $80,135 

Notes receivable are due from the Company's franchisees and are collateralized by the underlying franchise. The debtors' ability to repay the notes is dependent upon both the performance of the franchisee's industry as a whole and the individual franchise areas.

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(5) Goodwill and Intangible Assets

Changes in the carrying amount of goodwill for the three months ended March 27, 2021 are as follows:
(In thousands)March 27, 2021
Balance at beginning of period$448,258 
Pet Supplies Plus Acquisition335,134 
FFO Acquisition3,293 
Balance at end of period$786,685 
Components of intangible assets as of March 27, 2021 and December 26, 2020 were as follows:
 March 27, 2021
(In thousands)Gross carrying amountAccumulated amortizationNet carrying amount
Tradenames (1)$197,700 $ $197,700 
Customer contracts43,080 (2,675)40,405 
Franchise agreements77,600 (2,216)75,384 
Reacquired rights1,478 (554)924 
Total intangible assets$319,858 $(5,445)$314,413 

(1) Tradenames have an indefinite life and are tested for impairment on an annual basis.

 December 26, 2020
(In thousands)Gross carrying amountAccumulated amortizationNet carrying amount
Tradenames (1)$93,300 $ $93,300 
Customer contracts8,780 (2,158)6,622 
Franchise agreements10,500 (1,546)8,954 
Reacquired rights1,478 (462)1,016 
Total intangible assets$114,058 $(4,166)$109,892 

(1) Tradenames have an indefinite life and are tested for impairment on an annual basis.


(6) Revenue

For details regarding the principal activities from which the Company generates its revenue, see "Note 1. Organization and Significant Accounting Policies" in this quarterly report. For more detailed information regarding reportable segments, see "Note 14. Segments" in this quarterly report.

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The following represents the disaggregated revenue by reportable segments for the three months ended March 27, 2021:

March 27, 2021
Vitamin ShoppeAmerican FreightPet Supplies PlusBuddy's
(In thousands)Three Months EndedThree Months EndedThree Months EndedThree Months Ended
Retail sales$294,739 $239,058 $31,365 $1,368 
Wholesale sales  17,287