FRANCHISE GROUP, INC. 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 philosophy to generate strong cash flows. We currently operate four reportable segments:Liberty Tax , Buddy's, American Freight, and Vitamin Shoppe. Our Vitamin Shoppe segment is an omni-channel specialty retailer of vitamins, minerals, herbs, specialty supplements, sports nutrition and other health and wellness products. Our American Freight segment is a retail chain offering unbranded furniture, mattresses and home accessories at discount prices. OnOctober 23, 2019 , we completed the acquisition of theSears Outlet business ("Sears Outlet ") fromSears Hometown and Outlet Stores, Inc. (the "Sears Outlet Acquisition").Sears Outlet has been rebranded asAmerican Freight Outlet and is included in our American Freight segment. OurLiberty Tax segment is one of the leading providers of tax preparation services inthe United States andCanada . Our 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. Our revenue is primarily derived from merchandise sales, rental revenue, and service revenues comprised of royalties and other required fees from our franchisees and financial products. In evaluating our performance, management focuses on several metrics that we believe are key to our success: •Net change in retail and franchise locations. The change in retail and franchise locations from year to year is a function of the opening of new locations, offset by locations that we or our franchisees close. Please see "Item 2. Properties" in this Annual Report for the number of locations as ofDecember 26, 2020 . •Systemwide revenue. Systemwide revenue, which is an operating measure not in accordance with GAAP, includes sales by both Company-owned and franchised locations. We believe systemwide revenue data is useful in assessing consumer demand for our products and services and our performance. In addition, systemwide revenue reflects the size of our business, and because the size of our business drives our management and infrastructure needs, systemwide revenue data helps us assess those needs in comparison to other companies in our industry and other franchise operators. Acquisitions OnFebruary 14, 2020 , we completed our acquisition of American Freight (the "American Freight Acquisition"). Additionally, we, through certain of our subsidiaries, entered into a new$675 million credit facility which funded the American Freight Acquisition and refinanced certain debt of ourBuddy's Home Furnishings and Sears Outlet businesses, refer to "Note 2 - Acquisitions" in the Notes to the Consolidated Financial Statements. OnDecember 16, 2019 , we completed our acquisition of The Vitamin Shoppe (the "Vitamin Shoppe Acquisition"). For a complete description of the Vitamin Shoppe Acquisition, refer to "Note 2 - Acquisitions" in the Notes to the Consolidated Financial Statements. OnOctober 23, 2019 , we completed the Sears Outlet Acquisition. For a complete description of the Sears Outlet Acquisition, refer to "Note 2 - Acquisitions" in the Notes to the Consolidated Financial Statements.
On
On
OnJuly 10, 2019 (the "Buddy's Acquisition Date"), we formedFranchise Group New Holdco LLC ("New Holdco"), which completed the Buddy's Acquisition. At the Buddy's Acquisition Date, each outstanding unit of Buddy's was converted into the right to receive 0.459315 units of New Holdco ("New Holdco units") and 0.091863 shares of our Voting Non-Economic Preferred Stock. Each of the NewHoldco units held by the former equity holders of Buddy's (the "Buddy's Members") was, together with one-fifth of a share of Voting Non-Economic Preferred Stock held by the Buddy's Members, redeemable in exchange for one share of our common stock after an initial six-month lockup period following their issuance, 31 -------------------------------------------------------------------------------- Table of Contents which has expired. As of the Buddy's Acquisition Date, on an as-converted basis, the Buddy's Members' aggregate ownership of New Holdco units and share of Preferred Stock represented approximately 36.44% of our outstanding common stock, which implied an enterprise value of Buddy's of approximately$122 million and an equity value of$12.00 per share of our common stock. We are the sole managing member of New Holdco and is consolidated for financial reporting purposes. We and the Buddy's Members also entered into an income tax receivable agreement (the "TRA"), pursuant to which, subject to certain exceptions set forth in the TRA, 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 and Voting Non-Economic Preferred Stock held by the Buddy's Members in exchange for our common stock. As ofApril 1, 2020 , all shares of Voting Non-Economic Preferred Stock and New Holdco units (except for the New Holdco units held by us) were redeemed for shares of our common stock and no shares of Voting Non-Economic Preferred Stock or New Holdco units remained outstanding (except for the NewHoldco units held by us). Refer to the liquidity section below for further discussion. For a complete description of the Buddy's Acquisition, refer to "Note 2 - Acquisitions" in the Notes to the Consolidated Financial Statements.
Results of Operations
For the Year Ended
The following table sets forth the results of our operations for the years ended
Fiscal Years Ended Change
(In thousands) 12/26/2020 4/30/2019 $ %
Total revenues $ 2,152,504 $ 132,546 $ 2,019,958 1,524 %
Total operating expenses 2,076,382 133,405 1,942,977 1,456 %
Income (loss) from operations 76,122 (859) 76,981 (8,962) %
Net income (loss) $ 27,154 $ (2,156) $ 29,310 (1,359) %
Revenues. The table below sets forth the components and changes in our revenue
for the years ended
Fiscal Years Ended Change
(In thousands) 12/26/2020 4/30/2019 $ %
Product $ 1,899,662 $ - $ 1,899,662 - %
Service and other 188,575 132,546 56,029 42 %
Rental 64,267 - 64,267 - %
Total revenue $ 2,152,504 $ 132,546 $ 2,019,958 1,524 %
Our total revenue increased by $2.0 billion , or 1,524%, in the year ended
December 26, 2020 compared to the year ended April 30, 2019 . This increase was
primarily due to the Buddy's Acquisition on July 10, 2019 , which increased
revenue by $97.3 million , the Sears Outlet Acquisition on October 23, 2019 ,
which increased revenue by $433.7 million , the Vitamin Shoppe Acquisition on
December 19, 2019 , which increased revenue by $1,036.0 million , and the American
Freight Acquisition on February 14, 2020 , which increased revenue by $462.7
million .
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Operating expenses. The following table details the amounts and changes in our
operating expenses for the years ended December 26, 2020 and April 30, 2019 :
Fiscal Years Ended Change
(In thousands) 12/26/2020 4/30/2019 $ %
Cost of revenue:
Product $ 1,136,054 $ - $ 1,136,054 - %
Service and other 2,149 - 2,149 - %
Rental 21,905 - 21,905 - %
Total cost of revenue 1,160,108 - 1,160,108 - %
Selling, general and
administrative expenses 916,274 124,060 792,214 639 %
Restructuring expenses - 9,345 (9,345) (100) %
Total operating expenses $ 2,076,382 $ 133,405 $ 1,942,977 1,456 %
Total operating expenses increased $1.9 billion , or 1,456%, in the year ended
December 26, 2020 compared to the year ended April 30, 2019 . This increase was
primarily due to the Buddy's Acquisition on July 10, 2019 , which increased
operating expenses by $77.0 million , the Sears Outlet Acquisition on October 23,
2019 , which increased operating expenses by $445.6 million , the Vitamin Shoppe
Acquisition on December 19, 2019 , which increased operating expenses by $1.0
billion , and the American Freight Acquisition on February 14, 2020 , which
increased operating expenses by $410.5 million .
Income Taxes. The following table sets forth certain information regarding our
income taxes for the years ended
Fiscal Years Ended Change
(In thousands) 12/26/2020 4/30/2019 $ %
Loss before income taxes $ (30,816) $ (3,995) $ (26,821) 671 %
Income tax benefit (57,970) (1,839) (56,131) 3,052 %
Effective tax rate 188.1 % 46.0 %
The increase in our income tax benefit in the year ended December 26, 2020
compared to the year ended April 30, 2019 relates to The Coronavirus Aid,
Relief, and Economic Security (the "CARES Act") which was enacted on March 27,
2020 . The CARES Act retroactively changed the eligibility of certain assets for
expense treatment in the year placed in service, back to 2018, and permitted any
net operating loss for the tax years 2018, 2019 and 2020 to be carried back for
five years. The Company recorded an income tax benefit of $52.3 million as a
result of the CARES Act which is the primary reason for the change in the
effective rate for the year ended December 26, 2020 compared to the year ended
April 30, 2019 .
Net income. In the year ended
For a discussion of the 2019 Transition Period Results of Operations, including a discussion of the financial results for the Transition Period compared to unaudited periodMay 1, 2018 toDecember 29, 2018 , refer to Part II, Item 7 of our Transition Report on Form 10-K/T filed with theSEC onApril 24, 2020 ("Form 10-K/T"). For a discussion of the 2019 Results of Operations, including a discussion of the financial results for the fiscal year endedApril 30, 2019 compared to the fiscal year endedApril 30, 2018 , refer to Part II, Item 7 of our Annual Report on Form 10-K for the year endedApril 30, 2019 , filed with theSEC onJune 27, 2019 ("2019 10-K"). Segment Information
Our operations are conducted in four reporting business segments: Vitamin
Shoppe, American Freight,
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We measure the results of our segments using, among other measures, each
segment's net revenues, operating expenses and operating income (loss). We may
revise the measurement of each segment's operating income, including the
allocation of overhead costs, as determined by the information regularly
reviewed by the CODM. When the measurement of a segment changes, previous period
amounts and balances are reclassified to be comparable to the current period's
presentation. Because the American Freight Acquisition occurred in the year
ended December 26, 2020 , and the Buddy's Acquisition, Sears Outlet Acquisition,
and Vitamin Shoppe Acquisition occurred in the Transition Period, comparable
information is not available; therefore, Vitamin Shoppe, American Freight, and
Buddy's segment information is not provided in this discussion.
The following table summarizes the operating results of our
Fiscal Years Ended Change
(In thousands) 12/26/2020 4/30/2019 $ %
Total revenues $ 122,777 $ 132,546 $ (9,769) (7) %
Operating expenses 99,166 133,405 (34,239) (26) %
Operating income (loss) $ 23,611 $ (859) $ 24,470 (2,849) %
Total revenue for our Liberty Tax segment decreased $9.8 million , or 7%, for the
year ended December 26, 2020 as compared to the year ended April 30, 2019 . The
decrease in revenue is primarily driven by the following:
•a decrease of $8.6 million in royalties and advertising, financial products and
electronic filing fees related to store closures and reduced U.S. federal tax
returns due to COVID-19; and
•a
•an increase of$3.8 million in other revenues resulting primarily from gains recorded on AD and franchisee acquisitions where the consideration was less than the value of the acquired assets and ancillary product revenues; and
•a
Operating expenses for the Liberty Tax segment decreased$34.2 million or 26% for the year endedDecember 26, 2020 as compared to the year endedApril 30, 2019 . The decrease in operating expenses is primarily driven by the following:
•a
•a decrease of
•a decrease of
•a decrease of
•a$3.7 million decrease in depreciation, amortization and impairment charges primarily related to software disposed of inDecember 2019 , partially offset by AD buybacks in 2020; and
•a
For a discussion of the Liberty Tax segment 2019 Transition Period Results of Operations, including a discussion of the financial results for the Transition Period compared to unaudited periodMay 1, 2018 toDecember 29, 2018 , refer to Part II, Item 7 of our Form 10-K/T. For a discussion of the Liberty Tax segment 2019 Results of Operations, including a discussion of the financial results for the fiscal year endedApril 30, 2019 compared to the fiscal year endedApril 30, 2018 , refer to Part II, Item 7 of our 2019 10-K. 34 -------------------------------------------------------------------------------- Table of Contents Adjusted EBITDA. To provide additional information regarding our financial results, we have disclosed Adjusted EBITDA in the table below and within this Annual Report. Adjusted EBITDA represents net income (loss), before income taxes, interest expense, depreciation and amortization, and certain other items specified below. We have provided a reconciliation below of Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure. We have included Adjusted EBITDA in this Annual Report because we believe the presentation of these measures is useful to investors as supplemental measures in evaluating the aggregate performance of our operating businesses and in comparing our results from period to period because they exclude items that we do not believe are reflective of our core or ongoing operating results. These measures are used by our management to evaluate performance and make resource 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 the Company's credit facilities but is calculated differently. 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. Fiscal Years Ended (In thousands) 12/26/2020 4/30/2019 Net income (loss)$ 27,154 $ (2,156) Add back: Interest expense 101,751 3,023 Income tax benefit (57,970) (1,839) Depreciation and amortization charges 62,238 14,084 Total Adjustments 106,019 15,268 EBITDA 133,173 13,112 Adjustments to EBITDA Executive severance and related costs 6,360 933 Executive recruitment costs - 725 Stock based compensation 9,484 - Shareholder litigation costs 575 472 Restructuring expense - 9,345 Corporate compliance costs 796 614 Accrued judgments and settlements (238) 972 Store closures 592 - Rebranding costs 8,725 - Inventory fair value step up amortization 36,244 - Prepayment penalty on early debt repayment 8,752 - Right-of-use asset impairment 2,895 - Integration costs 2,703 - Divestiture of year-round accounting offices - 1,846 Acquisition costs 17,584 - Total Adjustments to EBITDA 94,472 14,907 Adjusted EBITDA$ 227,645 $ 28,019 Included in restructuring expense on the condensed consolidated statement of operations for the year endedApril 30, 2019 is$1.3 million of depreciation, amortization, and impairment charges. EBITDA is$14.4 million for the year endApril 30, 2019 with these expenses included. 35 -------------------------------------------------------------------------------- Table of Contents 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. 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 and acquisitions 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, receipt of prepaid payments from area developers, timing of repayment of loans to franchisees and the effects of changes in end markets.
Subsequent to
Sources and uses of cash
Operating activities
In the year ended
•a
•a
•a
•a
In the Transition Period, cash used in operating activities decreased
•a
•a
•a
•a
In the fiscal year ended
•a decrease of
•a$4.0 million reduction in executive severance and recruitment payments in fiscal 2019 compared to fiscal 2018. Investing activities
In the year ended
•a
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•a
•a
•partially offset by a$34.1 million decrease in cash used for operating loans to franchisees and ADs and a$35.1 million increase in the proceeds from the sales of Company-owned offices and area developer rights. In the Transition Period, cash used for investing activities increased$315.0 million compared to the period fromMay 1, 2018 toDecember 29, 2018 . This increase is primarily due to the Vitamin Shoppe Acquisition, theSears Outlet Acquisition and the acquisition of franchisees fromA-Team Leasing .
In the fiscal year ended
•a
•a
Financing activities
In the year ended
•an increase of
•an increase of
•an increase of
•partially offset by$498.0 million in repayments of long-term obligations including term loans used to acquire Buddy's,Sears Outlet , VSI, and American Freight; and
•a decrease of
•an increase of
In the Transition Period, cash from financing activities increased
•a$333.3 million increase in cash raised from borrowings under debt agreements and revolving credit facilities, primarily under the VitaminShoppe Credit Agreement, Sears Outlet Credit Agreement and Buddy's Credit Agreement (defined below);
•a
•an increase of
•an increase of
•an increase of
In the fiscal year ended
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Long-term debt borrowings
Franchise Group New Holdco Term Loan and ABL Term Loan. On February 14, 2020 , as
part of the American Freight Acquisition, we, through direct and indirect
subsidiaries, entered into a $675.0 million credit facility, which included a
$575.0 million senior secured term loan (the "FGNH Term Loan") and a $100.0
million senior secured asset based term loan (the "FGNH ABL Term Loan"), to
finance the American Freight Acquisition and repay the existing Sears Outlet and
Buddy's term loans for an amount of $106.7 million and $101.6 million including
accrued interest, respectively. The FGNH Term Loan will mature on February 14,
2025 and the FGNH ABL Term Loan matured on September 30, 2020 . We are required
to repay the FGNH Term Loan in equal quarterly installments of $6.3 million on
the last day of each fiscal quarter, which commenced on June 27, 2020 . On
September 23, 2020 , we repaid in full all amounts that were outstanding under
the FGNH ABL Term Loan and terminated the FGNH ABL Credit Agreement. On
September 23, 2020 , the Company, through direct and indirect subsidiaries,
entered into an ABL Credit Agreement (the "New ABL Credit Agreement") with
various lenders which provides for a senior secured revolving loan facility with
commitments available to the Company of the lesser of (i) $125.0 million and
(ii) a borrowing base based on the eligible credit card receivables, accounts,
inventory and revenue due under certain rental agreements, less certain
reserves. The New ABL Credit Agreement also includes a $15.0 million swingline
subfacility and a $15.0 million letter of credit subfacility. The Company has
borrowed approximately $30.3 million as of December 26, 2020 .
Vitamin Shoppe Term Loan. On December 16, 2019 as part of the Vitamin Shoppe
Acquisition, we, through direct and indirect subsidiaries, entered into a Loan
and Security Agreement (the "Vitamin Shoppe Term Loan Agreement") that provides
for a $70.0 million senior secured term loan (the "Vitamin Shoppe Term Loan")
which matures on December 16, 2022 . On August 13, 2020 , we repaid in full all
amounts that were outstanding under the Vitamin Shoppe Term Loan and terminated
the Vitamin Shoppe Term Loan Agreement on August 25, 2020 .
Vitamin Shoppe ABL Revolver. On December 16, 2019 , we, through direct and
indirect subsidiaries, entered into a Second Amended and Restated Loan and
Security Agreement (the "Vitamin Shoppe ABL Agreement") providing for a senior
secured revolving loan facility (the "Vitamin Shoppe ABL Revolver") with
commitments available to us of the lesser of (i) $100.0 million and (ii) a
specified borrowing base based on our eligible credit card receivables, accounts
and inventory, less certain reserves, and as to each of clauses (i) and (ii),
less a $10.0 million availability block. The Vitamin Shoppe ABL Revolver will
mature on December 16, 2022 . We borrowed $70.0 million on December 16, 2019 , the
proceeds of which were used to consummate the Vitamin Shoppe Acquisition.
Subject to the Intercreditor Agreement, we are required to repay borrowings
under the Vitamin Shoppe ABL Revolver with the net cash proceeds of certain
customary events (subject to certain customary reinvestment rights). Further, if
the outstanding principal amount of the borrowings under the Vitamin Shoppe ABL
Revolver at any time exceeds the lesser of $100.0 million and the borrowing
base, less, in each case, a $10.0 million availability block, we must prepay any
such excess. In addition, the Vitamin Shoppe ABL Agreement includes customary
affirmative and negative covenants binding on us and our subsidiaries, including
delivery of financial statements, borrowing base certificates and other reports.
Sears Outlet Credit Agreement. On October 23, 2019 in connection with the Sears
Outlet Acquisition, we, through indirect subsidiaries, entered into a credit
agreement ("the Sears Outlet Credit Agreement") that provides for a $105.0
million first priority senior secured term loan (the "Sears Outlet Term Loan"),
net of financing costs of $2.8 million , which matures on October 23, 2023 . We
repaid the Sears Outlet Term Loan on February 14, 2020 in connection with the
financing of the American Freight Acquisition.
Buddy's Credit Agreement. On July 10, 2019 , in connection with the Buddy's
Acquisition, we, through an indirect subsidiary, entered into a credit agreement
(the "Buddy's Credit Agreement") that provides for an $82.0 million first
priority senior secured term loan which matures on July 10, 2024 . On August 23,
2019 as part of the 41 stores acquisition from A-Team, the Buddy's Credit
Agreement was amended. The amendment provides for a $23.0 million first priority
senior secured loan (the "Buddy's Additional Term Loan"), net of financing costs
of $0.4 million . We repaid the amounts outstanding under the Buddy's Credit
Agreement on February 14, 2020 in connection with the financing of the American
Freight Acquisition.
Liberty Tax Credit Agreement. On May 16, 2019 , we entered into a new credit
agreement (the "Liberty Tax Credit Agreement") which provided for a $135.0
million senior revolving credit facility, a $10.0 million sub-facility for the
issuance of letters of credit, and a $20.0 million swingline loan sub-facility.
On October 2, 2019 , we amended the Liberty Tax Credit Agreement dated May 16,
2019 to extend the maturity date to October 2, 2022 , from the original maturity
date of May 31, 2020 and decrease the aggregate amount of commitments from
$135.0 million to $125.0 million as of October 2, 2019 . The Liberty Tax Credit
Agreement included customary affirmative, negative, and financial covenants,
including delivery of financial statements and other reports and maintenance of
existence. On February 14, 2020 , we amended certain provisions of the Liberty
Tax Credit Agreement to provide for the gradual reduction of the commitments
under the Liberty Tax Credit Agreement and termination of the facility on April
30, 2020 .
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For more information on the long-term obligations, refer to "Note 9 - Long-Term Obligations", to the Consolidated Financial Statements in Item 8.
Other factors affecting our liquidity
Seasonality of cash flow. OurLiberty Tax segment's tax return preparation business is seasonal, and most of its revenues and cash flow are generated during the period from late January throughApril 30 each year, with the exception of the 2020 tax season, which was extended toJuly 15 due to the COVID-19 pandemic. Following each tax season, fromMay 1 through late January of the following year, it relies significantly on excess operating cash flow from the previous season, from cash payments made by franchisees who purchase new territories prior to the next tax season, and on the use of its credit facility to fund its operating expenses and invest in the future growth of the business. Its business has historically generated a strong cash flow from operations on an annual basis. The Liberty Tax segment devotes a significant portion of its cash resources during the off-season to finance the working capital needs of its franchisees, and expenditures for property, equipment and software. Franchisee lending and potential exposure to credit loss. A portion of our cash flow during the year is utilized to provide funding to our franchisees. AtDecember 26, 2020 , our total balance of loans to franchisees for working capital and equipment loans, representing cash we had advanced to the franchisees, was$1.6 million . In addition, at that date, our franchisees and ADs together owed us an additional$44.9 million , net of unrecognized revenue of$5.1 million , representing unpaid royalties, the unpaid purchase price for franchise territories and other amounts. OurLiberty Tax segment franchise agreements allow us to obtain repayment of amounts due to us from our franchisees through an electronic fee intercept program before our franchisees receive the net proceeds from tax preparation and other fees they have charged to their customers on tax returns associated with tax settlement products. Therefore, we are able to minimize the nonpayment risk associated with amounts outstanding from franchisees by obtaining direct electronic payment in the ordinary course throughout the tax season. The unpaid amounts owed to us from our franchisees and ADs are collateralized by the underlying franchise or area and, when the franchise or area owner is an entity, are generally guaranteed by the owners of the respective entity. Accordingly, to the extent a franchisee or AD does not satisfy its payment obligations to us, we may repossess the underlying franchise or area in order to resell it in the future. AtDecember 26, 2020 , we had an investment in impaired accounts and notes receivable and related interest receivable of approximately$16.2 million . We consider accounts and notes receivable to be impaired if the amounts due exceed the fair value of the underlying franchise and estimate an allowance for doubtful accounts based on that excess. Amounts due include the recorded value of the accounts and notes receivable reduced by the allowance for uncollected interest, amounts due to ADs for their portion of franchisee receivables, any related unrecognized revenue and amounts owed to the franchisee or AD by us. In establishing the fair value of the underlying franchise, we consider net fees of open territories and the number of unopened territories. AtDecember 26, 2020 , our allowance for doubtful accounts for impaired accounts and notes receivable was$6.6 million . Tax Receivable Agreement. We may be required to make payments under the Tax Receivable Agreement ("TRA Payments") to the Buddy's Members. Under the terms of the Tax Receivable Agreement, we will 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 ofDecember 26, 2020 , we had TRA Payments due to the Buddy's Members of$16.8 million .
Dividends. See "Item 5-Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Future cash needs and capital requirements
Operating and financing cash flow needs. Following transactions completed
subsequent to
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normal operating activities. We believe that our 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 and ADs, 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.
•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
Off Balance Sheet Arrangements
From time to time, we have been party to interest rate swap agreements. These swaps effectively changed the variable-rate of our credit facility into a fixed-rate credit facility. Under the swaps, we received a variable interest rate based on the one-month LIBOR and paid a fixed interest rate. We entered into an interest rate swap agreement in relation to our mortgage payable to a bank, during fiscal 2017. We also enter into forward contracts to eliminate exposure related to foreign currency fluctuations in connection with the short-term advances we make to our Canadian subsidiary in order to fund personal income tax refund discounting for our Canadian operations. AtDecember 26, 2020 , there were no forward contracts outstanding, but we expect to enter into forward contracts in the future during the Canadian tax season.
Critical Accounting Policies
The preparation of financial statements requires the use of estimates. Certain of our estimates require a high level of judgment and have the potential to have a material effect on the financial statements if actual results vary significantly from those estimates. Following is a discussion of the estimates that we consider critical. Inventory. Inventory for our Buddy's segment is recorded at cost, including shipping and handling fees. All lease merchandise is available for lease or sale. Upon purchase, merchandise is not initially depreciated until it is leased or three months after the purchase date. Non-leased merchandise is depreciated on a straight-line basis over a period of 24 months. Leased merchandise is depreciated over the lease term of the rental agreement. On a weekly basis, all damaged, lost, stolen, or unsalable merchandise identified is written off. Maintenance and repairs of lease merchandise are charged to operations as incurred. Inventory for our American Freight banner is valued at the lower of cost or market, using the first-in, first-out method. We record adjustments to the value of inventory when the cost of the specific inventory items on hand exceeds the amount that we expect to realize from the sale or disposal of the inventory, based on our assumptions about future demand, market conditions and analysis of our historical performance. Inventory for ourAmerican Freight Outlet banner is recorded at the lower of cost or market using the weighted-average cost method. Inventory includes the purchase price of the inventory plus costs of freight for moving merchandise from vendors to distribution centers as well as from distribution centers to stores. We maintain a provision for estimated shrinkage based on the actual historical results of our physical inventories. We compare our estimates to the actual results of the physical inventory counts as they are taken and adjust the shrink estimates accordingly. We also record adjustments to the value of inventory equal to the difference between the carrying value and the estimated market value, based on assumptions about future demand or when a permanent markdown indicates that the net realizable value of the inventory is less than cost. Inventory for our Vitamin Shoppe segment is recorded at the lower of cost or market value using the weighted-average cost method. Inventory includes costs directly incurred in bringing the product to its existing condition and location. In 40 -------------------------------------------------------------------------------- Table of Contents addition, the cost of inventory is reduced by purchase discounts and other allowances received from vendors. A markdown reserve is estimated based on a variety of factors, including, but not limited to, the amount of inventory on hand and its remaining shelf life, current and expected market conditions and product expiration dates. In addition, we have established a reserve for estimated inventory shrinkage based on the actual, historical shrinkage of our most recent physical inventories adjusted, and if necessary, for current economic conditions and business trends. Physical inventories and cycle counts are taken on a regular basis. These adjustments are estimates, which could vary significantly from actual results if future economic conditions, customer demand or competition differ from management expectations. Long-Lived Assets. We review our long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset group may not be recoverable. We measure recoverability by comparison of the carrying value of an asset to its estimated undiscounted future cash flows expected to be generated by the asset. We recognize and measure potential impairment at the lowest level where cash flows are individually identifiable. If the carrying amount of an asset exceeds its estimated future cash flows, we recognize an impairment charge equal to the amount by which the carrying value of the asset exceeds the fair value of the asset. We determine fair value through various valuation techniques, including discounted cash flow models, quoted market values, and third-party independent appraisals. If assets are to be disposed of, we separately present these assets in the balance sheet and report them at the lower of the carrying amount or fair value less selling costs, and no longer depreciate them. When we have assets classified as held for sale, we present them separately in the appropriate asset section of the balance sheet. Business Combinations-Purchase Price Allocation. For acquisitions we allocated the purchase price to the various tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values, some of which are preliminary as ofDecember 26, 2020 . Determining the fair value of certain assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions, which are inherently uncertain. Many of the estimates and assumptions used to determine fair values, such as those used for intangible assets are made based on forecasted information and discount rates. In addition, the judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations.
Recently Issued Accounting Standards
Refer to "Note 1 - Organization and Significant Accounting Policies", in our consolidated financial statements.
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