0000716643-22-000030.txt : 20220510 0000716643-22-000030.hdr.sgml : 20220510 20220510080020 ACCESSION NUMBER: 0000716643-22-000030 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 68 CONFORMED PERIOD OF REPORT: 20220331 FILED AS OF DATE: 20220510 DATE AS OF CHANGE: 20220510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REGIS CORP CENTRAL INDEX KEY: 0000716643 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PERSONAL SERVICES [7200] IRS NUMBER: 410749934 STATE OF INCORPORATION: MN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12725 FILM NUMBER: 22907429 BUSINESS ADDRESS: STREET 1: 3701 WAYZATA BLVD STREET 2: SUITE 500 CITY: MINNEAPOLIS STATE: MN ZIP: 55416 BUSINESS PHONE: 9529477777 MAIL ADDRESS: STREET 1: 3701 WAYZATA BLVD STREET 2: SUITE 500 CITY: MINNEAPOLIS STATE: MN ZIP: 55416 10-Q 1 rgs-20220331.htm 10-Q rgs-20220331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from             to       
Commission file number 1-12725
Regis Corporation
(Exact name of registrant as specified in its charter)
Minnesota41-0749934
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
3701 Wayzata Boulevard,MinneapolisMinnesota55416
(Address of principal executive offices)(Zip Code)

 (952) 947-7777
(Registrant's telephone number, including area code) 
N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to be submit and post such files). Yes  No 
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer 
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes No   
Title of each classTrading symbolName of exchange
Common Stock, $0.05 par valueRGS NYSE
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of May 4, 2022: 45,505,055

REGIS CORPORATION
 
INDEX
 
 
    
  
   
  
    
  
    
  
    
  
    
  
    
 
    
 
    
 
    
    
 
    
 
    
 
 
    
  




PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
REGIS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
(Dollars in thousands, except share data)
 March 31,
2022
June 30,
2021
ASSETS  
Current assets:  
Cash and cash equivalents (Note 6)
$25,630 $19,191 
Receivables, net15,443 27,372 
Inventories8,606 22,993 
Other current assets13,254 17,103 
Total current assets62,933 86,659 
Property and equipment, net 21,922 23,113 
Goodwill (Note 1)
213,362 229,582 
Other intangibles, net3,420 3,761 
Right of use asset (Note 7)
525,429 611,880 
Other assets35,712 41,388 
Total assets$862,778 $996,383 
LIABILITIES AND SHAREHOLDERS' EQUITY  
Current liabilities:  
Accounts payable$14,319 $27,157 
Accrued expenses36,469 54,857 
Short-term debt, net (Note 8)
193,814  
Short-term lease liability (Note 7)
107,373 116,471 
Total current liabilities351,975 198,485 
Long-term debt, net (Note 8)
 186,911 
Long-term lease liability (Note 7)
437,117 518,866 
Other non-current liabilities62,567 75,075 
Total liabilities851,659 979,337 
Commitments and contingencies (Note 5)
Shareholders' equity:  
Common stock, $0.05 par value; issued and outstanding 45,505,055 and 35,795,844 common shares at March 31, 2022 and June 30, 2021, respectively
2,275 1,790 
Additional paid-in capital62,131 25,102 
Accumulated other comprehensive income9,326 9,543 
Accumulated deficit(62,613)(19,389)
Total shareholders' equity11,119 17,046 
Total liabilities and shareholders' equity$862,778 $996,383 
_______________________________________________________________________________ 
The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.
2


REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
For The Three And Nine Months Ended March 31, 2022 And 2021
(Dollars and shares in thousands, except per share amounts)
 Three Months Ended March 31,Nine Months Ended March 31,
 2022202120222021
Revenues:
Royalties$15,799 $12,835 $48,526 $36,989 
Fees3,364 5,120 11,496 9,600 
Product sales to franchisees1,293 13,079 11,729 41,057 
Advertising fund contributions8,078 5,580 24,213 14,804 
Franchise rental income (Note 7)
32,666 31,317 100,200 95,885 
Company-owned salon revenue3,549 32,336 16,597 117,648 
Total revenue64,749 100,267 212,761 315,983 
Operating expenses:
Cost of product sales to franchisees2,598 11,168 14,129 33,171 
Inventory reserve (1)6,420  6,420  
General and administrative15,569 24,582 53,342 77,419 
Rent (Note 7)
1,246 8,001 6,137 34,128 
Advertising fund expense8,078 5,580 24,213 14,804 
Franchise rent expense32,666 31,317 100,200 95,885 
Company-owned salon expense (2)5,292 33,707 18,304 110,261 
Depreciation and amortization1,997 3,620 5,846 17,384 
Long-lived asset impairment327 833 542 9,817 
Goodwill impairment16,000  16,000  
Total operating expenses90,193 118,808 245,133 392,869 
Operating loss(25,444)(18,541)(32,372)(76,886)
Other (expense) income:
Interest expense(3,403)(3,163)(10,158)(10,626)
Loss from sale of salon assets to franchisees, net(494)(4,575)(2,189)(8,463)
Interest income and other, net153 15,099 13 15,616 
Loss from operations before income taxes(29,188)(11,180)(44,706)(80,359)
Income tax benefit1,270 333 1,482 1,368 
Net loss$(27,918)$(10,847)$(43,224) $(78,991)
Net loss per share:
Basic and diluted:
Net loss per share, basic and diluted$(0.61)$(0.30)$(1.01)$(2.20)
Weighted average common and common equivalent shares outstanding:
Basic and diluted45,886 36,011 42,789 35,929 
_______________________________________________________________________________
(1)Includes charge in the third quarter associated with liquidation of distribution center inventory. Excludes reserves for inventory at salons.
(2)Includes cost of service and product sold to guests in our Company-owned salons. Excludes general and administrative expense, rent and depreciation and amortization related to Company-owned salons.

 The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.
3


REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS (Unaudited)
For The Three And Nine Months Ended March 31, 2022 And 2021
(Dollars in thousands)
 Three Months Ended March 31,Nine Months Ended March 31,
 2022202120222021
Net loss$(27,918)$(10,847)$(43,224)$(78,991)
Foreign currency translation adjustments221 306 (217)1,643 
Comprehensive loss$(27,697)$(10,541)$(43,441)$(77,348)
_______________________________________________________________________________ 
 The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.
4


REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited)
For The Three And Nine Months Ended March 31, 2022 And 2021
(Dollars in thousands)
Three Months Ended March 31, 2022
 Common StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income
Accumulated DeficitTotal
 SharesAmount
Balance, December 31, 202145,490,074 $2,277 $61,601 $9,105 $(34,695)$38,288 
Net loss— — — — (27,918)(27,918)
Foreign currency translation— — — 221 — 221 
Stock-based compensation— — 549 — — 549 
Net restricted stock activity14,981 (2)(19)— — (21)
Balance, March 31, 202245,505,055 $2,275 $62,131 $9,326 $(62,613)$11,119 
Three Months Ended March 31, 2021
 Common StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income
Retained EarningsTotal
 SharesAmount
Balance, December 31, 202035,768,086 $1,788 $22,076 $8,786 $25,798 $58,448 
Net loss— — — — (10,847)(10,847)
Foreign currency translation— — — 306 — 306 
Exercise of SARs3,775 — (24)— — (24)
Stock-based compensation— — 1,703 — — 1,703 
Net restricted stock activity17,964 1 (83)— — (82)
Balance, March 31, 202135,789,825 $1,789 $23,672 $9,092 $14,951 $49,504 
Nine Months Ended March 31, 2022
 Common StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income
Accumulated DeficitTotal
 SharesAmount
Balance, June 30, 202135,795,844 $1,790 $25,102 $9,543 $(19,389)$17,046 
Net loss— — — — (43,224)(43,224)
Foreign currency translation— — — (217)— (217)
Issuance of common stock, net of offering costs9,295,618 465 36,720 .— 37,185 
Stock-based compensation— — 854 — — 854 
Net restricted stock activity413,593 20 (545)— — (525)
Balance, March 31, 202245,505,055 $2,275 $62,131 $9,326 $(62,613)$11,119 
Nine Months Ended March 31, 2021
 Common StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income
Retained EarningsTotal
 SharesAmount
Balance, June 30, 202035,625,716 $1,781 $22,011 $7,449 $94,462 $125,703 
Net loss— — — — (78,991)(78,991)
Foreign currency translation— — — 1,643 — 1,643 
Exercise of SARs3,775 — (24)— — (24)
Stock-based compensation— — 1,792 — — 1,792 
Net restricted stock activity160,334 8 (107)— — (99)
Minority interest— — — — (520)(520)
Balance, March 31, 202135,789,825 $1,789 $23,672 $9,092 $14,951 $49,504 
_______________________________________________________________________________ 
The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.
5


REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
For The Nine Months Ended March 31, 2022 And 2021
(Dollars in thousands)
 Nine Months Ended March 31,
 20222021
Cash flows from operating activities:  
Net loss$(43,224)$(78,991)
Adjustments to reconcile net loss to cash used in operating activities: 
Depreciation and amortization4,944 13,968 
Long-lived asset impairment542 9,817 
Deferred income taxes(1,693)(806)
Inventory reserve (1)9,007 6,875 
Gain from disposal of distribution center assets (14,878)
Loss from sale of salon assets to franchisees, net2,189 8,463 
Goodwill impairment16,000  
Stock-based compensation854 1,792 
Amortization of debt discount and financing costs1,379 1,313 
Other non-cash items affecting earnings419 183 
Changes in operating assets and liabilities, excluding the effects of asset sales (2)(24,770)(27,743)
Net cash used in operating activities(34,353)(80,007)
Cash flows from investing activities: 
Capital expenditures(4,258)(9,609)
Proceeds from sale of assets to franchisees  7,743 
Costs associated with sale of salon assets to franchisees (242)
Proceeds from company-owned life insurance policies 1,200 
Net cash used in investing activities(4,258)(908)
Cash flows from financing activities: 
Borrowings on revolving credit facility10,000  
Repayments of revolving credit facility(3,096) 
Proceeds from issuance of common stock, net of offering costs37,185  
Taxes paid for shares withheld(844)(316)
Minority interest buyout (562)
Distribution center lease payments (724)
Net cash provided by (used in) financing activities43,245 (1,602)
Effect of exchange rate changes on cash and cash equivalents(88)6 
Increase (decrease) in cash, cash equivalents, and restricted cash4,546 (82,511)
Cash, cash equivalents and restricted cash: 
Beginning of period29,152 122,880 
End of period$33,698 $40,369 
_______________________________________________________________________________        
(1)Includes salon and distribution center reserves.
(2)Changes in operating assets and liabilities exclude assets and liabilities sold.
The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.
6


REGIS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.    BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The unaudited interim Condensed Consolidated Financial Statements of Regis Corporation (the Company) as of March 31, 2022 and for the three and nine months ended March 31, 2022 and 2021, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of March 31, 2022 and its consolidated results of operations, comprehensive loss, shareholders' equity and cash flows for the interim periods. Adjustments consist only of normal recurring items, except for any discussed in the notes below. The results of operations and cash flows for any interim period are not necessarily indicative of results of operations and cash flows for the full year.
The accompanying interim unaudited Condensed Consolidated Financial Statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP). The unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended June 30, 2021 and other documents filed or furnished with the SEC during the current fiscal year.
COVID-19 Impact:
During the periods ended March 31, 2022 and 2021, the global coronavirus pandemic (COVID-19) had an adverse impact on operations. The COVID-19 pandemic continues to impact salon guest visits and franchisee staffing, resulting in a significant reduction in revenue and profitability. In response to COVID-19, the Canada Emergency Wage Subsidy (CEWS), Canada Emergency Rent Subsidy (CERS) and the U.S. employee retention payroll tax credit were introduced for eligible employers. In fiscal years 2022 and 2021, the Company received $1.9 and $1.6 million, respectively, in CEWS and $1.2 and $0.0 million, respectively, in CERS that partially cover expenses incurred in Canada during those years. In fiscal year 2021, the Company recorded a $1.5 million benefit related to the U.S. employee retention tax credit. Additionally, in December 2021 the Company paid $2.5 million of social security contributions that had been deferred under the CARES Act. Overall, COVID-19 has, and may continue to have, a negative effect on revenue and profitability. The ultimate impact of the COVID-19 pandemic in both the short and long term is not currently estimable due to the uncertainty surrounding the duration of the pandemic, the availability and acceptance of preventative vaccines, the emergence and impact of new COVID-19 variants and changing government restrictions. Additional impacts to the business may arise that we are not aware of currently.
Liquidity:
The Company's debt of $193.8 million is due in March 2023 and management's current projected cash flows do not support the ability to repay this obligation in full at maturity. As a result of the maturity date, our debt is reflected as a current liability at March 31, 2022. Management is working with advisors to determine alternative financing arrangements and believes the ability to refinance alleviates substantial doubt related to the Company's ability to continue as a going concern. If the Company is not able to refinance our debt at terms acceptable to us by the maturity date, the lender would be able to call the debt and pursue other remedies that could be harmful to our business.
Inventories:
The Company has inventory valuation reserves for excess and obsolete inventories or other factors that may render inventories unmarketable at their historical costs. In fiscal year 2021, the Company announced it would transition away from its wholesale product distribution model in favor of a third-party distribution model. As a result, the Company exited its distribution centers in fiscal year 2022 and now stores inventory at a third-party facility. To facilitate the exit of the distribution centers, the Company sold and continues to sell inventory at discounts and dispose of hard-to-sell products. Additionally, the reduction in company-owned salons decreases the Company's ability to redistribute inventory from closed locations to other salons to be sold or used. The inventory valuation reserve as of March 31, 2022 and June 30, 2021 was $14.3 and $11.8 million, respectively. In the three and nine months ended March 31, 2022, the Company recorded total inventory reserve charges of $7.5 and $9.0 million, respectively. In the three months ended March 31, 2022, $6.4 and $1.1 million were recorded in Inventory reserve and Company-owned salon expense, respectively. In the nine months ended March 31, 2022, $6.4 and $2.6 million were recorded in Inventory reserve and Company-owned salon expense, respectively. Included in Company-owned salon expense is an inventory reserve charge of $5.3 and $6.9 million in the three and nine months ended March 31, 2021, respectively.
7


Long-Lived Asset Impairment Assessments:
The Company assesses impairment of long-lived salon assets and right of use (ROU) assets at the individual salon level, as this is the lowest level for which identifiable cash flows are largely independent of other groups of assets and liabilities, when events or changes in circumstances indicate the carrying value of the assets or the asset grouping may not be recoverable. Factors considered in deciding when to perform an impairment review include significant under-performance of an individual salon in relation to expectations, significant economic or geographic trends, and significant changes or planned changes in the use of the assets. The first step is to assess recoverability, and in doing that, the undiscounted salon cash flows are compared to the carrying value of the salon assets. If the undiscounted estimated cash flows are less than the carrying value of the assets, the Company calculates an impairment charge based on the difference between the carrying value of the asset group and its fair value. The fair value of the long-lived asset group is estimated using market participant methods based on the best information available. See Note 7 of the unaudited Condensed Consolidated Financial Statements for further discussion related to the ROU asset impairment.
Judgments made by management related to the expected useful lives of long-lived assets and the ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as changes in economic conditions and changes in operating performance. As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause the Company to realize material impairment charges.
Goodwill:
The Company assesses goodwill on an annual basis, during the Company's fourth fiscal quarter, and between annual assessments if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting below its carrying value. At the end of the period ended March 31, 2022, the Company determined a triggering event occurred related to a decrease in forecasted revenue due to slower than expected recovery from COVID-19, resulting in a quantitative impairment test performed over goodwill. Accordingly, the Company engaged a third-party valuation specialist to perform an impairment analysis on the Franchise reporting unit of the business as of March 31, 2022. For the goodwill impairment analysis, management utilized a combination of both a discounted cash flows approach and market approach to evaluate the Franchise reporting unit. The discounted cash flows model reflects management's assumptions regarding revenue growth rates, economic and market trends, cost structure, and other expectations about the anticipated short-term and long-term operating results. Management's assumptions related to revenue growth rates were reduced and management increased expected salon closures compared to prior valuations. These changes, along with a decline in value from the market approach, reduced the fair value of the reporting unit from previous valuations. The discount rate of 19.5% was also a key assumption utilized in the discounted cash flows which was an increase of 1% from the second quarter valuation due to an increase in market interest rates.
As a result of the impairment testing as of March 31, 2022, the Franchise reporting unit was determined to have a carrying value in excess of its fair value, resulting in a goodwill impairment charge of $16.0 million in the third quarter. As of March 31, 2022 and June 30, 2021, the Franchise reporting unit had goodwill of $213.4 and $229.6 million, respectively. The Company's projections of future operating performance do not anticipate future salon closures due to the COVID-19 pandemic. However, the ultimate severity and longevity of the COVID-19 pandemic is unknown, therefore; if actual results are not consistent with the estimates and assumptions used in the calculations, the Company may be exposed to future impairment losses that could be material.
The table below contains details related to the Company's goodwill (in thousands):
Franchise Reporting Unit
Goodwill, net at June 30, 2021$229,582 
Goodwill impairment(16,000)
Translation rate adjustments(220)
Goodwill, net at March 31, 2022$213,362 
8


Classification of Revenue and Expenses:
Beginning in the first quarter of fiscal year 2022, the Company adjusted its Statement of Operations for both periods presented to align the presentation of results to its franchise-focused business. Below is a summary of the changes to the financial statement captions. The change does not have a financial impact on the Company's reported revenue, operating loss, reported net loss or cash flows from operations.
Royalties - sales-based royalty received from franchisees. In prior years, these fees were included in Royalties and Fees and disclosed in the footnotes.
Fees - fees received from franchisees and third parties, including franchise fees, software and hardware fees related to Opensalon® Pro and fees received from the third-party distributors.
Product sales to franchisees - wholesale product sales to franchisees. This caption equates to Product sales in the Franchise segment in prior years. The Company is changing its franchise product sales business in fiscal year 2022 from a wholesale distribution model to a third-party distribution model. This revenue is expected to decrease significantly during fiscal year 2022.
Advertising fund contributions - sales-based advertising fund contributions received from franchisees. In prior years, these fees were included in Royalties and Fees and disclosed in the footnotes.
Company-owned salon revenue - service revenue and revenue derived from sales of product in Company-owned salons. This caption equates to revenue reported in the Company-owned segment in prior periods.
Cost of product sales to franchisees - direct cost of inventory and freight and other costs of sales. In prior years, these sales were included in the Franchise segment cost of product and site operating expenses.
Company-owned salon expense - cost of service and product sold to guests in our Company-owned salons and other salon-related costs. In prior years, these costs were classified as Company-owned segment cost of service, cost of product and site operating expenses. Excluded from this caption are general and administrative expense, rent and depreciation and amortization related to company-owned salons.
Depreciation:
Depreciation expense in the three months ended March 31, 2022 and 2021 include $0.3 and $0.8 million, respectively, and for the nine months ended March 31, 2022 and 2021 include $0.9 and $3.4 million, respectively, of asset retirement obligations, which are cash expenses.
9


2.    REVENUE RECOGNITION:
Revenue Recognition and Deferred Revenue:
Revenue recognized at point of sale
Product sales to franchisees are recorded at the time product is delivered to the franchisee. Payment for franchisee product revenue is generally collected within 30 to 90 days of delivery. Company-owned salon revenues are recognized at the time when the services are provided or the guest receives and pays for the merchandise. Revenues from purchases made with gift cards are also recorded when the guest takes possession of the merchandise or services are provided. Gift cards issued by the Company are recorded as a liability (deferred revenue) upon sale and recognized as revenue upon redemption by the guest. Gift card breakage, the amount of gift cards which will not be redeemed, is recognized proportional to redemptions using estimates based on historical redemption patterns.
Revenue recognized over time
Royalty and advertising fund revenues represent sales-based royalties that are recognized in the period in which the sales occur. Generally, royalty and advertising fund revenues are billed and collected monthly in arrears. Advertising fund revenues and expenditures, which must be spent on marketing and related activities per the franchise agreements, are recorded on a gross basis within the unaudited Condensed Consolidated Statement of Operations. The treatment increases both the gross amount of reported revenue and expense and generally has no impact on operating income and net income. Franchise fees are billed and received upon the signing of the franchise agreement. Recognition of these fees is deferred until the salon opening and is then recognized over the term of the franchise agreement, which is typically ten years. Software fees are recognized over the term of the SaaS agreement. Franchise rental income is a result of the Company signing leases on behalf of franchisees and entering into sublease arrangements with the franchisees. The Company recognizes franchise rental income and expense when it is due to the landlord.
Information about receivables, broker fees and deferred revenue subject to the current revenue recognition guidance is as follows:
March 31,
2022
June 30,
2021
Balance Sheet Classification
(Dollars in thousands)
Receivables from contracts with customers, net$10,209 $19,112 Receivables, net
Broker fees16,515 19,254 Other assets
Deferred revenue:
     Current
Gift card liability$2,097 $2,240 Accrued expenses
Deferred franchise fees unopened salons25 40 Accrued expenses
Deferred franchise fees open salons5,801 5,884 Accrued expenses
Total current deferred revenue$7,923 $8,164 
     Non-current
Deferred franchise fees unopened salons$3,778 $6,571 Other non-current liabilities
Deferred franchise fees open salons28,473 32,365 Other non-current liabilities
Total non-current deferred revenue$32,251 $38,936 
10


Receivables relate primarily to payments due for royalties, franchise fees, advertising fees, rent, franchise product sales and sales of salon services and product paid by credit card. The receivables balance is presented net of an allowance for expected losses (i.e., doubtful accounts), primarily related to receivables from franchisees. The following table is a rollforward of the allowance for doubtful accounts for the period (in thousands):
Balance as of June 30, 2021$7,774 
Benefit to reserve for doubtful accounts (1)(88)
Provision for franchisee rent (2)847 
Reclass of accrued rent (3)396 
Write-offs(1,600)
Balance as of March 31, 2022$7,329 
_______________________________________________________________________________
(1)The benefit to reserve for doubtful accounts is recognized as general and administrative in the unaudited Condensed Consolidated Statement of Operations.
(2)The provision for franchisee rent is recognized as rent in the unaudited Condensed Consolidated Statement of Operations.
(3)The reclass of accrued rent represents franchisee rent obligations guaranteed by the Company that were unbilled and deemed unrecoverable as of June 30, 2021. The amounts were billed in fiscal year 2022 and the related accrual was reclassified to the allowance for doubtful accounts.
Broker fees are the costs associated with using external brokers to identify new franchisees. These fees are paid upon the signing of the franchise agreement and recognized as general and administrative expense over the term of the franchise agreement. The following table is a rollforward of the broker fee balance for the periods indicated (in thousands):
Balance as of June 30, 2021$19,254 
Additions25 
Amortization(2,398)
Write-offs(366)
Balance as of March 31, 2022$16,515 
The decrease in non-current deferred franchise fees for unopened salons from June 30, 2021 to March 31, 2022 is primarily due to $1.9 million of deferred fees related to terminated development agreements being recognized as fees in the unaudited Condensed Consolidated Statement of Operations in the nine months ended March 31, 2022, of which $0.1 million was recognized in the third quarter. Deferred franchise fees related to open salons are generally recognized on a straight-line basis over the term of the franchise agreement. Franchise fee revenue for the three months ended March 31, 2022 and 2021 was $1.6 and $1.6 million, respectively, and for the nine months ended March 31, 2022 and 2021 was $4.9 and $4.9 million, respectively. Estimated revenue expected to be recognized in the future related to deferred franchise fees for open salons as of March 31, 2022 is as follows (in thousands):
Remainder of 2022$1,503 
20235,731 
20245,489 
20255,100 
20264,632 
Thereafter11,819 
Total$34,274 
11


3.    SHAREHOLDERS' EQUITY:
Stock-Based Employee Compensation:
During the three and nine months ended March 31, 2022, the Company granted various equity awards including RSUs, SOs, and SARs as follows:
Three Months Ended March 31, 2022Nine Months Ended March 31, 2022
Restricted stock units (RSUs)54,545 827,841 
Stock options (SOs)92,500 630,000 
Stock appreciation rights (SARs)112,500 600,000 
The RSUs granted during the third quarter of fiscal year 2022 were granted to a Board member who was appointed the chairman of the Board and vest on November 14, 2022. The RSUs granted during the nine months ended March 31, 2022 vest 20%, 20%, 60% over a three-year period subsequent to the grant date or cliff vest after a one-year period subsequent to the grant date. The SOs and SARs granted during the third quarter of fiscal year 2022 were granted to newly appointed members of the Company's executive team. The SOs and SARs granted during the three and nine months ended March 31, 2022 vest 20%, 20%, 60% over a three-year period subsequent to the grant date.
Total compensation cost for stock-based payment arrangements totaling $0.5 and $1.7 million for the three months ended March 31, 2022 and 2021, respectively, and $0.9 and $1.8 million for the nine months ended March 31, 2022 and 2021, respectively, were recorded within general and administrative expense on the unaudited Condensed Consolidated Statement of Operations. In the nine months ended March 31, 2022 and 2021, stock compensation includes a benefit related to executive forfeitures of $2.0 and $2.7 million, respectively.
Share Issuance Program:
In fiscal year 2021, the Company filed a $150.0 million shelf registration statement and $50.0 million prospectus supplement with the Securities and Exchange Commission (SEC) under which it may offer and sell, from time to time, up to $50.0 million worth of its Class A common stock in "at-the-market" offerings. During the nine months ended March 31, 2022, the Company received gross proceeds of $38.4 million related to the "at-the-market" offering and paid fees to sales agents and other fees of $1.2 million. Net proceeds from sales of shares under the "at-the-market" program, if any, may be used to, among other things, fund working capital requirements, repay debt and support growth strategies.
12


4.     INCOME TAXES:
 A summary of income tax benefits and corresponding effective tax rates is as follows:
Three Months Ended March 31,Nine Months Ended March 31,
2022202120222021
(Dollars in thousands)
Income tax benefit$1,270 $333 $1,482 $1,368 
Effective tax rate4.4 %3.0 %3.3 %1.7 %
The recorded tax benefits and effective tax rates for the three and nine months ended March 31, 2022 and 2021 were different than what would normally be expected primarily due to the impact of the deferred tax valuation allowance.
The Company is no longer subject to IRS examinations for years before 2014. Furthermore, with limited exceptions, the Company is no longer subject to state and international income tax examinations by tax authorities for years before 2012.


5.     COMMITMENTS AND CONTINGENCIES:
The Company is a plaintiff or defendant in various lawsuits and claims arising out of the normal course of business. Like certain other franchisors, the Company has faced allegations of franchise regulation and agreement violations. Additionally, because the Company may be the tenant under a master lease for a location subleased to a franchisee, the Company has faced allegations of non-payment of rent and associated charges. Further, similar to other large retail employers, the Company has been faced with allegations of purported class-wide consumer and wage and hour violations. In the three and nine months ended March 31, 2022, the Company recorded $1.0 and $2.0 million of potential settlement exposure related to litigation, respectively, of which $1.1 million was paid during the year. The Company's accrual related to potential settlement fees was $0.9 million as of March 31, 2022. Included in the charge in the third quarter is litigation brought in the 11th Judicial Circuit, St. Charles County, Missouri, in which the Company challenged a landlord regarding a lease the Company secured but the landlord leased to another tenant. The landlord in the case prevailed and the court ordered the Company to pay the landlord $0.5 million in attorney’s fees. The Company requested leave to appeal and plans to vigorously pursue overturning this judgment. In addition, the Company's existing point-of-sale system supplier had challenged the development of certain parts of the Company's technology systems in litigation brought in the Northern District of California. The Company and the supplier entered into an agreement, effective June 25, 2021, that provided for the dismissal of the lawsuit and set forth a commercial services agreement pursuant to which the supplier will assist in the transfer of franchise salons from its point-of-sale system to the Company's salon management system, Opensalon® Pro. The Company's accrual related to the agreement was $2.6 and $3.0 million as of March 31, 2022 and June 30, 2021, respectively. Other litigation is inherently unpredictable, and the outcome of these matters cannot presently be determined. Although the actions are being vigorously defended, the Company could incur judgments in the future or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period.
13


6.    CASH, CASH EQUIVALENTS AND RESTRICTED CASH:
The table below reconciles the cash and cash equivalents balances and restricted cash balances, recorded within other current assets on the unaudited Condensed Consolidated Balance Sheet to the amount of cash, cash equivalents and restricted cash reported on the unaudited Condensed Consolidated Statement of Cash flows:
March 31,
2022
June 30,
2021
(Dollars in thousands)
Cash and cash equivalents$25,630 $19,191 
Restricted cash, included in other current assets (1)8,068 9,961 
Total cash, cash equivalents and restricted cash $33,698 $29,152 
_______________________________________________________________________________
(1)Restricted cash within other current assets primarily relates to consolidated advertising cooperatives funds, which can only be used to settle obligations of the respective cooperatives and contractual obligations to collateralize the Company's self-insurance programs.


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7.    LEASES:
At contract inception, the Company determines whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides the Company the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, the Company considers it to be, or contain, a lease. The Company leases its company-owned salons and some of its corporate facilities under operating leases. The original terms of the salon leases range from 1 to 20 years with many leases renewable for an additional 5 to 10-year term at the option of the Company. In addition to the obligation to make fixed rental payments for the use of the salons, the Company also has variable lease payments that are based on sales levels. For most leases, the Company is required to pay real estate taxes and other occupancy expenses. Total rent includes the following:
Three Months Ended March 31,Nine Months Ended March 31,
2022202120222021
(Dollars in thousands)
Office and warehouse rent $987 $1,351 $3,904 $3,748 
Lease termination expense (benefit) (1)225 (147)1,803 6,523 
Lease liability benefit (2)(357)(3,009)(3,284)(11,295)
Franchise salon rent (3)(464)297 111 1,455 
Company-owned salon rent855 9,509 3,603 33,697 
Total$1,246 $8,001 $6,137 $34,128 
_______________________________________________________________________________
(1)During the three months ended March 31, 2022, the Company incurred costs of $0.2 million to exit salons before the lease end date in order to relieve the Company of future lease obligations. During the nine months ended March 31, 2022, the Company paid $0.9 million to exit its distribution centers before the lease end dates and incurred costs of $0.9 million to exit salons before the lease end date in order to relieve the Company of future lease obligations. For the three and nine months ended March 31, 2021, lease termination fees include $0.3 and $4.9 million, respectively, of early termination payments to close salons before the lease end date to relieve the Company of future lease obligations and $(0.5) and $1.5 million, respectively, of adjustments to accrue future lease payments for salons that are no longer operating.
(2)Upon termination of previously impaired leases, the Company derecognizes the corresponding ROU assets and lease liabilities which results in a net gain. In addition, the Company recognizes a benefit from lease liabilities decreasing in excess of previously impaired ROU assets for ongoing leases that were previously impaired.
(3)Includes the provision for uncollectible franchisee rent. The credit in the three months ended March 31, 2022 relates to lower estimated exposure.
The Company leases salon premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees. All lease-related costs are passed through to the franchisees. The Company records the rental payments due from franchisees as franchise rental income and the corresponding amounts owed to landlords as franchise rent expense on the unaudited Condensed Consolidated Statement of Operations. For the three months ended March 31, 2022 and 2021, franchise rental income and franchise rent expense were $32.7 and $31.3 million, respectively and $100.2 and $95.9 million, respectively, for the nine months ended March 31, 2022 and 2021. These leases generally have lease terms of approximately five years. The Company expects to renew SmartStyle and some franchise leases upon expiration. Other leases are expected to be renewed by the franchisee upon expiration.
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For salon operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date, including one lease term option when the lease is expected to be renewed. The ROU asset is initially and subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, less any accrued lease payments and unamortized lease incentives received, if any. For leases classified as operating leases, expense for lease payments is recognized on a straight-line basis over the lease term, including the lease renewal option when the lease is expected to be renewed. Generally, the non-lease components, such as real estate taxes and other occupancy expenses, are separate from rent expense within the lease and are not included in the measurement of the lease liability because these charges are variable.
The discount rate used to determine the present value of the lease payments is the Company's estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as the interest rate implicit in the lease cannot generally be determined. The Company uses the portfolio approach in applying the discount rate based on the original lease term. The weighted average remaining lease term was 6.15 and 6.44 years and the weighted average discount rate was 4.22% and 4.11% for all salon operating leases as of March 31, 2022 and June 30, 2021, respectively.
A lessee's ROU asset is subject to the same asset impairment guidance in ASC 360, Property, Plant, and Equipment, applied to other elements of property, plant, and equipment. The Company has identified its asset groups at the individual salon level as this represents the lowest level that identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Poor salon performance, primarily due to the COVID-19 pandemic, resulted in an ASC 360-10-35-21 triggering event. As a result, management assessed underperforming salon asset groups, which included the related ROU assets, for impairment in accordance with ASC 360.
The first step in the impairment test under ASC 360 is to determine whether the long-lived assets are recoverable, which is determined by comparing the net carrying value of the salon asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset group. Estimating cash flows for purposes of the recoverability test is subjective and requires significant judgment. Estimated future cash flows used for the purposes of the recoverability test were based upon historical cash flows for the salons, adjusted for expected changes in future market conditions related to the COVID-19 pandemic, and other factors. The period of time used to determine the estimates of the future cash flows for the recoverability test was based on the remaining useful life of the primary asset of the group, which was the ROU asset in all cases.
The second step of the long-lived asset impairment test requires that the fair value of the asset group be estimated when determining the amount of any impairment loss. For the salon asset groups that failed the recoverability test, an impairment loss was measured as the amount by which the carrying amount of the asset group exceeds its fair value. The Company applied the fair value guidance within ASC 820-10 to determine the fair value of the asset group from the perspective of a market-participant considering, among other things, appropriate discount rates, multiple valuation techniques, the most advantageous market, and assumptions about the highest and best use of the asset group. To determine the fair value of the salon asset groups, the Company utilized market-participant assumptions rather than the Company's own assumptions about how it intends to use the asset group. The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include the market rent of comparable properties and a discount rate.
In the three months ended March 31, 2022 and 2021, the Company recognized a long-lived impairment charge of $0.3 and $0.8 million, respectively, which included $0.3 and $0.3 million, respectively, related to the ROU assets, in the unaudited Condensed Consolidated Statement of Operations. In the nine months ended March 31, 2022 and 2021, the Company recognized a long-lived impairment charge of $0.5 and $9.8 million, respectively, which included $0.5 and $6.3 million, respectively, related to the ROU assets, in the unaudited Condensed Consolidated Statement of Operations. The impairments recorded were primarily the result of triggering events identified on certain underperforming salons, salons that were identified to close in the year, and certain salons where franchisees were unable to fulfill their rent obligations. Assessing the long-lived assets for impairment requires management to make assumptions and to apply judgment, which can be affected by economic conditions and other factors that can be difficult to predict. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions it uses to calculate impairment losses for its long-lived assets, including its ROU assets. The Company's projections of future operating performance do not anticipate future salon closures due to the COVID-19 pandemic. However, the ultimate severity and longevity of the COVID-19 pandemic is unknown, therefore; if actual results are not consistent with the estimates and assumptions used in the calculations, the Company may be exposed to future impairment losses that could be material.
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As of March 31, 2022, future operating lease commitments, including one renewal option for leases expected to be renewed, to be paid and received by the Company were as follows (in thousands):
Fiscal YearLeases for Franchise SalonsLeases for Company-owned SalonsCorporate LeasesTotal Operating Lease PaymentsSublease Income To Be Received From FranchiseesNet Rent Commitments
Remainder of 2022$31,816 $1,091 $584 $33,491 $(31,816)$1,675 
2023117,500 3,743 2,365 123,608 (117,500)6,108 
2024102,920 2,133 1,486 106,539 (102,920)3,619 
202586,453 735 1,525 88,713 (86,453)2,260 
202673,152 414 1,563 75,129 (73,152)1,977 
Thereafter184,351 370 6,498 191,219 (184,351)6,868 
Total future obligations$596,192 $8,486 $14,021 $618,699 $(596,192)$22,507 
Less amounts representing interest71,797 396 2,016 74,209 
Present value of lease liabilities$524,395 $8,090 $12,005 $544,490 
Less current lease liabilities101,655 3,818 1,900 107,373 
Long-term lease liabilities$422,740 $4,272 $10,105 $437,117 
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8.    FINANCING ARRANGEMENTS:
The Company's debt consists of the following:
Revolving Credit Facility
 Maturity DateMarch 31,
2022
March 31,
2022
June 30,
2021
 (Fiscal Year)(Interest rate %)(Dollars in thousands)
Revolving credit facility20235.125%$193,814 $186,911 
At March 31, 2022, cash and cash equivalents totaled $25.6 million. As of March 31, 2022, the Company has $193.8 million of outstanding borrowings under a $291.3 million revolving credit facility. The credit facility decreased $3.1 million from $294.4 million as of June 30, 2021 in accordance with the bulk sale provisions in the revolving credit facility agreement, due to the sale of secured inventory related to our transition to third-party distribution partners. At March 31, 2022, the Company had outstanding standby letters of credit under the revolving credit facility of $15.7 million, primarily related to the Company's self-insurance program. The unused available credit under the revolving credit facility was $81.8 million as of March 31, 2022. The Company's liquidity per the agreement includes the unused available balance under the credit facility, unrestricted cash and cash equivalents and the shortfall in the gap in expected proceeds from the sale of salon assets of $20.9 million as of March 31, 2022. Total liquidity per the agreement was $128.3 million as of March 31, 2022. The revolving credit facility has a minimum liquidity covenant of $75.0 million. As of March 31, 2022, the Company had cash, cash equivalents and restricted cash of $33.7 million and current liabilities of $352.0 million.
The Company was in compliance with all covenants and other requirements of the financing arrangements as of March 31, 2022. Management's current projected cash flows do not support the ability to repay this obligation in full at maturity, however, management is working with advisors to determine alternative financing arrangements.
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9.    FAIR VALUE MEASUREMENTS:
Fair value measurements are categorized into one of three levels based on the lowest level of significant input used: Level 1 (unadjusted quoted prices in active markets); Level 2 (observable market inputs available at the measurement date, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data).
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of March 31, 2022 and June 30, 2021, the estimated fair value of the Company's cash, cash equivalents, restricted cash, receivables, inventory, deferred compensation assets and accounts payable approximated their carrying values.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We measure certain assets, including the Company's equity method investments, tangible fixed and other assets and goodwill, at fair value on a nonrecurring basis when they are deemed to be other than temporarily impaired. The fair values of these assets are determined, when applicable, based on valuation techniques using the best information available, and may include quoted market prices, market comparables and discounted cash flow projections.
The following impairments were based on fair values using Level 3 inputs:
Three Months Ended March 31,Nine Months Ended March 31,
2022202120222021
(Dollars in thousands)
Goodwill impairment (1)$16,000 $ $16,000 $ 
Long-lived asset impairment (1)327 833