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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 25, 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.)
 
109 Innovation Court, Suite J
Delaware, Ohio 43015
(Address of principal executive offices)
(740) 363-2222
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each 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 October 29, 2021 was 40,295,469 shares.




FRANCHISE GROUP, INC. AND SUBSIDIARIES
 
Form 10-Q for the Quarterly Period Ended September 25, 2021
 
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 25, 2021December 26, 2020
Assets(Unaudited)(Audited)
Current assets:
Cash and cash equivalents$159,972 $148,780 
Current receivables, net 95,686 67,335 
Inventories, net533,552 302,307 
Current assets held for sale 43,023 
Other current assets18,643 13,997 
Total current assets807,853 575,442 
Property, equipment, and software, net202,968 135,872 
Non-current receivables, net12,000 12,800 
Goodwill787,441 448,258 
Intangible assets, net308,905 109,892 
Operating lease right-of-use assets656,561 502,104 
Non-current assets held for sale 55,116 
Other non-current assets55,856 8,428 
Total assets$2,831,584 $1,847,912 
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term obligations$1,420 $104,053 
Current operating lease liabilities158,577 127,032 
Accounts payable and accrued expenses 360,274 252,389 
Current liabilities held for sale 40,576 
Other current liabilities34,095 25,174 
Total current liabilities554,366 549,224 
Long-term obligations, excluding current installments1,072,909 466,944 
Non-current operating lease liabilities 513,461 402,276 
Non-current liabilities held for sale 8,779 
Other non-current liabilities 51,366 35,522 
Total liabilities2,192,102 1,462,745 
Stockholders' equity:
Common stock, $0.01 par value per share, 180,000,000 and 180,000,000 shares authorized, 40,237,297 and 40,092,260 shares issued and outstanding at September 25, 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 September 25, 2021 and December 26, 2020, respectively
45 13 
Additional paid-in capital471,405 382,383 
Accumulated other comprehensive loss, net of taxes (1,399)
Retained earnings167,630 3,769 
Total equity attributable to Franchise Group, Inc.639,482 385,167 
Non-controlling interest  
Total equity639,482 385,167 
Total liabilities and equity$2,831,584 $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 EndedNine Months Ended
 (In thousands, except share count and per share data)September 25, 2021September 26, 2020September 25, 2021September 26, 2020
Revenues: 
Product$782,608 $500,462 $2,172,193 $1,440,677 
Service and other37,891 19,826 114,659 46,516 
Rental8,327 17,404 26,077 51,000 
Total revenues828,826 537,692 2,312,929 1,538,193 
Operating expenses:  
Cost of revenue:
   Product485,682 296,920 1,347,673 862,320 
   Service and other8,737 678 10,076 2,135 
   Rental2,930 5,877 8,869 17,327 
Total cost of revenue497,349 303,475 1,366,618 881,782 
Selling, general, and administrative expenses276,714 209,537 780,416 619,799 
Total operating expenses774,063 513,012 2,147,034 1,501,581 
Income from operations54,763 24,680 165,895 36,612 
Other expense:  
Other(13,090)(1,246)(49,816)(5,295)
Interest expense, net(21,194)(26,269)(91,494)(78,658)
Income (loss) from continuing operations before income taxes20,479 (2,835)24,585 (47,341)
Income tax expense (benefit)(15,519)1,891 (15,600)(50,217)
Income (loss) from continuing operations35,998 (4,726)40,185 2,876 
Income (loss) from discontinued operations, net of tax128,072 (3,871)176,434 28,483 
Net income (loss)164,070 (8,597)216,619 31,359 
Less: Net (income) attributable to non-controlling interest   (2,090)
Net income (loss) attributable to Franchise Group, Inc.$164,070 $(8,597)$216,619 $29,269 
Amounts attributable to Franchise Group, Inc.:
Net income (loss) from continuing operations$35,998 $(4,726)$40,185 $(11,005)
Net income (loss) from discontinued operations128,072 (3,871)176,434 40,274 
Net income attributable to Franchise Group, Inc.$164,070 $(8,597)$216,619 $29,269 
Basic earnings (loss) per share:
Continuing operations$0.84 $(0.12)$0.84 $(0.34)
Discontinued operations3.18 (0.10)4.39 1.23 
Total basic earnings per share$4.02 $(0.22)$5.23 $0.89 
Diluted earnings (loss) per share:  
Continuing operations$0.83 $(0.12)$0.83 $(0.34)
Discontinued operations3.13 (0.10)4.31 1.23 
Total diluted earnings per share$3.96 $(0.22)$5.14 $0.89 
Weighted-average shares outstanding:
Basic40,229,232 39,692,384 40,171,458 32,679,576 
Diluted40,973,736 39,692,384 40,931,423 32,679,576 

See accompanying notes to condensed consolidated financial statements.
3


FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

 Three Months EndedNine Months Ended
(In thousands)September 25, 2021September 26, 2020September 25, 2021September 26, 2020
Net income (loss)$164,070 $(8,597)$216,619 $31,359 
Other comprehensive income (loss)
Unrealized (gain) loss on interest rate swap agreement, net of taxes of $, $2, $13, and $(29), respectively
 (39)45 (119)
Foreign currency translation adjustment 303 381 (188)
Forward contracts related to foreign currency exchange rates 1  7 
Reclassification of unrealized loss on interest rate swap agreement and foreign currency translation adjustments realized upon disposal of business973  973  
Other comprehensive income (loss)973 265 1,399 (300)
Comprehensive income (loss)165,043 (8,332)218,018 31,059 
Less: comprehensive (income) attributable to non-controlling interest   (1,915)
Comprehensive income (loss) attributable to Franchise Group, Inc.$165,043 $(8,332)$218,018 $29,144 
 
 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 25, 2021
(In thousands)Common stock sharesCommon stockPreferred stock sharesPreferred stockAdditional paid-in-capitalAccumulated other comprehensive lossRetained earningsTotal Franchise Group equity
Balance at June 26, 202140,208 $402 4,541 $45 $467,351 $(973)$21,170 $487,995 
Net income— — — — — — 164,070 164,070 
Total other comprehensive income— — — — — 973 — 973 
Exercise of stock options— — — — — — —  
Stock-based compensation expense, net29 — — — 4,054 — — 4,054 
Issuance of Series A Preferred Stock— — — — — — —  
Common dividend declared ($0.375 per share)— — — — — — (15,482)(15,482)
Preferred dividend declared ($0.469 per share)— — — — — — (2,128)(2,128)
Balance at September 25, 202140,237 $402 4,541 $45 $471,405 $ $167,630 $639,482 

Nine Months Ended September 25, 2021
(In thousands)Common stock sharesCommon stockPreferred stock sharesPreferred stockAdditional paid-in-capitalAccumulated other comprehensive lossRetained earningsTotal Franchise Group equity
Balance at December 26, 202040,092 $401 1,250 $13 $382,383 $(1,399)$3,769 $385,167 
Net income— — — — — — 216,619 216,619 
Total other comprehensive income— — — — — 1,399 — 1,399 
Exercise of stock options36 — — — 385 —  385 
Stock-based compensation expense, net109 1 — — 9,127  — 9,128 
Issuance of Series A Preferred Stock—  3,291 32 79,510 — — 79,542 
Common dividend declared ($0.375 per share)— — — — — — (46,372)(46,372)
Preferred dividend declared ($0.469 per share)— — — — — — (6,386)(6,386)
Balance at September 25, 202140,237 $402 4,541 $45 $471,405 $ $167,630 $639,482 
5


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

Three Months Ended September 26, 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 June 28, 202035,186 $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 options28 — — 333 — — 334 — 334 
Stock-based compensation expense, net13 — — — 1,945 — — 1,945 — 1,945 
Issuance of common stock4,830 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, 202040,057 $401 1,200 $12 $386,030 $(1,838)$23,927 $408,532 $ $408,532 


Nine Months Ended September 26, 2020
(In thousands)Common stock sharesCommon stockPreferred stock sharesPreferred stockAdditional paid-in-capitalAccumulated other comprehensive lossRetained earningsTotal Franchise Group equityNon-controlling interestTotal equity
Balance at December 29, 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— — — — 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 options50 — — 520 — — 521 — 521 
Stock-based compensation expense, net31 — — — 6,209 — — 6,209 — 6,209 
Issuance of common stock12,292 123 — — 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 stock9,434 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, 202040,057 $401 1,200 $12 $386,030 $(1,838)$23,927 $408,532 $ $408,532 

See accompanying notes to condensed consolidated financial statements.
6


FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
(In thousands)September 25, 2021September 26, 2020
Operating Activities 
Net income$216,619 $31,359 
Adjustments to reconcile net income to net cash provided by operating activities: 
Provision for doubtful accounts2,010 3,412 
Depreciation, amortization and impairment charges50,127 51,254 
Amortization of deferred financing costs35,590 28,703 
Loss (gain) on disposal of other(374)75 
Stock-based compensation expense - equity awards9,561 6,294 
(Gain) on bargain purchases and sales of Company-owned offices(3,368)(1,761)
Deferred tax (income) expense (17)7,851 
Prepayment penalty for early debt extinguishment36,726  
Gain on divestiture of Liberty Tax(173,699) 
Change in
Accounts, notes, and interest receivable 5,748 (2,223)
Income taxes receivable(13,473)(23,721)
Other assets26,026 3,971 
Accounts payable and accrued expenses21,959 38,884 
Inventory(108,947)79,967 
Deferred revenue10,952 5,649 
Net cash provided by operating activities115,440 229,714 
Investing Activities 
Issuance of operating loans to franchisees(17,749)(30,368)
Payments received on operating loans to franchisees23,103 50,064 
Purchases of Company-owned offices and acquired customer lists(1,086)(4,830)
Proceeds from sale of Company-owned offices3,189 1,118 
Acquisition of business, net of cash and restricted cash acquired(462,821)(353,423)
Divestiture of business, net of cash and restricted cash sold179,471  
Purchases of property, equipment, and software(36,871)(26,702)
Proceeds from sale of property, equipment, and software195 1,474 
Net cash (used in) in investing activities(312,569)(362,667)
Financing Activities 
Proceeds from the exercise of stock options386 520 
Dividends paid(50,016)(19,167)
Non-controlling interest distribution (4,716)
Repayment of other long-term obligations(957,382)(455,811)
Borrowings under revolving credit facility6,724 174,665 
Repayments under revolving credit facility(84,874)(218,260)
Issuance of common stock 198,003 
Issuance of preferred stock79,542 28,366 
Payment for debt issue costs and original issuance discounts(51,288)(16,673)
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(433)(85)
Net cash provided by financing activities205,933 272,842 
Effect of exchange rate changes on cash, net34 (142)
Net increase in cash equivalents and restricted cash8,838 139,747 
Cash, cash equivalents and restricted cash at beginning of period151,502 45,146 
Cash, cash equivalents and restricted cash at end of period$160,340 $184,893 
Supplemental Cash Flow Disclosure 
Cash paid for taxes, net of refunds$39,618 $944 
Cash paid for interest$79,074 $41,226 
Accrued capital expenditures $3,496 $3,633 
Non-cash proceeds from divestiture of Liberty Tax$59,680 $— 
Deferred financing costs from issuance of common stock$ $31,013 
Capital expenditures funded by finance lease liabilities$1,211 $ 
Tax receivable agreement included in other long-term liabilities$ $17,156 
7


See accompanying notes to condensed consolidated financial statements.

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)September 25, 2021September 26, 2020
Cash and cash equivalents$159,972 $173,415 
Restricted cash included in other non-current assets368 4,961 
Cash and cash equivalents for discontinued operations 6,517 
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows$160,340 $184,893 

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.



8


FRANCHISE GROUP, INC. AND SUBSIDIARIES
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
September 25, 2021 and September 26, 2020
 
(1) Basis of Presentation
 

Unless otherwise stated, references to the "Company," "we," "us," and "our" in this Quarterly Report on Form 10-Q (the "Quarterly Report") refer to Franchise Group, Inc. and its direct and indirect subsidiaries on a consolidated basis. The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and pursuant to the requirements of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. The unaudited condensed consolidated financial statements should be read in conjunction with Exhibit 99.1 of Form 8-K filed on June 25, 2021, to reflect certain retrospective revisions for discontinued operations and changes in reportable segments in the consolidated financial statements of the Company in its Annual Report on Form 10-K for the year ended December 26, 2020 that was previously filed with the Securities and Exchange Commission (“SEC”) on March 10, 2021 (the “Form 10-K”).

In the opinion of management, all adjustments (including those of a normal recurring nature) necessary for a fair presentation of such condensed consolidated financial statements in accordance with GAAP have been recorded. The December 26, 2020 balance sheet information was derived from the audited financial statements as of that date.

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 (the "Transaction"). On July 2, 2021 the Company completed the Transaction and received total consideration of approximately $241.0 million consisting of approximately $