Franchise Group

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from  to             
Commission File Number: 001-35588
FRANCHISE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
27-3561876
(State or other jurisdiction of

incorporation or organization)
(I.R.S. Employer

Identification No.)
109 Innovation Court, Suite J
Delaware, Ohio 43015
(Address of principal executive offices)
Registrant’s telephone number, including area code: (740) 363-2222
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
FRG
NASDAQ Global Market
7.50% Series A Cumulative Preferred Stock, par value
$0.01 per share and liquidation preference of $25.00 per
share
FRGAP
NASDAQ Global Market
Securities to be registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒    No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes o    No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☒   No  o 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer 

☐
Smaller reporting company
☐
 Emerging growth company ☐ 
 If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the
filing reflect the correction of an error to previously issued financial statements.☐ 
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).☐ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐    No ☒
The aggregate market value of the shares of common stock held by non-affiliates of the registrant computed based on the last reported sale price of $38.80
on June 25, 2022 was $1,097,885,557.

The number of shares of the registrant’s common stock outstanding as of February 22, 2023 was 34,925,773.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement for the 2023 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.
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Table of Contents
Part I
Item 1.
Business
7
Item 1A.
Risk Factors
11
Item 1B.
Unresolved Staff Comments
28
Item 2.
Properties
28
Item 3.
Legal Proceedings
28
Item 4.
Mine Safety Disclosures
28
Part II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
29
Item 6.
[Reserved]
29
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
30
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
40
Item 8.
Financial Statements and Supplementary Data
41
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
87
Item 9A.
Controls and Procedures
87
Item 9B.
Other Information
88
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
101
Part III
 
Item 10.
Directors, Executive Officers, and Corporate Governance
88
Item 11.
Executive Compensation
88
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
88
Item 13.
Certain Relationships and Related Transactions, and Director Independence
88
Item 14.
Principal Accounting Fees and Services
89
Part IV
 
Item 15.
Exhibits and Financial Statement Schedules
90
Item 16.
Form 10-K Summary
97
Signatures
97
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for the year ended December 31, 2022 (this “Annual 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 risk that natural disasters, public health crises, political uprisings, uncertainty or unrest, or other catastrophic events could adversely affect our
operations and financial results, including the impact of the COVID-19 pandemic on manufacturing operations and our supply chain, customer traffic
and our operations in general;
•
the possibility that any of the anticipated benefits of our acquisitions or dispositions will not be realized or will not be realized within the expected time
period, our businesses and our acquisitions may not be integrated successfully or such integration may be more difficult, time-consuming or costly than
expected, or revenues following our acquisitions may be lower than expected or we are unable to sell non-core assets;
•
our ability to identify and consummate attractive acquisitions on favorable terms;
•
additional leverage incurred in connection with acquisitions or other capital expenditure initiatives;
•
our inability to grow on a sustainable basis;
•
changes in operating costs, including employee compensation and benefits and increased transportation costs and delays attributed to global supply
chain challenges;
•
higher inflation rates, which may result in reduced customer traffic or impact discretionary consumer spending;
•
the seasonality of the products and services we provide in certain of our business segments;
•
departures of key executives, senior management members or directors;
•
our ability to attract additional talent to our teams;
•
our ability to maintain an active trading market for our common stock on The Nasdaq Global Market (“Nasdaq”);
•
the effect of regulation of the products and services that we offer, including changes in laws and regulations and the costs and administrative burdens
associated with complying with such laws and regulations;
•
our ability to develop and maintain relationships with our third-party product and service providers;
•
our ability to offer merchandise and services that our customers demand;
•
our ability to successfully manage our inventory levels and implement initiatives to improve inventory management and other capabilities;
•
competitive conditions in the retail industry and consumer services markets;
•
the performance of our products within the prevailing industry;
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•
worldwide economic conditions and business uncertainty, the availability of consumer and commercial credit, higher debt capital costs, change in
consumer confidence, tastes, preferences and spending, and changes in vendor relationships;
•
the uncertainty of the future impact of the COVID-19 pandemic and public health measures on our business and results of operations;
•
the effect of steps we take in response to the COVID-19 pandemic, the severity and duration of the pandemic, new variants of COVID-19 that have
emerged, and the speed and efficacy of vaccine and treatment developments, 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 and the related government mitigation efforts on our business and our financial results;
•
disruption of manufacturing, warehouse or distribution facilities or information systems;
•
the continued reduction of our competitors promotional pricing on new-in-box appliances, potentially adversely impacting our sales of out-of-box
appliances and associated margin;
•
any potential non-compliance, fraud or other misconduct by our franchisees, dealers, or employees;
•
our ability and the ability of our franchisees and dealers to comply with legal and regulatory requirements;
•
failures by our franchisees, the franchisees’ employees, and our dealers to comply with their contractual obligations to us and with laws and regulations,
to the extent these failures affect our reputation or subject us to legal risk;
•
our ability to attract and retain new franchisees and dealers and the ability of our franchisees and dealers to open new stores or territories and operate
them successfully;
•
the availability of suitable store locations at appropriate lease terms;
•
the ability of our franchisees and dealers to generate sufficient revenue to pay us royalties and fees;
•
our ability to manage Company-owned stores;
•
our exposure to litigation and any governmental investigations;
•
our ability and our franchisees’ and dealers’ ability to protect customers’ personal information, including from a cyber-security incident;
•
the impact of identity-theft concerns on customer attitudes toward our services;
•
our ability to access the credit markets and satisfy our covenants to lenders;
•
our operating subsidiary’s potential repurchase of certain finance receivables if certain representations and warranties about the quality and nature of
such receivables are breached, which may negatively impact our results of operations, financial condition, and liquidity;
•
a decline in the credit quality of our customers, a decrease in our credit sales, or other factors outside of our control, which could lead to a decrease in
our product sales and profitability;
•
our reliance on technology systems and electronic communications; and
•
other factors, including the risk factors discussed in this Annual Report.
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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 Annual 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 Annual Report.
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PART I
Item 1.    Business.
Overview
We are an owner and operator of franchised and franchisable businesses that continually looks to grow our portfolio of brands while utilizing our operating
and capital allocation philosophies to generate strong cash flows. We have a diversified and growing portfolio of highly recognized brands. Our asset-light
business model is designed to generate consistent, recurring revenue and strong operating margins and requires limited maintenance capital expenditures. As a
multi-brand operator, we continually look to diversify and grow our portfolio of brands either through acquisition or organic brand development. Our acquisition
strategy typically targets businesses that are highly cash flow generative with compelling unit economics that can be scaled by adding franchise, dealer and
company-owned units, or that can be restructured to enhance performance and value to Franchise Group. We strive to create value for our stockholders by
generating free cash flow and capital-efficient growth across economic cycles.
Our business segments include The Vitamin Shoppe (“Vitamin Shoppe”), Pet Supplies Plus, Badcock Home Furniture & more (“Badcock”), American
Freight, Buddy’s Home Furnishings (“Buddy’s”), and Sylvan Learning (“Sylvan”). As of the year ended December 31, 2022, on a combined basis, we operated
3,029 locations consisting of 1,310 franchised locations, 1,401 company-run locations and 318 dealer locations. Each of our companies has its own management
team with significant experience in its respective industry. Additionally, we offer our brands a shared services platform that allows us to drive economies of
scale, efficiencies and best practices. We believe our platform enables our portfolio of brands to be stronger together than they are apart.
We believe our financial performance and business model have been resilient across economic cycles and recently during the COVID-19 pandemic. In
addition, our franchised business model is designed to generate consistent, recurring revenue and predictable free cash flow in order to insulate us from the
operating cost variability of our franchised locations. The operating costs of our franchised locations are borne by our franchisees themselves; however, royalties
paid by our franchisees to us could be dependent upon our franchisees’ ability to effectively manage these operating costs. That is why we strive to deliver to our
franchisees a best-in-class franchise program through, among other things, our knowledge of the business, operational support and training.
We believe our success is driven in large part by our mutually beneficial relationships with our individual franchisees and dealers. Our franchise and dealer
programs are designed to promote consistency and we are selective in granting franchises and dealerships. We are focused on partnering with franchisees and
dealers who have the commitment, capability and capitalization to grow our brands. Franchisees and dealers can range in size from individuals owning just one
location to publicly-traded companies.
While the specific terms of our franchise agreements vary among our brands, we utilize both store-level franchise and multi-unit development programs.
Under both types of franchise programs, franchisees supply capital by purchasing or leasing the land, building, equipment, signs, inventory and supplies. Both
store-level franchise and multi-unit development agreements typically require payment to us of certain upfront fees such as initial fees paid upon opening a
store, fees paid to renew the term of the franchise agreement and fees paid in the event the franchise agreement is transferred to another franchisee. Franchisees
also pay monthly royalties based on a percentage of their store sales and are required to spend a certain amount to advertise and promote the brand.
Additionally, our Badcock segment offers dealership agreements, whereby a dealer is granted a non-exclusive license for use at designated premises to
operate the dealership devoted exclusively to the sale of merchandise and other approved activities. There are no fees that are paid by the dealer for entering into
a dealership agreement. However, the dealers are able to earn and may be entitled to receive a commission, as determined by Badcock, upon the sale of
merchandise consigned by Badcock to the dealer.
We seek to maintain healthy relationships with our franchisees, dealers and their representatives. We invest a significant amount of time working with the
franchisee and dealer community on key aspects of the business, including products, equipment, operational improvements, standards and management
techniques.
Our Brands
Our Vitamin Shoppe segment is an omnichannel specialty retailer and wellness lifestyle company with the mission of providing customers with the most
trusted products, guidance and services to help them become their best selves, however they define it. Vitamin Shoppe offers one of the largest varieties of
products among vitamin, mineral and supplement retailers. The broad product offering enables Vitamin Shoppe to provide our customers with a depth of
selection of products that may not be readily available at other specialty retailers or mass merchants, such as discount stores, supermarkets, drug stores and
wholesale clubs. Vitamin Shoppe continues to focus on improving the customer experience through the roll-out of initiatives including
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increasing customer engagement and personalization, enhancing the omnichannel experience (including in stores, online and on mobile devices), growing
private brands and improving the effectiveness of pricing and promotions.
Our Pet Supplies Plus segment is a leading omnichannel retail chain and franchisor of pet supplies and services. Pet Supplies Plus has a diversified revenue
model comprised of company-owned store revenue, franchise royalties and revenue generated by the wholesale distribution of products to its franchisees. Pet
Supplies Plus offers a curated selection of premium brands, proprietary private label and specialty products with retail price parity with online competitors.
Additionally, Pet Supplies Plus offers grooming, pet wash and other services in most of its locations. Our Pet Supplies Plus segment’s wholly-owned subsidiary
Wag N’ Wash is an emerging grooming, pet-wash and natural pet food franchise. Wag N’ Wash is primarily focused on dogs, has a store footprint that is
substantially smaller than a Pet Supplies Plus location and is operated by the Pet Supplies Plus management.
Our Badcock segment is a retailer of furniture, appliances, bedding, electronics, home office equipment, accessories and seasonal items in a showroom
format. Additionally, Badcock offers multiple and flexible payment solutions and credit options through third parties and its consumer financing services. We are
in the process of moving its consumer financing services business to a third-party provider.
Our American Freight segment is a retail chain offering in-store and online access to furniture, mattresses, new and out-of-box home appliances and home
accessories at discount prices. American Freight buys direct from manufacturers and sells direct in warehouse-style stores. By cutting out the middleman and
keeping its overhead costs low, American Freight is well positioned to offer quality products at low prices. Our American Freight segment provides customers
with multiple payment options, including third-party financing, providing access to high-quality products and brand name appliances that may otherwise remain
aspirational to some of its customers.
American Freight also serves as a liquidation channel for major appliance vendors. American Freight operates specialty distribution centers that test
out-of-box appliances before they are offered for sale to customers. Customers typically are covered by the original manufacturer’s warranty and are offered the
opportunity to purchase a full suite of extended-service plans and services.
Our Buddy’s segment is a specialty retailer of high quality, name brand consumer electronic, residential furniture, appliances and household accessories
through rent-to-own agreements. The rental transaction allows our customers the opportunity to benefit from the use of high-quality products under flexible
rental purchase agreements without long-term obligations.
Our Sylvan Learning segment is an established and growing franchisor of supplemental education for Pre-K-12 students and families. Sylvan addresses the
full range of student needs with a broad variety of academic curriculums delivered in an omnichannel format. The Sylvan platform provides franchisees with the
ability to provide a range of supplemental educational services, including on premises, virtually, at a satellite location and in the home.
Competition
Each of our brands competes with many well-established companies on the basis of product choice, quality, affordability, service and location. The Vitamin
Shoppe competes in the highly competitive nutritional supplements retail industry, in which competition is based primarily on quality, product assortment, price,
customer service, convenience, marketing support and availability of new products. American Freight and Badcock primarily compete with discount retailers of
furniture and mattresses and with big box retailers and locally-owned appliance retailers that sell new-in-box and liquidations of their out-of-box or as-is
appliances. Pet Supplies Plus competes in the highly competitive pet products retail industry, in which competition is based primarily on quality, product
assortment, price, customer service, convenience, marketing support and availability of new products. Buddy’s competes with other national, regional and local
rent-to-own businesses, including online only competitors, as well as with rental stores that do not offer their customers a purchase option. Sylvan competes with
other national, regional and local tutoring centers, including online only competitors.
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Business Strategy
Our strategy is to focus on the operation and acquisition of franchise and franchisable businesses. We strive to assemble a mix of businesses that we
believe provide us balance and overall economic resiliency, while also allowing us to benefit from the scale of a single franchising platform.
As a multi-brand operator, we continually look to diversify and grow our portfolio of brands either through acquisition or organic brand development. Our
acquisition strategy typically targets businesses that are cash flow generative with unit economics that can be scaled by adding franchise and company-owned
units, or that can be restructured to enhance performance and value to Franchise Group.
We have established a corporate platform that enables us to deploy capital to acquire diversified assets that may become more valuable as part of our
Company. Across all businesses, we look to create operating efficiencies in order to drive incremental free cash flow while allowing the management teams of
each brand to focus on growing their businesses. Furthermore, our aggregated platform of multiple brands and increased scale provides cost of capital
advantages relative to financing each business alone.
We believe our portfolio of brands will allow us to offer franchisees a variety of platforms that will allow them to diversify their investment portfolio in a
local area, optimize their geographic penetration and grow their businesses. We believe our investors will benefit from sustainable franchise royalties and
opportunistic franchise sales. Furthermore, we expect our refranchising strategy to create cash inflows to opportunistically de-lever and acquire additional
brands.
Impact of COVID-19
As of the date of this Annual Report, we have experienced some supply chain delays and disruptions, including adverse consequences to our supply chain
function from decreased procurement volumes in connection with the COVID-19 pandemic. Additionally, while fiscal stimulus provided in response to the
COVID-19 pandemic impacted our business positively by boosting the consumption of our products, the resulting surge in inflation from the fiscal stimulus and
supply chain constraints contributed to price tension and reduced sales activity. We believe that the lingering effects of the COVID-19 pandemic could
negatively impact our business and financial results by weakening demand for our products and services, further disrupting our supply chain or affecting our
ability to raise capital from financial institutions. As events continue to change, we are unable to accurately predict the impact that the COVID-19 pandemic will
have on our results of operations due to uncertainties including, but not limited to, the severity of the disease, the impact of new subvariants and the public’s
response to the outbreak; however, we are actively managing our business to respond to the impact.
Change of Year-End
For the years ended December 25, 2021 and December 26, 2020, our fiscal year ended on the Saturday in December closest to December 31 . On February
22, 2022, our Board of Directors (“Board”) approved a change in our fiscal year-end from the last Saturday in December closest to December 31  to the
Saturday in December or January, whichever is closest to December 31 . Fiscal year 2022 ended on December 31, 2022 and included 53 weeks, with the 53
week falling in the fourth fiscal quarter and Fiscal years 2021 and 2020 included 52 weeks.
Human Capital Management
General
As of December 31, 2022, we employed 8,575 full-time and 5,662 part-time employees. Part-time employees work an average of fewer than 30 hours per
work. The number of part-time employees fluctuates based on seasonal needs. We believe that we have developed strong relations with our employees. Our
employees are a key source of our competitive advantage and their actions are expected to be guided by our values and by an underlying set of ethical principles
as incorporated into our Code of Conduct. We believe these values strengthen our culture and our workforce. We strive to demonstrate to our customers,
franchisees, dealers, stockholders, business partners, communities and employees that we are worthy of their trust and continually strive to enhance our brand
reputation.
The success of our business relies on our ability to attract and retain talented employees. To attract and retain talent, we strive to create an inclusive,
diverse and supportive workplace, with opportunities for our employees to develop and grow in their careers, supported by competitive compensation, benefits
and health and wellness programs.
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Our franchises and dealerships are independently owned and operated businesses. As such, employees of our franchisees and dealers are not employees of
the Company.
Our Nominating and Corporate Governance Committee of our Board (our “NCG Committee”) oversees our environmental, social and governance (“ESG”)
policies and activities which includes human capital management. The NCG Committee also oversees activities including the review of management’s
strategies, activities, policies and goals with regard to environmental sustainability, climate change, human rights, and diversity, equity and inclusion (“DEI”)
initiatives. Our NCG Committee advises the Board on significant ESG-related feedback from stakeholders and makes recommendations on how the Company
can adapt to ESG trends and regulatory developments that could impact its operations, performance or reputation. Our NCG Committee also has the
responsibility to update and make recommendations to our Board on the impact of our human capital management strategies as outlined in its charter, subject to
NCG Committee and Board approval. In 2022, our NCG Committee recommended, and our Board approved, the implementation of the Company’s ESG, DEI
and Human Rights policies.
Corporate Culture
We are focused on creating a corporate culture of integrity and respect, with the goal of working together to drive our business to be innovative and
competitive. We operate in a performance-based environment where results matter and financial discipline is enforced. We strive to create a highly collaborative
culture in which employees feel that their input is encouraged and valued. At the same time, we believe in holding individuals accountable and endeavor to
create a culture in which employees do what they say they are going to do. We believe that our culture is a long-term competitive advantage for us, fuels our
ability to execute our business strategy and is a critical component of our employee talent strategy.
Diversity, Equity and Inclusion
We believe that a diverse workforce is critical to our success. Our goal is to cultivate an inclusive environment where human differences are valued,
respected and supported. We believe that maintaining a diverse leadership and employee base allows us to take advantage of the array of innovation, creativity
and talent of our human capital. We have taken actions to recruit, retain, develop and advance a diverse and talented workforce. At the close of fiscal 2022,
women represented 43.2% of our total workforce, with increased representation both in technical and executive roles across the enterprise, and underrepresented
minorities represented 37.6% of our total workforce. At the close of fiscal 2022, the representation of women in executive management was 41.8% collectively
across all segments, management and the Board. We are an equal opportunity employer. We respect diversity and do not discriminate on the basis of race, color,
creed, religion, national origin, ancestry, citizenship status, age, sex, gender, gender identity or expression (including transgender status), sexual orientation,
marital status, veteran status, physical or mental disability, genetic information, or any other characteristic protected by applicable federal, state or local laws.
Our management is dedicated to ensuring the fulfillment of this policy with respect to hiring, placement, promotion, transfer, demotion, layoff, separation,
recruitment, pay and equity, access to facilities and programs, training and general treatment during employment. We invest in attracting, developing and
retaining the best talent. We do this by communicating a clear purpose and strategy, transparent goal setting, driving accountability, continuously assessing,
developing, advancing talent and a leadership-driven talent strategy. We also comply with the Equal Employment Opportunity (“EEO”) Commission rules,
including making our EEO reports publicly available. Our Vitamin Shoppe segment, as a government contractor, has an affirmative action plan that is updated
annually.
With the support at the highest level of leadership to ensure we meet our goals for a diverse, equitable and inclusive workplace, in 2022, we established a
DEI Committee comprised of senior leaders from each of our brands. Guided by our enterprise DEI Policy, the DEI Committee is charged with providing DEI-
focused strategies for each Company brand, consistent with our business goals, to develop and implement DEI efforts and activities that are meaningful to our
employees and the communities we serve.
Our DEI initiatives include, among other things:
•
Establishing DEI as a recognized business interest, with every level of the organization taking responsibility for implementing DEI-focused strategies.
•
Promoting respectful communication and cooperation between all employees regardless of title or level.
•
Encouraging an environment where employees feel that their background and lifestyle do not affect perceptions of them as professionals or affect their
opportunities for development and promotion.
•
Fostering teamwork and employee participation, permitting the representation of all groups and employee perspectives.
•
Ensuring the availability of flexible working practices where appropriate, to accommodate employees’ varying needs.
•
Encouraging employer and employee contributions to the communities we serve to promote a greater understanding and respect for DEI.
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Health, Safety and Wellness
We are committed to the health, safety and wellness of our employees. We provide our employees and their families with access to a variety of health and
wellness programs, including programs that support their physical and mental health. We are continually focused on the safety of our associates and have a
strong emphasis on identifying and addressing the safety risks and concerns of our associates. Throughout the COVID-19 pandemic, a top priority of the
Company has been the health, safety and well-being of our employees and their families. Our management teams continue to monitor, identify and address
emerging risks to formulate our response to actions taken by governments and public policy organizations. We base our protocols on guidance from healthcare
experts and public health leaders, and regularly review and update them to reflect the best, most current information available.
Compensation, Benefits and Human Rights
We are committed to providing each of our employees a fair and equitable wage. We believe we provide competitive compensation and benefit programs
for our employees. In addition to competitive salaries, these programs include, among other items, bonuses, stock awards, a 401(k) plan, health and wellness
programs, health savings and flexible spending accounts, paid time off, flexible work schedules and employee assistance programs.
We recognize the importance of maintaining and promoting the fundamental human rights of employees and, in 2022, we implemented a Human Rights
Policy that: promotes a workplace free of discrimination and harassment; prohibits child labor, forced labor and human trafficking; provides fair and equitable
wages, benefits and other conditions of employment in accordance with all applicable labor and employment laws; provides safe working conditions in
accordance with all applicable labor and employment laws; and recognizes an employee’s right to associate or not to associate.
Ethics Hotline
We maintain an Ethics Hotline that is available to all employees to report (anonymously if desired) any matter of concern. Communications to the hotline
are routed to Human Resources, Legal and Executive Management for investigation and resolution. In certain instances, such communications may also be
escalated, pursuant to our internal policies, to the Audit Committee of our Board for review, investigation and resolution. In addition, any stockholder or other
interested party may send communications to us or our Board through our website.
Regulation
The products and services offered by our business segments are subject to federal laws and regulation by one or more federal agencies, including but not
limited to the Food and Drug Administration (“FDA”), the Federal Trade Commission (“FTC”), the Consumer Financial Protection Bureau (“CFPB”), the
United States Department of Agriculture and the Environmental Protection Agency. These activities are also regulated by various state, local and international
laws and agencies of the states and localities in which our products or services are provided. Please see “Item 1A. Risk Factors—Risks Related to Our
Segments” in this Annual Report.
Available Information
Our Annual Report, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed with or furnished to the SEC
are available, free of charge, through our website at www.franchisegrp.com as soon as reasonably practicable after such reports are electronically filed with or
furnished to the SEC. Our Board’s Charter and Corporate Governance Guidelines, Board committee charters, ESG, DEI and Human Rights policies, and Code of
Conduct are also available on our website. The SEC maintains a website at www.sec.gov containing reports, proxy and information statements and other
information regarding issuers who file electronically with the SEC. We encourage investors to visit our website from time to time, as information is updated, and
new information is posted. The content of our website is not incorporated by reference into this Annual Report on Form 10-K or in any other report or document
we file with the SEC, and any references to our website are intended to be inactive textual references only.
Item 1A.    Risk Factors.
In addition to the other information contained in this Annual Report, the following risk factors should be considered carefully in evaluating our business.
The Risk Factor Summary that follows should be read in conjunction with the detailed description of risk factors below. If any of the risks or uncertainties
described below were to occur, our business, financial condition, and results of operations may be materially and adversely affected. Additional risks not
presently known to us or that we currently deem immaterial may also impair our business and operations. When considering any investment in our securities,
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investors should consider the following risk factors, as well as the information contained under the caption “Special Note Regarding Forward-Looking
Statements,” in analyzing our present and future business performance.
Risks Related to Our Business, including risks related to:
•
the COVID-19 pandemic;
•
the integration of our recent acquisitions;
•
our indebtedness and our ability to incur more indebtedness;
•
additional leverage incurred in connection with acquisitions or other capital expenditure initiatives;
•
our ability to generate sufficient cash to service our indebtedness;
•
the terms of the agreements governing our indebtedness and their restriction of our current and future operations and operating flexibility;
•
rising interest rates and interest rate risk exposure from our floating rate debt financing;
•
changes in benchmark interest rates that may adversely affect interest rates on certain of our outstanding indebtedness that is currently dependent on the
London Interbank Offered Rate (“LIBOR”);
•
the substantial ownership stake of certain of our stockholders;
•
potential difficulties associated with our rapid growth and expansion;
•
the potential sale of one or more of our business segments or certain assets;
•
our operation in highly competitive industries;
•
our failure to maintain sound business and contractual relationships with our franchisees and dealers;
•
our significant lease obligations; and
•
our failure to achieve and maintain effective internal controls.
Risks Related to Our Segments, including risks related to:
•
our Badcock segment’s failure to operate its dealer network in its current manner, which remains outside the purview of federal and state franchise
laws, which may adversely affect its and our business, prospects, results of operations, financial condition and cash flows;
•
operational and other failures by dealers may adversely impact our Badcock segment and our business, prospects, results of operations, financial
condition and cash flows;
•
our Badcock segment’s consumer financing business is a highly regulated industry and existing and new laws and regulations could have a material
adverse effect on our Badcock segment;
•
unfavorable publicity or consumer perception of our segments’ products and any similar products distributed by other companies;
•
our Vitamin Shoppe and Pet Supplies Plus segments’ sale of food, dietary supplement, topical products and pet products containing cannabidiol;
•
disruptions at our Pet Supplies Plus, Badcock, American Freight, and Vitamin Shoppe segments’ warehouses and distribution facilities or at our
contract manufacturers’ manufacturing facilities;
•
increases in the price or shortages of supply in connection with our segments’ products;
•
product recalls, withdrawals or seizures;
•
consumer spending factors affecting the success of our segments;
•
the ability of our segments to compete effectively with the growing e-commerce sector;
•
the ability of our Vitamin Shoppe, Pet Supplies Plus, Badcock, American Freight and Buddy’s segments to successfully manage their inventory levels;
•
the growth and effective operations of our Company-owned locations and franchise and dealer locations;
•
our franchisees’ failure to open locations in new territories and successfully operate their new locations;
•
our potential to be held responsible by third parties, regulators, or courts for the action of, or failure to act, by our franchisees and dealers, and the
exposure to possible fines or other liabilities, and bad publicity;
•
disputes with our franchisees and dealers; and
•
the effectiveness of our marketing and advertising programs and franchisee support of these programs.
Risks Related to Legal and Regulatory Matters, including risks related to:
•
adverse outcomes related to litigation or regulatory actions;
•
our failure to protect or failure to comply with laws and regulations related to our customers’ personal information;
•
our or our franchisees’ failure to comply with marketing and advertising laws, including with regard to direct marketing;
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•
compliance with governmental regulations or newly enacted laws;
•
product liability claims; and
•
our involvement in federal securities class-action lawsuits and derivative complaints.
General Risk Factors, including risks related to:
•
our failure to protect our intellectual property rights;
•
our reliance on technology systems and electronic communications;
•
negative publicity, costly government enforcement actions or private litigation and increased costs as a result of our inability to secure our customers’
personal and confidential information, or other private data relating to our associates, suppliers or our business;
•
our failure to retain key senior management personnel or attract and retain highly skilled and other key personnel;
•
our ability to attract and retain qualified employees;
•
the exclusive forum provisions in our Certificate of Incorporation;
•
the volatility of our stock price;
•
our ability to continue to pay dividends in the future; and
•
antitakeover provisions in our charter documents.
Risks Related to Our Business
Our results of operations and financial condition have been, and will likely continue to be, affected by the COVID-19 pandemic and, depending on future
developments, may be materially adversely impacted by the COVID-19 pandemic.
The COVID-19 pandemic has had and will likely continue to have an impact on our operations and financial performance. The extent to which the
COVID-19 pandemic impacts our business, results of operations and financial condition is uncertain and cannot be predicted. There can be no assurance that any
of our efforts to address adverse impacts of the COVID-19 pandemic will be effective. Even after the COVID-19 pandemic has subsided, we may experience
adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future. For instance, changes in the
behavior of customers, businesses and their employees as a result of the COVID-19 pandemic, including social distancing practices, even after formal
restrictions have been lifted, are unknown. Furthermore, the financial condition of our customers and vendors may be adversely impacted, which may result in a
decrease in the demand for our products, the inability and our franchisees’ ability to operate store locations or a disruption to our supply chain. Any of these
events may, in turn, have a material adverse impact our business, results of operations and financial condition.
We have incurred significant transaction and acquisition-related costs and expect to incur integration-related costs in connection with our acquisitions.
We have incurred a number of non-recurring costs associated with our acquisitions and expect to incur integration-related costs in combining areas of the
companies. The substantial majority of non-recurring expenses were comprised of transaction costs related to certain of our acquisitions. We continue to assess
the magnitude of these costs, and additional unanticipated costs may be incurred in connection with the integration of all of these companies’ businesses.
Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of these businesses, should
allow us to offset integration-related costs over time, this net benefit may not be achieved in the near term, or at all.
Our indebtedness could adversely affect our financial condition, limit our ability to raise additional capital to fund our operations and prevent us from
fulfilling our obligations under our debt agreements.
We have substantial indebtedness, which could adversely affect our ability to fulfill our obligations and have a negative impact on our financing options
and liquidity position.
Our high level of debt could have significant consequences for us, including the following:
•
limiting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or other general corporate
purposes;
•
requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of
cash flows available for working capital, capital expenditures, acquisitions and other general corporate purposes;
•
limiting our ability to refinance our indebtedness on terms acceptable to us or at all;
•
increasing the cost of future borrowings and, accordingly, our cost of capital;
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•
imposing restrictive covenants on our operations;
•
placing us at a competitive disadvantage to competitors carrying less debt; and
•
making us more vulnerable to economic downturns and other conditions, changes in the markets and adverse developments in our business and limiting
our ability to withstand competitive pressures.
We may not be able to generate sufficient cash to service our indebtedness and may be forced to take other actions to satisfy our indebtedness, which may not
be successful.
Cash flows from operations are the principal source of funding for us. Our ability to make scheduled payments on or to refinance our debt obligations
depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial,
business, legislative, regulatory and other factors beyond our control, including the impact of the COVID-19 pandemic and the availability of financing in the
international banking and capital markets. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to fund our day-
to-day operations or to pay the principal, premium, if any, and interest on our indebtedness, or to refinance our indebtedness on commercially reasonable terms
or at all, which could materially and adversely affect our business, financial position and results of operations and our ability to satisfy our obligations.
If our cash flows and capital resources are insufficient to fund our debt service obligations and other cash requirements, we could face substantial liquidity
problems and could be forced to reduce or delay investments and capital expenditures or to sell assets or operations, seek additional debt or equity capital or
restructure or refinance our indebtedness. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all
and, even if successful, such alternative actions may not allow us to meet our scheduled debt service obligations. The agreements that govern our indebtedness
may restrict us from accomplishing any of these alternatives on commercially reasonable terms or at all. Additionally, the agreements that govern our
indebtedness may restrict (a) our ability to dispose of assets and use the proceeds from any such dispositions and (b) our ability to raise debt capital to be used to
repay our indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any
debt service obligations then due. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous
covenants, which could further restrict our business operations and limit our financial flexibility. Any issuances of additional capital stock would be dilutive to
existing stockholders.
In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of
our credit rating, which could harm our ability to incur additional indebtedness.
If we cannot make scheduled payments on our debt, we will be in default and, as a result, lenders under our existing and future indebtedness could declare
(or some of the following could occur automatically) all outstanding principal and interest to be due and payable, the lenders under our credit facilities could
terminate their commitments to loan money, our secured lenders could foreclose against the assets securing such borrowings and we could be forced into
bankruptcy or liquidation, in each case, which could result in any of the holders of our indebtedness and/or our stockholders losing their investments.
Despite current and anticipated indebtedness levels, we may still be able to incur substantially more debt.
If we were to incur substantial additional indebtedness in the future, it could further exacerbate the risks described above. Although the agreements that
govern our indebtedness restrict the incurrence of additional indebtedness, these restrictions are and will be subject to a number of qualifications and exceptions
and any additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also will not prevent us from incurring
obligations that do not constitute indebtedness (which may include, among others, trade payables and other expenses incurred in the ordinary course of
business). Further, pursuant to our credit facilities and subject to the limitations set forth therein, we may have the option to increase our commitments under our
credit facilities thereunder. Such increases would be secured indebtedness. If new debt is added to our current debt levels, the related risks that we now face
could intensify.
The terms of the agreements governing our indebtedness may restrict our current and future operations and operating flexibility, particularly our ability to
respond to changes in the economy or our industry or to pursue our business strategies, and could adversely affect our capital resources, financial condition
and liquidity.
The agreements that govern our indebtedness contain a number of restrictive covenants that impose significant operating and financial restrictions on us
and limit our ability to engage in acts that may be in our long-term best interests, including, among other things, restrictions on our ability to:
•
incur, assume or guarantee additional indebtedness;
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•
declare or pay dividends or make other distributions with respect to, or purchase or otherwise acquire or retire for value, equity interests;
•
make any principal payment on, or redeem or repurchase, certain indebtedness;
•
make loans, advances or other investments;
•
incur liens;
•
sell or otherwise dispose of assets, including capital stock of subsidiaries;
•
enter into sale and lease-back transactions;
•
consolidate or merge with or into, or sell all or substantially all of our assets to, another person;
•
enter into transactions with affiliates;
•
materially change the nature of our business;
•
enter into agreements that restrict the ability of certain subsidiaries to make dividends or other payments; and
•
service our indebtedness if covenants under our credit facilities are not satisfied.
Our credit facilities also contain covenants that may limit our ability to service our other indebtedness. As a result of these restrictions, we may be limited in
how we conduct our business, unable to raise additional debt or equity financing to operate during general economic or business downturns, or unable to
compete effectively, take advantage of new business opportunities or grow in accordance with our plans.
The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot assure you that we will be able to maintain
compliance with such covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the holders of such indebtedness and/or amend
the covenants. A breach of the covenants under the agreements governing our indebtedness could result in an event of default under the applicable indebtedness,
which, if not cured or waived, could result in us having to repay such indebtedness before its due date. Such an event of default may result in the acceleration of
any other debt to which a cross-acceleration or cross-default provision applies. In addition, such an event of default may permit the lenders in our credit facilities
to terminate all commitments to extend further credit thereunder. In the event the repayment of any of our indebtedness is accelerated, we cannot assure you that
we will have sufficient assets to repay such indebtedness. If we are forced to refinance such indebtedness on less favorable terms or if we experience difficulty in
refinancing such indebtedness, our results of operations or financial condition could be materially affected. Furthermore, if we are unable to repay the amounts
due and payable under the agreements governing our secured indebtedness, the lenders or holders of such indebtedness may be able to proceed against the
collateral granted to them to secure such indebtedness.
Our floating rate debt financing exposes us to interest rate risk.
We may borrow amounts under our credit facilities or otherwise that bear interest at rates that vary with prevailing market interest rates. If such market
interest rates increase, our debt service obligations on the variable rate indebtedness will increase even though the amount borrowed may remain the same, and
our profit and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. In the future, we may enter into interest rate
swaps that involve the exchange of floating for fixed rate interest payments in order to reduce interest rate volatility. However, it is possible that we will not
maintain interest rate swaps with respect to any of our variable rate indebtedness. Alternatively, any swaps we enter into may not fully or effectively mitigate our
interest rate risk.
Changes in benchmark interest rates may adversely affect interest rates on certain of our outstanding indebtedness that is currently dependent on LIBOR.
As of February 28, 2023, the indebtedness under our Second Lien Credit Agreement (the “Second Lien Credit Agreement”) bears interest at variable interest
rates that use LIBOR as a reference rate, while the indebtedness under our ABL Agreement (as defined herein) and First Lien Credit Agreement (the “First Lien
Credit Agreement”) (after giving effect to the Third Amendment to First Lien Credit Agreement, dated as February 2, 2023) bears interest at variable interest
rates that use the Secured Overnight Financing Rate (“SOFR”) as a benchmark rate.
In March 2021, the Chief Executive of the U.K. Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that the FCA will no longer
persuade or compel banks to submit rates for the calculation of the LIBOR benchmark after June 30, 2023. The Alternative Reference Rates Committee, a group
of market participants convened by the U.S. Federal Reserve Board and the Federal Reserve Bank of New York, has recommended SOFR as an alternative
benchmark rate to replace LIBOR.
Our Second Lien Credit Agreement includes provisions intended to provide for the replacement of LIBOR with SOFR or another widely-accepted
alternative benchmark rate upon the cessation of LIBOR. In the event that LIBOR is no longer available as a reference rate or ceases to adequately and fairly
reflect the cost to our lenders of making and maintaining loans,
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the Second Lien Credit Agreement permits the lenders to suspend maintaining loans that use LIBOR as a reference rate. We expect our Second Lien Credit
Agreement to bear interest based on a SOFR benchmark within fiscal 2023.
SOFR is calculated based on short-term repurchase agreements, backed by U.S. treasury securities. SOFR is an observed and backward looking rate, which
stands in contrast with the LIBOR benchmark rate which is an estimated forward-looking rate and relies, to some degree, on the expert judgment of submitting
panel members. Additionally, SOFR is a secured rate and does not take into account bank credit risk, as was the case with LIBOR.
While the difference between LIBOR and SOFR as of today is not significant, the difference may be larger in respect of longer interest periods. While it is
impossible for us to predict the effect of switching from a LIBOR to a SOFR benchmark under our Second Lien Credit Agreement, it is possible such a switch
could result in higher interest costs for us, which could in turn have an adverse effect on our operating results and liquidity.
In addition, the overall financial markets may be disrupted as a result of the phase-out or replacement of LIBOR. Disruption in the financial markets could
have an adverse effect on our business, financial condition and results of operations.
Certain stockholders have a substantial ownership stake, and their interests could conflict with the interests of our other stockholders.
As of December 31, 2022, Brian Kahn and Vintage Capital Management, LLC and its affiliates (“Vintage”), in aggregate, own shares of our common stock
representing approximately 40.2% of our outstanding common stock. As a result of substantial ownership of our stock, and Mr. Kahn’s participation on the
Board, Vintage currently has the ability to influence certain actions requiring stockholder approval, including increasing or decreasing the authorized share
capital, the election of directors, declaration of dividends, the appointment of management, and other policy decisions. The interests of Mr. Kahn and Vintage
may be different from the interests of our other stockholders. While any future transaction with Mr. Kahn and Vintage or other significant stockholders could
benefit us, the interests of Mr. Kahn and Vintage could at times conflict with the interests of other stockholders. Conflicts of interest may also arise between us
and Mr. Kahn and Vintage, which may result in the conclusion of transactions on terms not determined by market forces. Any such conflicts of interest could
adversely affect our business, financial condition and results of operations, and the trading price of our common stock. Moreover, the concentration of ownership
may delay, deter or prevent acts that would be favored by other stockholders or deprive our stockholders of an opportunity to receive a premium for their shares
of our common stock as part of a sale of us. Similarly, this concentration of stock ownership may adversely affect the trading price of our common stock because
investors may perceive disadvantages in owning equity in a company with concentrated ownership. Refer to "Note 14: Related Party Transactions" in the Notes
to the Consolidated Financial Statements.
Because of the significant changes to our business initiatives and strategies, including as a result of our acquisitions we are susceptible to the potential
difficulties associated with rapid growth and expansion and we may not achieve the same level of growth in revenues and profits as we had in prior years.
Our future viability, profitability, and growth will depend upon our ability to successfully operate and continue to expand our operations. We have grown
rapidly since we began making the acquisitions in July 2019. Our management believes that our future success depends in part on our ability to manage the rapid
growth and integration that we have experienced from current and future acquisitions, and the demands from increased responsibility on management personnel
within the businesses we acquired and at the corporate level. Our ability to continue to grow our business will be subject to a number of risks and uncertainties
and will depend in large part on:
•
our ability to manage increased responsibilities for our executive level personnel and administrative burdens;
•
our risk of litigation and other unanticipated liabilities;
•
adding new customers and retaining existing customers, franchisees and dealers;
•
innovating new products and services to meet the needs of our customers;
•
finding new opportunities in our existing and new markets;
•
remaining competitive in the specialty retailing, consumable durable goods and retail industries;
•
attracting and retaining capable franchisees and dealers;
•
delivering on our products and services in sufficient volumes and in a timely manner;
•
hiring, training, and retaining skilled managers and employees; and
•
expanding and improving the efficiency of our operations and systems and managing related organizational challenges.
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There can be no assurance that any of our efforts will prove successful or that we will continue to achieve growth in revenues and profits. Our operating
results could be adversely affected if we do not successfully manage our ability to grow and these potential risks and uncertainties. Our historical and pro forma
financial information is not necessarily indicative of the results that may be realized in the future. In addition, due to the timing of the acquisitions, there is very
limited comparative information on our combined business.
We may seek to continue to expand through acquisitions of and investments in other businesses. These acquisition activities may be unsuccessful or divert
management’s attention.
We may consider strategic and complementary acquisitions of and investments in other franchise-centric businesses. In pursuing these opportunities, we
will likely be competing with third parties that may have substantially greater financial resources than us. Acquisitions or investments in brands, businesses,
properties or assets, as well as third-party alliances are subject to risks that could affect our business, including risks related to: (i) issuing shares of stock that
could dilute the interests of our existing stockholders, (ii) spending cash and incurring debt, (iii) assuming contingent liabilities, or (iv) creating additional
expenses.
We may not be able to identify opportunities or complete transactions on commercially reasonable terms or at all or we may not actually realize any
anticipated benefits from such acquisitions or investments. Similarly, we may not be able to obtain financing for acquisitions or investments on attractive terms
or at all, or the ability to obtain financing may be restricted by the terms of our indebtedness. In addition, the success of any acquisition or investment also will
depend, in part, on our ability to integrate the acquisition or investment with our existing operations. Finally, any potential acquisitions or investments could
demand significant attention from management that would otherwise be available for business operations, which could harm our business.
We may seek to sell one of our business segments which may adversely affect our results of operations, personnel, reputation and financial position.
As a company that manages a portfolio of retail and franchised brands, we continue to evaluate opportunities to restructure our business in an effort to
optimize shareholder value, which could potentially include the divestiture of certain business segments. Divestitures involve numerous risks, such as: (i) the
acceptance of a less than favorable sales price, (ii) the potential loss of key employees, (iii) adverse reactions by customers, suppliers, or parties transacting
business with the divested business segment or us, (iv) potential litigation or any administrative proceedings arising from the divestiture, (v) negative impacts on
stock analyst ratings, and (vi) our inability to retain certain intellectual property rights. Such divestitures could result in significant costs to us which could
adversely affect our financial condition and results of operations. We cannot provide assurance that such a sale of a business segment will be successful or will
not harm our business, results of operations, financial condition, or stock price.
We operate in highly competitive industries and our revenues or profits could be harmed if we are unable to compete effectively.
The retail, consumer services, tutoring, and rent-to-own industries in which we operate are subject to intense competition. Our principal competitors are
other similar operators with well-established and recognized brands. We also compete against smaller retailers and “mom and pop” operations. If we are unable
to compete successfully, our revenues or profits may decline. Certain of our competitors may have significantly greater financial, technical and marketing
resources than we do, and may be able to adapt to changes in consumer preferences more quickly, devote greater resources to the marketing and sale of their
products or services, or generate greater brand recognition. In addition, our competitors may be more effective and efficient in introducing new products and
services. Furthermore, if we fail to meet supply and demand or fail to provide our customers with an attractive omnichannel experience, our business and results
of operations could be materially and adversely affected.
Failure to maintain sound business and contractual relationships with our franchisees and dealers may have a material adverse effect on our business and
our consolidated financial position, results of operations, and cash flows.
Our financial success depends in significant part on our ability to maintain sound business relationships with our franchisees and dealers. The support of
our franchisees and dealers is also critical for the success of our marketing programs and any new strategic initiatives we seek to undertake. Deterioration in our
relationships with our franchisees and dealers or the failure of our franchisees and dealers to support our marketing programs and strategic initiatives could have
a material adverse effect on our business and our consolidated financial position, results of operations, and cash flows. In addition, the failure of
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our franchisees and dealers to timely renew their franchise agreements could have a material adverse effect on our business and our ability to enforce the
franchisees’ and dealers’ contractual obligations.
We have significant lease obligations, which may require us to continue paying rent for store locations that we no longer operate.
We have company-owned operations of which the majority are operated in leased locations, specifically in our Vitamin Shoppe and American Freight
segments. We are subject to risks associated with our current and future real estate leases. Our costs could increase because of changes in the real estate markets
and supply or demand for real estate sites. We generally cannot cancel our leases, so if we decide to close or relocate a location, we may nonetheless be
committed to perform our obligations under the applicable lease including paying the base rent for the remaining lease term. As each lease expires, we may fail
to negotiate renewals, either on commercially acceptable terms or any terms at all and may not be able to find replacement locations that will provide for the
same success as current store locations.
Our failure to achieve and maintain effective internal controls could have a material adverse effect on our business and stock price.
Effective internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports, our brands and operating
results could be harmed. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial statement preparation and presentation. While we continue to evaluate and improve our
internal controls, we cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and
reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our
operating results or cause us to fail to meet our reporting obligations. If we fail to maintain the adequacy of our internal controls, as such standards are modified,
supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over
financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Failure to achieve and maintain an effective internal control environment could
cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price.
As we have grown our business through our acquisitions, our disclosure controls and internal controls have become more complex and may require
significantly more resources to ensure the effectiveness of these controls. If we are unable to continue upgrading our financial and management controls,
reporting segments, information technology and procedures in a timely and effective fashion, additional management and other resources may need to be
devoted to assist in compliance with the disclosure and financial reporting requirements which would adversely affect our business, financial position and results
of operations.
Risks Related to Our Segments
Our Badcock segment’s failure to operate its dealer network in a manner which remains outside the purview of federal and state franchise laws may
adversely affect its and our business, prospects, results of operations, financial condition and cash flows.
As operated now, our Badcock segment’s dealer program is not a franchise subject to franchise laws and regulations enacted by a number of states and
rules promulgated by the U.S. Federal Trade Commission (collectively, the “Franchise Laws”). However, if the relationship between our Badcock segment and
its dealers should be deemed to constitute a franchise under the Franchise Laws or otherwise violate one or more of the Franchise Laws, our Badcock segment’s
and our operations could be negatively affected including requiring our Badcock segment to incur substantial additional costs which could adversely affect its
and our business, prospects, results of operations, financial condition and cash flows. Additionally, our Badcock segment could face the prospect that
discontented dealers could use such violations as the basis for seeking to terminate its dealership agreement or to initiate claims against our Badcock segment for
alleged prior failure to comply with the Franchise Laws. Our Badcock segment may also face enforcement actions by the U.S. Federal Trade Commission and
state governmental agencies, which may seek fines and other remedies available to these agencies under such Franchise Laws. If our Badcock segment’s dealer
program were determined to be a franchise subject to the Franchise Laws, as a franchisor, our Badcock segment would be more susceptible to the risk of adverse
legislation or regulations being enacted in the future and we cannot predict how existing or future laws or regulations will be administered or interpreted.
Additionally, we cannot predict the amount of future expenditures that may be required in order to comply with any such laws or regulations. Companies that
operate franchise systems may be subject to claims arising out of violations of laws and regulations at their franchised locations, including, without limitation,
for allegedly being a joint employer with a franchisee. Litigation may lead to a decline in the sales
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and operating results of our Badcock segment’s stores and divert management resources regardless of whether the allegations in such litigation are valid or
whether our Badcock segment is liable.
Our Badcock segment’s consumer financing business is in an industry that is highly regulated. Existing and new laws and regulations could have a material
adverse effect on Badcock and adversely affect the Badcock segment’s and our business, prospects, results of operations, financial condition and cash flows
and failure to comply with these laws and regulations could subject our Badcock segment and us to various fines, civil penalties and other relief.
Our Badcock segment’s consumer financing business is subject to extensive regulation, supervision and licensing under various federal, state, and local
statutes, ordinances, regulations, rules and guidance. We must comply with federal laws, such as The Truth In Lending Act and Regulation Z, the Equal Credit
Opportunity Act and Regulation B, the Fair Credit Reporting Act, The Gramm-Leach-Bliley Act and Regulation P, and Title X of the Dodd-Frank Act, among
others. In addition, the CFPB has regulatory and enforcement powers over providers of consumer financial products and services under many federal consumer
protection laws and regulations. Included in the CFPB’s authority is the power to prohibit unfair, deceptive or abusive acts or practices (“UDAAP”) and to
investigate and penalize financial institutions. In addition to assessing financial penalties, the CFPB can require remediation of practices, pursue administrative
proceedings or litigation and obtain cease and desist orders (which can include orders for restitution or rescission or reformation of contracts). Also, if a
company has violated Title X of the Dodd-Frank Act or related CFPB regulations, the Dodd-Frank Act empowers state attorney general and state regulators to
bring civil actions to remedy violations. In addition, state attorneys generals and/or other state regulators have the authority to prohibit unfair and deceptive acts
and practices under state law (“UDAP”), as well as a wide variety of state consumer protection laws and regulations. If the CFPB or state attorneys general or
state regulators believe that our Badcock segment has violated any laws or regulations, they could exercise their enforcement powers which could adversely
affect our Badcock segment’s and our business, prospects, results of operations, financial condition and cash flows.
Accordingly, regulatory requirements, and the actions our Badcock segment must take to comply with regulations, vary considerably by jurisdiction.
Managing this complex regulatory environment requires considerable compliance efforts. It is costly to operate in this environment, and it is possible that those
costs will increase materially over time. This complexity also increases the risks that our Badcock segment will fail to comply with regulations which could
adversely affect our Badcock segment’s and our business, prospects, results of operations, financial condition and cash flows. These regulations affect our
Badcock segment’s business in many ways, and include regulations relating to:
•
the terms of consumer loans (such as interest rates, finance and other charges, fees, durations, repayment terms, maximum loan amounts, renewals
and extensions and repayment plans), the number and frequency of loans and reporting and use of state-wide databases;
•
underwriting requirements;
•
collection and servicing activity, including initiation of payments from consumer accounts;
•
licensing, reporting and document retention;
•
unfair, deceptive and abusive acts and practices and discrimination;
•
disclosures, notices, advertising and marketing;
•
requirements governing electronic payments, transactions, signatures and disclosures;
•
privacy and use of personally identifiable information and consumer data, including credit reports; and
•
posting of fees and charges.
There are a range of penalties that governmental entities could impose if our Badcock segment fails to comply with the various laws and regulations that
apply to its business, including:
•
ordering corrective actions, including changes to compliance systems, product terms and other business operations;
•
imposing fines or other monetary penalties, which could be substantial;
•
ordering restitution, damages or other amounts to customers, including multiples of the amounts charged;
•
requiring disgorgement of revenues or profits from certain activities;
•
imposing cease and desist orders, including orders requiring affirmative relief, targeting specific business activities;
•
subjecting Badcock’s operations to monitoring or additional regulatory examinations during a remediation period;
•
revoking licenses required to operate in particular jurisdictions; and/or
•
ordering the closure of one or more stores.
Accordingly, if our Badcock segment fails to comply with applicable laws and regulations, it could adversely affect our Badcock segment’s and our
business, prospects, results of operations, financial condition and cash flows.
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Unfavorable publicity or consumer perception of our services, products and any similar products distributed by other companies could have a material
adverse effect on our reputation, which could result in decreased sales and significant fluctuations in our business, financial condition and results of
operations.
We depend significantly on consumer perception regarding the safety and quality of our products, as well as similar products distributed by other
companies. Consumer perception of products can be significantly influenced by adverse publicity in the form of published scientific research, national media
attention or other publicity, whether or not accurate, that associates consumption of our Vitamin Shoppe segment’s products or any other similar products with
illness or other adverse effects, or questions the benefits of our or similar products or that claims that any such products are ineffective. A new product may
initially be received favorably, resulting in high sales of that product, but that sales level may not be sustainable as consumer preferences change. Future
scientific research or publicity could be unfavorable to our Vitamin Shoppe segment’s industry or any of its particular products and may not be consistent with
earlier favorable research or publicity. Unfavorable research or publicity could have a material adverse effect on our ability to generate sales within our Vitamin
Shoppe segment.
Our Vitamin Shoppe and Pet Supplies Plus segments sell food, dietary supplement, topical products and/or pet products containing cannabidiol (“CBD”),
which is a cannabinoid derived from the cannabis plant. There is significant uncertainty regarding the legal status of CBD and other hemp-based products
in the U.S. In addition, the FDA currently prohibits the sale of foods and dietary supplements containing certain CBD, which could subject our Vitamin
Shoppe and Pet Supplies Plus segments to regulatory enforcement action.
Products that contain CBD are subject to various state and federal laws regarding the production and sale of hemp-based products. Historically, the Drug
Enforcement Administration (“DEA”) considered CBD to be a Schedule I controlled substance subject to the Controlled Substances Act (“CSA”) under the
definition for “marijuana.” However, the Agriculture Improvement Act of 2018 (the “2018 Farm Bill”) removed “hemp” from the definition of “marijuana.”
“Hemp” is defined as the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers,
acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol (“THC”) concentration of not more than 0.3 percent on a dry
weight basis. As a result of the enactment of the 2018 Farm Bill, we believe that our Vitamin Shoppe segment’s CBD products and the hemp from which they
are derived are not Schedule I controlled substances under the CSA. However, there is a risk that we could be subject to DEA enforcement action, including
prosecution, if any of our Vitamin Shoppe segment’s products are determined to not meet the definition of “hemp” and to constitute “marijuana” based on THC
levels or other violations.
In addition, although hemp and hemp-derived CBD are no longer controlled substances subject to regulation under the CSA, the FDA has stated publicly
that it is nonetheless unlawful under the Federal Food, Drug, and Cosmetic Act (“FDCA”) to market foods or dietary supplements containing CBD, even if
lawful under the 2018 Farm Bill. Specifically, the FDCA prohibits the introduction or delivery for introduction into interstate commerce of any food or dietary
supplement that contains an approved drug or a drug for which substantial clinical investigations have been instituted and made public, unless a statutory
exemption applies. The FDA has stated its conclusion that this statutory prohibition applies and none of the exceptions has been met for CBD.
The FDA has held public meetings and formed an internal working group to evaluate the potential pathways to market for CBD products, which could
include seeking statutory changes from Congress or promulgating new regulations. If legislative action is necessary, such legislative changes could take years to
finalize and may not include provisions that would enable our Vitamin Shoppe and Pet Supplies Plus segments to produce, market and/or sell CBD products, and
FDA could similarly take years to promulgate new regulations. Additionally, while the agency’s enforcement focus to date has primarily been on CBD products
that are associated with therapeutic claims, the agency has recently issued warning letters to companies marketing CBD products without such claims, and there
is a risk that FDA could take enforcement action against our Vitamin Shoppe and Pet Supplies Plus segments, their third-party contract manufacturers or
suppliers, or those marketing similar products, which could limit or prevent these segments from marketing CBD products. While the FDA announced on March
5, 2020 that it is currently evaluating a risk-based enforcement policy for CBD to provide more clarity to industry and the public while the agency takes potential
steps to establish a clear regulatory pathway, it remains unclear whether or when FDA will ultimately issue such an enforcement policy.
Moreover, local, state, federal, and international CBD, hemp and cannabis laws and regulations are rapidly changing and subject to evolving
interpretations, which could require our Vitamin Shoppe and Pet Supplies Plus segments to incur substantial costs associated with compliance requirements or
alteration of certain aspects of their business plan in the event that its CBD products become subject to new restrictions. In addition, violations of these laws, or
allegations of such violations, could disrupt the businesses and result in a material adverse effect on their operations. We cannot predict the nature of any future
laws,
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regulations, interpretations, or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures,
when and if promulgated, could have on our Vitamin Shoppe and Pet Supplies Plus segments’ activities in the hemp and CBD industry. The constant evolution
of laws and regulations may require these segments to incur substantial costs associated with legal and compliance fees and ultimately require them to alter their
current business plans.
Disruptions at our American Freight, Pet Supplies Plus, Badcock, and Vitamin Shoppe segments’ warehouses and distribution facilities or at our contract
manufacturers’ manufacturing facilities could materially and adversely affect our business, financial condition, results of operations and customer
relationships.
Any significant disruption in our segments’ warehouse and distribution facilities or at any contract manufacturers’ manufacturing facilities for any reason,
including regulatory requirements, and FDA determination that the contract manufacturers’ facility is not in compliance with the cGMP regulations, the loss of
certifications, power interruptions, destruction of or damage to facilities, unexpected delays in delivery or increases in transportation costs (including through
increased fuel costs), terrorist attacks, civil unrest, war or the perceived threat thereof, natural disasters could disrupt our contract manufacturer’s ability to
manufacture products for our segments and our ability to deliver products to our customers. Any such disruption could have a material adverse effect on our
business.
Increases in the price or shortages of supply in connection with products sold by our segments and increased inflation could have a material adverse effect
on our business.
Certain products sold by our segments are composed of certain key raw materials. If the prices of these raw materials were to increase significantly,
including but not limited to the impact of higher interest rates or inbound freight costs, it could result in a significant increase to us in the prices charged to us for
our segments’ own branded products and third-party products. Raw material prices may increase in the future and we may not be able to pass on those increases
to customers who purchase our products. A significant increase in the price of raw materials that cannot be passed on to customers could have a material adverse
effect on our business.
Additionally, inflation rates have increased and may continue to rise. Our suppliers have raised their prices and may continue to raise prices that we may
not be able to pass on to our customers. This may adversely affect our business, including our competitive position, market share, revenues, and profit.
We may experience product recalls, withdrawals or seizures, which could materially and adversely affect our business.
We may be subject to product recalls, withdrawals or seizures if any of the products we sell are believed to cause injury or illness or if we are alleged to
have violated governmental regulations in the manufacturing, labeling, promotion, sale or distribution of those products. A significant recall, withdrawal or
seizure of any of the products we manufacture or sell may require significant management attention, which would likely result in substantial and unexpected
costs and may materially and adversely affect our business. Furthermore, a recall, withdrawal or seizure of any of our products may adversely affect consumer
confidence in our brands and thus decrease consumer demand for our products. In some cases, we rely on our contract manufacturers and suppliers to ensure that
the products they manufacture and sell to us comply with all applicable regulatory and legislative requirements. In general, we seek representations and
warranties, indemnification and/or insurance from our contract manufacturers and suppliers. However, even with adequate insurance and indemnification, any
claims of non-compliance could significantly damage our reputation and consumer confidence in our products. In addition, the failure of those products to
comply with applicable regulatory and legislative requirements could prevent us from marketing the products or require us to recall or remove such products
from the market, which in certain cases could materially and adversely affect our business, financial condition and results of operations.
The success of our segments is dependent on factors affecting consumer spending that are not under our control.
Consumer spending is affected by general economic conditions and other factors including levels of employment, disposable consumer income, prevailing
interest rates, consumer debt and availability of credit, costs of fuel, inflation, recession and fears of recession, war and fears of war, pandemics (such as the
COVID-19 pandemic), inclement weather, tariff policies, tax rates and rate increases, timing of receipt of tax refunds, consumer confidence in future economic
conditions and political conditions, and consumer perceptions of personal well-being and security. Unfavorable changes in factors affecting discretionary
spending could reduce demand for our products and services resulting in lower revenue and negatively impacting our business and financial results.
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If our segments are unable to compete effectively with the growing e-commerce sector, our business and results of operations may be materially adversely
affected.
With the continued expansion of Internet use, as well as mobile computing devices and smartphones, competition from the e-commerce sector continues to
grow. There can be no assurance we will be able to compete effectively on our existing e-commerce platform or grow our e-commerce operations in a profitable
manner. Certain of our competitors, and a number of e-commerce retailers, have established e-commerce operations against which we compete for customers. It
is possible that the increasing competition from the e-commerce sector may reduce our market share, gross and operating margins, and may materially adversely
affect our business and results of operations in other ways.
If our segments do not successfully manage their inventory levels, our operating results will be adversely affected.
We must maintain sufficient inventory levels to operate our business successfully. However, we also must avoid accumulating excess inventory as we seek
to minimize out-of-stock levels across all product categories and to maintain in-stock levels. We continue to rely on and obtain significant portions of our
inventory from vendors located outside the United States. Some of these vendors often require us to provide lengthy advance notice of our requirements in order
to be able to supply products in the quantities we request. This usually requires us to order merchandise and enter into purchase order contracts for the purchase
and manufacture of such merchandise, well in advance of the time these products will be offered for sale. As a result, we may experience difficulty in responding
to a changing retail environment, which makes us vulnerable to changes in price and consumer preferences. If we do not accurately anticipate the future demand
for a particular product or the time it will take to obtain new inventory, our inventory levels will not be appropriate, and our results of operations may be
negatively impacted.
Our success is tied to the growth and effective operations of our Company-owned locations, franchises and dealers, and the franchise and dealer operations
could adversely affect our business.
Our financial success depends on how effectively we operate our Company-owned locations and how our franchisees and dealers operate and develop their
businesses. We do not exercise direct control over the day-to-day operations of our franchises and dealers, and our franchisees and dealers may not operate their
businesses in a manner consistent with our philosophy and standards and may not increase the level of revenues generated compared to prior years. Our growth
and revenues may, therefore, be adversely affected. There can be no assurance that the training programs and quality control procedures we have established will
be effective in enabling franchisees and dealers to run profitable businesses or that we will be able to identify problems or take corrective action quickly enough.
In addition, failure by a franchisee or dealer to provide service at acceptable levels may result in adverse publicity that can materially adversely affect our
reputation and ability to compete in the market in which the franchisee or dealer is located.
If our franchisees or dealers fail to open locations in new territories or if they are not successful in operating their new locations, our franchise-related
revenue and results of operation will be adversely affected.
Each year, we anticipate adding locations to our franchise and dealer system, but the opening of these locations depends on the purchase of additional
territories by our franchisees and the opening of offices in territories previously purchased and newly purchased. Many factors go into opening a new location,
including obtaining a suitable location, the availability of sufficient start-up capital, and the ability to recruit qualified personnel to work in new locations. If a
significant number of locations that we expect to be open, fail to open, are delayed, or open in unsuitable locations or with insufficient personnel, the revenue we
expect to receive from royalty payments and the repayment of indebtedness to us by our franchisees and dealers will be adversely affected.
We may be held responsible by third parties, regulators, or courts for the action of, or failure to act, by our franchisees and dealers and their employees
which could expose us to possible fines, other liabilities, bad publicity or damage to our brands.
We grant our franchisees and dealers a limited license to use our registered service marks and, accordingly, there is risk that one or more of the franchisees
or dealers may be identified as being controlled by us. Third parties, regulators, or courts may seek to hold us responsible for the actions or failures to act by our
franchisees and dealers. In recent years, some government agencies have taken the position that the extent to which a franchise system establishes requirements
for franchisees may justify treating the franchisor or dealer as if it “controls” the franchisee’s or dealer’s behavior. Thus, the failure of our franchisees and
dealers to comply with laws and regulations may expose us to liability and damages that may have an adverse effect on our business.
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Our franchisees and dealers operate their businesses under our brands. Because our franchisees and dealers are independent third parties with their own
financial objectives, actions taken by them, including breaches of their contractual obligations, and negative publicity associated with these actions, could
adversely affect our reputation and brands more broadly. Any actions as a result of conduct by our franchisees and dealers, their employees or otherwise which
negatively impacts our reputation and brands may result in fewer customers and lower revenues and profits for us.
Disputes with our franchisees or dealers may have a material adverse effect on our business.
From time to time, we engage in disputes with some of our franchisees and dealers, and some of these disputes result in litigation or arbitration
proceedings. Disputes with our franchisees and dealers may require us to incur significant legal fees, subject us to damages, and occupy a disproportionate
amount of management’s time. A material increase in the number of these disputes, or unfavorable outcomes in these disputes, may have a material adverse
effect on our business. To the extent we have disputes with our franchisees and dealers, our relationships with our franchisees and dealers could be negatively
impacted, which could hurt our growth prospects or negatively impact our financial performance.
Additionally, to attempt to limit costly and lengthy consumer and other litigation, including class actions, and to provide a streamlined, faster and less
expensive method of dispute resolution, some of our segments require customers and employees to sign arbitration agreements and class action waivers, many of
which offer opt-out provisions. Recent judicial and regulatory actions have attempted to restrict or eliminate the enforceability of such agreements and waivers.
If we are not permitted to use arbitration agreements and/or class action waivers, or if the enforceability of such agreements and waivers is restricted or
eliminated, we could incur increased costs to resolve legal actions brought by customers, employees and others as we would be forced to participate in more
expensive and lengthy dispute resolution processes, including class actions.
Our operating results depend on the effectiveness of our marketing and advertising programs and franchisee or dealer support of these programs.
Our revenues are heavily influenced by brand marketing and advertising. If our marketing and advertising programs are unsuccessful, we may fail to retain
existing customers and attract new customers, which could limit the growth of our revenues or profitability or result in a decline in our revenues or profitability.
Moreover, because franchisees and dealers are required to pay us marketing and advertising fees based on a percentage of their revenues, our marketing fund
expenditures are dependent upon sales volumes of our franchisees and dealers.
The support of our franchisees and dealers is critical for the success of our marketing programs and any new strategic initiatives we seek to undertake.
While we can mandate certain strategic initiatives through enforcement of our franchise agreements, we need the active support of our franchisees and dealers if
the implementation of our marketing programs and strategic initiatives is to be successful. Although certain actions are required of our franchisees and dealers
under the franchise agreements, there can be no assurance that our franchisees or dealers will continue to support our marketing programs and strategic
initiatives. The failure of our franchisees and dealers to support our marketing programs and strategic initiatives would adversely affect our ability to implement
our business strategy and could have a material adverse effect on our business, financial condition, and results of operations.
Risks Related to Legal and Regulatory Matters
The lines of business in which we operate involve substantial litigation, and such litigation may damage our reputation or result in material liabilities and
losses.
We have been named, from time to time, as a defendant in various legal actions, including arbitration, class-actions, and other litigation arising in
connection with our various business activities. We are currently involved in a class-action lawsuit, in which we are vigorously defending ourselves. There can
be no assurance, however, that we will not have to pay significant damages or amounts in settlement above insurance coverage. Adverse outcomes related to
litigation could result in substantial damages and could materially affect our liquidity and capital resources and cause our net income to decline or may require
us to alter our business operations. Failure to pay any material judgment would be a default under our credit facilities. Negative public opinion can also result
from our actual or alleged conduct in such claims, possibly damaging our reputation, which could negatively impact our financial performance and could cause
the value of our stock to decline. Refer to “Note 15 – Commitments and Contingencies” in the Notes to the Consolidated Financial Statements.
If we fail to protect or fail to comply with laws and regulations related to our customers’ personal information, we may face significant fines, penalties, or
damages and our brands and reputation may be harmed.
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We are subject to various federal and state laws related to the use of and protection of customer personal information, including but not limited, California
Consumer Privacy Act (“CCPA”), which became effective January 1, 2020, as amended by the California Privacy Rights Act (“CPRA”), which became effective
as of January 1, 2023, the Gramm-Leach-Bliley Act and other laws and regulations enacted by the Federal Trade Commission (“FTC”). We rely on technology
in virtually all aspects of our business. Like those of many large businesses, certain of our information systems have been subject to computer viruses, malicious
code, unauthorized access, phishing efforts, denial-of-service attacks and other cyber-attacks and we expect to be subject to similar attacks in the future as such
attacks become more sophisticated and frequent. A significant disruption or failure of our technology systems could result in service interruptions, safety
failures, security events, regulatory compliance failures, an inability to protect information and assets against unauthorized users, and other operational
difficulties. Attacks perpetrated against our systems could result in loss of assets and critical information and expose us to remediation costs and reputational
damage.
We and our franchisees manage highly sensitive client information in our operations, and although we have established security procedures to protect
against identity theft and require our franchisees to do the same, a security incident resulting in breaches of our customers’ privacy may occur. Our computer
systems are subject to penetration and our data protection measures may not prevent unauthorized access to sensitive client information. Threats to our systems,
our franchisees systems, or associated third parties’ systems can derive from human error, fraud, or malice on the part of employees or third parties, or may
result from accidental technological failure. If the measures we have taken prove to be insufficient or inadequate or if our franchisees fail to meet their
obligations in this area, we and our franchisees may become subject to litigation or administrative sanctions, which could result in significant fines, penalties, or
damages and harm to our brands and reputation, which in turn could negatively impact our ability to retain our customers. Moreover, although we have some
insurance that may defray the cost, the cost of remediating any breach resulting from a cybersecurity incident or other breach of the privacy of customer
information would likely be substantial. Furthermore, we may be required to invest additional resources to protect us against damages caused by these actual or
perceived disruptions or security breaches in the future. We could also suffer harm to our reputation from a security breach or inappropriate disclosure of
customer information. Changes in these federal and state regulatory requirements could result in more stringent requirements and could result in a need to
change business practices, including how information is disclosed. These changes could have a material adverse effect on our business, financial condition, and
results of operations. Moreover, a significant security breach or disclosure of customer information could so damage our brands and reputation that demand for
the services that are provided by us and our franchisees may be reduced.
Although we have taken steps intended to mitigate these risks, a significant disruption or cyber intrusion could adversely affect our results of operations,
financial condition and liquidity. If we become victim to a security breach resulting in third-party access to customer’s personal information which we host,
collect, use and retain, this could have a material adverse effect on the demand for our services and products, our reputation, and cause material losses. These
risks apply to all of our business segments.
If we or our franchisees or dealers fail to comply with marketing and advertising laws, including with regard to direct marketing we may face significant
damages.
We rely on a variety of marketing techniques, including telemarketing, email and social media marketing and postal mailings, and we are subject to various
laws and regulations in the U.S. and internationally that govern marketing and advertising practices. The retention of customers by our business and franchisees
and dealers, and our ability to attract additional franchisees and dealers, depends on the use of these marketing techniques to contact customers and potential
franchisees and dealers. However, the Telephone Consumer Protection Act (“TCPA”) imposes significant restrictions on the ability to utilize telephone calls and
text messages to mobile telephone numbers as a means of communication, when the prior consent of the person being contacted has not been obtained.
Violations of the TCPA may be enforced by individual customers through class-actions, and statutory penalties for TCPA violations range from $500 to $1,500
per violation. If we fail to ensure that our own telemarketing and telemarketing efforts are TCPA compliant, or if our franchisees or dealers fail to do so and we
are held responsible for their behavior, we may incur significant damages.
Compliance with governmental regulations or newly enacted laws could increase our costs significantly and adversely affect our operating income and
financial results.
The products and services offered by our business segments are subject to federal laws and regulation by one or more federal agencies, including but not
limited to the FDA, the FTC, the CFPB, the United States Department of Agriculture and the Environmental Protection Agency. These activities are also
regulated by various state, local and international laws and agencies of the states and localities in which our products or services are provided. Regulations may
prevent or delay the introduction, or require the reformulation, of our products or services, which could result in lost sales and
increased costs to us.
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For example, the FDA may not accept the evidence of safety for any new ingredients that our Vitamin Shoppe segment may want to market, may
determine that a particular ingredient is not a legal dietary ingredient under the FDCA, may determine that a particular product or product ingredient presents an
unacceptable health risk, may determine that a particular statement of nutritional support on our products, or that we want to use on our products, is an
unacceptable drug claim or an unauthorized version of a food “health claim.” The FDA or FTC may determine that particular claims are not adequately
supported by available scientific evidence. The FDA may also determine that our Vitamin Shoppe segment’s CBD-containing food and dietary supplement
products are unlawful and may issue an enforcement action against us. Any such regulatory determination would prevent us from marketing particular products
or using certain statements on those products or force us to recall a particular product and be subject to additional enforcement or penalties, which could
adversely affect our sales of those products.
Additionally, our rental business unit is subject to various federal and state including consumer protection statutes, such as a grace period for late fees and
certain contract reinstatement rights. Moreover, many states have passed laws that regulate rental purchase transactions as separate and distinct from credit sales.
Specific rental purchase laws generally require certain contractual and advertising disclosures. Any failure of our Buddy’s segment to comply with such laws
could have a material adverse effect on our business.
The CCPA requires covered companies to provide new disclosures to California consumers, and afford such consumers new abilities to opt-out of certain
sales of personal information. We collect internal and customer data, including personally identifiable information for a variety of important business purposes,
including managing our workforce and providing requested products and services. The CCPA required us to modify our data processing practices and policies at
our Pet Supplies Plus, Vitamin Shoppe, Sylvan and American Freight segments, as a result of which we may incur substantial costs and expenses in an effort to
comply. Further, the CPRA, which became effective on January 1, 2023 (with certain provisions having retroactive effect to January 1, 2022), created additional
obligations with respect to processing and storing personal information of California consumers. The effects of the CCPA and CPRA are potentially significant
and require us to modify our data processing practices and policies which as a result, we may incur substantial costs and expenses in an effort to comply.
Additionally, Colorado, Connecticut, Utah, and Virginia have adopted comprehensive privacy laws, and other jurisdictions have adopted or may in the future
adopt their own, different privacy laws. We may also from time to time be subject to, or face assertions that we are subject to, additional obligations relating to
personal data by contract or due to assertions that self-regulatory obligations or industry standards apply to our practices. There may be additional regulatory
actions or enforcement priorities, or new interpretations of existing requirements that differ from ours, which could impose unanticipated limitations or require
changes to our business. Any developments of this nature could increase our costs significantly and could have a material adverse effect on our business,
financial condition and results of operations.
We may be subject to product liability claims if people or properties are harmed by the products we sell or the services we offer.
Some of the products we sell may expose us to product liability claims relating to personal injury, death, or property damage caused by such products, and
may require us to take actions such as product recalls. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for
liabilities actually incurred or that insurance will continue to be available to us on commercially reasonable terms, or at all. Our Vitamin Shoppe segment, in
particular, as a retailer and direct marketer of products designed for human consumption, is subject to product liability claims if the use of its products is alleged
to have resulted in injury or to include inadequate instructions for use or inadequate warnings concerning possible side effects and interactions with other
substances. In addition, third-party manufacturers produce many of the products we sell which may expose us to product liability claims for products we do not
manufacture. While we attempt to manage these risks by obtaining insurance and indemnification agreements from the manufacturers of products that we sell,
third parties may not satisfy their indemnification obligations to us and/or our insurance policies may not be sufficient or available. A product liability claim
against us, whether with respect to products of a third-party that we sell or our branded products, could result in increased costs and could adversely affect our
reputation with our customers, which in turn could materially adversely affect our business, financial condition and results of operations.
General Risk Factors
Our failure to protect our intellectual property rights may harm our competitive position, and litigation to protect our intellectual property rights or defend
against third-party allegations of infringement may be costly.
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We regard our intellectual property as critical to the success of our business. Third parties may infringe or misappropriate our brand names, trademarks or
other intellectual property rights, which could have a material adverse effect on our business, financial condition, or operating results. The actions we take to
protect our trademarks and other proprietary rights may not be adequate. Litigation may be necessary to enforce our intellectual property rights, protect our trade
secrets, or determine the validity and scope of the proprietary rights of others. There are no assurances that we will be able to prevent infringement of our
intellectual property rights or misappropriation of our proprietary information. Any infringement or misappropriation could harm any competitive advantage we
currently derive or may derive from our proprietary rights. In addition, third parties may assert infringement claims against us. Any claims and any resulting
litigation could subject us to significant liability for damages. An adverse determination in any litigation of this type could require us to design around a third-
party’s patent or to license alternative technology from another party. Litigation is time-consuming and expensive to defend and could result in the diversion of
our time and resources. Any claims from third parties may also result in limitations on our ability to use the intellectual property subject to these claims.
Our business relies on technology systems and electronic communications, which, if disrupted, could materially affect our business.
We depend heavily upon our information technology systems in the conduct of our business. We develop, own and license or otherwise contract for
sophisticated technology systems and services. If we experience significant disruptions to our systems, we could experience a loss of business, which could have
a material adverse effect on our business, financial condition, and results of operations. Any data breach or severe disruption of our network or electronic
communications could have a material adverse effect on our business, financial condition, and results of operations.
We rely on certain software vendors to maintain and periodically upgrade many of these systems so that they can continue to support our business. The
software programs supporting many of our systems were licensed to us by independent software developers. The inability of these developers or us to continue
to maintain and upgrade these information systems and software programs would disrupt or reduce the efficiency of our operations if we were unable to convert
to alternate systems in an efficient and timely manner.
If we are unable to secure our customers’ personal and confidential information, or other private data relating to our associates, suppliers or our business,
we could be subject to negative publicity, costly government enforcement actions or private litigation and increased costs, which could damage our business
reputation and adversely affect our results of operations or business.
Many of our information technology systems, such as those we use for our point-of-sale, web and mobile platforms, including online and mobile payment
systems, and for administrative functions, including human resources, payroll, accounting, and internal and external communications, contain personal, financial
or other information that is entrusted to us by our customers and associates. Many of our information technology systems also contain proprietary and other
confidential information related to our business and suppliers. Although we have developed procedures, employee training and technology in place to safeguard
our customers’ personal information, our associates’ private data, suppliers’ data, and our business records and intellectual property and other sensitive
information, we may nevertheless, be vulnerable to, and unable to anticipate, detect and appropriately respond to, data security breaches and data loss, including
cyber-security attacks. To date, we have not experienced a material information security data breach, however, if we or any third-party systems we use
experience a data security breach, we could be exposed to negative publicity, reputational risk with our customers, government enforcement actions and private
litigation, in addition to the potential of significant capital investments and other expenditures to remedy cybersecurity problems and prevent future security
breaches. These costs, which could be material, could adversely impact our results of operations in the period in which they are incurred and may not
meaningfully limit the success of future attempts to breach our information technology systems.
If we fail to retain our key senior management personnel or are unable to attract and retain highly skilled and other key personnel, our financial
performance could be materially adversely affected.
We depend on our senior management and other key or highly skilled personnel. The loss of any of our executive officers or other key employees or the
inability to hire, train, retain, and manage qualified personnel, could harm our business.
If we and our franchisees and dealers are unable to attract and retain qualified employees, our financial performance could be materially adversely affected.
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Both we and our franchisees and dealers depend on the ability to find, hire and retain qualified employees to manage day-to-day business activities. Our
operating subsidiaries also need qualified and competent personnel in executing their business plans and serving their customers. Our inability to recruit and
retain qualified and competent managers and personnel could have a material adverse effect on our business, financial condition and results of operations.
Our Certificate of Incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for certain disputes between us and our
stockholders, which may limit a stockholder’s ability to bring a claim in a judicial forum that it finds preferable for disputes with us and our directors,
officers or other employees.
Our Certificate of Incorporation provides that, unless we otherwise determine, the Court of Chancery of the State of Delaware will be the sole and
exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a claim of breach of a fiduciary duty owed by any of our
directors, officers or other employees to us or our stockholders, any action asserting a claim against us arising pursuant to any provision of the Delaware General
Corporation Law, our Certificate of Incorporation or Bylaws, or any action asserting a claim governed by the internal affairs doctrine. This forum selection
provision does not apply to suits brought to enforce a duty or liability created by the Securities Act of 1933, as amended (the “Securities Act”), or the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), or any claim for which the federal courts have exclusive jurisdiction. This forum selection provision
may limit a stockholder’s ability to bring a claim that is not arising under the Securities Act or the Exchange Act, in a judicial forum (other than in a Delaware
court) that it finds preferable for disputes with us or any of our directors, officers or other employees, which may discourage lawsuits with respect to such claims
and result in increased costs for stockholders to bring a claim. If a court were to find this forum selection provision to be inapplicable or unenforceable in an
action, we may incur additional costs or business interruption associated with resolving such action in other jurisdictions, which could adversely affect our
business and financial condition.
Our stock price has been extremely volatile, and investors may be unable to resell their shares at or above their acquisition price or at all.
Our stock price has been, and may continue to be, subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our
control, including, but not limited to:
•
actual or anticipated variations in our operating results from quarter to quarter;
•
actual or anticipated variations in our operating results and financial performance from the expectations of securities analysts and investors;
•
if analysts do not publish research or reports about our business or if they publish misleading or unfavorable research or reports about our business;
•
actual or anticipated variations in our operating results from our competitors;
•
fluctuations in the valuation of companies perceived by investors to be comparable to us;
•
sales of common stock or other securities by us or our stockholders in the future;
•
certain non-compliance, fraud and other misconduct by our franchisees, dealers, and/or employees;
•
departures of key executives or directors;
•
announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, financing efforts or capital commitments;
•
delays or other changes in our expansion plans;
•
failure to maintain adequate internal controls;
•
involvement in litigation (including securities class action litigation) or governmental investigations or enforcement activity;
•
stock price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
•
general economic, stock market and market conditions in our industry and the industries of our customers;
•
regulatory or political developments;
•
global pandemics (such as the ongoing COVID-19 pandemic); and
•
capital markets and trading markets fluctuations.
Although we may desire to continue to pay dividends in the future, our financial condition, debt covenants, or Delaware law may prohibit us from doing so.
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The payment of dividends will be at the discretion of our Board and will depend, among other things, on our earnings, capital requirements, and financial
condition. Our ability to pay dividends will also be 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 to determine that we have adequate
surplus prior to the declaration of dividends. Although we expect to pay a quarterly cash dividend to holders of our common stock, we have no obligation to do
so, and our dividend policy may change at any time without notice to our stockholders. We cannot provide an assurance that we will continue to pay dividends at
any specific level or at all.
Anti-takeover provisions in our charter documents, Delaware law, and our credit facility could make an acquisition of us more difficult, limit attempts by
our stockholders to replace or remove our current management, and adversely affect the value of our common stock.
Provisions in our second amended and restated certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or
changes in our management. In addition, our credit facility contains covenants that may impede, discourage, or prevent a takeover of us. For instance, upon a
change of control, we would default on our credit facility. As a result, a potential takeover may not occur unless sufficient funds are available to repay our
outstanding debt. Provisions in our bylaws and credit facility may frustrate or prevent any attempts by our stockholders to replace or remove our current
management by making it more difficult for stockholders to replace members of our Board, which is responsible for appointing the members of our
management. Any provision of our amended and restated certificate of incorporation and bylaws or our debt documents that has the effect of delaying or
deterring a change of control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock. Even in the absence of
a takeover attempt, the existence of these provisions may adversely affect our stock value if they are viewed as discouraging takeover attempts in the future.
Item 1B.    Unresolved Staff Comments.
None.
Item 2.    Properties.
Stores
As of December 31, 2022, we operated 1,401 Company-owned stores, operated 318 dealer-owned stores, and franchised 1,310 stores. See breakout of
Company-owned stores, dealer-owned stores, franchised stores, and distribution centers by segment as detailed below:
Company-owned
Dealer-owned
Franchised
Total
Distribution Centers
Vitamin Shoppe
702 
— 
2 
704 
2 
Pet Supplies Plus
232 
— 
443 
675 
3 
Badcock
64 
318 
— 
382 
3 
American Freight
362 
— 
9 
371 
8 
Buddy’s
36 
— 
302 
338 
— 
Sylvan
5 
— 
554 
559 
— 
Total Franchise Group
1,401 
318 
1,310 
3,029 
16 
We lease the vast majority of our Company-owned stores and our distribution centers. Our leases typically provide an initial term with options to extend.
As current leases expire, we believe that we will be able to obtain lease renewals, if desired, for present store locations, or to obtain leases for equivalent or
better locations in the same general area.
We lease our corporate headquarters, which is shared with American Freight. Our principal executive office is located at 109 Innovation Court, Suite J,
Delaware, Ohio 43015.
Item 3.    Legal Proceedings.
For information regarding legal proceedings, refer to “Note 15 - Commitments and Contingencies” in the Notes to the Consolidated Financial Statements,
which information is incorporated herein by reference.
Item 4.    Mine Safety Disclosures.
Not applicable.
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PART II
Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
Market and Stock Information
Our common stock and Series A Preferred Stock is traded on NASDAQ under the symbols “FRG” and “FRGAP,” respectively. As of February 22, 2023,
we had approximately 116 registered record holders of our common stock and 1 registered record holder of our Series A Preferred Stock. An aggregate
maximum of 5,000,000 shares of common stock are reserved for stock compensation award issuance.
Future decisions to pay cash dividends continue to be at the discretion of our Board and will be dependent 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 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.
Recent Sales of Unregistered Securities
Other than those sales of unregistered securities that we have disclosed in quarterly reports on Form 10-Q or current reports on Form 8-K, we have not
recently sold any unregistered securities.
Share Repurchases
On May 18, 2022, our Board of Directors approved a stock repurchase program under which we may repurchase up to $500.0 million of our outstanding
shares of common stock over the next three years. The repurchase program authorizes shares to be repurchased from time to time in open market or private
transactions, through block trades and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934,
as amended. The actual timing, number and value of shares, if any, repurchased under the program will be determined by management in its discretion and will
depend on a number of factors, including, among others, the availability of stock, general market and business conditions, the trading price of our common stock
and applicable legal requirements. This plan supersedes our previous stock repurchase programs. The following table represents our share repurchase activity
during the three months ended December 31, 2022:
Fiscal Period
Total number

 of shares purchased
Average price
paid per
share
Total number of shares
purchased as part of public
stock repurchase programs
Approximate dollar value of
shares that may yet be
purchased under the
program (in millions)
September 25, 2022 - October 22, 2022
— 
— 
—  $
422.1 
October 23, 2022 - November 19, 2022
733,951 
24.75 
733,951 
403.9 
November 20, 2022 - December 31, 2022
2,959,593 
25.81 
2,209,593 
327.5 
Total
3,693,544  $
25.61 
2,943,544  $
327.5 
During the fiscal year ended December 31, 2022, we purchased a total of 5,920,744 shares for a total of $172.5 million. As of February 22, 2023, we had
approximately $327.5 million remaining under the stock repurchase program approved by our Board.
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Stock Performance Graph
The following graph sets forth the yearly percentage change in the cumulative total shareholder return on our common stock during the five fiscal years
ended December 31, 2022, compared with the cumulative total returns of the S&P 500 Index and the S&P Retailing Index. The comparison assumes that $100
was invested in our common stock on May 1, 2017, and, in each of the foregoing indices on May 1, 2017, that dividends were reinvested. The stock price
performance shown in the graph is not necessarily indicative of future price performance.
Year or Period Ended
April 30, 2017
April 30, 2018
April 30, 2019
December 28, 2019
December 26, 2020
December 25, 2021
December 31, 2022
Franchise Group, Inc. $
100.00 
77.86 
57.97 
137.21 
169.25 
323.62 
160.68 
S&P 500 Index $
100.00 
123.56 
152.66 
167.91 
191.23 
244.90 
198.97 
S&P Retailing Index $
100.00 
101.11 
102.23 
103.48 
144.92 
198.68 
135.28 
Item 6. [Reserved]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
General
The discussion of our financial condition and results of operations for the years ended December 25, 2021 and December 26, 2020, included in Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) can be found in the Annual Report on Form 10-K for the
fiscal year ended December 25, 2021 that was previously filed with the Securities and Exchange Commission (“SEC”) on February 23, 2022 (the “Form 10-K”).
Overview
We are an owner and operator of franchised and franchisable businesses that continually looks to grow our portfolio of brands while utilizing our operating
and capital allocation philosophy to generate strong cash flows. We currently operate six reportable segments: Vitamin Shoppe, Pet Supplies Plus, Badcock,
American Freight, Buddy’s and Sylvan.
Our Vitamin Shoppe segment is an omnichannel specialty retailer of vitamins, minerals, herbs, specialty supplements, sports nutrition and other health and
wellness products. Our Pet Supplies Plus segment is a leading franchisor and retailer of pet supplies and services. Our Badcock segment carries a complete line
of furniture, appliances, bedding, electronics, home office equipment, accessories and seasonal items in a showroom format. Our American Freight segment is a
retail chain offering in-store and online access to furniture, mattresses, new and out-of-box appliances and home accessories at discount prices. Our Buddy’s
segment is a specialty retailer of high quality, name brand consumer electronic, residential furniture, appliances and
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household accessories through rent-to-own agreements. Our Sylvan segment is an established and growing franchisor of supplemental education for Pre-K-12
students and families.
Our revenue is primarily derived from merchandise sales, rental revenue, and service revenues comprised of royalties and other required fees from our
franchisees, dealers and financing programs.
In evaluating our performance, management focuses on several metrics that we believe are key to our success:
•
Net change in retail and franchise locations. The change in retail and franchise locations from year to year is a function of the opening of new
locations, offset by locations that we or our franchisees close. Please see “Item 2. Properties” in this Annual Report for the number of locations as of
December 31, 2022.
•
Same-store or comparable store sales. The difference in revenue generated by the segment’s existing store locations over a certain period (often a fiscal
week, month or quarter), compared to an identical period in the past, usually in the previous year. A segment’s store becomes a comparable store at the
beginning of the fiscal period following the one-year anniversary of the store open date (or the beginning of the 13  fiscal period after the store opens).
If a store relocates outside of the current trade area or defined territory, it is removed from the comparable store base and is treated as a new store.
Online revenue is included in the overall segment comparable store sales calculation.
•
Adjusted EBITDA. 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, amortization and certain other items.
Results of Operations
For the Year Ended December 31, 2022 as compared to the Year Ended December 25, 2021
The following table sets forth the results of our operations for the years ended December 31, 2022, and December 25, 2021:
Fiscal Years Ended
Change
(In thousands)
12/31/2022
12/25/2021
$
%
Total revenues
$
4,397,832 
$
3,255,204  $
1,142,628 
35.1 %
Total operating expenses
4,176,625 
3,028,853 
1,147,772 
37.9 %
Income (loss) from operations
221,207 
226,351 
(5,144)
(2.3)%
Net income (loss) from continuing operations
(68,573)
191,966 
(260,539)
(135.7)%
Net income (loss) from discontinued operations, net of tax
— 
171,822 
(171,822)
(100.0)%
Net income (loss) attributable to Franchise Group, Inc.
$
(68,573)
$
363,788  $
(432,361)
(118.8)%
Revenues. The table below sets forth the components and changes in our revenue for the years ended December 31, 2022 and December 25, 2021:
Fiscal Years Ended
Change
(In thousands)
12/31/2022
12/25/2021
$
%
Product
$
3,832,291 
$
3,012,471 
$
819,820 
27.2 %
Service and other
535,961 
209,103 
326,858 
156.3 %
Rental
29,580 
33,630 
(4,050)
(12.0)%
Total revenue
$
4,397,832 
$
3,255,204 
$
1,142,628 
35.1 %
Our total revenue increased by $1.1 billion, or 35%, in the year ended December 31, 2022 compared to the year ended December 25, 2021. This increase
was primarily due to:
•
A full year of revenue from the Badcock Acquisition, which increased revenue by $817.0 million;
•
a $371.3 million revenue increase at our Pet Supplies Plus segment due to a full period of activity reported in the current period compared to
the prior period, which began on the acquisition date of March 10, 2021, an increase in comparable store sales, and 81 additional franchisee
stores;
th
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•
a $34.1 million increase in revenue at our Vitamin Shoppe segment primarily attributable to the additional week in fiscal 2022 and higher
average transaction value; and
•
a full year of revenue from the Sylvan Acquisition, which increased revenue by $32.7 million.
Of the increases noted above, $73.1 million was attributable to the additional week in fiscal 2022 compared with fiscal 2021. These increases were offset
by a $105.4 million decrease in revenue at our American Freight segment and a $7.0 million decrease at our Buddy’s segment.
Operating expenses. The following table details the amounts and changes in our operating expenses for the years ended December 31, 2022 and
December 25, 2021:
Fiscal Years Ended
Change
(In thousands)
12/31/2022
12/25/2021
$
%
Cost of revenue:
Product
$
2,485,934 
$
1,892,741  $
593,193 
31.3 %
Service and other
36,340 
16,506 
19,834 
120.2 %
Rental
11,070 
11,552 
(482)
(4.2)%
Total cost of revenue
2,533,344 
1,920,799 
612,545 
31.9 %
Selling, general and administrative expenses
1,573,281 
1,108,054 
465,227 
42.0 %
Goodwill impairment
70,000 
— 
70,000 
100.0 %
Total operating expenses
$
4,176,625 
$
3,028,853  $
1,147,772 
37.9 %
Total operating expenses increased $1.1 billion, or 38%, in the year ended December 31, 2022 compared to the year ended December 25, 2021. This
increase was primarily due to:
•
the Badcock Acquisition, which increased operating expenses by $710.6 million;
•
the corresponding increased sales and inclusion of full period results from Pet Supplies Plus in the current period, which increased operating expenses
by $331.7 million;
•
Vitamin Shoppe segment’s increase in operating expenses of $31.3 million primarily due to a corresponding increase in sales for the period; and
•
operating expenses at our American Freight segment increased $40.7 million primarily due to a $70.0 million non-cash goodwill impairment charge
partially offset by a $28.5 million decrease in selling, general, and administrative expenses.
Non-operating expense. The following table sets forth certain information regarding our non-operating income (expense) for the years ended
December 31, 2022 and December 25, 2021:
Fiscal Years Ended
Change (Fiscal 2022 vs. Fiscal 2021)
(In thousands)
12/31/2022
12/25/2021
$
%
Bargain purchase gain
$
3,514 
$
132,559  $
(129,045)
(97.3)%
Gain on sale-leaseback transactions
59,772 
— 
59,772 
100.0 %
Other
(21,929)
(67,368)
45,439 
(67.4)%
Interest expense, net
(339,982)
(133,114)
(206,868)
155.4 %
Non-operating (expense)
$
(298,625)
$
(67,923) $
(230,702)
339.7 %
Non-operating expense increased $230.7 million due to the following:
•
In the prior year, a $132.0 million bargain purchase gain was recorded from the Badcock Acquisition. During the year ended December 31, 2022,
preliminary estimates were finalized, resulting in $3.5 million of bargain purchase gain in the current year;
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•
Gain on sale-leaseback transactions of $59.8 million in the current year as the Company’s Badcock segment entered into sale-leaseback transactions for
a number of its retail locations, distribution centers and corporate headquarters, resulting in a net gain of $59.8 million.
•
Other expenses decreased $45.4 million for the year ended December 31, 2022, primarily due to a prepayment penalty in the prior period of $36.7
million from the repayment of the Franchise Group New Holdco Term Loan and ABL Term Loan and a $8.1 million increase in the loss related to our
investment in NextPoint (as defined herein) compared to the prior period; and
•
Interest expense, net increased by $206.9 million due to an increase of $220.5 million of interest expense related to the Badcock securitized receivables
portfolio and $14.1 million in additional interest expense on the First and Second Lien Term Loans and revolving credit facility (the “ABL Revolver”),
offset by a decrease of $31.2 million of amortized deferred financing costs for the year ended December 31, 2022 compared to the prior year period.
Income Taxes. The following table sets forth certain information regarding our income taxes for the years ended December 31, 2022 and December 25,
2021:
Fiscal Years Ended
Change
(In thousands)
12/31/2022
12/25/2021
$
%
Gain (loss) before income taxes
$
(77,418)
$
158,428 
$
(235,846)
(149)%
Income tax expense (benefit)
(8,845)
(33,538)
24,693 
(74)%
Effective tax rate
11.4 %
(21.2)%
The increase in the effective tax rate from (21.2)% to 11.4% for the year ended December 31, 2022 compared to the year ended December 25, 2021 is
primarily due to a $14.7 million impairment of goodwill that is permanently disallowed for tax purposes. In addition, the Company released $6.8 million of a
valuation allowance in the current year compared to release of $45.2 million in the prior year, on the basis of management’s reassessment of the amount of its
deferred tax assets that are more likely than not to be realized. The bargain purchase gain recorded in the Badcock Acquisition in the prior year was disregarded
for tax purposes, which resulted in a permanent benefit.
Net Income. In the year ended December 31, 2022, we had net loss from continuing operations of $(68.6) million compared to net income of $192.0
million in the year ended December 25, 2021 due to the fluctuations noted above.
Segment Information
Our operations are conducted in six reporting business segments: Vitamin Shoppe, Pet Supplies Plus, Badcock, American Freight, Buddy’s, and Sylvan.
We define our segments as those operations whose results our Chief Operating Decision Maker regularly reviews to analyze performance and allocate resources.
Because the Sylvan Acquisition and Badcock Acquisition occurred in the fourth quarter of the year ended December 25, 2021, comparable information is not
available; therefore, Sylvan and Badcock segment information is not provided.
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Vitamin Shoppe
The following table summarizes the operating results of our Vitamin Shoppe segment for the years ended December 31, 2022 and December 25, 2021:
Fiscal Years Ended
Change
(In thousands)
12/31/2022
12/25/2021
$
%
Total revenues
$
1,206,824 
$
1,172,725 
$
34,099 
2.9 %
Operating expenses
1,100,035 
1,068,721 
31,314 
2.9 %
Operating income (loss)
$
106,789 
$
104,004 
$
2,785 
2.7 %
Total revenue for our Vitamin Shoppe segment increased $34.1 million, or 2.9%, for the year ended December 31, 2022 compared to the year ended
December 25, 2021. The increase was attributable to higher average transaction values and $19.5 million from the additional week in fiscal 2022.
Operating expenses for the Vitamin Shoppe segment increased $31.3 million, or 2.9%, for the year ended December 31, 2022 as compared to the year
ended December 25, 2021. The increase in operating expenses was primarily driven by:
•
a $28.9 million increase in cost of revenue correlated to the revenue growth noted above;
•
Gross profit decreased approximately eighty-five basis points to 44.4% compared to 45.2% in the prior year due to increased transportation and fuel
costs and higher sales for sports nutrition products, which have lower merchandise margins; and
•
a $6.4 million increase in rent and utility expenses offset by a $4.1 million decrease in depreciation expense primarily due to accelerated depreciation
related to vacant office space in fiscal year 2021.
Pet Supplies Plus
The following table summarizes the operating results of our Pet Supplies Plus segment for the years ended December 31, 2022 and December 25, 2021:
Fiscal Years Ended
Change
(In thousands)
12/31/2022
12/25/2021
$
%
Total revenues
$
1,288,724  $
917,439  $
371,285 
40.5 %
Operating expenses
1,207,496 
875,785 
331,711 
37.9 %
Operating income (loss)
$
81,228  $
41,654  $
39,574 
95.0 %
Total revenue for our Pet Supplies Plus segment increased $371.3 million, or 40.5%, for the year ended December 31, 2022 compared to the year ended
December 25, 2021. The increase in revenue was driven by:
•
The Pet Supplies Plus Acquisition occurring on March 10, 2021, resulting in a $203.1 million increase as the prior period did not include a full year's
results;
•
a $23.3 million increase due to the additional week in fiscal 2022 compared with fiscal 2021;
•
a $10.5 million increase in grooming and dog wash revenue compared to the prior year;
•
an increase in product revenue due to positive comparable store sales; and
•
an increase in wholesale and royalty revenue attributable to a net increase of 81 franchisee stores during fiscal year 2022.
Operating expenses for the Pet Supplies Plus segment increased $331.7 million, or 37.9%, for the year ended December 31, 2022 compared to the year
ended December 25, 2021. The increase in operating expenses was primarily due to the Pet Supplies Plus Acquisition occurring on March 10, 2021, resulting in
the prior period not including a full year’s results. Additionally, $20.0 million of the increase was attributable to the additional week in fiscal 2022 compared
with fiscal 2021.
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American Freight
The following table summarizes the operating results of our American Freight segment for the years ended December 31, 2022 and December 25, 2021:
Fiscal Years Ended
Change
(In thousands)
12/31/2022
12/25/2021
$
%
Total revenues
$
883,484  $
988,892  $
(105,408)
(10.7)%
Operating expenses
963,008 
922,351 
40,657 
4.4 %
Operating income (loss)
$
(79,524) $
66,541  $
(146,065)
(219.5)%
Total revenue for our American Freight segment decreased $105.4 million, or (10.7)%, for the year ended December 31, 2022 compared to the year ended
December 25, 2021. The decrease in revenue was attributable to lower demand for large discretionary spending due to high inflation and reduced government
stimulus programs which was nominally offset by a revenue increase of $15.3 million from the additional week in fiscal 2022.
Operating expenses for the American Freight segment increased $40.7 million, or 4.4%, for the year ended December 31, 2022 compared to the year ended
December 25, 2021. The increase in operating expenses was primarily due to a $70.0 million non-cash goodwill impairment charge partially offset by lower cost
of revenue, variable compensation and reduced advertising expenditures.
Buddy’s
The following table summarizes the operating results of our Buddy’s segment for the years ended December 31, 2022 and December 25, 2021:
Fiscal Years Ended
Change
(In thousands)
12/31/2022
12/25/2021
$
%
Total revenues
$
57,407  $
64,409  $
(7,002)
(10.9)%
Operating expenses
44,887 
47,724 
(2,837)
(5.9)%
Operating income (loss)
$
12,520  $
16,685  $
(4,165)
(25.0)%
Total revenue for our Buddy’s segment decreased $7.0 million, or (10.9)%, for the year ended December 31, 2022 compared to the year ended December
25, 2021. The decrease in revenue was primarily attributable to the refranchising of eight Company-owned stores on August 25, 2021 partially offset by $1.0
million in revenue from the additional week in fiscal 2022.
Operating expenses for the Buddy’s segment decreased $2.8 million, or (5.9)%, for the year ended December 31, 2022 compared to the year ended
December 25, 2021. The decrease in operating expenses was primarily due to the refranchising of eight Company-owned stores on August 25, 2021.
Adjusted EBITDA.
To provide additional information regarding our financial results, we have disclosed Adjusted EBITDA in the table below and within this Annual Report.
Adjusted EBITDA represents net income (loss), before income taxes, interest expense, depreciation and amortization, and certain other items specified below.
We have provided a reconciliation below of Adjusted EBITDA to net income (loss) from continuing operations, the most directly comparable GAAP financial
measure.
We have included Adjusted EBITDA in this Annual Report because we believe the presentation of these measures is useful to investors as supplemental
measures in evaluating the aggregate performance of our operating businesses and in comparing our results from period to period because they exclude items
that we do not believe are reflective of our core or ongoing operating results. These measures are used by our management to evaluate performance and make
resource allocation decisions each period. Adjusted EBITDA is also the primary operating metric used in the determination of executive management’s
compensation.  In addition, a measure similar to Adjusted EBITDA is used in our credit facilities. Adjusted EBITDA is not a recognized financial measure under
GAAP and may not be comparable to similarly-titled measures used by
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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 the fiscal years ended December 31, 2022 and December 25, 2021.
Fiscal Years Ended
(In thousands)
12/31/2022
12/25/2021
Net income (loss) from continuing operations
$
(68,573)
$
191,966 
Add back:
Interest expense
339,982 
133,114 
Income tax benefit
(8,845)
(33,538)
Depreciation and amortization charges
81,942 
69,086 
Total Adjustments
413,079 
168,662 
EBITDA
344,506 
360,628 
Adjustments to EBITDA
Executive severance and related costs
1,890 
302 
Stock-based and long term executive compensation
21,422 
14,956 
Litigation costs and settlements
526 
(1,130)
Corporate compliance costs
608 
2,172 
Store closures
1,342 
2,429 
Securitized accounts receivable interest income
(192,920)
— 
Securitized accounts receivable bad debt reserve
144,402 
— 
W.S. Badcock financing operations
(7,841)
(19,919)
Prepayment penalty on early debt repayment
— 
36,726 
Right-of-use asset and long-term asset impairment
3,422 
2,948 
Goodwill impairment
70,000 
— 
Integration costs
(2,274)
16,655 
Gain on sale-leaseback and owned properties, net
(61,548)
— 
Divestiture costs
4,079 
515 
Acquisition costs
6,267 
22,878 
Loss on investment in equity securities
23,671 
31,773 
Acquisition bargain purchase gain
(3,514)
(132,559)
Total Adjustments to EBITDA
9,532 
(22,254)
Adjusted EBITDA
$
354,038 
$
338,374 
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Funding Requirements
We believe that we have sufficient liquidity to support our ongoing operations and maintain a sufficient liquidity position to meet our obligations and
commitments. Our liquidity plans are established as part of our financial and strategic planning processes and consider the liquidity necessary to fund our
operating, capital expenditure and debt service needs.
We primarily fund our operations and acquisitions through operating cash flows and, as needed, a combination of borrowings under various credit
agreements, availability under our revolving credit facilities and the issuance of equity securities. Cash generation can be subject to variability based on many
factors, including seasonality, receipt of prepaid payments from area developers, timing of repayment of loans to franchisees and the effects of changes in end
markets.
Subsequent to December 31, 2022, several transactions and events occurred that will or have the potential to affect our liquidity and capital resources in
future periods. For more information, refer to “Note 17 - Subsequent Events”, to the Consolidated Financial Statements in Item 8.
Sources and uses of cash
Operating activities
Net cash provided by operating activities decreased $143.4 million in fiscal 2022 compared to fiscal 2021 due to a net $90.6 million decrease in accounts
receivable and securitized accounts receivable and a $17.0 million decrease in accounts payable and accrued expenses due to the timing of payments. These
were partially offset by a $73.8 million increase in interest payable, a $13.9 million increase in cash net income and a $56.7 million decrease in cash used for
inventory in the current year. Cash net income represents net income adjusted for non-cash or non-operating activities such as gain on bargain purchases, gains
on the sale of Company assets, depreciation and amortization, deferred financing cost amortization and the change in fair value of investments.
Investing activities
Net cash provided by (used in) investing activities increased $1,129.9 million in fiscal 2022 compared to fiscal 2021. This increase was primarily driven by
a $1,060.0 million reduction of cash used for acquisitions and an increase of $260.7 million of proceeds from the sale of property, plant, and equipment. These
increases for fiscal year 2022 were partially offset by $179.5 million in cash received from divestitures in the prior year.
Financing activities
Net cash provided by financing activities decreased $1,339.9 million in fiscal 2022 compared to fiscal 2021. The decrease was due to a $1,462.7 million
decrease in proceeds from the issuance of debt, a $392.6 million net increase in repayments of and proceeds from secured debt obligations, a $172.5 million
increase in payments for share repurchases, a $79.5 million decrease in proceeds from the issuance of preferred stock, and an increase of $44.5 million for
dividends paid. The decreases in cash provided by financing activities were partially offset by a $720.0 million reduction in repayments of long-term obligations
and a $101.3 million reduction of payments for debt issuance costs and penalty prepayment.
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Contractual Obligations
    
The following tables summarize our contractual obligations as of December 31, 2022:
Contractual Obligations
(in thousands)
Total
Interest
2023
2024
2025
2026
2027
Thereafter
Lease Financing
Finance lease liabilities
$
11,055 
$
926  $
3,300  $
2,827  $
2,602  $
1,997  $
1,255  $
— 
Operating lease liabilities
899,993 
151,806 
227,700 
197,095 
154,809 
123,037 
91,038 
258,120 
Long-Term Obligations
Debt secured by accounts
receivable
447,469 
— 
340,021 
107,448 
— 
— 
— 
— 
Term Loans and other debt
1,105,262 
— 
1,145 
4,660 
337 
1,099,120 
— 
— 
ABL Revolver
295,000 
— 
— 
— 
295,000 
— 
— 
— 
Total Obligations
$
1,847,731 
$
—  $
341,166  $
112,108  $
295,337  $
1,099,120  $
—  $
— 
Commitments
(in thousands)
Total
Expiring in 2023
Expiring in 2024
Expiring in 2025
Expiring in 2026
Expiring in 2027
Thereafter
Guarantees
$
30,242  $
5,860  $
5,325  $
4,757  $
4,343  $
3,312  $
6,645 
Purchase obligations
88,446 
40,917 
14,559 
6,221 
4,550 
4,358 
17,841 
Total commitments
$
118,688  $
46,777  $
19,884  $
10,978  $
8,893  $
7,670  $
24,486 
For more information on our long-term obligations, refer to “Note 10 - Long-Term Obligations”, to the Consolidated Financial Statements in Item 8.
Lease financing
Operating lease obligations. Refer to “Note 9 - Leases”, to the Consolidated Financial Statements in Item 8 for information on our operating leases.
The obligation above includes amounts for leases that were signed prior to December 31, 2022 for stores that were not yet open on December 31, 2022.
Other factors affecting our liquidity
Tax Receivable Agreement. We may be required to make payments under the Tax Receivable Agreement (“TRA Payments”) to the former owners of
Buddy’s (the “Buddy’s Members”). As of December 31, 2022, we had TRA Payments due to the Buddy’s Members of $15.4 million. Refer to “Note 13 - Income
Taxes”, to the Consolidated Financial Statements in Item 8 for more information on the Tax Receivable Agreement.
Dividends. On February 24, 2023, our Board approved quarterly cash dividends to common stockholders of $0.625 per share and preferred stockholders of
$0.46875 per share. The cash dividends will be paid on or about April 14, 2023 to holders of record of the Company’s common stock and preferred stock on the
close of business on March 31, 2023. The payment of dividends is at the discretion of our Board and depends, among other things, on our earnings, capital
requirements, and financial condition. Our ability to pay dividends is also subject to compliance with financial covenants that are contained in our credit facility
and may be restricted by any future indebtedness that we incur or issuances of our preferred stock. In addition, applicable law requires our Board 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.
Off Balance Sheet Arrangements
The Company remains secondarily liable under various real estate leases that were assigned to franchisees who acquired
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stores from the Company. In the event of the failure of an acquirer to pay lease payments, the Company could be obligated to pay the remaining lease payments
which extend through 2033 and aggregated $30.2 million as of December 31, 2022. If the Company is required to make payments under these guarantees, the
Company could seek to recover those amounts
from the franchisees or in some cases their affiliates. The Company believes that payment by the Company under these guarantees is remote as of December 31,
2022.
Interest Rate Risk
We are exposed to various types of market risk in the normal course of our business, including the impact of interest rate
changes. We may enter into interest rate swaps to manage exposure to interest rate changes. We do not enter into derivative
instruments for any purpose other than cash flow hedging and we do not hold derivative instruments for trading purposes.
Long-term Debt. We utilize short-term and long-term financing to manage our overall interest expense related to our existing variable-rate debt, as well as
to hedge the variability in cash flows due to changes in benchmark interest rates related to anticipated debt issuances. Refer to “Note 10 - Long-Term
Obligations” to the Consolidated Financial Statements in Item 8 for further details of the components of our long-term debt as of December 31, 2022.
Changes in Fair Value
Fair Value

(In thousands)
10 Basis Point Increase in
Underlying Rate
10 Basis Point Decrease in
Underlying Rate
Long-term debt
$
1,847,731  $
1,848  $
(1,848)
Critical Accounting Policies and Estimates
The preparation of financial statements requires the application of certain accounting policies that require the use of estimates. Certain of our estimates
require a high level of judgment and have the potential to have a material effect on the financial statements if actual results vary significantly from those
estimates. A description of what we consider to be our most significant critical accounting policies follows.
Long-Lived and Right-of-Use Assets. We review our long-lived assets, such as property, plant and equipment, purchased intangibles subject to
amortization, and operating lease right-of-use assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset
group may not be recoverable. We measure recoverability by comparison of the carrying value of an asset to its estimated undiscounted future cash flows
expected to be generated by the asset. We recognize and measure potential impairment at the lowest level where cash flows are individually identifiable. If the
carrying amount of an asset exceeds its estimated future cash flows, we recognize an impairment charge equal to the amount by which the carrying value of the
asset exceeds the fair value of the asset. We determine fair value through various valuation techniques, including discounted cash flow models, quoted market
values, and third-party independent appraisals.
Business Combinations-Purchase Price Allocation. For acquisitions which meet the definition of a business combination in accordance with Accounting
Standards Codification (“ASC”) 805, we allocate the purchase price to the various tangible and intangible assets acquired and liabilities assumed, based on their
estimated fair values. The excess of the purchase price over the fair values of the assets acquired and liabilities assumed represents goodwill derived from the
acquisition. The amount by which the net fair value of assets acquired and liabilities assumed exceeds the fair value of consideration transferred as the purchase
price is recorded as a bargain purchase gain. Determining the fair value of certain assets and liabilities is subjective in nature and often involves the use of
significant estimates and assumptions, which are inherently uncertain. Many of the estimates and assumptions used to determine fair values, such as those used
for intangible assets are made based on forecasted information and discount rates. In addition, the judgments made in determining the estimated fair value
assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations. Refer to “Note 2 -
Acquisitions” to the Consolidated Financial Statements in Item 8 for additional information.
Goodwill and Non-amortizing Intangible Assets. Goodwill and non-amortizing intangible assets are initially recorded at their fair values. These assets are
not amortized but are evaluated as of the end of July of each fiscal year, and a more frequent evaluation is performed if an event occurs or circumstances change
that would more likely than not reduce the assets’ fair values below their carrying values. Such events or circumstances could include, but are not limited to,
significant negative industry or economic trends, unanticipated changes in the competitive environment and a significant sustained decline in the market price of
our stock.
For goodwill, the Company performs a qualitative and/or quantitative assessment to determine whether it is more likely than not that each reporting unit’s
fair value is less than its carrying value, including goodwill. If the Company determines that
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it is more likely than not that the fair value of the reporting unit is less than its carrying value, the Company then estimates the fair value. The Company uses a
weighted average of values determined from an income approach and a market approach to estimate the fair value of its reporting units and recognizes goodwill
impairment for any excess of the carrying amount of a reporting unit’s goodwill over its estimated fair value.
For non-amortizing intangible assets, the Company evaluates its tradenames for impairment by comparing the fair value, based on an income approach
using the relief-from-royalty method, to its carrying value. If the carrying value of the asset exceeds its estimated fair value, an impairment loss is recognized in
an amount equal to that excess. The Company’s reporting units are determined in accordance with the provisions of ASC 350, “Intangibles - Goodwill and Other
(Topic 350).”
Refer to “Note 7 - Goodwill and Intangible Assets” to the Consolidated Financial Statements in Item 8 for additional information.
Recently Issued Accounting Standards
Refer to “Note 1 - Organization and Significant Accounting Policies”, to the Consolidated Financial Statements in Item 8.
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.
The information required by this item is incorporated by reference to the section entitled “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in Item 7 of this Annual Report.
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Item 8.    Financial Statements and Supplementary Data.
TABLE OF CONTENTS
Reports of Independent Registered Accounting Firm (PCAOB ID No. 34 (Deloitte & Touche LLP))
42
Consolidated Statements of Operations
46
Consolidated Balance Sheets
48
Consolidated Statements of Comprehensive Income (Loss)
47
Consolidated Statement of Stockholders’ Equity
49
Consolidated Statements of Cash Flows
51
Notes to Consolidated Financial Statements
53
Note 1 - Organization and Significant Accounting Policies
53
Note 2 - Acquisitions
59
Note 3 - Divestitures
64
Note 4 - Accounts and Notes Receivable
65
Note 5 - Secured Borrowing
66
Note 6 - Property, Plant, and Equipment, Net
68
Note 7 - Goodwill and Intangible Assets
68
Note 8 - Revenue
70
Note 9 - Leases
72
Note 10 - Long-Term Obligations
74
Note 11 - Stockholders’ Equity
76
Note 12 - Stock Compensation Plan
78
Note 13 - Income Taxes
81
Note 14 - Related Party Transactions
84
Note 15 - Commitments and Contingencies
84
Note 16 - Segments
85
Note 17 - Subsequent Events
86
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Franchise Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Franchise Group, Inc. and subsidiaries (the “Company”) as of December 31, 2022 and
December 25, 2021 and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows, for each of the
three fiscal years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the
financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and December 25, 2021 and the
results of its operations and its cash flows for each of the three fiscal years in the period ended December 31, 2022, in conformity with accounting principles
generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal
control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2023, expressed an adverse opinion on the Company’s
internal control over financial reporting because of a material weakness.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating
the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We
believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to
be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our
especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial
statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the
accounts or disclosures to which it relates.
Goodwill – American Freight Reporting Unit – Refer to Notes 1 and 7 to the financial statements
Critical Audit Matter Description
The Company performed a quantitative impairment evaluation of the goodwill for the American Freight reporting unit by comparing the estimated fair value of
the reporting unit to its carrying value. The Company determined the fair value of the American Freight reporting unit using an income approach and a market
approach. The determination of the fair value requires management to make significant estimates and assumptions related to projected cash flows, discount rates
and growth rates. Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both.
The goodwill balance was $737.4 million as of December 31, 2022, of which $300.8 million was related to the American Freight reporting unit. The carrying
value of the American Freight reporting unit exceeded its fair value as of the measurement date which resulted in a $70.0 million goodwill impairment.
Given the significant judgments made by management to estimate the fair value of the American Freight reporting unit, performing audit procedures to evaluate
the reasonableness of management’s estimates and assumptions related to projected cash flows, discount rates and growth rates of the American Freight
reporting unit required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.
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How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the projected cash flows and growth rates (“forecasts”), and the selection of a discount rate for the American Freight reporting
unit included the following, among others:
•
We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair
value of American Freight, such as controls related to management’s forecasts and selection of the discount rate.
•
We evaluated management’s ability to accurately forecast by comparing actual results to management’s historical forecasts.
•
We evaluated the reasonableness of management’s forecasts by comparing the forecasts to (1) historical results, (2) internal communications to
management and the Board of Directors and (3) forecasted information included in industry reports.
•
With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology, (2) discount rate, and (3)
market multiples by:
•
Testing the source information underlying the determination of the discount rate and market multiples and the mathematical accuracy
of the calculations.
•
Developing a range of independent estimates and comparing those to the discount rate and market multiples selected by management.
/s/ Deloitte & Touche LLP
Richmond, Virginia
February 28, 2023
We have served as the Company’s auditor since 2019.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Franchise Group, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Franchise Group, Inc. and subsidiaries (the “Company”) as of December 31, 2022, based on
criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). In our opinion, because of the effect of the material weakness identified below on the achievement of the objectives of the control criteria, the
Company has not maintained effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control —
Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated
financial statements as of and for the fiscal year ended December 31, 2022, of the Company and our report dated February 28, 2023, expressed an unqualified
opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is
to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Material Weakness
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a
material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
The Company identified a material weakness in its controls over financial reporting involving the preparation of its Statement of Cash Flows. As a result of this
deficiency, there was a misclassification of cash flows associated with interest payments on the Company’s secured borrowing resulting in an overstatement of
cash flows provided by operating activities and an overstatement of cash flows used in financing activities for the three and six months ended March 26, 2022
and June 25, 2022, respectively, within its Statement of Cash Flows.
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This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as
of and for the fiscal year ended December 31, 2022, of the Company, and this report does not affect our report on such financial statements.
/s/ Deloitte & Touche LLP
Richmond, Virginia
February 28, 2023
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FRANCHISE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31, 2022, December 25, 2021, and December 26, 2020
Year Ended
(In thousands, except per share data)
12/31/2022
12/25/2021
12/26/2020
Revenues:
 
Product
$
3,832,291 
$
3,012,471 
$
1,899,662 
Service and other
535,961 
209,103 
65,798 
Rental
29,580 
33,630 
64,267 
Total revenues
4,397,832 
3,255,204 
2,029,727 
Operating expenses:
Cost of revenue:
Product
2,485,934 
1,892,741 
1,136,054 
Service and other
36,340 
16,506 
2,149 
Rental
11,070 
11,552 
21,905 
Total cost of revenue
2,533,344 
1,920,799 
1,160,108 
Selling, general, and administrative expenses
1,573,281 
1,108,054 
817,108 
Goodwill impairment
70,000 
— 
— 
Total operating expenses
4,176,625 
3,028,853 
1,977,216 
Income from operations
221,207 
226,351 
52,511 
Other income (expense):
Bargain purchase gain
3,514 
132,559 
— 
Gain on sale-leaseback transactions, net
59,772 
— 
— 
Other, net
(21,929)
(67,368)
(5,294)
Interest expense, net
(339,982)
(133,114)
(96,774)
Income (loss) from continuing operations before income taxes
(77,418)
158,428 
(49,557)
Income tax expense (benefit)
(8,845)
(33,538)
(60,501)
Income (loss) from continuing operations
(68,573)
191,966 
10,944 
Income (loss) from discontinued operations, net of tax
— 
171,822 
16,210 
Net Income (Loss)
(68,573)
363,788 
27,154 
Less: Net (income) loss attributable to non-controlling interest
— 
— 
(2,090)
Net income (loss) attributable to Franchise Group, Inc.
$
(68,573)
$
363,788 
$
25,064 
Amounts attributable to Franchise Group, Inc.:
Net income (loss) from continuing operations
$
(68,573)
$
191,966
$
20,645
Net income (loss) from discontinued operations
—
171,822
4,419
Net income (loss) attributable to Franchise Group, Inc.
$
(68,573)
$
363,788
$
25,064
Income (loss) per share from continuing operations:
 
Basic
$
(1.96)
$
4.56 
$
0.57 
Diluted
(1.96)
4.48 
0.57 
Net income (loss) per share:
Basic
$
(1.96)
$
8.83 
$
0.70 
Diluted
(1.96)
8.67 
0.70 
Weighted-average shares outstanding:
Basic
39,309,855 
40,199,681 
34,531,362 
Diluted
39,309,855 
40,964,182 
34,971,935 
See accompanying notes to consolidated financial statements.
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FRANCHISE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
Years Ended December 31, 2022, December 25, 2021, and December 26, 2020
(In thousands)
Year Ended
12/31/2022
12/25/2021
12/26/2020
Net income (loss)
$
(68,573)
$
363,788 
$
27,154 
Other comprehensive income (loss)
Foreign currency translation adjustment
— 
381 
242 
Unrealized (loss) gain on interest rate swap agreement, net of taxes of $0, $13, and ($24),
respectively
— 
45 
(103)
Reclassification of unrealized loss on interest rate swap agreement and foreign currency
translation adjustments realized upon disposal of business
— 
973 
— 
Other comprehensive income (loss)
— 
1,399 
139 
Comprehensive income (loss)
(68,573)
365,187 
27,293 
Less: comprehensive (income) loss attributable to non-controlling interest
— 
— 
(1,915)
Comprehensive income (loss) attributable to Franchise Group, Inc.
$
(68,573)
$
365,187 
$
25,378 
See accompanying notes to consolidated financial statements.
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FRANCHISE GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31, 2022 and December 25, 2021
(In thousands, except share count and per share data)
12/31/2022
12/25/2021
Assets
 
 
Current assets:
 
 
Cash and cash equivalents
$
80,783 
$
292,714 
Current receivables, net
170,162 
118,698 
Current securitized receivables, net
292,913 
369,567 
Inventories, net
736,841 
673,170 
Current assets held for sale
8,528 
— 
Other current assets
27,272 
24,063 
Total current assets
1,316,499 
1,478,212 
Property, plant, and equipment, net
223,718 
449,886 
Non-current receivables, net
11,735 
11,755 
Non-current securitized receivables, net
39,527 
47,252 
Goodwill
737,402 
806,536 
Intangible assets, net
116,799 
127,951 
Tradenames
222,703 
222,687 
Operating lease right-of-use assets
890,949 
714,741 
Investment in equity securities
11,587 
35,249 
Other non-current assets
59,493 
18,902 
Total assets
$
3,630,412 
$
3,913,171 
Liabilities and Stockholders’ Equity
 
 
Current liabilities:
 
 
Current installments of long-term obligations, net
$
6,935 
$
183,924 
Current installments of debt secured by accounts receivable, net
340,021 
302,246 
Current operating lease liabilities
179,519 
173,101 
Accounts payable and accrued expenses
376,895 
410,552 
Other current liabilities
40,541 
50,833 
Total current liabilities
943,911 
1,120,656 
Long-term obligations, net, excluding current installments
1,374,479 
1,278,469 
Non-current debt secured by accounts receivable, net
107,448 
105,256 
Non-current operating lease liabilities
720,474 
557,071 
Other non-current liabilities
62,720 
88,888 
Total liabilities
3,209,032 
3,150,340 
Stockholders’ equity:
 
 
Common stock, $0.01 par value per share, 180,000,000 and 180,000,000 shares authorized, 34,925,773 and 40,296,688
shares issued and outstanding at December 31, 2022 and December 25, 2021, respectively
349 
403 
Preferred stock, $0.01 par value per share, 20,000,000 and 20,000,000 shares authorized, 4,541,125 and 4,541,125 shares
issued and outstanding at December 31, 2022 and December 25, 2021, respectively
45 
45 
Additional paid-in capital
311,069 
475,396 
Retained earnings
109,917 
286,987 
Total equity
421,380 
762,831 
Total liabilities and equity
$
3,630,412 
$
3,913,171 
See accompanying notes to consolidated financial statements.
48

Table of Contents
FRANCHISE GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders’ Equity
Year Ended December 31, 2022
(In thousands)
Shares
Common stock
Shares
Preferred stock
Additional paid-
in-capital
Accumulated other
comprehensive loss
Retained earnings
Total Franchise
Group Equity
Balance at December 25, 2021
40,297 
$
403 
4,541 
$
45 
$
475,396 
$
— 
$
286,987 
$
762,831 
Net income
— 
— 
— 
— 
— 
— 
(68,573)
(68,573)
Exercise of stock options
41 
1 
— 
— 
(311)
— 
— 
(310)
Stock-based compensation, net
509 
5 
— 
— 
8,379 
— 
— 
8,384 
Common dividend declared ($2.50 per share)
— 
— 
— 
— 
— 
— 
(99,983)
(99,983)
Preferred dividend declared ($1.88 per share)
— 
— 
— 
— 
— 
— 
(8,514)
(8,514)
Repurchase of common stock
(5,921)
(60)
0
0
(172,395)
— 
0
(172,455)
Balance at December 31, 2022
34,926 
$
349 
4,541 
$
45 
$
311,069 
$
— 
$
109,917 
$
421,380 
Consolidated Statement of Stockholders’ Equity
Year Ended December 25, 2021
(In thousands)
Shares
Common stock
Shares
Preferred stock
Additional paid-in-
capital
Accumulated other
comprehensive loss
Retained earnings
Total Franchise Group
Equity
Balance at December 26, 2020
40,092 
$
401 
1,250 
$
13 
$
382,383 
$
(1,399)
$
3,769 
$
385,167 
Net income
— 
— 
— 
— 
— 
— 
363,788 
363,788 
Total other comprehensive income
— 
— 
— 
— 
— 
1,399 
— 
1,399 
Exercise of stock options
60 
1 
— 
— 
663 
— 
— 
664 
Stock-based compensation, net
145 
1 
— 
— 
12,840 
— 
— 
12,841 
Issuance of Series A Preferred Stock
— 
— 
3,291 
32 
79,510 
— 
— 
79,542 
Common dividend declared ($1.750 per
share)
— 
— 
— 
— 
— 
— 
(72,055)
(72,055)
Preferred dividend declared ($1.875 per
share)
— 
— 
— 
— 
— 
— 
(8,515)
(8,515)
Balance at December 25, 2021
40,297 
$
403 
4,541 
$
45 
$
475,396 
$
— 
$
286,987 
$
762,831 
See accompanying notes to consolidated financial statements.
49

Table of Contents
FRANCHISE GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders’ Equity
Year Ended December 26, 2020
(In thousands)
Shares
Common
stock
Shares
Preferred
Stock
Additional
paid-in-capital
Accumulated other
comprehensive loss
Retained
earnings
Total Franchise
Group Equity
Non-controlling
interest
Total Equity
Balance at December 29, 2019
18,250 
$
183 
1,887 
$
19 
$
108,339 
$
(1,538)
$
18,388 
$
125,391 
$
26,370 
$
151,761 
Changes and distributions of non-
controlling interest in New Holdco
— 
— 
— 
— 
23,744 
(175)
— 
23,569 
(25,927)
(2,358)
Net income
— 
— 
— 
— 
— 
— 
25,064 
25,064 
2,090 
27,154 
Total other comprehensive income
— 
— 
— 
— 
— 
314 
— 
314 
(175)
139 
Exercise of stock options
50 
1 
— 
— 
519 
— 
— 
520 
— 
520 
Stock-based compensation, net
66 
— 
— 
— 
8,810 
— 
— 
8,810 
— 
8,810 
Issuance of common stock
12,292 
123 
— 
— 
228,892 
— 
— 
229,015 
— 
229,015 
Issuance of Series A Preferred Stock
— 
— 
1,250 
13 
29,470 
— 
— 
29,483 
— 
29,483 
Conversion of preferred to common stock
9,434 
94 
(1,887)
(19)
(10,028)
— 
— 
(9,953)
— 
(9,953)
Common dividend declared ($1.125 per
share)
— 
— 
— 
— 
— 
— 
(41,286)
(41,286)
— 
(41,286)
Preferred dividend declared ($0.609 per
share)
— 
— 
— 
— 
— 
— 
(755)
(755)
— 
(755)
Tax Receivable Agreement
— 
— 
— 
— 
(7,363)
— 
— 
(7,363)
— 
(7,363)
Adjustment
— 
— 
— 
— 
— 
— 
2,358 
2,358 
(2,358)
— 
Balance at December 26, 2020
40,092 
$
401 
1,250 
$
13 
$
382,383 
$
(1,399)
$
3,769 
$
385,167 
$
— 
$
385,167 
See accompanying notes to consolidated financial statements.
50

Table of Contents
FRANCHISE GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 2022, December 25, 2021, and December 26, 2020
Year Ended
(In thousands)
12/31/2022
12/25/2021
12/26/2020
Operating Activities
 
Net income (loss)
$
(68,573)
$
363,788 
$
27,154 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision for doubtful accounts for accounts receivable
136,978 
8,878 
5,930 
Goodwill impairment
70,000 
— 
— 
Depreciation, amortization, and impairment charges
85,363 
72,765 
62,543 
Amortization of deferred financing costs
17,327 
48,552 
30,635 
Amortization of secured debt discount
103,207 
4,413 
— 
Stock-based compensation expense
15,082 
13,696 
9,484 
Gain on sale-leaseback, bargain purchases, and sales of Company-owned stores, net
(66,078)
(137,747)
(4,133)
Prepayment penalty for early debt extinguishment
— 
36,726 
— 
Gain on divestiture of Liberty Tax
— 
(188,092)
— 
Change in fair value of investment
23,662 
31,773 
— 
Deferred income taxes
(74,208)
709 
1,092 
Other, net
577 
1,749 
85 
Change in
Accounts, notes, and interest receivable
(58,814)
(10,396)
(19,811)
Securitized accounts receivable
(50,359)
(8,147)
— 
Income taxes receivable
4,117 
(20,191)
(8,059)
Other assets
(3,804)
12,939 
(5,573)
Interest payable for secured debt
(70,667)
3,089 
— 
Accounts payable and accrued expenses
(29,177)
(12,215)
23,927 
Inventory
(64,663)
(121,393)
97,681 
Deferred revenue
(7,396)
5,073 
20,537 
Net cash provided by (used in) operating activities
(37,426)
105,969 
241,492 
Investing Activities
Purchases of property, plant, and equipment
(53,984)
(48,045)
(41,518)
Proceeds from sale of property, plant, and equipment
273,605 
12,872 
37,573 
Acquisition of business, net of cash and restricted cash acquired
(3,843)
(1,063,811)
(353,423)
Divestiture of business, net of cash and restricted cash sold
— 
179,471 
— 
Issuance of operating loans to franchisees
— 
(17,749)
(34,136)
Payments received on operating loans to franchisees
— 
23,103 
50,291 
Net cash provided by (used in) investing activities
215,778 
(914,159)
(341,213)
Financing Activities
Dividends paid
(111,728)
(67,234)
(29,350)
Issuance of long-term debt and other obligations
439,000 
1,901,724 
770,665 
Repayment of long-term debt and other obligations
(541,406)
(1,261,455)
(741,100)
Proceeds from secured debt obligations
382,133 
400,000 
— 
Repayment of secured debt obligations
(374,706)
— 
— 
Issuance of common stock
— 
— 
198,004 
Issuance of preferred stock
— 
79,542 
29,482 
Payments for repurchase of common stock
(172,455)
— 
— 
Principal payments of finance lease obligations
(2,673)
— 
(4,716)
Payment for debt issue costs and prepayment penalty on extinguishment
(1,339)
(102,652)
(16,865)
Cash paid for taxes on exercises/vesting of stock-based compensation
(7,010)
(191)
33 
Net cash provided by (used in) financing activities
(390,184)
949,734 
206,153 
Effect of exchange rate changes on cash, net
— 
36 
(76)
Net increase in cash and cash equivalents and restricted cash
(211,832)
141,580 
106,356 
Cash, cash equivalents and restricted cash at beginning of year
293,082 
151,502 
45,146 
Cash, cash equivalents and restricted cash at end of year
$
81,250 
$
293,082 
$
151,502 
See accompanying notes to consolidated financial statements.
51

Table of Contents
Supplemental Cash Flow Disclosure
Year Ended
(In thousands)
12/31/2022
12/25/2021
12/26/2020
Cash paid for taxes, net of refunds
$
65,796  $
42,154  $
1,858 
Cash paid for interest
81,158 
91,623 
49,825 
Cash paid for interest on secured debt
91,994 
— 
— 
Accrued capital expenditures
3,401 
3,445 
5,025 
Non-cash proceeds from divestiture of Liberty Tax
— 
74,073 
— 
Deferred financing costs from issuance of common stock
— 
— 
31,013 
Capital expenditures funded by finance lease liabilities
7,333 
756 
— 
Tax receivable agreement included in other long-term liabilities
— 
504 
16,775 
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets that sum to the
total of the same amounts shown in the consolidated statements of cash flows.
(In thousands)
12/31/2022
12/25/2021
Cash and cash equivalents
$
80,783  $
292,714 
Restricted cash included in other non-current assets
467 
368 
Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows
$
81,250  $
293,082 
Amounts included in other non-current assets represent those required to be set aside by a contractual agreement with an insurer for the payment of specific
workers’ compensation claims.
See accompanying notes to consolidated financial statements.
52

Table of Contents
FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Organization and Significant Accounting Policies
Description of Business. Franchise Group, Inc. (the “Company”) is an owner and operator of franchised and franchisable businesses that continually looks
to grow its portfolio of brands while utilizing its operating and capital allocation philosophies to generate strong cash flows. The Company has a diversified and
growing portfolio of highly recognized brands.
Acquisitions. For a complete description of the Company’s acquisitions, refer to “Note 2 - Acquisitions”. On March 10, 2021, the Company completed its
acquisition of Pet Supplies Plus for an aggregate purchase price of $451.3 million. On September 27, 2021, the Company completed its acquisition of Sylvan
Learning (“Sylvan”) for an aggregate purchase price of $82.9 million. On November 22, 2021, the Company completed its acquisition of Badcock Home
Furniture & more (“Badcock”) for an aggregate purchase price of $548.8 million.
The assets acquired and the liabilities assumed in the acquisitions above are recorded at fair value in accordance with Accounting Standards Codification
(“ASC”) 805, “Business Combinations.” Acquisition-related costs are expensed as incurred. The purchase price is allocated to the various tangible and
intangible assets acquired and liabilities assumed, based on their estimated fair values. In the case where there is an excess of aggregate net fair value of assets
acquired and liabilities assumed over the fair value of consideration transferred, the purchase price will be recorded as a bargain purchase gain. Determining the
fair value of certain assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions, which are inherently
uncertain. Many of the estimates and assumptions used to determine fair values, such as those used for intangible assets are made based on forecasted
information and discount rates. In addition, the judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities
assumed, as well as asset lives, can materially impact the Company’s results of operations.
During the measurement period, which is not to exceed one year from the acquisitions, the Company may record adjustments to the acquired assets and
liabilities assumed or the preliminary purchase price, with a corresponding offset to goodwill or bargain purchase gain, to reflect new information obtained about
facts and circumstances that existed as of the acquisition dates. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to
earnings.
Divestitures. On July 2, 2021, the Company completed the sale of its Liberty Tax business to NextPoint Acquisition Corp. (“NextPoint”), as described in
“Note 3 - Divestitures”.
Segment Information. The Company currently operates in six reportable segments: Vitamin Shoppe, Pet Supplies Plus, Badcock, American Freight,
Buddy’s and Sylvan.
The Vitamin Shoppe segment is an omnichannel specialty retailer and wellness lifestyle company with the mission of providing customers with the most
trusted products, guidance and services to help them become their best selves, however they define it. Vitamin Shoppe offers one of the largest varieties of
products among vitamin, mineral and supplement retailers. The broad product offering enables Vitamin Shoppe to provide customers with a depth of selection of
products that may not be readily available at other specialty retailers or mass merchants, such as discount stores, supermarkets, drug stores and wholesale clubs.
Vitamin Shoppe continues to focus on improving the customer experience through the roll-out of initiatives including increasing customer engagement and
personalization, enhancing the omnichannel experience (including in stores, online and on mobile devices), growing private brands and improving the
effectiveness of pricing and promotions.
The Pet Supplies Plus segment is a leading omnichannel retail chain and franchisor of pet supplies and services. Pet Supplies Plus has a diversified revenue
model comprised of Company-owned store revenue, franchise royalties and revenue generated by the wholesale distribution of products to its franchisees. Pet
Supplies Plus offers a curated selection of premium brands, proprietary private labels and specialty products with retail price parity with online players.
Additionally, Pet Supplies Plus offers grooming, pet wash and other services in most of its locations. On February 22, 2022, Pet Supplies Plus completed its
acquisition of Wag N’ Wash, an emerging grooming, pet-wash and natural pet food franchise. Wag N’ Wash is primarily focused on dogs, has a store footprint
that is substantially smaller than a Pet Supplies Plus location and is operated by the Pet Supplies Plus management.
The Badcock segment is a retailer of furniture, appliances, bedding, electronics, home office equipment, accessories and seasonal items in a showroom
format. Additionally, Badcock offers multiple and flexible payment solutions and credit
53

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
options through third parties and its consumer financing services. The Company is in the process of moving the financing business fully to a third-party provider.
The American Freight segment is a retail chain offering in-store and online access to furniture, mattresses, new and out-of-box home appliances and home
accessories at discount prices. American Freight buys direct from manufacturers and sells direct in warehouse-style stores. By cutting out the middleman and
keeping its overhead costs low, American Freight can offer quality products at low prices. The American Freight segment provides customers with multiple
payment options including third-party financing providing access to high-quality products and brand name appliances that may otherwise remain aspirational to
some of its customers. American Freight also serves as a liquidation channel for major appliance vendors. American Freight operates specialty distribution
centers that test every out-of-box appliance before it is offered for sale to customers. Customers typically are covered by the original manufacturer’s warranty
and are offered the opportunity to purchase a full suite of extended-service plans and services.
The Buddy’s segment is a specialty retailer of high quality, name brand consumer electronic, residential furniture, appliances and household accessories
through rent-to-own agreements. The rental transaction allows customers the opportunity to benefit from the use of high-quality products under flexible rental
purchase agreements without long-term obligations.
The Sylvan segment is an established and growing franchisor of supplemental education for Pre-K-12 students and families. Sylvan addresses the full
range of student needs with a broad variety of academic curriculums delivered in an omnichannel format. The Sylvan platform provides franchisees with the
ability to provide a range of supplemental educational services, including on premises, virtually, at a satellite location, and in the home.
Principles of Consolidation. The audited consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the U.S. (“GAAP”). The Company consolidates any entities in which it has a controlling interest, the usual condition of which is ownership of a majority
voting interest. Prior to April 1, 2020, the Company reported a non-controlling interest representing the economic interest in Franchise Group New Holdco, LLC
(“New Holdco”) held by the former equity holders of Buddy’s (the “Buddy’s Members”). As of April 1, 2020, the Company redeemed all outstanding New
Holdco units for shares of common stock of the Company and now has a 100% interest in New Holdco. Refer to “Note 11 - Stockholders’ Equity” for more
information on the non-controlling interest.
The Company does not possess any ownership interests in franchisee entities; however, the Company may provide financial support to franchisee entities.
Because the Company’s franchise arrangements provide franchisee entities the power to direct the activities that most significantly impact their economic
performance, the Company does not consider itself the primary beneficiary of any such entity that meets the definition of a variable interest entity (“VIE”). The
primary beneficiary is the entity that possesses the power to direct the activities of the VIE that most significantly impact its economic performance and has the
obligation to absorb losses or the right to receive benefits from the VIE that are significant to it. Based on the results of management’s analysis of potential VIEs,
the Company has not consolidated any franchisee entities. The Company’s maximum exposure to loss resulting from involvement with potential VIEs is
attributable to accounts and notes receivables and future lease payments due from franchisees. When the Company does not have a controlling interest in an
entity but has the ability to exert significant influence over the entity, the Company applies the equity method of accounting. All intercompany balances and
transactions have been eliminated in consolidation.
Fiscal Year End. For the years ended December 25, 2021 and December 26, 2020, our fiscal year ended on the Saturday in December closest to December
31 . On February 22, 2022, our Board of Directors (“Board”) approved a change in our fiscal year-end from the last Saturday in December closest to December
31  to the Saturday in December or January, whichever is closest to December 31 . Fiscal year 2022 ended on December 31, 2022 and included 53 weeks, with
the 53  week falling in the fourth fiscal quarter, and fiscal years 2021 and 2020 included 52 weeks.
Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Basis of Presentation. Revenues have been classified into product, service and other and rental revenues as further discussed in “Note 8 - Revenue.” Costs
of sales for product includes the cost of merchandise, transportation and warehousing costs. Service and other costs of sales include the direct costs of
warranties. Rental cost of sales represents the amortization of inventory costs over the leased term. Other operating expenses, including employee costs,
depreciation and amortization, and advertising expenses have been classified in selling, general and administrative expenses. For the years ended December 31,
2022, December 25, 2021 and December 26, 2020, total advertising expense was $98.1 million, $74.1 million, and $52.8 million, respectively. The Company
also includes occupancy costs in selling, general and administrative expenses.
st
st
st
rd
54

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Cash and Cash Equivalents. The Company considers all highly liquid instruments with maturities of three months or less at the time of purchase, as well as
credit card receivables for sales to customers in its Company-owned stores that generally settle within two to five business days, to be cash equivalents. The
Company maintains cash and cash equivalent balances with financial institutions that exceed federally-insured limits. The Company has not experienced any
losses related to these balances, and the Company believes credit risk to be minimal.
Securitization of Receivables. Sales of beneficial interests in customer revolving lines of credit are recorded as cash and an equivalent amount is recorded
as “Debt secured by accounts receivable, net” on the Company’s Consolidated Balance Sheets. The accounts receivable, which have been securitized, are
recorded as “Securitized accounts receivable” on the Consolidated Balance Sheets. The net securitized accounts receivable on the balance sheet include the
current and non-current portions, net of allowance for bad debt and an unamortized purchase discount recorded in purchase accounting related to the Badcock
Acquisition.
Inventories. Inventory for the Vitamin Shoppe segment is recorded at the lower of cost or market value using the weighted-average cost method. Inventory
includes costs directly incurred in bringing the product to its existing condition and location. In addition, the cost of inventory is reduced by purchase discounts
and other allowances received from vendors. A markdown reserve is estimated based on a variety of factors, including, but not limited to, the amount of
inventory on hand and its remaining shelf life, current and expected market conditions and product expiration dates. In addition, the Company has established a
reserve for estimated inventory shrinkage based on the actual, historical shrinkage of its most recent physical inventories adjusted, if necessary, for current
economic conditions and business trends. Physical inventories and cycle counts are taken on a regular basis. These adjustments are estimates, which could vary
significantly from actual results if future economic conditions, customer demand or competition differ from management expectations.
Inventory for the Pet Supplies Plus segment is recorded at the lower of cost, determined on the average cost method or net realizable value for store
inventories. Pet Supplies Plus includes freight and labor costs on products purchased from its distribution center in cost of products sold. Wholesale inventories
are valued at the lower of cost (including freight), determined on the average cost method or net realizable value. Volume-based vendor allowances, rebates, and
credits that relate to the Company’s store merchandising activities are applied to product cost and recognized in cost of goods sold as the related product is sold.
Inventory for the Badcock segment is comprised of finished goods and is valued at the lower of cost or market value, with cost determined by the first-in,
first-out method. Inventory includes the purchase price of the inventory plus costs of freight for moving merchandise from vendors to distribution centers as well
as from distribution centers to stores. An obsolescence reserve is estimated based on the amount of inventory on hand, its age, and its condition. Estimates are
compared to the actual results of the physical inventory counts as they are taken and adjust the shrink estimates accordingly.
Inventory for American Freight is comprised of finished goods and is valued at the lower of cost or market, with cost determined by the first-in, first-out
method. The Company writes down inventory, the impact of which is reflected in cost of sales in the consolidated statements of operations, if the cost of specific
inventory items on hand exceeds the amount the Company expects to be realized from the ultimate sale or disposal of the inventory. These estimates are based
on management’s judgment regarding future demand and market conditions and analysis of historical experience. Inventory includes the purchase price of the
inventory plus costs of freight for moving merchandise from vendors to distribution centers as well as from distribution centers to stores. A provision for
estimated shrinkage is maintained based on the actual historical results of physical inventories. Estimates are compared to the actual results of the physical
inventory counts as they are taken and adjust the shrink estimates accordingly.
Inventory for the Buddy’s segment is recorded at cost, including shipping and handling fees. Upon purchase, merchandise is not initially depreciated until
it is leased or three months after the purchase date. Non-leased merchandise is depreciated on a straight-line basis over a period of 24 months. Leased
merchandise is depreciated over the lease term of the rental agreement and recorded in rental cost of revenue. On a weekly basis, all damaged, lost, stolen, or
unsalable merchandise identified is written off. Maintenance and repairs of lease merchandise are charged to operations as incurred.
Receivables and Allowance for Doubtful Accounts. Notes and accounts receivable are due from the Company’s franchisees and are collateralized by the
underlying franchise. The debtors’ ability to repay the receivables is dependent upon both the performance of the franchisee’s industry as a whole and the
individual franchise. The adequacy of the allowance for doubtful accounts is assessed on a quarterly basis and adjusted as deemed necessary. Management
believes the recorded allowance is adequate based upon its consideration of the estimated value of the franchises, which collateralize the receivables. Any
adverse change in the individual franchisees’ areas could affect the Company’s estimate of the allowance.
55

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Goodwill and Non-amortizing Intangible Assets. Goodwill and non-amortizing intangible assets, including the segments’ tradenames, are not amortized,
but rather tested for impairment at least annually. In addition, goodwill and non-amortizing intangible assets will be tested on an interim basis if an event or
circumstance indicates that it is more likely than not that an impairment loss has been incurred. The Company performs a qualitative and/or quantitative
assessment to determine whether it is more likely than not that each reporting unit’s fair value is less than its carrying value, including goodwill. If the Company
determines that it is more likely than not that the fair value of the reporting unit is less than its carrying value, the Company then estimates the fair value. The
Company uses either a market multiple method or a discounted cash flow method to estimate the fair value of its reporting units and recognizes goodwill
impairment for any excess of the carrying amount of a reporting unit’s goodwill over its estimated fair value. The Company evaluates the segments’ tradenames
for impairment by comparing the fair value, based on an income approach using the relief-from-royalty method, to the carrying value. If the carrying value of
the asset exceeds its estimated fair value, an impairment loss is recognized in an amount equal to that excess. The Company’s reporting units are determined in
accordance with the provisions of ASC 350, “Intangibles – Goodwill and Other.” The Company performs its annual impairment testing of goodwill and non-
amortizing intangible assets on the last day of the first month of the Company’s third quarter. Refer to “Note 7 – Goodwill and Intangible Assets” for additional
information on these balances.
Intangible Assets and Asset Impairment. Components of intangible assets consist of customer contracts, franchise and dealer agreements, and proprietary
content. Amortization of intangible assets is calculated using the straight-line method over the estimated useful lives of the assets. Amortization of intangible
assets is generally two to ten years. Purchased intangible assets subject to amortization are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. Recognition and measurement of a potential
impairment is performed for these assets at the lowest level where cash flows are individually identifiable. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Fair
value is determined through various valuation techniques, including discounted cash flow models, quoted market values, and third-party independent appraisals,
as considered necessary.
Property, Plant, and Equipment. Property, plant, and equipment are stated at cost less accumulated depreciation and amortization. Long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Depreciation and
amortization are calculated using the straight-line method over the estimated useful lives of the assets, generally seven years for land and land improvements,
twenty to thirty years for buildings, and seven, fifteen, or thirty-nine years for building improvements. Leasehold improvements are amortized over the lesser of
the lease term or the estimated useful lives of the assets. Furniture, fixtures, and equipment are amortized five to ten years, which includes machinery (amortized
for seven years) and computer equipment (amortized three to five years). Certain allowable costs of software acquired, developed, or obtained for internal use
are capitalized and typically amortized over the estimated useful life of the software. Software also includes the Company’s Sylvan segment’s educational
materials, which is amortized over two to five years.
Insurance Programs. The Company maintains its own insurance arrangements with third-party insurance companies for exposures incurred for a number
of risks including worker’s compensation and general liability claims. The liability represents an estimate of the discounted cost of claims incurred and is
recorded in other current and long-term liabilities. The Company may use restricted cash as collateral for these programs which is recorded in “Other non-
current assets.”
Employee Compensation and Benefits. The Company records the cost of its employee compensation and benefits as compensation expense in selling,
general and administrative expenses within its Consolidated Statements of Operations. For the years ended December 31, 2022, December 25, 2021 and
December 26, 2020, total employee compensation and expense was $606.7 million, $494.9 million, and $376.5 million, respectively. Accrued compensation and
benefits is recorded within accounts payable and accrued expenses within the Consolidated Balance Sheets and totaled $38.7 million and $63.4 million as of
December 31, 2022 and December 25, 2021.
Stock-Based Compensation. The Company records the cost of its employee stock-based compensation as compensation expense in its consolidated
statements of operations. Compensation costs related to stock options are based on the grant-date fair value of awards using the Black-Scholes-Merton option
pricing model and considering forfeitures. Compensation costs related to restricted stock units are based on the grant-date fair value and are amortized on a
straight-line basis over the vesting period. The Company recognizes compensation costs for an award that has a graded vesting schedule on a straight-line basis
over the requisite service period for the entire award. Compensation costs related to market-based restricted stock units are based on the grant-date fair value of
the awards using a Monte Carlo simulation valuation model to calculate grant date fair value. Compensation expense is recognized over the requisite service
period using the proportionate amount of the award’s fair value that has been earned through service to date.
56

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Revenue Recognition. The following is a description of the principal activities from which the Company generates its revenues. For more detailed
information regarding reportable segments, refer to “Note 8 - Revenue.”
•
Product revenues: These include sales of merchandise at the stores and online. Revenue is measured based on the amount of fixed consideration that
the Company expects to receive, reduced by estimates for variable consideration such as returns. Revenue also excludes any amounts collected from
customers and remitted or payable to governmental authorities. In arrangements where the Company has multiple performance obligations, the
transaction price is allocated to each performance obligation using the relative stand-alone selling price. The Company satisfies its performance
obligations at the point of sale for retail store transactions and upon delivery for online transactions. The Company recognizes revenue for retail store
and online transactions when it transfers control of the goods to the customer. Merchandise sales also include payments received for the exercise of
the early purchase option offered through rental-purchase agreements or merchandise sold through point of sale transactions. Revenue for
merchandise sales associated with rental purchase agreements is recognized when payment is received, and ownership of the merchandise passes to
the customer.
•
Service and other revenues: These may include the following:
◦
Royalties and advertising fees;
◦
Financing revenue;
◦
Warranty and damage revenue;
◦
Interest income;
◦
Services and extended-service plans; and
◦
Other miscellaneous income.
Commissions earned on services and financing revenue are presented net of related costs because the Company is acting as an agent in arranging the
services for the customer and does not control the services being rendered. Financing revenue includes revenue received from third party financing
companies. The Company recognizes revenue on the commissions on extended-service plans when it transfers control of the related goods to the
customer. The Company recognizes franchise fee revenue for the sales of individual territories on a straight-line basis over the initial contract term
and renewal periods when the obligations of the Company to prepare the franchisee for operation are substantially complete, not to exceed the
estimated amount of cash to be received. Royalties and advertising fees are recognized as franchisees generate sales.
•
Rental revenue: The Company provides merchandise, consisting of consumer electronics, computers, residential furniture, appliances, and household
accessories to its customers pursuant to rental-purchase agreements which provide for weekly, semi-monthly or monthly non-refundable rental
payments. The average rental term is twelve to eighteen months and the Company maintains ownership of the lease merchandise until all payment
obligations are satisfied under sales and lease ownership agreements. Customers have the option to purchase the leased goods at any point in the lease
term. Customers can terminate the agreement at the end of any rental term without penalty. Therefore, rental transactions are accounted for as
operating leases and rental revenue is recognized over the rental term. Cash received prior to the beginning of the lease term is recorded as deferred
revenue. Revenue related to various reinstatement or late fees are recognized when paid by the customer. The Company offers additional product
plans along with rental agreements that provide customers with liability protection against significant damage or loss of a product, and club
membership benefits, including various discount programs, product services and replacement benefits in the event merchandise is damaged or lost.
Customers renew product plans in conjunction with their rental term renewals and can cancel the plans at any time. Revenue for product plans is
recognized over the term of the plan.
Leases. The Company’s lease portfolio primarily consists of leases for its retail store locations, office space and distribution centers, as well as in the
operation of certain of our dealer-owned stores. The Company also leases tractors and trucks used in its Badcock segment, local delivery trucks used in its
American Freight segment, and leases certain office equipment under finance leases. The finance lease right of use assets are included in property, plant, and
equipment (“PP&E”) and the finance lease liabilities are included in current and non-current installments of long-term obligations. The Company determines if
an arrangement is a lease at inception by evaluating whether the arrangement conveys the right to use an identified asset and whether the Company obtains
substantially all of the economic benefits from and has the ability to direct the use of the asset. Operating leases with an initial term of 12 months or less are not
recorded on the Consolidated Balance Sheets, and the Company recognizes rent expense for these leases on a straight-line basis over the lease term. For leases
with an
57

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
initial term in excess of 12 months, lease right-of-use assets and lease liabilities are recognized based on the present value of the future lease payments over the
committed lease term at the lease commencement date. The Company’s leases do not provide an implicit rate; therefore, the Company uses its incremental
borrowing rate and the information available at the lease commencement date in determining the present value of future lease payments. The incremental
borrowing rate is the rate of interest that the Company would have to pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease
payments in a similar economic environment. Most leases include one or more options to renew and the exercise of renewal options is at the Company’s sole
discretion. The Company does not include renewal options in its determination of the lease term unless the renewals are deemed to be reasonably certain at lease
commencement. The Company uses the long-lived assets impairment guidance in ASC 360-10, “Property, Plant, and Equipment - Overall,” to determine
whether a right-of-use asset is impaired, and if so, the amount of the impairment loss to recognize.
The Company subleases some of its real estate leases. The lessor and sublease portfolio primarily consists of stores within our Badcock segment that have
been leased to dealers. For leases where the Company is a lessor, rent income and related operating lease expense for lease payments is recognized on a straight-
line basis over the lease term.
For operating leases, lease costs are recorded within selling, general, and administrative expenses (“SG&A”) within the consolidated statements of
operations as follows: (1) rental expense related to leases for Company-owned stores, and (2) rental expense for leased properties that are subsequently
subleased to dealers, offset by rental income from sublease agreements with dealers. For finance leases where the Company is the lessee, lease cost includes the
amortization of the right-of-use (“ROU”) asset, which is amortized on a straight-line basis and recorded to “SG&A” and interest expense on the finance lease
liabilities is recorded to “Interest expense, net.” Finance lease ROU assets are amortized over the shorter of their estimated useful lives or the terms of the
respective leases. The Company’s subleases and leases for which the Company is a lessor are all classified as operating leases, for which the Company accounts
for the lease and non-lease components as one lease component, as discussed above.
The Company has lease agreements with lease and non-lease components, which the Company elects to combine as one lease component for all classes of
underlying assets. Non-lease components include variable costs based on actual costs incurred by the lessor related to the payment of real estate taxes, common
area maintenance, and insurance. These variable payments are expensed as incurred as variable lease costs.
Fair Value of Financial Instruments. As required, financial assets and liabilities are classified in the fair value hierarchy in their entirety based on the
lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value
measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The
carrying value of Cash and cash equivalents, restricted cash, accounts receivable and accounts payable as reported in the accompanying Consolidated Balance
Sheets approximate fair value due to their short-term maturities. The carrying amount of Long-term debt approximates fair value because the interest rate paid
has a variable component. The fair value for the Company’s Investment in equity securities for which it does not have the ability to exercise significant influence
is based on quoted prices in active markets.
Deferred Income Taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities, which are recorded within
“Other non-current assets” and “Other non-current liabilities” within the Consolidated Balance Sheets, are recognized for the future tax consequences
attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. In accordance with accounting standards, the Company assesses the likelihood that its deferred tax assets will be realized. Deferred tax
assets are reduced by a valuation allowance when, after considering all available positive and negative evidence, it is determined that it is more likely than not
that some portion, or all, of the deferred tax asset will not be realized. The Company will analyze its position in subsequent reporting periods, considering all
available positive and negative evidence, in determining the expected realization of its deferred tax assets. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the enactment date. The Company has elected to classify interest charged on a tax
settlement in interest expense, and accrued penalties, if any, in selling, general, and administrative expenses.
The determination of the Company’s provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application
of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items. The Company records unrecognized
tax benefit liabilities for known or anticipated tax issues based on an analysis of whether, and the extent to which, additional taxes will be due.
58

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Repurchases of Common Stock. The Company repurchases shares of its common stock through open market or private transactions. During the year ended
December 31, 2022, all purchases of common stock under the Company’s stock repurchase program were made at prices that exceeded the par value of the
repurchased common stock, and the portions of the purchase prices that exceeded par value were charged to additional paid-in capital to the extent that an excess
was present. Once additional paid-in capital is fully depleted, remaining excess of cost over par value is charged to retained earnings. Refer to “Note 11 -
Stockholders’ Equity” for additional information regarding share repurchases.
Reclassifications. Certain prior year amounts have been reclassified to conform to the current year presentation.
Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, “Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments”, which changes how companies will measure credit losses for most financial assets and certain
other instruments that aren’t measured at fair value through net income. The standard replaces the “incurred loss” approach with an “expected loss” model for
instruments measured at amortized cost (which generally will result in the earlier recognition of allowances for losses) and requires companies to record
allowances for available-for-sale debt securities, rather than reduce the carrying amount. In addition, companies will have to disclose significantly more
information, including information used to track credit quality by year of origination, for most financing receivables. The ASU should be applied as a
cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the standard is effective. The ASU is effective for the
Company for the 2023 fiscal year. The Company is in the process of adopting this standard and anticipates recording a cumulative effective adjustment between
$11.0 million and $16.0 million to retained earnings as of January 1, 2023 on its Consolidated Financial Statements Results for reporting periods beginning after
January 1, 2023 will be presented under the new guidance issued in ASU 2016-13. Prior period amounts will not be adjusted and will continue to be reported
under the previous accounting standards.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This
standard eliminates Step 2 from the goodwill impairment test. Instead, an entity should compare the fair value of a reporting unit with its carrying amount and
recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill
allocated to the reporting unit. The Company early adopted the ASU in the year ended December 31, 2022. Refer to “Note 7 – Goodwill and Intangible Assets”
for the calculation of the Company’s impairment test after the adoption of ASU 2017-04.
The London Interbank Offered Rate (“LIBOR”) is scheduled to be discontinued on June 30, 2023. In an effort to address the various challenges created by
such discontinuance, the FASB issued an amendment to existing guidance, ASU No. 2020-04, “Reference Rate Reform.” The amended guidance is designed to
provide relief from the accounting analysis and impacts that may otherwise be required for modifications to agreements (e.g., loans, debt securities, derivatives,
borrowings) necessitated by the reference rate reform. It also provides optional expedients to enable companies to continue to apply hedge accounting to certain
hedging relationships impacted by the reference rate reform. As further described in “Note 10 – Long-Term Obligations”, the Company entered into an
amendment to a debt agreement which changed the reference rate from LIBOR to Secured Overnight Financing Rate (“SOFR”). The adoption of ASU 2020-04
did not result in a material impact to the Company’s financial results or disclosures.
(2) Acquisitions
The Company continually looks to diversify and grow its portfolio of brands through acquisitions. On December 27, 2020, the Company completed its
acquisition of FFO Home (the “FFO Home Acquisition”), on March 10, 2021, the Company completed its acquisition of Pet Supplies Plus (the “Pet Supplies
Plus Acquisition”), on September 27, 2021, the Company completed its acquisition of Sylvan (the “Sylvan Acquisition”), and on November 22, 2021, the
Company completed its acquisition of Badcock (the “Badcock Acquisition” and, together with the FFO Home Acquisition, Pet Supplies Plus Acquisition, and
Sylvan Acquisition, the “Acquisitions”). On February 22, 2022, the Company’s Pet Supplies Plus segment completed its acquisition of Wag N’ Wash. For a
complete description of the Company’s accounting policy regarding acquisitions, refer to “Note 1 – Organization and Significant Accounting Policies”.
Badcock Acquisition
On November 22, 2021, the Company completed the Badcock Acquisition. The fair value of the consideration transferred at the acquisition date was
$548.8 million.
59

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table summarizes the final allocation of the fair values of the identifiable assets acquired and liabilities assumed in the Badcock Acquisition
on November 22, 2021.
(In thousands)
November 22, 2021
Cash and cash equivalents
$
23,413 
Inventories
130,045 
Accounts receivable
411,268 
Other current assets
5,023 
Property, plant, and equipment
238,865 
Operating lease right-of-use assets
55,626 
Other non-current assets
2,506 
Total assets
866,746 
Current operating lease liabilities
12,070 
Accounts payable and accrued expenses
71,436 
Other current liabilities
18,942 
Current installments of long-term obligations
5,261 
Long-term obligations, excluding current installments
7,247 
Non-current operating lease liabilities
39,599 
Other long-term liabilities
27,849 
Total liabilities
182,404 
Bargain purchase gain
(135,557)
Consideration transferred
$
548,785 
Operating lease right-of-use assets of $55.6 million and operating lease liabilities of $51.7 million, consist of leases for retail store locations, warehouses
and office equipment.
Property, plant and equipment consists of fixtures and equipment of $93.0 million, buildings and building improvements of $98.0 million, land and land
improvements of $33.4 million, leasehold improvements of $23.7 million, and construction in progress of $1.4 million.
During the year ended December 31, 2022, the preliminary estimates of the fair value of identifiable assets acquired and liabilities assumed were finalized,
which resulted in a $3.5 million increase to the bargain purchase gain for a cumulative bargain purchase gain of $135.6 million. The adjustment is classified as
“Bargain purchase gain” on the Consolidated Statements of Operations. The Company believes the seller in the Badcock Acquisition was willing to accept a
bargain purchase price in return for the Company’s ability to act more quickly, partially due to the Company’s access to capital to complete the transaction, and
with greater certainty than any other prospective acquirer. Additionally, the Company believes the seller was motivated to complete the transaction as part of an
overall repositioning of its business. Upon completion of this reassessment, the Company concluded that recording a bargain purchase gain with respect to the
Badcock Acquisition was appropriate and required under GAAP. The tax impact related to the bargain purchase gain was non-taxable and impacted the
Company’s effective tax rate for the period.
Sylvan Acquisition
On September 27, 2021, the Company completed the Sylvan Acquisition. The fair value of the consideration transferred at the acquisition date was $82.9
million.
60

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The table below summarizes the fair values of the identifiable assets acquired and liabilities assumed in the Sylvan Acquisition on September 27, 2021.
(In thousands)
September 27, 2021
Cash and cash equivalents
$
4,364 
Other current assets
3,592 
Property, plant, and equipment
26,324 
Goodwill
19,406 
Tradenames
24,987 
Operating lease right-of-use assets
2,874 
Other intangible assets
19,412 
Other non-current assets
185 
Total assets
101,144 
Current operating lease liabilities
891 
Accounts payable and accrued expenses
6,072 
Non-current operating lease liabilities
1,984 
Other long-term liabilities
9,320 
Total liabilities
18,267 
Consideration transferred
$
82,877 
Other intangible assets consists of the franchise agreements of $18.3 million and proprietary content of $1.1 million.
Property, plant and equipment consists of fixtures and equipment of $0.3 million, leasehold improvements of $0.7 million, and software and electronic
content of $25.3 million.
Goodwill is calculated as the excess of the purchase price over the fair value of the net assets acquired. The goodwill recognized is attributable to
operational synergies in the expected franchise models and growth opportunities. None of the acquired goodwill is deductible for tax purposes.
Pet Supplies Plus Acquisition
On March 10, 2021, the Company completed the Pet Supplies Plus Acquisition. The fair value of the consideration transferred at the date of acquisition
was $451.3 million.
61

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The table below summarizes the fair values of the identifiable assets acquired and liabilities assumed in the Pet Supplies Plus Acquisition on March 10,
2021.
(In thousands)
March 10, 2021
Cash and cash equivalents
$
2,131 
Other current assets
39,844 
Inventories
118,600 
Property, plant, and equipment
75,616 
Goodwill
335,995 
Operating lease right-of-use assets
151,243 
Tradenames
104,400 
Other intangible assets
101,400 
Other non-current assets
6,393 
Total assets
935,622 
Current operating lease liabilities
25,405 
Accounts payable and accrued expenses
82,237 
Other current liabilities
1,606 
Current installments of long-term obligations
3,507 
Long-term obligations, excluding current installments
247,458 
Non-current operating lease liabilities
114,292 
Other long-term liabilities
9,761 
Total liabilities
484,266 
Consideration transferred
$
451,356 
Other intangible assets consists of franchise agreements of $67.1 million and customer relationships of $34.3 million.
Operating lease right-of-use assets and lease liabilities consist of leases for retail store locations, warehouses and office equipment. Operating lease right-
of-use assets incorporates a favorable adjustment of $12.4 million, net for favorable and unfavorable Pet Supplies Plus real estate leases (as compared to
prevailing market rates) which will be amortized over the remaining lease terms.
Property, plant, and equipment consists of fixtures and equipment of $37.0 million, leasehold improvements of $33.5 million, construction in progress of
$3.5 million and financing leases of $1.7 million.
Other non-current assets includes $0.4 million of restricted cash.
Goodwill is calculated as the excess of the purchase price over the fair value of the net assets acquired. The goodwill recognized is attributable to
operational synergies in the expected franchise models and growth opportunities. All of the acquired goodwill is deductible for tax purposes.
Wag N’ Wash Acquisition
On February 22, 2022, Pet Supplies Plus completed its acquisition of Wag N’ Wash, an emerging natural pet food, dog wash, and grooming franchise, for
an all cash purchase price of $0.9 million, and five of the Wag N’ Wash stores were subsequently sold to a franchisee for $0.6 million. The components of the
purchase price allocation are not presented herein due to the immateriality of the transaction to the Company overall.
62

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Furniture Factory Outlet Acquisition
On December 27, 2020, the Company completed the FFO Home Acquisition, a regional retailer of furniture and mattresses, for an all cash purchase price
of $13.8 million.
(In thousands)
December 27, 2020
Cash and cash equivalents
$
6 
Other current assets
96 
Inventories
6,450 
Property, plant, and equipment
3,280 
Goodwill
2,947 
Operating lease right-of-use assets
26,571 
Total assets
39,350 
Current operating lease liabilities
2,587 
Other current liabilities
299 
Non-current operating lease liabilities
22,624 
Total liabilities
25,510 
Consideration transferred
$
13,840 
Operating lease right-of-use assets and lease liabilities consist of leases for retail store locations. Operating lease right-of-use assets incorporates a
favorable adjustment of $1.4 million, net for favorable and unfavorable FFO Home leases (as compared to prevailing market rates) which will be amortized over
the remaining lease terms.
The property, plant, and equipment consists of leasehold improvements of $2.5 million and fixtures and equipment of $0.8 million.
Pro forma financial information
The following unaudited consolidated pro forma summary has been prepared by adjusting the Company’s historical data to give effect to the Acquisitions
as if they had occurred on December 29, 2019.
(Unaudited)
(In thousands)
Year Ended 12/25/2021
Year Ended 12/26/2020
Revenue
$
4,282,329  $
3,849,583 
Net income (loss) from continuing operations
184,574  $
92,954 
Basic net income per share - continuing operations
4.59  $
2.69 
Diluted net income per share - continuing operations
4.51  $
2.66 
These unaudited pro forma results include adjustments such as inventory step-up, amortization of acquired intangible assets, depreciation of acquired
property, plant, and equipment and interest expense on debt financing in connection with the Acquisitions. Material, nonrecurring pro forma adjustments directly
attributable to the Acquisitions include the following. Acquired inventory step-up to its fair value of $7.1 million was removed from net income for the year
ended December 25, 2021 and recognized as an incremental product cost in the year ended December 26, 2020, and acquisition related costs of $11.3 million
were removed from net income for the year ended December 25, 2021 and recognized as an expense in the year ended December 26, 2020.
The unaudited consolidated pro forma financial information was prepared in accordance with accounting standards and is not necessarily indicative of the
results of operations that would have occurred if the Acquisitions had been completed on the dates indicated, nor is it indicative of the future operating results of
the Company.
The unaudited pro forma results do not reflect events that either have occurred or may occur after these Acquisitions, including, but not limited to, the
anticipated realization of operating synergies in subsequent periods. They also do not give
63

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
effect to certain charges that the Company expects to incur in connection with these Acquisitions, including, but not limited to, additional professional fees and
employee integration.
(3) Divestitures
Liberty Tax Divestiture
On July 2, 2021, the Company completed the sale of its Liberty Tax business (the “Liberty Transaction”) to NextPoint and received total consideration of
approximately $255.3 million, consisting of approximately $181.2 million in cash and approximately $74.1 million in proportionate voting shares of NextPoint
recorded as an investment in equity securities in “Investment in equity securities” on the Consolidated Balance Sheets. As a result of the Liberty Transaction, the
financial position and results of operations of the Liberty Tax business are presented as discontinued operations and, as such, have been excluded from
continuing operations and segment results for the years ended December 25, 2021, and December 26, 2020.
The following is a Consolidated Statement of Operations for the Liberty Tax business. The amounts are included in “Income (loss) from discontinued
operations, net of tax” in the Company’s Consolidated Statements of Operations.
Year Ended
(In thousands)
12/25/2021
12/26/2020
Revenue
$
107,486 
$
122,777 
Selling, general, and administrative expenses
66,042 
99,166 
Income from operations
41,444 
23,611 
Other expense:
Gain on sale of discontinued operations
188,091 
— 
Other
165 
107 
Interest expense, net
(3)
(4,977)
Income before income taxes
229,697 
18,741 
Income tax expense
57,875 
2,531 
Net Income
171,822 
16,210 
Less: Net (income) attributable to non-controlling interest
— 
(11,791)
Net income attributable to discontinued operations
$
171,822 
$
4,419 
The Company applied the “Intraperiod Tax Allocation” rules under ASC 740 “Income Taxes”, which requires the allocation of an entity’s total income tax
provision among continuing operations and, in the Company’s case, discontinued operations.
The following is the operating and investing activities for the Liberty Tax business. These amounts are included in the Company’s Consolidated Statements
of Cash Flows.
Year Ended
(In thousands)
12/25/2021
12/26/2020
Cash flows provided by operating activities from discontinued operations
$
39,334 
$
52,185 
Cash flows provided by investing activities from discontinued operations
173,633 
6,259 
Assets Held for Sale
As of December 31, 2022, Badcock was negotiating sale transactions for certain non-operating properties that it expects to sell within one year. The net
book value of the properties of $8.5 million is classified as “Current assets held for sale” on the Consolidated Balance Sheets.
64

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Sale-Leaseback Transactions
In the year ended December 31, 2022, Badcock sold a number of its retail locations, distribution centers, and its corporate headquarters for a total of
$260.6 million, resulting in a net gain of $59.8 million, comprised of $65.3 million of gains and $5.5 million of losses. Contemporaneously with these sales, the
Company entered into lease agreements pursuant to which the Company leased back the retail locations, distribution centers, and corporate headquarters, all of
which are being accounted for as operating leases. The net gain has been recognized as “Gain on sale-leaseback transactions” on the Consolidated Statements of
Operations for the year ended December 31, 2022.
(4) Accounts and Notes Receivable
Current and non-current receivables as of December 31, 2022 and December 25, 2021 are presented in the Consolidated Balance Sheets as follows:
(In thousands)
12/31/2022
12/25/2021
Accounts receivable
$
96,804  $
47,763 
Franchisee accounts receivable
46,778 
38,324 
Notes receivable
2,211 
1,681 
Interest receivable
— 
54 
Income tax receivable
28,325 
32,448 
Allowance for doubtful accounts
(3,956)
(1,572)
Current receivables, net
170,162 
118,698 
Notes receivable, non-current
11,867 
12,183 
Allowance for doubtful accounts, non-current
(132)
(428)
Non-current receivables, net
11,735 
11,755 
Total receivables
$
181,897  $
130,453 
Notes receivable are due from the Company’s franchisees and are collateralized by the underlying franchise. The debtors’ ability to repay the notes is
dependent upon both the performance of the franchisee’s industry as a whole and the individual franchise.
Allowance for Doubtful Accounts
The adequacy of the allowance for doubtful accounts is assessed on a quarterly basis and adjusted as deemed necessary. Activity in the allowance for
doubtful accounts for the years ended December 31, 2022 and December 25, 2021 was as follows:
(In thousands)
12/31/2022
12/25/2021
Balance at beginning of year
$
2,000 
$
283 
Provision for doubtful accounts
2,419 
1,720 
Write-offs, net of recoveries
(331)
(3)
Balance at end of year
$
4,088 
$
2,000 
65

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Analysis of Past Due Receivables
The breakdown of accounts and notes receivable past due at December 31, 2022 and December 25, 2021 was as follows:
 
12/31/2022
(In thousands)
Past due
Current
Interest receivable
Total receivables
Accounts receivable
$
10,303 
$
133,279 
$
— 
$
143,582 
Notes and interest receivable
133 
13,945 
— 
14,078 
Total accounts, notes, and interest receivable
$
10,436 
$
147,224 
$
— 
$
157,660 
 
12/25/2021
(In thousands)
Past due
Current
Interest receivable
Total receivables
Accounts receivable
$
7,966 
$
78,121 
$
— 
$
86,087 
Notes and interest receivable
452 
13,412 
54 
13,918 
Total accounts, notes, and interest receivable
$
8,418 
$
91,533 
$
54 
$
100,005 
(5) Securitized Accounts Receivable
In order to monetize its customer credit receivables portfolio, Badcock sells beneficial interests in customer revolving lines of credit pursuant to
securitization transactions. On December 20, 2021, Badcock securitized its existing consumer credit receivables portfolio for a purchase price of $400.0 million
in cash. The Company securitized an additional $382.1 million of its customer credit receivables portfolio in the year ended December 31, 2022. As tranches of
customer credit receivables are securitized, proceeds received are recorded as “Cash” and an equivalent amount is recorded as “Debt secured by accounts
receivable, net” on the Consolidated Balance Sheets, which includes the face amount of current and non-current receivables, net of the unamortized discount.
The securitizations do not qualify as a sale under ASC 860 - “Transfers and Servicing,” even though the underlying receivables are deemed to be legally sold.
The accounts receivable, which have been securitized, are recorded as “Current securitized accounts receivable, net” and “Non-current securitized accounts
receivable, net” on the Company’s Consolidated Balance Sheets. The accounts include the current and non-current portions, net of allowance for bad debt and an
unamortized purchase discount recorded in purchase accounting related to the Badcock Acquisition.
The Company records the income earned on the customer revolving lines of credit as interest income in “Service and other revenues” with a corresponding
amount recorded in “Interest expense, net” on the Consolidated Statements of Operations as a result of the securitization. Amortization of the secured debt
discount is also recorded in “Interest expense, net” on the Consolidated Statements of Operations. In connection with the securitization of the receivables,
Badcock has entered into a receivables servicing agreement with lenders pursuant to which Badcock will provide certain customary servicing and account
management services. During the year ended December 31, 2022, Badcock earned $10.2 million pursuant to this agreement, recorded in “Service and other
revenues” on the Consolidated Statements of Operations.
The debt secured by accounts receivable is non-recourse to the Company. Lenders must rely on payments received from the Company’s customers to
service the secured debt, unless the Company has breached its representations or warranties in the loan agreements. The lenders assume the credit risk of the
customer and their only recourse, upon default by the customer, is against the customer.
Badcock may periodically repay portions of the debt secured by accounts receivable early. The non-current portion of secured debt matures within two
years of the Company's Consolidated Balance Sheet date.
66

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The components of securitized accounts receivable and debt secured by accounts receivables at December 31, 2022 and December 25, 2021 were as
follows:
(In thousands)
12/31/2022
12/25/2021
Current securitized accounts receivable
$
374,179  $
476,071 
Unamortized purchase price discount
(24,171)
(106,504)
Allowance for doubtful securitized accounts, current
(57,095)
— 
Current securitized accounts receivable, net
292,913 
369,567 
Non-current securitized accounts receivable
50,494 
60,869 
Unamortized purchase price discount
(3,262)
(13,617)
Allowance for doubtful securitized accounts, non-current
(7,705)
— 
Non-current securitized accounts receivable, net
39,527 
47,252 
Total securitized assets, net
$
332,440  $
416,819 
Current installments of debt secured by accounts receivable
$
374,879  $
421,935 
Unamortized debt discount
(34,858)
(119,689)
Current debt secured by accounts receivable, net
340,021 
302,246 
Non-current installments of debt secured by accounts receivable
119,240 
111,671 
Unamortized debt discount
(11,792)
(6,415)
Non-current debt secured by accounts receivable, net
107,448 
105,256 
Total debt secured by accounts receivable, net
$
447,469  $
407,502 
When securitized receivables are delinquent for approximately one year, the estimated uncollectible amount from the customer is written off and the
corresponding securitized accounts receivable is reduced. Due to their non-recourse nature, the Company will record a gain on extinguishment for any debt
secured by uncollectible accounts receivable in the future when the debt meets the extinguishment requirements in accordance with ASC 470, “Debt”. Activity
in the allowance for doubtful accounts for the years ended December 31, 2022 and December 25, 2021 was as follows:
(In thousands)
12/31/2022
12/25/2021
Balance at beginning of year
$
—  $
— 
Provision for doubtful accounts
139,300 
— 
Write-offs, net of recoveries
(74,500)
— 
Balance at end of year
$
64,800  $
— 
The components of interest income and interest expense generated from securitized receivables for the years ended December 31, 2022 and December 25,
2021 were as follows:
(In thousands)
12/31/2022
12/25/2021
Interest income from securitization:
Interest income
$
101,172  $
8,712 
Interest income from amortization of original purchase discount
$
92,688  $
16,796 
Total interest income from securitization
$
193,860  $
25,508 
Interest expense, debt secured by accounts receivables:
Amortization of debt discount from sale of securitized accounts receivable
$
(103,207) $
(4,413)
Interest expense
$
(124,755) $
(3,089)
Total interest expense, debt secured by accounts receivables:
$
(227,962) $
(7,502)
Includes interest income from Badcock owned receivables (refer to “Note 4 – Accounts and Notes Receivable”) and securitized receivables.
1
1 
67

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Property, Plant, and Equipment, Net
Property, plant, and equipment at December 31, 2022, and December 25, 2021 was as follows:
(In thousands)
12/31/2022
12/25/2021
Land and land improvements
$
998 
$
36,306 
Buildings and building improvements
749 
176,188 
Leasehold improvements
123,728 
115,539 
Furniture, fixtures, and equipment
127,610 
117,973 
Software
114,852 
97,427 
Construction in progress
14,700 
4,388 
Finance lease asset
9,269 
6,148 
Property, plant, and equipment, gross
391,906 
553,969 
Less accumulated depreciation and amortization
168,188 
104,083 
Property, plant, and equipment, net
$
223,718 
$
449,886 
Total depreciation and amortization expense on property, plant, and equipment was $64.8 million, $56.0 million, and $47.6 million for the years ended
December 31, 2022, December 25, 2021, and December 26, 2020, respectively.
(7) Goodwill and Intangible Assets
The Company performs impairment tests for goodwill as of the end of July of each fiscal year and between annual impairment tests if an event occurs or
circumstances change that would more likely than not reduce the fair values of the Company’s reporting units below their carrying values. As part of the annual
impairment test as of July 2022, the Company updated its long-term forecasts based on the operating results in 2022 and the current macro-economic
environment. This resulted in the American Freight reporting unit fair value being lower than the carrying value resulting in a $70.0 million non-cash pre-tax
goodwill impairment charge, which was recorded in “Goodwill impairment” in the accompanying consolidated statements of operations. No other reporting
units had accumulated goodwill impairment losses recorded.
The estimated fair value of each of our reporting units was calculated using a weighted-average of values determined from an income approach and a
market approach. The income approach involves estimating the fair value of each reporting unit by discounting its estimated future cash flows using a discount
rate that would be consistent with a market participant’s assumption. The market approach bases the fair value measurement on information obtained from
observed stock prices of public companies and recent merger and acquisition transaction data of comparable entities. In order to estimate the fair value of
goodwill, management must make certain estimates and assumptions that affect the total fair value of the reporting unit including, among other things, an
assessment of market conditions, projected cash flows, discount rates and growth rates. Management’s estimates of projected cash flows related to the reporting
unit include, but are not limited to, future earnings of the reporting unit, assumptions about the use or disposition of assets included in the reporting unit,
estimated remaining lives of those assets, and future expenditures necessary to maintain the assets’ existing service potential. The assumptions in the fair value
measurement reflect the current market environment, industry-specific factors and company-specific factors.
Changes in the carrying amount of goodwill for the years ended December 31, 2022 and December 25, 2021 were as follows:
(In thousands)
Vitamin Shoppe
Pet Supplies Plus
Badcock
American
Freight
Buddy’s
Sylvan
Total
Balance as of December 26, 2020
$
1,277  $
—  $
—  $
367,882  $
79,099  $
—  $
448,258 
Acquisitions
— 
335,875 
— 
3,293 
— 
19,456 
358,624 
Disposals and purchase accounting
adjustments
— 
— 
— 
(346)
— 
— 
(346)
Balance as of December 25, 2021
$
1,277  $
335,875  $
—  $
370,829  $
79,099  $
19,456  $
806,536 
Acquisitions
— 
2,174 
— 
— 
— 
— 
2,174 
Goodwill impairment
— 
— 
— 
(70,000)
— 
— 
(70,000)
Disposals and purchase accounting
adjustments
— 
(1,258)
— 
— 
— 
(50)
(1,308)
Balance as of December 31, 2022
$
1,277  $
336,791  $
—  $
300,829  $
79,099  $
19,406  $
737,402 
68

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Components of intangible assets as of December 31, 2022 and December 25, 2021, were as follows:
(In thousands)
12/31/2022
Tradenames
Vitamin Shoppe
Pet Supplies Plus
Badcock
American
Freight
Buddy’s
Sylvan
Total
Gross carrying amount
$
12,000 
$
104,416  $
—  $
70,200  $
11,100  $
24,987  $
222,703 
Accumulated Amortization
— 
— 
— 
— 
— 
— 
— 
Net carrying amount
$
12,000 
$
104,416  $
—  $
70,200  $
11,100  $
24,987  $
222,703 
12/31/2022
(In thousands)
Vitamin Shoppe
Pet Supplies Plus
Badcock
American
Freight
Buddy’s
Sylvan
Total
Customer contracts
Gross carrying amount
— 
34,300 
— 
— 
8,184 
— 
42,484 
Accumulated Amortization
— 
(4,143)
— 
— 
(4,735)
— 
(8,878)
Net carrying amount
— 
30,157 
— 
— 
3,449 
— 
33,606 
Franchise and dealer agreements
Gross carrying amount
— 
67,240 
— 
— 
10,500 
18,265 
96,005 
Accumulated Amortization
— 
(8,057)
— 
— 
(3,646)
(2,645)
(14,348)
Net carrying amount
— 
59,183 
— 
— 
6,854 
15,620 
81,657 
Other intangible assets
Gross carrying amount
— 
110 
— 
44 
566 
1,593 
2,313 
Accumulated Amortization
— 
— 
— 
(14)
(460)
(303)
(777)
Net carrying amount
— 
110 
— 
30 
106 
1,290 
1,536 
Total intangible assets
$
— 
$
89,450  $
—  $
30  $
10,409  $
16,910  $
116,799 
(In thousands)
12/25/2021
Tradenames
Vitamin Shoppe
Pet Supplies Plus
Badcock
American Freight
Buddy’s
Sylvan
Total
Gross carrying amount
$
12,000 
$
104,400  $
—  $
70,200  $
11,100  $
24,987  $
222,687 
Accumulated amortization
— 
— 
— 
— 
— 
— 
— 
Net carrying amount
$
12,000 
$
104,400  $
—  $
70,200  $
11,100  $
24,987  $
222,687 
12/25/2021
(In thousands)
Vitamin Shoppe
Pet Supplies Plus
Badcock
American Freight
Buddy’s
Sylvan
Total
Customer contracts
Gross carrying amount
— 
34,300 
— 
— 
8,114 
— 
42,414 
Accumulated amortization
— 
(1,856)
— 
— 
(3,359)
— 
(5,215)
Net carrying amount
— 
32,444 
— 
— 
4,755 
— 
37,199 
Franchise and dealer agreements
Gross carrying amount
— 
67,100 
— 
— 
10,500 
18,265 
95,865 
Accumulated amortization
— 
(3,576)
— 
— 
(2,596)
(399)
(6,571)
Net carrying amount
— 
63,524 
— 
— 
7,904 
17,866 
89,294 
Other intangible assets
Gross carrying amount
— 
— 
— 
44 
566 
1,226 
1,836 
Accumulated amortization
— 
— 
— 
(3)
(319)
(56)
(378)
Net carrying amount
— 
— 
— 
41 
247 
1,170 
1,458 
Total intangible assets
$
— 
$
95,968  $
—  $
41  $
12,906  $
19,036  $
127,951 
69

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company’s tradenames have an indefinite life and their annual impairment test was performed as of July 2022. No impairment has been recorded for
any of the reporting units. The Company also reviews amortizable intangible assets for impairment whenever events or changes in circumstances indicate that
the carrying value of an asset may not be recoverable. The Company did not record impairment expense related to the amortizable intangible assets during the
years ended December 31, 2022, December 25, 2021, or December 26, 2020.
For the years ended December 31, 2022, December 25, 2021, and December 26, 2020, amortization expense was $11.8 million, $8.7 million, and $4.6
million, respectively.
Annual amortization expense for the next five years is estimated to be as follows:
(In thousands)
Estimate for Fiscal Year
2023
$
10,833 
2024
10,646 
2025
9,975 
2026
9,232 
2027
9,043 
  Thereafter
67,070 
Total estimated amortization expense
$
116,799 
(8) Revenue
For details regarding the principal activities from which the Company generates its revenue, refer to “Note 1 - Organization and Significant Accounting
Policies”. For more detailed information regarding reportable segments, refer to “Note 16 – Segments.”
The following represents the disaggregated revenue by reportable segments for the years ended December 31, 2022, December 25, 2021, and December
26, 2020.
Fiscal Year Ended 12/31/2022
(In thousands)
Vitamin Shoppe
Pet Supplies Plus
Badcock
American Freight
Buddy’s
Sylvan
Consolidated
Retail sales
$
1,204,168  $
659,606  $
628,170  $
762,488  $
2,737  $
54  $
3,257,223 
Wholesale sales
1,298 
559,651 
— 
14,119 
— 
— 
575,068 
Total product revenue
1,205,466 
1,219,257 
628,170 
776,607 
2,737 
54 
3,832,291 
Royalties and advertising fees
620 
38,952 
— 
2,226 
18,771 
36,912 
97,481 
Financing revenue
— 
— 
1,289 
36,955 
— 
— 
38,244 
Warranty and damage revenue
— 
— 
52,437 
41,516 
6,098 
— 
100,051 
Interest income from amortization
of original purchase discount
— 
— 
92,688 
— 
— 
— 
92,688 
Interest income
— 
305 
101,172 
771 
— 
— 
102,248 
Other revenues
738 
30,210 
43,301 
25,409 
221 
5,370 
105,249 
Total service and other revenue
1,358 
69,467 
290,887 
106,877 
25,090 
42,282 
535,961 
Rental revenue, net
— 
— 
— 
— 
29,580 
— 
29,580 
Total rental revenue
— 
— 
— 
— 
29,580 
— 
29,580 
Total revenue
$
1,206,824  $
1,288,724  $
919,057  $
883,484  $
57,407  $
42,336  $
4,397,832 
70

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Fiscal Year Ended 12/25/2021
(In thousands)
Vitamin Shoppe
Pet Supplies Plus
Badcock
American Freight
Buddy’s
Sylvan
Consolidated
Retail sales
$
1,172,462  $
517,508  $
67,353  $
894,905  $
3,913  $
8  $
2,656,149 
Wholesale sales
— 
355,377 
— 
945 
— 
— 
356,322 
Total product revenue
1,172,462 
872,885 
67,353 
895,850 
3,913 
8 
3,012,471 
Royalties and advertising fees
263 
20,161 
— 
1,287 
14,474 
8,306 
44,491 
Financing revenue
— 
— 
— 
41,623 
— 
— 
41,623 
Warranty and damage revenue
— 
— 
5,389 
34,786 
6,667 
— 
46,842 
Interest income from
amortization of original purchase
discount
— 
— 
16,796 
— 
— 
— 
16,796 
Interest income
— 
228 
8,712 
986 
— 
— 
9,926 
Other revenues
— 
24,165 
3,807 
14,360 
5,725 
1,368 
49,425 
Total service and other revenue
263 
44,554 
34,704 
93,042 
26,866 
9,674 
209,103 
Rental revenue, net
— 
— 
— 
— 
33,630 
— 
33,630 
Total rental revenue
— 
— 
— 
— 
33,630 
— 
33,630 
Total revenue
$
1,172,725  $
917,439  $
102,057  $
988,892  $
64,409  $
9,682  $
3,255,204 
Reflects the results from the March 10, 2021 acquisition date for the Pet Supplies Plus Acquisition.
Reflects the results from the November 22, 2021 acquisition date for the Badcock Acquisition.
Reflects the results from the September 27, 2021 acquisition date for the Sylvan Acquisition.
Fiscal Year Ended 12/26/2020
(In thousands)
Vitamin Shoppe
Pet Supplies Plus
Badcock
American
Freight
Buddy’s
Sylvan
Consolidated
Retail sales
$
1,035,964 
$
— 
$
— 
$
857,955 
$
5,743 
$
—  $
1,899,662 
Total product revenue
1,035,964 
— 
— 
857,955 
5,743 
— 
1,899,662 
Royalties and advertising fees
— 
— 
— 
— 
10,092 
— 
10,092 
Financing revenue
— 
— 
— 
15,977 
— 
— 
15,977 
Warranty and damage revenue
— 
— 
— 
16,799 
12,668 
— 
29,467 
Interest income
— 
— 
— 
1,288 
— 
— 
1,288 
Other revenues
— 
— 
— 
4,412 
4,562 
— 
8,974 
Total service and other revenue
— 
— 
— 
38,476 
27,322 
— 
65,798 
Rental revenue, net
— 
— 
— 
— 
64,267 
— 
64,267 
Total rental revenue
— 
— 
— 
— 
64,267 
— 
64,267 
Total revenue
$
1,035,964 
$
— 
$
— 
$
896,431 
$
97,332 
$
—  $
2,029,727 
1
2
3
1 
2 
3 
71

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Contract Balances
The following table provides information about receivables and contract liabilities (deferred revenue) from contracts with customers as of December 31,
2022 and December 25, 2021:
(In thousands)
12/31/2022
12/25/2021
Accounts receivable
$
143,582 
$
86
Notes receivable
14,078 
13
Customer deposits
$
20,816 
$
37
Gift cards and loyalty programs
9,565 
7
Deferred franchise fee revenue
22,175 
16
Other deferred revenue
10,688 
8
Total deferred revenue
$
63,244 
$
70
Deferred revenue consists of (1) amounts received for merchandise of which customers have not yet taken possession, (2) gift card or store credits
outstanding, and (3) loyalty reward program credits which are primarily recognized within one year following the revenue deferral. Deferred franchise fee
revenue is recognized over the term of the agreement, which is between five and twenty years. The amount of revenue recognized in the period that was
included in the contract liability balance at the beginning of the period is immaterial to the Condensed Consolidated Financial Statements.
(9) Leases
Refer to “Leases” under “Note 1 - Organization and Significant Accounting Policies” for a discussion of our accounting policies. The finance lease right of
use assets and lease liabilities are included in PP&E, current installments of long-term debt and long-term debt respectively. These leases are immaterial to the
Condensed Consolidated Financial Statements.
Company as Lessee
The components of lease costs for leases that were recognized in the accompanying Consolidated Statements of Operations for the years ended
December 31, 2022 and December 25, 2021 were as follows:
(In thousands)
12/31/2022
12/25/2021
Operating lease cost
$
244,565  $
212
Short-term operating lease costs
2,186 
2
Variable operating lease costs
41,467 
35
Sublease income
(8,857)
(1,
Total operating lease cost
279,361 
248
As of December 31, 2022, maturities of lease liabilities were as follows:
Fiscal Year
Operating leases

(In thousands)
2023
$
227,700 
2024
197,095 
2025
154,809 
2026
123,037 
2027
91,038 
Thereafter
258,120 
Total undiscounted lease payments
1,051,799 
Less interest
151,806 
Present value of lease liabilities
$
899,993 
72

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following represents other information pertaining to the Company’s lease arrangements for the years ended December 31, 2022 and December 25,
2021:
Operating
(In thousands)
December 31, 2022
December 25, 202
Right-of-use assets obtained in exchange for lease obligations
$
155,857 
$
153,53
Cash paid for amounts included in the measurement of lease liabilities
215,528 
191,82
Weighted average remaining lease terms (years)
7.05
4.9
Weighted average discount rates
8.31 %
9.0
(1) As of December 31, 2022, the majority of the lease liabilities arising from right-of-use assets were a result of Badcock’s sale-leaseback transactions.
For details regarding the sale-leaseback transaction, refer to “Note 3 – Divestitures”. As of December 25, 2021, the majority of the lease liabilities arising from
right-of-use assets were a result of the Pet Supplies Plus Acquisition.
Company as Lessor
Total rental income for the years ended December 31, 2022 and December 25, 2021 were $9.9 million and $0.9 million. Total rental income includes
sublease income of $8.0 million and $0.7 million recognized during fiscal 2022 and fiscal 2021, respectively.
The Company subleases some of its Badcock segment’s leased locations to certain dealers for operation as Badcock stores. The terms of these leases
generally match those of the lease the Company has with the lessor. The following table illustrates the Company’s maturity analysis of lease payments to be
received for non-cancelable subleases as of December 31, 2022:
Operating Leases
Fiscal Year (in thousands)
Subleases
2023
$
7,068 
2024
5,241 
2025
4,141 
2026
3,076 
2027
1,606 
Thereafter
537 
Total future minimum receipts
$
21,669 
Our Vitamin Shoppe, Pet Supplies Plus, and American Freight segments have subleases, but the lease payments on those locations are immaterial to the
Condensed Consolidated Financial Statements.
(1)
73

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) Long-Term Obligations
Long-term obligations as of December 31, 2022 and December 25, 2021 were as follows:
(In thousands)
12/31/2022
12/25/2021
Term loans, net of debt issuance costs
First lien term loan, due March 10, 2026
$
779,777 
$
790,057 
Second lien term loan, due September 10, 2026
289,435 
287,188 
Badcock first lien term loan, due November 22, 2023
— 
201,530 
Badcock second lien term loan, due November 22, 2023
— 
146,616 
Total term loans, net of debt issuance costs
1,069,212 
1,425,391 
ABL Revolver
295,000 
20,000 
Other long-term obligations
6,147 
10,537 
Finance lease liabilities
11,055 
6,465 
Total long-term obligations
1,381,414 
1,462,393 
Less current installments
6,935 
183,924 
Total long-term obligations, excluding current installments
$
1,374,479 
$
1,278,469 
First Lien Credit Agreement and Term Loan
On March 10, 2021 (the “PSP Closing Date”), the Company entered into a First Lien Credit Agreement (the “First Lien Credit Agreement”) with various
lenders (the “First Lien Lenders”) that provides for a $1,000.0 million senior secured term loan (the “First Lien Term Loan”).
The Company’s obligations under the First Lien Credit Agreement are guaranteed by the Company and each of the Company’s other direct and indirect
subsidiaries (other than certain excluded subsidiaries) pursuant to a First Lien Guarantee Agreement (the “First Lien Guarantee Agreement”) and are required to
be guaranteed by each of the Company’s direct and indirect subsidiaries (other than certain excluded subsidiaries) that may be formed or acquired after the PSP
Closing Date. The obligations of the Company under the First Lien Credit Agreement are secured on a first priority basis by substantially all of the assets and are
secured on a second priority basis by credit card receivables, accounts receivable, deposit accounts, securities accounts, commodity accounts, inventory and
goods (other than equipment) of the Company, and in each case are required to be secured by such assets of the Company (other than certain excluded
subsidiaries) that may be formed or acquired after the PSP Closing Date.
The proceeds of the First Lien Term Loan, together with the proceeds of the Second Lien Term Loan (as defined below) and certain cash on hand of the
Company, were used to consummate the Pet Supplies Plus Acquisition and to pay fees and expenses for certain related transactions, including the entry into the
ABL Agreement (as defined below). A portion of the First Lien Term Loan and Second Lien Term Loan were also used to repay existing lenders.
The First Lien Term Loan will mature on March 10, 2026 and bears interest at a variable rate with a LIBOR floor of 0.75%. Interest is payable on either
the last day of the interest period or the last business day of the calendar quarter. The Company is required to repay the First Lien Term Loan in equal quarterly
installments of $2.5 million on the last day of each calendar quarter, commencing on June 30, 2021 subject to certain early payment requirements based on
certain events. On July 2, 2021, the Company repaid $182.1 million of principal of the First Lien Term Loan using cash proceeds from the sale of the Liberty
Tax business. The payment also satisfied the requirements for the quarterly principal payments so no additional principal payments are due until the First Lien
Term Loan maturity date. The early repayment resulted in additional interest expense of $6.1 million for the write-off of deferred financing costs. On February 2,
2023, the Company entered into the Third Amendment to the First Lien Credit Agreement, which amends the First Lien Credit Agreement dated as of March 10,
2021 to provide for an incremental term loan facility in the principal amount of $300.0 million.
The First Lien Credit Agreement, the First Lien Term Loan and the First Lien Guarantee Agreement collectively include customary affirmative, negative,
and financial covenants binding on the Company, including delivery of financial statements and other reports. The negative covenants limit the ability of the
Company to, among other things, incur debt, incur liens, make investments, sell assets, pay dividends and enter into transactions with affiliates. The financial
covenants set forth in the First
74

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Lien Credit Agreement include a maximum total leverage ratio (net of certain cash) and a minimum fixed charge coverage ratio to be tested at the end of each
fiscal quarter commencing with the first full fiscal quarter ending after the PSP Closing Date. In addition, the First Lien Credit Agreement includes customary
events of default, the occurrence of which may require the Company to pay an additional 2.00% interest on the First Lien Term Loan and/or may result in,
among other consequences, acceleration of the payment obligations with respect to the First Lien Term Loan, calling on the guarantees, or exercise of remedies
with respect to the collateral.
Second Lien Credit Agreement and Second Lien Term Loan
On the PSP Closing Date, the Company entered into a Second Lien Credit Agreement (the “Second Lien Credit Agreement”) with various lenders (the
“Second Lien Lenders”, and together with the First Lien Lenders, the “Term Loan Lenders”) which provides for a $300.0 million senior secured term loan (the
“Second Lien Term Loan”, and together with the First Lien Term Loan, the “Term Loans”), made by the Second Lien Lenders to the Company.
The Company’s obligations under the Second Lien Credit Agreement are guaranteed by the loan parties pursuant to a Second Lien Guarantee Agreement
(the “Second Lien Guarantee Agreement”) and are required to be guaranteed by each of the Company’s direct and indirect subsidiaries (other than certain
excluded subsidiaries) that may be formed or acquired after the Closing Date. The obligations of the Company under the Second Lien Credit Agreement are
secured on a second priority basis by the Term Priority Collateral and are secured on a third priority basis by the ABL Priority Collateral (the “ABLE Priority
Collateral”) pursuant to a Second Lien Collateral Agreement (the “Second Lien Collateral Agreement”) and are required to be secured by such assets of each of
the Company’s direct and indirect subsidiaries (other than certain excluded subsidiaries) that may be formed or acquired after the PSP Closing Date.
The Second Lien Term Loan will mature on September 10, 2026 and bears interest at a variable rate with a 1.00% LIBOR floor. Interest is payable on
either the last day of the interest period or the last business day of the calendar quarter.
The Second Lien Term Loan is not subject to scheduled amortization. Solely to the extent the First Lien Term Loan and related obligations have been
repaid in full, the Company is required to prepay the Second Lien Term Loan with 50% of consolidated excess cash flow on an annual basis, subject to certain
exceptions and to leverage-based step-downs to 25% and 0%, and with 100% of the net cash proceeds of certain other customary events, including certain asset
sales (but excluding sales of ABL Priority Collateral), including customary reinvestment rights and leverage-based step-downs to 50% and 0%, in each case,
subject to certain exceptions.
Third Amended and Restated Loan and Security Agreement (ABL)
On June 3, 2022, the Company entered into the Second Amendment (the “Second ABL Amendment”) to the Third Amended and Restated Loan and
Security Agreement (as amended, the “FRG ABL Revolver Agreement”). The Second ABL Amendment amended the FRG ABL Revolver Agreement to,
among other things, increase the commitments under the revolving credit facility (the “ABL Revolver”) to $250.0 million, change the reference rate from
LIBOR to SOFR, amend certain negative covenants regarding investments for a time period specified in the Second ABL Agreement, and limits the maximum
principal amount of loans outstanding under the FRG ABL Revolver Agreement to $200.0 million for a time period specified in the Second ABL Agreement.
On August 22, 2022, the Company entered into the Third Amendment (the “Third ABL Amendment”) to the FRG ABL Revolver Agreement. The Third
ABL Amendment amends the FRG ABL Revolver Agreement to, among other things, increase the commitments under the ABL Revolver to $400.0 million,
amend the terms of the borrowing base and provide for the inclusion of certain types of inventory to the borrowing base, and make certain other changes to
reflect the increase in the revolving credit facility commitments and the addition of Badcock as a borrower to the parties under the ABL Loan Revolver.
The ABL Revolver matures on March 10, 2026, and borrowings under the ABL Revolver will bear interest at an interest rate per annum equal to the Term
SOFR Rate plus 0.10%, with a 0.00% floor. Interest is payable on either the last day of the interest period or the last business day of the calendar quarter.
The Company is subject to an agreement which requires the Company to repay the excess amount of borrowings under the ABL Revolver if: (i) the
aggregate outstanding principal amount of all borrowings by the Company under the ABL Revolver at any time exceeds the aggregate borrowing cap specified
therein, or (ii) the aggregate outstanding principal amount of all borrowings of certain of the Company’s subsidiaries exceeds their borrowing caps.
75

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The FRG ABL Revolver Agreement and the Third Amended and Restated Pledge Agreement, dated as of March 10, 2021, among the Company, the other
pledgors from time to time party thereto and JPMorgan Chase Bank, N.A., include customary affirmative and negative covenants that are binding on the
Company, including the delivery of financial statements, borrowing base certificates and other reports. Certain of the negative covenants included therein limit
the ability of the Company, among other things, to incur debt and liens, make investments, sell assets, pay dividends and enter into transactions with affiliates. In
addition, the FRG ABL Revolver Agreement includes customary events of default, the occurrence of which may require the Company to pay an additional 2.0%
interest on the borrowings under the ABL Revolver.
Compliance with Debt Covenants
The Company’s revolving credit and long-term debt agreements impose restrictive covenants on it, including requirements to meet certain ratios. As of
December 31, 2022, the Company was in compliance with all financial covenants under these agreements and, based on a continuation of current operating
results, the Company expects to continue to be in compliance for the next twelve months.
Aggregate maturities of long-term debt at December 31, 2022 were as follows:
(In thousands)
Estimate for fiscal year
2023
$
7,327 
2024
4,605 
2025
297,939 
2026
1,071,210 
2027
1,255 
Thereafter
— 
Total
$
1,382,336 
During the year ended December 31, 2022, the Badcock First and Second Lien Term Loans were fully repaid using cash proceeds from the sales of certain
parcels of land on which Badcock operates its distribution centers and corporate headquarters as discussed in “Note 3 - Divestitures” and from the securitization
of its existing consumer credit receivables portfolio as discussed in “Note 5 - Securitized Accounts Receivable.”
(11) Stockholders’ Equity
Stockholders’ Equity Activity
On January 11, 2021, the Company entered into an Underwriting Agreement with B. Riley Securities, Inc., as representative of the underwriters named
therein (the “Underwriters”), to issue and sell an aggregate of 2,976,191 shares of the Company’s 7.50% Series A Cumulative Perpetual Preferred Stock, par
value $0.01 per share and liquidation preference of $25.00 per share (the “Series A Preferred Stock”), in a public offering at a price to the public of $25.20 per
share. The Company also granted the Underwriters an option (the “Option”) to purchase up to 446,428 additional shares of Series A Preferred Stock during the
30 days following the date of the Underwriting Agreement. On January 14, 2021, the Underwriters partially exercised the Option for 314,934 shares. The
offering closed on January 14, 2021, and the net proceeds to the Company were approximately $79.5 million, after deducting underwriting discounts, an
advisory fee and offering expenses totaling approximately $3.2 million.
76

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Non-controlling interest
The Company is the sole managing member of New Holdco and, as a result, consolidates the financial results of New Holdco. Prior to April 1, 2020, the
Company reported a non-controlling interest representing the economic interest in New Holdco held by the Buddy’s Members. Changes in the Company’s
ownership interest in New Holdco while it retained a controlling interest in New Holdco were accounted for as equity transactions. On March 26, 2020, the
Company redeemed 3,937,726 New Holdco units and 787,545 shares of preferred stock for common stock. On April 1, 2020, the Company redeemed the
remaining 5,495,606 New Holdco units and 1,099,121 shares of preferred stock for common stock and the Company became the sole owner of New Holdco.
The exchange of New Holdco units for common stock resulted in an increase in the tax basis of the net assets of New Holdco and a liability to be
recognized pursuant to the Tax Receivable Agreement (“TRA”). The difference of $10.0 million in the adjustment of the deferred tax balances and the tax
receivable agreement liability was recorded as an adjustment to additional paid-in-capital. Refer to “Note 13 – Income Taxes” for further discussion of the TRA.
Share Repurchases
On May 18, 2022, the Company’s Board approved a stock repurchase program under which the Company may repurchase up to $500.0 million of its
outstanding shares of common stock over the next three years. The repurchase program authorizes shares to be repurchased from time to time in open market or
private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act
of 1934, as amended. The actual timing, number and value of shares, if any, repurchased under the program will be determined by management in its discretion
and will depend on a number of factors, including, among others, the availability of stock, general market and business conditions, the trading price of the
Company’s common stock and applicable legal requirements. This plan supersedes the Company’s previous stock repurchase programs. During the year ended
December 31, 2022, the Company repurchased 5,920,744 shares of its common stock through open market and repurchase agreement transactions totaling an
aggregate of $172.5 million. No stock repurchases were made during the year ended December 25, 2021.
Net Income (Loss) per Share
Diluted net income (loss) per share is computed using the weighted-average number of common stock and, if dilutive, the potential common stock
outstanding during the period. Potential common stock consists of the incremental common stock issuable upon the exercise of stock options and vesting of
restricted stock units. The dilutive effect of outstanding stock options and restricted stock units is reflected in diluted earnings per share by application of the
treasury stock method.
77

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The computation of basic and diluted net income per share for the years ended December 31, 2022, December 25, 2021, and December 26, 2020 is as
follows:
12/31/2022
12/25/2021
12/26/2020
(In thousands, except for share and per share amounts)
Common stock
Common stock
Common stock
Net income (loss) from continuing operations attributable to Franchise Group
$
(68,573) $
191,966  $
20,645 
Less: Preferred dividend declared
8,514 
8,514 
755 
Adjusted net income (loss) from continuing operations attributable to Franchise Group available
to Common Stockholders
(77,087)
183,452 
19,890 
Net income (loss) from discontinued operations attributable to Franchise Group
— 
171,822 
4,419 
Adjusted net income (loss) available to Common Stockholders
$
(77,087) $
355,274  $
24,309 
Weighted-average common shares outstanding
39,309,855 
40,199,681 
34,531,362 
Net dilutive effect of stock options and restricted stock
— 
764,501 
440,573 
Weighted-average dilutive shares outstanding
39,309,855 
40,964,182 
34,971,935 
Basic net income (loss) per share:
Continuing operations
$
(1.96) $
4.56  $
0.57 
Discontinued operations
— 
4.27 
0.13 
Basic net income (loss) per share
$
(1.96) $
8.83  $
0.70 
Diluted net income (loss) per share:
Continuing operations
$
(1.96) $
4.48  $
0.57 
Discontinued operations
— 
4.19 
0.13 
Diluted net income (loss) per share
$
(1.96) $
8.67  $
0.70 
(12) Stock Compensation Plan
2019 Omnibus Incentive Plan
In December 2019, the Company’s stockholders approved the Company’s 2019 Omnibus Incentive Plan (the “2019 Plan”). The 2019 Plan provides for a
variety of awards, including stock options, stock appreciation rights, performance units, performance shares, shares of the Company’s common stock, par value
$0.01 per share, restricted stock, restricted stock units, incentive awards, dividend equivalent units and other stock-based awards. Awards under the 2019 Plan
may be granted to the Company’s eligible employees, directors, or consultants or advisors. The 2019 Plan provides that an aggregate maximum of 5,000,000
shares of common stock are reserved for issuance under the 2019 Plan, subject to adjustment for certain corporate events. At December 31, 2022 and
December 25, 2021, 2,439,194 and 3,004,259 shares of common stock remained available for grant, respectively.
Restricted Stock Units
The Company has awarded service-based restricted stock units (“RSUs”) to its non-employee directors, officers and certain employees. The Company
recognizes expense based on the estimated fair value of the RSUs granted over the vesting period on a straight-line basis. The fair value of RSUs is determined
using the Company’s closing stock price on the date of the grant. At December 31, 2022, unrecognized compensation cost related to RSUs was $5.1 million.
These costs are expected to be recognized through fiscal 2023.
78

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table summarizes the status of service-based RSU activity during the years ended December 31, 2022, December 25, 2021, and December
26, 2020:
Number of RSUs
Weighted-Average Fair Value at
Grant Date
Balance at December 28, 2019
205,206  $
13.11 
Granted
192,809 
24.83 
Vested
(85,911)
12.67 
Forfeited
(15,957)
19.69 
Balance at December 26, 2020
296,147  $
20.51 
Granted
124,350 
35.95 
Vested
(148,447)
20.11 
Forfeited
(2,342)
12.22 
Balance at December 25, 2021
269,708  $
27.92 
Granted
118,359 
42.15 
Vested
(114,765)
29.26 
Forfeited
— 
— 
Balance at December 31, 2022
273,302  $
36.39 
Performance Restricted Stock Units
The Company has awarded performance restricted stock units (“PRSUs”) to its officers and certain employees. The Company recognizes expense based on
the estimated fair value of the PRSUs granted over the vesting period on a straight-line basis. The fair value of PRSUs is determined using the Company’s
closing stock price on the date of the grant. As the achievement of outstanding awards issued in fiscal years 2021 and 2022 was not probable at December 31,
2022, there were no unrecognized compensation costs related to these PRSUs.
The following table summarizes the status of PRSU activity during the years ended December 31, 2022, December 25, 2021, and December 26, 2020:
Number of PRSUs
Weighted-Average Fair Value at
Grant Date
Balance at December 28, 2019
465,833  $
14.40 
Granted
154,904 
24.84 
Vested
— 
— 
Forfeited
(2,000)
14.40 
Balance at December 26, 2020
618,737  $
17.00 
Granted
107,023 
35.66 
Vested
(19,500)
14.40 
Forfeited
— 
— 
Balance at December 25, 2021
706,260  $
19.90 
Granted
102,930 
42.25 
Adjusted for performance results achieved
222,166 
14.38 
Vested
(666,499)
14.38 
Forfeited
— 
— 
Balance at December 31, 2022
364,857  $
32.92 
(1) Represents an adjustment for performance results achieved related to outstanding 2019 PRSU shares that vested and were issued in November 2022 at 150%
achievement.
(1)
79

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Market-Based Restricted Stock Units
The Company has awarded market-based restricted stock units (“MPRSUs”) to its officers and certain employees. The Company recognizes expense based
on the estimated fair value of the MPRSUs granted over the vesting period on a straight-line basis. The fair value of MPRSUs is determined using a Monte Carlo
simulation valuation model to calculate grant date fair value. Compensation expense is recognized over the requisite service period using the proportionate
amount of the award’s fair value that has been earned through service to date. At December 31, 2022, unrecognized compensation cost related to MPRSUs was
$9.8 million. These costs are expected to be recognized through fiscal 2024.
The following table summarizes the status of MPRSU activity during the years ended December 31, 2022 and December 25, 2021:
Number of MPRSUs
Weighted-Average Fair Value at
Grant Date
Balance at December 26, 2020
—  $
— 
Granted
826,926 
20.13 
Vested
— 
— 
Forfeited
— 
— 
Balance at December 25, 2021
826,926  $
20.13 
Granted
70,000 
39.67 
Vested
— 
— 
Forfeited
(56,000)
20.26 
Balance at December 31, 2022
840,926  $
21.77 
Stock Options
The Company has awarded stock options to its non-employee directors and officers. Since fiscal 2020, no stock options have been granted and all
outstanding stock options were fully vested with no remaining unrecognized compensation cost. All outstanding stock options will expire in fiscal years 2023
and 2024.
The following table summarizes information about stock options outstanding and exercisable at December 31, 2022.
Options outstanding and exercisable
Range of Exercise Prices
Number of options
outstanding and exercisable
Weighted-average exercise
price
Weighted-average
remaining contractual life
(in years)
0.00 - 10.89
200,000 
$
8.81 
0.9
10.90 - 12.01
54,564 
11.97 
0.9
254,564 
$
9.49 
 
Stock Compensation Expense
The Company recorded $15.1 million, $13.4 million, and $8.9 million of expense related to stock awards from continuing operations for the years ended
December 31, 2022, December 25, 2021, and December 26, 2020, respectively.
Long-Term Incentive Plans
The Company has long-term incentive plans at various operating companies which are recorded as liabilities. Upon vesting, the awards granted under these
plans may be settled in cash or shares of the Company’s stock at the Company’s discretion. The total aggregate liability for these plans as of December 31, 2022
is $8.3 million, recorded in “Accounts payable and accrued expenses” on the Consolidated Balance Sheets. During the year ended December 31, 2022, total
expense recognized related to these plans was $8.0 million.
80

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) Income Taxes
Tax Receivable Agreement
The Company previously had a non-controlling interest as a result of its acquisition of Buddy’s on July 10, 2019. On April 1, 2020, the Company
redeemed all of the non-controlling interest units. On July 10, 2019, the Company entered into a tax receivable agreement (the “TRA”) with the then-existing
non-controlling interest holders, which comprised the Buddy’s Members that provides for the payment by the Company to the non-controlling interest holders of
40% of the cash savings, if any, in federal, state and local taxes that the Company realizes or is deemed to realize as a result of any increases in tax basis of the
assets of New Holdco resulting from future redemptions or exchanges of New Holdco units.
During the year ended December 26, 2020, the Company acquired an aggregate of 9,433,332 New Holdco units, which resulted in an increase in the tax
basis of its investment in New Holdco subject to the provisions of the TRA. Prior to December 31, 2022, the Company recognized a total liability in the amount
of $17.3 million for the payments due to the redeeming members under the Tax Receivable Agreement (“TRA Payments”), representing 40% of the cash savings
it expects to realize from the tax basis increases related to the redemption of New Holdco units. TRA Payments will be made when such TRA related deductions
actually reduce the Company’s income tax liability. Payments of $1.9 million were made to the Buddy’s Members pursuant to the TRA during the year ended
December 31, 2022, which reduced the total liability to $15.4 million.
Pursuant to the Company’s election under Section 754 of the Internal Revenue Code (the “Code”), the Company has obtained an increase in its share of the
tax basis in the net assets of New Holdco when the New Holdco units were redeemed or exchanged by the non-controlling interest holders and other qualifying
transactions. The Company has treated the redemptions and exchanges of New Holdco units by the non-controlling interest holders as direct purchases of New
Holdco units for U.S. federal income tax purposes. This increase in tax basis will reduce the amounts that it would otherwise pay in the future to various tax
authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital
assets.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act
The Coronavirus Aid, Relief, and Economic Security, or CARES Act (the “Act”) was enacted on March 27, 2020. The Act retroactively changed the
eligibility of certain assets for expense treatment in the year placed in service, back to 2018, and permitted any net operating loss for the tax years 2018, 2019
and 2020 to be carried back for 5 years. The Company recorded a total income tax benefit of $52.3 million during the year ended December 26, 2020 associated
with the income tax components contained in the Act. As of December 31, 2022, the Company has completed its analysis of the tax effects of the Act but
continues to monitor developments by federal and state rule making authorities regarding implementation of the Act. The Company will adjust, if needed, as
new laws or guidance becomes available.
Global intangible low-taxed income (GILTI)
The Tax Cuts and Jobs Act subjects a U.S. shareholder to tax on GILTI earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5,
Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for
temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred as a period
expense only. The Company elected to account for GILTI in the year the tax is incurred as a period cost.
81

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Components of income tax expense for the fiscal years ended December 31, 2022, December 25, 2021, and December 26, 2020 were as follows: 
(In thousands)
12/31/2022
12/25/2021
12/26/2020
Current:
Federal
$
52,046 
$
— 
$
(62,897)
State
12,238 
1,362 
615 
Current tax expense
64,284 
1,362 
(62,282)
Deferred:
Federal
(61,372)
(37,816)
3,931 
State
(11,757)
2,916 
(2,150)
Deferred tax expense (benefit)
(73,129)
(34,900)
1,781 
Total income tax expense (benefit)
$
(8,845)
$
(33,538)
$
(60,501)
For the years ended December 31, 2022, December 25, 2021, and December 26, 2020, income before taxes consisted of the following:
(In thousands)
12/31/2022
12/25/2021
12/26/2020
Income (loss) before income taxes
$
(77,418)
$
158,428 
$
(49,557)
Income tax benefit differed from the amounts computed by applying the U.S. federal income tax rate of 21% to pre-tax income from continuing operations
as a result of the following for years ended December 31, 2022 and December 25, 2021 are as follows:
(In thousands)
12/31/2022
12/25/2021
Computed “expected” income tax benefit
$
(16,258)
$
33,270 
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal benefit
(2,788)
5,304 
Bargain purchase gain
(738)
(27,729)
162(m) limitation
2,555 
2,019 
Nondeductible expenses
127 
197 
Stock compensation expense
(349)
(900)
Transaction costs
(179)
858 
Subpart F Income
43 
— 
Impairment of goodwill
14,700 
— 
Return to provision
2,385 
— 
Change in uncertain tax position
(1,768)
(66)
Decrease in valuation allowance
(6,796)
(45,180)
Tax rate change
1,049 
(1,311)
Other
(828)
— 
Total income tax expense (benefit)
$
(8,845)
$
(33,538)
82

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The tax effect of temporary differences between the financial statement carrying amounts and tax basis of assets and liabilities that give rise to significant
portions of deferred tax assets and liabilities as of December 31, 2022 and December 25, 2021 are as follows:
(In thousands)
12/31/2022
12/25/2021
Deferred tax assets:
Federal and state net operating loss carryforward
$
11,068 
$
16,865 
Section 743 adjustment
36,006 
38,604 
Interest expense carryforward
1,098 
1,485 
State bonus depreciation
4,587 
5,069 
Equity compensation
6,488 
3,806 
Inventory
9,349 
4,528 
Deferred revenue
6,807 
4,176 
Accrued expenses and reserves
4,932 
9,976 
Allowances
19,446 
795 
Lease liability (ASC 842)
235,743 
185,064 
Other
21,238 
3,463 
Total deferred tax assets (before valuation allowance)
356,762 
273,831 
Valuation allowance
(1,417)
(8,213)
Total deferred tax assets (after valuation allowance)
355,345 
265,618 
Deferred tax liabilities
Property, plant, and equipment (U.S.)
(31,165)
(78,895)
Goodwill, intangible assets, and assets held for sale (U.S.)
(48,142)
(33,786)
Right-of-use assets (ASC 842)
(230,501)
(181,227)
Prepaid expenses
(7,010)
(4,968)
Total deferred tax liabilities
(316,818)
(298,876)
Net deferred tax asset (liability)
$
38,527 
$
(33,258)
In assessing the realizability of the gross deferred tax assets, management considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods
in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies in making this assessment. The Company decreased its valuation allowance by $6.8 million.
As of December 31, 2022, the Company has gross U.S. federal net operating losses of $39.9 million, state net operating losses of $42.8 million, a portion
of which will begin to expire in 2024. A portion of the Company’s net operating loss carry forwards is subjected to an annual limitation under Section 382,
which may restrict the Company’s ability to use them to offset its taxable income in future periods.
The Company adopted the accounting and disclosure requirements for uncertain tax positions, which require a two-step approach to evaluate tax positions.
This approach involves recognizing any tax positions that are more likely than not to occur and then measuring those positions to determine the amounts to be
recognized in the financial statements. The Company decreased reserves for uncertain tax positions by $1.5 million due to statute expiration and $0.4 million
due to audit protection as of December 31, 2022. The Company increased reserves for an additional year of interest on prior tax positions. It is reasonably
possible that $1.1 million of uncertain tax positions may be recognized in the coming year as a result of a lapse of the statute of limitations.
83

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A reconciliation of the beginning and ending balance of the gross liability for uncertain tax positions for the fiscal years ended December 31, 2022 and
December 25, 2021, is as follows:
(In thousands)
12/31/2022
12/25/2021
Liability for uncertain tax positions, beginning of year
$
4,957 
$
357 
Decreases related to prior year positions
(1,938)
(219)
Increases related to prior year positions
170 
4,819 
Liability for uncertain tax positions, end of year
$
3,189 
$
4,957 
As of December 31, 2022, the Company’s earliest open tax year for U.S. federal income tax purposes was its fiscal year ended December 28, 2019.     
(14) Related Party Transactions
The Company considers directors and their affiliated companies, as well as named executive officers and members of their immediate families, to be
related parties.
Messrs. Kahn and Laurence
Brian Kahn and Vintage Capital Management, LLC and its affiliates (“Vintage”), in aggregate, held approximately 40.2% of the aggregate voting power of
the Company through their ownership of common stock as of December 31, 2022. Mr. Kahn and Andrew Laurence are principals of Vintage. Mr. Kahn is a
member of the Board, President and Chief Executive Officer of the Company. Mr. Laurence is an Executive Vice President of the Company and served as a
member of the Company’s Board until May 2021.
Buddy’s Franchises. Mr. Kahn’s brother-in-law owns eight Buddy’s franchises. All transactions between the Company’s Buddy’s segment and Mr. Kahn’s
brother-in-law are conducted on a basis consistent with other franchisees.
Tax Receivable Agreement
In connection with the Company’s acquisition of Buddy’s, the Company entered into a TRA with the Buddy’s Members that provides for the payment to
the Buddy’s Members of 40% of the amount of any tax benefits that the Company actually realizes as a result of increases in the tax basis of the net assets of
New Holdco resulting from any redemptions or exchanges of New Holdco units. Amounts due under the TRA to the Buddy’s Members as of December 31,
2022, were $15.4 million which is recorded in “Other non-current liabilities” in the accompanying Consolidated Balance Sheets. Payments made to Buddy’s
Members pursuant to the Tax Receivable Agreement totaled $1.9 million during the year ended December 31, 2022, of which entities under the control of
Vintage and Mr. Kahn received $1.7 million.
(15) Commitments and Contingencies
In the ordinary course of operations, the Company may become a party to legal proceedings. Based upon information currently available, management
believes that such legal proceedings, individually or in the aggregate, will not have a material adverse effect on the Company’s business, financial condition,
cash flows, or results of operations.
The Company is party to claims and lawsuits that are considered to be ordinary, routine litigation incidental to the business, including claims and lawsuits
concerning the fees charged to customers for various products and services, relationships with franchisees, intellectual property disputes, employment matters,
and contract disputes. Although the Company cannot provide assurance that it will ultimately prevail in each instance, it believes the amount, if any, it will be
required to pay in the discharge of liabilities or settlements in these claims will not have a material adverse impact on its consolidated results of operations,
financial position, or cash flows.
84

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Guarantees
The Company remains secondarily liable under various real estate leases that were assigned to franchisees who acquired Pet Supplies Plus or Vitamin
Shoppe stores from the Company. In the event of the failure of an acquirer to pay lease payments, the Company could be obligated to pay the remaining lease
payments which extend through 2033 and aggregated $30.2 million as of December 31, 2022. In certain cases, the Company could attempt to recover from the
franchisees’ personal assets should the Company be required to pay remaining lease obligations.
The Company also remains secondarily liable under loan agreements entered into by certain franchisees who acquired American Freight or Buddy’s stores
from the Company. In the event of the failure of these franchisees to make the loan payments, the Company could be obligated to pay the default amounts. No
amounts were outstanding under these agreements, and, therefore, the Company has no potential guarantee liability as of December 31, 2022.
If the Company is required to make payments under these guarantees, the Company could seek to recover those amounts from the franchisees or in some
cases their affiliates. The Company believes that payment under these guarantees is remote as of December 31, 2022.
(16) Segments
The Company’s operations are conducted in six reporting business segments: Vitamin Shoppe, Pet Supplies Plus, Badcock, American Freight, Buddy’s
and Sylvan. The Company defines its segments as those operations which results its Chief Operating Decision Maker (“CODM”) regularly reviews to analyze
performance and allocate resources. The Company measures the results of our segments using, among other measures, each segment’s net revenues and
operating income (loss).
Total revenues by segment are as follows:
Year Ended
(In thousands)
12/31/2022
12/25/2021
12/26/2020
Total revenue:
Vitamin Shoppe
$
1,206,824 
$
1,172,725 
$
1,035,964 
Pet Supplies Plus
1,288,724 
917,439 
— 
Badcock
919,057 
102,057 
— 
American Freight
883,484 
988,892 
896,431 
Buddy’s
57,407 
64,409 
97,332 
Sylvan
42,336 
9,682 
— 
Consolidated total revenue
$
4,397,832 
$
3,255,204 
$
2,029,727 
Operating income (loss) by segment are as follows:
Year Ended
(In thousands)
12/31/2022
12/25/2021
12/26/2020
Operating income (loss):
Vitamin Shoppe
$
106,789 
$
104,004 
$
5,371 
Pet Supplies Plus
81,228 
41,654 
— 
Badcock
129,104 
22,674 
— 
American Freight
(79,524)
66,541 
40,348 
Buddy’s
12,520 
16,685 
20,364 
Sylvan
5,328 
(712)
— 
Corporate
(34,238)
$
(24,495)
(13,572)
Operating income (loss):
$
221,207 
$
226,351 
$
52,511 
85

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Total assets by segment are as follows:
(In thousands)
12/31/2022
12/25/2021
Total assets:
Vitamin Shoppe
$
625,543 
$
596,964 
Pet Supplies Plus
977,234 
957,849 
Badcock
789,727 
1,062,310 
American Freight
904,378 
959,282 
Buddy’s
135,192 
146,033 
Sylvan
90,361 
103,850 
Corporate
107,977 
86,883 
Consolidated total assets
$
3,630,412 
$
3,913,171 
(17) Subsequent Events
 
On February 2, 2023, the Company entered into the Third Amendment to the First Lien Credit Agreement, which amends the First Lien Credit Agreement
dated as of March 10, 2021 to provide for an incremental term loan facility in the principal amount of $300.0 million and change the reference rate under the
First Lien Credit Agreement from LIBOR to SOFR. The net proceeds will be used to repay certain amounts outstanding under the Company’s ABL Credit
Agreement.
On February 24, 2023, the Company's Board of Directors declared quarterly dividends of $0.625 per share of common stock and $0.46875 per share of
Series A Preferred Stock. The dividends will be paid in cash on or about April 13, 2023 to holders of record of the Company's common stock and Series A
Preferred Stock on the close of business on March 31, 2023.
On February 28, 2023, the Company's Pet Supplies Plus segment acquired 20 stores through bankruptcy proceedings of a third party for approximately
$3.7 million.
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Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.    Controls and Procedures.
Disclosure Controls and Procedures
The Company, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the
Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of December 31, 2022. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that, as of December 31, 2022, our disclosure controls and procedures were not effective because of the material weakness in
our internal control over financial reporting described in the “Management’s Report on Internal Control Over Financial Reporting” section below.
Notwithstanding the identified material weakness, management believes that the Condensed Consolidated Financial Statements and related financial
information included in this 10-K fairly present, in all material respects, our balance sheets, statements of operations, comprehensive income and cash flows as
of and for the periods presented.
Changes in Internal Control over Financial Reporting
In the ordinary course of business, the Company reviews its system of internal control over financial reporting and makes changes to improve such controls
and increase efficiency. The Company is currently implementing new processes and controls as well as enhancing existing processes and control activities at
companies acquired through acquisitions. The Company believes the related changes to processes and internal controls will allow it to be more efficient and
further enhance its internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal
control over financial reporting is designed to provide reasonable assurance to the Company’s management and Board regarding the reliability of financial
reporting and preparation of financial statements for external purposes in accordance with GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated
Framework (2013). Based on the criteria set forth in the Internal Control-Integrated Framework, management concluded that, as of December 31, 2022, the
Company’s internal control over financial reporting is not effective.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material
weakness existed at December 31, 2022:
During the year ended December 31, 2022, the Company identified a material weakness in its controls over financial reporting involving the preparation of
its Statement of Cash Flows. As a result of this deficiency, there was a misclassification of cash flows associated with interest payments on the Company’s
secured borrowing resulting in an overstatement of cash flows provided by operating activities of $100.9 million and an overstatement of cash flows used in
financing activities of $100.9 million in the Company’s 10-Q for the period ended June 25, 2022, and an overstatement of cash flows provided by operating
activities of $53.0 million and an overstatement of cash used in financing activities of $53.0 million for the period ended March 26, 2022.
Management, with oversight from the Audit Committee, initiated several steps to design and implement new controls to remediate this material weakness.
These steps included (i) implementing changes to the cash flow statement to segregate
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material non-recurring transactions, such as securitization, to allow for better visibility of the presentation of the transactions, and (ii) enhancements to processes
to identify any new non-recurring transactions that occurred during the period.
While management has designed and implemented new controls to remediate this material weakness, the controls have not been in operation for a
sufficient period of time to demonstrate that the material weakness has been remediated. These actions and planned actions are subject to ongoing evaluation by
management and will require testing and validation of design and operating effectiveness of internal controls over financial reporting over future periods.
Management is committed to the continuous improvement of internal control over financial reporting.
Notwithstanding the identified material weakness, management believes that the Consolidated Financial Statements and related financial information
included in this 10-K fairly present, in all material respects, our Balance Sheets, Statements of Operations, Comprehensive Income and Cash Flows as of and for
the periods presented.
Deloitte and Touche LLP, the Company’s independent registered public accounting firm that audited the consolidated financial statements included in this
Annual Report on Form 10-K, has issued their audit report on the Company’s internal control over financial reporting, which is included herein.
Item 9B.    Other Information.
On February 24, 2023, the Company’s Board approved the Third Amended and Restated Bylaws of the Company (the “Amended Bylaws”), effective
immediately, with such amendments including updates to the advance notice provisions to address the adoption by the SEC of “universal proxy” rules.
With respect to stockholder nominees to the Company’s Board, the Amended Bylaws provide, among other things, (i) that stockholders must comply with
the SEC’s newly adopted Rule 14a-19 under the Exchange Act, (ii) that no stockholder may solicit proxies in support of a director nominee other than the
Board’s nominees unless such stockholder has complied with Rule 14a-19 under the Exchange Act, including applicable notice and solicitation requirements,
(iii) that, if any stockholder provides notice of intent to solicit proxies pursuant to Rule 14a-19 under the Exchange Act, such stockholder must provide upon
request by the Company, no later than five business days prior to the applicable meeting, evidence that such stockholder has met the requirements of Rule 14a-
19(a)(3) and Rule 14a-19(b) under the Exchange Act, and (iv) that the Company may disregard any proxies or votes solicited for a stockholder’s nominee(s) if
such stockholder does not comply with the requirements of Rule 14a-19(a)(2) and Rule 14a-19(a)(3) under the Exchange Act.
The foregoing summary of the Amended Bylaws is qualified in its entirety by reference to the full text of the Amended Bylaws, which is filed as Exhibit
3.2 to this Annual Report on Form 10-K and incorporated herein by reference.
Item 9C.    Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
None.
PART III
Item 10.    Directors, Executive Officers, and Corporate Governance.
The information required by this item will be provided by being incorporated herein by reference to the Company’s definitive proxy statement for its 2023
Annual Meeting of Stockholders.
Item 11.    Executive Compensation.
The information required by this item will be provided by being incorporated herein by reference to the Company’s definitive proxy statement for its 2023
Annual Meeting of Stockholders.
Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item will be provided by being incorporated herein by reference to the Company’s definitive proxy statement for its 2023
Annual Meeting of Stockholders.
Item 13.    Certain Relationships and Related Transactions, and Director Independence.
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The information required by this item will be provided by being incorporated herein by reference to the Company’s definitive proxy statement for its 2023
Annual Meeting of Stockholders.
Item 14.    Principal Accounting Fees and Services.
The information required by this item will be provided by being incorporated herein by reference to the Company’s definitive proxy statement for its 2023
Annual Meeting of Stockholders.
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PART IV
Item 15.    Exhibits, Financial Statement Schedules.
(a) Financial Statements.
The following financial statements of the Company are included in Item 8 of this Annual Report:
Audited Financial Statements for the Years Ended December 31, 2022, December 25, 2021, and December 26, 2020
 
Page
Reports of Independent Registered Public Accounting Firm (PCAOB ID No. 34 (Deloitte and Touche LLP))
 
42
Consolidated Balance Sheets as of December 31, 2022 and December 25, 2021
 
48
Consolidated Statements of Operations for the Years Ended December 31, 2022, December 25, 2021, and December 26, 2020
 
46
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2022, December 25, 2021, and December 26,
2020
47
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2022, December 25, 2021, and December 26, 2020
 
49
Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, December 25, 2021, and December 26, 2020
 
51
Notes to Consolidated Financial Statements
 
53
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(b) Exhibits.
Exhibit

Number
Exhibit Description
2.1
Agreement of Merger and Business Combination Agreement dated as of July 10, 2019, among Liberty Tax, Inc., Buddy’s Newco, LLC,
Franchise Group New Holdco, LLC, Franchise Group B Merger Sub, LLC, and Vintage RTO, L.P. (incorporated by reference to Exhibit
2.1 to Form 8-K, File No. 001-35588 filed on July 11, 2019).
2.2
Membership Interest Purchase Agreement, by and between NextPoint Acquisition Corp. and Franchise Group Intermediate L, LLC,
dated as of February 21, 2021 (incorporated by reference to Exhibit 2.1 to Form 8-K, File No. 001-35588 filed February 22, 2021).
2.2.1
Amendment No. 1, dated as of April 13, 2021 to Membership Interest Purchase Agreement, by and between NextPoint Acquisition Corp.
and Franchise Group Intermediate L, LLC, dates as of February 21, 2021.
2.2.2
Amendment No. 2, dated as of June 30, 2021 to Membership Interest Purchase Agreement, by and between NextPoint Acquisition Corp.
and Franchise Group Intermediate L, LLC, dates as of February 21, 2021 (incorporated by reference to Exhibit 2.6.2. to Form 10-Q, File
No. 001-35588 filed August 3, 2021).
2.3
Stock Purchase Agreement, dated as of November 22, 2021, by and among Franchise Group Newco BHF, LLC, W.S. Badcock
Corporation, the shareholders set forth on Annex I thereto, and William K. Pou, Jr. (incorporated by reference to Exhibit 2.1 to Form 8-
K, File No. 001-25588 filed November 24, 2021).*
2.4
Master Receivables Purchase Agreement, dated as of December 20, 2021, between W.S. Badcock Corporation and B. Riley Receivables,
LLC (incorporated by reference to Exhibit 2.1 to Form 8-K, File No. 001-35588 filed December 21, 2021).*
2.5
Purchase and Sale Agreement, dated as of March 31, 2022, between W.S. Badcock Corporation and National Retail Properties, LP
(incorporated by reference to Exhibit 2.9 to Form 10-Q, File No. 001-35588 filed May 5, 2022).*
2.6
Purchase and Sale Agreement, dated as of April 15, 2022, between W.S. Badcock Corporation and Mesirow Realty Sale-Leaseback, Inc
(incorporated by reference to Exhibit 2.10 to Form 10-Q, File No. 001-35588 filed May 5, 2022).*
2.7
Purchase and Sale Agreement, dated as of April 26, 2022, between W.S. Badcock Corporation and CAI Investments Sub Series 100,
LLC (incorporated by reference to Exhibit 2.11 to Form 10-Q, File No. 001-35588 filed May 5, 2022).*
2.8
Purchase and Sale Agreement, dated as of May 25, 2022, between W.S. Badcock Corporation and Oak Street Real Estate Capital Net
Lease Property Fund (Collector), LP (incorporated by reference to Exhibit 2.8 to Form 10-Q, File No. 001-35588 filed August 4, 2022)*.
2.8.1
Amended and Restated Purchase and Sale Agreement, dated as of May 25, 2022, by and between W.S. Badcock Corporation and Oak
Street Real Estate Capital Net Lease Property Fund (Collector), LP (incorporated by reference to Exhibit 2.8.1 to Form 10-Q, File No.
001-35588 filed August 4, 2022).*
2.9
Purchase and Sale Agreement, dated as of May 25, 2022, by and between W.S. Badcock Corporation and Oak Street Real Estate Capital
Net Lease Property Fund (Collector), LP (incorporated by reference to Exhibit 2.9 to Form 10-Q, File No. 001-35588 filed August 4,
2022).*
2.9.1
First Amendment, dated as of June 24, 2022, to Purchase and Sale Agreement by and between W.S. Badcock Corporation and Oak Street
Real Estate Capital Net Lease Property Fund (Collector), LP (incorporated by reference to Exhibit 2.9.1 to Form 10-Q, File No. 001-
35588 filed August 4, 2022).*
2.9.2
Second Amendment, dated as of June 30, 2022, to Purchase and Sale Agreement by and between W.S. Badcock Corporation and Oak
Street Real Estate Capital Net Lease Property Fund (Collector), LP (incorporated by reference to Exhibit 2.9.2 to Form 10-Q, File No.
001-35588 filed August 4, 2022).*
2.9.3
Third Amendment, dated as of July 6, 2022, to Purchase and Sale Agreement by and between W.S. Badcock Corporation and Oak Street
Real Estate Capital Net Lease Property Fund (Collector), LP (incorporated by reference to Exhibit 2.9.3 to Form 10-Q, File No. 001-
35588 filed August 4, 2022).*
2.9.4
Fourth Amendment, dated as of July 13, 2022, to Purchase and Sale Agreement by and between W.S. Badcock Corporation and Oak
Street Real Estate Capital Net Lease Property Fund (Collector), LP (incorporated by reference to Exhibit 2.9.4 to Form 10-Q, File No.
001-35588 filed August 4, 2022).*
2.9.5
Amended and Restated Purchase and Sale Agreement, dated as of May 25, 2022, by and between W.S. Badcock Corporation and BCHQ
Owner LLC (incorporated by reference to Exhibit 2.9.5 to Form 10-Q, File No. 001-35588 filed August 4, 2022).*
3.1
Second Amended and Restated Certificate of Incorporation of Liberty Tax, Inc. (incorporated by reference to Exhibit 3.1 to Form 8-K,
File No. 001-35588 filed on December 19, 2018).
3.1.1
Certificate of Designation of the Voting Non-Economic Preferred Stock of Liberty Tax, Inc. filed with the Secretary of State of the State
of Delaware July 10, 2019 (incorporated by reference to Exhibit 3.1, File No. 001-35588 filed on July 11, 2019).
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Exhibit

Number
Exhibit Description
3.1.2
Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation of Liberty Tax, Inc. (incorporated by
reference to Exhibit 3.1 to Form 8-K, File No. 001-35588 filed on September 19, 2019).
3.1.3
Certificate of Increase of the Number of Shares of Voting Non-Economic Preferred Stock of Franchise Group, Inc., filed with the
Secretary of State of the State of Delaware on September 30, 2019 (incorporated by reference to Exhibit 3.1 to Form 8-K, File No. 001-
35588 filed on October 1, 2019).
3.1.4
Certificate of Designation designating the 7.50% Series A Cumulative Perpetual Preferred Stock of Franchise Group, Inc. (incorporated
by reference to Exhibit 3.1 to Form 8-K, File No. 001-35588 filed September 18, 2020).
3.1.5
Certificate of Increase of the Number of Shares of 7.50% Series A Cumulative Perpetual Preferred Stock of Franchise Group, Inc., filed
with the Secretary of State of the State of Delaware on January 15, 2021 Certificate of Increase of the Number of Shares of Voting Non-
Economic Preferred Stock of Franchise Group, Inc., filed with the Secretary of State of the State of Delaware on September 30, 2019
(incorporated by reference to Exhibit 3.1 to Form 8-K, File No. 001-35588 filed on January 15, 2021).
3.2*
Third Amended and Restated Bylaws of Franchise Group, Inc.
4.1
Form of Indenture (incorporated by reference to Exhibit 4.27 to Form S-3, File No. 333-236211 filed on May 21, 2020).
4.2
Description of the Company’s Common Stock (incorporated by reference to Exhibit 4.3 to Form 10-K, File No. 001-35588 filed March
10, 2021).
10.1
First Amended and Restated Limited Liability Company Agreement dated as of July 10, 2019, among Franchise Group New Holdco,
LLC, as the company, Liberty Tax, Inc., the Brian DeGustino Revocable Trust, the Amy DeGustino Revocable Trust, Samjor Family LP,
Vintage RTO, L.P., Martin Meyer, Fengfeng Ren, David O’Neil and Jeffrey D. Miller, each as a member, and Liberty Tax, Inc., as the
manager (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 001-35588 filed on July 11, 2019).
10.1.1
Amended Schedule 1 to the First Amended and Restated Limited Liability Company Agreement, dated as of July 10, 2019, among
Franchise Group New Holdco, LLC, as the company, Franchise Group, Inc., the Brian DeGustino Revocable Trust, the Amy DeGustino
Revocable Trust, Samjor Family LP, Vintage RTO, L.P., Martin Meyer, Fengfeng Ren, David O’Neil and Jeffrey D. Miller, each as a
member, and Franchise Group, Inc., as the manager (incorporated by reference to Exhibit 10.2 File No. 001-35588 filed on October 1,
2019).
10.2
Registration Rights Agreement dated as of July 10, 2019, among Liberty Tax, Inc., Tributum, L.P., the Brian DeGustino Revocable Trust,
the Amy DeGustino Revocable Trust, Samjor Family LP, Vintage RTO, L.P., Martin Meyer and Fengfeng Ren, David O’Neil and Jeffrey
D. Miller (incorporated by reference to Exhibit 10.2 to Form 8-K, File No. 001-35588 filed on July 11, 2019).
10.2.1
Amendment No. 1 to Registration Rights Agreement, dated as of September 30, 2019, among Franchise Group, Inc., Tributum, L.P.,
Samjor Family LP, Vintage RTO, L.P., Vintage Capital Management, LLC and Vintage Tributum, LP (incorporated by reference to
Exhibit 10.2 to Form 8-K, File No. 001-35588 filed on October 1, 2019).
10.2.2
Amendment No. 2 to Registration Rights Agreement, dated as of October 23, 2019, by and among Franchise Group, Inc., Tributum, L.P.,
Samjor Family LP, Vintage RTO, L.P., Vintage Capital Management, LLC and Vintage Tributum, LP (incorporated by reference to
Exhibit 10.7 to Form 8-K, File No. 001-35588 filed on October 23, 2019).
10.2.3
Amendment No. 3 to Registration Rights Agreement dated as of December 16, 2019 (incorporated by reference to Exhibit 10.4 to Form
8-K, File No. 001-35588 filed on December 17, 2019).
10.2.4
Amendment No. 4 to Registration Rights Agreement, dated January 31, 2020, by and among Franchise Group, Inc., Tributum, L.P.,
Samjor Family LP, Vintage RTO, L.P., Vintage Capital Management, LLC, Vintage Tributum, LP, Stefac LP, Brian Kahn and Lauren
Kahn, as tenants by the entirety, and B. Riley FBR, Inc. (incorporated by reference to Exhibit 4.4.4 to Form S-3, File No. 333-236211
filed on January 31, 2020).
10.3
Income Tax Receivable Agreement dated as of July 10, 2019, among Liberty Tax, Inc., Vintage RTO, L.P., Samjor Family LP, the Brian
DeGustino Revocable Trust, the Amy DeGustino Revocable Trust, Martin Meyer, Fengfeng Ren, David O’Neil and Jeffrey D. Miller
(incorporated by reference to Exhibit 10.6 to Form 8-K, File No. 001-35588 filed on July 11, 2019).
10.4#
Executive Employment and Severance Agreement between Brian Kahn and Franchise Group, Inc., dated October 2, 2019 (incorporated
by reference to Exhibit 10.3 to Form 8-K, File No. 001-35588 filed on October 4, 2019).
10.5#
Executive Employment and Severance Agreement between Eric Seeton and Franchise Group, Inc., dated October 2, 2019 (incorporated
by reference to Exhibit 10.4 to Form 8-K, File No. 001-35588 filed on October 4, 2019). 
92

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Exhibit

Number
Exhibit Description
10.6#
Executive Employment and Severance Agreement between Andrew Laurence and Franchise Group, Inc., dated October 2, 2019
(incorporated by reference to Exhibit 10.5 to Form 8-K, File No. 001-35588 filed on October 4, 2019).
10.7#
Executive Employment and Severance Agreement between Andrew Kaminsky and Franchise Group, Inc., dated October 2, 2019
(incorporated by reference to Exhibit 10.6 to Form 8-K, File No. 001-35588 filed on October 4, 2019).
10.8#
Franchise Group, Inc. 2019 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 001-35588 filed on
December 5, 2019).
10.9#
Form of Franchise Group, Inc. 2019 Omnibus Incentive Plan Stock Option Award Agreement (incorporated by reference to Exhibit 10.2
to Form 8-K, File No. 001-35588 filed on December 5, 2019).
10.10#
Form of Franchise Group, Inc. 2019 Omnibus Incentive Plan Restricted Stock Unit Award Agreement (incorporated by reference to
Exhibit 10.3 to Form 8-K, File No. 001-35588 filed on December 5, 2019).
10.11#
Form of Franchise Group, Inc. 2019 Omnibus Incentive Plan Performance Restricted Stock Unit Award Memorandum and Agreement
(incorporated by reference to Exhibit 10.4 to Form 8-K, File No. 001-35588 filed on December 5, 2019).
10.12
Registration Rights Agreement, dated as of February 14, 2020, by and between Franchise Group, Inc. and Kayne FRG Holdings, L.P.
(incorporated by reference to Exhibit 10.7, File No. 001-35588 filed on February 18, 2020).
10.13
Second Amended and Restated Limited Liability Company Agreement of Franchise Group New Holdco, LLC dated as of April 1, 2020,
between Franchise Group New Holdco, Inc., as the company, and Franchise Group, Inc. (incorporated by reference to Exhibit 10.18.2 to
Form 10-K/T, File No. 001-35588 filed on April 24, 2020).
10.14#
Executive Employment and Severance Agreement between Todd Evans and Franchise Group, Inc., dated as of August 1, 2020.
10.14.1#
Amendment to Executive Employment and Severance Agreement between Todd Evans and Franchise Group, Inc., dated as of March 8,
2021 (incorporated by reference to Exhibit 10.50.1 to Form 10-K, File No. 001-35588 filed March 10, 2021).
10.15
First Lien Credit Agreement, dated as of March 10, 2021, among Franchise Group, Inc., a Delaware corporation, as a Borrower and as
Lead Borrower, Franchise Group Newco PSP, LLC, a Delaware limited liability company, Valor Acquisition, LLC, a Delaware limited
liability company, and Franchise Group Newco Intermediate AF, LLC, a Delaware limited liability company, each as a Borrower, the
Lenders from time to time party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent and as Collateral Agent (incorporated
by reference to Exhibit 10.1 to Form 8-K, File No. 001-35588 filed March 15, 2021).
10.15.1
First Amendment to First Lien Credit Agreement, dated as of November 22, 2021, by and among Franchise Group, Inc., Franchise Group
Newco PSP, LLC, Valor Acquisition, LLC, Franchise Group Newco Intermediate AF, LLC, the other loan parties party thereto from time
to time, the lenders party thereto from time to time, and JPMorgan Chase Bank, N.A. as Administrative Agent and Collateral Agent
(incorporated by reference to Exhibit 10.1 to Form 8-K, File No. 001-35588 filed November 24, 2021).
10.16
First Lien Guarantee Agreement, dated as of March 10, 2021, among Franchise Group, Inc., a Delaware corporation, Franchise Group
Newco PSP, LLC, a Delaware limited liability company, Valor Acquisition, LLC, a Delaware limited liability company, Franchise Group
Newco Intermediate AF, LLC, a Delaware limited liability company, the other Guarantors party thereto and JPMorgan Chase Bank,
N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 to Form 8-K, File No. 001-35588 filed March 15, 2021).
10.17
First Lien Collateral Agreement, dated as of March 10, 2021, among Franchise Group, Inc., a Delaware corporation, Franchise Group
Newco PSP, LLC, a Delaware limited liability company, Valor Acquisition, LLC, a Delaware limited liability company, Franchise Group
Newco Intermediate AF, LLC, a Delaware limited liability company, the other Grantors party thereto and JPMorgan Chase Bank, N.A.,
as Collateral Agent (incorporated by reference to Exhibit 10.3 to Form 8-K, File No. 001-35588 filed March 15, 2021).
10.18
Second Lien Credit Agreement, dated as of March 10, 2021, among Franchise Group, Inc., a Delaware corporation, as a Borrower and as
Lead Borrower, Franchise Group Newco PSP, LLC, a Delaware limited liability company, Valor Acquisition, LLC, a Delaware limited
liability company, and Franchise Group Newco Intermediate AF, LLC, a Delaware limited liability company, each as a Borrower, the
Lenders from time to time party thereto and Alter Domus (US) LLC, as Administrative Agent and as Collateral Agent (incorporated by
reference to Exhibit 10.4 to Form 8-K, File No. 001-35588 filed March 15, 2021).
10.18.1
First Amendment to Second Lien Credit Agreement, dated as of November 22, 2021, by and among Franchise Group, Inc., Franchise
Group Newco PSP, LLC, Valor Acquisition, LLC, Franchise Group Newco Intermediate AF, LLC, the other loan parties party thereto
from time to time, and Alter Domus (US) LLC, as Administrative Agent and Collateral Agent (incorporated by reference to Exhibit 10.2
to Form 8-K, File No. 001-35588 filed November 24, 2021).
93

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Exhibit

Number
Exhibit Description
10.19
Second Lien Guarantee Agreement, dated as of March 10, 2021, among Franchise Group, Inc., a Delaware corporation, Franchise Group
Newco PSP, LLC, a Delaware limited liability company, Valor Acquisition, LLC, a Delaware limited liability company, Franchise Group
Newco Intermediate AF, LLC, a Delaware limited liability company, the other Guarantors party thereto and Alter Domus (US) LLC, as
Administrative Agent (incorporated by reference to Exhibit 10.5 to Form 8-K, File No. 001-35588 filed March 15, 2021).
10.20
Second Lien Collateral Agreement, dated as of March 10, 2021, among Franchise Group, Inc., a Delaware corporation, Franchise Group
Newco PSP, LLC, a Delaware limited liability company, Valor Acquisition, LLC, a Delaware limited liability company, Franchise Group
Newco Intermediate AF, LLC, a Delaware limited liability company, the other Grantors party thereto and Alter Domus (US) LLC, as
Collateral Agent (incorporated by reference to Exhibit 10.6 to Form 8-K, File No. 001-35588 filed March 15, 2021).
10.21
Third Amended and Restated Loan and Security Agreement, dated as of March 10, 2021 (as the same may be amended, restated,
amended and restated, supplemented or otherwise modified from time to time), among Franchise Group, Inc., a Delaware corporation, as
Administrative Borrower and a Borrower, American Freight Outlet Stores, LLC, a Delaware limited liability company, American
Freight, LLC, a Delaware limited liability company, Franchise Group Newco PSP, LLC, a Delaware limited liability company, Pet
Supplies “Plus”, LLC, a Delaware limited liability company, Valor Acquisition, LLC, a Delaware limited liability company, Vitamin
Shoppe Industries LLC, a New York limited liability company, Franchise Group Newco Intermediate AF, LLC, a Delaware limited
liability company, each as a Borrower, the Guarantors from time to time party thereto, the Lenders and other entities from time to time
parties thereto and JPMorgan Chase Bank, N.A., as Agent (incorporated by reference to Exhibit 10.7 to Form 8-K, File No. 001-35588
filed March 15, 2021).
10.21.1
First Amendment to Third Amended and Restated Loan and Security Agreement, dated as of November 22, 2021, by and among
Franchise Group, Inc., Franchise Group Newco PSP, LLC, Valor Acquisition, LLC, Franchise Group Newco Intermediate AF, LLC, the
other loan parties party thereto from time to time, and JPMorgan Chase Bank, N.A., as Agent (incorporated by reference to Exhibit 10.3
to Form 8-K, File No. 001-35588 filed November 24, 2021).
10.21.2
Second Amendment to the Third Amended and Restated Loan and Security Agreement, dated as of November 22, 2021, by and among
Franchise Group, Inc., Franchise Group Newco PSP, LLC, Valor Acquisition, LLC, Franchise Group Newco Intermediate AF, LLC, the
other loan parties party thereto from time to time, and JPMorgan Chase Bank, N.A., as Agent (incorporated by reference to Exhibit 10.1
to Form 8-K, File No. 001-35588 filed on June 6, 2022).
10.21.3
Third Amendment to the Third Amended and Restated Loan and Security Agreement, dated as of November 22, 2021, by and among
Franchise Group, Inc., Franchise Group Newco PSP, LLC, Valor Acquisition, LLC, Franchise Group Newco Intermediate AF, LLC, W.S.
Badcock Corporation, the other loan parties party thereto from time to time, and JPMorgan Chase Bank, N.A., as Agent (incorporated by
reference to Exhibit 10.1 to Form 8-K, File No. 001-35588 filed on August 23, 2022).
10.22
Second Amended and Restated Guaranty Agreement, dated as of March 10, 2021 (as it may be amended, restated, amended and restated,
supplemented or otherwise modified from time to time), among Franchise Group, Inc., a Delaware corporation, as a Guarantor, the other
Guarantors from time to time party thereto and JPMorgan Chase Bank, N.A., as Agent (incorporated by reference to Exhibit 10.8 to
Form 8-K, File No. 001-35588 filed March 15, 2021).
10.23
Third Amended and Restated Pledge Agreement, dated as of March 10, 2021 (as the same may be amended, restated, amended and
restated, supplemented or otherwise modified from time to time), among Franchise Group, Inc., a Delaware corporation, as
Administrative Borrower and a Pledgor, the other Pledgors from time to time party thereto and JPMorgan Chase Bank, N.A., as Agent
(incorporated by reference to Exhibit 10.9 to Form 8-K, File No. 001-35588 filed March 15, 2021).
10.24
Amended and Restated Intercreditor Agreement, dated as of November 22, 2021, by and among JPMorgan Chase Bank, N.A. as ABL
Representative, JPMorgan Chase Bank N.A. as Initial First Lien Term Loan Representative, Alter Domus (US) LLC as Initial Second
Lien Term Loan Representative, JPMorgan Chase Bank, N.A. as BDK First Lien Term Loan Representative and Alter Domus (US) LLC
as BDK Second Lien Term Loan Representative (incorporated by reference to Exhibit 10.4 to Form 8-K, File No. 001-35588 filed
November 24, 2021).
10.25
First Lien Pari Passu Intercreditor Agreement, dated as of November 22, 2021, by and among JPMorgan Chase Bank, N.A. as Initial
FRG Representative and Initial FRG Collateral Agent and JPMorgan Chase Bank, N.A. as BDK Representative and BDK Collateral
Agent (incorporated by reference to Exhibit 10.5 to Form 8-K, File No. 001-35588 filed November 24, 2021).
10.26
Second Lien Pari Passu Intercreditor Agreement, dated as of November 22, 2021, by and among Alter Domus (US) LLC, as Initial FRG
Representative and Initial FRG Collateral Agent and Alter Domus (US) LLC, as BDK Representative and BDK Collateral Agent
(incorporated by reference to Exhibit 10.6 to Form 8-K, File No. 001-35588 filed November 24, 2021).
94

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Exhibit

Number
Exhibit Description
10.27

Amended and Restated 1L/2L Intercreditor Agreement, dated as of November 22, 2021, by and among JPMorgan Chase Bank, N.A., as
the Initial First Lien Representative and the Initial First Lien Collateral Agent for the First Lien Claimholders, Alter Domus (US) LLC,
as the Initial Second Lien Representative and the Initial Second Lien Collateral Agent for the Second Lien Claimholders, JPMorgan
Chase Bank, N.A. as the BDK First Lien Representative and the BDK First Lien Collateral Agent and Alter Domus (US) LLC as the
BDK Second Lien Representative and the BDK Second Lien Collateral Agent (incorporated by reference to Exhibit 10.7 to Form 8-K,
File No. 001-35588 filed November 24, 2021).
10.28
Four Lien Intercreditor Agreement, dated as of November 22, 2021, by and among JPMorgan Chase Bank, N.A., as First Lien
Representative and the First Lien Collateral Agent for the First Lien Claimholders, Alter Domus (US) LLC, as the Second Lien
Representative and the Second Lien Collateral Agent for the Second Lien Claimholders, JPMorgan Chase Bank, N.A. as Third Lien
Representative and the Third Lien Collateral Agent for the Third Lien Claimholders, and Alter Domus (US) LLC, as Fourth Lien
Representative and Fourth Lien Collateral Agent for the Fourth Lien Claimholders (incorporated by reference to Exhibit 10.8 to Form 8-
K, File No. 001-35588 filed November 24, 2021).
10.29
First Lien Credit Agreement, dated as of November 22, 2021, by and among Franchise Group, Inc., Franchise Group Newco PSP, LLC,
Valor Acquisition, LLC, Franchise Group Newco Intermediate AF, LLC, the lenders party thereto from time to time, and JPMorgan
Chase Bank, NA., as Administrative Agent and Collateral Agent (incorporated by reference to Exhibit 10.9 to Form 8-K, File No. 001-
35588 filed November 24, 2021).
10.30
First Lien Collateral Agreement, dated as of November 22, 2021, by and among Franchise Group, Inc., Franchise Group Newco PSP,
LLC, Valor Acquisition, LLC, Franchise Group Newco Intermediate AF, LLC, the other grantors party thereto from time to time, and
JPMorgan Chase Bank, N.A. as Collateral Agent (incorporated by reference to Exhibit 10.10 to Form 8-K, File No. 001-35588 filed
November 24, 2021).
10.31
First Lien Collateral Agreement, dated as of November 22, 2021, by and among W. S. Badcock Corporation and JPMorgan Chase Bank,
N.A. as Collateral Agent (incorporated by reference to Exhibit 10.12 to Form 8-K, File No. 001-35588 filed November 24, 2021).
10.32
First Lien Guarantee Agreement, dated as of November 22, 2021, by and among Franchise Group, Inc., Franchise Group Newco PSP,
LLC, Valor Acquisition, LLC, Franchise Group Newco Intermediate AF, LLC, the other guarantors party thereto from time to time, and
JPMorgan Chase Bank, N.A. as Administrative Agent (incorporated by reference to Exhibit 10.13 to Form 8-K, File No. 001-35588 filed
November 24, 2021).
10.33
First Lien Guarantee Agreement, dated as of November 22, 2021, by and among W.S. Badcock Corporation, the other guarantors party
thereto from time to time, and JPMorgan Chase Bank, N.A. as Administrative Agent (incorporated by reference to Exhibit 10.14 to Form
8-K, File No. 001-35588 filed November 24, 2021).
10.34
Second Lien Credit Agreement, dated as of November 22, 2021, by and among Franchise Group, Inc., Franchise Group Newco PSP,
LLC, Valor Acquisition, LLC, Franchise Group Newco Intermediate AF, LLC, the lenders party thereto from time to time, and Alter
Domus (US) LLC, as Administrative Agent and Collateral Agent (incorporated by reference to Exhibit 10.15 to Form 8-K, File No. 001-
35588 filed November 24, 2021).
10.35
Second Lien Collateral Agreement, dated as of November 22, 2021, by and among Franchise Group, Inc., Franchise Group Newco PSP,
LLC, Valor Acquisition, LLC, Franchise Group Newco Intermediate AF, LLC, the other grantors party thereto from time to time, and
Alter Domus (US) LLC, as Collateral Agent (incorporated by reference to Exhibit 10.16 to Form 8-K, File No. 001-35588 filed
November 24, 2021).
10.36
Second Lien Collateral Agreement, dated as of November 22, 2021, by and among W. S. Badcock Corporation and Alter Domus (US)
LLC, as Collateral Agent (incorporated by reference to Exhibit 10.16 to Form 8-K, File No. 001-35588 filed November 24, 2021).
10.37
Second Lien Guarantee Agreement, dated as of November 22, 2021, by and among Franchise Group, Inc., Franchise Group Newco PSP,
LLC, Valor Acquisition, LLC, Franchise Group Newco Intermediate AF, LLC, the other guarantors party thereto from time to time, and
Alter Domus (US) LLC, as Administrative Agent (incorporated by reference to Exhibit 10.17 to Form 8-K, File No. 001-35588 filed
November 24, 2021).
10.38
Second Lien Guarantee Agreement, dated as of November 22, 2021, by and among W.S. Badcock Corporation, the other guarantors party
thereto from time to time, and Alter Domus (US) LLC, as Administrative Agent (incorporated by reference to Exhibit 10.18 to Form 8-
K, File No. 001-35588 filed November 24, 2021).
10.39
Servicing Agreement, dated as of December 20, 2021, between W.S. Badcock Corporation and B. Riley Receivables, LLC (incorporated
by reference to Exhibit 10.1 to Form 8-K, File No. 001-35588 filed December 21, 2021).
10.40#
Executive Employment and Severance Agreement between Lee Wright and Franchise Group, Inc., dated as of January 3, 2022
(incorporated by reference to Exhibit 10.43 to Form 10-K, File No. 001-35588 filed February 23, 2022).
95

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Exhibit

Number
Exhibit Description
21.1*
Subsidiaries of Franchise Group, Inc.
23.1*
Consent of Deloitte & Touche LLP
24.1*
Power of Attorney (included on signature page)
31.1**  
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
31.2**
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
32.1**
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002
32.2**
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002
101 
The following materials from the Registrant's Annual Report on Form 10-K for the year ended December 31, 2022, are formatted in
XBRL (eXtensible Business Reporting Language):(i) Consolidated Balance Sheets as of December 31, 2022 and December 25, 2021, (ii)
Consolidated Statements of Operations for the years ended December 31, 2022, December 25, 2021, and December 26, 2020 iii)
Consolidated Statements of Comprehensive Income for the years ended December 31, 2022, December 25, 2021 and December 26,
2020, (iv) Consolidated Statement of Stockholders' Equity for the years ended December 31, 2022, December 25, 2021 and December
26, 2020, (v) Consolidated Statements of Cash Flows for the years ended December 31, 2022, December 25, 2021 and December 26,
2020, and (vi) Notes to Audited Consolidated Financial Statements.
104 
Cover Page Interactive Data File (embedded within the Inline XBRL document).
*    Filed herewith.
**    Furnished herewith.
#    Indicates management contract or compensatory plan
96

Table of Contents
Item 16.    Form 10-K Summary.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
 
 
FRANCHISE GROUP, INC.

(Registrant)
Date: February 28, 2023
 
By:
 
/s/ BRIAN R. KAHN
Brian R. Kahn

Chief Executive Officer and Director

(Principal Executive Officer)
Date: February 28, 2023
 
By:
 
/s/ ERIC F. SEETON
Eric F. Seeton

Chief Financial Officer

(Principal Financial and Accounting Officer)
97

Table of Contents
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each of the undersigned whose signature appears below constitutes and appoints Brian R. Kahn
and Eric F. Seeton, his true and lawful attorneys-in-fact, with full power of substitution and resubstitution for him and on his behalf, and in his name, place, and
stead, in any and all capacities to execute and sign any and all amendments to this Annual Report on Form 10-K and to file the same with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact or
any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof and the registrant hereby confers like authority on its
behalf.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Date: February 28, 2023
 
By:
 
/s/ BRIAN R. KAHN
Brian R. Kahn

Chief Executive Officer and Director

(Principal Executive Officer)
Date: February 28, 2023
 
By:
 
/s/ ERIC F. SEETON
Eric F. Seeton

Chief Financial Officer

(Principal Financial and Accounting Officer)
Date: February 28, 2023
 
By:
 
/s/ MATTHEW AVRIL
Matthew Avril

Director and Chairman of the Board
Date: February 28, 2023
 
By:
 
/s/ CYNTHIA DUBIN
Cynthia Dubin

Director
Date: February 28, 2023
 
By:
 
/s/  LISA M. FAIRFAX
Lisa M. Fairfax

Director
Date: February 28, 2023
By:
/s/ THOMAS HERSKOVITS
Thomas Herskovits

Director
Date: February 28, 2023
 
By:
 
/s/ NANHI SINGH
Nanhi Singh

Director
Date: February 28, 2023
 
By:
 
/s/ GARY S. RICH
Gary S. Rich

Director
98

Exhibit 3.2
THIRD AMENDED AND RESTATED BYLAWS
OF FRANCHISE GROUP, INC.
________________________
AS OF FEBRUARY 24, 2023
________________________
ARTICLE I
OFFICES
Section 1.1.    Offices. In addition to the registered office of Franchise Group, Inc. (the “Corporation”) in the State of
Delaware, as provided for in the Amended and Restated Certificate of Incorporation of the Corporation (the “Certificate of
Incorporation”), the Corporation may also have and maintain an office or principal place of business at such place as may be fixed by
the Board of Directors, and may also have offices at such other places, both within and without the State of Delaware, as the Board of
Directors may from time to time determine or the business of the Corporation may require.
Section 1.2.    Books and Records. The books and records of the Corporation may be kept at the Corporation’s headquarters
in Delaware, Ohio, or such other location or locations inside or outside the State of Delaware as may from time to time be designated
by the Board of Directors.
ARTICLE II
CORPORATE SEAL
Section 2.1.    Corporate Seal. The corporate seal shall consist of a die bearing the name of the Corporation and the
inscription, “Corporate Seal - Delaware.” The seal may be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise.
ARTICLE III
STOCKHOLDERS' MEETINGS
Section 3.1.    Place of Meetings. Meetings of the stockholders of the Corporation shall be held at such place, either within or
without the State of Delaware, as may be designated from time to time by the Board of Directors. The Board of Directors may, in its
sole discretion, determine that the meeting shall not be held at any place, but instead shall be held solely by means of remote
communication as provided under the General Corporation Law of the State of Delaware, as amended (the “DGCL”).
Section 3.2.    Annual Meeting. To the extent required by applicable law, an annual meeting of stockholders of the
Corporation shall be held each year at such date and time designated by the Board of Directors. At each annual meeting of
stockholders, directors shall be elected and any other proper business may be transacted.

Section 3.3.    Special Meetings. Except as may be provided in a resolution or resolutions providing for any series of
Preferred Stock of the Corporation, special meetings of stockholders of the Corporation may be called, for any purpose or purposes,
only by the Chairman of the Board or by the Secretary upon direction of the Board of Directors pursuant to a resolution adopted by a
majority of the entire Board of Directors, or by the holders of not less than twenty percent (20%) of all of the outstanding shares
entitled to vote on the matter for which the meeting is called. At any special meeting, the business transacted shall be limited to the
purpose or purposes of such meeting specified in the notice of the meeting.
Section 3.4.    Notice of Meetings.
(a)    Notice. Except as otherwise required by law, the Certificate of Incorporation or these Bylaws, written, printed or
electronic notice stating the place, if any, date and hour of the meeting, the record date for determining the stockholders entitled to
vote at the meeting (if such date is different from the record date for stockholders entitled to notice of the meeting) and, in the case of
a special meeting, the purpose or purposes for which the meeting is called, shall be prepared and delivered by the Corporation not less
than ten nor more than sixty days before the date of the meeting, either personally, by mail, or in the case of stockholders who have
consented to such delivery, by electronic transmission (as such term is defined in the DGCL), to each stockholder of record entitled to
vote at such meeting as of the record date for determining the stockholders entitled to notice of the meeting, such notice to specify the
means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at
any such meeting.
(b)    Notice Deemed Received. If mailed, such notice shall be deemed to be delivered when deposited in the United
States mail, postage prepaid, addressed to the stockholder at such address as it appears on the records of the Corporation. Notice
given by electronic transmission shall be effective (1) if by facsimile, when faxed to a number where the stockholder has consented to
receive notice; (2) if by electronic mail, when mailed electronically to an electronic mail address at which the stockholder has
consented to receive such notice; (3) if by posting on an electronic network together with a separate notice of such posting, upon the
later to occur of (i) the posting or (ii) the giving of separate notice of the posting; or (4) if by other form of electronic transmission,
when directed to the stockholder in the manner consented to by the stockholder.
(c)    Waiver of Notice. Notice of the date, hour and place, if any, and, if applicable, the purpose of any meeting of
stockholders may be waived in writing, signed by the person entitled to notice thereof, or by electronic transmission by such person,
either before or after such meeting, and will be waived by any such stockholder’s attendance at the meeting in person, by remote
communication, if applicable, or by proxy, except if the stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any stockholder
so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had
been given.
(d)    Postponement-Cancellation. Any previously scheduled meeting of stockholders may be postponed, and, unless
otherwise prohibited by applicable law or the Certificate of Incorporation, may be cancelled by resolution duly adopted by a majority
of the entire Board of Directors, upon public notice given prior to the date previously scheduled for such meeting of stockholders.
Section 3.5.    Quorum and Adjournment. Unless otherwise provided in the Certificate of Incorporation or these Bylaws or
required by applicable law, holders of a majority of the voting power of the issued and outstanding shares of capital stock of the
Corporation entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum for the transaction of
business at all meetings of stockholders. If such quorum is not so present or represented at any meeting of stockholders,

then the chairman of the meeting or the holders of a majority in voting power of the shares present in person or represented by proxy
at the meeting shall have power to adjourn the meeting from time to time until a quorum is so present or represented. When a meeting
is adjourned to another time or place, if any, notice need not be given of the adjourned meeting if the time and place, if any, of such
adjourned meeting, and the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be
present in person and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken. At such
adjourned meeting at which a quorum is so present or represented, the Corporation may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than 30 days a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the adjourned meeting. If after the adjournment a new record date for stockholders
entitled to vote is fixed for the adjourned meeting, the Board of Directors shall also fix a new record date for determining the
stockholders entitled to notice of such adjourned meeting, and shall give notice of the adjourned meeting to each stockholder of
record entitled to vote at such adjourned meeting as of the record date for notice of such adjourned meeting.
Section 3.6.    Voting. Each stockholder shall be entitled to that number of votes for each share of capital stock held by such
stockholder as set forth in the Certificate of Incorporation. In all matters, other than the election of directors and except as otherwise
required by law, the Certificate of Incorporation, these Bylaws or the rules and regulations of any stock exchange applicable to the
Corporation, the affirmative vote of a majority of the voting power of the shares present or represented by proxy at the meeting and
entitled to vote on the subject matter shall be the act of the stockholders. Subject to the rights of the holders of any series of Preferred
Stock to elect directors, a plurality of the voting power of the shares present in person or represented by proxy at the meeting and
entitled to vote with respect to the election of directors shall elect directors.
Section 3.7.    Voting Rights; Proxies. For the purpose of determining those stockholders entitled to vote at any meeting of
the stockholders, except as otherwise provided by law, only persons in whose names shares stand on the stock records of the
Corporation on the record date for such purpose shall be entitled to vote at any meeting of stockholders. Every stockholder entitled to
vote at a meeting may authorize another person or persons to act for such stockholder by proxy. No proxy shall be voted or acted
upon after three years from its date unless the proxy provides for a longer period. A proxy shall be irrevocable if it states that it is
irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder
may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by delivering to the Secretary of the
Corporation a revocation of the proxy or a new proxy bearing a later date.
Section 3.8.    Administration of the Meetings.
(a)    Annual Meetings of Stockholders.
(1)    Nominations of persons for election to the Board of Directors and the proposal of other business to be
considered by stockholders may be made at an annual meeting of stockholders only (i) pursuant to the Corporation’s notice of
meeting (or any supplement thereto), (ii) by or at the direction of the Board of Directors or any duly authorized committee thereof, or
(iii) by any stockholder of the Corporation who (A) was a stockholder of record of the Corporation (and, with respect to any
beneficial owner, if different, on whose behalf the nomination or proposal is made, only if such beneficial owner was the beneficial
owner of shares of the Corporation) at the time the notice provided for in this Section 3.8 is delivered to the Secretary of the
Corporation and at the time of the meeting, (B) is entitled to vote at the meeting, (C) complies with the procedures set forth in this
Section 3.8 and (D) complies with the requirements of Regulation 14A under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), including, without limitation, the requirements of Rule 14a-19 (as such

rule and regulations may be amended from time to time by the Securities and Exchange Commission including any SEC Staff
interpretations relating thereto).
(2)    For any nominations or other business to be properly brought before an annual meeting by a stockholder
pursuant to clause (iii) of the immediately preceding paragraph, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation and provide any updates or supplements to such notice required under paragraph (4) of this Section
3.8(a), and any proposed business must constitute a proper matter for stockholder action under the DGCL. To be timely, a
stockholder’s notice shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not
later than the close of business on the ninetieth day, nor earlier than the close of business on the one hundred twentieth day, prior to
the first anniversary of the preceding year’s annual meeting (provided, however, that in the event that the date of the annual meeting
is more than thirty days before or more than seventy days after such anniversary date, notice by the stockholder must be so delivered
not earlier than the close of business on the one hundred twentieth day prior to such annual meeting and not later than the close of
business on the later of the ninetieth day prior to such annual meeting and the tenth day following the day on which public
announcement of the date of such meeting is first made by the Corporation). In no event shall the public announcement of an
adjournment or postponement of an annual meeting commence a new time period (or extend any time period) for the giving of a
stockholder’s notice as described above. Such stockholder’s notice shall set forth as to each person whom the stockholder proposes to
nominate for election as a director: (i) all information relating to such person that is required to be disclosed in connection with
solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to and in
accordance with Section 14(a) of Exchange Act and the rules and regulations promulgated thereunder, (ii) all information relating to
such person that would be required to be set forth in the notice provided for in this Section 3.8 if such person were the stockholder
giving the notice, (iii) all information that would be required to be disclosed pursuant to Item 404 under Regulation S-K if the
stockholder giving the notice were the “registrant” for purposes of such rule and such person were a director or executive officer of
such registrant and (iv) such person’s written consent to being named in the proxy statement as a nominee, such person’s agreement to
serve as a director if elected and, if applicable, to file an application for licensing or finding of suitability if required by any gaming or
other regulatory authority having jurisdiction over the Corporation or otherwise deemed necessary or advisable by the Board of
Directors, and such person’s acknowledgement that, to the extent required by applicable law, such person’s eligibility to serve on the
Board of Directors shall be contingent upon receipt of any such licensing or finding of suitability. In addition to the requirements set
forth in this Section 3.8, unless otherwise required by law, (i) no stockholder shall solicit proxies in support of director nominees
other than the Corporation’s nominees unless such stockholder has complied with Rule 14a-19 promulgated under the Exchange Act,
in connection with the solicitation of such proxies in all respects, including but not limited to the minimum solicitation and notice
requirements. If any stockholder (1) provides notice pursuant to Rule 14a-19(b) promulgated under the Exchange Act and (2)
subsequently fails to comply with the requirements of Rules 14a-19(a)(2) and Rule 14a-19(a)(3) promulgated under the Exchange
Act, then the Corporation shall disregard any proxies or votes solicited for the stockholder’s candidates. Upon request by the
Corporation, if any stockholder provides notice pursuant to Rule 14a-19(b) promulgated under the Exchange Act, such stockholder
shall deliver to the Corporation, no later than five (5) business days prior to the applicable meeting, reasonable evidence that it has
met the requirements of Rule 14a-19(a)(3) and 14a-19(b). As to any other business that the stockholder proposes to bring before the
meeting, a stockholder’s notice given pursuant to this paragraph (4) of Section 3.8(a) shall set forth a brief description of the business
desired to be brought before the meeting, the text of the proposal or business (including the text of any resolutions proposed for
consideration and in the event that such business includes a proposal to amend these Bylaws, the language of the proposed
amendment), the reasons for conducting such business at the meeting and any material interest in such business of such stockholder
and the beneficial owner, if any, on whose behalf the proposal is made; and (z) as to the stockholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination or proposal is made: (i) the name and address of such stockholder, as

they appear on the Corporation’s books, and of any such beneficial owner, (ii) the class or series and number of shares of capital stock
of the Corporation which are owned beneficially and of record by such stockholder and any such beneficial owner, (iii) a description
of any agreement, arrangement or understanding with respect to the nomination or proposal between or among such stockholder
and/or any such beneficial owner, any of their respective affiliates or associates, and any others acting in concert with any of the
foregoing, including, in the case of any nomination, the nominee, (iv) a description of any agreement, arrangement or understanding
(including any derivative or short positions, profit interests, options, warrants, convertible securities, stock appreciation or similar
rights, hedging transactions, and borrowed or loaned shares) that has been entered into as of the date of the stockholder’s notice by, or
on behalf of, such stockholder and any such beneficial owner, whether or not such instrument or right shall be subject to settlement in
underlying shares of capital stock of the Corporation, the effect or intent of which is to mitigate loss to, manage risk or benefit of
share price changes for, or increase or decrease the voting power of, such stockholder or any such beneficial owner, with respect to
shares of stock of the Corporation, (v) a representation that the stockholder is a holder of record of stock of the Corporation entitled to
vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business or nomination, (vi) a
representation as to whether the stockholder or the beneficial owner, if any, intends or is part of a group that intends to deliver a proxy
statement and/or form of proxy to holders of the higher of (A) at least the percentage of the Corporation’s outstanding capital stock
required to approve or adopt the proposal or elect the nominee and/or otherwise to solicit proxies or votes from stockholders in
support of such proposal or nomination and (B) the percentage of stockholders meeting the minimum solicitation requirements set
forth in Rule 14a-19 of the Exchange Act and (ix) any other notice requirements in Rule 14a-19, and (vii) any other information
relating to such stockholder and beneficial owner, if any, required to be disclosed in a proxy statement or other filings required to be
made in connection with solicitations of proxies for, as applicable, the proposal and/or the election of directors in an election contest
pursuant to and in accordance with Section 14(a) of the Exchange Act and the rules and regulations promulgated thereunder. The
foregoing notice requirements of this Section 3.8 shall be deemed satisfied by a stockholder with respect to business other than a
nomination if the stockholder has notified the Corporation of his, her or its intention to present a proposal at an annual meeting in
compliance with applicable rules and regulations promulgated under the Exchange Act and such stockholder’s proposal has been
included in a proxy statement that has been prepared by the Corporation to solicit proxies for such annual meeting. The Corporation
may require any proposed nominee to furnish such other information as it may reasonably require to determine the eligibility of such
proposed nominee to serve as an independent director of the Corporation or that could be material to a reasonable stockholder’s
understanding of the independence of such proposed nominee.
(3)    Notwithstanding anything in the second sentence of the immediately preceding paragraph to the contrary,
in the event that the number of directors to be elected to the Board of Directors is increased effective at the annual meeting and there
is no public announcement by the Corporation naming the nominees for the additional directorships at least one hundred days prior to
the first anniversary of the preceding year’s annual meeting, a stockholder’s notice required by this Section 3.8 shall also be
considered timely, but only with respect to nominees for the additional directorships, if it shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of business on the tenth day following the day on which such
public announcement is first made by the Corporation.
(4)    A stockholder providing notice of any nominations or other business to be brought before an annual
meeting shall further update and supplement such notice, if necessary, so that the information provided or required to be provided in
such notice under this Section 3.8 shall be true and correct as of the record date for determining the stockholders entitled to notice of
the meeting and as of the date that is ten business days prior to the date of the meeting or any adjournment or postponement thereof,
and such update and supplement shall be delivered to the Secretary of the Corporation at the principal executive offices of the
Corporation not later than five business days after the record date of determining

the stockholders entitled to notice of the meeting (in the case of the update and supplement required to be made as of such record
date), and not later than eight business days prior to the date for the meeting or, if practicable, any adjournment or postponement
thereof (and, if not practicable, on the first practicable date prior to the date to which the meeting has been adjourned or postponed)
(in the case of the update and supplement required to be made as of ten business days prior to the date of the meeting or any
adjournment or postponement thereof).
(b)    Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as
shall have been brought before the meeting pursuant to the Corporation’s notice of meeting. Nominations of persons for election to
the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the
Corporation’s notice of meeting (i) by or at the direction of the Board of Directors or any duly authorized committee thereof or (ii)
provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the
Corporation who (x) is a stockholder of record (and, with respect to any beneficial owner, if different, on whose behalf the
nomination is made, only if such beneficial owner was the beneficial owner of shares of the Corporation) at the time the notice
provided for in this Section 3.8 is delivered to the Secretary of the Corporation and at the time of the meeting, (y) is entitled to vote at
the meeting and upon such election and (z) who complies with the notice procedures set forth in this Section 3.8. In the event the
Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, for any
stockholder entitled to vote in such election of directors to nominate a person or persons (as the case may be) for election to such
position(s) as specified in the Corporation’s notice of meeting, the stockholder must have given timely notice thereof in writing to the
Secretary of the Corporation, which notice shall set forth the information otherwise required to be included in a notice of a
nomination to be made at an annual meeting in accordance with paragraph (a)(2) of this Section 3.8, and provide any updates or
supplements to such notice required by this paragraph (b). To be timely, a stockholder’s notice shall be delivered to the Secretary of
the Corporation at the principal executive offices of the Corporation not earlier than the close of business on the one hundred
twentieth day prior to such special meeting and not later than the close of business on the later of the ninetieth day prior to such
special meeting and the tenth day following the day on which public announcement is first made of the date of the special meeting
and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of
an adjournment or postponement of a special meeting commence a new time period (or extend any time period) for the giving of a
stockholder’s notice as described above.
A stockholder providing notice of nominations of persons for election to the Board of Directors at a special meeting shall
further update and supplement such notice, if necessary, so that the information provided or required to be provided in such notice
under this Section 3.8 shall be true and correct as of the record date for determining the stockholders entitled to notice of the meeting
and as of the date that is ten business days prior to the date of the meeting or any adjournment or postponement thereof, and such
update and supplement shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not
later than five business days after the record date for determining the stockholders entitled to notice of the meeting (in the case of the
update and supplement required to be made as of such record date), and not later than eight business days prior to the date of the
meeting or, if practicable, any adjournment or postponement thereof (and, if not practicable, on the first practicable date prior to the
date to which the meeting has been adjourned or postponed) (in the case of the update and supplement required to be made as of ten
business days prior to the date of the meeting or any adjournment or postponement thereof).
(c)    General.
(1)    Only such persons who are nominated in accordance with the procedures set forth in this Section 3.8 shall
be eligible to be elected at an annual or special meeting of stockholders of

the Corporation to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been
brought before the meeting in accordance with the procedures set forth in this Section 3.8. Except as otherwise provided by law, the
chairman of the meeting shall have the power and duty (i) to determine whether a nomination or any business proposed to be brought
before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 3.8
(including whether the stockholder or beneficial owner, if any, on whose behalf the nomination or proposal is made solicited (or is
part of a group that solicited) or did not so solicit, as the case may be, proxies or votes in support of such stockholder’s nominee or
proposal in compliance with such stockholder’s representation as required by clauses (a)(2)(z)(v) and (a)(2)(z)(vi) of this Section 3.8)
and (ii) if any proposed nomination or business was not made or proposed in compliance with this Section 3.8, to declare that such
nomination shall be disregarded or that such proposed business shall not be transacted. Notwithstanding the foregoing provisions of
this Section 3.8, unless otherwise required by applicable law, if the stockholder (or a qualified representative of the stockholder) does
not appear at the annual or special meeting of stockholders of the Corporation to present a nomination or proposed business, such
nomination shall be disregarded and such proposed business shall not be transacted, notwithstanding that proxies in respect of such
vote may have been received by the Corporation. For purposes of this Section 3.8, to be considered a qualified representative of the
stockholder, a person must be a duly authorized officer, manager or partner of such stockholder or must be authorized by a writing
executed by such stockholder or an electronic transmission delivered by such stockholder to act for such stockholder as proxy at the
meeting of stockholders and such persons must produce such writing or electronic transmission, or a reliable reproduction of the
writing or electronic transmission, at the meeting of stockholders.
(2)    For purposes of this Section 3.8, “public announcement” shall include disclosure in a press release
reported by the Dow Jones News Service, Associated Press or other national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act and the rules and
regulations promulgated thereunder.
(3)    Notwithstanding the foregoing provisions of this Section 3.8, a stockholder shall also comply with all
applicable requirements of the Exchange Act and the rules and regulations promulgated thereunder with respect to the matters set
forth in this Section 3.8; provided, however, that any references in these Bylaws to the Exchange Act or the rules and regulations
promulgated thereunder are not intended to and shall not limit any requirements applicable to nominations or proposals as to any
other business to be considered pursuant to this Section 3.8, and compliance with this Section 3.8 shall be the exclusive means for a
stockholder to make nominations or submit other business. Nothing in this Section 3.8 shall be deemed to affect any rights (i) of
stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to applicable rules and regulations
promulgated under the Exchange Act or (ii) of the holders of any class of Common Stock or series of Preferred Stock to elect
directors pursuant to any applicable provisions of the Certificate of Incorporation.
Section 3.9.    List of Stockholders. The officer of the Corporation who has charge of the stock ledger shall prepare and make
available, at least ten days before every meeting of stockholders a complete list of the stockholders entitled to vote at said meeting
(provided, however, if the record date for determining the stockholders entitled to vote is less than ten days before the date of the
meeting, the list shall reflect the stockholders entitled to vote as of the tenth day before the meeting date), arranged in alphabetical
order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be
open to the examination of any stockholder, for any purpose germane to the meeting at least ten days prior to the meeting (a) on a
reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice
of the meeting, or (b) during ordinary business hours at the principal place of business of the Corporation. Except as otherwise
provided by law, the stock ledger shall be the only evidence as to who are the

stockholders entitled to examine the list of stockholders required by this Section 3.9 or to vote in person or by proxy at any meeting of
stockholders.
Section 3.10.    Organization.
(a)    At every meeting of stockholders, the Chairman of the Board, or, if a Chairman of the Board has not been
appointed or is absent, the Chief Executive Officer, or, if the Chief Executive Officer is absent, a chairman of the meeting chosen by a
majority in voting power of the stockholders entitled to vote, present in person or by proxy, shall act as chairman of the meeting. The
Secretary of the Corporation, or, in his or her absence, an Assistant Secretary or other person directed to do so by the chairman of the
meeting, shall act as secretary of the meeting.
(b)    The Board of Directors shall be entitled, to the extent not prohibited by law, to make such rules or regulations for
the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations, if
any, the chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all
such acts as, in the judgment of such chairman, are necessary, appropriate or convenient for the proper conduct of the meeting,
including, without limitation, convening and (for any or no reason) adjourning the meeting, establishing an agenda or order of
business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on
attendance at or participation in such meeting to stockholders of record of the Corporation entitled to vote at the meeting and their
duly authorized and constituted proxies and such other persons as the chairman shall permit, restrictions on entry to the meeting after
the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation
of the opening and closing of the polls for balloting on matters which are to be voted on by ballot. Unless and to the extent
determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in
accordance with rules of parliamentary procedure.
Section 3.11.    Inspection of Elections. If required by applicable law, the Board of Directors by resolution shall appoint one
or more inspectors, which inspector or inspectors may include individuals who serve the Corporation in other capacities, including,
without limitation, as officers, employees, agents or representatives of the Corporation, to act at the meeting and make a written report
thereof. One or more persons may be designated as alternate inspectors to replace any inspector who fails to act. If no inspector or
alternate has been appointed to act, or if all inspectors or alternates who have been appointed are unable to act, at a meeting of
stockholders, the chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before
discharging his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and
according to the best of his or her ability. The inspectors shall have the duties prescribed by the DGCL.
Section 3.12.    Action by Stockholders without a Meeting. Any action required to be taken at an annual or special meeting
of stockholders of the Corporation, or any action which may be taken at an annual or special meeting of stockholders, may be taken
without a meeting, without prior notice, and without a vote, if a consent or consents in writing, setting forth the action so taken, shall
be signed by the holder or holders of shares having not less than the minimum number of votes that would be necessary to take such
action at a meeting at which the holders of all shares entitled to vote thereon were present and voted. Every written consent shall bear
the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action
referred to therein unless, within 60 days of the earliest dated consent received in accordance with applicable law, a written consent or
consents signed by a sufficient number of holders to take such action are delivered to the Corporation as required by law. Prompt
written notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those
stockholders who did not consent in writing and who would be entitled to vote thereon at a meeting. The consent may be in more than
one counterpart so long

as each stockholder signs one of the counterparts. Delivery of the consent may be by hand, mail or electronic or facsimile
transmission. Electronic or facsimile transmission by a stockholder consenting to an action to be taken is considered to be written,
signed and dated for the purposes of this Section if the transmission sets forth or is delivered with information from which the
Corporation can determine that the transmission was transmitted by the stockholder and the date on which the stockholder transmitted
the transmission. The date of transmission is the date on which the consent was signed. Consent given by electronic or facsimile
transmission may be delivered to the principal place of business of the Corporation or to an officer or agent of the Corporation having
custody of the book in which proceedings of stockholder meetings are recorded to the extent and in the manner provided by resolution
of the Board of Directors.
ARTICLE IV
DIRECTORS
Section 4.1.    Powers. Subject to the provisions of the DGCL and any limitations in the Certificate of Incorporation, the
business and affairs of the Corporation shall be managed and all corporate powers shall be exercised by or under the control of the
Board of Directors.
Section 4.2.    Meetings.
(a)    Regular Meetings. The Board of Directors may, by resolution, provide for the time and place for the holding of
regular meetings of the Board of Directors. No further notice shall be required for regular meetings of the Board of Directors.
(b)    Special Meetings. Special meetings of the Board of Directors may be held at any time and place within or
without the State of Delaware, whenever called by the Chairman of the Board, the Chief Executive Officer or any two of the
directors.
(c)    Meetings by Electronic Communications Equipment. Any member of the Board of Directors, or of any
committee thereof, may participate in a meeting by means of conference telephone or other communications equipment by means of
which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute
presence in person at such meeting.
(d)    Notice of Special Meetings. Notice of the time and place of all special meetings of the Board of Directors shall be
given to each director at his business or residence in writing, or by facsimile transmission, telephone communication or electronic
transmission. If mailed, such notice shall be deemed adequately delivered when deposited in the United States mail so addressed, with
postage thereon prepaid, at least five days before such meeting. If by facsimile transmission or other electronic transmission, such
notice shall be transmitted at least twenty-four hours before such meeting. If by telephone, the notice shall be given at least twelve
hours prior to the time set for the meeting. Neither the business to be transacted at, nor the purpose of, any special meeting of the
Board of Directors need be specified in the notice of such meeting.
(e)    Waiver of Notice. Notice of any meeting may be waived in writing, or by electronic transmission, at any time
before or after the meeting and will be deemed waived by any director by attendance at the meeting, except when the director attends
the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the
meeting was not lawfully called or convened. All waivers shall be filed with the corporate records or made a part of the minutes of the
meeting.
Section 4.3.    Quorum and Voting.

(a)    Unless the Certificate of Incorporation requires a greater number, a quorum of the Board of Directors shall
consist of a majority of the total number of directors constituting the entire Board of Directors, as such total number is fixed from
time to time by the Board of Directors in accordance with the Certificate of Incorporation; provided, however, at any meeting,
whether a quorum be present or otherwise, a majority of the directors present may adjourn the meeting from time to time until the
time fixed for the next regular meeting of the Board of Directors, without notice other than by announcement at the meeting.
(b)    At each meeting of the Board of Directors at which a quorum is present, all questions and business shall be
determined by the affirmative vote of a majority of the directors present, unless a different vote is required by the DGCL, the
Certificate of Incorporation or these Bylaws.
Section 4.4.    Action Without a Meeting. Unless otherwise prohibited by the Certificate of Incorporation or these Bylaws,
any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the Board of Directors or the committee, as the case may be, consent thereto in writing or by
electronic transmission, and such writing or writings or transmission or transmissions are filed with the minutes of proceedings of the
Board of Directors or the committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in
electronic form if the minutes are maintained in electronic form.
Section 4.5.    Fees and Compensation. Directors shall be entitled to such compensation for their services as may be
approved by the Board of Directors, including, if so approved, a fixed sum and expenses of attendance, if any, for attendance at each
regular or special meeting of the Board of Directors and at any meeting of a committee of the Board of Directors. Nothing herein
contained shall be construed to preclude any director from serving the Corporation in any other capacity as an officer, agent,
employee, or otherwise and receiving compensation therefor.
Section 4.6.    Committees.
(a)    Establishment of Committees. The Board of Directors may, by resolution of a majority of the entire Board of
Directors, designate one or more committees, each such committee to consist of one or more of the directors of the Corporation. The
Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the DGCL and to the extent provided in the resolution of the Board of
Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such
committee shall have the power or authority in reference to the following matters: (i) approving or adopting, or recommending to the
stockholders any action or matter (other than the election or removal of directors) expressly required by the DGCL to be submitted to
stockholders for approval; or (ii) adopting, amending or repealing any By-Law.
(b)    Term. Except as provided by applicable law, the Board of Directors may at any time increase or decrease the
number of members of a committee or terminate the existence of a committee. The Board of Directors may at any time for any reason
remove any individual committee member and the Board of Directors may fill any committee vacancy created by death, resignation,
removal or increase in the number of members of the committee.

(c)    Meetings. Unless the Board of Directors shall otherwise provide, regular meetings of any committee appointed
pursuant to this Section 4 shall be held at such times and places, if any, as are determined by the Board of Directors, the Chairman of
the Board, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of
such regular meetings need be given thereafter. Special meetings of any such committee may be held at any place which has been
determined from time to time by such committee, and may be called by any director who is a member of such committee, upon notice
to the members of such committee of the time and place of such special meeting given in the matter provided for the giving of notice
to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special
meeting of any committee may be waived in writing at any time before or after the meeting and will be deemed waived by any
director by attendance at the meeting, except when the director attends such special meeting for the express purpose of objecting, at
the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Unless
otherwise provided by the Board of Directors in the resolutions authorizing the creation of the committee, a majority of the authorized
number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those
present at any meeting at which a quorum is present shall be the act of such committee.
Section 4.7.    Organization. At every meeting of the Board of Directors, the Chairman of the Board, or, if a Chairman of the
Board has not been appointed or is absent, the Chief Executive Officer (if a director), or if the Chief Executive Officer is absent, a
chairman of the meeting chosen by a majority of the directors present, shall preside over the meeting. The Secretary, or in his or her
absence, an Assistant Secretary or other person directed to do so by the chairman of the meeting, shall act as a secretary of the
meeting.
Section 4.8.    Audit Committee. The Board of Directors shall have an Audit Committee composed of three or more
Directors, each of whom shall satisfy any securities exchange independence requirements then in effect and applicable to the
Corporation. The responsibilities of the Audit Committee shall be stated in the committee’s charter, as approved by the Board of
Directors.
Section 4.9.    Compensation Committee. The Board of Directors shall have a Compensation Committee composed of three
or more directors, each of whom shall satisfy any securities exchange independence requirements then in effect and applicable to the
Corporation. The responsibilities of the Compensation Committee shall be stated in the committee’s charter, as approved by the Board
of Directors.
Section 4.10.    Nominating and Corporate Governance Committee. The Board of Directors shall have a Nominating and
Corporate Governance Committee composed of three or more directors, each of whom shall satisfy any securities exchange
independence requirements then in effect and applicable to the Corporation. The responsibilities of the Nominating and Corporate
Governance Committee shall be stated in the committee’s charter, as approved by the Board of Directors.
ARTICLE V
OFFICERS
Section 5.1.    Officers Designated. The officers of the Corporation shall include, if and when designated, a Chairman of the
Board, a Chief Executive Officer, a Chief Financial Officer, one or more Vice Presidents, a Secretary, and a Treasurer and such other
officers and agents as the Board of Directors from time to time may designate. The Board of Directors may give any officer such
further designations or alternative titles as it deems appropriate. The Chairman of the Board shall be chosen from the directors. All
officers chosen by the Board of Directors shall each have such powers and duties as generally pertain to their respective offices,
subject to the specific provisions of this Article V. Such officers shall also have

such powers and duties as from time to time may be conferred by the Board of Directors or by any committee thereof. Any one
person may hold any number of offices of the Corporation at any one time unless specifically prohibited therefrom by the DGCL. The
salaries and other compensation of the officers of the Corporation shall be fixed by or in the manner designated by the Board of
Directors.
Section 5.2.    Term of Office. Each officer of the Corporation shall hold office at the pleasure of the Board of Directors and
shall hold office until his or her successor shall have been duly elected and qualified, or until his or her death or until he or she shall
resign or be removed.
Section 5.3.    Duties of Officers.
(a)    Chairman of the Board. The Chairman of the Board, when present, shall preside at all meetings of the
stockholders and at all meetings of the Board of Directors. The Chairman of the Board shall have general supervision, direction and
control of the business and affairs of the Corporation, subject only to the power and authority of the Board of Directors. The
Chairman of the Board shall perform other duties commonly incident to his or her office and shall also perform such other duties and
have such other powers, as the Board of Directors shall designate from time to time.
(b)    Chief Executive Officer. The Chief Executive Officer shall preside at all meetings of the stockholders and (if a
director) at all meetings of the Board of Directors, unless a Chairman of the Board has been appointed and is present. The Chief
Executive Officer shall have general supervision, direction and control of the business and affairs of the Corporation, subject only to
the power and authority of the Board of Directors. The Chief Executive Officer shall perform other duties commonly incident to his
or her office, and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time
to time.
(c)    Chief Financial Officer. The Chief Financial Officer shall keep or cause to be kept the books of account of the
Corporation in a thorough and proper manner and shall render statements of the financial affairs of the Corporation in such form and
as often as required by the Board of Directors or the Chief Executive Officer. The Chief Financial Officer, subject to the order of the
Board of Directors, shall have custody of all funds and securities of the Corporation. The Chief Financial Officer shall disburse the
funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall
render to the Board of Directors, at its regular meetings or when the Board of Directors so requires, an account of the financial
condition of the Corporation. The Chief Financial Officer shall perform other duties commonly incident to his or her office, and shall
also perform such other duties and have such other powers as the Board of Directors or the Chief Executive Officer shall designate
from time to time.
(d)    Vice Presidents. The Vice Presidents shall perform other duties commonly incident to their office and shall also
perform such other duties and have such other powers as the Board of Directors or the Chief Executive Officer shall designate from
time to time.
(e)    Secretary. The Secretary shall attend all meetings of the stockholders and the Board of Directors and shall record
all acts and proceedings thereof in the minute book of the Corporation. The Secretary shall give notice in conformity with these
Bylaws of all meetings of the stockholders and of all meetings of the Board of Directors and any committee thereof requiring notice.
The Secretary shall perform all other duties given to the Secretary in these Bylaws and other duties commonly incident to his or her
office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to
time. Any Assistant Secretary may assume and perform the duties of the Secretary in the absence or disability of the Secretary, and
each Assistant Secretary shall perform other duties commonly incident to his or her office and shall also perform such other duties
and have such other powers as the Board of Directors or the Chief Executive Officer shall designate from time to time.

The Secretary shall have custody of the seal of the Corporation and shall affix the same to all instruments requiring it, when
authorized by the Board of Directors or the Chairman of the Board, and attest to the same.
(f)    Treasurer. The Treasurer may assume and perform the duties of the Chief Financial Officer in the absence or
disability of the Chief Financial Officer or whenever the office of Chief Financial Officer is vacant. The Treasurer shall perform other
duties commonly incident to his or her office and shall also perform such other duties and have such other powers as the Board of
Directors or the Chief Executive Officer shall designate from time to time. Any Assistant Treasurer may assume and perform the
duties of the Treasurer in the absence or disability of the Treasurer, and each Assistant Treasurer shall perform other duties commonly
incident to his or her office and shall also perform such other duties and have such other powers as the Board of Directors or the Chief
Executive Officer shall designate from time to time.
Section 5.4.    Delegation of Authority. The Board of Directors may from time to time delegate the powers or duties of any
officer to any other officer or agent, notwithstanding any provision hereof.
Section 5.5.    Resignations. Any officer may resign at any time by giving notice in writing or by electronic transmission to
the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the Secretary. Any such resignation shall be
effective when received by the person or persons to whom such notice is given, unless a later time is specified therein in which event
the resignation shall become effective at such later time. Unless otherwise specified in such notice, the acceptance of any such
resignation by the Corporation shall not be necessary to make it effective. Any resignation shall be without prejudice to the rights, if
any, of the Corporation under applicable law, the Certificate of Incorporation, these Bylaws or any contract with the resigning officer.
Section 5.6.    Removal. Any officer may be removed from office at any time, either with or without cause, by the affirmative
vote of a majority of the entire Board of Directors, or by the unanimous written consent of the directors in office at the time, or by any
committee or superior officers upon whom such power of removal may have been conferred by the Board of Directors.
ARTICLE VI
EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION
Section 6.1.    Execution of Corporate Instruments. The Board of Directors may, in its discretion, determine the method and
designate the signatory officer or officers, or other person or persons, to execute on behalf of the Corporation any corporate
instrument or document, or to sign on behalf of the Corporation the corporate name, or to enter into contracts on behalf of the
Corporation, except where otherwise provided by applicable law or these Bylaws, and such execution or signature shall be binding
upon the Corporation.
In the absence of any determination by the Board of Directors, all instruments and documents requiring the corporate
signature, unless otherwise required by applicable law, may be executed, signed or endorsed by the Chairman of the Board, the Chief
Executive Officer or Treasurer or in such other manner as may be directed by the Board of Directors.
All checks and drafts drawn on banks or other depositaries on funds to the credit of the Corporation or in special accounts of
the Corporation shall be signed by such person or persons as the Board of Directors shall authorize so to do.

Unless authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee
shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable
for any purpose or for any amount.
Section 6.2.    Voting of Securities Owned by the Corporation. All stock and other securities of other corporations owned or
held by the Corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be
executed, by the person authorized so to do by resolution of the Board of Directors, or, in the absence of such authorization, by the
Chairman of the Board, the Chief Executive Officer or any Vice President.
ARTICLE VII
SHARES OF STOCK
Section 7.1.    Form and Execution of Certificates. The Corporation may issue shares of any class or series of stock in
certificated or uncertificated form, as determined by the Board of Directors. Certificates for the shares of stock of the Corporation
shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the
Corporation represented by certificate shall be entitled to have a certificate signed by or in the name of the Corporation by the
Chairman of the Board, or the Chief Executive Officer or any Vice President and by the Treasurer or Assistant Treasurer or the
Secretary or Assistant Secretary, certifying the number of shares owned by such stockholder in the Corporation. Any or all of the
signatures on the certificate may be facsimiles. In case any officer, transfer agent, or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is
issued, it may be issued with the same effect as if he or she were such officer, transfer agent, or registrar at the date of issue. Each
certificate shall state upon the face or back thereof, in full or in summary, all of the powers, designations, preferences, and the
relative, participating, optional or other special rights, and the qualifications, limitations or restrictions of the shares authorized to be
issued or shall, except as otherwise required by applicable law, set forth on the face or back a statement that the Corporation will
furnish without charge to each stockholder who so requests the powers, designations, preferences, and the relative, participating,
optional or other special rights, and the qualifications, limitations or restrictions, of a class or any series of stock. Upon request and
within a reasonable time after the issuance or transfer or uncertificated stock, the Corporation shall send to the registered owner
thereof a written notice containing the information required to be set forth or stated on certificates pursuant to this Section 7.1 or
otherwise required by applicable law, or with respect to this Section 7.1 a statement that the Corporation will furnish without charge
to each stockholder who so requests the powers, designations, preferences, and the relative, participating, optional or other special
rights, and the qualifications, limitations or restrictions, of a class or any series of stock. Except as otherwise expressly provided by
law, the rights and obligations of the holders of certificates representing stock of the same class or series shall be identical.
Section 7.2.    Lost Certificates. A new certificate or certificates or uncertificated shares shall be issued in place of any
certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen, or destroyed, upon the making of an
affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. The Corporation may require, as a
condition precedent to the issuance of a new certificate or certificates or uncertificated shares, the owner of such lost, stolen, or
destroyed certificate or certificates, or such owner’s legal representative, to give the Corporation a surety bond in such form and
amount as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate
alleged to have been lost, stolen or destroyed.
Section 7.3.    Fixing Record Dates.
(a)    In order that the Corporation may determine the stockholders entitled to notice of any meeting of stockholders or
any adjournment thereof, the Board of Directors may fix a record date,

which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors,
and which record date shall, subject to applicable law, not be more than sixty nor less than ten days before the date of such meeting. If
the Board of Directors so fixes a record date, such record date shall also be the record date for determining the stockholders entitled to
vote at such meeting unless the Board of Directors determines, at the time it fixes such record date, that a later date on or before the
date of the meeting shall be the date for making such determination. If no record date is fixed by the Board of Directors, the record
date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day
on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders
shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for
determination of stockholders entitled to vote at the adjourned meeting, and in such case shall also fix as the record date for
stockholders entitled to notice of such adjourned meeting the same or an earlier date as that fixed for determination of stockholders
entitled to vote in accordance herewith at the adjourned meeting.
(b)    In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other
distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or
exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty
days prior to such action. If no such record date is fixed, the record date for determining stockholders for any such purpose shall be at
the close of business on the day on which the Board of Directors adopts the resolution relating thereto.
Section 7.4.    Registered Stockholders. The Corporation shall be entitled to recognize the exclusive right of a person
registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have express or
other notice thereof, except as otherwise provided by applicable law.
ARTICLE VIII
OTHER SECURITIES OF THE CORPORATION
Section 8.1.    Execution of Other Securities. All bonds, debentures and other corporate securities of the Corporation, other
than stock certificates (covered in Section 7.1), may be signed by the Chairman of the Board, the Chief Executive Officer or any Vice
President, or such other person as may be authorized by the Board of Directors, and the corporate seal may be impressed thereon or a
facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Treasurer or an
Assistant Treasurer; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the
manual signature, or where permissible facsimile signature, of a trustee under an indenture pursuant to which such bond, debenture or
other corporate security shall be issued, the signatures of the persons signing and attesting the corporate seal on such bond, debenture
or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such
bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an Assistant
Treasurer of the Corporation or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the
facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate
security, or whose facsimile signature shall appear thereon or on any such interest coupon, shall have ceased to be such officer before
the bond, debenture or other corporate security so signed or attested shall have been delivered such bond, debenture or other corporate
security nevertheless may be adopted by the Corporation and issued and delivered as though the person who signed

the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the Corporation.
ARTICLE IX
DIVIDENDS
Section 9.1.    Declaration of Dividends. Dividends upon the capital stock of the Corporation, subject to the provisions of the
Certificate of Incorporation and applicable law, if any, may be declared by the Board of Directors pursuant to law at any regular or
special meeting. Dividends may be paid in cash, in property, or in shares of capital stock of the Corporation, subject to the provisions
of the Certificate of Incorporation and applicable law.
Section 9.2.    Dividend Reserve. The Board of Directors may set apart out of any of the funds of the Corporation available
for dividends a reserve or reserves for any proper purpose and may abolish any such reserve.
ARTICLE X
FISCAL YEAR
Section 10.1.    Fiscal Year. The fiscal year of the Corporation shall end on the Saturday closest to December 31 (whether
such Saturday occurs in the month of December or January) or such other date as shall be fixed from time to time by resolution of the
Board of Directors.
ARTICLE XI
INDEMNIFICATION
Section 11.1.    Right of Indemnification. The Corporation shall indemnify and hold harmless, to the fullest extent permitted
by applicable law as it presently exists or may hereafter be amended, any person (a “Covered Person”) who was or is made or is
threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or
investigative (a “Proceeding”), by reason of the fact that he or she, or a person for whom he or she is the legal representative, is or
was a director or officer of the Corporation or, while a director or officer of the Corporation, is or was serving at the request of the
Corporation as a director, officer, manager, employee or agent of another corporation or of a partnership, limited liability company,
joint venture, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liability and
loss suffered and expenses (including attorneys’ fees) reasonably incurred by such Covered Person. Notwithstanding the preceding
sentence, except as otherwise provided in Section 11.3, the Corporation shall be required to indemnify, or advance expenses to, a
Covered Person in connection with a Proceeding (or part thereof) commenced by such Covered Person only if the commencement of
such Proceeding (or part thereof) by the Covered Person was authorized by the Board of Directors.
Section 11.2.    Prepayment of Expenses. The Corporation shall to the fullest extent not prohibited by applicable law pay the
expenses (including attorneys’ fees) incurred by a Covered Person in defending any Proceeding in advance of its final disposition,
provided, however, that, to the extent required by law, such payment of expenses in advance of the final disposition of the Proceeding
shall be made only upon receipt of an undertaking by the Covered Person to repay all amounts advanced if it should be ultimately
determined that the Covered Person is not entitled to be indemnified under this Article XI or otherwise.
Section 11.3.    Claims. If a claim for indemnification (following the final disposition of the Proceeding with respect to which
indemnification is sought, including any settlement of such Proceeding) or advancement of expenses under this Article XI is not paid
in full within thirty days after a written claim therefor by the Covered Person has been received by the Corporation, the Covered
Person may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid

the expense of prosecuting such claim to the fullest extent permitted by applicable law. In any such action the Corporation shall have
the burden of proving that the Covered Person is not entitled to the requested indemnification or advancement of expenses under this
Article XI and applicable law.
Section 11.4.    Non-Exclusivity of Rights. The rights conferred on any Covered Person by this Article XI shall not be
exclusive of any other rights which such Covered Person may have or hereafter acquire under any statute, any other provision of the
Certificate of Incorporation, these Bylaws, or any agreement, vote of stockholders or disinterested directors or otherwise.
Section 11.5.    Amendment or Repeal. Any right to indemnification or to advancement of expenses of any Covered Person
arising hereunder shall not be eliminated or impaired by an amendment to or repeal of this Article XI after the occurrence of the act or
omission that is the subject of the civil, criminal, administrative or investigative action, suit or proceeding for which indemnification
or advancement of expenses is sought.
Section 11.6.    Other Indemnification and Advancement of Expenses. This Article XI shall not limit the right of the
Corporation, to the extent and in the matter permitted by law, to indemnify and to advance expenses to persons other than Covered
Persons when and as authorized by appropriate corporate action.
ARTICLE XII
NOTICES
Section 12.1.    Notice to Stockholders. Notice to stockholders of stockholder meetings shall be given as provided in Section
3.4 herein. Without limiting the manner by which notice may otherwise be given effectively to stockholders under any agreement or
contract with such stockholder, and except as otherwise required by law, notice to stockholders for purposes other than stockholder
meetings may be sent by U.S. mail or nationally recognized overnight courier, or by facsimile, or by electronic mail or other
applicable electronic means consented to by such stockholder in accordance with Section 232 of the DGCL.
Section 12.2.    Notice to Directors. Any notice required to be given to any director may be given by the method stated in
Section 12.1, as otherwise provided in these Bylaws, or by U.S. mail or nationally recognized overnight courier, or by facsimile, or by
electronic mail, except that such notice other than one which is delivered personally shall be sent to such address as such director
shall have filed in writing with the Secretary, or, in the absence of such filing, to the last known post office address of such director.
Section 12.3.    Affidavit of Notice. An affidavit of notice, executed by a duly authorized and competent employee of the
Corporation or its transfer agent appointed with respect to the class of stock affected, specifying the name and address or the names
and addresses of the stockholder or stockholders, or director or directors, to whom any such notice or notices was or were given, and
the time and method of giving the same, shall, in the absence of fraud, be prima facie evidence of the facts therein contained.
Section 12.4.    Time Notices Deemed Given. All notices given by mail, as above provided, shall be deemed to have been
given as of the time of mailing, and all notices given by facsimile or electronic mail shall be deemed to have been given as of the
sending time recorded at time of transmission.
Section 12.5.    Methods of Notice. It shall not be necessary that the same method of giving notice be employed in respect of
all directors or stockholders, but one permissible method may be employed in respect of any one or more, and any other permissible
method or methods may be employed in respect of any other or others.

Section 12.6.    Failure to Receive Notice. The period or limitation of time within which any stockholder may exercise any
option or right, or enjoy any privilege or benefit, or be required to act, or within which any director may exercise any power or right,
or enjoy any privilege, pursuant to any notice sent to such stockholder in the manner above provided, shall not be affected or extended
in any manner by the failure of such stockholder or such director to receive such notice.
Section 12.7.    Notice to Person with Whom Communication is Unlawful. Whenever notice is required to be given, under
any provision of law or of the Certificate of Incorporation or these Bylaws, to any person with whom communication is unlawful, the
giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency
for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any
such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the
event that the action taken by the Corporation is such as to require the filing of a certificate under any provision of the DGCL, the
certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except
such persons with whom communication is unlawful.
Section 12.8.    Notice to Person with Undeliverable Address. Whenever notice is required to be given, under any provision
of law or the Certificate of Incorporation or Bylaws, to any stockholder to whom (a) notice of two consecutive annual meetings, and
all notices of meetings to such person during the period between such two consecutive annual meetings, or (b) all, and at least two,
payments (if sent by first-class mail) of dividends or interest on securities during a twelve-month period, have been mailed addressed
to such person at his or her address as shown on the records of the Corporation and have been returned undeliverable, the giving of
such notice to such person shall not be required. Any meeting which shall be taken or held without notice to such person shall have
the same force and effect as if such notice had been duly given. If any such person shall deliver to the Corporation a written notice
setting forth his or her then current address, the requirement that notice be given to such person shall be reinstated. In the event that
the action taken by the Corporation is such as to require the filing of a certificate under any provision of the DGCL, the certificate
need not state that notice was not given to persons to whom notice was not required to be given pursuant to this paragraph.
Notwithstanding the foregoing, this Section 12.8 shall not apply to notice given by means of electronic transmission.
Section 12.9.    Notice to Stockholders Sharing an Address. Except as otherwise prohibited under the DGCL, any notice
given under the provisions of the DGCL, the Certificate of Incorporation or these Bylaws shall be effective if given by a single
written notice to stockholders who share an address if consented to by the stockholders at that address to whom such notice is given.
Such consent shall have been deemed to have been given if such stockholder fails to object in writing to the Corporation within sixty
days of having been given notice by the Corporation of its intention to send the single notice. Any consent shall be revocable by the
stockholder by written notice to the Corporation.
ARTICLE XIII
AMENDMENTS
Section 13.1.    Amendments. These Bylaws may be altered or amended or new Bylaws adopted as provided in the Certificate
of Incorporation.

Exhibit 21.1
SUBSIDIARIES OF FRANCHISE GROUP, INC.
Entity
Jurisdiction
Sole Member
Franchise Group New Holdco, LLC
DE
Franchise Group, Inc.
Franchise Group Intermediate Holdco, LLC
DE
Franchise Group New Holdco, LLC
Franchise Group Intermediate B, LLC
DE
Franchise Group Intermediate Holdco, LLC
Buddy’s Newco, LLC
DE
Franchise Group Intermediate B, LLC
Buddy’s Franchising and Licensing, LLC
FL
Buddy’s Newco, LLC
Franchise Group Intermediate S, LLC
DE
Franchise Group Intermediate Holdco, LLC
Franchise Group Newco S, LLC
DE
Franchise Group Intermediate S, LLC
Franchise Group Newco Intermediate AF, LLC
DE
Franchise Group Intermediate Holdco, LLC
American Freight Outlet Stores, LLC
DE
Franchise Group Newco S, LLC
Outlet Merchandise, LLC
DE
Franchise Group Newco S, LLC
American Freight Franchisor LLC
DE
American Freight Outlet Stores LLC
American Freight Franchising LLC (formerly) American Freight Discount
Outlet Franchising, LLC
DE
Franchise Group Newco S, LLC
American Freight Group, LLC
DE
Franchise Group Newco Intermediate AF, LLC
American Freight Holdings, LLC
DE
American Freight Group, LLC
American Freight, LLC
DE
American Freight Holdings, LLC
American Freight Management Company, LLC
DE
American Freight, LLC
Franchise Group Intermediate V, LLC
DE
Franchise Group Intermediate Holdco, LLC
Franchise Group Newco V, LLC
DE
Franchise Group Intermediate V, LLC
Valor Acquisition, LLC
DE
Franchise Group Newco V, LLC
Vitamin Shoppe Industries LLC
NY
Valor Acquisition, LLC
Vitamin Shoppe Global, LLC
DE
Vitamin Shoppe Industries LLC
Vitamin Shoppe Mariner, LLC
DE
Vitamin Shoppe Industries LLC
Vitamin Shoppe Procurement Services LLC
DE
Vitamin Shoppe Industries LLC
Vitamin Shoppe Franchising LLC
DE
Vitamin Shoppe Industries LLC
Vitamin Shoppe Florida, LLC
DE
Vitamin Shoppe Industries LLC
Betancourt Sports Nutrition, LLC
FL
Vitamin Shoppe Industries LLC
Franchise Group Intermediate L, LLC
DE
Franchise Group New Holdco, LLC
Franchise Group Intermediate L 1, LLC
DE
Franchise Group Intermediate L, LLC
Franchise Group Intermediate L 2, LLC
DE
Franchise Group Intermediate L 1, LLC
Franchise Group Intermediate PSP, LLC
DE
Franchise Group Intermediate Holdco, LLC
Franchise Group Newco PSP, LLC
DE
Franchise Group Intermediate PSP, LLC
PSP Midco, LLC
DE
Franchise Group Newco PSP, LLC
Pet Supplies "Plus", LLC
DE
PSP Midco, LLC
PSP Group, LLC
DE
Pet Supplies "Plus", LLC
PSP Service Newco, LLC
DE
PSP Group, LLC
PSP Stores, LLC
OH
PSP Group, LLC
PSP Subco, LLC
DE
PSP Group, LLC
PSP Franchising, LLC
DE
PSP Stores, LLC
PSP Distribution, LLC
DE
PSP Stores, LLC
Franchise Group Intermediate BHF LLC
DE
Franchise Group Intermediate Holdco, LLC
Franchise Group Newco BHF, LLC
DE
Franchise Group Intermediate BHF LLC
W.S. Badcock Corporation
FL
Franchise Group Newco BHF, LLC
Franchise Group Intermediate SL, LLC
DE
Franchise Group Intermediate Holdco, LLC
Franchise Group Newco SL, LLC
DE
Franchise Group Intermediate SL, LLC

Educate, Inc.
DE
Franchise Group Newco SL, LLC
Educate Operating Company, LLC
DE
Educate, Inc.
Sylvan Learning, LLC
DE
Educate Operating Company, LLC
Learning Partnerships, LLC
DE
Educate Operating Company, LLC
Educate Product Development, LLC
DE
Educate Operating Company, LLC
Sylvan School Solutions, LLC (formerly Achievement Solutions, LLC)
DE
Educate Operating Company, LLC
Learning System of the Future, LLC
DE
Educate Operating Company, LLC
Sylvan In-Home, LLC
DE
Educate Operating Company, LLC
Educate Corporate Centers Holdings, LLC
DE
Educate Operating Company, LLC
Internet Strategy Group, LLC
DE
Educate Operating Company, LLC
Educate Digital, LLC
DE
Educate Operating Company, LLC
Sylvan Learning Centers, LLC
DE
Educate Corporate Centers Holdings, LLC
Omega Learning Centers, LLC
DE
Sylvan Learning Centers, LLC
Maryland Learning Centers, LLC
DE
Sylvan Learning Centers, LLC
Massachusetts Learning Centers, LLC
DE
Sylvan Learning Centers, LLC

Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-236211 and 333-257430 on Form S-3 and in Registration Statement Nos. 333-
182585 and 333-236209 on Form S-8 of our reports dated February 28, 2023, relating to the financial statements of Franchise Group, Inc. and subsidiaries (the
“Company”) and the effectiveness of the Company’s internal control over financial reporting appearing in this Annual Report on Form 10-K for the fiscal year
ended December 31, 2022.
/s/ Deloitte & Touche LLP
Richmond, Virginia
February 28, 2023

Exhibit 31.1
I, Brian R. Kahn, certify that:
 
1.                   I have reviewed this Annual Report on Form 10-K of Franchise Group, Inc.;
 
2.                   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.                   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.                   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)              Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
 
(b)              Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted
accounting principles;
 
(c)               Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)              Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and
 
5.                   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)              All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information; and
 
(b)              Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date: March 1, 2023
By:
 
 
Brian R. Kahn
 
 
Chief Executive Officer and Director
 
 
(Principal Executive Officer)

Exhibit 31.2
I, Eric F. Seeton, certify that:
 
1.                          I have reviewed this Annual Report on Form 10-K of Franchise Group, Inc.;
 
2.                          Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.                          Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.                          The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)                       Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
 
(b)                       Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted
accounting principles;
 
(c)                        Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)                       Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and
 
5.                            The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)                       All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)                       Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
 
Date: February 28, 2023
By:
/s/ Eric F. Seeton
 
 
Eric F. Seeton

 
 
Chief Financial Officer
 
 
(Principal Financial and Accounting Officer)

Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Annual Report of Franchise Group, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), I, Brian R. Kahn, Chief Executive Officer and Director of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date: March 1, 2023
By:
/s/ Brian R. Kahn
 
 
Brian R. Kahn

 
 
Chief Executive Officer and Director
(Principal Executive Officer)


Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Annual Report of Franchise Group, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), I, Eric F. Seeton, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date: March 1, 2023
By:
/s/ Eric F. Seeton
 
 
Eric F. Seeton

 
 
Chief Financial Officer
 
 
(Principal Financial and Accounting Officer)