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 July 1, 2023

 

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 class			Trading symbol(s)			Name of each exchange on which registered
Common stock, par value $0.01 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 August 3, 2023 was 35,191,461 shares.

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FRANCHISE GROUP, INC. AND SUBSIDIARIES

 

Form 10-Q for the Quarterly Period Ended July 1, 2023

 

Table of Contents

 

						Page Number
PART I - FINANCIAL INFORMATION
Item 1.			Financial Statements (Unaudited)			1
			Condensed Consolidated Statements of Operations			2
			Condensed Consolidated Balance Sheets			3
			Condensed Consolidated Statements of Stockholders’ Equity			4
			Condensed Consolidated Statements of Cash Flows			6
			Notes to Unaudited Condensed Consolidated Financial Statements			7
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3.			Quantitative and Qualitative Disclosures About Market Risk			33
Item 4.			Controls and Procedures			33
PART II - OTHER INFORMATION
Item 1.			Legal Proceedings			34
Item 1A.			Risk Factors			34
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds			36
Item 3.			Defaults Upon Senior Securities			36
Item 4.			Mine Safety Disclosures			36
Item 5.			Other Information			36
Item 6.			Exhibits			37
Signatures						39

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PART I. FINANCIAL INFORMATION

ITEM 1

FINANCIAL STATEMENTS (UNAUDITED)

1

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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)						July 1, 2023						June 25, 2022						July 1, 2023						June 25, 2022
Revenues:
Product						$	916,112					$	952,009					$	1,892,920					$	1,931,173
Service and other						115,501						135,648						236,069						283,929
Rental						7,073						7,341						14,518						15,365
Total revenues						1,038,686						1,094,998						2,143,507						2,230,467
Operating expenses:
Cost of revenue:
Product						621,482						600,780						1,278,386						1,217,364
Service and other						8,634						8,732						18,213						17,395
Rental						2,507						2,741						5,133						5,603
Total cost of revenue						632,623						612,253						1,301,732						1,240,362
Selling, general, and administrative expenses						383,563						405,639						770,804						782,633
Goodwill impairment						—						—						75,000						—
Total operating expenses						1,016,186						1,017,892						2,147,536						2,022,995
Income (loss) from operations						22,500						77,106						(4,029)						207,472
Other expense:
Bargain purchase gain						6						3,581						6						3,514
Gain on sale-leaseback transactions, net						—						49,854						—						49,854
Other, net						(3,783)						12,853						(5,617)						(9,122)
Interest expense, net						(83,364)						(88,839)						(170,493)						(181,167)
Income (loss) from operations before income taxes						(64,641)						54,555						(180,133)						70,551
Income tax expense (benefit)						(13,845)						13,572						(21,020)						17,250
Net income (loss) attributable to Franchise Group, Inc.						(50,796)						40,983						(159,113)						53,301
Other comprehensive income (loss)						—						—						—						—
Comprehensive income (loss)						$	(50,796)					$	40,983					$	(159,113)					$	53,301
Net income (loss) per share:
Basic						$	(1.50)					$	0.96					$	(4.66)					$	1.22
Diluted						(1.50)						0.94						(4.66)						1.19
Weighted-average shares outstanding:
Basic						35,177,146						40,356,299						35,089,660						40,331,855
Diluted						35,177,146						41,126,605						35,089,660						41,148,668

See accompanying notes to condensed consolidated financial statements.

2

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FRANCHISE GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except share count and per share data)						July 1, 2023						December 31, 2022
Assets
Current assets:
Cash and cash equivalents						$	106,264					$	80,783
Current receivables, net of allowance for credit losses of $(8,204) and $(4,106), respectively						256,003						170,162
Current securitized receivables, net of allowance for credit losses of $(65,519) and $(57,095), respectively						191,826						292,913
Inventories, net						746,753						736,841
Current assets held for sale						7,633						8,528
Other current assets						28,238						27,272
Total current assets						1,336,717						1,316,499
Property, plant, and equipment, net						238,922						223,718
Non-current receivables, net of allowance for credit losses of $(1,070) and $(892), respectively						10,808						11,735
Non-current securitized receivables, net of allowance for credit losses of $(8,816) and $(7,705), respectively						25,812						39,527
Goodwill						663,481						737,402
Intangible assets, net						111,432						116,799
Tradenames						222,703						222,703
Operating lease right-of-use assets						890,611						890,949
Investment in equity securities						5,977						11,587
Other non-current assets						65,398						59,493
Total assets						$	3,571,861					$	3,630,412
Liabilities and Stockholders’ Equity
Current liabilities:
Current installments of long-term obligations, net						$	13,192					$	6,935
Current installments of debt secured by accounts receivable, net						341,144						340,021
Current operating lease liabilities						179,250						179,519
Accounts payable and accrued expenses						407,543						376,895
Other current liabilities						34,827						40,541
Total current liabilities						975,956						943,911
Long-term obligations, excluding current installments						1,526,605						1,374,479
Non-current liabilities debt secured by accounts receivable, net						44,423						107,448
Non-current operating lease liabilities						729,870						720,474
Other non-current liabilities						69,576						62,720
Total liabilities						3,346,430						3,209,032
Stockholders’ equity:
Common stock, $0.01 par value per share, 180,000,000 shares authorized, 35,186,943 and 34,925,733 shares issued and outstanding at July 1, 2023 and December 31, 2022, respectively						352						349
Preferred stock, $0.01 par value per share, 20,000,000 shares authorized, and 4,541,125 shares issued and outstanding at July 1, 2023 and December 31, 2022, respectively						45						45
Additional paid-in capital						310,654						311,069
Retained earnings (deficit)						(85,620)						109,917
Total equity						225,431						421,380
Total liabilities and equity						$	3,571,861					$	3,630,412

See accompanying notes to condensed consolidated financial statements.

3

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FRANCHISE GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

						Three Months Ended July 1, 2023
(In thousands)						Common stock shares						Common stock						Preferred stock shares						Preferred stock						Additional paid-in-capital						Retained earnings (deficit)						Total Franchise Group equity
Balance at April 1, 2023						35,149						$	351					4,541						$	45					$	310,160					$	(32,909)					$	277,647
Net loss						—						—						—						—						—						(50,796)						(50,796)
Exercise of stock options						33						1						—						—						360						—						361
Stock-based compensation, net						5						—						—						—						134						—						134
Common dividend declared ($0.625 per share)						—						—						—						—						—						214						214
Preferred dividend declared ($0.469 per share)						—						—						—						—						—						(2,129)						(2,129)
Balance at July 1, 2023						35,187						$	352					4,541						$	45					$	310,654					$	(85,620)					$	225,431

						Six Months Ended July 1, 2023
(In Thousands)						Common stock shares						Common stock						Preferred stock shares						Preferred stock						Additional paid-in-capital						Retained earnings						Total Franchise Group equity
Balance at December 31, 2022						34,926						$	349					4,541						$	45					$	311,069					$	109,917					$	421,380
Cumulative effect of adopted accounting standards, net						—						—						—						—						—						(9,978)						(9,978)
Net loss						—						—						—						—						—						(159,113)						(159,113)
Exercise of stock options						48						1						—						—						490						—						491
Stock-based compensation expense, net						213						2						—						—						(905)						—						(903)
Common dividend declared ($0.625 per share)						—						—						—						—						—						(22,189)						(22,189)
Preferred dividend declared ($0.469 per share)						—						—						—						—						—						(4,257)						(4,257)
Balance at July 1, 2023						35,187						$	352					4,541						$	45					$	310,654					$	(85,620)					$	225,431

4

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FRANCHISE GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

						Three Months Ended June 25, 2022
(In thousands)						Common stock shares						Common stock						Preferred stock shares						Preferred stock						Additional paid-in-capital												Retained earnings						Total Franchise Group equity
Balance at March 26, 2022						40,354						$	404					4,541						$	45					$	480,628											$	270,609					$	751,686
Net income						—						—						—						—						—												40,983						40,983
Stock-based compensation, net						5						—						—						—						5,431												—						5,431
Common dividend declared ($0.625 per share)						—						—						—						—						—												(27,117)						(27,117)
Preferred dividend declared ($0.469 per share)						—						—						—						—						—												(2,129)						(2,129)
Balance at June 25, 2022						40,359						$	404					4,541						$	45					$	486,059											$	282,346					$	768,854

						Six Months Ended June 25, 2022
(In thousands)						Common stock shares						Common stock						Preferred stock shares						Preferred stock						Additional paid-in-capital						Retained earnings						Total Franchise Group equity
Balance at December 25, 2021						40,297						$	403					4,541						$	45					$	475,396					$	286,987					$	762,831
Net income						—						—						—						—						—						53,301						53,301
Exercise of stock options						15						—						—						—						180						—						180
Stock-based compensation expense, net						47						1						—						—						10,483						—						10,484
Common dividend declared ($0.625 per share)						—						—						—						—						—						(53,685)						(53,685)
Preferred dividend declared ($0.469 per share)						—						—						—						—						—						(4,257)						(4,257)
Balance at June 25, 2022						40,359						$	404					4,541						$	45					$	486,059					$	282,346					$	768,854

See accompanying notes to condensed consolidated financial statements.

5

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FRANCHISE GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

						Six Months Ended
(In thousands)						July 1, 2023						June 25, 2022
Operating Activities
Net income (loss)						$	(159,113)					$	53,301
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses for accounts receivable						45,743						56,840
Depreciation, amortization, and impairment charges						44,282						42,236
Goodwill impairment						75,000						—
Amortization of deferred financing costs						5,788						12,032
Securitized financing costs						48,630						59,618
Stock-based compensation expense						2,829						10,853
Change in fair value of investment						5,611						10,855
Gain on bargain purchases and sales of Company-owned stores						(42)						(55,883)
Other non-cash items						262						(2,182)
Changes in operating assets and liabilities						(30,905)						(238,903)
Net cash provided by (used in) operating activities						38,085						(51,233)
Investing Activities
Purchases of property, plant, and equipment						(28,760)						(21,809)
Proceeds from sale of property, plant, and equipment						3,379						240,558
Acquisition of business, net of cash and restricted cash acquired						(3,682)						(3,754)
Payments received on operating loans to franchisees and dealers						—						1,000
Net cash provided by (used in) investing activities						(29,063)						215,995
Financing Activities
Dividends paid						(49,806)						(54,665)
Issuance of long-term debt and other obligations						538,000						88,500
Repayment of long-term debt and other obligations						(389,389)						(358,172)
Proceeds from secured debt obligations						133,398						130,556
Repayment of secured debt obligations						(192,030)						(166,653)
Principal payments of finance lease obligations						(3,180)						(1,383)
Payment for debt issue costs						(17,393)						(431)
Cash paid for taxes on exercises/vesting of stock-based compensation, net						(3,240)						(190)
Net cash provided by (used in) financing activities						16,360						(362,438)
Net increase (decrease) in cash equivalents and restricted cash						25,382						(197,676)
Cash, cash equivalents and restricted cash at beginning of period						81,250						292,714
Cash, cash equivalents and restricted cash at end of period						$	106,632					$	95,038
Supplemental Cash Flow Disclosure
Cash paid for taxes, net of refunds						$	4,048					$	17,842
Cash paid for interest						67,075						42,013
Cash paid for interest on secured debt						43,414						48,506
Accrued capital expenditures						2,461						2,751
Capital expenditures funded by finance lease liabilities						14,147						—

See accompanying notes to condensed consolidated financial statements.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Statements of Cash Flows.

(In thousands)						July 1, 2023						June 25, 2022
Cash and cash equivalents						$	106,264					$	95,038
Restricted cash included in other non-current assets						368						—
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows						$	106,632					$	95,038

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.

6

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FRANCHISE GROUP, INC. AND SUBSIDIARIES

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

(1) Basis of Presentation

 

Unless otherwise stated, references to the “Company,” “we,“ “us,” and “our” in this Quarterly Report on Form 10-Q (this “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 the Company’s Form 10-K for the year ended December 31, 2022 that was filed with the Securities and Exchange Commission (“SEC”) on February 28, 2023 (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 31, 2022 balance sheet information was derived from the audited financial statements as of that date.

Reclassifications

Certain prior year amounts within the footnotes have been reclassified to conform to the current year presentation.

Recent Accounting Pronouncements Adopted

In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2016-13, “Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which changes how companies 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.

Effective January 1, 2023, the Company adopted ASU 2016-13 and applied a cumulative-effect adjustment to retained earnings. The Company has reviewed its entire portfolio of assets recognized on the balance sheet as of December 31, 2022 and identified customer receivables and securitized receivables as the materially impacted assets within the scope of ASC 326. Upon adoption of ASC 326 the Company recorded a net decrease to retained earnings of $10.0 million as of January 1, 2023. Prior period amounts were not adjusted and will continue to be reported under the previous accounting standards.

The cumulative effect of the changes made to the Company’s Condensed Consolidated Balance Sheet as a result of the adoption of ASC 326 were as follows:

						Impact of Adoption of ASC 326
(In thousands)						Balance at December 31, 2022						Adjustments due to ASC 326						Balance at January 1, 2023
Assets
Current receivables, net						$	170,162					$	(654)					$	169,508
Current securitized receivables, net						292,913						(11,619)						281,294
Non-current securitized receivables, net						39,527						(1,568)						37,959
Deferred income taxes						38,528						3,863						42,391
Stockholders’ Equity
Retained earnings						$	109,917					$	(9,978)					$	99,939

7

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(2) Acquisitions and Business Combinations

On May 10, 2023, the Company announced that it has entered into a definitive agreement and plan of merger with Freedom VCM, Inc., a Delaware Corporation (“Parent”) and Freedom VCM Subco, Inc., a Delaware corporation and wholly owned subsidiary of Parent (the “Merger Agreement”), pursuant to which members of the senior management team of the Company led by Brian Kahn, the Company’s Chief Executive Officer (collectively with affiliates and related parties of the senior management team, the “Management Group”), have agreed to acquire approximately 64.0% of the Company’s issued and outstanding common stock that the Management Group does not presently own or control (the “Proposed Merger”). Under the terms of the Proposed Merger, the Company’s common stockholders, other than the Management Group, are entitled to receive $30.00 in cash for each share of the Company’s common stock they hold. On July 19, 2023, the Company announced a notice of redemption (the “Redemption”) for all outstanding shares of its 7.50% Series A Cumulative Perpetual Preferred Stock in connection with the Merger Agreement. The Company's preferred stock will be redeemed in cash at a redemption price equal to $25.00 per share plus any accrued and unpaid dividends. The Redemption is contingent upon the Company’s successful completion of the Proposed Merger and, in the event the Proposed Merger does not occur and the Merger Agreement is terminated in accordance with its terms, the notice of redemption will be deemed rescinded and the Redemption will not occur.

The Proposed Merger is anticipated to close in the second half of 2023, subject to satisfaction or waiver of the closing conditions, including approval by regulatory authorities and the Company’s stockholders, including approval by a majority of the shares of common stock of the Company not owned or controlled by the Management Group. Upon completion of the Proposed Merger, the Company will become a private company and will no longer be publicly listed or traded on Nasdaq.

Additional information about the Merger Agreement and the Proposed Merger is set forth in the Company’s Definitive Proxy Statement on Schedule 14A filed with the SEC on July 14, 2023.

Treatment of Company Equity Awards in Connection with Proposed Merger

Treatment of Stock Options. At the effective time of the Proposed Merger (the “Effective Time”), any outstanding stock options will exercise and entitle the holder of such stock option to receive, without interest, an amount in cash equal to the product of multiplying (A) the number of shares of the Company’s common stock subject to such stock option as of immediately prior to the Effective Time and (B) the excess, if any, of the per share merger consideration over the exercise price per share of the Company’s common stock subject to such stock option.

Treatment of RSUs. At the Effective Time, any outstanding RSU will vest and entitle the holder of such RSU to receive, without interest, an amount in cash equal to the product obtained by multiplying (A) the number of shares of the Company’s common stock subject to such RSU immediately prior to the Effective Time and (B) the per share merger consideration, therefore, stock-based compensation will cease at that time.

Treatment of PRSUs. At the Effective Time, any outstanding PRSU will vest and entitle the holder of such PRSU to receive, without interest, an amount in cash equal to the product obtained by multiplying (A) the number of shares of the Company’s common stock subject to such PRSU immediately prior to the Effective Time and (B) the per share merger consideration, therefore, stock-based compensation will cease at that time.

Treatment of MPRSUs. At the Effective Time, each outstanding MPRSU will, automatically and without any action on the part of the holder thereof, be cancelled for no consideration, payment or right to consideration or payment, therefore, stock-based compensation will cease at that time.

2019 Omnibus Incentive Plan. The Company expects to terminate the 2019 Omnibus Incentive Plan at the Effective Time of the Proposed Merger.

The Company continually looks to diversify and grow its portfolio of brands through acquisitions. On February 28, 2023, the Company’s Pet Supplies Plus segment acquired 20 stores through bankruptcy proceedings of a third party for approximately $3.7 million. The components of the preliminary purchase price allocation are not presented herein due to the immateriality of the transaction to the Company overall. The Company’s Pet Supplies Plus segment subsequently franchised 12 of the 20 acquired stores.

8

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(3) Accounts and Notes Receivable

Current and non-current receivables as of July 1, 2023 and December 31, 2022 are presented in the Condensed Consolidated Balance Sheets as follows:

(In thousands)						July 1, 2023						December 31, 2022
Trade accounts receivable						$	33,924					$	40,165
Customer accounts receivable						128,004						56,639
Franchisee accounts receivable						51,969						46,778
Notes and interest receivable						2,064						2,361
Income tax receivable						48,246						28,325
Allowance for credit losses						(8,204)						(4,106)
Current receivables, net						256,003						170,162
Notes receivable, non-current						11,878						12,627
Allowance for credit losses, non-current						(1,070)						(892)
Non-current receivables, net						10,808						11,735
Total receivables						$	266,811					$	181,897

Allowance for Credit Losses

The adequacy of the allowance for credit losses is assessed on a quarterly basis and adjusted as deemed necessary. Receivables that are ultimately deemed to be uncollectible, and for which collection efforts have been exhausted, are written off against the allowance for credit losses. Expected credit losses for trade and franchisee accounts receivable are immaterial. 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.

Activity in the allowance for credit losses for trade, customer, and franchisee accounts receivable and notes receivable for the six months ended July 1, 2023 and June 25, 2022 were as follows:

						Six Months Ended
(In thousands)						July 1, 2023						June 25, 2022
Balance at beginning of period						$	4,998					$	6,192
Cumulative effect of adopted accounting standards						654						—
Provision for credit loss expense (benefit)						3,683						10,224
Write-offs, net of recoveries						(61)						(109)
Balance at end of period						$	9,274					$	16,307

Past due amounts are primarily attributable to trade and franchisee accounts receivable that have been generated over the past year and are past due by 1-30 days. The delinquency distribution of accounts and notes receivable past due at July 1, 2023 were as follows:

						July 1, 2023
(In thousands)						Past due						Current						Total receivables
Accounts receivable						$	27,993					$	185,904					$	213,897
Notes and interest receivable						—						13,942						13,942
Total accounts, notes and interest receivable						$	27,993					$	199,846					$	227,839

9

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(4) Securitized Accounts Receivable

In order to monetize its customer credit receivables portfolio, the Company’s Badcock Home Furniture & more (“Badcock”) segment sells beneficial interests in customer revolving lines of credit pursuant to securitization transactions. The Company securitized an additional $133.4 million of its customer credit receivables portfolio during the six months ended July 1, 2023. For additional details regarding these securitizations, refer to “Note 5 – Securitized Accounts Receivable” in the Form 10-K.

When securitized receivables are delinquent for approximately one year, the estimated uncollectible amount from the customer is written off and the corresponding securitized accounts receivable is reduced. Financial instruments that could potentially subject the Company to concentrations of credit risk consist of accounts receivable with its customers. The Company manages such risk by managing the customer accounts receivable portfolio using delinquency as a key credit quality indicator. Management believes the allowance is adequate to cover the Company’s credit loss exposure. Due to their non-recourse nature, the Company will record a gain on extinguishment for any debt secured by uncollectible accounts receivable in the future when the debt meets the extinguishment requirements in accordance with ASC 470, “Debt”.

Activity in the allowance for credit losses on securitized accounts for the six months ended July 1, 2023 and June 25, 2022 was as follows:

						Six Months Ended
(In thousands)						July 1, 2023						June 25, 2022
Balance at beginning of period						$	64,800					$	—
Cumulative effect of adopted accounting standards						13,187						—
Provision for credit loss expense						42,036						46,560
Write-offs, net of recoveries						(45,688)						(32,293)
Balance at end of period						$	74,335					$	14,267

Current amounts include receivables for customers who have made a payment in the past 30 days. Any customers who have not made a required payment within the last 30 days are considered past due. The following table presents the delinquency distribution of the carrying value of customer accounts receivable by year of origination as of July 1, 2023:

Delinquency Bucket						2023						2022						2021						Prior						Total
(in thousands)
Current						$	55,147					$	106,332					$	12,030					$	4,243					$	177,752
1-30						6,740						19,626						3,752						1,298						31,416
31-60						2,376						7,626						2,369						951						13,322
61-90						1,580						5,899						2,069						812						10,360
91+						2,314						43,742						18,929						7,303						72,288
Total						$	68,157					$	183,225					$	39,149					$	14,607					$	305,138

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Servicing revenue, interest income and interest expense generated from securitized receivables for the six months ended July 1, 2023 and June 25, 2022 were as follows:

						Six Months Ended
(In thousands)						July 1, 2023						June 25, 2022
Securitization servicing revenue						$	6,291					$	4,972
Interest income from securitization1						56,986						114,156
Interest expense, debt secured by accounts receivable						(88,144)						(128,208)

1 Includes interest income from Badcock customer receivables (refer to “Note 3 – Accounts and Notes Receivable”) and securitized receivables.

(5) Goodwill and Intangible Assets

The Company performs impairment tests for goodwill as of the end of July of each fiscal year and between annual impairment tests if an event occurs or circumstances change that would more likely than not reduce the fair values of the Company’s reporting units below their carrying values. As a result of the Company’s American Freight segment’s underperformance compared to projections for the three months ended April 1, 2023, as well as current macroeconomic conditions, the Company updated its long-term forecasts. The Company performed an interim goodwill impairment quantitative assessment as of April 1, 2023, and based on the results of the analysis, the Company recorded a non-cash goodwill impairment charge of $75.0 million, which was recorded in “Goodwill impairment” in the accompanying Condensed Consolidated Statements of Operations. Other than the American Freight segment’s accumulated goodwill impairment of $70.0 million as of December 31, 2022, no other reporting units had accumulated goodwill impairment losses recorded.

The estimated fair value of the Company’s American Freight reporting unit was calculated using a weighted-average of values determined from an income approach and a market approach. The income approach involves estimating the fair value of each reporting unit by discounting its estimated future cash flows using a discount rate that would be consistent with a market participant’s assumption. The market approach bases the fair value measurement on information obtained from observed stock prices of public companies and recent merger and acquisition transaction data of comparable entities. In order to estimate the fair value of goodwill, management must make certain estimates and assumptions that affect the total fair value of the reporting unit including, among other things, an assessment of market conditions, projected cash flows, discount rates and growth rates. Management’s estimates of projected cash flows related to the reporting unit include, but are not limited to, future earnings of the reporting unit, assumptions about the use or disposition of assets included in the reporting unit, estimated remaining lives of those assets, and future expenditures necessary to maintain the assets’ existing service potential. The assumptions in the fair value measurement reflect the current market environment, industry-specific factors and company-specific factors. A change in assumptions used in American Freight’s quantitative analysis (e.g. projected cash flows, discount rates and growth rates) could result in the reporting unit’s estimated fair value being less than the carrying value. If American Freight is unable to achieve its current financial forecast, the Company may be required to record an impairment charge in a future period related to its goodwill. As of July 1, 2023, American Freight’s goodwill totaled $225.8 million.

Changes in the carrying amount of goodwill for the six months ended July 1, 2023 are as follows:

						Vitamin Shoppe						Pet Supplies Plus												American Freight						Buddy’s						Sylvan						Total
Balance as of December 31, 2022						$	1,277					$	336,791											$	300,829					$	79,099					$	19,406					$	737,402
Acquisitions						—						3,690												—						—						—						3,690
Goodwill impairment						—						—												(75,000)						—						—						(75,000)
Disposals and purchase accounting adjustments						—						(2,611)												—						—						—						(2,611)
Balance as of July 1, 2023						$	1,277					$	337,870											$	225,829					$	79,099					$	19,406					$	663,481

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Components of intangible assets as of July 1, 2023 and December 31, 2022 were as follows:

						July 1, 2023
(In thousands)						Gross carrying amount						Accumulated amortization						Net carrying amount
Indefinite lived tradenames						$	222,703					$	—					$	222,703
Intangible assets:
Franchise and dealer agreements						$	96,005					$	(17,995)					$	78,010
Customer contracts						42,578						(10,752)						31,826
Other intangible assets						2,583						(987)						1,596
Total intangible assets						$	141,166					$	(29,734)					$	111,432

						December 31, 2022
(In thousands)						Gross carrying amount						Accumulated amortization						Net carrying amount
Indefinite lived tradenames						$	222,703					$	—					$	222,703
Intangible assets:
Franchise and dealer agreements						$	96,005					$	(14,348)					$	81,657
Customer contracts						42,484						(8,878)						33,606
Other intangible assets						2,313						(777)						1,536
Total intangible assets						$	140,802					$	(24,003)					$	116,799

(6) Revenue

For details regarding the principal activities from which the Company generates its revenue, refer to “Note 1 – Description of Business and Summary of Significant Accounting Policies Presentation” in the Form 10-K. For more detailed information regarding reportable segments, refer to “Note 13 – Segments” in this Quarterly Report. The following represents the disaggregated revenue by reportable segments for the three months ended July 1, 2023:

						Three Months Ended
						July 1, 2023
(In thousands)						Vitamin Shoppe						Pet Supplies Plus						Badcock						American Freight						Buddy’s						Sylvan						Consolidated
Retail sales						$	303,809					$	162,310					$	123,450					$	171,104					$	565					$	5					$	761,243
Wholesale sales						611						150,293						—						3,965						—						—						154,869
Total product revenue						304,420						312,603						123,450						175,069						565						5						916,112
Royalties and advertising fees						201						11,568						—						806						4,657						11,388						28,620
Financing revenue						—						—						659						11,511						—						—						12,170
Interest income						—						78						20,478						177						—						—						20,733
Interest income from amortization of original purchase discount						—						—						6,032						—						—						—						6,032
Warranty and damage revenue						—						—						11,753						8,667						1,498						—						21,918
Other revenues						106						8,534						9,849						7,197						26						316						26,028
Total service revenue						307						20,180						48,771						28,358						6,181						11,704						115,501
Rental revenue, net						—						—						—						—						7,073						—						7,073
Total rental revenue						—						—						—						—						7,073						—						7,073
Total revenue						$	304,727					$	332,783					$	172,221					$	203,427					$	13,819					$	11,709					$	1,038,686

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The following represents the disaggregated revenue by reportable segments for the six months ended July 1, 2023:

						Six Months Ended
						July 1, 2023
(In thousands)						Vitamin Shoppe						Pet Supplies Plus						Badcock						American Freight						Buddy's						Sylvan						Consolidated
Retail sales						$	624,406					$	325,569					$	255,706					$	373,253					$	1,289					$	13					$	1,580,236
Wholesale sales						1,393						302,275						—						9,016						—						—						312,684
Total product revenue						625,799						627,844						255,706						382,269						1,289						13						1,892,920
Royalties and advertising fees						380						22,452						—						1,602						9,840						21,268						55,542
Financing revenue						—						—						1,157						21,438						—						—						22,595
Interest income						—						161						42,717						354						—						—						43,232
Interest income from amortization of original purchase discount						—						—						14,269						—						—						—						14,269
Warranty and damage revenue						—						—						24,057						19,255						3,062						—						46,374
Other revenues						250						16,397						21,602						15,071						77						660						54,057
Total service revenue						630						39,010						103,802						57,720						12,979						21,928						236,069
Rental revenue, net						—						—						—						—						14,518						—						14,518
Total rental revenue						—						—						—						—						14,518						—						14,518
Total revenue						$	626,429					$	666,854					$	359,508					$	439,989					$	28,786					$	21,941					$	2,143,507

The following represents the disaggregated revenue by reportable segments for the three months ended June 25, 2022:

						Three Months Ended
						June 25, 2022
(In thousands)						Vitamin Shoppe						Pet Supplies Plus						Badcock						American Freight						Buddy’s						Sylvan						Consolidated
Retail sales						$	306,183					$	151,421					$	161,195					$	194,789					$	661					$	13					$	814,262
Wholesale sales						314						134,196						—						3,237						—						—						137,747
Total product revenue						306,497						285,617						161,195						198,026						661						13						952,009
Royalties and advertising fees						207						9,395						—						516						4,603						10,668						25,389
Financing revenue						—						—						—						10,860						—						—						10,860
Interest income						—						67						24,216						191						—						—						24,474
Interest income from amortization of original purchase discount						—						—						24,671						—						—						—						24,671
Warranty and damage revenue						—						—						13,046						10,677						1,480						—						25,203
Other revenues						193						7,654						10,171						6,158						44						831						25,051
Total service revenue						400						17,116						72,104						28,402						6,127						11,499						135,648
Rental revenue, net						—						—						—						—						7,341						—						7,341
Total rental revenue						—						—						—						—						7,341						—						7,341
Total revenue						$	306,897					$	302,733					$	233,299					$	226,428					$	14,129					$	11,512					$	1,094,998

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The following represents the disaggregated revenue by reportable segments for the six months ended June 25, 2022:

						Six Months Ended
						June 25, 2022
(In thousands)						Vitamin Shoppe						Pet Supplies Plus						Badcock						American Freight						Buddy's						Sylvan						Consolidated
Retail sales						$	616,614					$	313,970					$	327,837					$	406,301					$	1,731					$	24					$	1,666,477
Wholesale sales						488						257,428						—						6,780						—												264,696
Total product revenue						617,102						571,398						327,837						413,081						1,731						24						1,931,173
Royalties and other franchise based fees						341						18,457						—						1,064						9,427						20,177						49,466
Financing revenue						—						—						—						19,034						—						—						19,034
Interest income						—						139						51,879						387						—						—						52,405
Interest income from amortization of original purchase discount						—						—						62,277						—						—						—						62,277
Warranty and damage revenue						—						—						26,591						22,156						3,084						—						51,831
Other revenues						408						13,952						20,974						12,121						106						1,355						48,916
Total service revenue						749						32,548						161,721						54,762						12,617						21,532						283,929
Rental revenue, net						—						—						—						—						15,365						—						15,365
Total rental revenue						—						—						—						—						15,365						—						15,365
Total revenue						$	617,851					$	603,946					$	489,558					$	467,843					$	29,713					$	21,556					$	2,230,467

Contract Balances

The following table provides information about receivables and contract liabilities (deferred revenue) from contracts with customers as of July 1, 2023 and December 31, 2022:

(In thousands)						July 1, 2023						December 31, 2022
Accounts receivable						$	213,897					$	143,582
Notes receivable						13,739						14,988
Customer deposits						$	16,394					$	20,816
Gift cards and loyalty programs						9,393						9,565
Deferred franchise fee revenue						24,010						22,175
Other deferred revenue						10,279						10,688
Total deferred revenue						$	60,076					$	63,244

Deferred revenue consists of (1) amounts received for merchandise of which customers have not yet taken possession, (2) gift card or store credits outstanding, and (3) loyalty reward program credits which are primarily recognized within one year following the revenue deferral. Deferred franchise fee revenue is recognized over the term of the agreement, which is between five and twenty years. The amount of revenue recognized in the period that was included in the contract liability balance at the beginning of the period is immaterial to the condensed consolidated financial statements.

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(7) Long-Term Obligations

For details regarding the Company’s long-term debt obligations, refer to “Note 10 – Long-Term Obligations” in the Form 10-K.

Long-term obligations at July 1, 2023 and December 31, 2022 were as follows:

(In thousands)						July 1, 2023						December 31, 2022
Term loans, net of debt issuance costs
First lien term loan, due March 10, 2026						$	1,066,349					$	779,777
Second lien term loan, due September 10, 2026						290,566						289,435
Total term loans, net of debt issuance costs						1,356,915						1,069,212
ABL Revolver						146,500						295,000
Other long-term obligations						4,007						6,147
Finance lease liabilities						32,375						11,055
Total long-term obligations						1,539,797						1,381,414
Less current installments						13,192						6,935
Total long-term obligations, net						$	1,526,605					$	1,374,479

First Lien Credit Agreement

On February 2, 2023, the Company entered into the Third Amendment to the First Lien Credit Agreement, which amends the First Lien Credit Agreement dated as of March 10, 2021 to provide for an incremental term loan facility in the principal amount of $300.0 million and change the reference rate under the First Lien Credit Agreement from LIBOR to SOFR. The net proceeds were used to repay certain amounts outstanding under the Company’s ABL Credit Agreement.

Compliance with Debt Covenants

The Company’s revolving credit and long-term debt agreements impose restrictive covenants on it, including requirements to meet certain ratios. As of July 1, 2023, the Company was in compliance with all covenants under these agreements and, based on a continuation of current operating results, the Company expects to be in compliance for the next twelve months.

(8) Income Taxes

Overview

For the three months ended July 1, 2023 and June 25, 2022, the Company had an effective tax rate of 21.4% and 24.9%, respectively. For the six months ended July 1, 2023 and June 25, 2022, the Company had an effective tax rate of 11.7% and 24.5%, respectively. The changes in the effective tax rate compared to the prior year are due to a current year projected pre-tax loss compared to prior year pre-tax income and a current year non-cash goodwill impairment charge that is nondeductible for tax purposes.

Tax Receivable Agreement

On July 10, 2019, the Company entered into a tax receivable agreement (the “Tax Receivable Agreement”) with the then-existing non-controlling interest holders (the “Buddy’s Members”) that provides for the payment by the Company to the Buddy’s Members of 40% of the cash savings, if any, in federal, state and local taxes that the Company realizes or is deemed to realize as a result of any increases in tax basis of the assets of Franchise Group New Holdco, LLC (“New Holdco”) resulting from future redemptions or exchanges of New Holdco units.

Payments will be made when such Tax Receivable Agreement related deductions actually reduce the Company’s income tax liability. No payments were made to the Buddy’s Members pursuant to the Tax Receivable Agreement during the six months ended July 1, 2023. Total amounts due under the Tax Receivable Agreement to the Buddy’s Members as of July 1, 2023 were $15.4 million, with $1.0 million in “Other current liabilities” and the remaining amount recorded in “Other non-current liabilities” in the accompanying Condensed Consolidated Balance Sheets. Pursuant to the Company’s election under Section 754 of the Internal Revenue Code, the Company has obtained an increase in its share of the tax basis in the net assets of

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New Holdco when the New Holdco units were redeemed or exchanged by the non-controlling interest holders and other qualifying transactions. The Company has treated the redemptions and exchanges of New Holdco units by the non-controlling interest holders as direct purchases of New Holdco units for U.S. federal income tax purposes. This increase in tax basis will reduce the amounts that it would otherwise pay in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.

(9) Net Income (Loss) Per Share

Diluted net income (loss) per share is computed using the weighted-average number of common stock and, if dilutive, the potential common stock outstanding during the period. Potential common stock consists of the incremental common stock issuable upon the exercise of stock options and vesting of restricted stock units. The dilutive effect of outstanding stock options and restricted stock units is reflected in diluted earnings per share by application of the treasury stock method.

The following table sets forth the calculations of basic and diluted net income (loss) per share:

						Three Months Ended												Six Months Ended
(In thousands, except for share and per share amounts)						July 1, 2023						June 25, 2022						July 1, 2023						June 25, 2022
Net income (loss) attributable to Franchise Group						$	(50,796)					$	40,983					$	(159,113)					$	53,301
Less: Preferred dividend declared						(2,129)						(2,129)						(4,257)						(4,257)
Adjusted net income (loss) available to Common Stockholders						$	(52,925)					$	38,854					$	(163,370)					$	49,044
Weighted-average common stock outstanding						35,177,146						40,356,299						35,089,660						40,331,855
Net dilutive effect of stock options and restricted stock						—						770,306						—						816,813
Weighted-average diluted shares outstanding						35,177,146						41,126,605						35,089,660						41,148,668
Net income (loss) per share:
Basic net income per share						$	(1.50)					$	0.96					$	(4.66)					$	1.22
Diluted net income per share						(1.50)						0.94						(4.66)						1.19

(10) Equity & Stock Compensation Plans

 

For a discussion of our stock-based compensation plans, refer to “Note 12 – Stock Compensation Plans” in the Form 10-K.

Restricted Stock Units

The Company has awarded service-based restricted stock units (the “RSUs”) to its non-employee directors, officers and certain employees. The Company recognizes expense based on the estimated fair value of the RSUs granted over the vesting period on a straight-line basis. The fair value of RSUs is determined using the Company’s closing stock price on the date of the grant. At July 1, 2023, unrecognized compensation costs related to the RSUs were $6.8 million. These costs are expected to be recognized through fiscal year 2026.

The following table summarizes the status of the RSUs as of and changes during the six months ended July 1, 2023:

						Number of RSUs						Weighted average fair value at grant date
Balance as of December 31, 2022						273,302						$	36.39
Granted						284,818						27.89
Vested						(55,751)						29.18
Canceled						(130,919)						30.59
Balance as of July 1, 2023						371,450						$	33.00

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Performance Restricted Stock Units

The Company has awarded performance restricted stock units (the “PRSUs”) to its officers and certain employees. The Company recognizes expense based on the estimated fair value of the PRSUs granted over the vesting period on a straight-line basis. The fair value of PRSUs is determined using the Company’s closing stock price on the date of the grant. At July 1, 2023, unrecognized compensation costs related to the PRSUs were $0.1 million. These costs are expected to be recognized through fiscal year 2025.

The following table summarizes the status of the PRSUs as of and changes during the six months ended July 1, 2023:

						Number of PRSUs						Weighted average fair value at grant date
Balance as of December 31, 2022						364,857						$	32.92
Granted						217,088						33.79
Adjusted for performance results achieved(1)						154,904						24.84
Vested						(282,256)						24.82
Canceled						(86,475)						46.50
Balance as of July 1, 2023						368,118						$	33.05

(1) Represents an adjustment for performance results achieved related to outstanding 2020 PRSU shares that reached 200% achievement in March 2023.

Market-Based Performance Restricted Stock Units

The Company has awarded market-based performance restricted stock units (the “MPRSUs”) to its officers and certain employees. The Company recognizes expense based on the estimated fair value of the MPRSUs granted over the vesting period on a straight-line basis. The fair value of MPRSUs is determined using a Monte Carlo simulation valuation model to calculate grant date fair value. Compensation expense is recognized over the requisite service period using the proportionate amount of the award’s fair value that has been earned through service to date. Under GAAP, compensation expense is not reversed if the award target is not achieved. At July 1, 2023, unrecognized compensation costs related to the MPRSUs were $5.3 million. These costs are expected to be recognized through fiscal year 2024.

The following table summarizes the status of the MPRSUs as of and changes during the six months ended July 1, 2023:

						Number of MPRSUs						Weighted average fair value at grant date
Balance as of December 31, 2022						840,926						$	21.77
Granted						—						—
Vested						—						—
Canceled						(125,500)						30.96
Balance as of July 1, 2023						715,426						$	20.16

Stock Options

The Company has awarded stock options to its non-employee directors and officers. As of July 1, 2023, there were 206,376 stock options outstanding. During the six months ended July 1, 2023, there were no stock options granted, 48,188 stock options exercised, and no stock options forfeited. The weighted-average exercise price of stock options outstanding was $9.32 per share as of July 1, 2023. All outstanding stock options will expire in fiscal years 2023 and 2024.

At July 1, 2023, there were zero non-vested stock options outstanding and there was no remaining unrecognized compensation cost related to vested stock options.

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The following table summarizes information about stock options outstanding and exercisable at July 1, 2023:

						Options Outstanding and Exercisable
Range of exercise prices						Number						Weighted average exercise price						Weighted average remaining contractual life (in years)
$0.00 - $10.39						175,000						$	8.85					0.5
$10.40 - $11.97						17,487						11.93						1.2
$11.98 - $12.01						13,889						12.01						0.5
						206,376						$	9.32

Stock Compensation Expense

The Company recorded $2.8 million and $10.9 million in stock-based compensation expense during the six months ended July 1, 2023 and June 25, 2022, respectively.

Long-Term Incentive Plans

The Company has long-term incentive plans at various operating companies which are recorded as liabilities. Upon vesting, the awards granted under these plans may be settled in cash or shares of the Company’s stock at the Company’s discretion. The total aggregate liability for these plans as of July 1, 2023 is $12.7 million, recorded in “Other non-current liabilities” on the Condensed Consolidated Balance Sheets. During the six months ended July 1, 2023, total expense recognized related to these plans was $4.4 million.

(11) Related Party Transactions

The Company considers any of its directors, executive officers or beneficial owners of more than 5% of its common stock, or any member of the immediate family of the foregoing persons, to be related parties.

Messrs. Kahn and Laurence

Brian Kahn and Vintage Capital Management, LLC and its affiliates (“Vintage”), in aggregate, held approximately 34.8% of the aggregate voting power of the Company through their ownership of common stock as of July 1, 2023. Brian Kahn and Andrew Laurence are principals of Vintage. Mr. Kahn is a member of the Board of Directors, President and Chief Executive Officer of the Company. Mr. Laurence is an Executive Vice President of the Company and served as a member of the Company’s Board of Directors until May 2021.

On May 10, 2023, the Company announced that it has entered into a definitive agreement and plan of merger with Freedom VCM, Inc., a Delaware corporation (“Parent”) and Freedom VCM Subco, Inc., a Delaware corporation and wholly owned subsidiary of Parent (the “Merger Agreement”), pursuant to which members of the senior management team of the Company led by Brian Kahn, the Company’s Chief Executive Officer (collectively with affiliates and related parties of the senior management team, the “Management Group”), have agreed to acquire approximately 64% of the Company’s issued and outstanding common stock that the Management Group does not presently own or control (the “Proposed Merger”). For more detailed information regarding the Merger Agreement and Proposed Merger, refer to “Note 2 – Acquisitions and Business Combinations” in this Quarterly Report.

Buddy’s Franchises. Mr. Kahn’s brother-in-law owns eight Buddy’s franchises. All transactions between the Company’s Buddy’s segment and Mr. Kahn’s brother-in-law are conducted on a basis consistent with other franchisees.

Tax Receivable Agreement

Refer to “Note 8 – Income Taxes” for detail regarding the amounts due under the Tax Receivable Agreement to the Buddy’s Members.

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(12) Commitments and Contingencies

    

In the ordinary course of operations, the Company may become a party to legal proceedings. Based upon information currently available, management believes that such legal proceedings, individually or in the aggregate, will not have a material adverse effect on the Company’s business, financial condition, cash flows, or results of operations.

The Company is party to claims and lawsuits that are considered to be ordinary, routine litigation incidental to the business, including claims and lawsuits concerning the fees charged to customers for various products and services, relationships with franchisees, intellectual property disputes, employment matters, and contract disputes. Although the Company cannot provide assurance that it will ultimately prevail in each instance, it believes the amount, if any, it will be required to pay in the discharge of liabilities or settlements in these claims will not have a material adverse impact on its consolidated results of operations, financial position, or cash flows.

Refer to “Note 14 – Subsequent Events” for detail regarding litigation related to the Proposed Merger.

Guarantees

The Company remains secondarily liable under various real estate leases that were assigned to franchisees who acquired Pet Supplies Plus or Vitamin Shoppe stores from the Company. In the event of the failure of an acquirer to pay lease payments, the Company could be obligated to pay the remaining lease payments which extend through 2033 and in aggregate are $34.4 million and $30.2 million as of July 1, 2023 and December 31, 2022, respectively. In certain cases, the Company could attempt to recover from the franchisees’ personal assets should the Company be required to pay remaining lease obligations.

If the Company is required to make payments under any of these guarantees, the Company could seek to recover those amounts from the franchisees or in some cases their affiliates. The Company believes that payment under any of these guarantees is remote as of July 1, 2023.

(13) Segments

The Company’s operations are conducted in six reportable business segments: Vitamin Shoppe, Pet Supplies Plus, Badcock, American Freight, Buddy’s, and Sylvan. The Company defines its segments as those operations which results its chief operating decision maker regularly reviews to analyze performance and allocate resources.

The Vitamin Shoppe segment is an omnichannel specialty retailer and wellness lifestyle company with the mission of providing customers with the most trusted products, guidance, and services to help them become their best selves, however they define it. The Vitamin Shoppe segment offers one of the largest varieties of products among vitamin, mineral and supplement retailers. The broad product offering enables the company to provide customers with a depth of selection of products that may not be readily available at other specialty retailers or mass merchants, such as discount stores, supermarkets, drug stores and wholesale clubs. The Vitamin Shoppe continues to focus on improving the customer experience through the roll-out of initiatives including increasing customer engagement and personalization, redesigning the omnichannel experience (including in stores as well as through the internet and mobile devices), growing private brands and improving the effectiveness of pricing and promotions. Vitamin Shoppe is headquartered in Secaucus, New Jersey.

The Pet Supplies Plus segment is a leading omnichannel retail chain and franchisor of pet supplies and services. Pet Supplies Plus has a diversified revenue model comprised of Company-owned store revenue, franchise royalties and revenue generated by the wholesale distribution of products to its franchisees. Pet Supplies Plus offers a curated selection of premium brands, proprietary private labels and specialty products with retail price parity with online players. Additionally, Pet Supplies Plus offers grooming, pet wash and other services in most of its locations. The Pet Supplies Plus segment operates under the “Pet Supplies Plus” and "Wag N' Wash" brands and is headquartered in Livonia, Michigan.

The Badcock segment is a retailer of furniture, appliances, bedding, electronics, home office equipment, accessories and seasonal items in a showroom format. Additionally, Badcock offers multiple and flexible payment solutions and credit options through its consumer and third-party financing services. The Badcock segment operates under the “Badcock Home Furniture & more” brand and is headquartered in Mulberry, Florida.

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. American Freight buys direct from manufacturers and sells direct in warehouse-style stores. By cutting out the middleman and keeping its overhead costs low, American Freight can offer quality products at low prices. American Freight provides customers with multiple payment options providing access to high-quality products and brand name appliances that may otherwise remain aspirational to some of its customers.

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American Freight also serves as a liquidation channel for major appliance vendors. American Freight operates specialty distribution centers that test every out-of-box appliance before it is offered for sale to customers. Customers typically are covered by the original manufacturer’s warranty and are offered the opportunity to purchase a full suite of extended-service plans and services. The American Freight segment operates under the “American Freight” brand and is headquartered in Delaware, Ohio.

The Buddy’s segment is a specialty retailer of high quality, name brand consumer electronic, residential furniture, appliances and household accessories through rent-to-own agreements. The rental transaction allows customers the opportunity to benefit from the use of high-quality products under flexible rental purchase agreements without long-term obligations. The Buddy’s segment operates under the “Buddy’s” brand and is headquartered in Orlando, Florida.

The Sylvan segment is an established and growing franchisor of supplemental education for Pre-K-12 students and families. Sylvan addresses the full range of student needs with a broad variety of academic curriculums delivered in an omnichannel format. The Sylvan platform provides franchisees with the ability to provide a range of services, including on premises, virtually, at a satellite location, and in the home. Sylvan is headquartered in Hunt Valley, Maryland.

Refer to “Note 6 – Revenue” for total revenues by segment. Operating income (loss) by segment were as follows:

						Three Months Ended												Six Months Ended
(In thousands)						July 1, 2023						June 25, 2022						July 1, 2023						June 25, 2022
Income (loss) from operations:
Vitamin Shoppe						$	28,651					$	31,017					$	55,846					$	66,371
Pet Supplies Plus						17,589						18,654						36,955						35,675
Badcock						2,859						30,903						17,602						101,134
American Freight						(21,890)						5,029						(108,519)						16,242
Buddy’s						2,894						3,561						6,633						7,626
Sylvan						1,823						1,633						2,974						2,581
Total Segments						31,926						90,797						11,491						229,629
Corporate						(9,426)						(13,691)						(15,520)						(22,157)
Consolidated income (loss) from operations						$	22,500					$	77,106					$	(4,029)					$	207,472

Total assets by segment were as follows:

(In thousands)						July 1, 2023						December 31, 2022
Total assets:
Vitamin Shoppe						$	620,559					$	625,543
Pet Supplies Plus						996,304						977,234
Badcock						730,969						789,727
American Freight						843,288						904,378
Buddy’s						133,091						135,192
Sylvan						87,282						90,361
Total Segments						3,411,493						3,522,435
Corporate						160,368						107,977
Consolidated total assets						$	3,571,861					$	3,630,412

(14) Subsequent Events

Redemption of Preferred Stock

On July 19, 2023, the Company issued a notice of redemption for all outstanding shares of its 7.50% Series A Cumulative Perpetual Preferred Stock (the “Preferred Stock”). The Company is redeeming the Preferred Stock in connection

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with the Proposed Merger and in accordance with the terms and conditions of the Merger Agreement. The Redemption is contingent upon the Company’s successful completion of the Proposed Merger and, in the event the Proposed Merger does not occur and the Merger Agreement is terminated in accordance with its terms, the notice of redemption will be deemed rescinded and the Redemption will not occur.

The Preferred Stock will be redeemed in cash at a redemption price equal to $25.00 per share plus any accrued and unpaid dividends from the last dividend payment date, if any, up to but not including the Redemption Date (the “Redemption Price”). The Redemption Price is expected to be paid on August 18, 2023 or such later date as the parties to the Merger Agreement may agree, but in no event later than one business day following the Effective Time of the Proposed Merger (the “Redemption Date”). From and after the Redemption Date, dividends will cease to accrue on the Preferred Stock and the Preferred Stock will no longer be deemed outstanding and all rights of the holders of the Preferred Stock, other than the right to receive the Redemption Price upon Redemption, will cease and terminate. Upon Redemption, the Preferred Stock will be delisted from trading on the Nasdaq Global Market.

Litigation Related to the Proposed Merger

As disclosed in the definitive proxy statement filed by the Company with the SEC on July 14, 2023 (the “Definitive Proxy Statement”), between June 14, 2023 and July 13, 2023, the Company received from purported stockholders of the Company (i) five demand letters relating to the Proposed Merger and (ii) five demands pursuant to Section 220 of the General Corporation Law of the State of Delaware seeking certain books and records of the Company related to the Proposed Merger and related matters.

Following the filing of the Definitive Proxy Statement, one lawsuit relating to the Proposed Merger was filed: John Pels v. Franchise Group, Inc., et al., Case 23 CVH 07 0508 (Ohio C.P., July 20, 2023), (the “Action”) and the Company received from purported Company stockholders (i) two additional Section 220 books and records demands (cumulatively with the Section 220 books and records demands disclosed in the Definitive Proxy Statement, the “220 Demands”) and (ii) nine additional demand letters relating to the Proposed Merger (cumulatively with the demand letters disclosed in the Definitive Proxy Statement, the “Demand Letters” and together with the 220 Demands and the Actions, the “Matters”). The Matters allege, among other things, that the defendants named therein violated Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 14a-9 promulgated thereunder because the preliminary proxy statement filed with the SEC in connection with the Proposed Merger or Definitive Proxy Statement allegedly omit or misstate certain material information, and/or were allegedly in breach of their obligations under state law and/or common law. The Action seeks, among other things, injunctive relief preventing the consummation of the Proposed Merger, rescission of the Proposed Merger if it is consummated, damages and attorneys’ fees.

The Company believes that the claims asserted in the Matters are without merit and that no supplemental disclosure is required under applicable law. However, in order to moot unmeritorious disclosure claims, to avoid the risk of the Matters delaying or adversely affecting the Proposed Merger and to minimize the costs, risks and uncertainties inherent in litigation, without admitting any liability or wrongdoing, the Company determined to voluntarily supplement the Definitive Proxy Statement as described in the supplement to the Definitive Proxy Statement filed on August 8, 2023.

This Action is not expected to affect the timing of the Company’s special meeting of stockholders to be held for the purpose of voting upon, among other things, the Proposed Merger, which is scheduled to be held on August 17, 2023, or the amount of the consideration to be paid to the Company’s stockholders in connection with the Proposed Merger.

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ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Special Note Regarding Forward-Looking Statements

 

This Quarterly Report contains forward-looking statements concerning our business, operations, and financial performance and condition as well as our plans, objectives, and expectations for our business operations and financial performance and condition. Any statements contained herein that are not of historical facts may be deemed to be forward-looking statements. You can identify these statements by words such as “aim,” “anticipate,” “assume,” “believe,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “positioned,” “should,” “target,” “will,” “would,” and other similar expressions that are predictions of or indicate future events and future trends. These forward-looking statements are based on current expectations, estimates, forecasts, and projections about our business and the industry in which we operate and our management’s beliefs and assumptions. They are not guarantees of future performance or development and involve known and unknown risks, uncertainties, and other factors that are in some cases beyond our control. Additionally, other factors may cause actual results to differ materially from historical results or from any results expressed or implied by such forward-looking statements. Factors that may cause such differences include, but are not limited to, the risks described under “Item 1A-Risk Factors,” including:

•the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement;

•the inability to complete the Proposed Merger due to the failure to obtain stockholder approval for the Proposed Merger or the failure to satisfy other conditions to completion of the Proposed Merger;

•risks related to disruption of management’s attention from our ongoing business operations due to the Proposed Merger;

•unexpected costs, charges or expenses resulted from the Proposed Merger;

•our ability to retain and hire key personnel in light of the Proposed Merger;

•certain restrictions during the pendency of the Proposed Merger that may impact our ability to pursue certain business opportunities or strategic transactions;

•litigation relating to the Proposed Merger has and could be instituted against the parties to the Merger Agreement or their respective directors, managers or officers, including the effects of any outcomes related thereto;

•the effect of the announcement of the Proposed Merger on our relationships with our franchisees, dealers and customers, operating results and business generally;

•the risk that the Proposed Merger will not be consummated in a timely manner, if at all;

•the market's perception of our prospects could be adversely affected if the Proposed Merger were delayed or were not consummated;

•the risk that natural disasters, public health crises, political uprisings, uncertainty or unrest, or other catastrophic events could adversely affect our operations and financial results, including the impact of the COVID-19 pandemic on manufacturing operations and our supply chain, customer traffic and our operations in general;

•the possibility that any of the anticipated benefits of our acquisitions or dispositions will not be realized or will not be realized within the expected time period, our businesses and our acquisitions may not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected, or revenues following our acquisitions may be lower than expected or we are unable to sell non-core assets;

•our ability to identify and consummate attractive acquisitions on favorable terms;

•additional leverage incurred in connection with acquisitions or other capital expenditure initiatives;

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•our inability to grow on a sustainable basis;

•changes in operating costs, including employee compensation and benefits and increased transportation costs and delays attributed to global supply chain challenges;

•higher inflation rates, which may result in reduced customer traffic or impact discretionary consumer spending;

•the seasonality of the products and services we provide in certain of our business segments;

•departures of key executives, senior management members or directors;

•our ability to attract additional talent to our teams;

•our ability to maintain an active trading market for our common stock on The Nasdaq Global Market (“Nasdaq”);

•the effect of regulation of the products and services that we offer, including changes in laws and regulations and the costs and administrative burdens associated with complying with such laws and regulations;

•our ability to develop and maintain relationships with our third-party product and service providers;

•our ability to offer merchandise and services that our customers demand;

•our ability to successfully manage our inventory levels and implement initiatives to improve inventory management and other capabilities;

•competitive conditions in the retail industry and consumer services markets;

•the performance of our products within the prevailing industry;

•worldwide economic conditions and business uncertainty, the availability of consumer and commercial credit, higher debt capital costs, change in consumer confidence, tastes, preferences and spending, and changes in vendor relationships;

•the uncertainty of public health measures on our business and results of operations;

•disruption of manufacturing, warehouse or distribution facilities or information systems;

•the continued reduction of our competitors promotional pricing on new-in-box appliances, potentially adversely impacting our sales of out-of-box appliances and associated margin;

•any potential non-compliance, fraud or other misconduct by our franchisees, dealers, or employees;

•our ability and the ability of our franchisees and dealers to comply with legal and regulatory requirements;

•failures by our franchisees, the franchisees’ employees, and our dealers to comply with their contractual obligations to us and with laws and regulations, to the extent these failures affect our reputation or subject us to legal risk;

•our ability to attract and retain new franchisees and dealers and the ability of our franchisees and dealers to open new stores and territories and operate them successfully;

•the availability of suitable store locations at appropriate lease terms;

•the ability of our franchisees and dealers to generate sufficient revenue to pay us royalties and fees;

•our ability to manage Company-owned stores;

•our exposure to litigation and any governmental investigations;

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•our ability and our franchisees’ and dealers’ ability to protect customers’ personal information, including from a cyber-security incident;

•the impact of identity-theft concerns on customer attitudes toward our services;

•our ability to access the credit markets and satisfy our covenants to lenders;

•our operating subsidiary’s potential repurchase of certain finance receivables if certain representations and warranties about the quality and nature of such receivables are breached, which may negatively impact our results of operations, financial condition, and liquidity;

•a decline in the credit quality of our customers, a decrease in our credit sales, or other factors outside of our control, which could lead to a decrease in our product sales and profitability;

•our reliance on technology systems and electronic communications; and

•other factors, including the risk factors discussed in this Quarterly Report.

Potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on the forward-looking statements. These forward-looking statements speak only as of the date of this quarterly report. Unless required by law, we do not intend to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise. A potential investor or other vendor should, however, review the factors and risks we describe in the reports we will file from time to time with the U.S. Securities and Exchange Commission (“SEC”) after the date of this Quarterly Report.

Overview

 

We are an owner and operator of franchised and franchisable businesses that continually looks to grow our portfolio of brands while utilizing our operating and capital allocation philosophies to generate strong cash flows. We have a diversified and growing portfolio of highly recognized brands. Our asset-light business model is designed to generate consistent, recurring revenue and strong operating margins and requires limited maintenance capital expenditures. As a multi-brand operator, we continually look to diversify and grow our portfolio of brands either through acquisition or organic brand development. Our acquisition strategy typically targets businesses that are highly cash flow generative with compelling unit economics that can be scaled by adding franchise and company owned units, or that can be restructured to enhance performance and value to Franchise Group. We strive to create value for our stockholders by generating free cash flow and capital-efficient growth across economic cycles.

Our business lines include The Vitamin Shoppe (“Vitamin Shoppe”), Pet Supplies Plus, Badcock Home Furniture & more (“Badcock”), American Freight, Buddy’s Home Furnishings (“Buddy’s”), and Sylvan Learning (“Sylvan”). Refer to “Note 13 – Segments” in this Quarterly Report for additional information.

Our revenue is primarily derived from merchandise sales, rental revenue, and service revenues comprised of royalties and other required fees from our franchisees, dealers and financing programs.

In evaluating our performance, management focuses on Adjusted EBITDA as a measure of the cash flow from recurring operations from the businesses. Adjusted EBITDA represents net income (loss), before income taxes, interest expense, depreciation and amortization, and certain other items.

Proposed Merger

On May 10, 2023, we announced that we had entered into a definitive agreement and plan of merger with Freedom VCM, Inc., a Delaware corporation (“Parent”) and Freedom VCM Subco, Inc., a Delaware corporation and wholly owned subsidiary of Parent (the “Merger Agreement”), pursuant to which members of our senior management team led by Brian Kahn, our Chief Executive Officer (collectively with affiliates and related parties of our senior management team, the “Management Group”), have agreed to acquire approximately 64% of our issued and outstanding common stock that the Management Group does not presently own or control(the “Proposed Merger”). Under the terms of the Proposed Merger, our common stockholders, other than the Management Group, are entitled to receive $30.00 in cash for each share of our common stock they hold.

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The Proposed Merger is anticipated to close in the second half of 2023, subject to satisfaction or waiver of the closing conditions, including approval by regulatory authorities and our stockholders, including approval by a majority of the shares of our common stock not owned or controlled by the Management Group. Upon completion of the Proposed Merger, we will become a private company and will no longer be publicly listed or traded on Nasdaq.

Additional information about the Merger Agreement and the Proposed Merger is set forth in our Definitive Proxy Statement on Schedule 14A filed with the SEC on July 14, 2023.

Impact of COVID-19

As of the date of this Quarterly Report, we have experienced some supply chain delays and disruptions, including adverse consequences to our supply chain function from decreased procurement volumes in connection with the COVID-19 pandemic. We believe that the lingering effects of the COVID-19 pandemic could negatively impact our business and financial results by weakening demand for our products and services, further disrupting our supply chain or affecting our ability to raise capital from financial institutions. As events continue to change, we are unable to accurately predict the impact that the COVID-19 pandemic will have on our results of operations due to uncertainties including, but not limited to, the impact of new subvariants and the public's or governments' response to the outbreak; however, we are actively managing our business to respond to the impact.

Results of Operations

The table below shows results of operations for the three and six months ended July 1, 2023 and June 25, 2022.

						Three Months Ended																								Six Months Ended
																		Change																								Change
(In thousands)						July 1, 2023						June 25, 2022						$						%						July 1, 2023						June 25, 2022						$						%
Total revenues						$	1,038,686					$	1,094,998					$	(56,312)					(5.1)		%				$	2,143,507					$	2,230,467					$	(86,960)					(3.9)		%
Income from operations						22,500						77,106						(54,606)						(70.8)		%				(4,029)						207,472						(211,501)						(101.9)		%
Net income						$	(50,796)					$	40,983					$	(91,779)					(223.9)		%				$	(159,113)					$	53,301					$	(212,414)					(398.5)		%

Revenues. The table below sets forth the components and changes in our revenues for the three and six months ended July 1, 2023 and June 25, 2022.

						Three Months Ended																								Six Months Ended
																		Change																								Change
(In thousands)						July 1, 2023						June 25, 2022						$						%						July 1, 2023						June 25, 2022						$						%
Product						$	916,112					$	952,009					$	(35,897)					(3.8)		%				$	1,892,920					$	1,931,173					$	(38,253)					(2.0)		%
Service and other						115,501						135,648						(20,147)						(14.9)		%				236,069						283,929						(47,860)						(16.9)		%
Rental						7,073						7,341						(268)						(3.7)		%				14,518						15,365						(847)						(5.5)		%
Total revenue						$	1,038,686					$	1,094,998					$	(56,312)					(5.1)		%				$	2,143,507					$	2,230,467					$	(86,960)					(3.9)		%

For the three months ended July 1, 2023, total revenues decreased $56.3 million, or (5.1)%, to $1,038.7 million compared to $1,095.0 million in the same period last year. This decrease was primarily due to a $61.1 million decrease in revenue at our Badcock segment and a $23.0 million decrease in revenue at our American Freight segment. These decreases were partially offset by a $30.1 million increase in revenue at our Pet Supplies Plus segment.

For the six months ended July 1, 2023, total revenues decreased $87.0 million, or (3.9)%, to $2,143.5 million compared to $2,230.5 million in the same period last year. The decrease was primarily due to a $130.1 million decrease in revenue at our Badcock segment and a $27.9 million decrease in revenue at our American Freight segment. These decreases were partially offset by a $62.9 million increase in revenue at our Pet Supplies Plus segment.

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Operating expenses.    The following table details the amounts and changes in our operating expenses for the three and six months ended July 1, 2023 and June 25, 2022.

						Three Months Ended																								Six Months Ended
																		Change																								Change
(In thousands)						July 1, 2023						June 25, 2022						$						%						July 1, 2023						June 25, 2022						$						%
Cost of revenue:
Product						$	621,482					$	600,780					$	20,702					3.4		%				$	1,278,386					$	1,217,364					$	61,022					5.0		%
Service and other						8,634						8,732						(98)						(1.1)		%				18,213						17,395						818						4.7		%
Rental						2,507						2,741						(234)						(8.5)		%				5,133						5,603						(470)						(8.4)		%
Total cost of revenue						632,623						612,253						20,370						3.3		%				1,301,732						1,240,362						61,370						4.9		%
Selling, general, and administrative expenses						383,563						405,639						(22,076)						(5.4)		%				770,804						782,633						(11,829)						(1.5)		%
Goodwill impairment expense						—						—						—						100.0		%				75,000						—						75,000						—		%
Total operating expenses						$	1,016,186					$	1,017,892					$	(1,706)					(0.2)		%				$	2,147,536					$	2,022,995					$	124,541					6.2		%

For the three months ended July 1, 2023, total operating expenses were $1,016.2 million compared to $1,017.9 million in the same period last year, representing a decrease of $1.7 million, or (0.2)%. This decrease was primarily due to a $33.0 million decrease in operating expenses at our Badcock segment, partially offset by a $31.1 million increase in operating expenses at our Pet Supplies Plus segment.

For the six months ended July 1, 2023, total operating expenses were $2,147.5 million compared to $2,023.0 million in the same period last year, representing an increase of $124.5 million, or 6.2%. This increase was primarily due to a $96.9 million increase in operating expenses at our American Freight segment, $75.0 million of which was due to a non-cash goodwill impairment charge, as further discussed in “Note 5 - Goodwill and Intangible Assets” in the Notes to the Consolidated Financial Statements in this Quarterly Report. The remaining increase was due to a $61.6 million increase in operating expenses at our Pet Supplies Plus segment and a $19.1 million increase in operating expenses at our Vitamin Shoppe segment, partially offset by a $46.5 million decrease in operating expenses at our Badcock segment.

Non-operating income (expense) decreased $64.6 million and $39.2 million for the three and six months ended July 1, 2023, respectively, due to the following:

Gain on sale-leaseback transactions. Gain on sale-leaseback transactions decreased $49.9 million for the three and six months ended July 1, 2023 compared to the prior year due to sale-leaseback transactions in the three months ended June 25, 2022.

Other. Other expense increased $16.6 million for the three months ended July 1, 2023 compared to the prior year due to a $16.6 million increase in the loss related to our investment in NextPoint Acquisition Corp. compared to the prior period. For the six months ended July 1, 2023, other expense decreased $5.2 million due to a decrease in the loss related to our investment in NextPoint Acquisition Corp. compared to the prior period.

Interest expense, net. Interest expense, net decreased $5.5 million and $10.7 million for the three and six months ended July 1, 2023, respectively. These decreases were due primarily to decreases of $22.9 million and $40.1 million of interest expense related to the Badcock securitized receivables portfolio for the three and six months ended July 1, 2023, respectively, partially offset by $14.9 million and $26.5 million in additional interest expense for the three and six months ended July 1, 2023, respectively, related to the First and Second Lien Term Loans and revolving credit facility (the “ABL Revolver”).

Income tax benefit. Our effective tax rate, including discrete income tax items, was 11.7% and 24.5% for the six months ended July 1, 2023 and June 25, 2022, respectively. The changes in the effective tax rate for the six months ended July 1, 2023 compared to the same period in the prior year are due to a current year projected pre-tax loss compared to prior year pre-tax income and a current year non-cash goodwill impairment charge that is nondeductible for tax purposes.

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Segment Information

We, through our franchisees and Company-owned stores, operate a system of point of sale retail and rent-to-own locations. Our operations are conducted in six reporting business segments: Vitamin Shoppe, Pet Supplies Plus, Badcock, American Freight, Buddy’s, and Sylvan. Refer to “Note 13 – Segments” in this Quarterly Report for additional information.

Vitamin Shoppe

The following table summarizes the operating results of our Vitamin Shoppe segment:

						Three Months Ended																								Six Months Ended
																		Change																								Change
(In thousands)						July 1, 2023						June 25, 2022						$						%						July 1, 2023						June 25, 2022						$						%
Total revenues						$	304,727					$	306,897					$	(2,170)					(0.7)		%				$	626,429					$	617,851					$	8,578					1.4		%
Operating expenses						276,076						275,880						196						0.1		%				570,583						551,480						19,103						3.5		%
Segment income						$	28,651					$	31,017					$	(2,366)					(7.6)		%				$	55,846					$	66,371					$	(10,525)					(15.9)		%

Total revenue for the three months ended July 1, 2023 for our Vitamin Shoppe segment decreased $2.2 million, or 0.7%, compared to the same period in the prior year. The decrease was primarily due to lower store count. Total revenue for the six months ended July 1, 2023 increased $8.6 million, or 1.4%, compared to the same period in the prior year. The increase in revenue was driven primarily by higher average transaction values and increased store traffic compared to the prior year period.

Operating expenses for our Vitamin Shoppe segment remained relatively flat with an increase of $0.2 million, or 0.1%, for the three months ended July 1, 2023. For the six months ended July 1, 2023, operating expenses increased $19.1 million, or 3.5%, compared to the same period in the prior year primarily due to an increase in cost of goods sold of $14.1 million, which was primarily due to increased sales and merchandise mix.

Pet Supplies Plus

The following table summarizes the operating results of our Pet Supplies Plus segment:

						Three Months Ended																								Six Months Ended
																		Change																								Change
(In thousands)						July 1, 2023						June 25, 2022						$						%						July 1, 2023						June 25, 2022						$						%
Total revenues						$	332,783					$	302,733					$	30,050					9.9		%				$	666,854					$	603,946					$	62,908					10.4		%
Operating expenses						315,194						284,079						31,115						11.0		%				629,899						568,271						61,628						10.8		%
Segment income						$	17,589					$	18,654					$	(1,065)					(5.7)		%				$	36,955					$	35,675					$	1,280					3.6		%

Total revenue for our Pet Supplies Plus segment increased $30.1 million, or 9.9%, for the three months ended July 1, 2023 as compared to the same period last year. Our Pet Supplies Plus segment opened 66 franchise stores and 9 corporate stores since the prior year period, resulting in a $16.1 million increase in wholesale revenue and a $13.3 million increase in retail sales.

Total revenue for our Pet Supplies Plus segment increased $62.9 million, or 10.4%, for the six months ended July 1, 2023 as compared to the same period last year. The increase was also due the opening of 66 franchise stores and 9 corporate stores since the prior year period, resulting in a $44.8 million increase in wholesale revenue and a $17.6 million increase in retail sales.

Operating expenses for our Pet Supplies Plus segment increased $31.1 million, or 11.0%, for the three months ended July 1, 2023 as compared to the same period last year as cost of revenue increased at a rate comparable to revenue and merchandise costs also increased.

Operating expenses for our Pet Supplies Plus segment increased $61.6 million, or 10.8%, for the six months ended July 1, 2023 as compared to the same period last year as cost of revenue increased at a rate comparable to revenue.

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Badcock

The following table summarizes the operating results of our Badcock segment:

						Three Months Ended																								Six Months Ended
																		Change																								Change
(In thousands)						July 1, 2023						June 25, 2022						$						%						July 1, 2023						June 25, 2022						$						%
Total revenues						$	172,221					$	233,299					$	(61,078)					(26.2)		%				$	359,508					$	489,558					$	(130,050)					(26.6)		%
Operating expenses						169,362						202,396						(33,034)						(16.3)		%				341,906						388,424						(46,518)						(12.0)		%
Segment income						$	2,859					$	30,903					$	(28,044)					(90.7)		%				$	17,602					$	101,134					$	(83,532)					(82.6)		%

Total revenue for our Badcock segment decreased $61.1 million, or (26.2)%, for the three months ended July 1, 2023 as compared to the same period last year. The decrease was attributable to:

•A $37.7 million decrease in product revenue driven by the inflationary environment, which resulted in decreased customer traffic compared to the prior year period.

•A $23.3 million decrease in service revenue, as the amortization of the accounts receivable discount included in service revenue was less than the prior year period ($6.0 million in the three months ended July 1, 2023 compared to $24.7 million in the three months ended June 25, 2022). The remaining decrease was driven by lower interest income due to the declining customer financing receivable balance.

For the six months ended July 1, 2023, total revenue for our Badcock segment decreased $130.1 million, or (26.6)% as compared to the same period last year. The decrease was attributable to:

•A $72.1 million decrease in product revenue driven by the inflationary environment, which resulted in decreased customer traffic compared to the prior year period.

•A $57.9 million decrease in service revenue, as the amortization of the accounts receivable discount included in service revenue was less than the prior year period ($14.3 million in the six months ended July 1, 2023 compared to $62.3 million in the six months ended June 25, 2022). The remaining decrease was driven by lower interest income due to the declining customer financing receivable balance.

Operating expenses for our Badcock segment decreased $33.0 million, or (16.3)%, and $46.5 million, or (12.0)%, for the three and six months ended July 1, 2023, respectively, as compared to the same periods last year. These decreases were due to the decrease in revenue partially offset by higher merchandise costs.

American Freight

The following table summarizes the operating results of our American Freight segment:

						Three Months Ended																								Six Months Ended
																		Change																								Change
(In thousands)						July 1, 2023						June 25, 2022						$						%						July 1, 2023						June 25, 2022						$						%
Total revenues						$	203,427					$	226,428					$	(23,001)					(10.2)		%				$	439,989					$	467,843					$	(27,854)					(6.0)		%
Operating expenses						225,317						221,399						3,918						1.8		%				548,508						451,601						96,907						21.5		%
Segment income						$	(21,890)					$	5,029					$	(26,919)					(535.3)		%				$	(108,519)					$	16,242					$	(124,761)					(768.1)		%

Total revenue for our American Freight segment decreased $23.0 million, or 10.2%, and $27.9 million, or (6.0)%, for the three and six months ended July 1, 2023, respectively, as compared to the same period last year. The decreases were attributable to lower demand for furniture, mattresses, and appliances driven by the inflationary environment which resulted in reduced customer traffic.

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Operating expenses for our American Freight segment increased $3.9 million, or 1.8%, and $96.9 million, or 21.5%, for the three and six months ended July 1, 2023, respectively, as compared to the same period in the prior year. The increase in operating expense for the six months ended July 1, 2023 was primarily due to a $75.0 million non-cash goodwill impairment charge, as further discussed in “Note 5 – Goodwill and Intangible Assets” in the Notes to the Consolidated Financial Statements in this Quarterly Report. The increase was also due to higher merchandise costs from orders placed in the prior year, which includes higher inbound freight costs.

Buddy’s

The following table summarizes the operating results of our Buddy’s segment:

						Three Months Ended																								Six Months Ended
																		Change																								Change
(In thousands)						July 1, 2023						June 25, 2022						$						%						July 1, 2023						June 25, 2022						$						%
Total revenues						$	13,819					$	14,129					$	(310)					(2.2)		%				$	28,786					$	29,713					$	(927)					(3.1)		%
Operating expenses						10,925						10,568						357						3.4		%				22,153						22,087						66						0.3		%
Segment income						$	2,894					$	3,561					$	(667)					(18.7)		%				$	6,633					$	7,626					$	(993)					(13.0)		%

Total revenue for our Buddy’s segment decreased $0.3 million, or (2.2)%, and $0.9 million, or (3.1)%, for the three and six months ended July 1, 2023, respectively, as compared to the same periods last year. The decreases in revenue were primarily attributable to the inflationary environment which resulted in reduced customer traffic.

Operating expenses for our Buddy’s segment increased $0.4 million, or 3.4%, and $0.1 million, or 0.3%, for the three and six months ended July 1, 2023, respectively, due to an increase in selling, general, and administrative expense in the current year period.

Sylvan

The following table summarizes the operating results of our Sylvan segment:

						Three Months Ended																								Six Months Ended
																		Change																								Change
(In thousands)						July 1, 2023						June 25, 2022						$						%						July 1, 2023						June 25, 2022						$						%
Total revenues						$	11,709					$	11,512					$	197					1.7		%				$	21,941					$	21,556					$	385					1.8		%
Operating expenses						9,886						9,879						7						0.1		%				18,967						18,975						(8)						—		%
Segment income						$	1,823					$	1,633					$	190					11.6		%				$	2,974					$	2,581					$	393					15.2		%

Total revenue for our Sylvan segment increased $0.2 million, or 1.7%, and $0.4 million, or 1.8%, for the three and six months ended July 1, 2023, respectively as compared to the same periods last year. The increases were attributable to an increase in franchise revenue.

Adjusted EBITDA

To provide additional information regarding our financial results, we have disclosed Adjusted EBITDA in the table below and within this Quarterly Report. Adjusted EBITDA represents net income (loss), before income taxes, interest expense, depreciation and amortization, and certain other items specified below. Additionally, acquisition costs include adjusting for costs of potential acquisitions and final costs of completed acquisitions. We have provided a reconciliation below of Adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure.

We have included Adjusted EBITDA in this Quarterly Report because we believe the presentation of this measure is useful to investors as a supplemental measure in evaluating the aggregate performance of our operating businesses and in comparing our results from period to period because it excludes items that we do not believe are reflective of our core or ongoing operating results. In the Adjusted EBITDA table below, we have removed all revenues and expenses related to our Badcock segment’s in-house financing operations. This includes all amounts related to accounts receivables and securitized receivables. We believe this provides investors a more accurate representation of ongoing operations as we intend to cease in-house financing operations within a year. This measure is used by our management to evaluate performance and make resource

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allocation decisions each period. Adjusted EBITDA is also the primary operating metric used in the determination of executive management’s compensation. In addition, a measure similar to Adjusted EBITDA is used in our credit facilities. Adjusted EBITDA is not a recognized financial measure under GAAP and may not be comparable to similarly-titled measures used by other companies in our industry. Adjusted EBITDA should not be considered in isolation from or as an alternative to net income (loss), operating income (loss), or any other performance measures derived in accordance with GAAP.

The following table presents a reconciliation of Adjusted EBITDA for each of the periods indicated.

						Reconciliation of Net Income to Adjusted EBITDA
						Three Months Ended												Six Months Ended
(In thousands)						July 1, 2023						June 25, 2022						July 1, 2023						June 25, 2022
Net income (loss)						$	(50,796)					$	40,983					$	(159,113)					$	53,301
Add back:
Interest expense						83,364						88,839						170,493						181,167
Income tax expense (benefit)						(13,845)						13,572						(21,020)						17,250
Depreciation and amortization charges						21,265						19,554						42,889						41,588
Total Adjustments						90,784						121,965						192,362						240,005
EBITDA						39,988						162,948						33,249						293,306
Adjustments to EBITDA
Executive severance and related costs						24						161						1,593						256
Stock-based and long term executive compensation						2,771						8,041						7,221						14,667
Litigation costs and settlements						1,214						(269)						1,308						(39)
Corporate compliance costs						—						—						(4)						51
Store closures						99						153						117						1,086
Securitized accounts receivable interest income						(26,286)						(48,657)						(56,871)						(113,683)
Securitized accounts receivable allowance for credit losses						26,344						43,549						48,339						59,962
W.S. Badcock financing operations						(2,485)						(1,820)						(5,607)						(4,078)
Right-of-use and long-term asset impairment						274						273						819						648
Goodwill impairment						—						—						75,000						—
Integration costs						331						64						980						528
Gain on sale-leaseback and owned properties, net						—						(49,854)						—						(52,127)
Divestiture costs						—						493						198						2,429
Acquisition costs						7,860						4,776						7,961						5,403
Loss (gain) on investment in equity securities						3,781						(12,859)						5,611						10,864
Acquisition bargain purchase gain						—						(3,581)						—						(3,514)
Total Adjustments to EBITDA						13,927						(59,530)						86,665						(77,547)
Adjusted EBITDA						$	53,915					$	103,418					$	119,914					$	215,759

Liquidity and Capital Resources

We believe that we have sufficient liquidity to support our ongoing operations and maintain a sufficient liquidity position to meet our obligations and commitments for the next twelve months. Our liquidity plans are established as part of our financial and strategic planning processes and consider the liquidity necessary to fund our operating, capital expenditure and debt service needs.

We primarily fund our operations through operating cash flows and, as needed, a combination of borrowings under various credit agreements, availability under our revolving credit facilities and the issuance of equity securities. Cash generation can be subject to variability based on many factors, including seasonality and the effects of changes in end markets.

As of July 1, 2023, we have current installments of long-term obligations of $13.2 million, of which $6.9 million is finance leases and $6.3 million is the current portion of our senior secured revolving loan facility. We expect these obligations can be serviced from our cash and cash equivalents, which were $106.3 million as of July 1, 2023.

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During the six months ended July 1, 2023, we executed the following substantial transaction that will affect our liquidity and capital resources in future periods:

•On February 2, 2023, we entered into the Third Amendment to the First Lien Credit Agreement to provide for an incremental term loan facility in the principal amount of $300.0 million. The net proceeds of $281.5 million were used to make repayments on our senior secured revolving loan facility.

Sources and uses of cash

 

Operating activities. In the six months ended July 1, 2023, net cash provided by operating activities increased $89.3 million compared to the same period in the prior year primarily due to a $142.7 million decrease in cash used for inventory compared to the prior year period, a $31.8 million decrease in accounts receivable and a $29.9 million increase in accounts payable. These were primarily offset by a $118.7 million decrease in cash income from operations. Cash net income represents net income adjusted for non-cash or non-operating activities such as goodwill impairment, gains on the sale of Company assets, depreciation and amortization, deferred financing cost amortization and the change in fair value of investment.

Investing activities. In the six months ended July 1, 2023, cash provided by investing activities decreased $245.1 million compared to the same period in the prior year. This decrease was primarily due to a $237.2 million decrease in cash proceeds from the sale of property, plant and equipment compared to the prior year period.

 

Financing activities. In the six months ended July 1, 2023, cash provided by financing activities was $16.4 million, compared to cash used by financing activities of $362.4 million in the six months ended June 25, 2022. The increase in cash provided by financing activities was primarily due to proceeds received from the issuance of long-term debt, which increased $449.5 million in the current year period. Additionally, repayment of long-term debt increased $31.2 million in the current year period. These sources of cash were offset by a decrease of net cash from secured debt obligations of $22.5 million and a $17.0 million increase in payments for debt issuance costs.

Long-term debt borrowings

For a description of our long-term debt borrowing refer to “Note 7 – Long-Term Obligations” in this Quarterly Report.

Other factors affecting our liquidity

Tax Receivable Agreement. We may be required to make payments under the Tax Receivable Agreement (“TRA Payments”) to the former equity holders of Buddy’s (the “Buddy’s Members”). Under the terms of the Tax Receivable Agreement, we agreed to pay the Buddy’s Members 40% of the cash savings, if any, in federal, state and local taxes that we realize or are deemed to realize as a result of any increases in tax basis of the assets of New Holdco resulting from future redemptions or exchanges of New Holdco units held by the Buddy’s Members. Any future obligations and the timing of such payments under the Tax Receivable Agreement, however, are subject to several factors, including (i) the timing of subsequent exchanges of New Holdco units by the Buddy’s Members, (ii) the price of our common stock at the time of exchange, (iii) the extent to which such exchanges are taxable, (iv) the ability to generate sufficient future taxable income over the term of the Tax Receivable Agreement to realize the tax benefits and (v) any future changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the Tax Receivable Agreement to utilize the tax benefits, then we would not be required to make the related TRA Payments. Although the amount of the TRA Payments would reduce the total cash flow to us and New Holdco, we expect the cash tax savings we will realize from the utilization of the related tax benefits would be sufficient to fund the required payments. As of July 1, 2023, we have TRA Payments due to the Buddy's Members of $15.4 million.

Dividends. On May 9, 2023, the Board declared quarterly dividends of $0.46875 per share of Series A Preferred Stock. The dividends were paid in cash on July 17, 2023 to holders of record of the Company's Series A Preferred Stock on the close of business on July 3, 2023. The payment of dividends is at the discretion of our Board of Directors and depends, among other things, on our earnings, capital requirements, and financial condition. Our ability to pay dividends is also subject to compliance with financial covenants that are contained in our credit facility and may be restricted by any future indebtedness that we incur or issuances of our preferred stock. In addition, applicable law requires our Board of Directors to determine that we have adequate surplus prior to the declaration of dividends. We cannot provide an assurance that we will pay dividends at any specific level or at all.

On July 19, 2023, we issued a notice of redemption (the “Redemption”) for all outstanding shares of the Series A Preferred Stock. We are redeeming the Series A Preferred Stock in connection with the Proposed Merger and in accordance

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with the terms and conditions of the Merger Agreement. The Redemption is contingent upon our successful completion the Proposed Merger and, in the event the Proposed Merger does not occur and the Merger Agreement is terminated in accordance with its terms, the notice of redemption will be deemed rescinded and the Redemption will not occur.

The Preferred Stock will be redeemed in cash at a redemption price equal to $25.00 per share plus any accrued and unpaid dividends from the last dividend payment date, if any, up to but not including the Redemption Date (the “Redemption Price”). The Redemption Price is expected to be paid on August 18, 2023 or such later date as the parties to the Merger Agreement may agree but in no event later than one business day following the Effective Time (the “Redemption Date”). From and after the Redemption Date, dividends will cease to accrue on the Preferred Stock and the Preferred Stock will no longer be deemed outstanding and all rights of the holders of the Preferred Stock, other than the right to receive the Redemption Price upon Redemption, will cease and terminate. Upon Redemption, the Preferred Stock will be delisted from trading on the Nasdaq Global Market.

Future cash needs and capital requirements

Operating and financing cash flow needs. Our primary cash needs are expected to include the payment of scheduled debt and interest payments, capital expenditures and normal operating activities. We believe that the revolving credit facilities along with cash from operating activities, will be sufficient to support our cash flow needs for at least the next twelve months.

Several factors could affect our cash flow in future periods, including the following:

•The extent to which we extend additional operating financing to our franchisees beyond the levels of prior periods;

•The extent and timing of capital expenditures;

•The extent and timing of future acquisitions;

•Our ability to integrate our acquisitions and implement business and cost savings initiatives to improve profitability; and

•The extent, if any, to which our Board of Directors elects to continue to declare dividends on our common stock.

Compliance with debt covenants. Our revolving credit and long-term debt agreements impose restrictive covenants on us, including requirements to meet certain ratios. As of July 1, 2023, we were in compliance with all covenants under these agreements and, based on a continuation of current operating results, we expect to be in compliance for the remainder of fiscal 2023.

Off Balance Sheet Arrangements

For off balance sheet arrangements and guarantees to which the Company remains secondarily liable, refer to “Note 12 – Commitments and Contingencies” in this Quarterly Report.

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ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to various types of market risk in the normal course of our business, including the impact of interest rate changes. We may enter into interest rate swaps to manage exposure to interest rate changes. We do not enter into derivative instruments for any purpose other than cash flow hedging and we do not hold derivative instruments for trading purposes.

Our exposure to interest rate risk relates to our long-term debt obligations, as they bear interest at LIBOR and SOFR, reset periodically and have an interest rate margin. Assuming our revolving credit facility was fully drawn, a ten basis point change in the interest rates would change our annual interest expense by $1.9 million.

ITEM 4

CONTROLS AND PROCEDURES

The Company, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15I and 15d-15(e) under the Exchange Act) as of July 1, 2023. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of July 1, 2023 because of the material weakness in our internal control over financial reporting described below.

During the fiscal quarter ended September 24, 2022, the Company identified a material weakness in its controls over financial reporting involving the preparation of its Statement of Cash Flows. As a result of this deficiency, there was a misclassification of cash flows associated with interest payments on the Company’s secured borrowing resulting in an overstatement of cash flows provided by operating activities of $100.9 million and an overstatement of cash flows used in financing activities of $100.9 million in the Company’s 10-Q for the period ended June 25, 2022 and an overstatement of cash flows provided by operating activities of $53.0 million and an overstatement of cash used in financing activities of $53.0 million for the period ended March 26, 2022.

Management, with oversight from the Audit Committee, initiated several steps to design and implement new controls to remediate this material weakness. These steps included (i) implementing changes to the cash flow statement to segregate material non-recurring transactions, such as securitizations, to allow for better visibility of the presentation of the transactions, and (ii) enhancements to processes to identify any new non-recurring transactions that occurred during the period. While management has designed and implemented new controls to remediate this material weakness, the controls have not been in operation for a sufficient period of time to demonstrate that the material weakness has been remediated. These actions and planned actions are subject to ongoing evaluation by management and will require testing and validation of design and operating effectiveness of internal controls over financial reporting over future periods. Management is committed to the continuous improvement of internal control over financial reporting.

Notwithstanding the identified material weakness, management believes that the Condensed Consolidated Financial Statements and related financial information included in this 10-Q fairly present, in all material respects, our balance sheets, statements of operations, comprehensive income and cash flows as of and for the periods presented.

Changes in Internal Control over Financial Reporting

Other than the ongoing remediation efforts of the material weakness disclosed above, there were no changes in our internal control over financial reporting during the three months ended July 1, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

 

ITEM 1

LEGAL PROCEEDINGS

For information regarding legal proceedings, refer to “Note 12 – Commitments and Contingencies” in the Notes to the Consolidated Financial Statements in this Quarterly Report, which information is incorporated herein by reference.

ITEM 1A

RISK FACTORS

 

The following additional risk factors should be considered in addition to the risk factors described in Part I, Item 1A, in the Form 10-K.

The consummation of the Proposed Merger is subject to a number of conditions, many of which are largely outside of the parties’ control, and, if these conditions are not satisfied or waived on a timely basis, the Merger Agreement may be terminated and the Proposed Merger may not be completed.

The Proposed Merger is subject to certain customary closing conditions, including, but not limited to: (i) the Requisite Company Vote (as defined in the Merger Agreement); (ii) the absence of an injunction or law restraining, enjoining, rendering illegal or otherwise prohibiting consummation of the Proposed Merger; (iii) subject to customary materiality qualifiers, the accuracy of the representations and warranties contained in the Merger Agreement, including the representation that the Company has not suffered a Material Adverse Effect (as defined in the Merger Agreement) since May 10, 2023; and (iv) material performance by the other parties of their covenants under the Merger Agreement. The failure to satisfy all of the required conditions could delay the completion of the Proposed Merger by a significant period of time or prevent it from occurring. Any delay in completing the Proposed Merger could cause the parties to not realize some or all of the benefits that are expected to be achieved if the Proposed Merger is successfully completed within the expected timeframe. There can be no assurance that the conditions to closing of the Proposed Merger will be satisfied or waived or that the Proposed Merger will be completed within the expected timeframe or at all.

Failure to complete the Proposed Merger could adversely affect the stock price and future business and financial results of the Company.

There can be no assurance that the conditions to the closing of the Proposed Merger will be satisfied or waived or that the Proposed Merger will be completed. If the Proposed Merger is not completed within the expected timeframe or at all, the ongoing business of the Company could be adversely affected and the Company will be subject to a variety of risks and possible consequences associated with the failure to complete the Proposed Merger, including the following: (i) upon termination of the Merger Agreement under specified circumstances, the Company is required to pay Parent a termination fee of $10,350,000; (ii) the Company will incur certain transaction costs, including legal, accounting, financial advisor, filing, printing and mailing fees, regardless of whether the Proposed Merger closes; (iii) under the Merger Agreement, the Company is subject to certain restrictions on the conduct of its business prior to the closing of the Proposed Merger, which may adversely affect its ability to execute certain of its business strategies; (iv) the Company may lose key employees during the period in which the Company and Freedom VCM, Inc., a Delaware corporation (“Parent”) are pursuing the Proposed Merger, which may adversely affect the Company in the future if it is not able to hire and retain qualified personnel to replace departing employees; and (v) the Proposed Merger, whether or not it closes, will divert the attention of certain management and other key employees of the Company from ongoing business activities, including the pursuit of other opportunities that could be beneficial to the Company as an independent company.

If the Proposed Merger is not completed, these risks could materially affect the business and financial results of the Company and its stock price, including to the extent that the current market price of the Company’s common stock is positively affected by a market assumption that the Proposed Merger will be completed.

While the Proposed Merger is pending, the Company will be subject to business uncertainties and certain contractual restrictions that could adversely affect the business and operations of the Company.

In connection with the Proposed Merger, some customers, vendors, franchisees or other third parties of the Company may react unfavorably, including by delaying or deferring decisions concerning their business relationships or transactions with the Company, which could adversely affect the revenues, earnings, funds from operations, cash flows and expenses of the Company, regardless of whether the Proposed Merger is completed. In addition, due to certain restrictions in the Merger

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Agreement on the conduct of business prior to completing the Proposed Merger, the Company may be unable (without prior written consent), during the pendency of the Proposed Merger, to pursue strategic transactions, undertake significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions, even if such actions would prove beneficial and may cause the Company to forego certain opportunities it might otherwise pursue. In addition, the pendency of the Proposed Merger may make it more difficult for the Company to effectively retain and incentivize key personnel and may cause distractions from the Company’s strategy and day-to-day operations for its current employees and management.

The Company will incur substantial transaction fees and merger-related costs in connection with the Proposed Merger that could adversely affect the business and operations of the Company if the Proposed Merger is not completed.

The Company expects to incur non-recurring transaction fees, which include legal and advisory fees and substantial merger-related costs associated with completing the Proposed Merger, and which could adversely affect the business operations of the Company if the Proposed Merger is not completed.

The termination fee and restrictions on solicitation contained in the Merger Agreement may discourage other companies from trying to acquire the Company.

The Merger Agreement prohibits the Company from initiating, soliciting or proposing an Acquisition Proposal (as defined in the Merger Agreement) or knowingly encouraging, knowingly assisting or otherwise knowingly facilitating any Acquisition Proposal, subject to certain limited exceptions. The Merger Agreement also contains certain termination rights, including, but not limited to, the right of the Company to terminate the Merger Agreement to accept a Superior Proposal (as defined in the Merger Agreement), subject to and in accordance with the terms and conditions of the Merger Agreement, and provides that, upon termination of the Merger Agreement by the Company to enter into an Alternative Acquisition Agreement (as defined by the Merger Agreement) with respect to a Superior Proposal, the Company will be required to pay Parent a termination fee of $10,350,000 in cash. The termination fee and restrictions could discourage other companies from trying to acquire the Company even though those other companies might be willing to offer greater value to the Company’s stockholders than Parent has offered in the Proposed Merger.

Litigation against the Company or the members of the Company’s Board of Directors, could prevent or delay the completion of the Proposed Merger or result in the payment of damages following completion of the Proposed Merger.

It is a condition to the Proposed Merger that no injunction or other order preventing the consummation of the Proposed Merger shall have been issued by any court of competent jurisdiction or other governmental authority of competent jurisdiction and remain in effect. As of the date of this Quarterly Report, a lawsuit has been filed by a purported stockholder of the Company challenging the Proposed Merger or the other transactions contemplated by the Merger Agreement, which have named the Company and/or members of the Company’s Board of Directors as defendants. It is possible that additional lawsuits may be filed by the Company’s stockholders challenging the Proposed Merger. The outcome of such lawsuits cannot be assured, including the amount of costs associated with defending these claims or any other liabilities that may be incurred in connection with the litigation of these claims. If plaintiffs are successful in obtaining an injunction prohibiting the parties from completing the Proposed Merger on the agreed-upon terms, such an injunction may delay the consummation of the Proposed Merger in the expected timeframe, or may prevent the Proposed Merger from being consummated at all. Whether or not any plaintiff’s claim is successful, this type of litigation can result in significant costs and divert management’s attention and resources from the closing of the Proposed Merger and ongoing business activities, which could adversely affect the operations of the Company.

If the Proposed Merger is not consummated by November 10, 2023, or, under certain conditions, December 13, 2023, either the Company or Parent may terminate the Merger Agreement, subject to certain exceptions.

Either the Company or Parent may terminate the Merger Agreement if the Merger has not been consummated by November 10, 2023. However, this termination right will not be available to a party if that party failed to fulfill its obligations under the Merger Agreement and that failure was the proximate cause of the failure to consummate the Proposed Merger on time. In the event the Merger Agreement is terminated by either party due to the failure of the Proposed Merger to close by November 10, 2023, the Company will have incurred significant costs and will have diverted significant management focus and resources from other strategic opportunities and ongoing business activities without realizing the anticipated benefits of the Proposed Merger.

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ITEM 2

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

There were no sales of our equity securities for the period covered by this Quarterly Report.

SHARE REPURCHASES

 

On May 18, 2022, our Board of Directors approved a stock repurchase program under which we may repurchase up to $500.0 million of our outstanding shares of common stock over the next three years. The repurchase program authorizes shares to be repurchased from time to time in open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The actual timing, number and value of shares, if any, repurchased under the program will be determined by management in its discretion and will depend on a number of factors, including, among others, the availability of stock, general market and business conditions, the trading price of our common stock and applicable legal requirements. This plan supersedes our previous stock repurchase programs. There was no share repurchase activity during the six months ended July 1, 2023.

As of July 1, 2023, we had approximately $327.5 million remaining under the stock repurchase program approved by our Board of Directors.

ITEM 3

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4

MINE SAFETY DISCLOSURES

None.

ITEM 5

OTHER INFORMATION

During the three months ended July 1, 2023, none of our directors or officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934, as amended) adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K of the Securities Act of 1933).

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ITEM 6

EXHIBITS

 

We have filed the following exhibits as part of this Quarterly Report:

 

Exhibit Number

Exhibit Description

Filed  Herewith

Incorporated by  Reference

2.1

Agreement and Plan of Merger, dated as of May 10, 2023, by and among Franchise Group, Inc., Freedom VCM, Inc. and Freedom VCM Subco, Inc. (incorporated by reference to Exhibit 2.1 to Form 8-K, File No. 001-35588 filed on May 11, 2023).

X

3.1

Second Amended and Restated Certificate of Incorporation of Liberty Tax, Inc. (incorporated by reference to Exhibit 3.1 to Form 8-K, File No. 001-35588 filed on December 19, 2018).

X

3.1.1

Certificate of Designation of the Voting Non-Economic Preferred Stock of Liberty Tax, Inc. filed with the Secretary of State of the State of Delaware July 10, 2019 (incorporated by reference to Exhibit 3.1, File No. 001-35588 filed on July 11, 2019).

X

3.1.2

Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation of Liberty Tax, Inc. (incorporated by reference to Exhibit 3.1 to Form 8-K, File No. 001-35588 filed September 19, 2019).

X

3.1.3

Certificate of Increase of the Number of Shares of Voting Non-Economic Preferred Stock of Franchise Group, Inc., filed with the Secretary of State of the State of Delaware on September 30, 2019 (incorporated by reference to Exhibit 3.1 to Form 8-K, File No. 001-35588 filed October 1, 2019).

X

3.1.4

Certificate of Designation designating the 7.50% Series A Cumulative Perpetual Preferred Stock of Franchise Group, Inc. (incorporated by reference to Exhibit 3.1 to Form 8-K, File No. 001-35588 filed September 18, 2020).

X

3.1.5

Certificate of Increase of the Number of Shares of 7.50% Series A Cumulative Perpetual Preferred Stock of Franchise Group, Inc., filed with the Secretary of State of the State of Delaware on January 15, 2021 (incorporated by reference to Exhibit 3.1 to Form 8-K, File No. 001-35588 filed January 15, 2021).

X

3.2

Third Amended and Restated Bylaws of Franchise Group, Inc. (incorporated by reference to Exhibit 3.2 to Form 10-K, File No. 001-35588 filed on February 28, 2023).

X

10.1

Voting Agreement, dated as of May 10, 2023, by and among Franchise Group, Inc., Freedom VCM, Inc. and each of the persons set forth on the signature pages thereto (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 001-35588 filed on May 11, 2023).

X

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10.2

Rollover Agreement, dated as of May 10, 2023, by and among Freedom VCM Holdings, LLC and each of the persons set forth on the signature pages thereto (incorporated by reference to Exhibit 10.2 to Form 8-K, File No. 001-35588 filed on May 11, 2023).

X

10.3

Limited Guarantee, dated as of May 10, 2023, by B. Riley Financial, Inc. in favor of Franchise Group, Inc. (incorporated by reference to Exhibit 10.3 to Form 8-K, File No. 001-35588 filed on May 11, 2023).

X

31.1

Certification of Chief Executive Officer

X

31.2

Certification of Chief Financial Officer

X

32.1

Section 1350 Certification (Chief Executive Officer)

X

32.2

Section 1350 Certification (Chief Financial Officer)

X

101

The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2023, formatted in Inline XBRL, filed herewith: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations (unaudited), (iii) the Condensed Consolidated Statements of Stockholders’ Equity (unaudited), (iv) the Condensed Consolidated Statements of Cash Flows (unaudited) and (v) the Notes to Unaudited Condensed Consolidated Financial Statements

X

104

The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2023, formatted in Inline XBRL (included with Exhibit 101)

X

*All schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish the omitted disclosure schedules to the SEC upon request by the SEC; provided, however, that the Company reserves the right to request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any schedule or exhibit so furnished.

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

						FRANCHISE GROUP, INC. (Registrant)
August 8, 2023			By:						/s/ Brian R. Kahn
									Brian R. Kahn Chief Executive Officer and Director (Principal Executive Officer)
August 8, 2023			By:						/s/ Eric F. Seeton
									Eric F. Seeton Chief Financial Officer (Principal Financial and Accounting Officer)

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