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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Franchise Group, Inc.    FRG

FRANCHISE GROUP, INC.

(FRG)
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Franchise : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

11/04/2020 | 04:24pm EST

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, potential future

temporary store closures due to government mandates 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 and cost reduction initiatives (including the Company's

ability to effectively obtain lease concessions with landlords);

• the effect of steps the Company takes in response to COVID-19, the severity

and duration of the pandemic, including whether there is a "second wave" as a

result of the loosening of governmental restrictions, the pace of recovery

when the pandemic subsides and the heightened impact it has on many of the

risks described herein and in our other filings with the SEC;

• potential regulatory actions relating to the COVID-19 pandemic;

• 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, Vitamin Shoppe segment or

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 certain of the Company's business segments;

• 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");




                                       38
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• our inability to secure reliable sources of the products and services we make

available to our customers;

• government regulation and oversight over our products and services;

• 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;

• the performance of our products within the prevailing retail industry;

• 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;


• competitive conditions in the retail industry and tax preparation market;

• 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 COVID-19

pandemic on manufacturing operations and our supply chain, customer traffic

and our operations in general;

• 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;

                                       39
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• 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;



• 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;

• 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 the U.S. Securities
and Exchange Commission ("SEC") after the date of this quarterly report.


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Overview

We are a retailer, franchisor operator and acquirer of franchised and franchisable businesses that can be scaled using our operating philosophies. We currently operate four reportable segments: Liberty Tax, Buddy's, American Freight, and Vitamin Shoppe.


Our Liberty Tax segment is one of the largest providers of tax preparation
services in the U.S. and Canada. 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 ended December 28, 2019 (the "2019 Transition Report"),
for details of the U.S. office activity and the number of Canadian and
Company-owned offices for the years ended December 28, 2019, April 30, 2019, and
April 30, 2018.

On July 10, 2019, we completed our acquisition of Buddy's Home Furnishings ("Buddy's"). Our Buddy's segment franchises or operates rent-to-own stores that lease household durable goods, such as electronics, residential furniture, appliances and household accessories, to customers on a rent-to-own basis. Merchandise is also offered for immediate purchase or an installment sales basis.


On October 23, 2019, we completed the acquisition of the Sears Outlet business
from Sears Hometown and Outlet Stores, Inc. ("Sears Outlet"). Sears Outlet has
been rebranded as American Freight Outlet and is included in the American
Freight segment. American Freight provides in-store and online access to
purchase new, one-of-a-kind, out-of-box, discontinued, obsolete, reconditioned,
overstocked, scratched and dented household appliances and unbranded furniture
and mattresses at value prices. Merchandise categories formerly associated with
Sears Outlet, such as apparel, sporting goods, lawn and garden equipment, tools,
and other household goods have been discontinued to make space for a new
furniture and mattress program. Products are generally covered by a warranty and
a full suite of extended-service plans and services are also offered.

On December 16, 2019, we completed our acquisition of the Vitamin Shoppe, Inc.
("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. 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 14,000 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.

On February 14, 2020, we completed the acquisition of American Freight Group,
Inc. ("American Freight"). Our American Freight segment is a retail chain
offering unbranded 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, American Freight 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
On February 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 debts of our Buddy's Home Furnishings
business and the American Freight Outlet portion of our American Freight
businesses.
For purposes of this section and throughout this quarterly report, all
references to "fiscal 2020" refer to the year ending December 26, 2020 and
corresponding references to fiscal quarters are references to quarters within
that fiscal year. For purposes of this section and throughout this quarterly
report all references to "tax season" refer to the period between January 1 and
April 30 of the referenced year.

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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 were deemed essential businesses and, therefore, the
majority our stores have remained open during the pandemic. The highest number
of store closures we experienced due to COVID-19 was approximately 240 stores.
As of September 26, 2020, none of our stores remained closed due to COVID-19 out
of our 4,035 total stores (owned or franchised); however, we cannot predict
whether our stores will remain open if the COVID-19 pandemic worsens and states
and localities issue new restrictions.

We also made changes to reduce our exposure to potential short-term liquidity
risk in the banking system. On June 30, 2020, we completed a public offering of
4.2 million shares of our common stock with net cash proceeds to the Company of
approximately $92.2 million and on September 18, 2020, we completed a public
offering of 1.2 million shares of our Series A Preferred Stock with net cash
proceeds to the Company of approximately $28.8 million. As of September 26,
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 next twelve
months.

While too early to fully quantify, we have not experienced a significant
negative impact on our sales and profitability due to the COVID-19 pandemic.
However, the COVID-19 pandemic could negatively impact our business and
financial results by weakening 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 COVID-19 pandemic 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 and nine months ended
September 26, 2020 and September 30, 2019
                                                   Three Months Ended                                                         Nine Months Ended
                                                                                Change                                                                       Change
(In thousands)            September 26, 2020     September 30, 2019         $            %          September 26, 2020       September 30, 2019           $            %
Total revenues           $         550,992      $           18,920     $ 532,072      (2,812 )%   $          1,656,185     $            138,578     $ 1,517,607      1,095 %
Income from operations              19,323                 (25,047 )      44,370         177  %                 76,733                   24,164          52,569        218 %
Net income                          (8,597 )               (23,464 )      14,867          63  %                 31,359                    9,471          21,888        231 %


Revenues. The table below sets forth the components and changes in our revenues
for the three and nine months ended September 26, 2020 and September 30, 2019.
                                                   Three Months Ended                                                            Nine Months Ended
                                                                                  Change                                                                        Change
(In thousands)            September 26, 2020       September 30, 2019          $            %         September 26, 2020       September 30, 2019           $             %
Product                 $            500,462     $                557     $ 499,905      89,750 %   $          1,440,677     $                557     $ 1,440,120      258,549 %
Service and other                     33,126                   10,284        22,842         222 %                164,508                  129,942          34,566           27 %
Rental                                17,404                    8,079         9,325         115 %                 51,000                    8,079          42,921          531 %
Total revenue           $            550,992     $             18,920     $ 532,072       2,812 %   $          1,656,185     $            138,578     $ 1,517,607        1,095 %




                                       42
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For the three months ended September 26, 2020, total revenues increased $532.1
million, or 2,812%, to $551.0 million compared to $18.9 million in the same
period last year. This increase was primarily due to the timing of the Buddy's
Acquisition, which increased revenue by $12.0 million, the American Freight
Acquisition and Sears Outlet Acquisition, which collectively increased revenue
by $245.2 million and the Vitamin Shoppe Acquisition, which increased revenue by
$267.0 million. Our Liberty Tax segment had a $7.9 million increase in service
and other revenue primarily due to the COVID-19 pandemic which extended the tax
filing deadline to July 15, 2020.

For the nine months ended September 26, 2020, total revenues increased $1,517.6
million, or 1,095%, to $1,656.2 million compared to $138.6 million in the same
period last year. This increase was primarily due to the timing of the Buddy's
Acquisition which increased revenue by $61.7 million, the American Freight
Acquisition and Sears Outlet Acquisition which collectively increased revenue by
$682.4 million and the Vitamin Shoppe Acquisition which increased revenue by
$780.6 million. These increases were offset by a $7.1 million decrease in
service and other revenue from our Liberty Tax segment primarily due to reduced
tax returns from store closures.

Operating expenses.  The following table details the amounts and changes in our
operating expenses for the three and nine months ended September 26, 2020 and
September 30, 2019.
                                                      Three Months Ended                                                            Nine Months Ended
                                                                                     Change                                                                        Change
(In thousands)               September 26, 2020       September 30, 2019          $            %         September 26, 2020       September 30, 2019           $             %
Cost of revenue:
 Product                   $            296,920     $                438     $ 296,482      67,690 %   $            862,320     $                438     $   861,882      196,777 %
 Service and other                          678                        -           678           - %                  2,135                        -           2,135            - %
 Rental                                   5,877                    3,048         2,829          93 %                 17,327                    3,048          14,279          468 %
   Total cost of revenue                303,475                    3,486       299,989       8,606 %                881,782                    3,486         878,296       25,195 %
Selling, general, and
administrative expenses                 228,194                   40,481       187,713         464 %                697,670                  110,928         586,742          529 %
  Total operating
expenses                   $            531,669     $             43,967     $ 487,702       1,109 %   $          1,579,452     $            114,414     $ 1,465,038        1,280 %



For the three months ended September 26, 2020, total operating expenses were
$531.7 million compared to $44.0 million in the same period last year,
representing an increase of $487.7 million, or 1,109%. This increase was
primarily due the timing of the Buddy's Acquisition which increased operating
expenses by $8.9 million, the American Freight Acquisition and Sears Outlet
Acquisition which collectively increased operating expenses by $225.3 million
and the Vitamin Shoppe Acquisition which increased operating expenses by $264.1
million.

For the nine months ended September 26, 2020, total operating expenses were
$1,579.5 million compared to $114.4 million in the same period last year,
representing an increase of $1,465.0 million, or 1,280%. This increase was
primarily due to the timing of the Buddy's Acquisition which increased operating
expenses by $50.0 million, the American Freight Acquisition and Sears Outlet
Acquisition which collectively increased operating expenses by $648.4 million
and the Vitamin Shoppe Acquisition which increased operating expenses by $783.8
million.
.

Other. Other expense increased $5.2 million for the nine months ended September 26, 2020. The increase is primarily due to a prepayment penalty from the repayment of the debt used to fund the Buddy's Acquisition, Sears Outlet Acquisition, and Vitamin Shoppe Acquisition.


Interest expense, net. Interest expense, net increased $23.5 million and $79.4
million for the three and nine months ended September 26, 2020, respectively.
These increases were primarily due to an increase in long-term obligations to
finance the acquisitions of Buddy's, Sears Outlet, Vitamin Shoppe and American
Freight, deferred financing cost amortization expense for the New Holdco debt of
$4.3 million and $13.9 million in the three and nine months ended September 26,
2020, respectively. Additionally, there was a $3.2 million write-off of deferred
financing costs due to the termination of the Vitamin Shoppe Term Loan Agreement
in the quarter ended September 26, 2020 and a $3.5 million write-off of deferred
financing costs due to the termination of the Liberty Tax Credit Agreement in
the quarter ended June 27, 2020.


                                       43
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Income tax expense (benefit). Our effective tax rate from continuing operations,
including discrete income tax items, was (5.2)% and 15.6% for the three months
ended September 26, 2020 and September 30, 2019, respectively, and 357.0% and
52.3% for the nine months ended September 26, 2020 and September 30, 2019,
respectively. The Coronavirus Aid, Relief, and Economic Security, or CARES Act,
was enacted on March 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
$45.6 million as a result of the CARES Act which is the primary reason for the
change in the effective rate for the nine months ended September 26, 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 and Vitamin 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 American Freight Acquisition and Vitamin Shoppe
Acquisition occurred subsequent to the nine months ended September 30, 2019, no
comparable information is available for the three and nine months ended
September 26, 2020; therefore, American Freight and Vitamin Shoppe segment
information is not provided in this discussion.

The following table summarizes the operating results of the Liberty Tax segment:
                                      Three Months Ended                                      Nine Months Ended
                                                           Change                                                   Change
                      September     September 30,                           September 26,   September 30,
(In thousands)         26, 2020         2019            $           %           2020            2019            $            %
Total revenues       $   13,300$    5,414$ 7,886      145.7  %   $   117,992$   125,072$ (7,080 )     (5.7 )%
Operating expenses       18,657         20,122       (1,465 )     (7.3 )%        77,871          89,514      (11,643 )    (13.0 )%
Segment income       $   (5,357 )$  (14,708 )$ 9,351      (63.6 )%   $    40,121$    35,558$  4,563       12.8  %



Total revenue for our Liberty Tax segment increased $7.9 million or 145.7% for
the three months ended September 26, 2020 as compared to the same period last
year. The increase in revenue was primarily driven by the following:

• a decrease of $0.8 million in interest income due to fewer working capital

       loans issued to franchisees; and


• a $0.1 million decrease in other revenues primarily related to gains in

the prior year on sales of Company-owned stores where the sales price

       exceeds the carrying value of the assets sold; and


• an increase of $8.4 million in royalties and advertising fees, financial

       products, tax preparation and electronic filing fees related to the
       extension of the tax season due to COVID-19; and


• an increase of $0.4 million in franchise and area developer fees due to AD

buybacks and the timing of payments made on loans.




Total revenue for our Liberty Tax segment decreased $7.1 million or 5.7% for the
nine months ended September 26, 2020 as compared to the same period last year.
The decrease in revenue was primarily driven by the following:

• a decrease of $8.8 million in royalties and advertising fees, financial

products and electronic filing fees related to store closures and reduced

       tax returns due to COVID-19; and


• a $2.7 million decrease in interest income due to fewer working capital

       loans issued to franchisees; and


• a decrease of $0.6 million in franchise and area developer fees due to AD

       buybacks and the timing of payments made on loans; and



                                       44
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•      an increase of $3.2 million in assisted tax preparation fees, net of

discounts related to an increase in the number of Company-owned stores

       operated in 2020; and


• a $1.7 million increase in other revenues primarily related to gains on

sales of Company-owned stores where the sales price exceeds the carrying

value of the assets sold.




Operating expenses for Liberty Tax decreased $1.5 million or 7.3% for the three
months ended September 26, 2020 as compared to the same period last year. The
decrease in operating expenses was driven by the following:

• a $2.8 million decrease in other expenses primarily related to reduced bad

       debt expense in 2020 and non-recurring professional fees and legal
       settlements in 2019; and


• a decrease of $0.9 million in depreciation, amortization and impairment

       charges primarily related to software disposed of in December 2019,
       partially offset by AD buybacks in 2020; and



•      a $0.4 million decrease in advertising expense due to the timing of
       advertising spending compared to the prior year; and



•      a $1.5 million increase in employee compensation due to management
       incentives and increased company-owned stores; and



•      a $1.2 million increase in AD expenses due to the extension of the tax
       season related to COVID-19.



Operating expenses for Liberty Tax decreased $11.6 million or 13.0% for the nine
months ended September 26, 2020 as compared to the same period last year. The
decrease in operating expenses was driven by the following:

• a $5.6 million decrease in AD expenses due to reacquired ADs and reduced

       tax return volume; and


• a decrease of $4.2 million in depreciation, amortization and impairment

       charges primarily related to software disposed of in December 2019,
       partially offset by AD buybacks in 2020; and



•      a $4.1 million decrease in other expenses primarily related to
       non-recurring professional fees and legal settlements in 2019 and

decreased bad debt expense in 2020, partially offset by higher software

       license and rebate costs; and



•      a $1.2 million increase in advertising expense due to the timing of
       advertising spending compared to the prior year; and



•      a $1.1 million increase in employee compensation due to management
       incentives and increased company-owned stores.



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

                                       Three Months Ended                                         Nine Months Ended
                                                              Change                                                    Change
                     September 26,    September 30,                            September 26,    September 30,
(In thousands)            2020             2019            $           %            2020             2019            $           %
Total revenues       $     25,515$     13,506$ 12,009       88.9 %   $     75,219$     13,506$ 61,713      456.9 %
Operating expenses         20,213           11,274        8,939       79.3 %         61,234           11,274       49,960      443.1 %
Segment income       $      5,302$      2,232$  3,070      137.5 %   $     13,985$      2,232$ 11,753      526.6 %



Total revenue for our Buddy's segment increased $12.0 million or 88.9% for the
three months ended September 26, 2020 as compared to the same period last year.
The increase in revenue was primarily driven by the acquisition of 41
Company-owned stores on August 23, 2019 and 21 Company-owned stores on September
30, 2019.


                                       45
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Total revenue for our Buddy's segment increased $61.7 million or 456.9% for the
nine months ended September 26, 2020 as compared to the same period last year.
The increase in revenue was primarily driven by additional days in the nine
months ended September 26, 2020 and the fact that the Buddy's Acquisition
occurred in the same period last year.

Operating expenses for Buddy's increased $8.9 million or 79.3% for the three
months ended September 26, 2020 as compared to the same period last year. The
increase in operating expenses was primarily driven by the acquisition of 41
Company-owned stores on August 23, 2019 and 21 Company-owned stores on September
30, 2019.


Operating expenses for Buddy's increased 50.0 million or 443.1% for the nine
months ended September 26, 2020 as compared to the same period last year. The
increase in operating expenses was primarily driven by additional days in the
nine months ended September 26, 2020 and the fact that the Buddy's Acquisition
occurred in the same period last 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 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.

                                       46
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The following table presents a reconciliation of Adjusted EBITDA for each of the periods indicated.


                                                   Reconciliation of Net 

Income (Loss) to Adjusted EBITDA

                                                Three Months Ended                            Nine Months Ended
                                                                                                            September 30,
(In thousands)                      September 26, 2020      September 30, 2019       September 26,2020          2019
Net income (loss)                  $          (8,597 )     $          (14,886 )     $           29,269     $      18,049
Add back:
Interest expense                              26,264                    2,755                   83,642             4,225
Income tax expense (benefit)                     427                   (4,339 )                (43,561 )          10,367
Depreciation and amortization
charges                                       17,462                    4,467                   51,254            12,239
Total Adjustments                             44,153                    2,883                   91,335            26,831
EBITDA                                        35,556                  (12,003 )                120,604            44,880
Adjustments to EBITDA
Executive severance and related
costs                                            664                        -                    5,983               952
Stock based compensation                       1,956                      292                    6,294               905
Shareholder litigation costs                     219                      210                      506               271
Corporate compliance costs                       533                        -                      637                58
Prepayment penalty on early debt
repayment                                      1,246                        -                    5,295                 -
Accrued judgments and
settlements                                      334                      643                     (835 )             968
Store closures                                   203                        -                      719             1,221
Rebranding costs                               1,286                        -                    4,509                 -
Acquisition costs                              1,073                   10,920                   18,173            11,595
Inventory fair value step up
amortization                                   6,960                        -                   35,153                 -
Tender offer                                       -                      549                        -               549
Total Adjustments to EBITDA                   14,474                  
12,614                   76,434            16,519
Adjusted EBITDA                    $          50,030       $              611       $          197,038     $      61,399




                                       47
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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. 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 of September 26, 2020, we have current installments of long-term obligations
of $112.4 million. The $53.0 million due on the Vitamin Shoppe ABL Revolver and
$32.7 million due on the New ABL Revolver, while classified as current
installments, expire in December 2022 and September 2025, respectively. We
expect that the remaining $26.7 million of current obligations can be serviced
from our cash and cash equivalents, which were $179.9 million as of
September 26, 2020.

During the nine months ended September 26, 2020, we executed several substantial transactions that will affect our liquidity and capital resources in future periods. For more details please see "Note 6. Long-Term Obligations":

• On January 3, 2020, we entered into a subscription agreement with an

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 or

redeemed until their maturity and to also fund general, working capital

       and cash needs of the Company.


• On February 14, 2020, we entered into a $675.0 million credit facility,

       which was used to fund the American Freight Acquisition and repay the
       existing Sears Outlets and Buddy's term loans.


• On May 1, 2020, we entered into a backstop commitment for a $100.0 million

asset-based lending facility with B. Riley. As of September 26, 2020, this

       commitment has been ended.


• On June 30, 2020, we completed an offering in which we sold 4.2 million

shares of our common stock and received net proceeds of approximately

       $92.2 million, after deducting underwriting discounts and estimated
       offering expenses totaling approximately $5.4 million. On July 30, 2020,
       the Common Stock Underwriters exercised their option to purchase

additional shares of our common stock, and on August 3, 2020 we received

net proceeds of approximately $13.8 million, after deducting underwriting

       discounts of approximately $0.8 million.



•      On September 18, 2020, we completed an offering in which we sold 1.2

million shares of our Series A Preferred Stock and received net proceeds

of approximately $28.8 million, after deducting underwriting discounts,

the structuring fee and estimated offering expenses totaling approximately

       $1.2 million.


• On September 23, 2020, we entered into a $125.0 million New ABL Credit

       Agreement in which we have borrowed $32.7 million.


• The outbreak of the 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 COVID-19 pandemic,

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.




                                       48
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Sources and uses of cash


Operating activities. In the nine months ended September 26, 2020, cash from
operating activities increased $175.4 million compared to the same period in the
prior year was primarily due to a $79.4 million increase in cash due to a
decrease in inventory, a $95.8 million increase in cash income, a $31.2 million
increase in accounts payable and accrued expenses and a $9.0 million increase in
deferred revenue partially offset by a $32.7 million decrease in income taxes
receivable.

Investing activities. In the nine months ended September 26, 2020, we used
$347.7 million more cash for investing activities compared to the same period in
the prior year. This increase was primarily due to $327.0 million more cash used
for the American Freight Acquisition compared to the Buddy's Acquisition, a
$16.2 million decrease in cash payments received on operating loans to
franchisees and ADs and a $25.5 million increase in purchases of property,
equipment and software. This increase was partially offset by a $21.1 million
decrease in cash used for operating loans to franchisees and ADs.

Financing activities. In the nine months ended September 26, 2020, cash provided
from financing activities increased $226.5 million compared to the same period
in the prior year. This was driven by a $481.0 million increase in borrowings
under the FGNH Credit Agreement compared to the term loan issued for the Buddy's
Acquisition, a $201.4 million increase due to proceeds from share issuances and
a $52.8 million increase in proceeds from revolving credit agreements. The
increases were partially offset by the $439.6 million repayment of long-term
obligations primarily the term loans used to acquire Buddy's, Sears Outlet, and
American Freight, $32.2 million increase in repayments of borrowings under
revolving credit facilities, a $23.4 million increase in dividends and
non-controlling interest distributions paid and a $12.3 million increase in
payments for debt issuance costs.

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 transaction and repay the existing Sears 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 on February 24, 2025 and
the FGNH ABL Term Loan will mature on September 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, which commenced on June 27, 2020. On September
23, 2020, the Company 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 entered into a New ABL Credit Agreement which provides for
a New ABL Revolver in which the Company has borrowed approximately $32.7
million.
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, the Company 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.
On May 22, 2020, the Vitamin Shoppe ABL Revolver was amended to permit the Term
Loan Assignment and provide for the Dividend Waiver.

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

                                       49
--------------------------------------------------------------------------------


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.

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. Our Liberty 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 through April 30 each year. Following each
tax season, from May 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. At
September 26, 2020, our total balance of loans to franchisees for working
capital and equipment loans, representing cash we had advanced to the
franchisees, was $1.9 million. In addition, at that date, our franchisees and
ADs together owed us an additional $45.9 million, net of unrecognized revenue of
$3.9 million, representing unpaid royalties, the unpaid purchase price for
franchise territories and other amounts.

Our Liberty 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. At September 26, 2020, we had an investment in impaired accounts and
notes receivable and related interest receivable of approximately $17.1 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. At September 26, 2020,
our allowance for doubtful accounts for impaired accounts and notes receivable
was $5.9 million.

Tax Receivable Agreement. We may be required to make payments under the Tax
Receivable Agreement ("TRA Payments") to the former equity holders of Buddy's
(the "Buddy's Members"). Under the terms of the Tax Receivable Agreement, we
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 of September 26, 2020, we have TRA Payments due to the
Buddy's Members of $17.2 million.


                                       50
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Dividends. On September 4, 2020, our Board of Directors declared a quarterly
dividend of $0.25 per share of common stock. On September 24, 2020, our Board of
Directors declared a quarterly dividend of $0.140625 per share of Series A
Preferred Stock. The cash dividend was paid on or about October 15, 2020 to
holders of record of our common stock on the close of business on September 15,
2020 and our Series A Preferred Stock on October 4, 2020, respectively. 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. 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 to September 26, 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; and


• The extent, if any, to which our Board of Directors elects to continue to

declare dividends on our common stock.




Compliance with debt covenants. Our revolving credit and long-term debt
agreements impose restrictive covenants on us, including requirements to meet
certain ratios. As of September 26, 2020, we were in compliance with all
covenants under these agreements and, based on a continuation of current
operating results, we expect to be in compliance for the remainder of fiscal
2020.

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. At September 26, 2020, the value of our forward
contracts outstanding was $0.2 million.

ITEM 3

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