FRG Franchise Group Inc

Franchise Group, Inc. (NASDAQ: FRG) (“Franchise Group,” “FRG” or the “Company”) today announced the financial results for its fiscal second quarter ended July 1, 2023. For the second quarter of fiscal 2023, total reported revenue for Franchise Group was approximately $1.0 billion, net loss from operations was approximately $50.8 million or $1.50 per fully diluted share, Adjusted EBITDA was approximately $53.9 million and Non-GAAP EPS was a loss of $0.22 per share. On July 1, 2023, total cash on hand was approximately $106.3 million and outstanding term debt was approximately $1.4 billion.

The Company currently has six reportable segments: American Freight; The Vitamin Shoppe; Pet Supplies Plus; Buddy’s; Sylvan; and Badcock.

The following table summarizes Revenue, Adjusted EBITDA, and Net Income/(Loss) for each of these segments. Reconciliations of Adjusted EBITDA, Non-GAAP Net Income and Non-GAAP EPS to their respective most comparable GAAP measures, are included below under “Non-GAAP Financial Measures and Key Metrics.”

		For the Three Months Ended												For the Six Months Ended
		July 1, 2023												July 1, 2023
					Adjusted				Net								Adjusted				Net
		Revenue			EBITDA				Income/(Loss)					Revenue			EBITDA				Income/(Loss)
		(In thousands)												(In thousands)
American Freight		$	203,427		$	(16,378	)		$	(27,362	)			$	439,989		$	(23,919	)		$	(121,221	)
Vitamin Shoppe			304,727			35,316				12,388					626,429			70,435				24,280
Pet Supplies Plus			332,783			27,297				6,929					666,854			56,921				14,688
Buddy's			13,819			3,723				1,002					28,786			8,229				2,726
Sylvan			11,709			3,954				306					21,941			7,296				185
Badcock			172,221			1,537				(30,793	)				359,508			5,843				(57,981	)
Corporate			-			(1,534	)			(13,266	)				-			(4,892	)			(21,790	)
Total		$	1,038,686		$	53,915			$	(50,796	)			$	2,143,507		$	119,914			$	(159,113	)

Redemption of Series A Preferred StockAs previously disclosed, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Freedom VCM, Inc., a Delaware corporation (“Parent”) and Freedom VCM Subco, Inc., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which, upon the terms and subject to the conditions set forth therein, Merger Sub shall merge with and into the Company, with the Company surviving the merger as a wholly owned subsidiary of Parent (the “Proposed Merger”). On July 19, 2023, in connection with the Proposed Merger, the Company issued a notice of redemption for all outstanding shares of the Series A Preferred Stock (the “Redemption”), which is contingent upon the successful completion of the Proposed Merger. The Series A 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”).

In light of the Proposed Merger, the Company is not scheduling a conference call to discuss its quarterly financial results.

About Franchise Group, Inc.Franchise Group is an owner and operator of franchised and franchisable businesses that continually looks to grow its portfolio of brands while utilizing its operating and capital allocation philosophy to generate strong cash flow for its shareholders. Franchise Group’s business lines include Pet Supplies Plus, American Freight, The Vitamin Shoppe, Badcock Home Furniture & more, Buddy’s Home Furnishings, Sylvan Learning and Wag N Wash. On a combined basis, Franchise Group currently operates over 3,000 locations predominantly located in the U.S. that are either Company-run or operated pursuant to franchising and dealer agreements.

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share count and per share data)		July 1, 2023				December 31, 2022
Assets		(Unaudited)				(Unaudited)
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 installments of 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 issued and outstanding at July 1, 2023 and December 31, 2022			45				45
Additional paid-in capital			310,654				311,069
Retained earnings			(85,620	)			109,917
Total equity			225,431				421,380
Total liabilities and equity		$	3,571,861			$	3,630,412

 

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
		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
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
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) before income taxes			(64,641	)			54,555				(180,133	)			70,551
Income tax expense (benefit)			(13,845	)			13,572				(21,020	)			17,250
Income (loss) attributable to Franchise Group, Inc.		$	(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

 

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
		Six Months Ended
(In thousands)		July 1, 2023				June 25, 2022
		(Unaudited)				(Unaudited)
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 other 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
Payments received on operating loans to franchisees			(3,682	)			1,000
Acquisition of business, net of cash and restricted cash acquired			-				(3,754	)
Net cash (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 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				-

Non-GAAP Financial Measures and Key Metrics

Adjusted EBITDA, Non-GAAP Net Income and Non-GAAP EPS are financial measures that are not prepared in accordance with GAAP. Management believes the presentation of these measures is useful to investors as supplemental measures in evaluating the aggregate performance of the Company’s operating businesses and in comparing its results from period to period because they exclude items that the Company does not believe are reflective of its core or ongoing operating results. These measures are used by management to evaluate the Company’s performance and make resource allocation decisions each period. These metrics are also used in the determination of executive management's compensation. Adjusted EBITDA, Non-GAAP Net Income and Non-GAAP EPS should not be considered in isolation or as a substitute for net income or other income statement information prepared in accordance with GAAP and our presentation of these non-GAAP measures may not be comparable to similarly titled measures used by other companies.

Management defines and calculates Adjusted EBITDA as net income (loss) from continuing operations before interest, income taxes, depreciation and amortization adjusted for certain non-core or non-operational items related to executive severance and related costs, stock-based compensation, shareholder litigation costs, corporate governance costs, accrued judgments and settlements, net of estimated revenue, store closures, rebranding costs, acquisition costs, inventory fair value step up amortization and prepayment penalty on early debt repayment. Adjusted EBITDA is a financial measure that is not prepared in accordance with GAAP.

Management defines and calculates Non-GAAP Net Income and Non-GAAP EPS as net income (loss) and net income (loss) per diluted share from continuing operations adjusted for non-core or non-operational items related to executive severance and related costs, stock-based compensation, non-cash executive compensation expense, shareholder litigation costs, prepayment penalties on early debt repayment, non-cash amortization of debt issuance costs, store closures, the Badcock segment’s in-house financing operations, rebranding costs, acquisition costs, inventory fair value step up amortization, and amortization of acquired intangible assets. Although amortization of acquired intangible assets is excluded from these non-GAAP measures, it is important for investors to understand that such intangible assets support revenue generation. Management excludes amortization of intangible assets because these are non-cash amounts for which the amount and frequency are significantly impacted by the timing and size of our acquisitions, which vary from period to periods and across companies. The tax effect on the related non-GAAP adjustments was calculated based on an estimated annual non-GAAP effective tax rate of 25.8%.

Reconciliation of Adjusted EBITDABelow is the reconciliation of Net Income/(Loss) from continuing operations to Adjusted EBITDA for the three months and six months ended July 1, 2023.

		For the Three Months Ended July 1, 2023
($ In thousands)		Buddy's			Pet SuppliesPlus				American Freight				Vitamin Shoppe			Sylvan			Badcock				Corporate				Total
Net income (loss)		$	1,002		$	6,929			$	(27,362	)		$	12,388		$	306		$	(30,793	)		$	(13,266	)		$	(50,796	)
Add back:
Interest expense			1,550			8,879				14,672				11,960			1,317			44,207				779				83,364
Income tax expense (benefit)			348			1,781				(9,200	)			4,303			200			(10,555	)			(722	)			(13,845	)
Depreciation and amortization charges			823			6,746				3,940				6,665			2,015			1,057				19				21,265
Total Adjustments			2,721			17,406				9,412				22,928			3,532			34,709				76				90,784
EBITDA			3,723			24,335				(17,950	)			35,316			3,838			3,916				(13,190	)			39,988
Adjustments to EBITDA
Executive severance and related costs			-			-				(24	)			-			-			48				-				24
Litigation costs and settlements			-			-				1,211				-			3			-				-				1,214
Stock-based and long term executive compensation			-			2,536				12				-			113			-				110				2,771
Corporate compliance costs			-			-				-				-			-			-				-				-
Store closures			-			-				99				-			-			-				-				99
Securitized accounts receivable interest income			-			-				-				-			-			(26,286	)			-				(26,286	)
Securitized accounts receivable allowance for credit losses			-			-				-				-			-			26,344				-				26,344
W.S. Badcock financing operations			-			-				-				-			-			(2,485	)			-				(2,485	)
Right-of-use asset and long-term asset impairment			-			-				274				-			-			-				-				274
Goodwill impairment			-			-				-				-			-			-				-				-
Integration costs			-			319				-				-			-			-				12				331
Divestiture costs			-			-				-				-			-			-				-				-
Acquisition costs			-			107				-				-			-			-				7,753				7,860
Loss on investment in equity securities			-			-				-				-			-			-				3,781				3,781
Acquisition bargain purchase gain			-			-				-				-			-			-				-				-
Total Adjustments to EBITDA			-			2,962				1,572				-			116			(2,379	)			11,656				13,927
Adjusted EBITDA		$	3,723		$	27,297			$	(16,378	)		$	35,316		$	3,954		$	1,537			$	(1,534	)		$	53,915

		For the Six Months Ended July 1, 2023
($ In thousands)		Buddy's			Pet Supplies Plus				American Freight				Vitamin Shoppe			Sylvan			Badcock				Corporate				Total
Net income (loss)		$	2,726		$	14,688			$	(121,221	)		$	24,280		$	185		$	(57,981	)		$	(21,790	)		$	(159,113	)
Add back:
Interest expense			2,966			17,165				28,264				23,132			2,548			95,581				837				170,493
Income tax expense (benefit)			947			5,102				(15,563	)			8,433			241			(19,998	)			(182	)			(21,020	)
Depreciation and amortization charges			1,590			14,450				7,204				13,359			4,122			2,134				30				42,889
Total Adjustments			5,503			36,717				19,905				44,924			6,911			77,717				685				192,362
EBITDA			8,229			51,405				(101,316	)			69,204			7,096			19,736				(21,105	)			33,249
Adjustments to EBITDA
Executive severance and related costs			-			(6	)			366				1,185			-			48				-				1,593
Litigation costs and settlements			-			-				1,252				46			10			-				-				1,308
Stock-based and long term executive compensation			-			4,224				(22	)			-			190			-				2,829				7,221
Corporate compliance costs			-			-				-				-			-			-				(4	)			(4	)
Store closures			-			-				117				-			-			-				-				117
Securitized accounts receivable interest income			-			-				-				-			-			(56,871	)			-				(56,871	)
Securitized accounts receivable allowance for credit losses			-			-				-				-			-			48,339				-				48,339
W.S. Badcock financing operations			-			-				-				-			-			(5,607	)			-				(5,607	)
Right-of-use asset and long-term asset impairment			-			135				684				-			-			-				-				819
Goodwill impairment			-			-				75,000				-			-			-				-				75,000
Integration costs			-			956				-				-			-			-				24				980
Divestiture costs			-			-				-				-			-			198				-				198
Acquisition costs			-			207				-				-			-			-				7,753				7,961
Loss on investment in equity securities			-			-				-				-			-			-				5,611				5,611
Acquisition bargain purchase gain			-			-				-				-			-			-				-				-
Total Adjustments to EBITDA			-			5,516				77,397				1,231			200			(13,893	)			16,213				86,665
Adjusted EBITDA		$	8,229		$	56,921			$	(23,919	)		$	70,435		$	7,296		$	5,843			$	(4,892	)		$	119,914

Reconciliation of Non-GAAP Net Income and EPS

Below is the reconciliation of Net Income/(Loss) from continuing operations to Non-GAAP Net Income and Net Income/(Loss) from continuing operations per diluted share to Non-GAAP EPS for the three months and six months ended July 1, 2023.

		For the Three Months Ended								For the Six Months Ended
($ In thousands except share count and per share data)		July 1, 2023								July 1, 2023
Net income (loss) / Net income (loss) per diluted share		$	(50,796	)			(1.44	)		$	(159,113	)			(4.53	)
Less: Preferred dividend declared			(2,129	)			(0.06	)			(4,257	)			(0.12	)
Adjusted Net Income available to Common Stockholder			(52,925	)			(1.50	)			(163,370	)			(4.66	)
Add back:
Executive severance and related costs			24				-				1,593				0.05
Litigation costs and settlements			1,214				0.03				1,308				0.04
Stock-based and long term executive compensation			2,771				0.08				7,221				0.21
Corporate compliance costs			-				-				(4	)			-
Store closures			99				-				117				-
Securitized accounts receivable interest income			(26,286	)			(0.75	)			(56,871	)			(1.62	)
Securitized accounts receivable allowance for credit losses			26,344				0.75				48,339				1.38
W.S. Badcock financing operations			(2,485	)			(0.07	)			(5,607	)			(0.16	)
Right-of-use asset and long-term asset impairment			274				0.01				819				0.02
Goodwill impairment			-				-				75,000				2.14
Integration costs			331				0.01				980				0.03
Divestiture costs			-				-				198				0.01
Acquisition costs			7,860				0.22				7,961				0.23
Loss on investment in equity securities			3,781				0.11				5,611				0.16
Acquisition bargain purchase gain			-				-				-				-
Adjustments to EBITDA			13,927				0.39				8,664				0.25
Non-cash amortization of debt issuance costs			2,958				0.08				(29,456	)			(0.84	)
Amortization of acquisition-related intangibles			4,297				0.12				88,144				2.51
Securitized receivables interest expense			40,019				1.14				-				-
Tax impact			(15,778	)			(0.45	)			159,805				4.57
Impact of diluted share count assuming non-GAAP net income			-				-				(3,566	)			(0.09	)
Total Adjustments to Net income (loss)			45,423				1.28				159,805				4.57
Non-GAAP Net Income / Non-GAAP diluted EPS		$	(7,502	)		$	(0.22	)		$	(3,566	)		$	(0.09	)
Basic weighted average shares							35,177,146								35,089,660
Non-GAAP diluted weighted average shares outstanding							35,177,146								35,089,660

Forward-Looking StatementsThis press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, projections, predictions, expectations, or beliefs about future events or results and are not statements of historical fact. Such statements may include statements regarding the Company’s results of operation and financial condition, the proposed redemption of the Series A Preferred Stock and the Proposed Merger. Such forward-looking statements are based on various assumptions as of the time they are made, and are inherently subject to known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements are often accompanied by words that convey projected future events or outcomes such as “expect,” “believe,” “estimate,” “plan,” “project,” “anticipate,” “intend,” “will,” “may,” “view,” “opportunity,” “potential,” or words of similar meaning or other statements concerning opinions or judgment of the Company or its management about future events. Although the Company believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance, or achievements of the Company or matters pertaining to the Proposed Merger will not differ materially from any projected future results, performance, achievements or other matters expressed or implied by such forward-looking statements. Actual future results, performance, achievements or other matters may differ materially from historical results or those anticipated depending on a variety of factors, many of which are beyond the control of the Company. The Company refers you to the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of the Company’s Form 10-K for the fiscal year ended December 31, 2022, and comparable sections of the Company’s Quarterly Reports on Form 10-Q and other filings, which have been filed with the SEC and are available on the SEC’s website at www.sec.gov. All of the forward-looking statements made in this press release are expressly qualified by the cautionary statements contained or referred to herein. The actual results or developments anticipated may not be realized or, even if substantially realized, they may not have the expected consequences to or effects on the Company or its business or operations. Readers are cautioned not to rely on the forward-looking statements contained in this press release. Forward-looking statements speak only as of the date they are made and the Company does not undertake any obligation to update, revise or clarify these forward-looking statements, whether as a result of new information, future events or otherwise.

Investor Relations & Media Contact:Andrew F. KaminskyEVP & Chief Administrative OfficerFranchise Group, Inc.akaminsky@franchisegrp.com(914) 939-5161