UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  
FORM 10-Q
 
ý☒Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended July 31, 20171, 2023
 
OR
 
o☐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
 
Liberty Tax,Franchise Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware27-3561876
(State of incorporation)(IRS employer identification no.)
 
1716 Corporate Landing Parkway109 Innovation Court, Suite J
Virginia Beach, Virginia 23454Delaware, Ohio 43015
(Address of principal executive offices)
(757) 493-8855(740) 363-2222
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common stock, par value $0.01 per shareFRGNasdaq Global Market
7.50% Series A Cumulative Preferred Stock, par value $0.01 per share and liquidation preference of $25.00 per shareFRGAPNasdaq Global Market
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 ý☒No o☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes ý☒No o☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
o

☒		Accelerated filer
x

☐
Non-accelerated filer
o
☐		Smaller reporting companyo☐
(Do not check if a smaller reporting company)Emerging growth companyo☐
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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐  Noý☒

The number of shares outstanding of the registrant’s Class A common stock, par value $0.01 value per share, as of September 1, 2017August 3, 2023 was 12,683,45935,191,461 shares.
The number of shares outstanding of the registrant's Class B common stock as of September 1, 2017 was 200,000 shares.




LIBERTY TAX,

FRANCHISE GROUP, INC. AND SUBSIDIARIES
 
Form 10-Q for the Quarterly Period Ended July 31, 20171, 2023
 
Table of Contents
 
Page Number
Number
PART I.
I - FINANCIAL INFORMATION
1
Consolidated Balance Sheets as of July 31, 2017, April 30, 2016 and July 31, 2016
1
Condensed Consolidated Statements of Operations for the three months ended July 31, 2017 and 2016
2
Condensed Consolidated Balance Sheets
3
Condensed Consolidated Statements of Comprehensive Loss for the three months ended July 31, 2017 and 2016Stockholders’ Equity
34
Condensed Consolidated Statements of Cash Flows for the three months ended July 31, 2017 and 2016
46
Notes to Unaudited Condensed Consolidated Financial Statements
67
2122
2933
2933
PART II.
II - OTHER INFORMATION
30
3034
34
Risk Factors
30
Item 2.
3036
36
36
36
3137
39




PART I. FINANCIAL INFORMATION
ITEM 1
FINANCIAL STATEMENTS (UNAUDITED)
1
LIBERTY TAX,

FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance SheetsStatements of Operations (Unaudited)
July 31, 2017, April 30, 2017 and July 31, 2016
(In thousands, except share data)
 Three Months EndedSix Months Ended
 (In thousands, except share count and per share data)July 1, 2023June 25, 2022July 1, 2023June 25, 2022
Revenues: 
Product$916,112 $952,009 $1,892,920 $1,931,173 
Service and other115,501 135,648 236,069 283,929 
Rental7,073 7,341 14,518 15,365 
Total revenues1,038,686 1,094,998 2,143,507 2,230,467 
Operating expenses:  
Cost of revenue:
   Product621,482 600,780 1,278,386 1,217,364 
   Service and other8,634 8,732 18,213 17,395 
   Rental2,507 2,741 5,133 5,603 
Total cost of revenue632,623 612,253 1,301,732 1,240,362 
Selling, general, and administrative expenses383,563 405,639 770,804 782,633 
Goodwill impairment— — 75,000 — 
Total operating expenses1,016,186 1,017,892 2,147,536 2,022,995 
Income (loss) from operations22,500 77,106 (4,029)207,472 
Other expense:  
Bargain purchase gain6 3,581 6 3,514 
Gain on sale-leaseback transactions, net— 49,854 — 49,854 
Other, net(3,783)12,853 (5,617)(9,122)
Interest expense, net(83,364)(88,839)(170,493)(181,167)
Income (loss) from operations before income taxes(64,641)54,555 (180,133)70,551 
Income tax expense (benefit)(13,845)13,572 (21,020)17,250 
Net income (loss) attributable to Franchise Group, Inc.(50,796)40,983 (159,113)53,301 
Other comprehensive income (loss)— — — — 
Comprehensive income (loss)$(50,796)$40,983 $(159,113)$53,301 
Net income (loss) per share:
Basic$(1.50)$0.96 $(4.66)$1.22 
Diluted(1.50)0.94 (4.66)1.19 
Weighted-average shares outstanding:
Basic35,177,146 40,356,299 35,089,660 40,331,855 
Diluted35,177,146 41,126,605 35,089,660 41,148,668 
 July 31, 2017 April 30, 2017 July 31, 2016
Assets(unaudited)  
 (unaudited)
Current assets: 
  
  
Cash and cash equivalents$6,254
 $16,427
 $4,882
Receivables:   
  
Accounts receivable43,225
 54,723
 38,561
Notes receivable - current33,493
 27,845
 34,474
Interest receivable, net of uncollectible amounts2,554
 1,967
 2,826
Allowance for doubtful accounts - current(8,745) (10,052) (6,284)
Total current receivables, net70,527
 74,483
 69,577
Assets held for sale14,678
 11,989
 16,623
Income taxes receivable47
 55
 7,093
Deferred income tax asset—
 6,956
 2,847
Other current assets4,717
 5,757
 2,796
Total current assets96,223
 115,667
 103,818
Property, equipment, and software, net of accumulated depreciation of $27,172, $25,972 and $23,826, respectively39,744
 39,789
 41,013
Notes receivable, non-current18,202
 18,213
 24,481
  Allowance for doubtful accounts, non-current(1,880) (1,968) (2,339)
Total notes receivables, non-current16,322
 16,245
 22,142
Deferred tax asset - non-current173
 —
 —
Goodwill7,620
 8,576
 4,183
Other intangible assets, net21,902
 21,224
 15,884
Other assets2,814
 2,767
 3,246
Total assets$184,798
 $204,268
 $190,286
Liabilities and Stockholders’ Equity 
  
  
Current liabilities: 
  
  
Current installments of long-term obligations$5,202
 $7,738
 $6,754
Accounts payable and accrued expenses13,958
 12,953
 9,590
Due to Area Developers (ADs)9,168
 23,143
 10,449
Income taxes payable208
 6,442
 —
Deferred revenue - current2,854
 2,892
 3,687
Total current liabilities31,390
 53,168
 30,480
Long-term obligations, excluding current installments, net17,816
 18,461
 18,298
Revolving credit facility20,611
 —
 27,984
Deferred revenue and other - non-current5,466
 5,817
 6,555
Deferred income tax liability3,585
 10,367
 6,259
Total liabilities78,868
 87,813
 89,576
Stockholders’ equity: 
    
Special voting preferred stock, $0.01 par value per share, 10 shares authorized, issued and outstanding—
 —
 —
Class A common stock, $0.01 par value per share, 21,200,000 shares authorized, 12,682,550, 12,682,550 and 12,594,756 shares issued and outstanding, respectively127
 127
 126
Class B common stock, $0.01 par value per share, 1,000,000 shares authorized, 200,000, 200,000 and 300,000 shares issued and outstanding, respectively2
 2
 3
Exchangeable shares, $0.01 par value, 1,000,000 shares authorized, issued and outstanding10
 10
 10
Additional paid-in capital8,925
 8,371
 7,897
Accumulated other comprehensive loss, net of taxes(1,065) (2,084) (1,580)
Retained earnings97,931
 110,029
 94,254
Total stockholders’ equity105,930
 116,455
 100,710
Total liabilities and stockholders’ equity$184,798
 $204,268
 $190,286


See accompanying notes to condensed consolidated financial statements.

2


LIBERTY TAX,FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of OperationsBalance Sheets (Unaudited)
Three Months Ended July 31, 2017 and 2016 (unaudited)
(In thousands, except share count and per share data)
(In thousands, except share count and per share data)July 1, 2023December 31, 2022
Assets
Current assets:
Cash and cash equivalents$106,264 $80,783 
Current receivables, net of allowance for credit losses of $(8,204) and $(4,106), respectively256,003 170,162 
Current securitized receivables, net of allowance for credit losses of $(65,519) and $(57,095), respectively191,826 292,913 
Inventories, net746,753 736,841 
Current assets held for sale7,633 8,528 
Other current assets28,238 27,272 
Total current assets1,336,717 1,316,499 
Property, plant, and equipment, net238,922 223,718 
Non-current receivables, net of allowance for credit losses of $(1,070) and $(892), respectively10,808 11,735 
Non-current securitized receivables, net of allowance for credit losses of $(8,816) and $(7,705), respectively25,812 39,527 
Goodwill663,481 737,402 
Intangible assets, net111,432 116,799 
Tradenames222,703 222,703 
Operating lease right-of-use assets890,611 890,949 
Investment in equity securities5,977 11,587 
Other non-current assets65,398 59,493 
Total assets$3,571,861 $3,630,412 
Liabilities and Stockholders’ Equity
Current liabilities:
Current installments of long-term obligations, net$13,192 $6,935 
Current installments of debt secured by accounts receivable, net341,144 340,021 
Current operating lease liabilities179,250 179,519 
Accounts payable and accrued expenses407,543 376,895 
Other current liabilities34,827 40,541 
Total current liabilities975,956 943,911 
Long-term obligations, excluding current installments1,526,605 1,374,479 
Non-current liabilities debt secured by accounts receivable, net44,423 107,448 
Non-current operating lease liabilities729,870 720,474 
Other non-current liabilities69,576 62,720 
Total liabilities3,346,430 3,209,032 
Stockholders’ equity:
Common stock, $0.01 par value per share, 180,000,000 shares authorized, 35,186,943 and 34,925,733 shares issued and outstanding at July 1, 2023 and December 31, 2022, respectively352 349 
Preferred stock, $0.01 par value per share, 20,000,000 shares authorized, and 4,541,125 shares issued and outstanding at July 1, 2023 and December 31, 2022, respectively45 45 
Additional paid-in capital310,654 311,069 
Retained earnings (deficit)(85,620)109,917 
Total equity225,431 421,380 
Total liabilities and equity$3,571,861 $3,630,412 
  Three Months Ended July 31, 
  2017 2016 
Revenue:  
  
 
Franchise fees $71
 $240
 
Area Developer fees 1,068
 970
 
Royalties and advertising fees 1,689
 1,455
 
Financial products 582
 536
 
Interest income 2,297
 2,658
 
Assisted tax preparation fees, net of discounts 1,639
 986
 
Other revenues 842
 304
 
Total revenues 8,188
 7,149
 
Operating expenses:  
  
 
Employee compensation and benefits 9,991
 9,682
 
Other costs and expenses 9,202
 8,279
 
Area Developer expense 372
 460
 
Advertising expense 2,376
 1,918
 
Depreciation, amortization, and impairment charges 2,196
 2,012
 
Total operating expenses 24,137
 22,351
 
Loss from operations (15,949) (15,202) 
Other income (expense):     
Foreign currency transaction gain (loss) 110
 (8) 
Gain on sale of available-for-sale securities —
 50
 
Interest expense (281) (344) 
Loss before income taxes (16,120) (15,504) 
Income tax benefit (6,362) (6,074) 
Net loss (9,758) (9,430) 
Net loss per share attributable to Class A and Class B common stock:     
Basic and diluted $(0.76) $(0.73) 
      
Weighted-average shares outstanding basic and diluted 12,882,550
 12,894,740
 
      
Dividends declared per share of common stock and common stock equivalents $0.16
 $0.16
 


See accompanying notes to condensed consolidated financial statements.

3


LIBERTY TAX,FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive LossStockholders’ Equity (Unaudited)
Three Months Ended July 31, 2017 and 2016 (unaudited)
(In thousands)
Three Months Ended July 1, 2023
(In thousands)Common stock sharesCommon stockPreferred stock sharesPreferred stockAdditional paid-in-capitalRetained earnings (deficit)Total Franchise Group equity
Balance at April 1, 202335,149 $351 4,541 $45 $310,160 $(32,909)$277,647 
Net loss— — — — — (50,796)(50,796)
Exercise of stock options33 1 — — 360 — 361 
Stock-based compensation, net5 — — — 134 — 134 
Common dividend declared ($0.625 per share)— — — — — 214 214 
Preferred dividend declared ($0.469 per share)— — — — — (2,129)(2,129)
Balance at July 1, 202335,187 $352 4,541 $45 $310,654 $(85,620)$225,431 

Six Months Ended July 1, 2023
(In Thousands)Common stock sharesCommon stockPreferred stock sharesPreferred stockAdditional paid-in-capitalRetained earningsTotal Franchise Group equity
Balance at December 31, 202234,926 $349 4,541 $45 $311,069 $109,917 $421,380 
Cumulative effect of adopted accounting standards, net— — — — — (9,978)(9,978)
Net loss— — — — — (159,113)(159,113)
Exercise of stock options48 1 — — 490 — 491 
Stock-based compensation expense, net213 2 — — (905)— (903)
Common dividend declared ($0.625 per share)— — — — — (22,189)(22,189)
Preferred dividend declared ($0.469 per share)— — — — — (4,257)(4,257)
Balance at July 1, 202335,187 $352 4,541 $45 $310,654 $(85,620)$225,431 

4

  Three Months Ended July 31, 
  2017 2016 
      
Net loss $(9,758) $(9,430) 
Unrealized loss on interest rate swap agreement, net of taxes of $- and $-, respectively (15) —
 
Unrealized gain on available-for-sale securities, net of taxes of $- and $345, respectively —
 580
 
Reclassified gain on sale of available-for-sale securities included in income, net of taxes of $- and $20, respectively —
 (30) 
Foreign currency translation adjustment 1,034
 (431) 
Comprehensive loss $(8,739) $(9,311) 
FRANCHISE GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
Three Months Ended June 25, 2022
(In thousands)Common stock sharesCommon stockPreferred stock sharesPreferred stockAdditional paid-in-capitalRetained earningsTotal Franchise Group equity
Balance at March 26, 202240,354 $404 4,541 $45 $480,628 $270,609 $751,686 
Net income— — — — — 40,983 40,983 
Stock-based compensation, net5 — — — 5,431 — 5,431 
Common dividend declared ($0.625 per share)— — — — — (27,117)(27,117)
Preferred dividend declared ($0.469 per share)— — — — — (2,129)(2,129)
Balance at June 25, 202240,359 $404 4,541 $45 $486,059 $282,346 $768,854 

Six Months Ended June 25, 2022
(In thousands)Common stock sharesCommon stockPreferred stock sharesPreferred stockAdditional paid-in-capitalRetained earningsTotal Franchise Group equity
Balance at December 25, 202140,297 $403 4,541 $45 $475,396 $286,987 $762,831 
Net income— — — — — 53,301 53,301 
Exercise of stock options15 — — — 180 — 180 
Stock-based compensation expense, net47 1 — — 10,483 — 10,484 
Common dividend declared ($0.625 per share)— — — — — (53,685)(53,685)
Preferred dividend declared ($0.469 per share)— — — — — (4,257)(4,257)
Balance at June 25, 202240,359 $404 4,541 $45 $486,059 $282,346 $768,854 

See accompanying notes to condensed consolidated financial statements.



LIBERTY TAX,
5


FRANCHISE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended July 31, 2017 and 2016 (unaudited)
(In thousands)
  Three Months Ended July 31,
  2017 2016
Cash flows from operating activities:  
  
Net loss $(9,758) $(9,430)
Adjustments to reconcile net loss to net cash used in operating activities:  
  
Provision for doubtful accounts 1,408
 1,380
Depreciation, amortization, and impairment charges 2,196
 2,012
Stock-based compensation expense 554
 683
Gain on sale of available-for-sale securities —
 (50)
Gain on bargain purchases and sales of Company-owned offices (536) (28)
Deferred tax expense (34) 578
Changes in accrued income taxes (6,187) (10,997)
Changes in other assets and liabilities (2,167) (6,071)
Net cash used in operating activities (14,524) (21,923)
Cash flows from investing activities:  
  
Issuance of operating loans to franchisees and ADs (11,275) (10,828)
Payments received on operating loans to franchisees 1,545
 1,096
Purchases of AD rights, Company-owned offices and acquired customer lists (352) (1,802)
Proceeds from sale of Company-owned offices and AD rights 76
 46
Proceeds from sale of available-for-sale securities —
 5,049
Purchases of property, equipment and software (1,110) (1,556)
Net cash used in investing activities (11,116) (7,995)
Cash flows from financing activities:    
Dividends paid (2,339) (2,223)
Repayment of amounts due to former ADs and franchisees —
 (423)
Repayment of long-term obligations (3,283) (416)
Borrowings under revolving credit facility 20,706
 28,002
Repayments under revolving credit facility (95) (18)
Tax benefit of stock option exercises —
 60
Net cash provided by financing activities 14,989
 24,982
Effect of exchange rate changes on cash, net 478
 (88)
Net decrease in cash and cash equivalents (10,173) (5,024)
Cash and cash equivalents at beginning of period 16,427
 9,906
Cash and cash equivalents at end of period $6,254
 $4,882

See accompanying notes to condensed consolidated financial statements.




LIBERTY TAX, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Three Months Ended July 31, 2017 and 2016 (unaudited)
(In thousands)
  Three Months Ended July 31,
  2017 2016
Supplemental disclosures of cash flow information:  
  
Cash paid for interest, net of capitalized interest of $145 and $106, respectively $281
 $241
Cash paid for taxes, net of refunds (137) 4,286
Accrued capitalized software costs included in accounts payable 54
 144
During the three months ended July 31, 2017 and 2016, the Company acquired certain assets from ADs, franchisees, and third parties as follows:    
Fair value of assets purchased $3,664
 $8,622
Receivables applied, net of amounts written off, due ADs and related deferred revenue (2,714) (4,146)
Bargain purchase gains (322) (80)
Long-term obligations and accounts payable issued (276) (2,594)
Cash paid to ADs, franchisees and third parties $352
 $1,802
During the three months ended July 31, 2017 and 2016, the Company sold certain assets to ADs and franchisees as follows:  
  
Book value of assets sold $24
 $1,191
Gain on sale - revenue deferred 18
 12
Gain (loss) on sale - gain (loss) recognized 37
 (12)
Notes received (3) (1,145)
Long-term obligations and accounts payable assumed —
 —
Cash received from ADs and franchisees $76
 $46

Six Months Ended
(In thousands)July 1, 2023June 25, 2022
Operating Activities 
Net income (loss)$(159,113)$53,301 
Adjustments to reconcile net income to net cash provided by operating activities: 
Provision for credit losses for accounts receivable45,743 56,840 
Depreciation, amortization, and impairment charges44,282 42,236 
Goodwill impairment75,000 — 
Amortization of deferred financing costs5,788 12,032 
Securitized financing costs48,630 59,618 
Stock-based compensation expense2,829 10,853 
Change in fair value of investment5,611 10,855 
Gain on bargain purchases and sales of Company-owned stores(42)(55,883)
Other non-cash items262 (2,182)
Changes in operating assets and liabilities(30,905)(238,903)
Net cash provided by (used in) operating activities38,085 (51,233)
Investing Activities 
Purchases of property, plant, and equipment(28,760)(21,809)
Proceeds from sale of property, plant, and equipment3,379 240,558 
Acquisition of business, net of cash and restricted cash acquired(3,682)(3,754)
Payments received on operating loans to franchisees and dealers— 1,000 
Net cash provided by (used in) investing activities(29,063)215,995 
Financing Activities 
Dividends paid(49,806)(54,665)
Issuance of long-term debt and other obligations538,000 88,500 
Repayment of long-term debt and other obligations(389,389)(358,172)
Proceeds from secured debt obligations133,398 130,556 
Repayment of secured debt obligations(192,030)(166,653)
Principal payments of finance lease obligations(3,180)(1,383)
Payment for debt issue costs(17,393)(431)
Cash paid for taxes on exercises/vesting of stock-based compensation, net(3,240)(190)
Net cash provided by (used in) financing activities16,360 (362,438)
Net increase (decrease) in cash equivalents and restricted cash25,382 (197,676)
Cash, cash equivalents and restricted cash at beginning of period81,250 292,714 
Cash, cash equivalents and restricted cash at end of period$106,632 $95,038 
Supplemental Cash Flow Disclosure 
Cash paid for taxes, net of refunds$4,048 $17,842 
Cash paid for interest67,075 42,013 
Cash paid for interest on secured debt43,414 48,506 
Accrued capital expenditures2,461 2,751 
Capital expenditures funded by finance lease liabilities14,147 — 
See accompanying notes to condensed consolidated financial statements.



The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Statements of Cash Flows.
LIBERTY TAX,
(In thousands)July 1, 2023June 25, 2022
Cash and cash equivalents$106,264 $95,038 
Restricted cash included in other non-current assets368 — 
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows$106,632 $95,038 

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.
6

FRANCHISE GROUP, INC. AND SUBSIDIARIES
 
Notes to Unaudited Condensed Consolidated Financial Statements
 
July 31, 2017 and 2016 (Unaudited)
(1) Organization and Significant Accounting Policies
Description of Business
Liberty Tax, Inc. (the "Company"), a Delaware corporation, is a holding company engaged through its subsidiaries as a franchisor and, to a lesser degree, an operator of a system of income tax preparation offices located in the United States and Canada. The Company's principal operations are conducted through JTH Tax, Inc. (d/b/a Liberty Tax Service), the Company's largest subsidiary, and SiempreTax, LLC. Through this system of income tax preparation offices, the Company also facilitates refund-based tax settlement financial products, such as refund transfer products in the United States ("U.S.") and personal income tax refund discounting in Canada. The Company also offers online tax preparation services. The majority of offices are operated under the Liberty Tax Service and SiempreTax+ brands.

The Company provides a substantial amount of lending to its franchisees and Area Developers ("ADs"). The Company allows franchisees and ADs to defer a portion of the franchise fee and AD fee, which are paid over time. The Company also offers its franchisees working capital loans to fund their operations between tax seasons.

The Company’s operating revenues are seasonal in nature, with peak revenues occurring in the months of January through April.  Therefore, results for interim periods are not indicative of results to be expected for the full year.

Unless the context requires otherwise, the terms "Liberty Tax," "Liberty Tax Service," "we," "the Company," "us," and "our" refer to Liberty Tax, Inc. and its consolidated subsidiaries.
Basis of Presentation
 The condensed consolidated financial statements include
Unless otherwise stated, references to the accounts of Liberty Tax,“Company,” “we,“ “us,” and “our” in this Quarterly Report on Form 10-Q (this “Quarterly Report”) refer to Franchise Group, Inc. and its wholly-owned subsidiaries. Assetsdirect and liabilities of the Company's Canadian operations have been translated into U.S. dollars using the exchange rate in effect at the end of the period. Revenues and expenses have been translated using the average exchange rates in effect each month of the period. Foreign exchange transaction gains and losses are recognized when incurred. The Company consolidates any entities in which it hasindirect subsidiaries on a controlling interest, the usual condition of which is ownership of a majority voting interest. The Company also considers for consolidation an entity in which the Company has certain interests where a controlling financial interest may be achieved through arrangements that do not involve voting interests. Such an entity, known as a variable interest entity ("VIE"), is required to be consolidated by its primary beneficiary. 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 might be a VIE. 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 exerts significant influence over the entity, the Company applies the equity method of accounting. All intercompany balances and transactions have been eliminated in consolidation.
basis. The unaudited condensed consolidated financial statements have been prepared in accordance with U.S.accounting principles generally accepted accounting principles ("GAAP"in the United States of America (“GAAP”) for interim financial information.  The condensedinformation and pursuant to the requirements of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements, including these notes, arestatements. The unaudited and exclude some of the disclosures required only in annual financial statements.  Consolidated balance sheet data as of April 30, 2017 was derived from the Company’s April 30, 2017 Annual Report on Form 10-K filed on July 7, 2017.
In the opinion of management, all adjustments necessary for a fair presentation of such financial statements in accordance with GAAP have been recorded.  These adjustments consisted only of normal recurring items.  The accompanyingcondensed consolidated financial statements should be read in conjunction with the Company’s financial statements and notes thereto included in its April 30, 2017 Annual Report on Form 10-K filed on July 7, 2017.




Office Count
As a seasonal business, the Company works throughout the off season to open new offices, and at the same time, some of our franchisees will choose not to reopen for the next season. Someyear ended December 31, 2022 that was filed with the Securities and Exchange Commission (“SEC”) on February 28, 2023 (the “Form 10-K”).

In the opinion of these decisions are not made until January each year and the Company will report office count informationmanagement, all adjustments (including those of a normal recurring nature) necessary for the quarter ended January 31, 2018 once all offices have been opened.
Usea fair presentation of Estimates
Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities at the date of thesuch condensed consolidated financial statements andin accordance with GAAP have been recorded. The December 31, 2022 balance sheet information was derived from the reported amounts of revenues and expenses during the reporting period, to prepare these condensed consolidatedaudited financial statements and accompanying notes in conformity with GAAP. Actual results could differ from those estimates.as of that date.
Accounting Pronouncements
On May 1, 2017,Reclassifications

Certain prior year amounts within the Company adopted Accounting Standards Update ("ASU") No. 2016-09, "Compensation-Stock Compensation (Topic 718) Improvementsfootnotes have been reclassified to Employee Share-Based Payment Accounting." This update provides for simplification of the accounting for share-based payment transactions, including the income tax consequences and classification on the statement of cash flows. Under the update, the excess tax benefits and deficiencies that result from the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes should be recognized as income tax expense or benefit in the reporting period in which they occur. Previously, the excess tax benefits were recognized in additional paid-in capital and tax deficiencies were recognized either as an offset to accumulated excess tax benefits, if any, or in the statement of operations. This amendment has been adopted by the Company on a prospective basis. The update also provides that excess tax benefits should be classified along with other income tax cash flows as an operating activity on the statement of cash flows. Priorconform to the update, excess tax benefits were separated from other income tax cash flows and classified as a financing activity. This amendment has been adopted by the Company on a prospective transition method basis. Additionally, cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity on the statement of cash flows. Previously, no guidance was provided for cash flow classification of cash paid for tax-withholding purposes for shares withheld for tax purposes. This amendment has been adopted by the Company on a retrospective basis. There were no reclassifications of prior periods required as a result of the retrospective adoption of this amendment. Under the update, an entity can elect to either estimate the number of awards that are expected to vest or account for forfeitures as they occur. The Company has elected to account for forfeitures when they occur. The impact to retained earnings as a result of the adoption was immaterial. All amendments of the update have been adopted for all periods beginning on or after May 1, 2017.current year presentation.


On May 1, 2017, the Company adopted ASU 2015-17, "IncomeTaxes (Topic 740)," which requires entities with a classified balance sheet to present all deferred tax assets and liabilities as non-current. The update has been adopted prospectively to all deferred tax liabilities and assets and prior periods have not been retrospectively adjusted.Recent Accounting Pronouncements Adopted


In May 2014,June 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, "Revenue from Contracts with Customers." This update will replace existing revenue recognition guidance in GAAP and requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new standard is effective for the Company in fiscal year 2019, which begins on May 1, 2018. The standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption ("modified retrospective method"Accounting Standards Update (“ASU”). The Company currently expects to apply the modified retrospective transition method upon adoption. The Company expects the adoption of the new guidance to change the timing of recognition of initial franchise fees and AD fees. Currently, franchise fees are generally recognized when our obligations to prepare the franchise for operation have been substantially completed and cash has been received and AD fees are recognized on the straight-line basis over the contract term not to exceed the amount of cash received. The new guidance will generally require these fees to be recognized over the term of the related franchise or AD agreements, which will impact the revenue recognized for franchise fees. The Company does not expect this new guidance to materially impact the recognition of royalty and advertising fees, financial products revenue or tax preparation fees. The Company is continuing to evaluate the impact the adoption of this new guidance will have on these and other revenue transactions, in addition to the impact on accounting policies and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, "Leases." This update will replace existing lease guidance in GAAP and will require lessees to recognize lease assets and lease liabilities on the balance sheet for all leases and disclose key information about leasing arrangements, such as information about variable lease payments and options to renew and terminate leases. When implemented, lessees and lessors will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The update is effective for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently finalizing its implementation plan


and evaluating the impact of the new pronouncement on its consolidated financial statements. The Company expects the adoption of this pronouncement to result in a material increase in the assets and liabilities on its consolidated balance sheets and to not have a material impact on its consolidated statement of operations.

In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230)", which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. The update is intended to reduce the existing diversity in practice and is effective for the Company beginning with its first quarterly filing in fiscal year 2019. The Company is currently evaluating the impact of the adoption of this newly issued standard to its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, "“Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments"Instruments”, which changes how companies will measure credit losses for most financial assets and certain other instruments that aren'taren’t measured at fair value through net income. The standard replaces the "incurred loss"“incurred loss” approach with an "expected loss"“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

Effective January 1, 2023, the Company adopted ASU should be2016-13 and applied as a cumulative-effect adjustment to retained earningsearnings. The Company has reviewed its entire portfolio of assets recognized on the balance sheet as of December 31, 2022 and identified customer receivables and securitized receivables as the beginningmaterially impacted assets within the scope of ASC 326. Upon adoption of ASC 326 the Company recorded a net decrease to retained earnings of $10.0 million as of January 1, 2023. Prior period amounts were not adjusted and will continue to be reported under the previous accounting standards.

The cumulative effect of the first reporting period in whichchanges made to the standard is effective. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for all entities for annual periods beginning after December 15, 2018, and interim periods therein. The ASU is effective for the Company beginning in the first quarter of fiscal year 2021. The Company is currently evaluating the impactCompany’s Condensed Consolidated Balance Sheet as a result of the adoption of this newlyASC 326 were as follows:

Impact of Adoption of ASC 326
(In thousands)Balance at
December 31, 2022		Adjustments due to ASC 326Balance at
January 1, 2023
Assets
Current receivables, net$170,162 $(654)$169,508 
Current securitized receivables, net292,913 (11,619)281,294 
Non-current securitized receivables, net39,527 (1,568)37,959 
Deferred income taxes38,528 3,863 42,391 
Stockholders’ Equity
Retained earnings$109,917 $(9,978)$99,939 

7


(2) Acquisitions and Business Combinations

On May 10, 2023, the Company announced that it has entered into a definitive agreement and plan of merger with Freedom VCM, Inc., a Delaware Corporation (“Parent”) and Freedom VCM Subco, Inc., a Delaware corporation and wholly owned subsidiary of Parent (the “Merger Agreement”), pursuant to which members of the senior management team of the Company led by Brian Kahn, the Company’s Chief Executive Officer (collectively with affiliates and related parties of the senior management team, the “Management Group”), have agreed to acquire approximately 64.0% of the Company’s issued standardand outstanding common stock that the Management Group does not presently own or control (the “Proposed Merger”). Under the terms of the Proposed Merger, the Company’s common stockholders, other than the Management Group, are entitled to receive $30.00 in cash for each share of the Company’s common stock they hold. On July 19, 2023, the Company announced a notice of redemption (the “Redemption”) for all outstanding shares of its consolidated financial statements.7.50% Series A Cumulative Perpetual Preferred Stock in connection with the Merger Agreement. The Company's preferred stock will be redeemed in cash at a redemption price equal to $25.00 per share plus any accrued and unpaid dividends. The Redemption is contingent upon the Company’s successful completion of the Proposed Merger and, in the event the Proposed Merger does not occur and the Merger Agreement is terminated in accordance with its terms, the notice of redemption will be deemed rescinded and the Redemption will not occur.


In January 2017,The Proposed Merger is anticipated to close in the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifyingsecond half of 2023, subject to satisfaction or waiver of the Definitionclosing conditions, including approval by regulatory authorities and the Company’s stockholders, including approval by a majority of the shares of common stock of the Company not owned or controlled by the Management Group. Upon completion of the Proposed Merger, the Company will become a private company and will no longer be publicly listed or traded on Nasdaq.

Additional information about the Merger Agreement and the Proposed Merger is set forth in the Company’s Definitive Proxy Statement on Schedule 14A filed with the SEC on July 14, 2023.

Treatment of Company Equity Awards in Connection with Proposed Merger

Treatment of Stock Options. At the effective time of the Proposed Merger (the “Effective Time”), any outstanding stock options will exercise and entitle the holder of such stock option to receive, without interest, an amount in cash equal to the product of multiplying (A) the number of shares of the Company’s common stock subject to such stock option as of immediately prior to the Effective Time and (B) the excess, if any, of the per share merger consideration over the exercise price per share of the Company’s common stock subject to such stock option.

Treatment of RSUs. At the Effective Time, any outstanding RSU will vest and entitle the holder of such RSU to receive, without interest, an amount in cash equal to the product obtained by multiplying (A) the number of shares of the Company’s common stock subject to such RSU immediately prior to the Effective Time and (B) the per share merger consideration, therefore, stock-based compensation will cease at that time.

Treatment of PRSUs. At the Effective Time, any outstanding PRSU will vest and entitle the holder of such PRSU to receive, without interest, an amount in cash equal to the product obtained by multiplying (A) the number of shares of the Company’s common stock subject to such PRSU immediately prior to the Effective Time and (B) the per share merger consideration, therefore, stock-based compensation will cease at that time.

Treatment of MPRSUs. At the Effective Time, each outstanding MPRSU will, automatically and without any action on the part of the holder thereof, be cancelled for no consideration, payment or right to consideration or payment, therefore, stock-based compensation will cease at that time.

2019 Omnibus Incentive Plan. The Company expects to terminate the 2019 Omnibus Incentive Plan at the Effective Time of the Proposed Merger.

The Company continually looks to diversify and grow its portfolio of brands through acquisitions. On February 28, 2023, the Company’s Pet Supplies Plus segment acquired 20 stores through bankruptcy proceedings of a Business", which clarifiesthird party for approximately $3.7 million. The components of the definitionpreliminary purchase price allocation are not presented herein due to the immateriality of a business with the objection of adding guidancetransaction to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. The ASU is effective for the Company beginning in the first quarter of fiscal year 2019.overall. The Company is currently evaluating the impactCompany’s Pet Supplies Plus segment subsequently franchised 12 of the adoption of this newly issued standard to its consolidated financial statements.20 acquired stores.


In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This new 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 standard will be effective for the Company in the first quarter of our fiscal year 2021. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this newly issued standard to its consolidated financial statements.

Foreign Operations
8

Canadian operations contributed $1.0 million and $0.9 million in revenues for the three months ended July 31, 2017 and 2016, respectively.
(2)(3) Accounts and Notes Receivable

Current and non-current receivables as of July 1, 2023 and December 31, 2022 are presented in the Condensed Consolidated Balance Sheets as follows:
(In thousands)July 1, 2023December 31, 2022
Trade accounts receivable$33,924 $40,165 
Customer accounts receivable128,004 56,639 
Franchisee accounts receivable51,969 46,778 
Notes and interest receivable2,064 2,361 
Income tax receivable48,246 28,325 
Allowance for credit losses(8,204)(4,106)
   Current receivables, net256,003 170,162 
Notes receivable, non-current11,878 12,627 
Allowance for credit losses, non-current(1,070)(892)
   Non-current receivables, net10,808 11,735 
      Total receivables$266,811 $181,897 

Allowance for Credit Losses

The Company provides financing to ADs and franchisees for the purchase of franchises, areas, Company-owned offices, and operating loans for working capital and equipment needs. The franchise-related notes generally are payable over five years and the operating loans generally are due within one year. Most notes bear interest at an annual rate of 12%. 

Mostadequacy of the notesallowance for credit losses is assessed on a quarterly basis and adjusted as deemed necessary. Receivables that are ultimately deemed to be uncollectible, and for which collection efforts have been exhausted, are written off against the allowance for credit losses. Expected credit losses for trade and franchisee accounts receivable are immaterial. Notes receivable are due from the Company's ADs andCompany’s franchisees and are collateralized by the underlying franchise and, when the AD or franchise is an entity, are guaranteed by the owners of the respective entity.franchise. The debtors'debtors’ ability to repay the notes is dependent upon both the performance of the tax preparationfranchisee’s industry as a whole and the individual franchise or AD areas.


At July 31, 2017, the Company had unfunded lending commitments for working capital loans to franchisees and ADs of $18.4 million through the end of the current fiscal year.



Allowance for Doubtful Accounts
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 fair value of the franchises and AD areas collateralizing the receivables. Any adverse change in the tax preparation industry or the individual franchise or AD areas could affect the Company's estimate of the allowance.
Activity in the allowance for doubtfulcredit losses for trade, customer, and franchisee accounts receivable and notes receivable for the threesix months ended July 31, 20171, 2023 and 2016 wasJune 25, 2022 were as follows:
Six Months Ended
(In thousands)July 1, 2023June 25, 2022
Balance at beginning of period$4,998 $6,192 
Cumulative effect of adopted accounting standards654 — 
Provision for credit loss expense (benefit)3,683 10,224 
Write-offs, net of recoveries(61)(109)
Balance at end of period$9,274 $16,307 

  Three Months Ended July 31, 
  2017 2016 
  (In thousands)
Balance at beginning of period $12,020
 $8,850
 
Provision for doubtful accounts 1,408
 1,380
 
Write-offs (2,950) (1,571) 
Foreign currency adjustment 147
 (36) 
Balance at end of period $10,625
 $8,623
 


Management considers specificPast due amounts are primarily attributable to trade and franchisee accounts and notes receivable to be impaired ifthat have been generated over the net amounts due exceed the fair value of the underlying franchise at the time of the annual valuation performed as of April 30 of eachpast year and estimates an allowance for doubtful accounts based on that excess. The Company performs its impairment analysis annually due to the seasonal nature of its operations. At the end of each fiscal quarter, the Company considers the activity during the period for accounts and notes receivable impaired at each prior fiscal year end and adjusts the allowance for doubtful accounts accordingly. While not specifically identifiable as of the balance sheet date, the Company's analysis of its past experience also indicates that a portion of other accounts and notes receivable may not be collectible. Net amounts due include contractually obligated accounts and notes receivable plus accrued interest, reduced by unrecognized revenue, the allowance for uncollected interest, amounts due ADs, and amounts owed to the franchisee by the Company. In establishing the fair value of the underlying franchise, management considers a variety of factors, including recent sales between franchisees, sales of Company-owned stores, net fees of open offices earned during the most recently completed tax season, and the number of unopened offices.


The allowance for doubtful accounts at July 31, 2017, April 30, 2016 and July 31, 2016, was allocated as follows:
  July 31, 2017 April 30, 2017 July 31, 2016
  (In thousands)
Impaired:  
    
Notes and interest receivable, net of unrecognized revenue $12,397
 $14,646
 $11,040
Accounts receivable 10,146
 11,396
 6,425
Less amounts due to ADs and franchisees (1,312) (1,834) (1,251)
Amounts receivable less amounts due to ADs and franchisees $21,231
 $24,208
 $16,214
       
Allowance for doubtful accounts for impaired notes and accounts receivable $7,973
 $9,542
 $6,240
       
Non-impaired:  
    
Notes and interest receivable, net of unrecognized revenue $41,852
 $33,379
 $50,741
Accounts receivable 33,079
 43,327
 32,136
Less amounts due to ADs and franchisees (8,239) (23,119) (10,335)
Amounts receivable less amounts due to ADs and franchisees $66,692
 $53,587
 $72,542
       
Allowance for doubtful accounts for non-impaired notes and accounts receivable $2,652
 $2,478
 $2,383
       
Total:      
Notes and interest receivable, net of unrecognized revenue $54,249
 $48,025
 $61,781
Accounts receivable 43,225
 54,723
 38,561
Less amounts due to ADs and franchisees (9,551) (24,953) (11,586)
Amounts receivable less amounts due to ADs and franchisees $87,923
 $77,795
 $88,756
       
Total allowance for doubtful accounts $10,625
 $12,020
 $8,623

The Company’s average investment in impaired receivables during the three months ended July 31, 2017 and 2016 was $22.7 million and $17.4 million, respectively.
Analysis of Past Due Receivables
Accounts receivable are considered to be past due if unpaid 30 days after billing and notes receivable are considered past due if unpaid 90 days after the due date. If it is determined the likelihood of collecting substantially all of the note and accrued interest is not probable the notes are put on non-accrual status. Accounts receivables unpaid as of April 30 each year often remain unpaid until the following tax season due to the seasonal nature of the Company's operations and franchisees' cash flows. Non-accrual notes that are paid current and expected to remain current are moved back into accrual status during the next annual review.
by 1-30 days. The breakdowndelinquency distribution of accounts and notes receivable past due at July 31, 20171, 2023 were as follows:

July 1, 2023
(In thousands)Past dueCurrentTotal receivables
Accounts receivable$27,993 $185,904 $213,897 
Notes and interest receivable— 13,942 13,942 
Total accounts, notes and interest receivable$27,993 $199,846 $227,839 

9

(4) Securitized Accounts Receivable

In order to monetize its customer credit receivables portfolio, the Company’s Badcock Home Furniture & more (“Badcock”) segment sells beneficial interests in customer revolving lines of credit pursuant to securitization transactions. The Company securitized an additional $133.4 million of its customer credit receivables portfolio during the six months ended July 1, 2023. For additional details regarding these securitizations, refer to “Note 5 – Securitized Accounts Receivable” in the Form 10-K.

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. Financial instruments that could potentially subject the Company to concentrations of credit risk consist of accounts receivable with its customers. The Company manages such risk by managing the customer accounts receivable portfolio using delinquency as a key credit quality indicator. Management believes the allowance is adequate to cover the Company’s credit loss exposure. 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 credit losses on securitized accounts for the six months ended July 1, 2023 and June 25, 2022 was as follows:

Six Months Ended
(In thousands)July 1, 2023June 25, 2022
Balance at beginning of period$64,800 $— 
Cumulative effect of adopted accounting standards13,187 — 
Provision for credit loss expense42,036 46,560 
Write-offs, net of recoveries(45,688)(32,293)
Balance at end of period$74,335 $14,267 


Current amounts include receivables for customers who have made a payment in the past 30 days. Any customers who have not made a required payment within the last 30 days are considered past due. The following table presents the delinquency distribution of the carrying value of customer accounts receivable by year of origination as of July 1, 2023:

Delinquency Bucket202320222021PriorTotal
(in thousands)
Current$55,147 $106,332 $12,030 $4,243 $177,752 
1-306,740 19,626 3,752 1,298 31,416 
31-602,376 7,626 2,369 951 13,322 
61-901,580 5,899 2,069 812 10,360 
91+2,314 43,742 18,929 7,303 72,288 
Total$68,157 $183,225 $39,149 $14,607 $305,138 


10

  Past due Current 
Total
receivables
  (In thousands)
Accounts receivable $40,373
 $2,852
 $43,225
Notes and interest receivable, net of unrecognized revenue (1) 11,345
 42,904
 54,249
Total accounts, notes and interest receivable $51,718
 $45,756
 $97,474
Servicing revenue, interest income and interest expense generated from securitized receivables for the six months ended July 1, 2023 and June 25, 2022 were as follows:
(1)    Interest receivable is shown net of an allowance for uncollectible
Six Months Ended
(In thousands)July 1, 2023June 25, 2022
Securitization servicing revenue$6,291 $4,972 
Interest income from securitization1
56,986 114,156 
Interest expense, debt secured by accounts receivable(88,144)(128,208)

1 Includes interest of $2.4 million.income from Badcock customer receivables (refer to “Note 3 – Accounts and Notes Receivable”) and securitized receivables.



The Company’s investment in notes receivable on non-accrual status was $13.7 million, $7.0 million and $13.2 million at July 31, 2017, April 30, 2017, and July 31, 2016, respectively. Payments received on notes in non-accrual status are applied to the principal until the note is current then to interest income.

(3)(5) 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 a result of the Company’s American Freight segment’s underperformance compared to projections for the three months ended April 1, 2023, as well as current macroeconomic conditions, the Company updated its long-term forecasts. The Company performed an interim goodwill impairment quantitative assessment as of April 1, 2023, and based on the results of the analysis, the Company recorded a non-cash goodwill impairment charge of $75.0 million, which was recorded in “Goodwill impairment” in the accompanying Condensed Consolidated Statements of Operations. Other than the American Freight segment’s accumulated goodwill impairment of $70.0 million as of December 31, 2022, no other reporting units had accumulated goodwill impairment losses recorded.

The estimated fair value of the Company’s American Freight reporting unit 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. A change in assumptions used in American Freight’s quantitative analysis (e.g. projected cash flows, discount rates and growth rates) could result in the reporting unit’s estimated fair value being less than the carrying value. If American Freight is unable to achieve its current financial forecast, the Company may be required to record an impairment charge in a future period related to its goodwill. As of July 1, 2023, American Freight’s goodwill totaled $225.8 million.

Changes in the carrying amount of goodwill for the threesix months ended July 31, 2017 and 2016 were1, 2023 are as follows:

Vitamin ShoppePet Supplies PlusAmerican FreightBuddy’sSylvanTotal
Balance as of December 31, 2022$1,277 $336,791 $300,829 $79,099 $19,406 $737,402 
Acquisitions— 3,690 — — — 3,690 
Goodwill impairment— — (75,000)— — (75,000)
Disposals and purchase accounting adjustments— (2,611)— — — (2,611)
Balance as of July 1, 2023$1,277 $337,870 $225,829 $79,099 $19,406 $663,481 


11
  July 31, 2017 July 31, 2016
  (In thousands)
Balance at beginning of period $8,576
 $4,228
Acquisitions of assets from franchisees and others 22
 —
Disposals and foreign currency changes, net 54
 (45)
Purchase price reallocation (1,032)  
Balance at end of period $7,620
 $4,183

Components of intangible assets were as follows as of July 1, 2023 and December 31, 2017, April 30, 2016 and July 31, 2016:2022 were as follows:
 July 1, 2023
(In thousands)Gross carrying amountAccumulated
amortization		Net carrying amount
Indefinite lived tradenames$222,703 $— $222,703 
Intangible assets:
Franchise and dealer agreements$96,005 $(17,995)$78,010 
Customer contracts42,578 (10,752)31,826 
Other intangible assets2,583 (987)1,596 
Total intangible assets$141,166 $(29,734)$111,432 

 December 31, 2022
(In thousands)Gross carrying amountAccumulated amortizationNet carrying amount
Indefinite lived tradenames$222,703 $— $222,703 
Intangible assets:
Franchise and dealer agreements$96,005 $(14,348)$81,657 
Customer contracts42,484 (8,878)33,606 
Other intangible assets2,313 (777)1,536 
Total intangible assets$140,802 $(24,003)$116,799 

(6) Revenue
  July 31, 2017
  Weighted average amortization period Gross carrying amount Accumulated amortization Net carrying amount
  (In thousands)
Amortizable intangible assets:        
Customer lists acquired from unrelated third parties 5 years $3,188
 $(1,058) $2,130
Tradenames 3 years $431
 $(64) 367
Non-compete agreements 2 years $241
 $(55) 186
Assets acquired from franchisees:        
Customer lists 4 years 1,266
 (1,000) 266
Reacquired rights 2 years 956
 (934) 22
AD rights 10 years 27,072
 (8,141) 18,931
Total intangible assets   $33,154
 $(11,252) $21,902


  April 30, 2017
  Weighted average amortization period Gross carrying amount Accumulated amortization Net carrying amount
  (In thousands)
Amortizable intangible assets:        
Customer lists acquired from unrelated third parties 4 years $2,827
 $(899) $1,928
Assets acquired from franchisees:        
Customer lists 4 years 1,189
 (908) 281
Reacquired rights 2 years 935
 (919) 16
AD rights 10 years 26,427
 (7,428) 18,999
Total intangible assets   $31,378
 $(10,154) $21,224



  July 31, 2016
  Weighted average amortization period Gross carrying amount Accumulated amortization Net carrying amount
  (In thousands)
Amortizable intangible assets:        
Customer lists acquired from unrelated third parties 4 years $1,027
 $(408) $619
Assets acquired from franchisees:        
Customer lists 4 years 1,355
 (551) 804
Reacquired rights 2 years 491
 (452) 39
AD rights 10 years 20,415
 (5,993) 14,422
Total intangible assets   $23,288
 $(7,404) $15,884
The Company acquired $0.6 million of AD rights duringFor details regarding the three months ended July 31, 2017. The Company did not acquire any AD rights during the three months ended July 31, 2016.
During the three months ended July 31, 2017 and July 31, 2016,principal activities from which the Company did not acquire any assetsgenerates its revenue, refer to “Note 1 – Description of U.S. or Canadian franchisees, or third parties that were not classified as assets held for sale.
DuringBusiness and Summary of Significant Accounting Policies Presentation” in the third and fourth quarters of 2017, the Company acquired the assets of six unrelated offices of smaller regional or local accounting firms for cash of $2.3 million and $2.8 million of estimated contingent consideration that is includedForm 10-K. For more detailed information regarding reportable segments, refer to “Note 13 – Segments” in long-term obligations. These offices perform year-round accounting services.this Quarterly Report. The following table summarizedrepresents the preliminary estimates of the fair values of the identifiable assets acquired and liabilities assumed as of the acquisition dates. The preliminary estimates of the fair value of identifiable assets acquired and liabilities assumed are subject to revisions, which may result in adjustments to the preliminary values presented below, when management's appraisals and estimates are finalized. In conjunction with the change in the preliminary estimate, the estimated life of customer lists was revised from four years to six years.
 Preliminary Estimates  
 As Reported As Revised  
 April 30, 2017 July 31, 2017 Adjustments
 (in thousands)
Accounts receivable$261
 $261
 $—
Property, equipment and software, net55
 55
 —
Customer lists1,120
 1,480
 360
Tradenames—
 431
 431
Non-compete agreements—
 241
 241
Goodwill3,624
 2,592
 (1,032)
   Total purchase price$5,060
 $5,060
 $—
(4) Assets Held For Sale
At the end of the first quarter of fiscal 2018 and 2017, assets acquired from U.S. franchisees were classified as assets held for sale. During the three months ended July 31, 2017, the Company acquired $3.0 million in assets from U.S. franchisees and third parties that were first accounted for as business combinations, with the value allocated to customer lists and reacquired rights of $1.5 million and goodwill of $1.5 million prior to being recorded as assets held for sale. During the three months ended July 31, 2016, the Company acquired $7.6 million in assets from U.S. franchisees and third parties that were first accounted for as business combinations, with the value allocated to customer lists and reacquired rights of $4.1 million and goodwill of $3.5 million prior to being recorded as assets held for sale. The acquired businesses are operated as Company-owned offices until a buyer is located and a new franchise agreement is entered into.



Changes in the carrying amount of assets held for saledisaggregated revenue by reportable segments for the three months ended July 1, 2023:

Three Months Ended
July 1, 2023
(In thousands)Vitamin ShoppePet Supplies PlusBadcockAmerican Freight
Buddy’s
SylvanConsolidated
Retail sales$303,809 $162,310 $123,450 $171,104 $565 $5 $761,243 
Wholesale sales611 150,293 — 3,965 — — 154,869 
Total product revenue304,420 312,603 123,450 175,069 565 5 916,112 
Royalties and advertising fees201 11,568 — 806 4,657 11,388 28,620 
Financing revenue— — 659 11,511 — — 12,170 
Interest income— 78 20,478 177 — — 20,733 
Interest income from amortization of original purchase discount— — 6,032 — — — 6,032 
Warranty and damage revenue— — 11,753 8,667 1,498 — 21,918 
Other revenues106 8,534 9,849 7,197 26 316 26,028 
Total service revenue307 20,180 48,771 28,358 6,181 11,704 115,501 
Rental revenue, net— — — — 7,073 — 7,073 
Total rental revenue— — — — 7,073 — 7,073 
Total revenue$304,727 $332,783 $172,221 $203,427 $13,819 $11,709 $1,038,686 


12

The following represents the disaggregated revenue by reportable segments for the six months ended July 1, 2023:

Six Months Ended
July 1, 2023
(In thousands)Vitamin ShoppePet Supplies PlusBadcockAmerican FreightBuddy'sSylvanConsolidated
Retail sales$624,406 $325,569 $255,706 $373,253 $1,289 $13 $1,580,236 
Wholesale sales1,393 302,275 — 9,016 — — 312,684 
Total product revenue625,799 627,844 255,706 382,269 1,289 13 1,892,920 
Royalties and advertising fees380 22,452 — 1,602 9,840 21,268 55,542 
Financing revenue— — 1,157 21,438 — — 22,595 
Interest income— 161 42,717 354 — — 43,232 
Interest income from amortization of original purchase discount— — 14,269 — — — 14,269 
Warranty and damage revenue— — 24,057 19,255 3,062 — 46,374 
Other revenues250 16,397 21,602 15,071 77 660 54,057 
Total service revenue630 39,010 103,802 57,720 12,979 21,928 236,069 
Rental revenue, net— — — — 14,518 — 14,518 
Total rental revenue— — — — 14,518 — 14,518 
Total revenue$626,429 $666,854 $359,508 $439,989 $28,786 $21,941 $2,143,507 

The following represents the disaggregated revenue by reportable segments for the three months ended June 25, 2022:

Three Months Ended
June 25, 2022
(In thousands)Vitamin ShoppePet Supplies PlusBadcockAmerican FreightBuddy’sSylvanConsolidated
Retail sales$306,183 $151,421 $161,195 $194,789 $661 $13 $814,262 
Wholesale sales314 134,196 — 3,237 — — 137,747 
Total product revenue306,497 285,617 161,195 198,026 661 13 952,009 
Royalties and advertising fees207 9,395 — 516 4,603 10,668 25,389 
Financing revenue— — — 10,860 — — 10,860 
Interest income— 67 24,216 191 — — 24,474 
Interest income from amortization of original purchase discount— — 24,671 — — — 24,671 
Warranty and damage revenue— — 13,046 10,677 1,480 — 25,203 
Other revenues193 7,654 10,171 6,158 44 831 25,051 
Total service revenue400 17,116 72,104 28,402 6,127 11,499 135,648 
Rental revenue, net— — — — 7,341 — 7,341 
Total rental revenue— — — — 7,341 — 7,341 
Total revenue$306,897 $302,733 $233,299 $226,428 $14,129 $11,512 $1,094,998 


13

The following represents the disaggregated revenue by reportable segments for the six months ended June 25, 2022:

Six Months Ended
June 25, 2022
(In thousands)Vitamin ShoppePet Supplies PlusBadcockAmerican FreightBuddy'sSylvanConsolidated
Retail sales$616,614 $313,970 $327,837 $406,301 $1,731 $24 $1,666,477 
Wholesale sales488 257,428 — 6,780 — 264,696 
Total product revenue617,102 571,398 327,837 413,081 1,731 24 1,931,173 
Royalties and other franchise based fees341 18,457 — 1,064 9,427 20,177 49,466 
Financing revenue— — — 19,034 — — 19,034 
Interest income— 139 51,879 387 — — 52,405 
Interest income from amortization of original purchase discount— — 62,277 — — — 62,277 
Warranty and damage revenue— — 26,591 22,156 3,084 — 51,831 
Other revenues408 13,952 20,974 12,121 106 1,355 48,916 
Total service revenue749 32,548 161,721 54,762 12,617 21,532 283,929 
Rental revenue, net— — — — 15,365 — 15,365 
Total rental revenue— — — — 15,365 — 15,365 
Total revenue$617,851 $603,946 $489,558 $467,843 $29,713 $21,556 $2,230,467 

Contract Balances

The following table provides information about receivables and contract liabilities (deferred revenue) from contracts with customers as of July 1, 2023 and December 31, 20172022:
(In thousands)July 1, 2023December 31, 2022
Accounts receivable$213,897 $143,582 
Notes receivable13,739 14,988 
Customer deposits$16,394 $20,816 
Gift cards and loyalty programs9,393 9,565 
Deferred franchise fee revenue24,010 22,175 
Other deferred revenue10,279 10,688 
Total deferred revenue$60,076 $63,244 

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 2016(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.


14

(7) Long-Term Obligations

For details regarding the Company’s long-term debt obligations, refer to “Note 10 – Long-Term Obligations” in the Form 10-K.

Long-term obligations at July 1, 2023 and December 31, 2022 were as follows:

(In thousands)July 1, 2023December 31, 2022
Term loans, net of debt issuance costs
First lien term loan, due March 10, 2026$1,066,349 $779,777 
Second lien term loan, due September 10, 2026290,566 289,435 
Total term loans, net of debt issuance costs1,356,915 1,069,212 
ABL Revolver146,500 295,000 
Other long-term obligations4,007 6,147 
   Finance lease liabilities32,375 11,055 
   Total long-term obligations1,539,797 1,381,414 
Less current installments13,192 6,935 
   Total long-term obligations, net$1,526,605 $1,374,479 

 Three Months Ended July 31,
 2017 2016
 (In thousands)
Balance at beginning of period$11,989
 $9,886
Reacquired and acquired from third parties2,979
 7,647
Dispositions, impairments and other(290) (910)
Balance at end of period$14,678
 $16,623
First Lien Credit Agreement


During fiscal 2017,On February 2, 2023, the Company reviewed assets heldentered 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 sale thatan 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 were deemed unlikelyused to repay certain amounts outstanding under the Company’s ABL Credit Agreement.

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 July 1, 2023, the Company was in compliance with all covenants under these agreements and, based on a continuation of current operating results, the Company expects to be sold in compliance for the proceeding 12next twelve months. Those identified were transferred to assets held for use and amortization expense was recorded on a cumulative basis for customer lists and reacquired rights.


(5) Long-Term Obligations(8) Income Taxes

The Company has a credit facility that consists of a $21.2 million term loan and a revolving credit facility that currently allows borrowing of up to $203.8 million with an accordion feature that permits the Company to request an increase in availability of up to an additional $50.0 million. Outstanding borrowings accrue interest, which is paid monthly at a rate of the one-month London Interbank Offered Rate ("LIBOR") plus a margin ranging from 1.50% to 2.25% depending on the Company’s leverage ratio.Overview


The average interest rate paid duringFor the three months ended July 31, 20171, 2023 and 2016 was 2.81%June 25, 2022, the Company had an effective tax rate of 21.4% and 2.07%24.9%, respectively. For the six months ended July 1, 2023 and June 25, 2022, the Company had an effective tax rate of 11.7% and 24.5%, respectively. The indebtedness is collateralized by substantially allchanges in the assets ofeffective tax rate compared to the Company and both loans mature on April 30, 2019. 

The credit facility contains certain financial covenants that the Company must meet, including leverage and fixed-charge coverage ratios as well as minimum net worth requirements. In addition, the Company must reduce the outstanding balance under its revolving credit facility to zero for a period of at least 45 consecutive days each fiscal year. The Company was in compliance with the financial covenants at July 31, 2017. 

In December 2016, the Company obtained a mortgage payableprior year are due to a bank in monthly installments of principle payments plus interest at the one-month LIBOR plus 1.85% through December 2026 withcurrent year projected pre-tax loss compared to prior year pre-tax income and a balloon payment of $0.8 million due at maturity. The mortgagecurrent year non-cash goodwill impairment charge that is collateralized by land and building.nondeductible for tax purposes.


In December 2016, in connection with obtaining a mortgage payable to a bank,Tax Receivable Agreement

On July 10, 2019, the Company entered into ana tax receivable agreement (the “Tax Receivable Agreement”) with the then-existing non-controlling interest rate swap agreementholders (the “Buddy’s Members”) that allows itprovides for the payment by the Company to manage fluctuationsthe Buddy’s Members of 40% of the cash savings, if any, in cash flowfederal, 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 Franchise Group New Holdco, LLC (“New Holdco”) resulting from changesfuture redemptions or exchanges of New Holdco units.

Payments will be made when such Tax Receivable Agreement related deductions actually reduce the Company’s income tax liability. No payments were made to the Buddy’s Members pursuant to the Tax Receivable Agreement during the six months ended July 1, 2023. Total amounts due under the Tax Receivable Agreement to the Buddy’s Members as of July 1, 2023 were $15.4 million, with $1.0 million in “Other current liabilities” and the remaining amount recorded in “Other non-current liabilities” in the interest rate onaccompanying Condensed Consolidated Balance Sheets. Pursuant to the mortgage. This swap effectively changes the variable-rateCompany’s election under Section 754 of the Company's mortgage into a fixed rateInternal Revenue Code, the Company has obtained an increase in its share of 4.12%.the tax basis in the net assets of
15

New Holdco when the New Holdco units were redeemed or exchanged by the non-controlling interest holders and other qualifying transactions. The Company has designated this swap agreementtreated the redemptions and exchanges of New Holdco units by the non-controlling interest holders as a cash flow hedge. At July 31, 2017, the fair valuedirect purchases of the interest rate swap is less than $0.1 million and is included in accounts payable and accrued expenses. The interest rate swap expires in December 2026.


Long-term obligations at July 31, 2017, April 30, 2017, and July 31, 2016 consisted of the following:
  July 31, 2017 April 30, 2017 July 31, 2016
  (In thousands)
Credit Facility:  
    
Revolver $20,611
 $—
 $27,984
Term loan, net of debt issuance costs 16,409
 17,471
 18,500
Total credit facility 37,020
 17,471
 46,484
       
Long-Term Obligations      
   Term loan, net of debt issuance costs 16,409
 17,471
 18,500
   Due former ADs, franchisees and third parties 4,479
 6,568
 4,330
   Mortgages 2,130
 2,160
 2,222
  23,018
 26,199
 25,052
   Less: current installments (5,202) (7,738) (6,754)
Long-term obligations $17,816
 $18,461
 $18,298

(6) Income Taxes
The Company computes its provisionNew Holdco units for or benefit from, income taxes by applying the estimated annual effective tax rate to income or loss from recurring operations and adjusting for the effects of any discreteU.S. federal income tax items specificpurposes. 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 period.extent tax basis is allocated to those capital assets.


(7) Stockholders’ Equity

Stockholders' Equity Activity
During the three months ended July 31, 2017 and 2016, activity in stockholders’ equity was as follows:
  Three Months Ended July 31,
  2017 2016
  (in thousands, except for share amounts)
Class A common stock issued from the vesting of restricted stock and as director compensation —
 1,083
Class B common stock converted to Class A common shares —
 600,000
     
Stock-based compensation expense $554
 $683
Tax benefit of stock option exercises $—
 $60
Dividends declared $2,339
 $2,223

During the three months ended July 31, 2016, the sole holder of the Company's Class B common stock converted 600,000 of those shares to the Company's Class A common stock on a one-for-one basis and for no additional consideration.



Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss at July 31, 2017, April 30, 2017 and July 31, 2016 were as follows.
  July 31, 2017 April 30, 2017 July 31, 2016
  (In thousands)
Foreign currency adjustment $(1,026) $(2,059) $(1,580)
Unrealized loss on equity securities, available-for-sale, net of taxes —
 30
 —
Gain on sale of available-for-sale securities, net of taxes —
 (30) —
Unrealized gain on interest rate swap agreement, net of taxes (39) (25) —
Total accumulated other comprehensive loss $(1,065) $(2,084) $(1,580)

(9) Net Loss perIncome (Loss) Per Share
Net loss per share of Class A and Class B common stock is computed using the two-class method. Basic net loss per share is computed by allocating undistributed earnings to common stock and participating securities (exchangeable shares) and using the weighted-average number of common stock outstanding during the period.  Undistributed losses are not allocated to participating securities because they do not meet the required criteria for such allocation. 

Diluted net lossincome (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 consistconsists 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. Additionally, the computation of the diluted net loss per share of Class A common stock assumes the conversion of Class B common stock and exchangeable shares, if dilutive, while the diluted net loss per share of Class B common stock does not assume conversion of those shares.

The rights, including liquidation and dividend rights, offollowing table sets forth the holders of Class A and Class B common stock are identical, with the exception of the election of directors. As a result, the undistributed earnings for each year are allocated based on the contractual participation rights of the Class A and Class B common stock as if the earnings for the year had been distributed.  Participating securities have dividend rights that are identical to Class A and Class B common stock.
The computationcalculations of basic and diluted net lossincome (loss) per share for the three months ended July 31, 2017 and 2016 is as follows:share:

Three Months EndedSix Months Ended
(In thousands, except for share and per share amounts)July 1, 2023

June 25, 2022July 1, 2023

June 25, 2022
Net income (loss) attributable to Franchise Group$(50,796)$40,983 $(159,113)$53,301 
Less: Preferred dividend declared(2,129)(2,129)(4,257)(4,257)
Adjusted net income (loss) available to Common Stockholders$(52,925)$38,854 $(163,370)$49,044 
Weighted-average common stock outstanding35,177,146 40,356,299 35,089,660 40,331,855 
Net dilutive effect of stock options and restricted stock— 770,306 — 816,813 
Weighted-average diluted shares outstanding35,177,146 41,126,605 35,089,660 41,148,668 
Net income (loss) per share:
Basic net income per share$(1.50)$0.96 $(4.66)$1.22 
Diluted net income per share(1.50)0.94 (4.66)1.19 

  Three Months Ended 
 July 31, 2017		 Three Months Ended 
 July 31, 2016
  Class A Class B Class A Class B
  Common Stock Common Stock Common Stock Common Stock
  (in thousands, except for share and per
share amounts)
Basic and diluted net loss per share:  
  
  
  
Numerator  
  
  
  
Allocation of undistributed losses $(9,607) $(151) $(9,120) $(310)
Denominator        
Weighted-average common stock outstanding 12,682,550
 200,000
 12,470,827
 423,913
         
Basic and diluted net loss per share $(0.76) $(0.76) $(0.73) $(0.73)
         



As a result of the net losses for the periods shown, diluted net loss per share excludes the impact of shares of potential common stock from the exercise of options to purchase 1,391,423 and 1,262,182 shares for the three months ended July 31, 2017 and 2016, respectively, because the effect would be anti-dilutive.


(8)(10) Equity & Stock Compensation Plans
 
For a discussion of our stock-based compensation plans, refer to “Note 12 – Stock Compensation Plans” in the Form 10-K.

Restricted Stock Units

The Company has awarded service-based restricted stock units (the “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 July 1, 2023, unrecognized compensation costs related to the RSUs were $6.8 million. These costs are expected to be recognized through fiscal year 2026.

The following table summarizes the status of the RSUs as of and changes during the six months ended July 1, 2023:

Number of RSUsWeighted average fair value at grant date
Balance as of December 31, 2022273,302 $36.39 
Granted284,818 27.89 
Vested(55,751)29.18 
Canceled(130,919)30.59 
Balance as of July 1, 2023371,450 $33.00 



16

Performance Restricted Stock Units

The Company has awarded performance restricted stock units (the “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. At July 1, 2023, unrecognized compensation costs related to the PRSUs were $0.1 million. These costs are expected to be recognized through fiscal year 2025.

The following table summarizes the status of the PRSUs as of and changes during the six months ended July 1, 2023:

Number of PRSUsWeighted average fair value at grant date
Balance as of December 31, 2022364,857 $32.92 
Granted217,088 33.79 
Adjusted for performance results achieved(1)
154,904 24.84 
Vested(282,256)24.82 
Canceled(86,475)46.50 
Balance as of July 1, 2023368,118 $33.05 

(1) Represents an adjustment for performance results achieved related to outstanding 2020 PRSU shares that reached 200% achievement in March 2023.

Market-Based Performance Restricted Stock Units

The Company has awarded market-based performance restricted stock units (the “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. Under GAAP, compensation expense is not reversed if the award target is not achieved. At July 1, 2023, unrecognized compensation costs related to the MPRSUs were $5.3 million. These costs are expected to be recognized through fiscal year 2024.

The following table summarizes the status of the MPRSUs as of and changes during the six months ended July 1, 2023:
Number of MPRSUsWeighted average fair value at grant date
Balance as of December 31, 2022840,926 $21.77 
Granted— — 
Vested— — 
Canceled(125,500)30.96 
Balance as of July 1, 2023715,426 $20.16 

Stock Options

The Company has an equityawarded stock options to its non-employee directors and cash incentive plan, forofficers. As of July 1, 2023, there were 206,376 stock options outstanding. During the issuance of up to 2,500,000 shares of Class A common stock in which employees and outside directors are eligible to receive awards. At July 31, 2017, 940,594 shares of Class A common stock remain available for grant.
Stock option activity during the threesix months ended July 31, 2017 was as follows:
  
Number of
options
 
Weighted
average
exercise price
Balance at beginning of period 1,387,331
 $18.02
Granted 188,088
 14.30
Exercised —
 —
Expired or forfeited (73,353) 15.01
Balance at end of period 1,502,066
 17.70

Intrinsic value is defined as the fair value of the stock less the cost to exercise. There1, 2023, there were no stock options granted, 48,188 stock options exercised, during the three months ended July 31, 2017.and no stock options forfeited. The total intrinsic valueweighted-average exercise price of stock options outstanding atwas $9.32 per share as of July 31, 2017 was $0.8 million. Stock options vest from six months to five years from the date of grant and expire from four to five years after the vesting date.
Nonvested1, 2023. All outstanding stock options activity during the three months endedwill expire in fiscal years 2023 and 2024.

At July 31, 20171, 2023, there were zero non-vested stock options outstanding and there was as follows: 
  
Nonvested
options
 
Weighted
average
exercise price
Balance at beginning of period 678,118
 $15.88
Granted 188,088
 14.30
Vested (9,000) 10.51
Forfeited —
 —
Balance at end of period 857,206
 15.59
At July 31, 2017,no remaining unrecognized compensation costscost related to nonvestedvested stock options were $2.2 million. These costs are expected to be recognized through fiscal 2021.options.


17

The following table summarizes information about stock options outstanding and exercisable at July 31, 2017:1, 2023:
Options Outstanding and Exercisable
Range of exercise pricesNumberWeighted average exercise priceWeighted average remaining contractual life (in years)
$0.00 - $10.39175,000 $8.85 0.5
$10.40 - $11.9717,487 11.93 1.2
$11.98 - $12.0113,889 12.01 0.5
206,376 $9.32 
  Options Outstanding Options Exercisable
Range of exercise prices Number of shares outstanding Weighted average exercise price Weighted average remaining contractual life (in years) Number of options exercisable Weighted average exercise price
     
$10.51 - $15.00 821,647
 $13.35
 5.4 130,440
 $14.69
$15.01 - $19.75 284,616
 17.92
 2.8 266,616
 17.96
$19.76 - $29.48 330,387
 25.22
 4.3 212,387
 25.15
$29.48 - $33.38 65,416
 33.38
 4.3 35,417
 33.38

 1,502,066
 17.70
 
 644,860
 20.51


Stock Compensation Expense




Restricted Stock Units
Restricted stock activityThe Company recorded $2.8 million and $10.9 million in stock-based compensation expense during the three months endedJuly 31, 2017 was as follows:
  
Number of
Restricted stock units
 
Weighted
average fair value at grant date
Balance at beginning of period 176,396
 $13.61
Granted 27,797
 14.30
Vested —
 —
Forfeited (714) 23.09
Balance at end of period 203,479
 13.67
At July 31, 2017, unrecognized compensation costs related to restricted stock units were $2.2 million. These costs are expected to be recognized through fiscal 2022.

(9) Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities subject to fair value measurements on a recurring basis are classified according to a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. Valuation methodologies for the fair value hierarchy are as follows:
Level 1 — Quoted prices for identical assets and liabilities in active markets.
Level 2 — Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-based valuations in which all significant inputs are observable in the market.

Level 3 — Unobservable inputs in which little or no market data exists, therefore, requiring an entity to develop its own assumptions.

The Company measures or monitors certain of its assets and liabilities on a fair value basis. Fair value is used on a recurring basis for those assets and liabilities for which fair value is the primary basis of accounting. Other assets and liabilities are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. The following tables present, at July 31, 2017, April 30, 2017 and July 31, 2016, for each of the fair value hierarchy levels, the assets and liabilities that are measured at fair value on a recurring and nonrecurring basis (in thousands):
  July 31, 2017
    Fair value measurements using
  Total Level 1 Level 2 Level 3
Assets:  
  
  
  
Nonrecurring:  
  
  
  
Impaired accounts and notes receivable, net of unearned revenue $14,570
 —
 —
 $14,570
  
 

 
 
Liabilities:  
  
  
  
Recurring:  
  
  
  
Contingent consideration included in obligations due to former ADs, franchisees and others $4,186
 $—
 $—
 $4,186
Interest rate swap agreement 39
 —
 39
 —
Total recurring liabilities $4,225
 $—
 $39
 $4,186
  
 

 
 



  April 30, 2017
    Fair value measurements using
  Total Level 1 Level 2 Level 3
Assets:  
  
  
  
Recurring:  
  
  
  
Cash equivalents $10,393
 $10,393
 $—
 $—
Total recurring assets 10,393
 10,393
 —
 —
Nonrecurring:  
  
  
  
Impaired accounts and notes receivable, net of unearned revenue 16,500
 —
 —
 16,500
Impaired goodwill 94
 —
 —
 94
Impaired customer lists 18
 —
 —
 18
Assets held for sale 11,989
 —
 —
 11,989
Total nonrecurring assets 28,601
 —
 —
 28,601
Total recurring and nonrecurring assets $38,994
 $10,393
 $—
 $28,601
         
Liabilities:  
  
  
  
Recurring:  
  
  
  
Contingent consideration included in obligations due to former ADs, franchisees and others $3,215
 —
 $—
 $3,215
Total recurring liabilities $3,215
 $—
 $—
 $3,215


  July 31, 2016
    Fair value measurements using
  Total Level 1 Level 2 Level 3
Assets:  
  
  
  
Nonrecurring:  
  
  
  
Impaired accounts and notes receivable, net of unearned revenue $11,224
 —
 —
 $11,224
Total recurring and nonrecurring assets $11,224
 $—
 $—
 $11,224
Liabilities:  
  
  
  
Recurring:  
  
  
  
Contingent consideration included in obligations due to former ADs, franchisees and others $2,173
 —
 —
 $2,173
Total recurring liabilities $2,173
 $—
 $—
 $2,173


The Company’s policy is to recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. There were no transfers into or out of level 1 or 2 requiring fair value measurements for each of the threesix months ended July 31, 20171, 2023 and 2016.June 25, 2022, respectively.


Long-Term Incentive Plans

The following methods and assumptionsCompany has long-term incentive plans at various operating companies which are used to estimaterecorded as liabilities. Upon vesting, the fair value of our financial instruments.
Cash equivalents: The carrying amounts approximate fair value becauseawards granted under these plans may be settled in cash or shares of the short maturity of these instruments. Cash equivalent financial instruments consist of money market accounts.

Impaired accounts and notes receivable, net of unearned revenue: Accounts and notes receivable are considered to be impaired if the net amounts due exceed the fair value of the underlying franchise or if management considers it probable that all principal and interest will not be collected when contractually due. In establishing the estimated fair value of the underlying


franchise, consideration is given to recent sales between franchisees, sales of Company-owned stores, the net fees of open offices, and the number of unopened offices.

Impaired goodwill, reacquired rights, and customer lists: Goodwill, reacquired rights and customer lists associated with a Company-owned office are considered to be impaired if the net carrying amount exceeds the fair value of the underlying office. In establishing the fair value of the underlying office, consideration is given to the related net fees and marketplace transactions and when appropriate a discounted cash flow model.

Assets held for sale: Assets held for sale are recordedCompany’s stock at the lowerCompany’s discretion. The total aggregate liability for these plans as of July 1, 2023 is $12.7 million, recorded in “Other non-current liabilities” on the carrying value orCondensed Consolidated Balance Sheets. During the sales price, less costs to sell, which approximates fair value. The sales price is calculated as a percentage of prior year net fees and marketplace transactions.

Contingent consideration included in obligations due to former ADs, franchisee and others: Obligations due to former ADs and franchiseessix months ended July 1, 2023, total expense recognized related to estimated contingent consideration are carried at fair value. The fair value of these obligationsplans was determined using a discounted cash flow model.$4.4 million.

Interest rate swap agreement: Value of interest rate swap on variable rate mortgage debt. The fair value of this instrument was determined based on third party market research.

Other Fair Value Measurements

Additionally, accounting standards require the disclosure of the estimated fair value of financial instruments that are not recorded at fair value. For the financial instruments that the Company does not record at fair value, estimates of fair value are made at a point in time based on relevant market data and information about the financial instrument. No readily available market exists for a significant portion of the Company's financial instruments. Fair value estimates for these instruments are based on current economic conditions, interest rate risk characteristics, and other factors. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision. Therefore, the calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. In addition, changes in assumptions could significantly affect these fair value estimates. The following methods and assumptions were used by the Company in estimating fair value of these financial instruments.

Notes receivable: The carrying amount approximates fair value because the interest rate charged by the Company on these notes approximates rates currently offered by local lending institutions for loans of similar terms to individuals/entities with comparable credit risk (Level 3).

Long-term obligations: The carrying amount approximates fair value because the interest rate paid has a variable component (Level 2).

(10)(11) Related Party Transactions

The Company considers any of its directors, and their affiliated companies, as well as executive officers and membersor beneficial owners of theirmore than 5% of its common stock, or any member of the immediate families,family of the foregoing persons, to be related parties.
During fiscal 2017,
Messrs. Kahn and Laurence

Brian Kahn and Vintage Capital Management, LLC and its affiliates (“Vintage”), in aggregate, held approximately 34.8% of the aggregate voting power of the Company through their ownership of common stock as of July 1, 2023. Brian Kahn and Andrew Laurence are principals of Vintage. Mr. Kahn is a member of the Board of Directors, 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 of Directors until May 2021.

On May 10, 2023, the Company announced that it has entered into a three-year contractdefinitive agreement and plan of merger with Freedom VCM, Inc., a Delaware corporation (“Parent”) and Freedom VCM Subco, Inc., a Delaware corporation and wholly owned subsidiary of Parent (the “Merger Agreement”), pursuant to purchase a license for the use of Canadian tax software at a price of $0.9 million from a company in which it has an investment accounted for under the equity method. One of the members of the Company's Boardsenior management team of Directors is affiliatedthe Company led by Brian Kahn, the Company’s Chief Executive Officer (collectively with affiliates and related parties of the company providingsenior management team, the “Management Group”), have agreed to acquire approximately 64% of the Company’s issued and outstanding common stock that the Management Group does not presently own or control (the “Proposed Merger”). For more detailed information regarding the Merger Agreement and Proposed Merger, refer to “Note 2 – Acquisitions and Business Combinations” in this service.Quarterly Report.

(11)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

Refer to “Note 8 – Income Taxes” for detail regarding the amounts due under the Tax Receivable Agreement to the Buddy’s Members.


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(12) Commitments and Contingencies
In the ordinary course of operations, the Company may become a party to legal proceedings. Except as provided below and basedBased 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'sCompany’s business, financial condition, cash flows, or results of operations.
JTH Tax, Inc. and SiempreTax LLC v. Gregory Aime, Aime Consulting, LLC, Aime Consulting, Inc. and Wolf Ventures, Inc. (Case No. 2:16-cv-279). The Company filed suit in the United States District Court for the Eastern District of Virginia against the defendants, former Company franchisees, on June 9, 2016, as amended on June 22, 2016, claiming the defendants breached the purchase and sale agreement (the “PSA”) entered between the parties on January 21, 2016 and that the defendants had failed to comply with the post termination obligations of the franchise agreements (together with the PSA, the “Aime


Agreements”). The Company sought damages in an amount equal to three times the defendants’ earnings and profits, as well as injunctive relief to enforce the defendants to comply with the post termination obligations of the Aime Agreements, to be determined by the trier of fact. The Company specifically sought, in part, to enjoin the defendants from continued operation of a tax preparation business using the Company’s protected trademarks, enforcement of the non-compete provision of the Aime Agreements, and an order that the defendants assign all of the leases related to the franchised businesses to the Company. On July 1, 2016, the Magistrate Judge issued a report and recommendation finding a likelihood of success on the merits and recommending entry of the requested temporary restraining order (the “TRO”) in favor of the Company, which was adopted in part on August 3, 2016. On September 9, 2016, the defendants filed an answer and counterclaim against the Company, alleging breach of the PSA, breach of the implied covenant of good faith and fair dealing and fraud and seeking approximately $2.4 million in damages, plus future loss profits, punitive damages and other expenses.  After a three-day bench trial, on January 13, 2017, the court vacated the TRO, finding in favor of the defendants.  On February 15, 2017, the court issued its written opinion and order granting the defendants’ breach of contract and breach of the implied covenant of good faith and fair dealing claims, denying the Company’s claims against the defendants and finding certain post termination obligations to be unenforceable. Judgment was entered in favor of the defendants for approximately $2.7 million. The Company has accrued $2.7 million as of the fourth quarter of fiscal 2017 in connection with the judgment, which is recorded in "Accounts payable and accrued expense" in the accompanying consolidated balance sheets. The Company has filed an appeal of the judgment with the Fourth Circuit Court of Appeals.
The Company is also party to claims and lawsuits that are considered to be ordinary, routine litigation incidental to the business, including claims and lawsuits concerning the preparation of customers' income tax returns, 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 financial position.cash flows.


Refer to “Note 14 – Subsequent Events” for detail regarding litigation related to the Proposed Merger.
(12)
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 in aggregate are $34.4 million and $30.2 million as of July 1, 2023 and December 31, 2022, respectively. In certain cases, the Company could attempt to recover from the franchisees’ personal assets should the Company be required to pay remaining lease obligations.

If the Company is required to make payments under any of 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 any of these guarantees is remote as of July 1, 2023.

(13) Segments

The Company’s operations are conducted in six reportable 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 regularly reviews to analyze performance and allocate resources.

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. The Vitamin Shoppe segment offers one of the largest varieties of products among vitamin, mineral and supplement retailers. The broad product offering enables the company 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. The Vitamin Shoppe continues to focus on improving the customer experience through the roll-out of initiatives including increasing customer engagement and personalization, redesigning the omnichannel experience (including in stores as well as through the internet and mobile devices), growing private brands and improving the effectiveness of pricing and promotions. Vitamin Shoppe is headquartered in Secaucus, New Jersey.

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. The Pet Supplies Plus segment operates under the “Pet Supplies Plus” and "Wag N' Wash" brands and is headquartered in Livonia, Michigan.

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 options through its consumer and third-party financing services. The Badcock segment operates under the “Badcock Home Furniture & more” brand and is headquartered in Mulberry, Florida.

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. American Freight provides customers with multiple payment options providing access to high-quality products and brand name appliances that may otherwise remain aspirational to some of its customers.
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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 American Freight segment operates under the “American Freight” brand and is headquartered in Delaware, Ohio.

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 Buddy’s segment operates under the “Buddy’s” brand and is headquartered in Orlando, Florida.

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 services, including on premises, virtually, at a satellite location, and in the home. Sylvan is headquartered in Hunt Valley, Maryland.

Refer to “Note 6 – Revenue” for total revenues by segment. Operating income (loss) by segment were as follows:

Three Months EndedSix Months Ended
(In thousands)July 1, 2023June 25, 2022July 1, 2023June 25, 2022
Income (loss) from operations:
Vitamin Shoppe$28,651 $31,017 $55,846 $66,371 
Pet Supplies Plus17,589 18,654 36,955 35,675 
Badcock2,859 30,903 17,602 101,134 
American Freight(21,890)5,029 (108,519)16,242 
Buddy’s2,894 3,561 6,633 7,626 
Sylvan1,823 1,633 2,974 2,581 
Total Segments31,926 90,797 11,491 229,629 
   Corporate(9,426)(13,691)(15,520)(22,157)
Consolidated income (loss) from operations$22,500 $77,106 $(4,029)$207,472 

Total assets by segment were as follows:
(In thousands)July 1, 2023December 31, 2022
Total assets:
Vitamin Shoppe$620,559 $625,543 
Pet Supplies Plus996,304 977,234 
Badcock730,969 789,727 
American Freight843,288 904,378 
Buddy’s133,091 135,192 
Sylvan87,282 90,361 
Total Segments3,411,493 3,522,435 
   Corporate160,368 107,977 
Consolidated total assets$3,571,861 $3,630,412 

(14) Subsequent Events

Redemption of Preferred Stock

On September 5, 2017, the Board of Directors approved a quarterly cash dividend to stockholders of $0.16 per share payable on or about October 23, 2017 to holders of record of common stock and common stock equivalents on October 13, 2017.

On September 5, 2017, John T. Hewitt, the Chief Executive Officer and Chairman, was terminated by the Board of Directors, effective immediately. As Mr. Hewitt was terminated without cause, he will be eligible for severance of approximately $1.8 million, which is not reflected in the accompanying consolidated financial statements.

As part of the Company's initiatives to improve its overall profitability, certain contractual arrangements are being evaluated. Subsequent to July 31, 2017,19, 2023, the Company stopped using the servicesissued a notice of oneredemption for all outstanding shares of its vendors (and no longer receive any benefits from such services)7.50% Series A Cumulative Perpetual Preferred Stock (the “Preferred Stock”). The Company is attempting to negotiate a settlement redeeming the Preferred Stock in connection
20

with the vendor,Proposed Merger and in accordance with the terms and conditions of the Merger Agreement. The Redemption is contingent upon the Company’s successful completion of the Proposed Merger and, in the event the Proposed Merger does not occur and the Merger Agreement is terminated in accordance with its terms, the notice of redemption will be deemed rescinded and the Redemption will not occur.

The Preferred Stock will be redeemed in cash at a redemption price equal to $25.00 per share plus any accrued and unpaid dividends from the last dividend payment date, if any, up to but not including the Redemption Date (the “Redemption Price”). The Redemption Price is expected to be paid on August 18, 2023 or such later date as the parties to the Merger Agreement may agree, but in no event later than one business day following the Effective Time of the Proposed Merger (the “Redemption Date”). From and after the Redemption Date, dividends will cease to accrue on the Preferred Stock and the Preferred Stock will no longer be deemed outstanding and all rights of the holders of the Preferred Stock, other than the right to receive the Redemption Price upon Redemption, will cease and terminate. Upon Redemption, the Preferred Stock will be delisted from trading on the Nasdaq Global Market.

Litigation Related to the Proposed Merger

As disclosed in the definitive proxy statement filed by the Company with the SEC on July 14, 2023 (the “Definitive Proxy Statement”), between June 14, 2023 and July 13, 2023, the Company received from purported stockholders of the Company (i) five demand letters relating to the Proposed Merger and (ii) five demands pursuant to Section 220 of the General Corporation Law of the State of Delaware seeking certain books and records of the Company related to the Proposed Merger and related matters.

Following the filing of the Definitive Proxy Statement, one lawsuit relating to the Proposed Merger was filed: John Pels v. Franchise Group, Inc., et al., Case 23 CVH 07 0508 (Ohio C.P., July 20, 2023), (the “Action”) and the Company received from purported Company stockholders (i) two additional Section 220 books and records demands (cumulatively with the Section 220 books and records demands disclosed in the Definitive Proxy Statement, the “220 Demands”) and (ii) nine additional demand letters relating to the Proposed Merger (cumulatively with the demand letters disclosed in the Definitive Proxy Statement, the “Demand Letters” and together with the 220 Demands and the Actions, the “Matters”). The Matters allege, among other things, that the defendants named therein violated Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 14a-9 promulgated thereunder because the preliminary proxy statement filed with the SEC in connection with the Proposed Merger or Definitive Proxy Statement allegedly omit or misstate certain material information, and/or were allegedly in breach of their obligations under state law and/or common law. The Action seeks, among other things, injunctive relief preventing the consummation of the Proposed Merger, rescission of the Proposed Merger if it is unsuccessful, a charge willconsummated, damages and attorneys’ fees.

The Company believes that the claims asserted in the Matters are without merit and that no supplemental disclosure is required under applicable law. However, in order to moot unmeritorious disclosure claims, to avoid the risk of the Matters delaying or adversely affecting the Proposed Merger and to minimize the costs, risks and uncertainties inherent in litigation, without admitting any liability or wrongdoing, the Company determined to voluntarily supplement the Definitive Proxy Statement as described in the supplement to the Definitive Proxy Statement filed on August 8, 2023.

This Action is not expected to affect the timing of the Company’s special meeting of stockholders to be recognized duringheld for the second quarterpurpose of upvoting upon, among other things, the Proposed Merger, which is scheduled to $2.4 million.be held on August 17, 2023, or the amount of the consideration to be paid to the Company’s stockholders in connection with the Proposed Merger.


21




ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Special Note Regarding Forward-Looking Statements
 
This quarterly reportQuarterly 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”“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. As a result,Additionally, other factors may cause actual results to differ materially from historical results or from any results expressed or all of ourimplied by such forward-looking statements in this quarterly report may turn out to be inaccurate.statements. Factors that may cause such differences include, but are not limited to, the risks described under “Item 1A—Risk Factors” in our Annual Report on Form 10-K1A-Risk Factors,” including:

•the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement;

•the inability to complete the Proposed Merger due to the failure to obtain stockholder approval for the fiscal year ended April 30, 2017Proposed Merger or the failure to satisfy other conditions to completion of the Proposed Merger;

•risks related to disruption of management’s attention from our ongoing business operations due to the Proposed Merger;

•unexpected costs, charges or expenses resulted from the Proposed Merger;

•our ability to retain and hire key personnel in light of the Proposed Merger;

•certain restrictions during the pendency of the Proposed Merger that may impact our ability to pursue certain business opportunities or strategic transactions;

•litigation relating to the Proposed Merger has and could be instituted against the parties to the Merger Agreement or their respective directors, managers or officers, including the effects of any outcomes related thereto;

•the effect of the announcement of the Proposed Merger on our relationships with our franchisees, dealers and customers, operating results and business generally;

•the risk that the Proposed Merger will not be consummated in a timely manner, if at all;

•the market's perception of our prospects could be adversely affected if the Proposed Merger were delayed or were not consummated;

•the risk that natural disasters, public health crises, political uprisings, uncertainty or unrest, or other filingscatastrophic 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 the U.S. Securities and Exchange Commission ("SEC"), including:acquisitions or other capital expenditure initiatives;
22


•our inability to grow on a sustainable basis;

•changes in operating costs, including employee compensation and benefitsand 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 our business;

the continued serviceproducts and services we provide in certain of our business segments;

•departures of key executives, senior management team and members or directors;

•our ability to attract additional talent;
our inability to secure reliable sources of the tax settlement products we make availabletalent to our customers; teams;

government regulation and oversight, including the regulation of tax preparers or settlement products such as refund transfers and loan settlement products;•our ability to maintain an active trading market for our common stock on The Nasdaq Global Market (“Nasdaq”);

government initiatives that simplify tax return preparation, improve the timing and efficiency of processing tax returns, limit payments to tax preparers, or decrease the number of tax returns filed or the size of the refunds;

government initiatives to pre-populate income tax returns;
•the effect of regulation of the products and services that we offer, including changes in laws and regulations and the costs and administrative burdens associated with complying with such laws and regulations;

the possible characterization of refund transfers as a form of loan or extension of credit;
changes in the tax settlement products offered to our customers that make our services less attractive to customers or more costly to us;
•our ability to develop and maintain relationships with our tax settlementthird-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;

•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 public health measures on our business and results of operations;

•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 their employeesour 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 and 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 repay their indebtedness to us;pay us royalties and fees;


•our ability to profitably manage Company-owned offices and sell to franchisees;stores;


•our exposure to litigation;litigation and any governmental investigations;



23

•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;

challenges in deploying accurate tax software in •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 timely way each tax season;

delaysdecline in the commencementcredit quality of the tax season attributable to Congressional action affecting tax matters and the resulting inability of federal and state tax agencies to accept tax returns onour customers, a timely basis,decrease in our credit sales, or other changes that have the effectfactors outside of delaying the tax refund cycle;our control, which could lead to a decrease in our product sales and profitability;

competition in the tax preparation market;

the effect of federal and state legislation that affects the demand for paid tax preparation, such as the Affordable Care Act and potential immigration reform;
•our reliance on technology systems and electronic communications; and

our ability to effectively deploy software in a timely manner and with all the features our customers require;

the impact of any acquisitions or dispositions, including our ability to integrate acquisitions and capitalize on their anticipated synergies; and

•other factors, including the risk factors discussed in our latest annual report filed with the SEC.this Quarterly Report.


Potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on the forward-looking statements. These forward-looking statements speak only as of the date of this quarterly report. Unless required by law, we do not intend to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise. A potential investor or other vendor should, however, review the factors and risks we describe in the reports we will file from time to time with the SECU.S. Securities and Exchange Commission (“SEC”) after the date of this quarterly report.Quarterly Report.


Overview
 
We are onean owner and operator of the leading providersfranchised and franchisable businesses that continually looks to grow our portfolio of tax preparation servicesbrands 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 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 lines 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”). Refer to “Note 13 – Segments” in the United States and Canada, last year, we operated 4,077 tax offices. As measured by the number of returns prepared, we believe we are one of the largest retail preparer of individual tax returns in the both the United States and Canada. Our tax preparation services and related tax settlement products are offered primarily through franchised locations, although we operate a limited number of Company-owned offices each tax season. See Note 1 "Description of Business and Summary of Significant Accounting Policies" in the notes to Consolidated Financial Statements in our Annualthis Quarterly Report on Form 10-K for the fiscal year ended April 30, 2017, for details of the U.S. office activity and the number of Canadian and Company-owned offices for the years ended April 30, 2017, 2016 and 2015.additional information.


Our revenue is primarily consistsderived from merchandise sales, rental revenue, and service revenues comprised of the following components:
Franchise Fees: Our standard franchise fee per territory ranges from $20,000 to $40,000, and we offer our franchisees flexible structures and financing options for franchise fees. Franchise fee revenue is recognized when our obligations to prepare the franchisee for operation are substantially complete and as cash is received.
Area Developer ("AD") Fees: Our fees for AD areas vary based on our assessment of the revenue potential of each AD area and also depend on the performance of any existing franchisees within the AD area being sold. Our ADs generally receive 50% of franchise fees, royalties and a portion of the interest income derived from territories located in their area. ADother required fees received are recognized as revenue on a straight-line basis over the initial contract term of each AD agreement, which has historically been ten years, with the cumulative amount of revenue recognized not to exceed the amount of cash received. We changed the term of new and renewal AD contracts to six years beginning in July 2014.


Royalties: Our franchise agreements require franchisees to pay us a base royalty typically equal to 14% of the franchisee's tax preparation revenue, subject to certain specified minimums.
Advertising Fees: Our franchise agreements require all franchisees to pay us an advertising fee of 5% of the franchisee's tax preparation revenue, which we use primarily to fund collective advertising efforts.
Financial Products: We offer two types of tax settlement financial products: refund transfer products, which involve providing a means by which a customer may receive his or her refund more quickly and conveniently, and refund-based loans. We earn fees from the arranging of the sale of these financial products.
Interest Income: We earn interest income from our franchisees, dealers and ADsfinancing programs.
In evaluating our performance, management focuses on Adjusted EBITDA as a measure of the cash flow from recurring operations from the businesses. Adjusted EBITDA represents net income (loss), before income taxes, interest expense, depreciation and amortization, and certain other items.
Proposed Merger

On May 10, 2023, we announced that we had entered into a definitive agreement and plan of merger with Freedom VCM, Inc., a Delaware corporation (“Parent”) and Freedom VCM Subco, Inc., a Delaware corporation and wholly owned subsidiary of Parent (the “Merger Agreement”), pursuant to which members of our senior management team led by Brian Kahn, our Chief Executive Officer (collectively with affiliates and related parties of our senior management team, the “Management Group”), have agreed to both indebtednessacquire approximately 64% of our issued and outstanding common stock that the Management Group does not presently own or control(the “Proposed Merger”). Under the terms of the Proposed Merger, our common stockholders, other than the Management Group, are entitled to receive $30.00 in cash for each share of our common stock they hold.

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The Proposed Merger is anticipated to close in the unpaid portionssecond half of their franchise fees2023, subject to satisfaction or waiver of the closing conditions, including approval by regulatory authorities and AD territory fees,our stockholders, including approval by a majority of the shares of our common stock not owned or controlled by the Management Group. Upon completion of the Proposed Merger, we will become a private company and for other loanswill no longer be publicly listed or traded on Nasdaq.

Additional information about the Merger Agreement and the Proposed Merger is set forth in our Definitive Proxy Statement on Schedule 14A filed with the SEC on July 14, 2023.

Impact of COVID-19

As of the date of this Quarterly Report, we extendhave experienced some supply chain delays and disruptions, including adverse consequences to our franchisees relatedsupply chain function from decreased procurement volumes in connection with the COVID-19 pandemic. 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 operationimpact of their territories. We also earn interest on our accounts receivable.
Assisted Tax Preparation Fees: We earn tax preparation fees, net of discounts, directly from bothnew subvariants and the operation of Company-owned offices in the U.S. and Canada.

We operate Company-owned offices, substantially all of which are held for sale. If these offices remain unsold at the start of a tax season we will operate them for the tax season with the intent of selling them to qualified franchisees the next year and as a result the number of Company-owned offices will vary from year to year. Going forward the number of Company-owned offices may increase if the Company reacquires more offices from existing franchisees and does not find a suitable buyer to take over the office.

For purposes of this section and throughout this quarterly report, all references to “fiscal 2018” and “fiscal 2017” refer to our fiscal years ending April 30, 2018 and ended April 30, 2017, respectively, and corresponding references to fiscal quarters are references to quarters within those fiscal years. For purposes of this section and throughout this quarterly report, all references to “year”public's or “years” are the respective fiscal year or years ended April 30 unless otherwise noted in this quarterly report, and all references to “tax season” refergovernments' response to the period between January 1 and April 30 ofoutbreak; however, we are actively managing our business to respond to the referenced year.impact.


Results of Operations
The table below shows results of operations for the three and six months ended July 31, 20171, 2023 and 2016.June 25, 2022.
 Three Months EndedSix Months Ended
   ChangeChange
(In thousands)July 1, 2023June 25, 2022$%July 1, 2023June 25, 2022$%
Total revenues$1,038,686 $1,094,998 $(56,312)(5.1)%$2,143,507 $2,230,467 $(86,960)(3.9)%
Income from operations22,500 77,106 (54,606)(70.8)%(4,029)207,472 (211,501)(101.9)%
Net income$(50,796)$40,983 $(91,779)(223.9)%$(159,113)$53,301 $(212,414)(398.5)%
  Three Months Ended July 31,
      Change
  2017 2016 $ %
(dollars in thousands)
Total revenues $8,188
 $7,149
 $1,039
 15%
Loss from operations (15,949) (15,202) (747) 5%
Net loss (9,758) (9,430) (328) 3%
Revenues. The table below sets forth the components and changes in our revenues for the three and six months ended July 31, 20171, 2023 and 2016.June 25, 2022.
  Three Months Ended July 31,
      Change
  2017 2016 $ %
(dollars in thousands)
Franchise fees $71
 $240
 $(169) (70)%
Area Developer fees 1,068
 970
 98
 10 %
Royalties and advertising fees 1,689
 1,455
 234
 16 %
Financial products 582
 536
 46
 9 %
Interest income 2,297
 2,658
 (361) (14)%
Assisted tax preparation fees, net of discounts 1,639
 986
 653
 66 %
Other revenues 842
 304
 538
 177 %
Total revenues $8,188
 $7,149
 $1,039
 15 %


 Three Months EndedSix Months Ended
   ChangeChange
(In thousands)July 1, 2023June 25, 2022$%July 1, 2023June 25, 2022$%
Product$916,112 $952,009 $(35,897)(3.8)%$1,892,920 $1,931,173 $(38,253)(2.0)%
Service and other115,501 135,648 (20,147)(14.9)%236,069 283,929 (47,860)(16.9)%
Rental7,073 7,341 (268)(3.7)%14,518 15,365 (847)(5.5)%
Total revenue$1,038,686 $1,094,998 $(56,312)(5.1)%$2,143,507 $2,230,467 $(86,960)(3.9)%
For the three months ended July 31, 2017,1, 2023, total revenues increased $1.0decreased $56.3 million, or 15%(5.1)%, to $8.2$1,038.7 million compared to $7.1$1,095.0 million in the same period last year. This decrease was primarily due to a $61.1 million decrease in revenue at our Badcock segment and a $23.0 million decrease in revenue at our American Freight segment. These decreases were partially offset by a $30.1 million increase in revenue at our Pet Supplies Plus segment.

For the six months ended July 1, 2023, total revenues decreased $87.0 million, or (3.9)%, to $2,143.5 million compared to $2,230.5 million in the same period last year. The increasedecrease was largelyprimarily due to higher assisted tax preparation fees of $0.7a $130.1 million driven by the year-round accounting offices we acquireddecrease in late fiscal 2017 along with an increaserevenue at our Badcock segment and a $27.9 million decrease in other revenues of $0.5 million due to bargain purchase gains from territories which we reacquiredrevenue at below market values;our American Freight segment. These decreases were partially offset by lower franchise fees resulting from fewer new sales as well as a free-territory promotion for selected existing franchisees.$62.9 million increase in revenue at our Pet Supplies Plus segment.

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Operating expenses.    The following table below details the amounts and changes in our operating expenses for the three and six months endedJuly 31, 20171, 2023 and 2016.June 25, 2022.
  Three Months Ended July 31,
      Change
  2017 2016 $ %
(dollars in thousands) 
      
Employee compensation and benefits $9,991
 $9,682
 $309
 3 %
Other costs and expenses 9,202
 8,279
 923
 11 %
Area Developer expense 372
 460
 (88) (19)%
Advertising expense 2,376
 1,918
 458
 24 %
Depreciation, amortization, and impairment charges 2,196
 2,012
 184
 9 %
Total operating expenses $24,137
 $22,351
 $1,786
 8 %
 Three Months EndedSix Months Ended
   ChangeChange
(In thousands)July 1, 2023June 25, 2022$%July 1, 2023June 25, 2022$%
Cost of revenue:
  Product$621,482 $600,780 $20,702 3.4 %$1,278,386 $1,217,364 $61,022 5.0 %
  Service and other8,634 8,732 (98)(1.1)%18,213 17,395 818 4.7 %
  Rental2,507 2,741 (234)(8.5)%5,133 5,603 (470)(8.4)%
     Total cost of revenue632,623 612,253 20,370 3.3 %1,301,732 1,240,362 61,370 4.9 %
Selling, general, and administrative expenses383,563 405,639 (22,076)(5.4)%770,804 782,633 (11,829)(1.5)%
Goodwill impairment expense— — — 100.0 %75,000 — 75,000 — %
   Total operating expenses$1,016,186 $1,017,892 $(1,706)(0.2)%$2,147,536 $2,022,995 $124,541 6.2 %
For the three months ended July 31, 2017,1, 2023, total operating expenses were $24.1$1,016.2 million compared to $22.4$1,017.9 million in the same period last year, representing a decrease of $1.7 million, or (0.2)%. This decrease was primarily due to a $33.0 million decrease in operating expenses at our Badcock segment, partially offset by a $31.1 million increase in operating expenses at our Pet Supplies Plus segment.

For the six months ended July 1, 2023, total operating expenses were $2,147.5 million compared to $2,023.0 million in the same period last year, representing an increase of $1.8$124.5 million, or 8%6.2%. TheThis increase was primarily drivendue to a $96.9 million increase in operating expenses at our American Freight segment, $75.0 million of which was due to a non-cash goodwill impairment charge, as further discussed in “Note 5 - Goodwill and Intangible Assets” in the Notes to the Consolidated Financial Statements in this Quarterly Report. The remaining increase was due to a $61.6 million increase in operating expenses at our Pet Supplies Plus segment and a $19.1 million increase in operating expenses at our Vitamin Shoppe segment, partially offset by a $46.5 million decrease in operating expenses at our Badcock segment.

Non-operating income (expense) decreased $64.6 million and $39.2 million for the three and six months ended July 1, 2023, respectively, due to the following:


a $0.9Gain on sale-leaseback transactions. Gain on sale-leaseback transactions decreased $49.9 million increase in other costs and expenses due primarily to higher rent and utility expense from our company-owned stores;
a $0.5 million increase in advertising expense for the recruitment of new franchisees as well as advertising expense associated with new client growth;
a $0.3 million increase in employee compensationthree and benefits mainlysix months ended July 1, 2023 compared to the prior year due to higher compensation associated with our new year-round Company-owned offices;sale-leaseback transactions in the three months ended June 25, 2022.
a $0.2
Other. Other expense increased $16.6 million increase in amortization expense due to the acquisition of our new year-round Company-owned offices, slightly offset by;
a reduction in area developer expense of $0.1 million.

Income tax benefit. We recorded income tax benefits with effective rates of 39.5% and 39.2% duringfor the three months ended July 31, 2017 and July 31, 2016, respectively. Due1, 2023 compared to the seasonal natureprior year due to a $16.6 million increase in the loss related to our investment in NextPoint Acquisition Corp. compared to the prior period. For the six months ended July 1, 2023, other expense decreased $5.2 million due to a decrease in the loss related to our investment in NextPoint Acquisition Corp. compared to the prior period.

Interest expense, net. Interest expense, net decreased $5.5 million and $10.7 million for the three and six months ended July 1, 2023, respectively. These decreases were due primarily to decreases of $22.9 million and $40.1 million of interest expense related to the Badcock securitized receivables portfolio for the three and six months ended July 1, 2023, respectively, partially offset by $14.9 million and $26.5 million in additional interest expense for the three and six months ended July 1, 2023, respectively, related to the First and Second Lien Term Loans and revolving credit facility (the “ABL Revolver”).

Income tax benefit. Our effective tax rate, including discrete income tax items, was 11.7% and 24.5% for the six months ended July 1, 2023 and June 25, 2022, respectively. The changes in the effective tax rate for the six months ended July 1, 2023 compared to the same period in the prior year are due to a current year projected pre-tax loss compared to prior year pre-tax income and a current year non-cash goodwill impairment charge that is nondeductible for tax purposes.


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Segment Information

We, through our franchisees and Company-owned stores, operate a system of point of sale retail and rent-to-own locations. Our operations are conducted in six reporting business segments: Vitamin Shoppe, Pet Supplies Plus, Badcock, American Freight, Buddy’s, and Sylvan. Refer to “Note 13 – Segments” in this Quarterly Report for additional information.

Vitamin Shoppe

The following table summarizes the operating results of our business,Vitamin Shoppe segment:

Three Months EndedSix Months Ended
ChangeChange
(In thousands)July 1, 2023June 25, 2022$%July 1, 2023June 25, 2022$%
Total revenues$304,727 $306,897 $(2,170)(0.7)%$626,429 $617,851 $8,578 1.4 %
Operating expenses276,076 275,880 196 0.1 %570,583 551,480 19,103 3.5 %
Segment income$28,651 $31,017 $(2,366)(7.6)%$55,846 $66,371 $(10,525)(15.9)%

Total revenue for the three months ended July 1, 2023 for our Vitamin Shoppe segment decreased $2.2 million, or 0.7%, compared to the same period in the prior year. The decrease was primarily due to lower store count. Total revenue for the six months ended July 1, 2023 increased $8.6 million, or 1.4%, compared to the same period in the prior year. The increase in revenue was driven primarily by higher average transaction values and increased store traffic compared to the prior year period.

Operating expenses for our Vitamin Shoppe segment remained relatively flat with an increase of $0.2 million, or 0.1%, for the three months ended July 1, 2023. For the six months ended July 1, 2023, operating expenses increased $19.1 million, or 3.5%, compared to the same period in the prior year primarily due to an increase in cost of goods sold of $14.1 million, which was primarily due to increased sales and merchandise mix.

Pet Supplies Plus

The following table summarizes the operating results of our Pet Supplies Plus segment:

Three Months EndedSix Months Ended
ChangeChange
(In thousands)July 1, 2023June 25, 2022$%July 1, 2023June 25, 2022$%
Total revenues$332,783 $302,733 $30,050 9.9 %$666,854 $603,946 $62,908 10.4 %
Operating expenses315,194 284,079 31,115 11.0 %629,899 568,271 61,628 10.8 %
Segment income$17,589 $18,654 $(1,065)(5.7)%$36,955 $35,675 $1,280 3.6 %

Total revenue for our Pet Supplies Plus segment increased $30.1 million, or 9.9%, for the three months ended July 1, 2023 as compared to the same period last year. Our Pet Supplies Plus segment opened 66 franchise stores and 9 corporate stores since the prior year period, resulting in a $16.1 million increase in wholesale revenue and a $13.3 million increase in retail sales.

Total revenue for our Pet Supplies Plus segment increased $62.9 million, or 10.4%, for the six months ended July 1, 2023 as compared to the same period last year. The increase was also due the opening of 66 franchise stores and 9 corporate stores since the prior year period, resulting in a $44.8 million increase in wholesale revenue and a $17.6 million increase in retail sales.

Operating expenses for our Pet Supplies Plus segment increased $31.1 million, or 11.0%, for the three months ended July 1, 2023 as compared to the same period last year as cost of revenue increased at a rate comparable to revenue and merchandise costs also increased.

Operating expenses for our Pet Supplies Plus segment increased $61.6 million, or 10.8%, for the six months ended July 1, 2023 as compared to the same period last year as cost of revenue increased at a rate comparable to revenue.


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Badcock
The following table summarizes the operating results of our Badcock segment:

Three Months EndedSix Months Ended
ChangeChange
(In thousands)July 1, 2023June 25, 2022$%July 1, 2023June 25, 2022$%
Total revenues$172,221 $233,299 $(61,078)(26.2)%$359,508 $489,558 $(130,050)(26.6)%
Operating expenses169,362 202,396 (33,034)(16.3)%341,906 388,424 (46,518)(12.0)%
Segment income$2,859 $30,903 $(28,044)(90.7)%$17,602 $101,134 $(83,532)(82.6)%

Total revenue for our Badcock segment decreased $61.1 million, or (26.2)%, for the three months ended July 1, 2023 as compared to the same period last year. The decrease was attributable to:

•A $37.7 million decrease in product revenue driven by the inflationary environment, which resulted in decreased customer traffic compared to the prior year period.

•A $23.3 million decrease in service revenue, as the amortization of the accounts receivable discount included in service revenue was less than the prior year period ($6.0 million in the three months ended July 1, 2023 compared to $24.7 million in the three months ended June 25, 2022). The remaining decrease was driven by lower interest income due to the declining customer financing receivable balance.

For the six months ended July 1, 2023, total revenue for our Badcock segment decreased $130.1 million, or (26.6)% as compared to the same period last year. The decrease was attributable to:

•A $72.1 million decrease in product revenue driven by the inflationary environment, which resulted in decreased customer traffic compared to the prior year period.

•A $57.9 million decrease in service revenue, as the amortization of the accounts receivable discount included in service revenue was less than the prior year period ($14.3 million in the six months ended July 1, 2023 compared to $62.3 million in the six months ended June 25, 2022). The remaining decrease was driven by lower interest income due to the declining customer financing receivable balance.

Operating expenses for our Badcock segment decreased $33.0 million, or (16.3)%, and $46.5 million, or (12.0)%, for the three and six months ended July 1, 2023, respectively, as compared to the same periods last year. These decreases were due to the decrease in revenue partially offset by higher merchandise costs.

American Freight
The following table summarizes the operating results of our American Freight segment:

Three Months EndedSix Months Ended
ChangeChange
(In thousands)July 1, 2023June 25, 2022$%July 1, 2023June 25, 2022$%
Total revenues$203,427 $226,428 $(23,001)(10.2)%$439,989 $467,843 $(27,854)(6.0)%
Operating expenses225,317 221,399 3,918 1.8 %548,508 451,601 96,907 21.5 %
Segment income$(21,890)$5,029 $(26,919)(535.3)%$(108,519)$16,242 $(124,761)(768.1)%

Total revenue for our American Freight segment decreased $23.0 million, or 10.2%, and $27.9 million, or (6.0)%, for the three and six months ended July 1, 2023, respectively, as compared to the same period last year. The decreases were attributable to lower demand for furniture, mattresses, and appliances driven by the inflationary environment which resulted in reduced customer traffic.

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Operating expenses for our American Freight segment increased $3.9 million, or 1.8%, and $96.9 million, or 21.5%, for the three and six months ended July 1, 2023, respectively, as compared to the same period in the prior year. The increase in operating expense for the six months ended July 1, 2023 was primarily due to a $75.0 million non-cash goodwill impairment charge, as further discussed in “Note 5 – Goodwill and Intangible Assets” in the Notes to the Consolidated Financial Statements in this Quarterly Report. The increase was also due to higher merchandise costs from orders placed in the prior year, which includes higher inbound freight costs.

Buddy’s

The following table summarizes the operating results of our Buddy’s segment:
Three Months EndedSix Months Ended
ChangeChange
(In thousands)July 1, 2023June 25, 2022$%July 1, 2023June 25, 2022$%
Total revenues$13,819 $14,129 $(310)(2.2)%$28,786 $29,713 $(927)(3.1)%
Operating expenses10,925 10,568 357 3.4 %22,153 22,087 66 0.3 %
Segment income$2,894 $3,561 $(667)(18.7)%$6,633 $7,626 $(993)(13.0)%

Total revenue for our Buddy’s segment decreased $0.3 million, or (2.2)%, and $0.9 million, or (3.1)%, for the three and six months ended July 1, 2023, respectively, as compared to the same periods last year. The decreases in revenue were primarily attributable to the inflationary environment which resulted in reduced customer traffic.

Operating expenses for our Buddy’s segment increased $0.4 million, or 3.4%, and $0.1 million, or 0.3%, for the three and six months ended July 1, 2023, respectively, due to an increase in selling, general, and administrative expense in the current year period.

Sylvan

The following table summarizes the operating results of our Sylvan segment:

Three Months EndedSix Months Ended
ChangeChange
(In thousands)July 1, 2023June 25, 2022$%July 1, 2023June 25, 2022$%
Total revenues$11,709 $11,512 $197 1.7 %$21,941 $21,556 $385 1.8 %
Operating expenses9,886 9,879 7 0.1 %18,967 18,975 (8)— %
Segment income$1,823 $1,633 $190 11.6 %$2,974 $2,581 $393 15.2 %

Total revenue for our Sylvan segment increased $0.2 million, or 1.7%, and $0.4 million, or 1.8%, for the three and six months ended July 1, 2023, respectively as compared to the same periods last year. The increases were attributable to an increase in franchise revenue.

Adjusted EBITDA

To provide additional information regarding our financial results, we expect any losseshave disclosed Adjusted EBITDA in the table below and within this Quarterly Report. Adjusted EBITDA represents net income (loss), before income taxes, interest expense, depreciation and amortization, and certain other items specified below. Additionally, acquisition costs include adjusting for costs of potential acquisitions and final costs of completed acquisitions. We have provided a reconciliation below of Adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure.

We have included Adjusted EBITDA in this Quarterly Report because we believe the presentation of this measure is useful to investors as a supplemental measure in evaluating the aggregate performance of our operating businesses and in comparing our results from period to period because it excludes items that we incur throughdo not believe are reflective of our core or ongoing operating results. In the first eight monthsAdjusted EBITDA table below, we have removed all revenues and expenses related to our Badcock segment’s in-house financing operations. This includes all amounts related to accounts receivables and securitized receivables. We believe this provides investors a more accurate representation of ongoing operations as we intend to cease in-house financing operations within a year. This measure is used by our management to evaluate performance and make resource
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allocation decisions each fiscal year willperiod. 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 more than offsetcomparable to similarly-titled measures used by the resultsother companies in our industry. Adjusted EBITDA should not be considered in isolation from or as an alternative to net income (loss), operating income (loss), or any other performance measures derived in accordance with GAAP.

The following table presents a reconciliation of Adjusted EBITDA for each of the last four months of the fiscal year.periods indicated.


Reconciliation of Net Income to Adjusted EBITDA
Three Months EndedSix Months Ended
(In thousands)July 1, 2023June 25, 2022July 1, 2023June 25, 2022
Net income (loss)$(50,796)$40,983 $(159,113)$53,301 
Add back:
Interest expense83,364 88,839 170,493 181,167 
Income tax expense (benefit)(13,845)13,572 (21,020)17,250 
Depreciation and amortization charges21,265 19,554 42,889 41,588 
Total Adjustments90,784 121,965 192,362 240,005 
EBITDA39,988 162,948 33,249 293,306 
Adjustments to EBITDA
Executive severance and related costs24 161 1,593 256 
Stock-based and long term executive compensation2,771 8,041 7,221 14,667 
Litigation costs and settlements1,214 (269)1,308 (39)
Corporate compliance costs— — (4)51 
Store closures99 153 117 1,086 
Securitized accounts receivable interest income(26,286)(48,657)(56,871)(113,683)
Securitized accounts receivable allowance for credit losses26,344 43,549 48,339 59,962 
W.S. Badcock financing operations(2,485)(1,820)(5,607)(4,078)
Right-of-use and long-term asset impairment274 273 819 648 
Goodwill impairment— — 75,000 — 
Integration costs331 64 980 528 
Gain on sale-leaseback and owned properties, net— (49,854)— (52,127)
Divestiture costs— 493 198 2,429 
Acquisition costs7,860 4,776 7,961 5,403 
Loss (gain) on investment in equity securities3,781 (12,859)5,611 10,864 
Acquisition bargain purchase gain— (3,581)— (3,514)
Total Adjustments to EBITDA13,927 (59,530)86,665 (77,547)
Adjusted EBITDA$53,915 $103,418 $119,914 $215,759 

Liquidity and Capital Resources

OverviewWe believe that we have sufficient liquidity to support our ongoing operations and maintain a sufficient liquidity position to meet our obligations and commitments for the next twelve months. 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 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 and the effects of changes in end markets.

As of July 1, 2023, we have current installments of long-term obligations of $13.2 million, of which $6.9 million is finance leases and $6.3 million is the current portion of our senior secured revolving loan facility. We expect these obligations can be serviced from our cash and cash equivalents, which were $106.3 million as of July 1, 2023.

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During the six months ended July 1, 2023, we executed the following substantial transaction that will affect our liquidity and capital resources in future periods:

•On February 2, 2023, we entered into the Third Amendment to the First Lien Credit Agreement to provide for an incremental term loan facility in the principal amount of $300.0 million. The net proceeds of $281.5 million were used to make repayments on our senior secured revolving loan facility.

Sources and uses of cash
Operating activities. In the six months ended July 1, 2023, net cash provided by operating activities increased $89.3 million compared to the same period in the prior year primarily due to a $142.7 million decrease in cash used for inventory compared to the prior year period, a $31.8 million decrease in accounts receivable and a $29.9 million increase in accounts payable. These were primarily offset by a $118.7 million decrease in cash income from operations. Cash net income represents net income adjusted for non-cash or non-operating activities such as goodwill impairment, gains on the sale of Company assets, depreciation and amortization, deferred financing cost amortization and the change in fair value of investment.

Investing activities. In the six months ended July 1, 2023, cash provided by investing activities decreased $245.1 million compared to the same period in the prior year. This decrease was primarily due to a $237.2 million decrease in cash proceeds from the sale of property, plant and equipment compared to the prior year period.
Financing activities. In the six months ended July 1, 2023, cash provided by financing activities was $16.4 million, compared to cash used by financing activities of $362.4 million in the six months ended June 25, 2022. The increase in cash provided by financing activities was primarily due to proceeds received from the issuance of long-term debt, which increased $449.5 million in the current year period. Additionally, repayment of long-term debt increased $31.2 million in the current year period. These sources of cash were offset by a decrease of net cash from secured debt obligations of $22.5 million and a $17.0 million increase in payments for debt issuance costs.

Long-term debt borrowings

For a description of our long-term debt borrowing refer to “Note 7 – Long-Term Obligations” in this Quarterly Report.
Other factors affecting our liquidity


SeasonalityTax Receivable Agreement. We may be required to make payments under the Tax Receivable Agreement (“TRA Payments”) to the former equity holders of cash flow. Our tax return preparation business is seasonal, and most of our revenues and cash flow are generated duringBuddy’s (the “Buddy’s Members”). Under the period from late January through April 30. Following each tax season, from May 1 through late Januaryterms of the following year,Tax Receivable Agreement, we rely onagreed to pay the useBuddy’s Members 40% of our credit facility, excess operatingthe cash flowsavings, if any, in federal, state and local taxes that we realize or are deemed to realize as a result of any increases in tax basis of the assets of New Holdco resulting from future redemptions or exchanges of New Holdco units held by the previous tax season,Buddy’s Members. Any future obligations and from cashthe timing of such payments made by franchisees and ADs who purchase new territories and development areas prior tounder the next tax season to fund our operating expenses and those of our franchisees, as well as invest in the future growth of our business. Our business has historically generated a strong annual operating cash flow.

Credit facility. Our credit facility consists of a term loan and a revolving credit facility that currently allows borrowing of up to $203.8 million with an accordion feature that permits the Company to request an increase in availability of up to an additional $50.0 million.

Under our credit facility, weTax Receivable Agreement, however, are subject to a numberseveral factors, including (i) the timing of covenants that could potentially restrict howsubsequent exchanges of New Holdco units by the Buddy’s Members, (ii) the price of our common stock at the time of exchange, (iii) the extent to which such exchanges are taxable, (iv) the ability to generate sufficient future taxable income over the term of the Tax Receivable Agreement to realize the tax benefits and (v) any future changes in tax laws. If we carry out our business or that require us to meet certain periodic testsdo not generate sufficient taxable income in the form of financial covenants. The restrictions we consider to be material to our ongoing business includeaggregate over the following:


We must satisfy a “leverage ratio” test that is based on our outstanding indebtedness at the end of each fiscal quarter,
We must satisfy a “fixed charge coverage ratio” test at the end of each fiscal quarter,
We must reduce the outstanding balance under our revolving loan to zero for a period of at least 45 consecutive days each fiscal year, and

We must maintain a minimum net worth requirement, measured at April 30 of each year.
In addition, were we to experience certain types of changes in control affecting Mr. Hewitt's continuing control of us, or certain changes to the composition of our Board of Directors, we might become subject to an event of default under our credit facility, which could result in the acceleration of our obligations under that facility.
Our credit facility also contains customary affirmative and negative covenants, including limitations on indebtedness, limitations on liens and negative pledges, limitations on investments, loans and acquisitions, limitations on mergers, consolidations, liquidations and dissolutions, limitations on sales of assets, limitations on certain restricted payments and limitations on transactions with affiliates, among others.

We were in compliance with our financial covenants as of July 31, 2017.
Franchisee lending and potential exposure to credit loss.  At July 31, 2017, our total balance of loans to franchisees and ADs for working capital and equipment loans, representing cash amounts we had advanced to the franchisees and ADs, was $22.8 million. In addition, at that date, our franchisees and ADs together owed us an additional $74.7 million, net of unrecognized revenue of $23.9 million, for amounts representing the unpaid purchase price for franchise territories or areas comprising clusters of territories and other amounts owed to us for royalties and other amounts for which our franchisees and ADs had outstanding payment obligations.

Our actual exposure to potential credit loss associated with franchisee loans is less than the aggregate amount of those loans because a significant portion of those loans are to franchisees located within AD areas, where our AD is ultimately entitled to a substantial portionterm of the franchise fee and royalty revenues represented by some of these loans. For this reason,Tax Receivable Agreement to utilize the tax benefits, then we would not be required to make the related TRA Payments. Although the amount of indebtedness of franchiseesthe TRA Payments would reduce the total cash flow to us is effectively offset in part by ourand New Holdco, we expect the cash tax savings we will realize from the utilization of the related payable obligationtax benefits would be sufficient to ADs in respect of franchise fees and royalties.fund the required payments. As of July 31, 2017,1, 2023, we have TRA Payments due to the total indebtednessBuddy's Members of franchisees to us where$15.4 million.

Dividends. On May 9, 2023, the franchisee is located in an AD area was $57.5 million,Board declared quarterly dividends of which $9.2 million of that indebtedness represents amounts ultimately payable to ADs as their$0.46875 per share of franchise fees and royalties onceSeries A Preferred Stock. The dividends were paid in cash is received.
Our franchisees make electronic return filings for their customers utilizing our software. Our franchise agreements allow uson July 17, 2023 to obtain repaymentholders of amounts due to us from our franchisees through an electronic fee intercept program before our franchisees receive the net proceeds from tax preparation and other fees they have charged to their customers on tax returns associated with tax settlement products. Therefore, we are able to minimize the nonpayment risk associated with amounts outstanding from franchisees by obtaining direct electronic payment in the ordinary course throughout the tax season. Our credit risk associated with amounts outstanding to ADs is also mitigated by our electronic fee intercept program, which enables us to retain repayments of amounts that would otherwise flow through to ADs as their share of franchise fee and royalty payments, to the extent of an AD's indebtedness to us.

 The unpaid amounts owed to us from our ADs and franchisees are collateralized by the underlying franchise or area and, when the franchise or area owner is an entity, are generally guaranteed by the related ownersrecord of the respective entity. Accordingly, toCompany's Series A Preferred Stock on the extent a franchisee or AD does not satisfy its payment obligations to us, we may repossess the underlying franchise or area in order to resell it in the future. Atclose of business on July 31, 2017, we had an investment in impaired accounts and notes receivable and related interest receivable of approximately $21.2 million. We consider accounts and notes receivable to be impaired if the amounts due exceed the fair value of the underlying franchise and estimate an allowance for doubtful accounts based on that excess. Amounts due include the recorded value of the accounts and notes receivable reduced by the allowance for uncollected interest, amounts due to ADs for their portion of franchisee receivables, any related unrecognized revenue and amounts owed to the franchisee or AD by us. In establishing the fair value of the underlying franchise, we consider net fees of open territories and the number of unopened territories. At July 31, 2017, we have recorded an allowance for doubtful accounts for impaired accounts and notes receivable of $8.0 million. There were no significant concentrations of credit risk with any individual franchisee or AD as of July 31, 2017. We believe our allowance for doubtful accounts as of July 31, 2017 is adequate for our existing loss exposure. We closely monitor the performance of our franchisees and ADs and will adjust our allowances as appropriate if we determine the existing allowances are inadequate to cover estimated losses.


Dividends. Beginning in April 2015, we announced a $0.16 per share quarterly cash dividend and may continue to pay cash dividends in the future, the3, 2023. The payment of dividends will beis at the discretion of our Board of Directors and will depend,depends, among other things, on our earnings, capital requirements, and financial condition. Our ability to pay dividends willis 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 our preferred stock. In addition, applicable law requires our Board of Directors to determine that we have adequate surplus prior to the declaration of dividends. We cannot provide an assurance that we will continue to pay dividends at any specific level or at all.


SourcesOn July 19, 2023, we issued a notice of redemption (the “Redemption”) for all outstanding shares of the Series A Preferred Stock. We are redeeming the Series A Preferred Stock in connection with the Proposed Merger and usesin accordance
31

with the terms and conditions of cashthe Merger Agreement. The Redemption is contingent upon our successful completion the Proposed Merger and, in the event the Proposed Merger does not occur and the Merger Agreement is terminated in accordance with its terms, the notice of redemption will be deemed rescinded and the Redemption will not occur.

Operating activities. InThe Preferred Stock will be redeemed in cash at a redemption price equal to $25.00 per share plus any accrued and unpaid dividends from the first three months of fiscal 2018, we used $7.4 million less cash in our operating activities comparedlast dividend payment date, if any, up to but not including the Redemption Date (the “Redemption Price”). The Redemption Price is expected to be paid on August 18, 2023 or such later date as the parties to the same periodMerger Agreement may agree but in fiscal 2017. This decrease is primarily dueno event later than one business day following the Effective Time (the “Redemption Date”). From and after the Redemption Date, dividends will cease to a change in timingaccrue on the Preferred Stock and the Preferred Stock will no longer be deemed outstanding and all rights of our estimated tax paymentsthe holders of the Preferred Stock, other than the right to receive the second quarter of fiscal 2018 compared toRedemption Price upon Redemption, will cease and terminate. Upon Redemption, the first quarter.Preferred Stock will be delisted from trading on the Nasdaq Global Market.

Investing activities. In the first three months of fiscal 2018, we utilized $3.1 million more cash for investing activities compared to the same period in fiscal 2017. This increased usage is primarily due to a decrease of $5.0 million in cash generated from the sale of securities in the three months ended July 31, 2016, partially offset by a decrease of $1.5 million in cash used for the purchase of AD rights, Company-owned offices and acquired customers lists.
Financing activities. In the first three months of fiscal 2018, cash from financing activities decreased $10.0 million compared to the same period in fiscal 2017, largely due to a $7.3 million decrease in net borrowings under our revolving credit facility and an increase of $2.9 million for the repayment of long-term obligations relating to prior year AD and customer list acquisitions.

Future cash needs and capital requirements

Operating and financing cash flow needs. Our primary cash needs are expected to include the payment of scheduled debt and interest payments, capital expenditures and normal operating activities. We believe ourthat the revolving credit facility entered into on April 30, 2012, as amended,facilities along with cash from operating activities, will be sufficient to support our cash flow needs for the foreseeable future. At July 31, 2017, using the leverage ratio applicable under our loan covenants at the end of the quarter, our maximum unused borrowing capacity was $86.6 million.
Our credit facility also contains a requirement that we reduce the balance of our revolving loan to zero for a period of at least 45 consecutive days each fiscal year; however, because our term loan will remain outstanding during that 45 day period, and given our historic cash flow experience at the end of and beginning of each fiscal year, we do not anticipate that the unavailability of our revolving loan during that 45 day period each fiscal year will adversely affect our cash flow. As of June 14, 2017, we had maintained a zero balance on our revolver for the required 45 days and thus have already met the requirement for fiscal 2018.next twelve months.

Several factors could affect our cash flow in future periods, including the following:


the delay by the IRS to issue refunds to taxpayers who claim the Earned Income Tax Credit or the Child Tax Credit;
the•The extent to which we extend additional operating financing to our franchisees and ADs andbeyond the extent that our franchisees and ADs repay their notes to us;levels of prior periods;


the•The extent and timing of capital expenditures;

the cash flow effect•The extent and timing of stock option exercises and the extent to which we engage in stock repurchases;future acquisitions;

our•Our ability to generate feeintegrate our acquisitions and other income relatedimplement business and cost savings initiatives to tax settlement products in light of regulatory pressures on usimprove profitability; and our business partners;

the extent to which we repurchase AD areas, which will involve the use of cash in the short-term, but improve cash receipts in future periods from what would have been the AD's share of royalties and franchise fees;

the extent to which we repurchase certain assets from franchisees and third parties and our ability to operate these assets profitably; and

the•The extent, if any, to which our Board of Directors elects to continue to declare cash dividends on our common stock.



Effect of ourCompliance with debt covenants. Our revolving credit facilityand long-term debt agreements impose restrictive covenants on our future performance. Our credit facility, which matures on April 30, 2019, imposes several restrictive covenants,us, including a covenant that requires usrequirements to maintain a leverage ratiomeet certain ratios. As of not more than 5.5:July 1, at the end of each fiscal quarter ending January 31 and a leverage ratio of not more than 3.0:1 at the end of each other fiscal quarter. The higher permitted leverage ratio at the end of the January 31 quarter reflects the fact that as of that date,2023, we have typically extended significant credit to our franchisees for working capital and other needs that is not reflected in repayments received from our franchisees until the period beginning in February each year. At July 31, 2017, our leverage ratio was 1.0:1.
We continue to be obligated under our credit facility to satisfy a fixed charge coverage ratio test, which requires that ratio to be not less than 1.50:1 at the end of every fiscal quarter. At July 31, 2017, our fixed charge coverage ratio was 4.9:1.
We were in compliance with the ratio tests described in this section asall covenants under these agreements and, based on a continuation of July 31, 2017. Wecurrent operating results, we expect to be able to manage our cash flow and our operating activities in such a manner that we will continue to be able to satisfy our obligations under the credit facilitycompliance for the remainder of the term of that facility.fiscal 2023.


Non-GAAP Financial Information. We report our financial results in accordance with generally accepted accounting principles in the U.S. ("GAAP"); however, we believe that earnings before interest, taxes, depreciation, amortization and impairment ("EBITDA") and non-GAAP results should be evaluated, in addition to, and not as an alternative for, net loss, as determined in accordance with GAAP. We consider our non-GAAP financial results to be a useful metric for management and investors to evaluate and compare current year results with prior periods. Because not all companies use the same calculations, our definition of EBITDA may not be comparable to similarly titled figures from other companies. In addition, when evaluating non-GAAP results, we exclude certain items that are not considered to be part of future operating results. Descriptions of the items which are excluded are as follows:

Executive severance, including stock-based compensation: We exclude from our non-GAAP financial measures cash and non-cash stock-based compensation and perquisites associated with the separation of employment with executives of the Company.

Compliance Task Force and related costs: We exclude from our non-GAAP financial measures third-party expenses we incur related to our Compliance Task Force, which we established in fiscal 2016 to examine and prevent non-compliance, fraud and other misconduct among our franchisees and employees. These expenses include professional and legal fees.

Gain on available-for-sale securities: We exclude from our non-GAAP financial measures gains and losses we record when we sell equity securities and other investments.

Executive sign-on bonus and recruitment costs: We exclude from our non-GAAP financial measures one-time costs incurred to attract and hire new executives.

The following is a reconciliation of EBITDA to GAAP Net Loss:

  Three Months Ended July 31,
  2017 2016
  (in thousands)
Net loss - as reported $(9,758) $(9,430)
Add back:    
Interest expense 281
 344
Income tax benefit (6,362) (6,074)
Depreciation, amortization, and impairment charges 2,196
 2,012
Total Adjustments (3,885) (3,718)
EBITDA $(13,643) $(13,148)

The following is a reconciliation of our reported net loss to our non-GAAP financial measures. Amounts may not add or recalculate due to rounding.


Three Months Ended July 31, 2017
(in thousands except per share data)
 RevenuesOperating ExpensesLoss from OperationsEBITDAPre-tax LossNet LossBasic and Diluted EPS
As Reported$8,188
$24,137
$(15,949)$(13,643)$(16,120)$(9,758)$(0.76)
        
Adjustments: (1)       
Executive recruiting costs—
(325)325
325
325
197
0.02
Compliance Task Force and related costs—
(172)172
172
172
104
0.01
Total adjustments—
(497)497
497
497
301
0.03
Non-GAAP$8,188
$23,640
$(15,452)$(13,146)$(15,623)$(9,457)$(0.73)
        
        
Three Months Ended July 31, 2016
(in thousands except per share data)
 RevenuesOperating ExpensesLoss from OperationsEBITDAPre-tax LossNet LossBasic and Diluted EPS
As Reported$7,149
$22,351
$(15,202)$(13,148)$(15,504)$(9,430)$(0.73)
        
Adjustments: (1)       
Executive severance including stock-based compensation—
(877)877
877
877
533
0.04
Compliance Task Force and related costs—
(640)640
640
640
389
0.03
Gain on available-for-sale securities—
—
—
(50)(50)(30)—
Total adjustments—
(1,517)1,517
1,467
1,467
892
0.07
Non-GAAP$7,149
$20,834
$(13,685)$(11,681)$(14,037)$(8,538)$(0.66)

(1)    The net loss impact of the adjustments is calculated using the effective tax rate for the period.

Seasonality of Operations
Given the seasonal nature of the tax return preparation business, we have historically generated and expect to continue to generate most of our revenues during the period from January 1 through April 30 of each year. For example, in fiscal 2017 we earned 28% of our annual revenues during our fiscal third quarter ended January 31 and 92% of our annual revenues during the combined fiscal third and fourth quarters of 2017. We historically operate at a loss through the first eight months of each fiscal year, during which we incur costs associated with preparing for the upcoming tax season.

Off Balance Sheet Arrangements


We are a partyFor off balance sheet arrangements and guarantees to an interest rate swap agreement that allows uswhich the Company remains secondarily liable, refer to manage fluctuations“Note 12 – Commitments and Contingencies” in cash flow resulting from changes in the interest rate on our variable rate mortgage. This swap effectively changes the variable-rate of our mortgage into a fixed rate of 4.12%. At July 31, 2017, the fair value of our interest rate swap was a liability of less than $0.1 million and was included in accounts payable and accrued expenses. The interest rate swap expires in December 2026.this Quarterly Report.

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ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
ThereWe 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.

Our exposure to interest rate risk relates to our long-term debt obligations, as they bear interest at LIBOR and SOFR, reset periodically and have been no material changesan interest rate margin. Assuming our revolving credit facility was fully drawn, a ten basis point change in the interest rates would change our market risks from those reported in our Annual Report on Form 10-K for the fiscal year ended April 30, 2017.annual interest expense by $1.9 million.

ITEM 4
CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We,The Company, under the supervision and with the participation of ourthe 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-15I and 15d-15(e) under the Exchange Act) as of July 1, 2023. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our 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 July 31, 2017. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of July 31, 2017, our disclosure controls and procedures were not effective as of July 1, 2023 because of the material weakness in providing reasonable assurance that information required to be disclosedour internal control over financial reporting described below.

During the fiscal quarter ended September 24, 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 usoperating activities of $100.9 million and an overstatement of cash flows used in financing activities of $100.9 million in the reportsCompany’s 10-Q for the period endedJune 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 material non-recurring transactions, such as securitizations, to allow for better visibility of the presentation of the transactions, and (ii) enhancements to processes to identify any new non-recurring transactions that we file or submit underoccurred during the Exchange Actperiod. 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 recorded, processed, summarizedcommitted to the continuous improvement of internal control over financial reporting.

Notwithstanding the identified material weakness, management believes that the Condensed Consolidated Financial Statements and reported byrelated financial information included in this 10-Q fairly present, in all material respects, our management on a timely basis in order to comply with our disclosure obligations underbalance sheets, statements of operations, comprehensive income and cash flows as of and for the Exchange Act and the rules and regulations promulgated thereunder.periods presented.

Changes in Internal Control over Financial Reporting

During our most recent fiscal quarter ended July 31, 2017,Other than the ongoing remediation efforts of the material weakness disclosed above, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) underduring the Exchange Act)three months ended July 1, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




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PART II. OTHER INFORMATION
 
ITEM 1
LEGAL PROCEEDINGS
For information regarding legal proceedings, please see "Note 13.refer to “Note 12 – Commitments and Contigencies"Contingencies” in the Notes to the Consolidated Financial Statements in this Quarterly Report, which information is incorporated herein by reference.

ITEM 1A
RISK FACTORS
 
The following additional risk factors should be considered in addition to the risk factors described in Part I, Item 1A, in the Form 10-K.

The consummation of the Proposed Merger is subject to a number of conditions, many of which are largely outside of the parties’ control, and, if these conditions are not satisfied or waived on a timely basis, the Merger Agreement may be terminated and the Proposed Merger may not be completed.

The Proposed Merger is subject to certain customary closing conditions, including, but not limited to: (i) the Requisite Company Vote (as defined in the Merger Agreement); (ii) the absence of an injunction or law restraining, enjoining, rendering illegal or otherwise prohibiting consummation of the Proposed Merger; (iii) subject to customary materiality qualifiers, the accuracy of the representations and warranties contained in the Merger Agreement, including the representation that the Company has not suffered a Material Adverse Effect (as defined in the Merger Agreement) since May 10, 2023; and (iv) material performance by the other parties of their covenants under the Merger Agreement. The failure to satisfy all of the required conditions could delay the completion of the Proposed Merger by a significant period of time or prevent it from occurring. Any delay in completing the Proposed Merger could cause the parties to not realize some or all of the benefits that are expected to be achieved if the Proposed Merger is successfully completed within the expected timeframe. There can be no assurance that the conditions to closing of the Proposed Merger will be satisfied or waived or that the Proposed Merger will be completed within the expected timeframe or at all.

Failure to complete the Proposed Merger could adversely affect the stock price and future business and financial results of the Company.

There can be no assurance that the conditions to the closing of the Proposed Merger will be satisfied or waived or that the Proposed Merger will be completed. If the Proposed Merger is not completed within the expected timeframe or at all, the ongoing business of the Company could be adversely affected and the Company will be subject to a variety of risks and possible consequences associated with the failure to complete the Proposed Merger, including the following: (i) upon termination of the Merger Agreement under specified circumstances, the Company is required to pay Parent a termination fee of $10,350,000; (ii) the Company will incur certain transaction costs, including legal, accounting, financial advisor, filing, printing and mailing fees, regardless of whether the Proposed Merger closes; (iii) under the Merger Agreement, the Company is subject to certain restrictions on the conduct of its business prior to the closing of the Proposed Merger, which may adversely affect its ability to execute certain of its business strategies; (iv) the Company may lose key employees during the period in which the Company and Freedom VCM, Inc., a Delaware corporation (“Parent”) are pursuing the Proposed Merger, which may adversely affect the Company in the future if it is not able to hire and retain qualified personnel to replace departing employees; and (v) the Proposed Merger, whether or not it closes, will divert the attention of certain management and other key employees of the Company from ongoing business activities, including the pursuit of other opportunities that could be beneficial to the Company as an independent company.

If the Proposed Merger is not completed, these risks could materially affect the business and financial results of the Company and its stock price, including to the extent that the current market price of the Company’s common stock is positively affected by a market assumption that the Proposed Merger will be completed.

While the Proposed Merger is pending, the Company will be subject to business uncertainties and certain contractual restrictions that could adversely affect the business and operations of the Company.

In connection with the Proposed Merger, some customers, vendors, franchisees or other third parties of the Company may react unfavorably, including by delaying or deferring decisions concerning their business relationships or transactions with the Company, which could adversely affect the revenues, earnings, funds from operations, cash flows and expenses of the Company, regardless of whether the Proposed Merger is completed. In addition, due to certain restrictions in the Merger
34

Agreement on the conduct of business prior to completing the Proposed Merger, the Company may be unable (without prior written consent), during the pendency of the Proposed Merger, to pursue strategic transactions, undertake significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions, even if such actions would prove beneficial and may cause the Company to forego certain opportunities it might otherwise pursue. In addition, the pendency of the Proposed Merger may make it more difficult for the Company to effectively retain and incentivize key personnel and may cause distractions from the Company’s strategy and day-to-day operations for its current employees and management.

The Company will incur substantial transaction fees and merger-related costs in connection with the Proposed Merger that could adversely affect the business and operations of the Company if the Proposed Merger is not completed.

The Company expects to incur non-recurring transaction fees, which include legal and advisory fees and substantial merger-related costs associated with completing the Proposed Merger, and which could adversely affect the business operations of the Company if the Proposed Merger is not completed.

The termination fee and restrictions on solicitation contained in the Merger Agreement may discourage other companies from trying to acquire the Company.

The Merger Agreement prohibits the Company from initiating, soliciting or proposing an Acquisition Proposal (as defined in the Merger Agreement) or knowingly encouraging, knowingly assisting or otherwise knowingly facilitating any Acquisition Proposal, subject to certain limited exceptions. The Merger Agreement also contains certain termination rights, including, but not limited to, the right of the Company to terminate the Merger Agreement to accept a Superior Proposal (as defined in the Merger Agreement), subject to and in accordance with the terms and conditions of the Merger Agreement, and provides that, upon termination of the Merger Agreement by the Company to enter into an Alternative Acquisition Agreement (as defined by the Merger Agreement) with respect to a Superior Proposal, the Company will be required to pay Parent a termination fee of $10,350,000 in cash. The termination fee and restrictions could discourage other companies from trying to acquire the Company even though those other companies might be willing to offer greater value to the Company’s stockholders than Parent has offered in the Proposed Merger.

Litigation against the Company or the members of the Company’s Board of Directors, could prevent or delay the completion of the Proposed Merger or result in the payment of damages following completion of the Proposed Merger.

It is a condition to the Proposed Merger that no injunction or other order preventing the consummation of the Proposed Merger shall have been no material changesissued by any court of competent jurisdiction or other governmental authority of competent jurisdiction and remain in effect. As of the date of this Quarterly Report, a lawsuit has been filed by a purported stockholder of the Company challenging the Proposed Merger or the other transactions contemplated by the Merger Agreement, which have named the Company and/or members of the Company’s Board of Directors as defendants. It is possible that additional lawsuits may be filed by the Company’s stockholders challenging the Proposed Merger. The outcome of such lawsuits cannot be assured, including the amount of costs associated with defending these claims or any other liabilities that may be incurred in connection with the litigation of these claims. If plaintiffs are successful in obtaining an injunction prohibiting the parties from completing the Proposed Merger on the agreed-upon terms, such an injunction may delay the consummation of the Proposed Merger in the expected timeframe, or may prevent the Proposed Merger from being consummated at all. Whether or not any plaintiff’s claim is successful, this type of litigation can result in significant costs and divert management’s attention and resources from the closing of the Proposed Merger and ongoing business activities, which could adversely affect the operations of the Company.

If the Proposed Merger is not consummated by November 10, 2023, or, under certain conditions, December 13, 2023, either the Company or Parent may terminate the Merger Agreement, subject to our risk factors previously disclosed in Part I. Item 1Acertain exceptions.

Either the Company or Parent may terminate the Merger Agreement if the Merger has not been consummated by November 10, 2023. However, this termination right will not be available to a party if that party failed to fulfill its obligations under the Merger Agreement and that failure was the proximate cause of our Annual Reportthe failure to consummate the Proposed Merger on Form 10-K fortime. In the year ended April 30, 2017.event the Merger Agreement is terminated by either party due to the failure of the Proposed Merger to close by November 10, 2023, the Company will have incurred significant costs and will have diverted significant management focus and resources from other strategic opportunities and ongoing business activities without realizing the anticipated benefits of the Proposed Merger.

35


ITEM 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
There were no issuancessales of unregisteredour equity securities duringfor the three months ended July 31, 2017.period covered by this Quarterly Report.


SHARE REPURCHASES
 
OurOn May 18, 2022, our Board of Directors has authorizedapproved a stock repurchase program under which we may repurchase up to $10.0$500.0 million for share repurchases, which was increased $3.2 million on June 10, 2016. This authorization has no specific expiration dateof 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 cash proceeds from stock option exercises increase the amountpursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the authorization. In addition,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. There was no share repurchase activity during the six months ended July 1, 2023.

As of July 1, 2023, we had approximately $327.5 million remaining under the stock repurchase program approved by our Board of Directors authorized an Area Developer repurchase program, which reducesDirectors.

ITEM 3
DEFAULTS UPON SENIOR SECURITIES

None.
ITEM 4
MINE SAFETY DISCLOSURES

None.
ITEM 5
OTHER INFORMATION
During the amountthree months ended July 1, 2023, none of our directors or officers (as defined in Rule 16a-1(f) of the share repurchase authorization onSecurities Exchange Act of 1934, as amended) adopted or terminated a dollar-for-dollar basis. Shares repurchased from option exercises and RSUs vesting thatRule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are net-share settled by us and shares repurchaseddefined in privately negotiated transactions are not considered share repurchases under this authorization.Item 408 of Regulation S-K of the Securities Act of 1933).

36





ITEM 6
EXHIBITS
 
We have filed the following exhibits as part of this report:Quarterly Report:
 
Exhibit
Number		Exhibit Description
Filed
Herewith
Incorporated by
Reference
X
Exhibit
Number3.1
Exhibit Description
Filed
Herewith
Incorporated by
Reference
10.1

Retention BonusSecond Amended and Restricted Stock Unit Agreement, effective asRestated Certificate of September 6, 2017, by and betweenIncorporation of Liberty Tax, Inc. and Kathleen E. Donovan (Exhibit 10.1(incorporated by reference to the Company's Current Report onExhibit 3.1 to Form 8-K, File No. 001-35588 filed on September 6, 2017) *December 19, 2018).
X

X
X
10.3

Retention BonusSecond Amended and Restricted Stock Unit Agreement, effective asRestated Certificate of September 6, 2017, by and betweenIncorporation of Liberty Tax, Inc. (incorporated by reference to Exhibit 3.1 to Form 8-K, File No. 001-35588 filed September 19, 2019).
X
X
X
X
X
X
37

X
X

X

X

X

X
101.INS101The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2023, formatted in Inline XBRL, Instance Documentfiled herewith: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations (unaudited), (iii) the Condensed Consolidated Statements of Stockholders’ Equity (unaudited), (iv) the Condensed Consolidated Statements of Cash Flows (unaudited) and (v) the Notes to Unaudited Condensed Consolidated Financial StatementsX
101.SCH104The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2023, formatted in Inline XBRL Taxonomy Extension Schema(included with Exhibit 101)X
101.CALXBRL Taxonomy Extension Calculation LinkbaseX
101.LABXBRL Taxonomy Extension Label LinkbaseX
101.PREXBRL Taxonomy Extension Presentation LinkbaseX
101.DEFXBRL Taxonomy Extension Definition LinkbaseX
*All schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish the omitted disclosure schedules to the SEC upon request by the SEC; provided, however, that the Company reserves the right to request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any schedule or exhibit so furnished.
(1) This exhibit is furnished and shall not be deemed “filed” for purposes of the Securities Exchange Act of 1934, as amended.

38

* Management contract or compensatory plan or arrangement



SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Liberty Tax, Inc.
(Registrant)
September 11, 2017By:/s/ Kathleen E. Donovan
Kathleen E. Donovan
Chief Financial Officer
(Principal Financial Officer)


EXHIBIT INDEX
Exhibit
Number
Exhibit Description
Filed
Herewith
Incorporated by
Reference
FRANCHISE GROUP, INC.
(Registrant)
10.1
Retention Bonus and Restricted Stock Unit Agreement, effective as of September 6, 2017, by and between Liberty Tax, Inc. and Kathleen E. Donovan (Exhibit 10.1 to the Company's Current Report on Form 8-K filed on September 6, 2017) *
X
August 8, 2023By:/s/ Brian R. Kahn
10.2
Retention Bonus and Restricted Stock Unit Agreement, effective as of September 6, 2017, by and between Liberty Tax, Inc. and Vanessa M. Szajnoga (Exhibit 10.2 to the Company's Current Report on Form 8-K filed on September 6, 2017) *
X
10.3
Retention Bonus and Restricted Stock Unit Agreement, effective as of September 6, 2017, by and between Liberty Tax, Inc. and Richard G. Artese (Exhibit 10.3 to the Company's Current Report on Form 8-K filed on September 6, 2017) *
X
31.1
Certification of Brian R. Kahn
Chief Executive Officer
X and Director
(Principal Executive Officer)
31.2
August 8, 2023		By:
Certification of /s/ Eric F. Seeton
Eric F. Seeton
Chief Financial Officer		X
32.1(1)
Section 1350 Certification (Chief Executive
(Principal Financial and Accounting Officer)
X
32.2(1)
Section 1350 Certification (Chief Financial Officer)
X
101.INSXBRL Instance DocumentX
101.SCHXBRL Taxonomy Extension SchemaX
101.CALXBRL Taxonomy Extension Calculation LinkbaseX
101.LABXBRL Taxonomy Extension Label LinkbaseX
101.PREXBRL Taxonomy Extension Presentation LinkbaseX
101.DEFXBRL Taxonomy Extension Definition LinkbaseX
39
(1) This exhibit is intended to be furnished and shall not be deemed “filed” for purposes of the Securities Exchange Act of 1934, as amended.

* Management contract or compensatory plan or arrangement

33