FRANCHISE GROUP, INC. 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 uncertainty of the future impact of the COVID-19 pandemic and public
health measures on our business and results of operations, including
uncertainties surrounding the physical and financial health of our customers,
the ability of government assistance programs to individuals, households and
businesses to support consumer spending, levels of foot traffic in our
stores, changes in customer demand for our products and services, possible
disruptions in our supply chain or sources of supply, and whether we will
have the governmental approvals, personnel and sources of supply to be able
to keep our stores open;
• our plans and expectations in response to the COVID-19 pandemic, including
increased expenses for potential higher wages and bonuses paid to associates
and the cost of personal protective equipment and additional cleaning
supplies and protocols for the safety of our associates, and expected delays
in new store openings;
• potential regulatory actions relating to the COVID-19 pandemic, including the
extensions of tax filing deadlines or other related relief;
• the possibility that any of the anticipated benefits of the Buddy's
Acquisition, Sears Outlet Acquisition, Vitamin Shoppe Acquisition and
American Freight Acquisition (as all such terms are defined below) will not
be realized or will not be realized within the expected time period, the
businesses of the Company and the Buddy's segment,
American Freight segment may not be integrated successfully or such
integration may be more difficult, time-consuming or costly than expected,
revenues following the Buddy's Acquisition, Sears Outlet Acquisition, Vitamin
Shoppe Acquisition or American Freight Acquisition may be lower than
expected;
• our inability to grow on a sustainable basis;
• changes in operating costs, including employee compensation and benefits;
• the seasonality of our
• departures of key executives or directors;
• our ability to attract additional talent to our senior management team;
• our ability to maintain an active trading market for our common stock on The
Nasdaq Global Market ("Nasdaq");
• our inability to secure reliable sources of the tax settlement products we
make available to our customers;
• government regulation and oversight over our products and services;
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--------------------------------------------------------------------------------• our ability to comply with the terms of our settlement with the Department of
Justice (the "DOJ") and the Internal Revenue Service ("IRS");
• government initiatives that simplify tax return preparation, improve the
timing and efficiency of processing tax returns, limit payments to tax
preparers, or decrease the number of tax returns filed or the size of the
refunds;
• government initiatives to pre-populate income tax returns;
• 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;
• the possible characterization of refund transfers as a form of loan or
extension of credit;
• changes in the tax settlement products offered to our customers that make our
services less attractive to customers or more costly to us;
• our ability to 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;
• the performance of our products within the prevailing retail industry;
• worldwide economic conditions and business uncertainty, the availability of
consumer and commercial credit, change in consumer confidence, tastes,
preferences and spending, and changes in vendor relationships;
• 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 coronavirus
outbreak on manufacturing operations and our supply chain, customer traffic
and our operations in general;
• 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 or
employees;
• our ability and the ability of our franchisees to comply with legal and
regulatory requirements;
• failures by our franchisees and their employees 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;
• the ability of our franchisees to open new territories and operate them
successfully;
• the availability of suitable store locations at appropriate lease terms;
• the ability of our franchisees to generate sufficient revenue to repay their
indebtedness to us;
• our ability to manage Company-owned offices;
• our exposure to litigation and any governmental investigations;
• our ability and our franchisees' ability to protect customers' personal
information, including from a cyber-security incident;
• the impact of identity-theft concerns on customer attitudes toward our
services;
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• our ability to access the credit markets and satisfy our covenants to lenders;
• challenges in deploying accurate tax software in a timely way each tax season;
• delays in the commencement of the tax season attributable to Congressional
action affecting tax matters and the resulting inability of federal and state
tax agencies to accept tax returns on a timely basis or other changes that
have the effect of delaying the tax refund cycle;
• competition in the tax preparation market;
• the effect of federal and state legislation that affects the demand for paid
tax preparation, such as the Affordable Care Act and potential immigration
reform;
• our reliance on technology systems and electronic communications;
• our ability to effectively deploy software in a timely manner and with all
the features our customers require;
• the impact of any acquisitions or dispositions, including our ability to
integrate acquisitions and capitalize on their anticipated synergies; 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 theU.S. Securities and Exchange Commission ("SEC") after the date of this quarterly report. 36 --------------------------------------------------------------------------------
Overview
We are a retailer, franchisor operator and acquirer of franchised and
franchisable businesses that can be scaled using our operating expertise. We
currently operate four reportable segments:
OurLiberty Tax segment is one of the largest providers of tax preparation services in theU.S. andCanada . Our tax preparation services and related tax settlement products are offered primarily through franchised locations, although we operate a limited number of Company-owned offices each tax season. See "Note 1. Organization and Significant Accounting Policies" in the notes to Consolidated Financial Statements in our Transition Report on Form 10-K/T for the transition period endedDecember 28, 2019 , for details of theU.S. office activity and the number ofCanadian and Company -owned offices for the years endedDecember 28, 2019 ,April 30, 2019 , andApril 30, 2018 .
On
OnOctober 23, 2019 , we completed the acquisition of theSears Outlet business fromSears Hometown and Outlet Stores, Inc. ("Sears Outlet ").Sears Outlet has been rebranded asAmerican Freight Outlet and is included in the American Freight segment.American Freight Outlet provides in-store and online access to purchase outlet-value products across a broad assortment of merchandise categories, including home appliances, mattresses, apparel sporting goods, lawn and garden equipment, tools, and other household goods at prices that are significantly lower than list prices. Products are generally covered by a warranty and a full suite of extended-service plans and services are also offered. OnDecember 16, 2019 , we completed our acquisition of theVitamin Shoppe, Inc. ("Vitamin Shoppe ). OurVitamin Shoppe segment is an omni-channel specialty retailer of vitamins, minerals, herbs, specialty supplements, sports nutrition and other health and wellness products. We believe we offer one of the largest varieties of products among vitamin, mineral and supplement ("VMS") retailers and continue to refine our product assortment with approximately 7,200 stock keeping units ("SKUs") offered in our stores or though e-commerce. We believe our product offering and emphasis on product knowledge and customer service helps us meet the needs of our target customer and serves as a foundation for enhancing strong customer loyalty. OnFebruary 14, 2020 , we completed the acquisition ofAmerican Freight Group, Inc. ("American Freight"). Our American Freight segment is a retail chain offering brand-name furniture, mattresses 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, we can offer quality, new furniture and mattresses at the lowest prices. American Freight offers same-day delivery on all in-stock items with flexible payment options including free layaway and take it home today for$50 with low, easy payment plans. Our revenue is primarily derived from merchandise sales, lease revenue, loans and fee charges in our Company-owned stores, royalties and other required fees from our franchisees and financial products related to refund transfers. 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. Acquisition OnFebruary 14, 2020 , we announced the completion of our previously announced acquisition of American Freight ("American Freight Acquisition"). Additionally, we entered into a new$675 million credit facility which funded the American Freight Acquisition and refinanced certain debt of our Buddy's Home Furnishings and American Freight businesses. For purposes of this section and throughout this quarterly report, all references to "fiscal 2020" endingDecember 26, 2020 and corresponding references to fiscal quarters are references to quarters within those fiscal year. For purposes of this section and throughout this quarterly report all references to "tax season" refer to the periodbetween January 1 and April 30 of the referenced year. 37
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Impact of COVID-19
The COVID-19 pandemic has affected, and likely will continue to affect, our financial condition and results of operations for the foreseeable future.
In most states, our segments have been deemed essential businesses and, therefore, the majority our stores have remained open during the pandemic. The highest number of stores closures due to COVID-19 was approximately 240 stores. As ofJune 15, 2020 , one store is closed due to COVID-19 out of our 4,096 total stores (owned or franchised). We also made changes to reduce our exposure to potential short-term liquidity risk in the banking system, including executing a backstop commitment letter onMay 1, 2020 pursuant to which B. Riley Financial, Inc. agreed to provide, subject to the terms and conditions set forth therein, a backstop commitment for a$100 million asset-based lending facility. As ofMarch 28, 2020 , we were in compliance with our debt covenants and, based on a continuation of current operating results, we expect to be in compliance for the remainder of fiscal 2020. While too early to quantify, we have recently experienced a negative impact on our sales and profitability. The coronavirus could continue to negatively impact our business and financial results by continuing to weaken demand for our products and services, interfering with our ability and our franchisees' ability to operate store locations, disrupting our supply chain or affecting our ability to raise capital from financial institutions. As events are rapidly changing, we are unable to accurately predict the impact that the coronavirus will have on our results of operations due to uncertainties including, but not limited to, the duration of shutdowns, quarantines and travel restrictions, the severity of the disease, the duration of the outbreak and the public's 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 months endedMarch 28, 2020 andMarch 31, 2019 . Three Months Ended Change March 28, 2020 March 31, 2019 $ % (In thousands) Total revenues$ 592,565 $ 95,838 $ 496,727 518 % Income from operations 45,837 54,873 (9,036 ) (16 )% Net income 61,898 38,191 23,707 62 %
Revenues. The table below sets forth the components and changes in our revenues
for the three months ended
Three Months Ended
Change
March 28, 2020 March 31, 2019 $ %
(In thousands)
Product $ 473,505 $ - $ 473,505 - %
Service and other 102,640 95,838 6,802 7 %
Rental 16,420 - 16,420 - %
Total revenue $ 592,565 $ 95,838 $ 496,727 518 %
For the three months ended March 28, 2020 , total revenues increased $496.7
million million, or 518%, to $592.6 million million compared to $95.8 million
million in the same period last year. This increase was primarily due to the
Buddy's Acquisition which increased revenue by $24.3 million , the American
Freight Acquisition and Sears Outlet Acquisition which collectively increased
revenue by $202.7 million and the Vitamin Shoppe Acquisition which increased
revenue by $275.9 million . These increases are offset by a $6.2 million decrease
in service and other revenue from our Liberty Tax segment primarily due to
reduced tax returns from store closures and the extension of the tax filing
deadline to July 15, 2020 due to the COVID-19 pandemic.
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Operating expenses. The following table details the amounts and changes in our
operating expenses for the three months ended March 28, 2020 and March 31, 2019 .
Three Months Ended
Change
March 28, 2020 March 31, 2019 $ %
(In thousands)
Cost of revenue:
Product $ 287,818 $ - $ 287,818 - %
Service and other 756 - 756 - %
Rental 5,942 - 5,942 - %
Total cost of revenue 294,516 - 294,516 - %
Selling, general, and administrative
expenses 252,212 40,965 211,247 516 %
Restructuring expenses - - - - %
Total operating expenses $ 546,728 $
40,965
For the three months endedMarch 28, 2020 , total operating expenses were$546.7 million compared to$41.0 million in the same period last year, representing an increase of$505.8 million , or 1,235%. This increase was primarily due to the Buddy's Acquisition which increased operating expenses by$21.0 million , the American Freight Acquisition and Sears Outlet Acquisition which collectively increased operating expenses by$201.0 million and theVitamin Shoppe Acquisition which increased operating expenses by$281.4 million . Other. Other expense increased by$4.0 million due to a prepayment penalty from the repayment of the debt used to fund the Buddy's Acquisition and the Sears Outlet Acquisition. Interest expense, net. Interest expense, net increased$24.7 million due to an increase in debt to finance the acquisitions of Buddy's,Sears Outlet ,Vitamin Shoppe and American Freight and a$4.6 million write-off of deferred financing costs due to the repayment of the debt used to finance the Buddy's Acquisition and Sears Outlet Acquisition. Income tax benefit. Our effective tax rate from continuing operations, including discrete income tax items, was (286.2)% and 29.0% for the three months endedMarch 28, 2020 andMarch 31, 2019 , respectively. The CARES Act was enacted onMarch 27, 2020 , which 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$46.8 million as a result of the CARES Act which is the primary reason for the change in the effective rate for the three months endedMarch 28, 2020 compared to the same period in the prior year. Segment Information We, through our franchisees and Company-owned stores, operate a system of tax preparation, rent-to-own and point of sale retail locations. Our operations are conducted in four reporting business segments:Liberty Tax , Buddy's, American Freight andVitamin Shoppe . We define our segments as those operations whose results our chief operating decision maker ("CODM") regularly reviews to analyze performance and allocate resources. We measure the results of our segments using, among other measures, each segment's net sales, 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 Buddy's Acquisition, American Freight Acquisition and Vitamin Shoppe Acquisition occurred subsequent to the three months endedMarch 31, 2019 , no comparable information is available for the three months endedMarch 28, 2020 ; therefore, Buddy's, American Freight andVitamin Shoppe segment information is not provided in this discussion. 39 -------------------------------------------------------------------------------- The following table summarizes the operating results of theLiberty Tax segment: Three Months Ended Change (In thousands) March 28, 2020 March 31, 2019 $ % Total revenues$ 89,618 $ 95,838 $ (6,220 ) (6.5 )% Operating expenses 40,937 40,965 (28 ) (0.1 )% Segment income 48,681 54,873 (6,192 ) (11.3 )% Total revenue for ourLiberty Tax segment decreased 6.5% for the three months endedMarch 28, 2020 as compared to the same period last year. The decrease in revenue is primarily driven by the following:
• a decrease of
products and electronic filing fees related to store closures and reduced
tax returns due to COVID-19; and
• a
loans issued to franchisees.
These decreases were offset by:
• an increase of
discounts related to an increase in the number of Company-owned stores
operated in 2020; and
• a
sales of Company-owned stores where the sales price exceeds the carrying
value of the assets sold.
Operating expenses for
• a
Developers and reduced tax return volume; and
• a decrease of
charges primarily related to software disposed of in December 2019 .
• a
software license costs, the reversal of a legal settlement in 2019 and
higher franchisee rebate costs;
• a
advertising compared to the prior year;
Adjusted EBITDA
To provide additional information regarding our financial results, we have disclosed in the table below and within this quarterly report Adjusted EBITDA. 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 quarterly report because we seek to manage our business to achieve higher levels of Adjusted EBITDA and to improve the level of Adjusted EBITDA as a percentage of revenue. In addition, it is a key basis upon which we assess the performance of our operations and management. We also use Adjusted EBITDA for business planning and the evaluation of acquisition opportunities. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons. We believe the presentation of Adjusted EBITDA enhances an overall understanding of the financial performance of and prospects for our business. 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.
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Three Months Ended
March 28, 2020 March 31, 2019
Reconciliation of Net Loss to Adjusted EBITDA (In thousands)
Net income $ 61,898 $ 38,191
Add back:
Interest expense 25,752 1,055
Income tax benefit (45,869 ) 15,634
Depreciation, amortization, and impairment charges 15,927 4,073
Total Adjustments (4,190 ) 20,762
EBITDA 57,708 58,953
Adjustments to EBITDA
Executive severance and related costs 4,657 -
Stock based compensation 2,485 388
Shareholder litigation costs 131 -
Corporate compliance costs 99 -
Prepayment penalty on early debt repayment 4,048 -
Accrued judgments and settlements (1,285 ) (2,306 )
Store closures 259 1,163
Acquisition costs 10,354 175
Inventory fair value step up amortization 20,790 -
Total Adjustments to EBITDA 41,538 (580 )
Adjusted EBITDA $ 99,246 $ 58,373
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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, which has included the sale of securities to affiliates ofVintage and B. Riley FBR, Inc. , among others. 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. As ofMarch 28, 2020 , we have current installments of long-term obligations of$257.5 million . OnMay 1, 2020 , we entered into an ABL Commitment Letter withB. Riley pursuant to whichB. Riley agreed to provide a backstop commitment for a$100.0 million asset-based lending facility to replace the$100.0 million FGNH ABL Term Loan due onSeptember 30, 2020 . The$70.0 million due on the Vitamin Shoppe ABL Revolver, while classified as a current installment as required of revolving credit facilities, expires inDecember 2022 . The remaining$87.5 million of current obligations can be serviced from our cash and cash equivalents, which were$147.0 million as ofMarch 28, 2020 .
During the three months ended
• On
affiliate of Vintage, pursuant to which the affiliate of Vintage purchased
from the Company 2,354,000 shares of common stock for an aggregate
purchase price of $28.2 million in cash.
• On February 7, 2020 , in connection with our repurchases of Vitamin
Shoppe's outstanding 2.25% Convertible Senior Notes due 2020 (the "VSI
Convertible Notes"), certain investors provided the Company with an
aggregate of approximately $65.9 million of equity financing to fund the
repurchase or redemption of the VSI Convertible Notes, make interest
payments on the VSI Convertible Notes that are not so repurchased orredeemed until their maturity and to also fund general, working capital
and cash needs of the Company.
• On
which was used to fund the American Freight Acquisition and repay the
existing Sears Outlets and Buddy's term loans.
• The outbreak of the coronavirus (COVID-19) pandemic has affected economic
conditions, including macroeconomic conditions and levels of business
confidence and has created economic disruption. Mitigation efforts,
including federal, state and local government restrictions, including
travel restrictions, restrictions on public gatherings, closing of
nonessential businesses and quarantining of people who may have been
exposed to the coronavirus, may have an impact on our cash flow from
operations and our ability to raise capital from financial institutions.
Currently, there is significant uncertainty surrounding the potential
impact on our business and we are actively managing our business to
respond to the impact and increase our liquidity.
Sources and uses of cash
Operating activities. In the three months endedMarch 28, 2020 , cash from operating activities increased$65.0 million compared to the same period in the prior year is primarily due to a$40.0 million decrease in inventory,$34.8 million increase in accounts payable and accrued liabilities,$50.8 million in cash income and a$5.4 million increase in accounts, notes and interest receivable partially offset by a$65.0 million decrease in income taxes receivable and a$5.4 million decrease in accounts, notes and interest receivable. Investing activities. In the three months endedMarch 28, 2020 , we used$369.5 million more cash for investing activities compared to the same period in the prior year. This increase is primarily due to$357.3 million of cash used for the American Freight Acquisition, a$15.3 million decrease in cash payments on operating loans to franchisees and ADs and a$6.0 million increase in purchases of property, equipment and software. This increase was partially offset by a$10.2 million decrease in cash used for operating loans to franchisees and ADs. 42 -------------------------------------------------------------------------------- Financing activities. In the three months endedMarch 28, 2020 , cash from financing activities increased$406.6 million compared to the same period in the prior year. This increase was driven by a$575.0 million in borrowing under the FGNH Credit Agreement, a$94.3 million increase in proceeds from revolving credit agreements, a$80.7 million increase due to proceeds from share issuances and a$35.2 million decrease in repayments of borrowings under revolving credit facilities. The increases are partially offset by the$368.7 million repayment of term loans used to acquire Buddy's,Sears Outlet and American Freight.
Long-term debt borrowings
Franchise Group New Holdco Term Loan. OnFebruary 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 transaction and repay the existingSears Outlets 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 onFebruary 24, 2025 and the FGNH ABL Term Loan will mature onSeptember 30, 2020 . We are required to repay the FGNH Term Loan in equal quarterly installments of$6.25 million on the last day of each fiscal quarter, commencing onJune 30, 2020 . Vitamin Shoppe Term Loan. OnDecember 16, 2019 as part of theVitamin 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 onDecember 16, 2022 . Our obligations under theVitamin Shoppe Term Loan are secured by substantially all of the assets of ourVitamin Shoppe segment. We are required to repay the term loan in equal quarterly installments of$4.3 million on the last day of each fiscal quarter, commencing onMarch 28, 2020 . The Vitamin Shoppe Term Loan Agreement includes customary affirmative, negative, and financial covenants binding on us and our subsidiaries, including delivery of financial statements, borrowing base certificates and other reports. OnMay 22, 2020 , the Vitamin Shoppe Term Loan was amended to among other things, (i) permit the assignment of$5.3 million of the outstanding term loan to the Company (the "Term Loan Assignment"), subject to certain conditions and certain limitations on the Company's rights as a lender, (ii) modify the minimum consolidated EBITDA covenant, (iii) limit the quarterly dividend payment by the Company that would otherwise have been permitted in the second fiscal quarter of 2020 (by reference to certain financial calculations from the first fiscal quarter of 2020) (the "Dividend Waiver") and (iv) permit the Company to use an anticipated tax refund to prepay$12.5 million of the term loan upon receipt of such tax refund, along with a 2% prepayment fee, plus (x) if the tax refund prepayment is not made byJuly 31, 2020 , the Company will be required to pay a fee of 0.5% of the outstanding term loan (other than the portion of the term loan held by Parent) and (y) if the tax refund prepayment is not made bySeptember 25, 2020 , the Company will be required to pay additional amortization of$3.1 million for each fiscal quarter (beginning with the fiscal quarter ending onSeptember 26, 2020 ) until the tax refund prepayment is made (which additional quarterly amortization may be deducted from the required tax refund prepayment). Vitamin Shoppe ABL Revolver. OnDecember 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 onDecember 16, 2022 . We borrowed$70.0 million onDecember 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.
On
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Liberty Tax Credit Agreement. On May 16, 2019 , we entered into a new credit
agreement (the "Liberty Tax Credit Agreement") which provides for a $135.0
million senior revolving credit facility (the "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 includes 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 .
For more information on the long-term obligations, refer to "Note 6 - Long-Term Obligations", to the Consolidated Financial Statements in Item 1.
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. 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. TheLiberty 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. AtMarch 28, 2020 , our total balance of loans to franchisees for working capital and equipment loans, representing cash we had advanced to the franchisees, was$4.6 million . In addition, at that date, our franchisees and ADs together owed us an additional$58.3 million , net of unrecognized revenue of$4.1 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. AtMarch 28, 2020 , we had an investment in impaired accounts and notes receivable and related interest receivable of approximately$15.9 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. AtMarch 28, 2020 , our allowance for doubtful accounts for impaired accounts and notes receivable was$5.8 million . Tax Receivable Agreement. We may be required to make TRA payments to the Buddy's Members. Under the terms of the TRA, 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 TRA, 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 TRA 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 TRA to utilize the tax benefits, then we would not be required to make the related TRA payments. As a result of these uncertainties, we cannot estimate the amount of total potential 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 44 --------------------------------------------------------------------------------
would be sufficient to fund the required payments. As of
Dividends. OnMarch 12, 2020 , our Board of Directors declared a quarterly dividend to stockholders of$0.25 per share. The cash dividend was paid onApril 27, 2020 to holders of record of our common stock on the close of business onApril 10, 2020 . However, we may not continue to pay cash dividends in the future. 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 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.
Future cash needs and capital requirements
Operating and financing cash flow needs. Following transactions completed subsequent toMarch 28, 2020 , our primary cash needs will 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 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 ofMarch 28, 2020 , we were in compliance with all covenants under these agreements. 45
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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. AtMarch 28, 2020 , the value of our forward contracts outstanding were$1.4 million .
ITEM 3
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