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,September 30, 2021 |
| 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)
| | | | | | | | | | | | | | |
Minnesota | | 41-0749934 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
3701 Wayzata Boulevard, | Minneapolis | Minnesota | | 55416 |
(Address of principal executive offices) | | (Zip Code) |
(952) 947-7777
(Registrant’sRegistrant'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"large accelerated filer,” “accelerated" "accelerated filer,” “smaller" "smaller reporting company,”" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | ☐ | | Accelerated filer | ☒ | |
| Non-accelerated filer | ☐ | | Smaller reporting company | ☐ | |
| Emerging growth company | ☐ | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 class | | Trading symbol | | Name of exchange |
Common Stock, $0.05 par value | | RGS | | NYSE |
Indicate the number of shares outstanding of each of the issuer’sissuer's classes of common stock as of April 30,October 29, 2021: 35,789,820
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, 2021 | | June 30, 2020 |
| | | | |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 34,510 | | | $ | 113,667 | |
Receivables, net | | 31,254 | | | 31,030 | |
Inventories | | 38,221 | | | 62,597 | |
Other current assets | | 14,082 | | | 19,138 | |
Total current assets | | 118,067 | | | 226,432 | |
| | | | |
Property and equipment, net | | 27,080 | | | 57,176 | |
Goodwill (Note 9) | | 229,221 | | | 227,457 | |
Other intangibles, net | | 4,186 | | | 4,579 | |
Right of use asset (Note 10) | | 629,006 | | | 786,216 | |
Other assets | | 40,423 | | | 40,934 | |
| | | | |
Total assets | | $ | 1,047,983 | | | $ | 1,342,794 | |
| | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 28,840 | | | $ | 50,918 | |
Accrued expenses | | 51,164 | | | 48,825 | |
Short-term lease liability (Note 10) | | 123,224 | | | 137,271 | |
Total current liabilities | | 203,228 | | | 237,014 | |
| | | | |
Long-term debt, net (Note 11) | | 177,500 | | | 177,500 | |
Long-term lease liability (Note 10) | | 536,234 | | | 680,454 | |
Long-term financing liabilities (Note 11) | | 0 | | | 27,981 | |
Other non-current liabilities | | 81,517 | | | 94,142 | |
Total liabilities | | 998,479 | | | 1,217,091 | |
Commitments and contingencies (Note 7) | | 0 | | 0 |
Shareholders’ equity: | | | | |
Common stock, $0.05 par value; issued and outstanding 35,789,825 and 35,625,716 common shares at March 31, 2021 and June 30, 2020, respectively | | 1,789 | | | 1,781 | |
Additional paid-in capital | | 23,672 | | | 22,011 | |
Accumulated other comprehensive income | | 9,092 | | | 7,449 | |
Retained earnings | | 14,951 | | | 94,462 | |
Total shareholders’ equity | | 49,504 | | | 125,703 | |
Total liabilities and shareholders’ equity | | $ | 1,047,983 | | | $ | 1,342,794 | |
| | | | | | | | | | | | | | |
| | September 30, 2021 | | June 30, 2021 |
| | | | |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 45,508 | | | $ | 19,191 | |
Receivables, net | | 21,833 | | | 27,372 | |
Inventories | | 16,774 | | | 22,993 | |
Other current assets | | 16,049 | | | 17,103 | |
Total current assets | | 100,164 | | | 86,659 | |
| | | | |
Property and equipment, net | | 22,588 | | | 23,113 | |
Goodwill | | 229,007 | | | 229,582 | |
Other intangibles, net | | 3,604 | | | 3,761 | |
Right of use asset (Note 7) | | 573,475 | | | 611,880 | |
Other assets | | 40,013 | | | 41,388 | |
| | | | |
Total assets | | $ | 968,851 | | | $ | 996,383 | |
| | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 20,784 | | | $ | 27,157 | |
Accrued expenses | | 48,099 | | | 54,857 | |
Short-term lease liability (Note 7) | | 113,585 | | | 116,471 | |
Total current liabilities | | 182,468 | | | 198,485 | |
| | | | |
Long-term debt, net (Note 8) | | 195,805 | | | 186,911 | |
Long-term lease liability (Note 7) | | 480,769 | | | 518,866 | |
| | | | |
Other non-current liabilities | | 69,999 | | | 75,075 | |
Total liabilities | | 929,041 | | | 979,337 | |
Commitments and contingencies (Note 5) | | 0 | | 0 |
Shareholders' equity: | | | | |
Common stock, $0.05 par value; issued and outstanding 43,964,489 and 35,795,844 common shares at September 30, 2021 and June 30, 2021, respectively | | 2,198 | | | 1,790 | |
Additional paid-in capital | | 58,310 | | | 25,102 | |
Accumulated other comprehensive income | | 9,069 | | | 9,543 | |
Accumulated deficit | | (29,767) | | | (19,389) | |
Total shareholders' equity | | 39,810 | | | 17,046 | |
Total liabilities and shareholders' equity | | $ | 968,851 | | | $ | 996,383 | |
_______________________________________________________________________________
The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.
REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
For The Three And Nine Months Ended March 31,September 30, 2021 And 2020
(Dollars and shares in thousands, except per share data amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Nine Months Ended March 31, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | | |
Revenues: | | | | | | | | |
Service | | $ | 24,645 | | | $ | 78,387 | | | $ | 90,040 | | | $ | 322,133 | |
Product | | 20,770 | | | 34,877 | | | 68,665 | | | 124,516 | |
Royalties and fees | | 23,535 | | | 8,698 | | | 61,393 | | | 66,062 | |
Franchise rental income (Note 10) | | 31,317 | | | 31,821 | | | 95,885 | | | 96,875 | |
Total revenue | | 100,267 | | | 153,783 | | | 315,983 | | | 609,586 | |
Operating expenses: | | | | | | | | |
Cost of service | | 15,821 | | | 54,824 | | | 66,441 | | | 212,664 | |
Cost of product | | 21,268 | | | 21,672 | | | 54,840 | | | 75,257 | |
Site operating expenses | | 13,366 | | | 3,660 | | | 36,955 | | | 62,932 | |
General and administrative | | 24,582 | | | 31,871 | | | 77,419 | | | 105,187 | |
Rent (Note 10) | | 8,001 | | | 18,665 | | | 34,128 | | | 63,424 | |
Franchise rent expense | | 31,317 | | | 31,821 | | | 95,885 | | | 96,875 | |
Depreciation and amortization | | 3,620 | | | 10,359 | | | 17,384 | | | 27,486 | |
Long-lived asset impairment | | 833 | | | 0 | | | 9,817 | | | 0 | |
TBG mall location restructuring (Note 3) | | 0 | | | 146 | | | 0 | | | 2,368 | |
Goodwill impairment | | 0 | | | 40,164 | | | 0 | | | 40,164 | |
Total operating expenses | | 118,808 | | | 213,182 | | | 392,869 | | | 686,357 | |
| | | | | | | | |
Operating loss | | (18,541) | | | (59,399) | | | (76,886) | | | (76,771) | |
| | | | | | | | |
Other (expense) income: | | | | | | | | |
Interest expense | | (3,163) | | | (1,712) | | | (10,626) | | | (4,615) | |
Loss from sale of salon assets to franchisees, net | | (4,575) | | | (7,858) | | | (8,463) | | | (26,125) | |
Interest income and other, net | | 15,099 | | | 148 | | | 15,616 | | | 3,188 | |
| | | | | | | | |
Loss from continuing operations before income taxes | | (11,180) | | | (68,821) | | | (80,359) | | | (104,323) | |
| | | | | | | | |
Income tax benefit | | 333 | | | 979 | | | 1,368 | | | 5,783 | |
| | | | | | | | |
Loss from continuing operations | | (10,847) | | | (67,842) | | | (78,991) | | | (98,540) | |
| | | | | | | | |
Income from discontinued operations, net of taxes (Note 3) | | 0 | | | 301 | | | 0 | | | 753 | |
| | | | | | | | |
Net loss | | $ | (10,847) | | | $ | (67,541) | | | $ | (78,991) | | | $ | (97,787) | |
| | | | | | | | |
Net loss per share: | | | | | | | | |
Basic and diluted: | | | | | | | | |
Loss from continuing operations | | $ | (0.30) | | | $ | (1.89) | | | $ | (2.20) | | | $ | (2.74) | |
Income from discontinued operations | | 0.00 | | | 0.01 | | | 0.00 | | | 0.02 | |
Net loss per share, basic and diluted (1) | | $ | (0.30) | | | $ | (1.88) | | | $ | (2.20) | | | $ | (2.72) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Weighted average common and common equivalent shares outstanding: | | | | | | | | |
Basic and diluted | | 36,011 | | | 35,815 | | | 35,929 | | | 35,958 | |
| | | | | | | | |
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2021 | | 2020 |
| | | | |
Revenues: | | | | |
Royalties | | $ | 16,602 | | | $ | 11,405 | |
Fees | | 3,265 | | | 2,042 | |
Product sales to franchisees | | 8,008 | | | 13,742 | |
Advertising fund contributions | | 8,114 | | | 4,509 | |
Franchise rental income (Note 7) | | 33,762 | | | 32,283 | |
Company-owned salon revenue | | 8,005 | | | 47,415 | |
Total revenue | | 77,756 | | | 111,396 | |
Operating expenses: | | | | |
Cost of product sales to franchisees | | 8,112 | | | 10,678 | |
General and administrative | | 21,789 | | | 26,148 | |
Rent (Note 7) | | 1,803 | | | 13,225 | |
Advertising fund expense | | 8,114 | | | 4,510 | |
Franchise rent expense | | 33,762 | | | 32,283 | |
Company-owned salon expense (1) | | 7,945 | | | 42,943 | |
Depreciation and amortization | | 1,869 | | | 7,376 | |
Long-lived asset impairment | | 163 | | | 5,824 | |
| | | | |
Total operating expenses | | 83,557 | | | 142,987 | |
| | | | |
Operating loss | | (5,801) | | | (31,591) | |
| | | | |
Other (expense) income: | | | | |
Interest expense | | (3,306) | | | (3,762) | |
Loss from sale of salon assets to franchisees, net | | (1,080) | | | (662) | |
Interest income and other, net | | (239) | | | 114 | |
| | | | |
Loss from continuing operations before income taxes | | (10,426) | | | (35,901) | |
| | | | |
Income tax benefit | | 48 | | | 635 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Net loss | | $ | (10,378) | | | $ | (35,266) | |
| | | | |
Net loss per share: | | | | |
Basic and diluted: | | | | |
| | | | |
| | | | |
Net loss per share, basic and diluted (2) | | $ | (0.28) | | | $ | (0.98) | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Weighted average common and common equivalent shares outstanding: | | | | |
Basic and diluted | | 36,850 | | | 35,908 | |
| | | | |
(1)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.
(2)Total is a recalculation; line items calculated individually may not sum to total due to rounding.
The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.
REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS (Unaudited)
For The Three And Nine Months Ended March 31,September 30, 2021 And 2020
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Nine Months Ended March 31, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | | |
Net loss | | $ | (10,847) | | | $ | (67,541) | | | $ | (78,991) | | | $ | (97,787) | |
Foreign currency translation adjustments | | 306 | | | (2,482) | | | 1,643 | | | (2,344) | |
Comprehensive loss | | $ | (10,541) | | | $ | (70,023) | | | $ | (77,348) | | | $ | (100,131) | |
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2021 | | 2020 |
| | | | |
Net loss | | $ | (10,378) | | | $ | (35,266) | |
Foreign currency translation adjustments | | (474) | | | 502 | |
Comprehensive loss | | $ | (10,852) | | | $ | (34,764) | |
_______________________________________________________________________________
The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.
REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited)
For The Three And Nine Months Ended March 31,September 30, 2021 And 2020
(Dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income | | Accumulated Deficit | | Total |
| | Shares | | Amount | | | | |
| | | | | | | | | | | | |
Balance, June 30, 2021 | | 35,795,844 | | | $ | 1,790 | | | $ | 25,102 | | | $ | 9,543 | | | $ | (19,389) | | | $ | 17,046 | |
Net loss | | — | | | — | | | — | | | — | | | (10,378) | | | (10,378) | |
Foreign currency translation | | — | | | — | | | — | | | (474) | | | — | | | (474) | |
Issuance of common stock, net of offering costs | | 8,072,304 | | | 404 | | | 31,789 | | | — | | | — | | | 32,193 | |
| | | | | | | | | | | | |
Stock-based compensation | | — | | | — | | | 1,678 | | | — | | | — | | | 1,678 | |
Net restricted stock activity | | 96,341 | | | 4 | | | (259) | | | — | | | — | | | (255) | |
| | | | | | | | | | | | |
Balance, September 30, 2021 | | 43,964,489 | | | $ | 2,198 | | | $ | 58,310 | | | $ | 9,069 | | | $ | (29,767) | | | $ | 39,810 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2021 |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income | | Retained Earnings | | Total |
| | Shares | | Amount | | | | |
| | | | | | | | | | | | |
Balance, December 31, 2020 | | 35,768,086 | | | $ | 1,788 | | | $ | 22,076 | | | $ | 8,786 | | | $ | 25,798 | | | $ | 58,448 | |
Net loss | | — | | | — | | | — | | | — | | | (10,847) | | | (10,847) | |
Foreign currency translation | | — | | | — | | | — | | | 306 | | | — | | | 306 | |
Exercise of SARs | | 3,775 | | | — | | | (24) | | | — | | | — | | | (24) | |
Stock-based compensation | | — | | | — | | | 1,703 | | | — | | | — | | | 1,703 | |
Net restricted stock activity | | 17,964 | | | 1 | | | (83) | | | — | | | — | | | (82) | |
| | | | | | | | | | | | |
Balance, March 31, 2021 | | 35,789,825 | | | $ | 1,789 | | | $ | 23,672 | | | $ | 9,092 | | | $ | 14,951 | | | $ | 49,504 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income | | Retained Earnings | | Total |
| | Shares | | Amount | | | | |
| | | | | | | | | | | | |
Balance, December 31, 2019 | | 35,563,611 | | | $ | 1,778 | | | $ | 21,230 | | | $ | 9,480 | | | $ | 235,534 | | | $ | 268,022 | |
Net loss | | — | | | — | | | — | | | — | | | (67,541) | | | (67,541) | |
Foreign currency translation | | — | | | — | | | — | | | (2,482) | | | — | | | (2,482) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Stock-based compensation | | — | | | — | | | (25) | | | — | | | — | | | (25) | |
Net restricted stock activity | | 2,595 | | | — | | | (19) | | | — | | | — | | | (19) | |
Minority interest | | — | | | — | | | — | | | — | | | 38 | | | 38 | |
Balance, March 31, 2020 | | 35,566,206 | | | $ | 1,778 | | | $ | 21,186 | | | $ | 6,998 | | | $ | 168,031 | | | $ | 197,993 | |
REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited)
For The Three And Nine Months Ended March 31, 2021 And 2020 (Continued)
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended March 31, 2021 |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income | | Retained Earnings | | Total |
| | Shares | | Amount | | | | |
| | | | | | | | | | | | |
Balance, June 30, 2020 | | 35,625,716 | | | $ | 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 SARs | | 3,775 | | | — | | | (24) | | | — | | | — | | | (24) | |
Stock-based compensation | | — | | | — | | | 1,792 | | | — | | | — | | | 1,792 | |
Net restricted stock activity | | 160,334 | | | 8 | | | (107) | | | — | | | — | | | (99) | |
Minority interest | | — | | | — | | | — | | | — | | | (520) | | | (520) | |
Balance, March 31, 2021 | | 35,789,825 | | | $ | 1,789 | | | $ | 23,672 | | | $ | 9,092 | | | $ | 14,951 | | | $ | 49,504 | |
| | | Nine Months Ended March 31, 2020 | | Three Months Ended September 30, 2020 |
| | | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income | | Retained Earnings | | Total | | | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income | | Retained Earnings | | Total |
| | | Shares | | Amount | | | | Shares | | Amount | |
| Balance, June 30, 2019 | | 36,869,249 | | | $ | 1,843 | | | $ | 47,152 | | | $ | 9,342 | | | $ | 265,908 | | | $ | 324,245 | | |
Balance, June 30, 2020 | | Balance, June 30, 2020 | | 35,625,716 | | | $ | 1,781 | | | $ | 22,011 | | | $ | 7,449 | | | $ | 94,462 | | | $ | 125,703 | |
Net loss | Net loss | | — | | | — | | | — | | | — | | | (97,787) | | | (97,787) | | Net loss | | — | | | — | | | — | | | — | | | (35,266) | | | (35,266) | |
Foreign currency translation | Foreign currency translation | | — | | | — | | | — | | | (2,344) | | | — | | | (2,344) | | Foreign currency translation | | — | | | — | | | — | | | 502 | | | — | | | 502 | |
Stock repurchase program | | (1,504,000) | | | (75) | | | (26,281) | | | — | | | — | | | (26,356) | | |
Exercise of SARs | | 1,776 | | | — | | | 28 | | | — | | | — | | | 28 | | |
| Stock-based compensation | Stock-based compensation | | — | | | — | | | 2,114 | | | — | | | — | | | 2,114 | | Stock-based compensation | | — | | | — | | | (1,225) | | | — | | | — | | | (1,225) | |
Net restricted stock activity | Net restricted stock activity | | 199,181 | | | 10 | | | (1,827) | | | — | | | — | | | (1,817) | | Net restricted stock activity | | 40,067 | | | 2 | | | (190) | | | — | | | — | | | (188) | |
Minority interest | Minority interest | | — | | | — | | | — | | | — | | | (90) | | | (90) | | Minority interest | | — | | | — | | | — | | | — | | | 15 | | | 15 | |
Balance, March 31, 2020 | | 35,566,206 | | | $ | 1,778 | | | $ | 21,186 | | | $ | 6,998 | | | $ | 168,031 | | | $ | 197,993 | | |
Balance, September 30, 2020 | | Balance, September 30, 2020 | | 35,665,783 | | | $ | 1,783 | | | $ | 20,596 | | | $ | 7,951 | | | $ | 59,211 | | | $ | 89,541 | |
_______________________________________________________________________________
The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.
REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
For The NineThree Months Ended March 31,September 30, 2021 And 2020
(Dollars in thousands)
| | | | | | | | | | | | | | |
| | Nine Months Ended March 31, |
| | 2021 | | 2020 |
| | | | |
Cash flows from operating activities: | | | | |
Net loss | | $ | (78,991) | | | $ | (97,787) | |
Adjustments to reconcile net loss to cash used in operating activities: | | | | |
Non-cash adjustments related to discontinued operations | | 0 | | | (967) | |
Depreciation and amortization | | 13,968 | | | 23,635 | |
Salon asset impairment | | 0 | | | 3,851 | |
Long-lived asset impairment | | 9,817 | | | 0 | |
Deferred income taxes | | (806) | | | (6,469) | |
Inventory reserve | | 6,875 | | | 0 | |
Gain from disposal of distribution center assets | | (14,878) | | | 0 | |
Gain from sale of company headquarters, net | | 0 | | | (2,513) | |
Loss from sale of salon assets to franchisees, net | | 8,463 | | | 26,125 | |
| | | | |
Goodwill impairment | | 0 | | | 40,164 | |
Stock-based compensation | | 1,792 | | | 2,114 | |
Amortization of debt discount and financing costs | | 1,313 | | | 206 | |
Other non-cash items affecting earnings | | 183 | | | (442) | |
Changes in operating assets and liabilities, excluding the effects of asset sales (1) | | (27,743) | | | (38,938) | |
Net cash used in operating activities | | (80,007) | | | (51,021) | |
| | | | |
Cash flows from investing activities: | | | | |
Capital expenditures | | (9,609) | | | (32,331) | |
Proceeds from sale of assets to franchisees | | 7,743 | | | 87,916 | |
Costs associated with sale of salon assets to franchisees | | (242) | | | (1,887) | |
Proceeds from company-owned life insurance policies | | 1,200 | | | 0 | |
Proceeds from sale of company headquarters | | 0 | | | 8,996 | |
Net cash (used in) provided by investing activities | | (908) | | | 62,694 | |
| | | | |
Cash flows from financing activities: | | | | |
Borrowings on revolving credit facility | | 0 | | | 213,000 | |
Repayments of revolving credit facility | | 0 | | | (30,000) | |
Repurchase of common stock | | 0 | | | (28,246) | |
Taxes paid for shares withheld | | (316) | | | (1,968) | |
| | | | |
Minority interest buyout | | (562) | | | 0 | |
| | | | |
Distribution center lease payments | | (724) | | | (677) | |
Net cash (used in) provided by financing activities | | (1,602) | | | 152,109 | |
| | | | |
Effect of exchange rate changes on cash and cash equivalents | | 6 | | | (379) | |
| | | | |
(Decrease) increase in cash, cash equivalents, and restricted cash | | (82,511) | | | 163,403 | |
| | | | |
Cash, cash equivalents and restricted cash: | | | | |
Beginning of period | | 122,880 | | | 92,379 | |
End of period | | $ | 40,369 | | | $ | 255,782 | |
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2021 | | 2020 |
| | | | |
Cash flows from operating activities: | | | | |
Net loss | | $ | (10,378) | | | $ | (35,266) | |
Adjustments to reconcile net loss to cash used in operating activities: | | | | |
| | | | |
Depreciation and amortization | | 1,574 | | | 6,087 | |
| | | | |
Long-lived asset impairment | | 163 | | | 5,824 | |
Deferred income taxes | | (258) | | | (384) | |
| | | | |
| | | | |
| | | | |
Loss from sale of salon assets to franchisees, net | | 1,080 | | | 662 | |
| | | | |
| | | | |
Stock-based compensation | | 1,678 | | | (1,225) | |
Amortization of debt discount and financing costs | | 460 | | | 438 | |
Other non-cash items affecting earnings | | 232 | | | 4 | |
Changes in operating assets and liabilities, excluding the effects of asset sales (1) | | (6,805) | | | (5,006) | |
Net cash used in operating activities | | (12,254) | | | (28,866) | |
| | | | |
Cash flows from investing activities: | | | | |
Capital expenditures | | (1,524) | | | (3,811) | |
Proceeds from sale of assets to franchisees | | — | | | 3,735 | |
Costs associated with sale of salon assets to franchisees | | — | | | (125) | |
| | | | |
| | | | |
Net cash used in investing activities | | (1,524) | | | (201) | |
| | | | |
Cash flows from financing activities: | | | | |
Borrowings on revolving credit facility | | 10,000 | | | — | |
Repayments of revolving credit facility | | (1,106) | | | — | |
Proceeds from issuance of common stock, net of offering costs | | 32,193 | | | — | |
| | | | |
Taxes paid for shares withheld | | (255) | | | (187) | |
| | | | |
| | | | |
| | | | |
Distribution center lease payments | | — | | | (238) | |
Net cash provided by (used in) financing activities | | 40,832 | | | (425) | |
| | | | |
Effect of exchange rate changes on cash and cash equivalents | | (148) | | | 88 | |
| | | | |
Increase (decrease) in cash, cash equivalents, and restricted cash | | 26,906 | | | (29,404) | |
| | | | |
Cash, cash equivalents and restricted cash: | | | | |
Beginning of period | | 29,152 | | | 122,880 | |
End of period | | $ | 56,058 | | | $ | 93,476 | |
_______________________________________________________________________________
(1)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.
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,September 30, 2021 and for the three and nine months ended March 31,September 30, 2021 and 2020, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of March 31,September 30, 2021 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’sCompany's Annual Report on Form 10-K for the year ended June 30, 20202021 and other documents filed or furnished with the SEC during the current fiscal year.
Impact of COVID-19 on Business Operations:Impact:
During the period ended March 31,September 30, 2021, the global coronavirus pandemic (COVID-19) had an adverse impact on operations, including prolonged government-mandated salon closures in California and Ontario, in addition to other U.S. states and Canadian provinces during the three and nine months ended March 31, 2021.operations. The COVID-19 pandemic continues to impact salon guest visits and franchisee staffing, resulting in a significant reduction in revenue. As a result, COVID-19 has, and may continue to have, a negative affect on revenue and traffic. Due to the economic disruption caused byprofitability. The ultimate impact of the COVID-19 pandemic in both the Company faces a greater degreeshort and long term is not currently estimable due to the uncertainty surrounding the duration of uncertainty than normal in making judgmentsthe pandemic, the availability and estimates neededacceptance of preventative vaccines, the emergence and impact of new COVID-19 variants and changing government restrictions. Additional impacts to apply the Company's significant accounting policies. Actual results and outcomesbusiness may differ from management's estimates and assumptions.arise that we are not aware of currently.
Inventory:Inventories:
The Company has inventory valuation reserves for excess and obsolete inventories or other factors that may render inventories unmarketable at their historical costs. For the three and nine months ended March 31,In fiscal year 2021, the Company recorded $5.3 and $6.9 millionannounced it would transition away from its wholesale product distribution model in favor of inventory excess and obsolescence charges, respectively. The increasea third-party distribution model. As a result, the Company exited 1 distribution center in the reserve in the three months ended March 31, 2021 was related to management's decisionquarter and plans to exit its product sales businessother distribution center in fiscal year 2022. To facilitate the exit, the Company is selling inventory at discounts and wind down operations atdisposing of hard-to-sell products. Additionally, the reduction in company-owned salons decreases the Company's two distribution centers.ability to re-distribute inventory from closed locations to other salons to be sold or used. The expenseinventory valuation reserve as of September 30, 2021 and June 30, 2021 was recorded to Cost of product in the unaudited Condensed Consolidated Statement of Operations$8.8 and is a non-cash add back to Net loss on the unaudited Condensed Consolidated Statement of Cash Flows.$11.8 million, respectively.
Salon Long-Lived Asset and Right of Use 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 salon long-lived asset group is estimated using market participant methods based on the best information available. See Note 107 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.
Long-lived asset impairment charges, including ROU and salon property and equipment, of $0.8 and $9.8 million were recorded in the three and nine months ended March 31, 2021, respectively, on the unaudited Condensed Consolidated Statement of Operations. Of the total long-lived asset impairment charges, $0.3 and $6.3 million, respectively, were allocated to the ROU asset and $0.5 and $3.5 million, respectively, were allocated to salon property and equipment. Long-lived salon property and equipment asset impairment charges of $1.2 and $3.9 million were recorded during the three and nine months ended March 31, 2020, respectively, and are recorded in Depreciation and amortization in the unaudited Condensed Consolidated Statement of Operations.
Goodwill:
As of March 31,September 30, 2021 and June 30, 2020,2021, the Franchise reporting unit had $229.2$229.0 and $227.5$229.6 million, respectively, of goodwill. For further information, see Note 9 ofThe change in goodwill for the unaudited Condensed Consolidated Financial Statements.three months ended September 30, 2021 is due to foreign currency translation. The Company assesses goodwill impairment 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 unit below its carrying amount. An interim impairment analysis was not required in the three and nine months ended March 31,September 30, 2021. The COVID-19 pandemic, which began in March 2020, was an interim triggering event in fiscal year 2020. The Company assessed its goodwill as of March 31, 2020 and determined that the Company-owned goodwill was fully impaired. As a result, the Company recorded a goodwill impairment charge of $40.2 million in the three and nine months ended March 31, 2020.
The Company performs its annual impairment assessment as of April 30. For the fiscal year 20202021 annual impairment assessment, due to the impact of the COVID-19 pandemic, the Company elected to forgo the optionalperformed a Step 0 assessment and performed the quantitative1 impairment analysis ontest for the Franchise reporting unit. The Company compared the carrying value of the Franchise reporting unit, including goodwill, to the estimated fair value. The resultresults of thethis assessment indicated that the estimated fair value of the Company's reporting unit exceeded its carrying value by approximately 50 percent. For the goodwill impairment analysis, management utilized a combination of both a discounted cash flows approach and a market approach. The key assumptions utilized in the analysis were the number of salons to be sold to franchisees and the discount rate. If a future triggering event occurs or if during the Company's annual impairment assessment the fair value of the Franchise reporting unit has decreased significantly it may result in a non-cash impairment charge that reducesexceeded the carrying valuevalue.
Classification of goodwill.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 and nine months ended March 31,September 30, 2021 includes $0.8 and $3.42020 include $0.3 and $1.3 million of asset retirement obligations, which are cash expenses.
Minority Interest:
In December 2020, the Company purchased its non-controlling interest in Roosters from the minority shareholders. The Company paid $0.6 million to obtain 100% ownership. The payment is recorded in cash used in financing activities on the unaudited Condensed Consolidated Statement of Cash Flows.
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. Product revenues for company-owned salons are recognized whenprovided 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 customer.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. Product sales, including sales of the hardware related to our proprietary cloud-based management and point-of-sale commerce solution, to franchisees are included within product revenues in the unaudited Condensed Consolidated Statement of Operations and 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.
Revenue recognized over time
Franchise revenues primarily include royalties, advertising fund cooperatives fees, franchise fees and other fees. 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 revenue isrevenues 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 gross presentationtreatment increases both the gross amount of reported franchise revenue and site operating 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 a sublease arrangementarrangements with the franchisee.franchisees. The Company recognizes franchise rental income and expense when it is due to the landlord.
The following table disaggregates revenue by timing of revenue recognition and is reconciled to reportable segment revenues as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2021 | | Three Months Ended March 31, 2020 |
| | Franchise | | Company-owned | | Franchise | | Company-owned |
| | | | | | | | |
| | (Dollars in thousands) |
| | | | | | | | |
Revenue recognized at a point in time: | | | | | | | | |
Service | | $ | 0 | | | $ | 24,645 | | | $ | 0 | | | $ | 78,387 | |
Product | | 13,079 | | | 7,691 | | | 15,318 | | | 19,559 | |
Total revenue recognized at a point in time | | $ | 13,079 | | | $ | 32,336 | | | $ | 15,318 | | | $ | 97,946 | |
| | | | | | | | |
Revenue recognized over time: | | | | | | | | |
Royalty and other franchise fees | | $ | 17,955 | | | $ | 0 | | | $ | 16,487 | | | $ | 0 | |
Advertising fund fees (refunds), net (1) | | 5,580 | | | 0 | | | (7,789) | | | 0 | |
Franchise rental income | | 31,317 | | | 0 | | | 31,821 | | | 0 | |
Total revenue recognized over time | | 54,852 | | | 0 | | | 40,519 | | | 0 | |
Total revenue | | $ | 67,931 | | | $ | 32,336 | | | $ | 55,837 | | | $ | 97,946 | |
(1)Fiscal year 2020 includes the refund of $14.9 million of previously collected cooperative advertising fees. Cooperative advertising fees were not refunded in fiscal year 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended March 31, 2021 | | Nine Months Ended March 31, 2020 |
| | Franchise | | Company-owned | | Franchise | | Company-owned |
| | | | | | | | |
| | (Dollars in thousands) |
| | | | | | | | |
Revenue recognized at a point in time: | | | | | | | | |
Service | | $ | 0 | | | $ | 90,040 | | | $ | 0 | | | $ | 322,133 | |
Product | | 41,057 | | | 27,608 | | | 45,287 | | | 79,229 | |
Total revenue recognized at a point in time | | $ | 41,057 | | | $ | 117,648 | | | $ | 45,287 | | | $ | 401,362 | |
| | | | | | | | |
Revenue recognized over time: | | | | | | | | |
Royalty and other franchise fees | | $ | 46,589 | | | $ | 0 | | | $ | 52,721 | | | $ | 0 | |
Advertising fund fees | | 14,804 | | | 0 | | | 13,341 | | | 0 | |
Franchise rental income | | 95,885 | | | 0 | | | 96,875 | | | 0 | |
Total revenue recognized over time | | 157,278 | | | 0 | | | 162,937 | | | 0 | |
Total revenue | | $ | 198,335 | | | $ | 117,648 | | | $ | 208,224 | | | $ | 401,362 | |
Information about receivables, broker fees and deferred revenue subject to the current revenue recognition guidance is as follows:
| | | March 31, 2021 | | June 30, 2020 | | Balance Sheet Classification | | September 30, 2021 | | June 30, 2021 | | Balance Sheet Classification |
| | | (Dollars in thousands) | | | (Dollars in thousands) | |
| Receivables from contracts with customers, net | Receivables from contracts with customers, net | | $ | 22,106 | | | $ | 22,991 | | | Accounts receivable, net | Receivables from contracts with customers, net | | $ | 14,612 | | | $ | 19,112 | | | Receivables, net |
Broker fees | Broker fees | | 19,599 | | | 20,516 | | | Other assets | Broker fees | | 18,272 | | | 19,254 | | | Other assets |
| Deferred revenue: | Deferred revenue: | | Deferred revenue: | |
Current | Current | | Current | |
Gift card liability | Gift card liability | | $ | 2,336 | | | $ | 2,543 | | | Accrued expenses | Gift card liability | | $ | 2,150 | | | $ | 2,240 | | | Accrued expenses |
Deferred franchise fees unopened salons | Deferred franchise fees unopened salons | | 80 | | | 77 | | | Accrued expenses | Deferred franchise fees unopened salons | | 31 | | | 40 | | | Accrued expenses |
Deferred franchise fees open salons | Deferred franchise fees open salons | | 5,929 | | | 5,537 | | | Accrued expenses | Deferred franchise fees open salons | | 5,901 | | | 5,884 | | | Accrued expenses |
Total current deferred revenue: | Total current deferred revenue: | | $ | 8,345 | | | $ | 8,157 | | | Total current deferred revenue: | | $ | 8,082 | | | $ | 8,164 | | |
Non-current | Non-current | | | | | | Non-current | | | | | |
Deferred franchise fees unopened salons | Deferred franchise fees unopened salons | | $ | 7,656 | | | $ | 11,855 | | | Other non-current liabilities | Deferred franchise fees unopened salons | | $ | 5,824 | | | $ | 6,571 | | | Other non-current liabilities |
Deferred franchise fees open salons | Deferred franchise fees open salons | | 33,001 | | | 33,623 | | | Other non-current liabilities | Deferred franchise fees open salons | | 31,101 | | | 32,365 | | | Other non-current liabilities |
Total non-current deferred revenue | Total non-current deferred revenue | | $ | 40,657 | | | $ | 45,478 | | | Total non-current deferred revenue | | $ | 36,925 | | | $ | 38,936 | | |
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, 20202021 | | $ | 6,8997,774 | |
Provision for doubtful accounts (1) | | 792237 | |
Provision for franchisee rent (2) | | 907364 | |
Reclass of accrued rent (3) | | 396 | |
Write-offs | | (1,436)(102) | |
Balance as of March 31,September 30, 2021 | | $ | 7,1628,669 | |
_______________________________________________________________________________(1)The provision for doubtful accounts is recognized as General and administrative expense 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 Generalgeneral 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, 20202021 | | $ | 20,51619,254 | |
Additions | | 1,57325 | |
Amortization | | (2,369)(862) | |
Write-offs | | (121)(145) | |
Balance as of March 31,September 30, 2021 | | $ | 19,59918,272 | |
Deferred revenue includes the gift card liability and deferred franchise fees for unopened salons and open salons. Gift card revenue for the three months ended March 31, 2021 and 2020 was $0.3 and $0.8 million, respectively, and for the nine months ended March 31, 2021 and 2020 was $0.7 and $2.3 million, respectively. 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,September 30, 2021 and 2020 was $1.6 and $1.4 million, respectively, and for the nine months ended March 31, 2021 and 2020 was $4.9 and $3.8$1.6 million, respectively. Estimated revenue expected to be recognized in the future related to deferred franchise fees for open salons as of March 31,September 30, 2021 is as follows (in thousands):
| Remainder of 2021 | | $ | 1,505 | | |
2022 | | 5,901 | | |
Remainder of 2022 | | Remainder of 2022 | | $ | 4,391 | |
2023 | 2023 | | 5,725 | | 2023 | | 5,866 | |
2024 | 2024 | | 5,483 | | 2024 | | 5,631 | |
2025 | 2025 | | 5,092 | | 2025 | | 5,246 | |
2026 | | 2026 | | 4,776 | |
Thereafter | Thereafter | | 15,224 | | Thereafter | | 11,092 | |
Total | Total | | $ | 38,930 | | Total | | $ | 37,002 | |
3. TBG RESTRUCTURING AND DISCONTINUED OPERATIONS:SHAREHOLDERS' EQUITY:
In October 2017,Stock-Based Employee Compensation:
During the three months ended September 30, 2021, the Company sold substantially all of its mall-based salon business in North America, representing 858 salons, to The Beautiful Group (TBG). The Company classified the results of its mall-based businessgranted one equity award as discontinued operations in the unaudited Condensed Consolidated Statement of Operations. Included in discontinued operations in fiscal year 2020 are adjustments to actuarial assumptions related to the discontinued operations. Other than the items presented in the unaudited Consolidated Statement of Cash Flows, there were no other significant non-cash operating activities or non-cash investing activities related to discontinued operations for the nine months ended March 31, 2021 and 2020.follows:
For the three and nine months ended March 31, 2020, the Company recorded $0.1 and $2.4 million of professional fees and restructuring charges related to the Company assisting TBG with operating expenses to mitigate the risk of default associated with TBG's lease obligations. In the second quarter of fiscal year 2020, TBG transferred 207 of its North American mall-based salons to the Company. The 207 North American mall-based salons transferred were the salons that the Company was the guarantor of the lease obligation. As of March 31, | | | | | | | | | | |
| | Three Months Ended September 30, 2021 prior to any mitigation efforts which may be available, the Company remains liable for up to approximately $12 million related to its mall-based salon lease commitments on the 62 salons that remain open, an $11 million reduction from June 30, 2020. The commitments are included in our lease liabilities.
4.EARNINGS PER SHARE:
| | |
| | | | |
| | | | |
Restricted stock units | | 2,987 | | | |
| | | | |
| | | | |
The Company’s basic earnings per share is calculated as net loss divided by weighted average common shares outstanding, excluding unvested outstanding stock options (SOs), restricted stock units (RSUs) and stock-settled performance units (PSUs). The Company’s diluted earnings per share is calculated as net loss divided by weighted average common shares and common share equivalents outstanding, which includes shares issued under the Company’s stock-based compensation plans. Stock-based awards with exercise prices greater than the average market price of the Company’s common stock are excluded from the computation of diluted earnings per share.
For the three and nine months ended March 31, 2021, there were 972,485 and 511,970, respectively, and for the three and nine months ended March 31, 2020 there were 663,636 and 1,145,053, respectively, common stock equivalents of dilutive common stock excluded in the diluted earnings per share calculations due to the net loss from continuing operations.
The computation of weighted average shares outstanding, assuming dilution, excluded 1,261,200 and 670,997 of stock-based awardsRSUs granted during the three months ended March 31,September 30, 2021 vest on October 27, 2021 and 2020, respectively, and 2,240,743 and 174,698 of stock-based awardswere granted to a Board member who joined the Company during the nine months ended March 31, 2021 and 2020, respectively, as they were not dilutive under the treasury stock method.
5.SHAREHOLDERS’ EQUITY:
Stock-Based Employee Compensation:
During the three and nine months ended March 31, 2021, the Company granted various equity awards including RSUs, PSUs and SOs.
A summary of equity awards granted is as follows:
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2021 | | Nine Months Ended March 31, 2021 |
| | | | |
| | | | |
Restricted stock units | | 47,303 | | | 891,825 | |
Performance-based restricted stock units | | 0 | | | 62,290 | |
Stock option units | | 0 | | | 1,458,680 | |
The RSUs granted to employees during the three and nine months ended March 31, 2021 vest in equal amounts over a three-year period subsequent to the grant date, cliff vest after a one-year period, cliff vest after a three-year period or cliff vest after a five-year period subsequent to the grant date. The CEO, who was appointed in October 2020, was granted 0.4 million "sign-on" RSUs that vest pro-rated over one year.
The PSUs granted to employees have a three-year performance period ending June 30, 2023 linked to the Company's stock price reaching a specified volume weighted average closing price for a 50-day period that ends on June 30, 2023. The PSUs granted have a maximum vesting percentage of 200% based on the level of performance achieved for the respective award.
The SOs granted during the nine months ended March 31, 2021 were granted in connection with the appointment of the Company's CEO and consist of options to purchase shares of the Company's common stock. The SOs are subject to both a four-year service-based vesting condition and a performance-based vesting condition. Additionally, 0.4 million SOs are matching options that vest on the fourth anniversary of employment up to the number of RSUs the CEO still holds of the "sign-on" RSUs.quarter.
Total compensation cost for stock-based payment arrangements totaling $1.7 and $0.0$(1.2) million for the three months ended March 31, 2021 and 2020, respectively, and $1.8 and $2.1 million for the nine months ended March 31,September 30, 2021 and 2020, respectively, was recorded within Generalgeneral and administrative expense on the unaudited Condensed Consolidated Statement of Operations. In the ninethree months ended March 31, 2021,September 30, 2020, stock compensation includes a $2.4 million benefit from the forfeiture of awards related to the departure of the Company's former CEO.
Share Repurchases:Issuance Program:
During the nine months ended March 31,In fiscal year 2021, the Company did 0t repurchasefiled 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 three months ended September 30, 2021, the Company raised gross proceeds of $33.2 million related to the "at-the-market" offering and paid fees to sales agents and other fees of $1.0 million. On September 29, 2021, the Company sold 1.2 million shares for net proceeds of $5.0 million, which settled on October 1, 2021. The settlement occurred in the second quarter so it is excluded from interim unaudited Condensed Consolidated Statement of Shareholders' Equity and Cash Flows. Net proceeds from sales of shares under the previously approved stock repurchase program. During the nine months ended March 31, 2020, the Company repurchased 1.5 million shares for $26.4 million under a previously approved stock repurchase program. At March 31, 2021, $54.6 million remains outstanding under the approved stock repurchase program."at-the-market" program, if any, may be used to, among other things, fund working capital requirements, repay debt and support growth strategies.
6.4. 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, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | | |
| | (Dollars in thousands) |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Income tax benefit | | $ | 333 | | | $ | 979 | | | $ | 1,368 | | | $ | 5,783 | |
Effective tax rate | | 3.0 | % | | 1.4 | % | | 1.7 | % | | 5.5 | % |
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | |
| | 2021 | | 2020 | | | | |
| | | | | | | | |
| | (Dollars in thousands) |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Income tax benefit | | $ | 48 | | | $ | 635 | | | | | |
Effective tax rate | | 0.5 | % | | 1.8 | % | | | | |
The recorded tax provisions and effective tax rates for the three and nine months ended March 31,September 30, 2021 and 2020 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.
7.5. COMMITMENTS AND CONTINGENCIES:
The Company is a defendant in various lawsuits and claims arising out of the normal course of business. Like certain other large retail employers, the Company has been faced with allegations of purported class-wide consumer and wage and hour violations. Litigation is inherently unpredictable, and the outcome of these matters cannot presently be determined. Although the actions are being vigorously defended, the Company could in the future, incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period. The Company is a defendant in two wage and hour lawsuits in California. The first, a class action in US District Court, alleges various violations of the California Labor Code, including, but not limited to failure to pay wages, failure to permit rest breaks, failure to pay all wages due on termination of employment, waiting time penalties, failure to provide accurate wage statements and violation of the business and professions code. This case has been preliminarily settled, pending approval of the court and class, for $2.1 million. The second, a class action filed in California Superior Court, alleges various violations of the California Labor Code as well as PAGA penalties. Barring successful objection from plaintiffs’ attorneys to the first class action, the second case will be subsumed into the first case’s settlement. As of June 30, 2020 and March 31, 2021, $2.1 million was included within accrued expenses on the unaudited Condensed Consolidated Balance Sheet related to these class action lawsuits. In addition, our existing point-of-sale system supplier hashad challenged the development of certain parts of our technology systems in litigation brought in the Northern District of California, case No. 20-cv-02181-MMC. We have vigorously denied the allegations made by this third-party supplier and have asserted certain counterclaims against the third party. However, the dispute regarding our ownership and involvement of certain key personnel may be costly and distracting,The Company and the outcome is currently uncertain. 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 has not recorded an expenseCompany's accrual related to damages in connection with these matters because any potential loss is not currently probable or reasonably estimable under U.S. GAAP. Additionally, the Company is unable to reasonably estimate the rangeagreement was $3.0 million as of loss, if any, that may result from these matters.September 30, 2021 and June 30, 2021.
8.6. CASH, CASH EQUIVALENTS AND RESTRICTED CASH:
The table below reconciles the cash and cash equivalents balances and restricted cash balances, recorded inwithin other current assets fromon 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, 2021 | | June 30, 2020 | | September 30, 2021 | | June 30, 2021 |
| | | (Dollars in thousands) | | (Dollars in thousands) |
| Cash and cash equivalents | Cash and cash equivalents | $ | 34,510 | | | $ | 113,667 | | Cash and cash equivalents | | $ | 45,508 | | | $ | 19,191 | |
Restricted cash, included in Other current assets (1) | 5,859 | | | 9,213 | | |
Restricted cash, included in other current assets (1) | | Restricted cash, included in other current assets (1) | | 10,550 | | | 9,961 | |
Total cash, cash equivalents and restricted cash | Total cash, cash equivalents and restricted cash | $ | 40,369 | | | $ | 122,880 | | Total cash, cash equivalents and restricted cash | | $ | 56,058 | | | $ | 29,152 | |
(1)Restricted cash within Otherother 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.
9. GOODWILL:
The table below contains details related to the Company's goodwill:
| | | | | | | | |
| | Franchise Reporting Unit |
| | |
| | (Dollars in thousands) |
| | |
Goodwill, net at June 30, 2020 | | $ | 227,457 | |
Translation rate adjustments | | 1,764 | |
| | |
| | |
Goodwill, net at March 31, 2021 | | $ | 229,221 | |
10. LEASES7. 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 year10-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 Rentrent includes the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Nine Months Ended March 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | |
| (Dollars in thousands) |
| | | | | | | |
Minimum rent | $ | 8,400 | | | $ | 13,571 | | | $ | 28,605 | | | $ | 48,638 | |
Percentage rent based on sales | 3 | | | 298 | | | 78 | | | 2,145 | |
Real estate taxes and other expenses | 1,989 | | | 3,672 | | | 7,147 | | | 9,842 | |
Lease termination (benefit) expense (1) | (154) | | | 44 | | | 6,484 | | | 123 | |
Lease liability benefit (2) | (3,009) | | | 0 | | | (11,295) | | | 0 | |
Corporate segment rent | 671 | | | 904 | | | 2,046 | | | 1,909 | |
Franchise segment non-reimbursable rent | 101 | | | 176 | | | 1,063 | | | 767 | |
Total | $ | 8,001 | | | $ | 18,665 | | | $ | 34,128 | | | $ | 63,424 | |
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | |
| | 2021 | | 2020 | | | | |
| | | | | | | | |
| | (Dollars in thousands) |
| | | | | | | | |
Office and warehouse rent | | $ | 1,669 | | | $ | 1,203 | | | | | |
Lease termination expense (1) | | 1,340 | | | 5,554 | | | | | |
Lease liability benefit (2) | | (2,431) | | | (6,061) | | | | | |
Franchise salon rent | | 329 | | | 718 | | | | | |
Company-owned salon rent | | 896 | | | 11,811 | | | | | |
Total | | $ | 1,803 | | | $ | 13,225 | | | | | |
(1)During the three and nine months ended March 31,September 30, 2021, the Company terminated the leases for 15 and 244 company-owned salons, respectively,paid $0.9 million to exit its distribution centers before the lease end dates. During the threedates and nine months ended March 31, 2020, the Company terminated the leases for 3 and 60 company-ownedincurred costs of $0.4 million to exit salons respectively, before the lease end dates.date in order to relieve the Company of future lease obligations. For the three and nine months ended March 31, 2021,September 30, 2020, lease termination fees include $0.3 and $4.9includes $2.5 million respectively, of early termination payments to close salons before the lease end date to relieve the Company of future lease obligations. For the threeobligations and nine months ended March 31, 2021, lease termination fees also include $(0.5) and $1.5$3.1 million respectively, of adjustments to accrue future lease payments for salons that are no longer operating. The early termination payments made in the nine months ended March 31, 2021 decreased the future minimum rent liability by $9.5 million plus saved the Company from the associated real estate taxes and other lease expenses.
(2)For the three and nine months ended March 31, 2021, uponUpon termination of previously impaired leases, the Company derecognizedderecognizes the corresponding ROU assets of $3.2 and $13.3 million, respectively, and lease liabilities of $5.2 and $19.7 million, respectively, that resultedwhich results in a net gain of $2.0 and $6.4 million, respectively.gain. In addition, the Company recognizedrecognizes a benefit from lease liabilities decreasing in excess of previously impaired ROU assets. The benefit recognized was $1.0 and $4.9 million in the three and nine months ended March 31, 2021, respectively.assets for ongoing leases that were previously impaired.
The Company leases salon premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees. All lease 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,September 30, 2021 and 2020, franchise rental income and franchise rent expense were $31.3$33.8 and $31.8$32.3 million, respectively. For the nine months ended March 31, 2021 and 2020, franchise rental income and franchise rent expense were $95.9 and $96.9 million. These leases generally have lease terms of approximately 5five years. The Company expects to renew SmartStyle and Supercutssome franchise leases upon expiration. Other leases are expected to be renewed by the franchisee upon expiration. This represents a Board-approved change in estimate that occurred inAll lease-related costs are passed through to the second quarter of fiscal year 2021 and was intended to reduce lease exposure. The change in estimate resulted in a decrease to lease liabilities and right of use assets of $72.9 million, with no impact to net income.franchisees.
For franchise and company-owned 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. The Company's consolidated ROU asset balance was $629.0$573.5 and $786.2$611.9 million as of March 31,September 30, 2021 and June 30, 2020,2021, respectively. 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 6.446.38 and 6.876.44 years and the weighted average discount rate was 4.07%4.14% and 3.95%4.11% for all salon operating leases as of March 31,September 30, 2021 and June 30, 2020,2021, respectively.
A lessee’slessee'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.
Step twoThe 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’sCompany'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;include: the market rent of comparable properties based on recently negotiated leases as applicable, the asset group’sgroup's projected sales for properties with no recently negotiated leases, and a discount rate.
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 ultimate severity and longevity of the COVID-19 pandemic is unknown and 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. In the three and nine months ended March 31,September 30, 2021 and 2020, the Company recognized a long-lived impairment charge of $0.8$0.2 and $9.8$5.8 million, respectively, which included $0.3$0.1 and $6.3$4.6 million, respectively, related to the right of useROU assets, in the unaudited Condensed Consolidated Statement of Operations. The impairments recorded for the three and nine months ended March 31,September 30, 2021 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. Our 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.
As of March 31,September 30, 2021, 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 Year | Fiscal Year | | Leases for Franchise Salons | | Leases for Company-owned Salons | | Corporate Leases | | Total Operating Lease Payments | | Sublease Income To Be Received From Franchisees | | Net Rent Commitments | Fiscal Year | | Leases for Franchise Salons | | Leases for Company-owned Salons | | Corporate Leases | | Total Operating Lease Payments | | Sublease Income To Be Received From Franchisees | | Net Rent Commitments |
| Remainder of 2021 | | $ | 30,985 | | | $ | 6,537 | | | $ | 976 | | | $ | 38,498 | | | $ | (30,985) | | | $ | 7,513 | | |
2022 | | 116,803 | | | 22,514 | | | 3,566 | | | 142,883 | | | (116,803) | | | 26,080 | | |
Remainder of 2022 | | Remainder of 2022 | | $ | 96,767 | | | $ | 4,460 | | | $ | 2,071 | | | $ | 103,298 | | | $ | (96,767) | | | $ | 6,531 | |
2023 | 2023 | | 103,418 | | | 16,936 | | | 3,550 | | | 123,904 | | | (103,418) | | | 20,486 | | 2023 | | 115,343 | | | 4,944 | | | 2,365 | | | 122,652 | | | (115,343) | | | 7,309 | |
2024 | 2024 | | 91,108 | | | 11,803 | | | 3,616 | | | 106,527 | | | (91,108) | | | 15,419 | | 2024 | | 100,818 | | | 3,005 | | | 1,486 | | | 105,309 | | | (100,818) | | | 4,491 | |
2025 | 2025 | | 77,655 | | | 5,911 | | | 3,683 | | | 87,249 | | | (77,655) | | | 9,594 | | 2025 | | 84,740 | | | 1,013 | | | 1,525 | | | 87,278 | | | (84,740) | | | 2,538 | |
2026 | | 2026 | | 71,674 | | | 566 | | | 1,563 | | | 73,803 | | | (71,674) | | | 2,129 | |
Thereafter | Thereafter | | 216,156 | | | 12,559 | | | 27,331 | | | 256,046 | | | (216,156) | | | 39,890 | | Thereafter | | 177,274 | | | 904 | | | 6,498 | | | 184,676 | | | (177,274) | | | 7,402 | |
Total future obligations | Total future obligations | | $ | 636,125 | | | $ | 76,260 | | | $ | 42,722 | | | $ | 755,107 | | | $ | (636,125) | | | $ | 118,982 | | Total future obligations | | $ | 646,616 | | | $ | 14,892 | | | $ | 15,508 | | | $ | 677,016 | | | $ | (646,616) | | | $ | 30,400 | |
Less amounts representing interest | Less amounts representing interest | | 78,998 | | | 6,462 | | | 10,189 | | | 95,649 | | | Less amounts representing interest | | 79,466 | | | 925 | | | 2,271 | | | 82,662 | | |
Present value of lease liabilities | Present value of lease liabilities | | $ | 557,127 | | | $ | 69,798 | | | $ | 32,533 | | | $ | 659,458 | | | Present value of lease liabilities | | $ | 567,150 | | | $ | 13,967 | | | $ | 13,237 | | | $ | 594,354 | | |
Less current lease liabilities | Less current lease liabilities | | 99,351 | | | 21,705 | | | 2,168 | | | 123,224 | | | Less current lease liabilities | | 106,010 | | | 5,407 | | | 2,168 | | | 113,585 | | |
Long-term lease liabilities | Long-term lease liabilities | | $ | 457,776 | | | $ | 48,093 | | | $ | 30,365 | | | $ | 536,234 | | | Long-term lease liabilities | | $ | 461,140 | | | $ | 8,560 | | | $ | 11,069 | | | $ | 480,769 | | |
11.8. FINANCING ARRANGEMENTS:
The Company’sCompany's long-term debt consists of the following:
Revolving Credit Facility
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Maturity Date | | March 31, 2021 | | March 31, 2021 | | June 30, 2020 |
| | | | | | | | |
| | (Fiscal Year) | | (Interest rate %) | | (Dollars in thousands) |
| | | | | | | | |
Revolving credit facility | | 2023 | | 5.00% | | $ | 177,500 | | | $ | 177,500 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Maturity Date | | September 30, 2021 | | September 30, 2021 | | June 30, 2021 |
| | | | | | | | |
| | (Fiscal Year) | | (Interest rate %) | | (Dollars in thousands) |
| | | | | | | | |
Revolving credit facility | | 2023 | | 5.00% | | $ | 195,805 | | | $ | 186,911 | |
At March 31,September 30, 2021, cash and cash equivalents totaled $34.5$45.5 million. As of March 31,September 30, 2021, the Company has $177.5$195.8 million of outstanding borrowings under a $295.0$293.3 million revolving credit facility. The credit facility decreased $1.1 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,September 30, 2021, the Company hashad outstanding standby letters of credit under the revolving credit facility of $18.7$15.7 million, primarily related to the Company's self-insurance program. The unused available credit under the revolving credit facility was $98.8$81.8 million as of March 31,September 30, 2021. The Company's liquidity whichper the agreement includes the unused available balance under the credit facility, and unrestricted cash and cash equivalents totaled $133.3and the shortfall in the gap in expected proceeds from the sale of salon assets of $20.9 million as of March 31,September 30, 2021. Total liquidity per the agreement was $148.2 million as of September 30, 2021. The revolving credit facility has a minimum liquidity covenant of $75.0 million. As of March 31,September 30, 2021, the Company had cash, cash equivalents and restricted cash of $40.4$56.1 million and current liabilities of $203.2$182.5 million.
The Company iswas in compliance with all covenants and other requirements of the financing arrangements as of March 31,September 30, 2021 and believes it will continue to be in compliance for at least one year from ourthe filing date.
Sale and Leaseback Transaction
The Company’s long-term financing liabilities consists of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Maturity Date | | Interest Rate | | March 31, 2021 | | June 30, 2020 |
| | | | | | | | |
| | (Fiscal Year) | | | | (Dollars in thousands) |
| | | | | | | | |
Financial liability - Salt Lake City Distribution Center | | 2034 | | 3.30% | | $ | 0 | | | $ | 16,773 | |
Financial liability - Chattanooga Distribution Center | | 2034 | | 3.70% | | 0 | | | 11,208 | |
Long- term financing liability | | | | | | $ | 0 | | | $ | 27,981 | |
In fiscal year 2019, the Company sold its Salt Lake City and Chattanooga Distribution Centers to an unrelated party. At the time of the sale, the transactions were considered failed sale and leaseback transactions, as the Company had planned to lease the property for more than 75% of its economic life. The sale proceeds received from the buyer-lessor were recognized as a financial liability, which was reduced based on the rental payments made under the lease that were allocated between principal and interest. In the third quarter of fiscal year 2021, as a result of the Company exiting its wholesale product sales business, the Company informed the landlord of its intention to exit the leased spaces. Because the Company no longer plans to lease the distribution centers for the majority of the assets’ useful lives, these transactions are subsequently considered sale and leaseback transactions. As a result, the Company derecognized the financial liability of $28.5 million and the carrying value of the related assets of $13.6 million and recognized a gain of $14.9 million for the difference between the liability and asset. The gain on distribution centers was recorded to Interest income and other, net in the unaudited Condensed Consolidation Statement of Operations. As the leases for the 2 distribution centers meet the sale and leaseback criteria, the Company recognized a right of use asset and lease liability of $20.3 million on the unaudited Condensed Consolidated Balance Sheet as of March 31, 2021.
12.9. 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,September 30, 2021 and June 30, 2020,2021, the estimated fair value of the Company’sCompany's cash, cash equivalents, restricted cash, receivables, inventory, deferred compensation assets and accounts payable debt and long-term financial liabilities approximated their carrying values. The estimated fair values of the Company's debt and long-term financial liability areis based on Level 2 inputs.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We measure certain assets, including the Company’sCompany'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, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | | |
| | (Dollars in thousands) |
| | | | | | | | |
Goodwill | | $ | 0 | | | $ | 40,164 | | | $ | 0 | | | $ | 40,164 | |
Long-lived asset impairment (1) | | 833 | | | 1,208 | | | 9,817 | | | 3,851 | |
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | |
| | 2021 | | 2020 | | | | |
| | | | | | | | |
| | (Dollars in thousands) |
| | | | | | | | |
Long-lived asset impairment (1) | | $ | 163 | | | $ | 5,824 | | | | | |
(1)Long-lived asset impairment charges, including right of use and salon property and equipment, are separately stated on the unaudited Condensed Consolidated Statement of Operations for the three and nine months ended March 31, 2021. Long-lived salon property and equipment asset impairment charges are recorded in Depreciation and amortization in the unaudited Condensed Consolidated Statement of Operations for the three and nine months ended March 31, 2020. See Note 1 to the unaudited Condensed Consolidated Financial Statements.
13.10. SEGMENT INFORMATION:
Segment information is prepared on the same basis that the chief operating decision maker reviews financial information for operational decision-making purposes. Beginning in fiscal year 2022, corporate costs are included within the Franchise segment to reflect how the chief operating decision maker reviews the business.
The Company’sCompany's reportable operating segments consisted of the following salons:
| | | March 31, 2021 | | June 30, 2020 | | September 30, 2021 | | June 30, 2021 |
| FRANCHISE SALONS: | FRANCHISE SALONS: | | FRANCHISE SALONS: | |
SmartStyle/Cost Cutters in Walmart Stores | SmartStyle/Cost Cutters in Walmart Stores | | 1,569 | | | 1,317 | | SmartStyle/Cost Cutters in Walmart Stores | | 1,676 | | | 1,666 | |
Supercuts | Supercuts | | 2,357 | | | 2,508 | | Supercuts | | 2,369 | | | 2,386 | |
Portfolio Brands (1) | Portfolio Brands (1) | | 1,233 | | | 1,217 | | Portfolio Brands (1) | | 1,391 | | | 1,357 | |
Total North American salons | Total North American salons | | 5,159 | | | 5,042 | | Total North American salons | | 5,436 | | | 5,409 | |
Total International salons (2)(1) | Total International salons (2)(1) | | 158 | | | 167 | | Total International salons (2)(1) | | 151 | | | 154 | |
Total Franchise salons | Total Franchise salons | | 5,317 | | | 5,209 | | Total Franchise salons | | 5,587 | | | 5,563 | |
as a percent of total Franchise and Company-owned salons | as a percent of total Franchise and Company-owned salons | | 86.6 | % | | 76.1 | % | as a percent of total Franchise and Company-owned salons | | 96.9 | % | | 95.3 | % |
| COMPANY-OWNED SALONS: | COMPANY-OWNED SALONS: | | COMPANY-OWNED SALONS: | |
SmartStyle/Cost Cutters in Walmart Stores | SmartStyle/Cost Cutters in Walmart Stores | | 373 | | | 751 | | SmartStyle/Cost Cutters in Walmart Stores | | 67 | | | 91 | |
Supercuts | Supercuts | | 124 | | | 210 | | Supercuts | | 24 | | | 35 | |
Portfolio Brands (1) | Portfolio Brands (1) | | 267 | | | 505 | | Portfolio Brands (1) | | 88 | | | 150 | |
Mall-based (3) | | 62 | | | 166 | | |
Total Company-owned salons | Total Company-owned salons | | 826 | | | 1,632 | | Total Company-owned salons | | 179 | | | 276 | |
as a percent of total Franchise and Company-owned salons | as a percent of total Franchise and Company-owned salons | | 13.4 | % | | 23.9 | % | as a percent of total Franchise and Company-owned salons | | 3.1 | % | | 4.7 | % |
| OWNERSHIP INTEREST LOCATIONS: | OWNERSHIP INTEREST LOCATIONS: | | OWNERSHIP INTEREST LOCATIONS: | |
Equity ownership interest locations | Equity ownership interest locations | | 78 | | | 82 | | Equity ownership interest locations | | 77 | | | 78 | |
| Grand Total, System-wide | Grand Total, System-wide | | 6,221 | | | 6,923 | | Grand Total, System-wide | | 5,843 | | | 5,917 | |
(1)Portfolio Brands was previously referred to as Signature Style.
(2)Canadian and Puerto Rican salons are included in the North American salon totals.
(3)The mall-based salons were acquired from TBG on December 31, 2019. They are included in continuing operations under the Company-owned operating segment from January 1, 2020.
As of March 31,September 30, 2021, the Franchise operating segment is comprised primarily of Supercuts®, SmartStyle®, Cost Cutters®, First Choice Haircutters®, Magicuts®, and Roosters® concepts and the Company-owned operating segment is comprised primarily of SmartStyle®, Supercuts®, Cost Cutters®, and other regional trade names.
Financial information concerning the Company's reportable operating segments is shown in the following tables: | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2021 |
| | Franchise | | Company-owned | | Consolidated |
| | | | | | |
| | (Dollars in thousands) |
| | | | | | |
Revenues: | | | | | | |
Royalties | | $ | 16,602 | | | $ | — | | | $ | 16,602 | |
Fees | | 3,265 | | | — | | | 3,265 | |
Product sales to franchisees | | 8,008 | | | — | | | 8,008 | |
Advertising fund contributions | | 8,114 | | | — | | | 8,114 | |
Franchise rental income | | 33,762 | | | — | | | 33,762 | |
Company-owned salon revenue | | — | | | 8,005 | | | 8,005 | |
Total revenue | | 69,751 | | | 8,005 | | | 77,756 | |
| | | | | | |
Operating expenses: | | | | | | |
Cost of product sales to franchisees | | 8,112 | | | — | | | 8,112 | |
General and administrative | | 21,243 | | | 546 | | | 21,789 | |
Rent | | 1,677 | | | 126 | | | 1,803 | |
Advertising fund expense | | 8,114 | | | — | | | 8,114 | |
Franchise rent expense | | 33,762 | | | — | | | 33,762 | |
Company-owned salon expense | | — | | | 7,945 | | | 7,945 | |
Depreciation and amortization | | 1,623 | | | 246 | | | 1,869 | |
Long-lived asset impairment | | — | | | 163 | | | 163 | |
| | | | | | |
Total operating expenses | | 74,531 | | | 9,026 | | | 83,557 | |
Operating loss | | $ | (4,780) | | | $ | (1,021) | | | $ | (5,801) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2021 |
| | Franchise | | Company-owned | | Corporate | | Consolidated |
| | | | | | | | |
| | (Dollars in thousands) |
| | | | | | | | |
Revenues: | | | | | | | | |
Service | | $ | 0 | | | $ | 24,645 | | | $ | 0 | | | $ | 24,645 | |
Product | | 13,079 | | | 7,691 | | | 0 | | | 20,770 | |
Royalties and fees | | 23,535 | | | 0 | | | 0 | | | 23,535 | |
Franchise rental income | | 31,317 | | | 0 | | | 0 | | | 31,317 | |
Total revenue | | 67,931 | | | 32,336 | | | 0 | | | 100,267 | |
| | | | | | | | |
Operating expenses: | | | | | | | | |
Cost of service | | 0 | | | 15,821 | | | 0 | | | 15,821 | |
Cost of product | | 11,148 | | | 10,120 | | | 0 | | | 21,268 | |
Site operating expenses | | 5,600 | | | 7,766 | | | 0 | | | 13,366 | |
General and administrative | | 7,450 | | | 1,525 | | | 15,607 | | | 24,582 | |
Rent | | 101 | | | 7,229 | | | 671 | | | 8,001 | |
Franchise rent expense | | 31,317 | | | 0 | | | 0 | | | 31,317 | |
Depreciation and amortization | | 333 | | | 1,687 | | | 1,600 | | | 3,620 | |
Long-lived asset impairment | | 22 | | | 811 | | | 0 | | | 833 | |
| | | | | | | | |
| | | | | | | | |
Total operating expenses | | 55,971 | | | 44,959 | | | 17,878 | | | 118,808 | |
Operating income (loss) | | 11,960 | | | (12,623) | | | (17,878) | | | (18,541) | |
Other (expense) income: | | | | | | | | |
Interest expense | | 0 | | | 0 | | | (3,163) | | | (3,163) | |
Loss from sale of salon assets to franchisees, net | | 0 | | | 0 | | | (4,575) | | | (4,575) | |
Interest income and other, net | | 0 | | | 0 | | | 15,099 | | | 15,099 | |
Income (loss) from continuing operations before income taxes | | $ | 11,960 | | | $ | (12,623) | | | $ | (10,517) | | | $ | (11,180) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 |
| | Franchise | | Company-owned | | Corporate | | Consolidated |
| | | | | | | | |
| | (Dollars in thousands) |
| | | | | | | | |
Revenues: | | | | | | | | |
Service | | $ | 0 | | | $ | 78,387 | | | $ | 0 | | | $ | 78,387 | |
Product | | 15,318 | | | 19,559 | | | 0 | | | 34,877 | |
Royalties and fees | | 8,698 | | | 0 | | | 0 | | | 8,698 | |
Franchise rental income | | 31,821 | | | 0 | | | 0 | | | 31,821 | |
Total revenue | | 55,837 | | | 97,946 | | | 0 | | | 153,783 | |
| | | | | | | | |
Operating expenses: | | | | | | | | |
Cost of service | | 0 | | | 54,824 | | | 0 | | | 54,824 | |
Cost of product | | 11,452 | | | 10,220 | | | 0 | | | 21,672 | |
Site operating expenses | | (7,789) | | | 11,449 | | | 0 | | | 3,660 | |
General and administrative | | 8,657 | | | 4,566 | | | 18,648 | | | 31,871 | |
Rent | | 176 | | | 17,585 | | | 904 | | | 18,665 | |
Franchise rent expense | | 31,821 | | | 0 | | | 0 | | | 31,821 | |
Depreciation and amortization | | 292 | | | 9,799 | | | 268 | | | 10,359 | |
TBG mall location restructuring | | 146 | | | 0 | | | 0 | | | 146 | |
Goodwill impairment | | 0 | | | 40,164 | | | 0 | | | 40,164 | |
Total operating expenses | | 44,755 | | | 148,607 | | | 19,820 | | | 213,182 | |
Operating income (loss) | | 11,082 | | | (50,661) | | | (19,820) | | | (59,399) | |
Other (expense) income: | | | | | | | | |
Interest expense | | 0 | | | 0 | | | (1,712) | | | (1,712) | |
Loss from sale of salon assets to franchisees, net | | 0 | | | 0 | | | (7,858) | | | (7,858) | |
Interest income and other, net | | 0 | | | 0 | | | 148 | | | 148 | |
Income (loss) from continuing operations before income taxes | | $ | 11,082 | | | $ | (50,661) | | | $ | (29,242) | | | $ | (68,821) | |
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2020 |
| | Franchise | | Company-owned | | Consolidated |
| | | | | | |
| | (Dollars in thousands) |
| | | | | | |
Revenues: | | | | | | |
Royalties | | $ | 11,405 | | | $ | — | | | $ | 11,405 | |
Fees | | 2,042 | | | — | | | 2,042 | |
Product sales to franchisees | | 13,742 | | | — | | | 13,742 | |
Advertising fund contributions | | 4,509 | | | — | | | 4,509 | |
Franchise rental income | | 32,283 | | | — | | | 32,283 | |
Company-owned salon revenue | | — | | | 47,415 | | | 47,415 | |
Total revenue | | 63,981 | | | 47,415 | | | 111,396 | |
| | | | | | |
Operating expenses: | | | | | | |
Cost of product sales to franchisees | | 10,678 | | | — | | | 10,678 | |
General and administrative | | 23,171 | | | 2,977 | | | 26,148 | |
Rent | | 1,279 | | | 11,946 | | | 13,225 | |
Advertising fund expense | | 4,510 | | | — | | | 4,510 | |
Franchise rent expense | | 32,283 | | | — | | | 32,283 | |
Company-owned salon expense | | — | | | 42,943 | | | 42,943 | |
Depreciation and amortization | | 2,294 | | | 5,082 | | | 7,376 | |
Long-lived asset impairment | | 610 | | | 5,214 | | | 5,824 | |
| | | | | | |
Total operating expenses | | 74,825 | | | 68,162 | | | 142,987 | |
Operating loss | | $ | (10,844) | | | $ | (20,747) | | | $ | (31,591) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended March 31, 2021 |
| | Franchise | | Company-owned | | Corporate | | Consolidated |
| | | | | | | | |
| | (Dollars in thousands) |
| | | | | | | | |
Revenues: | | | | | | | | |
Service | | $ | 0 | | | $ | 90,040 | | | $ | 0 | | | $ | 90,040 | |
Product | | 41,057 | | | 27,608 | | | 0 | | | 68,665 | |
Royalties and fees | | 61,393 | | | 0 | | | 0 | | | 61,393 | |
Franchise rental income | | 95,885 | | | 0 | | | 0 | | | 95,885 | |
Total revenue | | 198,335 | | | 117,648 | | | 0 | | | 315,983 | |
| | | | | | | | |
Operating expenses: | | | | | | | | |
Cost of service | | 0 | | | 66,441 | | | 0 | | | 66,441 | |
Cost of product | | 33,117 | | | 21,723 | | | 0 | | | 54,840 | |
Site operating expenses | | 14,858 | | | 22,097 | | | 0 | | | 36,955 | |
General and administrative | | 23,055 | | | 6,936 | | | 47,428 | | | 77,419 | |
Rent | | 1,063 | | | 31,019 | | | 2,046 | | | 34,128 | |
Franchise rent expense | | 95,885 | | | 0 | | | 0 | | | 95,885 | |
Depreciation and amortization | | 896 | | | 11,080 | | | 5,408 | | | 17,384 | |
Long-lived asset impairment | | 726 | | | 9,091 | | | 0 | | | 9,817 | |
| | | | | | | | |
| | | | | | | | |
Total operating expenses | | 169,600 | | | 168,387 | | | 54,882 | | | 392,869 | |
Operating income (loss) | | 28,735 | | | (50,739) | | | (54,882) | | | (76,886) | |
Other (expense) income: | | | | | | | | |
Interest expense | | 0 | | | 0 | | | (10,626) | | | (10,626) | |
Loss from sale of salon assets to franchisees, net | | 0 | | | 0 | | | (8,463) | | | (8,463) | |
Interest income and other, net | | 0 | | | 0 | | | 15,616 | | | 15,616 | |
Income (loss) from continuing operations before income taxes | | $ | 28,735 | | | $ | (50,739) | | | $ | (58,355) | | | $ | (80,359) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended March 31, 2020 |
| | Franchise | | Company-owned | | Corporate | | Consolidated |
| | | | | | | | |
| | (Dollars in thousands) |
| | | | | | | | |
Revenues: | | | | | | | | |
Service | | $ | 0 | | | $ | 322,133 | | | $ | 0 | | | $ | 322,133 | |
Product | | 45,287 | | | 79,229 | | | 0 | | | 124,516 | |
Royalties and fees | | 66,062 | | | 0 | | | 0 | | | 66,062 | |
Franchise rental income | | 96,875 | | | 0 | | | 0 | | | 96,875 | |
Total revenue | | 208,224 | | | 401,362 | | | 0 | | | 609,586 | |
| | | | | | | | |
Operating expenses: | | | | | | | | |
Cost of service | | 0 | | | 212,664 | | | 0 | | | 212,664 | |
Cost of product | | 34,804 | | | 40,453 | | | 0 | | | 75,257 | |
Site operating expenses | | 13,341 | | | 49,591 | | | 0 | | | 62,932 | |
General and administrative | | 25,990 | | | 22,263 | | | 56,934 | | | 105,187 | |
Rent | | 767 | | | 60,748 | | | 1,909 | | | 63,424 | |
Franchise rent expense | | 96,875 | | | 0 | | | 0 | | | 96,875 | |
Depreciation and amortization | | 662 | | | 21,844 | | | 4,980 | | | 27,486 | |
TBG mall location restructuring | | 2,368 | | | 0 | | | 0 | | | 2,368 | |
Goodwill impairment | | 0 | | | 40,164 | | | 0 | | | 40,164 | |
Total operating expenses | | 174,807 | | | 447,727 | | | 63,823 | | | 686,357 | |
Operating income (loss) | | 33,417 | | | (46,365) | | | (63,823) | | | (76,771) | |
Other (expense) income: | | | | | | | | |
Interest expense | | 0 | | | 0 | | | (4,615) | | | (4,615) | |
Loss from sale of salon assets to franchisees, net | | 0 | | | 0 | | | (26,125) | | | (26,125) | |
Interest income and other, net | | 0 | | | 0 | | | 3,188 | | | 3,188 | |
Income (loss) from continuing operations before income taxes | | $ | 33,417 | | | (46,365) | | | $ | (91,375) | | | $ | (104,323) | |
14.REVISION OF THIRD QUARTER 2020 UNAUDITED RESULTS:
During the fourth quarter of 2020, the Company identified an error in the calculation of the goodwill derecognition associated with the sale of salons to franchisees in the second quarter and third quarter. During the third quarter, goodwill derecognition was overstated by $2.4 million. As of March 31, 2020, the Company fully impaired its remaining Company-owned goodwill with the amount of goodwill impairment being overstated by $4.4 million in the third quarter. The Company assessed the applicable guidance issued by the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) and concluded these misstatements were not material, individually or in the aggregate, to the Company’s Unaudited Condensed Consolidated Financial Statements for the aforementioned interim periods. However, to facilitate comparisons among periods, the Company has decided to revise its previously issued second and third quarter unaudited condensed consolidated financial information.
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 |
| | As Previously Reported | | Adjustments | | As Revised |
| | | | | | |
| | (Dollars in thousands, except per share amounts) |
| | | | | | |
Rent expense (1) | | $ | 19,243 | | | $ | (578) | | | $ | 18,665 | |
Goodwill impairment (2) | | 44,529 | | | (4,365) | | | 40,164 | |
Operating loss | | (64,342) | | | 4,943 | | | (59,399) | |
Loss from sale of salon assets to franchisees, net | | (10,208) | | | 2,350 | | | (7,858) | |
Interest income and other, net | | (1,329) | | | 1,477 | | | 148 | |
Loss from continuing operations before income taxes | | (77,591) | | | 8,770 | | | (68,821) | |
Income tax benefit | | 2,253 | | | (1,274) | | | 979 | |
Net loss | | (75,037) | | | 7,496 | | | (67,541) | |
Net loss per share | | (2.10) | | | 0.22 | | | (1.88) | |
Comprehensive loss | | (77,519) | | | 7,496 | | | (70,023) | |
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended March 31, 2020 |
| | As Previously Reported | | Adjustments | | As Revised |
| | | | | | |
| | (Dollars in thousands, except per share amounts) |
| | | | | | |
Rent expense (1) | | $ | 64,002 | | | $ | (578) | | | $ | 63,424 | |
Goodwill impairment (2) | | 44,529 | | | (4,365) | | | 40,164 | |
Operating loss | | (81,714) | | | 4,943 | | | (76,771) | |
Loss from sale of salon assets to franchisees, net | | (21,760) | | | (4,365) | | | (26,125) | |
Interest income and other, net | | 3,188 | | | 0 | | | 3,188 | |
Loss from continuing operations before income taxes | | (104,901) | | | 578 | | | (104,323) | |
Income tax benefit | | 5,904 | | | (121) | | | 5,783 | |
Net loss | | (98,244) | | | 457 | | | (97,787) | |
Net loss per share | | (2.73) | | | 0.01 | | | (2.72) | |
Comprehensive loss | | (100,588) | | | 457 | | | (100,131) | |
The Company revised the amounts originally reported for the third quarter of fiscal year 2020 for the following items:
(1)Adjusted third quarter rent expense includes a $0.6 million benefit related to leases signed in the third quarter, but not identified until the fourth quarter. The net loss for the three and nine months ended March 31, 2020 were both impacted by the misstatement.
(2)During the third quarter, goodwill derecognition was overstated by $2.4 million. As of March 31, 2020, the Company impaired its remaining Company-owned goodwill, with the amount of goodwill impairment being overstated by $4.4 million. As the second quarter error which understated goodwill derecognition was not identified until the fourth quarter, goodwill impairment and loss from the sale of salons to franchisees, net were misstated in the third quarter. The Company recorded a $4.4 million decrease to goodwill impairment and a $2.4 million decrease to loss from the sale of salon assets to franchisees, net to correct the error. Net loss for the nine months ended March 31, 2020 was not misstated. However, goodwill impairment and the loss from the sales of salons to franchisees, net were misstated in the nine months ended March 31, 2020, with goodwill impairment overstated by $4.4 million and loss from the sale of salons to franchisees, net understated by $4.4 million.
Item 2. Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations
Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our consolidated financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. This MD&A should be read in conjunction with the MD&A included in our June 30, 20202021 Annual Report on Form 10-K and other documents filed or furnished with the Securities and Exchange Commission (SEC)SEC during the current fiscal year.
MANAGEMENT’SMANAGEMENT'S OVERVIEW
Regis Corporation (RGS) franchises owns,technology-enabled hairstyling and operates beauty salons.hair care salons throughout the United States, Puerto Rico and the United Kingdom. As of March 31,September 30, 2021, the Company franchised, owned or held ownership interests in 6,2215,843 worldwide locations. Our locations consisted of 6,1435,766 system-wide North American and Internationalinternational salons, and in 7877 locations we maintained a non-controlling ownership interest less than 100 percent. Each of the Company’sCompany's salon concepts generally offer similar salon products and services and serve the mass market. As of March 31,September 30, 2021, wethe Company had approximately 4,000 corporate1,172 employees worldwide.
Impact of COVID-19 on Business Operations
During the period ended March 31,September 30, 2021, the global coronavirusCOVID-19 pandemic (COVID-19) had an adverse impact on operations, including prolonged government-mandated salon closures in California and Ontario, in addition to other U.S. states and Canadian provinces during the three and nine months ended March 31, 2021.operations. The COVID-19 pandemic continues to impact salon guest visits and franchisee staffing, resulting in a significant reduction in revenue. As a result, COVID-19 has, and may continue to have, a negative affect on revenue and traffic. Due to the economic disruption caused byprofitability. The ultimate impact of the COVID-19 pandemic in both the Company faces a greater degreeshort and long term is not currently estimable due to the uncertainty surrounding the duration of uncertainty than normal in making judgmentsthe pandemic, the availability and estimates neededacceptance of preventative vaccines, the emergence and impact of new COVID-19 variants, and changing government restrictions. Additional impacts to apply the Company's significant accounting policies. Actual results and outcomesbusiness may differ from management's estimates and assumptions.arise that we are not aware of currently.
Merchandising Strategy
As part of the Company's transformation to focus on managing and nurturing brands, and in line with its capital-light business, a new merchandise strategy to outsource product distribution was adopted in the third quarter.quarter of fiscal year 2021. The Company plans to shiftsis shifting its product business from a whole-salewholesale model to a third-party distribution model. Management expects the change will positively impact franchisees by providing them access to industry-leading pricing, loyalty programs, promotional benefits, educational assets, and ongoing support. The Company will receive a fee from the third-party distributors which is included in Fees on the interim unaudited Condensed Consolidated Statement of Operations. The change will resultsis expected to result in a decrease inproduct sales to franchisees providing significantly less revenue costby the end of fiscal year 2022. Cost of product sales to franchisees and general and administrative expense going forward.are expected to decrease once the transition is complete which is expected to be by the end of fiscal year 2022.
CRITICAL ACCOUNTING POLICIES
The interim unaudited Condensed Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the interim unaudited Condensed Consolidated Financial Statements, we are required to make various judgments, estimates and assumptions that could have a significant impact on the results reported in the interim unaudited Condensed Consolidated Financial Statements. We base these estimates on historical experience and other assumptions believed to be reasonable under the circumstances. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Changes in these estimates could have a material effect on our interim unaudited Condensed Consolidated Financial Statements.
Our significant accounting policies can be found in Note 1 to the Consolidated Financial Statements contained in Part II, Item 8 of the June 30, 20202021 Annual Report on Form 10-K, as well as Notes 1 and 2 to the unaudited Condensed Consolidated Financial Statements contained within this Quarterly Report on Form 10-Q. We believe the accounting policies related to the valuation of goodwill, the valuation and estimated useful lives of long-lived assets, estimates used in relation to tax liabilities and deferred taxes are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations. Discussion of each of these policies is contained under “Critical"Critical Accounting Policies”Policies" in Part II, Item 7 of our June 30, 20202021 Annual Report on Form 10-K. Our policies related to revenue recognition guidance ASC Topic 606, can be found in Note 2 to the unaudited Condensed Consolidated Financial Statements.
RESULTS OF OPERATIONS
Impact of salons sold to franchisees on operations.
In the three and nine months ended March 31, 2021, the Company sold 126 and 408, respectively, company-owned salons to franchisees. The impact of these transactions are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Increase (Decrease) | | Nine Months Ended March 31, | | Increase (Decrease) |
| | 2021 | | 2020 | | | 2021 | | 2020 | |
| | | | | | | | | | | | |
| | (Dollars in thousands) |
| | | | | | | | | | | | |
Salons sold to franchisees | | 126 | | | 375 | | | (249) | | | 408 | | | 1,363 | | | (955) | |
Cash proceeds received | | $ | 595 | | | $ | 18,502 | | | $ | (17,907) | | | $ | 7,743 | | | $ | 87,916 | | | $ | (80,173) | |
| | | | | | | | | | | | |
(Loss) gain on venditions, excluding goodwill derecognition | | $ | (4,575) | | | $ | 9,628 | | | $ | (14,203) | | | $ | (8,463) | | | $ | 50,841 | | | $ | (59,304) | |
Non-cash goodwill derecognition | | — | | | (17,486) | | | 17,486 | | | — | | | (76,966) | | | 76,966 | |
Loss from sale of salon assets to franchisees, net | | $ | (4,575) | | | $ | (7,858) | | | $ | 3,283 | | | $ | (8,463) | | | $ | (26,125) | | | $ | 17,662 | |
System-wide results
As we continue to transition to an asset-light franchise platform, our results will be moreare impacted by our system-wide sales, which include sales by all points of distribution, whether owned by our franchisees or the Company or our franchisees.Company. While we do not record sales by franchisees as revenue, and such sales are not included in our consolidated financial statements,unaudited Condensed Consolidated Financial Statements, we believe that this operating measure is important in obtaining an understanding of our financial performance. We believe system-wide sales information aids in understanding how we derive royalty revenue and in evaluating performance.
System-wide same-store sales (1) by concept are detailed in the table below:
| | | Three Months Ended March 31, | | Nine Months Ended March 31, | | Three Months Ended September 30, | |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | |
| SmartStyle | SmartStyle | | (19.6) | % | | (9.5) | % | | (28.7) | % | | (4.8) | % | SmartStyle | | 17.0 | % | | (33.9) | % | |
Supercuts | Supercuts | | (22.3) | | | (3.7) | | | (29.9) | | | (1.4) | | Supercuts | | 30.5 | | | (33.4) | | |
Portfolio Brands | Portfolio Brands | | (17.9) | | | (4.8) | | | (26.6) | | | (2.7) | | Portfolio Brands | | 18.5 | | | (30.2) | | |
Consolidated system-wide same store sales | | (20.7) | % | | (5.4) | % | | (28.7) | % | | (2.7) | % | |
Consolidated system-wide same-store sales | | Consolidated system-wide same-store sales | | 23.2 | % | | (32.6) | % | |
(1)System-wideFiscal year 2022 system-wide same-store sales are calculated as the total change in sales for system-wide franchise and company-owned locations that were open on a specific day of the week during the current period and the corresponding prior period. Fiscal year 2021 system-wide same-store sales are calculated as the total change in sales for system-wide franchise and company-owned locations for more than one year that were open on a specific day of the week during the current period and the corresponding prior period. Quarterly and year-to-date system-wide same-store sales are the sum of the system-wide same-store sales computed on a daily basis. Franchise salons that do not report daily sales are excluded from same-store sales. Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period. System-wide same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.
Condensed Consolidated Results of Operations (Unaudited)
The following table sets forth, for the periods indicated, certain information derived from our unaudited Condensed Consolidated Statement of Operations. The percentages are computed as a percent of total consolidated revenues, except as otherwise indicated, and the increase (decrease) increase is measured in basis points.
| | | Three Months Ended March 31, | | Nine Months Ended March 31, | | Three Months Ended September 30, | |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | |
| | | ($ in millions) | | % of Total Revenues (1) | | (Decrease) Increase | | ($ in millions) | | % of Total Revenues (1) | | (Decrease) Increase | | | ($ in millions) | | % of Total Revenues (1) | | Increase (Decrease) | |
| Service revenues | $ | 24.6 | | | $ | 78.4 | | | 24.5 | % | | 51.0 | % | | (2,650) | | | $ | 90.0 | | | $ | 322.1 | | | 28.6 | % | | 52.8 | % | | (2,420) | | |
Product revenues | 20.8 | | | 34.9 | | | 20.8 | | | 22.7 | | | (190) | | | 68.7 | | | 124.5 | | | 21.7 | | | 20.4 | | | 130 | | |
Royalties and fees | 23.5 | | | 8.7 | | | 23.5 | | | 5.7 | | | 1,780 | | | 61.4 | | | 66.1 | | | 19.4 | | | 10.8 | | | 860 | | |
Royalties | | Royalties | | $ | 16.6 | | | $ | 11.4 | | | 21.4 | % | | 10.3 | % | | 1,110 | | |
Fees | | Fees | | 3.3 | | | 2.0 | | | 4.2 | | | 1.8 | | | 240 | | |
Product sales to franchisees | | Product sales to franchisees | | 8.0 | | | 13.7 | | | 10.3 | | | 12.3 | | | (200) | | |
Advertising fund contributions | | Advertising fund contributions | | 8.1 | | | 4.5 | | | 10.4 | | | 4.0 | | | 640 | | |
Franchise rental income | Franchise rental income | 31.3 | | | 31.8 | | | 31.2 | | | 20.7 | | | 1,050 | | | 95.9 | | | 96.9 | | | 30.3 | | | 15.9 | | | 1,440 | | Franchise rental income | | 33.8 | | | 32.3 | | | 43.4 | | | 29.0 | | | 1,440 | | |
Company-owned salon revenue | | Company-owned salon revenue | | 8.0 | | | 47.4 | | | 10.3 | | | 42.6 | | | (3,230) | | |
| Cost of service (2) | 15.8 | | | 54.8 | | | 64.2 | | | 69.9 | | | (570) | | | 66.4 | | | 212.7 | | | 73.8 | | | 66.0 | | | 780 | | |
Cost of product (2) | 21.3 | | | 21.7 | | | 102.4 | | | 62.2 | | | 4,020 | | | 54.8 | | | 75.3 | | | 79.8 | | | 60.5 | | | 1,930 | | |
Site operating expenses | 13.4 | | | 3.7 | | | 13.4 | | | 2.4 | | | 1,100 | | | 37.0 | | | 62.9 | | | 11.7 | | | 10.3 | | | 140 | | |
Cost of product sales to franchisees (2) | | Cost of product sales to franchisees (2) | | 8.1 | | | 10.7 | | | 101.3 | | | 78.1 | | | 2,320 | | |
General and administrative | General and administrative | 24.6 | | | 31.9 | | | 24.6 | | | 20.7 | | | 390 | | | 77.4 | | | 105.2 | | | 24.5 | | | 17.3 | | | 720 | | General and administrative | | 21.8 | | | 26.1 | | | 28.0 | | | 23.4 | | | 460 | | |
Rent | Rent | 8.0 | | | 18.7 | | | 8.0 | | | 12.2 | | | (420) | | | 34.1 | | | 63.4 | | | 10.8 | | | 10.4 | | | 40 | | Rent | | 1.8 | | | 13.2 | | | 2.3 | | | 11.8 | | | (950) | | |
Advertising fund expense | | Advertising fund expense | | 8.1 | | | 4.5 | | | 10.4 | | | 4.0 | | | 640 | | |
Franchise rent expense | Franchise rent expense | 31.3 | | | 31.8 | | | 31.2 | | | 20.7 | | | 1,050 | | | 95.9 | | | 96.9 | | | 30.3 | | | 15.9 | | | 1,440 | | Franchise rent expense | | 33.8 | | | 32.3 | | | 43.4 | | | 29.0 | | | 1,440 | | |
Company-owned salon expense | | Company-owned salon expense | | 7.9 | | | 42.9 | | | 10.2 | | | 38.5 | | | (2,830) | | |
Depreciation and amortization | Depreciation and amortization | 3.6 | | | 10.4 | | | 3.6 | | | 6.8 | | | (320) | | | 17.4 | | | 27.5 | | | 5.5 | | | 4.5 | | | 100 | | Depreciation and amortization | | 1.9 | | | 7.4 | | | 2.4 | | | 6.6 | | | (420) | | |
Long-lived asset impairment | Long-lived asset impairment | 0.8 | | | — | | | 0.8 | | | — | | | N/A | | 9.8 | | | — | | | 3.1 | | | — | | | N/A | Long-lived asset impairment | | 0.2 | | | 5.8 | | | 0.3 | | | 5.2 | | | (490) | | |
TBG restructuring | — | | | 0.1 | | | — | | | 0.1 | | | (10) | | | — | | | 2.4 | | | — | | | 0.4 | | | (40) | | |
Goodwill impairment | — | | | 40.2 | | | — | | | 26.1 | | | (2,610) | | | — | | | 40.2 | | | — | | | 6.6 | | | (660) | | |
| | Operating loss (3) | Operating loss (3) | (18.5) | | | (59.4) | | | (18.5) | | | (38.6) | | | 2,010 | | | (76.9) | | | (76.8) | | | (24.3) | | | (12.6) | | | (1,170) | | Operating loss (3) | | (5.8) | | | (31.6) | | | (7.5) | | | (28.4) | | | 2,090 | | |
| Interest expense | Interest expense | (3.2) | | | (1.7) | | | (3.2) | | | (1.1) | | | (210) | | | (10.6) | | | (4.6) | | | (3.4) | | | (0.8) | | | (260) | | Interest expense | | (3.3) | | | (3.8) | | | (4.2) | | | (3.4) | | | (80) | | |
Loss from sale of salon assets to franchisees, net | Loss from sale of salon assets to franchisees, net | (4.6) | | | (7.9) | | | (4.6) | | | (5.1) | | | 50 | | | (8.5) | | | (26.1) | | | (2.7) | | | (4.3) | | | 160 | | Loss from sale of salon assets to franchisees, net | | (1.1) | | | (0.7) | | | (1.4) | | | (0.6) | | | (80) | | |
Interest income and other, net | Interest income and other, net | 15.1 | | | 0.1 | | | 15.1 | | | 0.1 | | | 1,500 | | | 15.6 | | | 3.2 | | | 4.9 | | | 0.5 | | | 440 | | Interest income and other, net | | (0.2) | | | 0.1 | | | (0.3) | | | 0.1 | | | (40) | | |
| Income tax benefit (4) | Income tax benefit (4) | 0.3 | | | 1.0 | | | 3.0 | | | 1.4 | | | N/A | | 1.4 | | | 5.8 | | | 1.7 | | | 5.5 | | | N/A | Income tax benefit (4) | | — | | | 0.6 | | | 0.5 | | | 1.8 | | | N/A | |
| Income from discontinued operations, net of income taxes | — | | | 0.3 | | | — | | | 0.2 | | | (20) | | | — | | | 0.8 | | | — | | | 0.1 | | | (10) | | |
Net loss (3) | | Net loss (3) | | (10.4) | | | (35.3) | | | (13.4) | | | (31.7) | | | 1,830 | | |
(1)Cost of service is computed as a percent of service revenues. Cost of product sales to franchisees is computed as a percent of product revenues.sales to franchisees.
(2)Excludes depreciation and amortization expense.
(3)Total is a recalculation; line items calculated individually may not sum to total due to rounding.
(4)Computed as a percent of loss from continuing operations before income taxes. The income taxes basis point change is noted as not applicable (N/A) as the discussion within MD&A is related to the effective income tax rate.
Consolidated Revenues
Consolidated revenues primarily include revenues of company-owned salons,franchise royalties, fees, product and equipment sales to franchisees, franchise royaltiesadvertising contributions, rental income, and feesservice and franchise rental income.product sales in company-owned salons. The following tables summarize revenues and same-store sales by concept, as well as the reasons for the percentage change:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Nine Months Ended March 31, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | | |
| | (Dollars in thousands) |
| | | | | | | | |
Franchise salons: | | | | | | | | |
Product | | $ | 13,079 | | | $ | 15,318 | | | $ | 41,057 | | | $ | 45,287 | |
Royalties and fees | | 23,535 | | | 8,698 | | | 61,393 | | | 66,062 | |
Franchise rental income | | 31,317 | | | 31,821 | | | 95,885 | | | 96,875 | |
Total, Franchise salons | | $ | 67,931 | | | $ | 55,837 | | | $ | 198,335 | | | $ | 208,224 | |
Franchise salon same-store sales decrease (1) | | (19.3) | % | | (4.1) | % | | (27.6) | % | | (1.8) | % |
| | | | | | | | |
Company-owned salons: | | | | | | | | |
SmartStyle | | $ | 11,056 | | | $ | 46,277 | | | $ | 43,802 | | | $ | 197,912 | |
Supercuts | | 5,743 | | | 11,743 | | | 17,562 | | | 53,063 | |
Portfolio Brands | | 15,537 | | | 39,926 | | | 56,284 | | | 150,387 | |
Total, Company-owned salons | | $ | 32,336 | | | $ | 97,946 | | | $ | 117,648 | | | $ | 401,362 | |
Company-owned salon same-store sales decrease (2) | | (28.8) | % | | (7.9) | % | | (33.8) | % | | (3.9) | % |
| | | | | | | | |
Consolidated revenues | | $ | 100,267 | | | $ | 153,783 | | | $ | 315,983 | | | $ | 609,586 | |
Percent change from prior year | | (34.8) | % | | (40.5) | % | | (48.2) | % | | (25.7) | % |
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2021 | | 2020 |
| | | | |
| | (Dollars in thousands) |
| | | | |
Franchise: | | | | |
Royalties | | $ | 16,602 | | | $ | 11,405 | |
Fees | | 3,265 | | | 2,042 | |
Product sales to franchisees | | 8,008 | | | 13,742 | |
Advertising fund contributions | | 8,114 | | | 4,509 | |
Franchise rental income | | 33,762 | | | 32,283 | |
Total, Franchise | | $ | 69,751 | | | $ | 63,981 | |
Franchise same-store sales (1) | | 23.7 | % | | (31.9) | % |
| | | | |
Total, Company-owned salons | | $ | 8,005 | | | $ | 47,415 | |
| | | | |
| | | | |
Consolidated revenues | | $ | 77,756 | | | $ | 111,396 | |
Percent change from prior year (2) | | (30.2) | % | | (54.9) | % |
(1)Franchise same-store sales in fiscal year 2022 are calculated as the total change in sales for salonsfranchise locations that have beenwere open on a specific day of the week during the current period and the corresponding prior period. Franchise same-store sales in fiscal year 2021 are calculated as the total change in sales for franchise locationlocations for more than one year that were open on a specific day of the week during the current period and the corresponding prior period. Quarterly and year-to-date franchise same-store sales are the sum of the franchise same-store sales computed on a daily basis. Franchise salons that do not report daily sales are excluded from same-store sales. Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period. Franchise same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.
(2)Company-owned same-store sales are calculated asDecrease due to the total change in sales forCompany's strategic shift from a company-owned locations that were open on a specific day of the week during the current period and the corresponding prior period. Quarterly and year-to-date company-owned same-store sales are the sum of the company-owned same-store sales computed on a daily basis. Locations relocated within a one-mile radius are included in same-store sales as they are consideredsalon business to have been open in the prior period. Company-owned same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.an asset-light franchise model.
Three and Nine Months Ended March 31,September 30, 2021 Compared with Three and Nine Months Ended March 31,September 30, 2020
Consolidated Revenues
Consolidated revenues are primarily comprised of service and product revenues, as well as franchise royalties, and fees, advertising fund contributions, franchise product sales, rental income and rental income.company-owned salon revenue.
Consolidated revenue decreased $53.5 and $293.6$33.6 million, or 34.8% and 48.2%30.2%, for the three and nine months ended March 31, 2021, respectively. ServiceSeptember 30, 2021. Royalty revenue and product revenue decreased $53.8 and $14.1increased $5.2 million respectively, in the three months ended March 31,September 30, 2021 and decreased $232.1 and $55.8 million, respectively, in the nine months ended March 31, 2021. The decline in service and product revenue is primarily due to the Company's sale of salons to franchisees.higher franchise system-wide sales and higher franchise salon counts. During the twelve months ended March 31,September 30, 2021, 519692 salons were sold to franchisees net of buy backs and 833799 and 3531 system-wide salons were closed and constructed, respectively (2021(2022 Net Salon Count Changes). During the three months ended September 30, 2021, company-owned salon revenue decreased $39.4 million due primarily to the sale of salons to franchisees and salon closures. For the three and nine months ended March 31,September 30, 2021, the impact to consolidated revenue due to the sale of salons to franchisees and closure of salons was $44.9 and $214.0 million, respectively. System-wide sales also declined, primarily due to fewer guest visits and government-mandated closures related to the COVID-19 pandemic, in the three and nine months ended March 31, 2021, which also contributed to the decline in service, product and royalties and fees revenue. In$35.3 million.
Royalties
During the three months ended March 31, 2020, the Company refunded $14.9 million of previously collected cooperative advertising fees, which reducedSeptember 30, 2021, royalties and fees in the prior period.
Service Revenues
The decreases of $53.8 and $232.1increased $5.2 million, or 68.6% and 72.0%45.6%, in service revenues during the three and nine months ended March 31, 2021, respectively, were primarily due to the increase in franchise salons and higher franchise system-wide sales. Total franchised locations open at September 30, 2021 Net Salon Count Changes. Forwere 5,587 as compared to 5,226 at September 30, 2020.
Fees
During the three and nine months ended March 31,September 30, 2021, the impact to service revenuefees increased $1.3 million, primarily due to the increase in franchise salons and an increase in salons running Opensalon® Pro.
Product Sales to Franchisees
Product sales to franchisees decreased $5.7 million, or 41.6%, during the three months ended September 30, 2021, primarily due to the Company's shift to third-party distribution partners. The Company expects revenue from product sales to decrease significantly during fiscal year 2022.
Advertising Fund Contributions
Advertising fund contributions increased $3.6 million, or 80.0%, during the three months ended September 30, 2021, primarily due to the increase in franchise salon count and system-wide sales.
Franchise Rental Income
During the three months ended September 30, 2021, franchise rental income increased $1.5 million, or 4.6%, primarily due to the increase in franchise salon count.
Company-owned Salon Revenue
Company-owned salon revenue decreased $39.4 million due to the decrease in Company-owned salons as a result of the sale of salons to franchisees and closure of salons was $35.0 and $172.5 million, respectively. The remaining decrease in service revenue relates primarily to fewer guest visits assalon closures, a result of the COVID-19 pandemic.
Product Revenues
The decreases of $14.1 and $55.8 million, or 40.4% and 44.9%,decline in product revenues during the threesales, and nine months ended March 31, 2021, respectively, were primarily due to the 2021 Net Salon Count Changes. For the three and nine months ended March 31, 2021, the impact to product revenue due to the sale of salons to franchisees and closure of salons was $9.9 and $41.5 million, respectively. Additionally, franchise same-store product sales declined 20.0% and 24.2% for the three and nine months ended March 31, 2021, respectively, contributing to the decline.
Royalties and Fees
During the three months ended March 31, 2021, royalties and fees increased $14.8 million, or 170.6%, primarily due to the Company refunding cooperative advertising fund contributions in the third quarter of fiscal year 2020. During the nine months ended March 31, 2021, royalties and fees decreased $4.7 million, or 7.1%, primarily due to a $1.5 million decline in cooperative advertising funds charged to franchisees during the nine months ended March 31, 2021. For the three and nine months ended March 31, 2021, cooperative advertising funds were temporarily reduced as part ofexiting our COVID-19 pandemic relief effort and also declined due to lower same-store sales. The declines in cooperative advertising are offset in site expense and have no impact on operating income. Royalties and fees were also impacted by the decreases in franchise same-store sales of 19.3% and 27.6% for the three and nine months ended March 31, 2021, respectively, partially offset by an increase in franchise salons. Total franchised locations open at March 31, 2021 were 5,317 as compared to 5,126 at March 31, 2020.
Franchise Rental Income
During the three and nine months ended March 31, 2021, franchise rental income decreased $0.5 and $1.0 million, or 1.6% and 1.0%, respectively. The decrease in the three months ended March 31, 2021 is primarily due to an increase in rent considered uncollectible and to the change in the lease renewal assumption. The decrease in the nine months ended March 31, 2021 is due to the rental income from TBG salons included in fiscal year 2020 and an increase in rent considered uncollectible.
Cost of Service
During the three months ended March 31, 2021, cost of service as a percent of service revenues decreased 570 basis points, primarily due to payroll related COVID-19 relief tax credits. During the nine months ended March 31, 2021, cost of service as a percent of service revenues increased 780 basis points, primarily due to inefficient and non-productive stylist hours as a result of reduced guest visits related to the COVID-19 pandemic and higher minimum wages.
third-party logistic revenue.Cost of Product Sales to Franchisees
The 4,020 and 1,9302,320 basis point increasesincrease in cost of product as a percent of product revenues during the three and nine months ended March 31,September 30, 2021 respectively, werewas primarily due to a $5.3 million reserve for excessthe Company reducing prices to liquidate inventory at its distribution centers to facilitate exiting the distribution centers.
General and obsolete inventory related to the change in the Company's merchandising strategy and the shift from retail sales to franchise product sales. Excluding the excess and obsolescence reserve, margins on retail product sales were 37.4% and 47.7% in the three months ended March 31, 2021 and 2020, respectively. Margins on franchise product sales were 14.8% and 25.2% in the three months ended March 31, 2021 and 2020, respectively. Excluding the excess and obsolescence reserve, margins on retail product sales were 46.2% and 48.9% in the nine months ended March 31, 2021 and 2020, respectively. Margins on franchise product sales were 19.3% and 23.1% in the nine months ended March 31, 2021 and 2020, respectively. Decreases in franchise product margins were primarily driven by a shift to lower-margin customers and products.Administrative
Site Operating Expenses
Site operating expenses increased $9.7The decrease of $4.3 million, or 265.2%16.5%, in general and administrative expense during the three months ended March 31,September 30, 2021 and decreased $25.9 million, or 41.3%, during the nine months ended March 31, 2021. Site operating expenses during the three months ended March 31, 2020 were reduced by the refunding of $14.9 million of previously collected advertising fees in the prior period, as noted above in Royalties and fees. Excluding the refund, site operating expenses decreased due to a net reduction in salon counts and decreases in marketing spend. The decrease in site operating expenses during the nine months ended March 31, 2021 was primarily due to a net reduction in salon counts and decreases in marketing spend, partially offset by a $1.5 million increase in cooperative advertising expense, as noted above in Royalties and fees.
General and Administrative
The decreases of $7.3 and $27.8 million, or 22.9% and 26.4%, in general and administrative (G&A) during the three and nine months ended March 31, 2021, respectively, were primarily due to lower administrative and field management salaries due to reductions in headcount as we align our cost structure with our transition to an asset-light franchise model. AAdditionally, bad debt expense decreased $2.1 million year-over-year. These decreases were offset by an increase in stock compensation expense of $2.9 million, due primarily to a $2.4 million benefit from the forfeiture of equity awards related to the departure of the Company's former CEO contributed $2.4 million to the decrease in the nine months ended March 31, 2021. Additionally, $1.3 million of the decline in the nine months ended March 31, 2021 is due to the Company not holding its annual franchise convention in fiscal year 2021 due to the COVID-19 pandemic.2021.
Rent
The decreasesdecrease of $10.7 and $29.3$11.4 million, or 57.1% and 46.2%86.4%, in rent expense during the three and nine months ended March 31,September 30, 2021 respectively, werewas primarily due to the net reduction in the number of company-owned salons associated withsalons. Partially offsetting the decrease is a $1.3 million broker fee incurred this fiscal year related to exiting the Company's transformationdistribution centers.
Advertising Fund Expense
Advertising fund expense increased $3.6 million, or 80.0%, during the three months ended September 30, 2021, primarily due to a fully-franchised portfolio.the increase in franchise salon count and system-wide sales.
Franchise Rent Expense
During the three and nine months ended March 31,September 30, 2021, franchise rent expense decreased $0.5 and $1.0increased $1.5 million, or 1.6% and 1.0%4.6%, respectively. The decreaseprimarily due to the increase in franchise salon count.
Company-owned Salon Expense
Company-owned salon expense for the three months ended March 31,September 30, 2021 isdecreased $35.0 million, or 81.6%, primarily due to an increasethe reduction in rent considered uncollectible and the change in the lease renewal assumption. The decrease in the nine months ended March 31, 2021 is due to the rental income from TBG salons included in fiscal year 2020 and an increase in rent considered uncollectible.company-owned salons.
Depreciation and Amortization
The decreasesdecrease of $6.8 and $10.1$5.5 million, or 65.1% and 36.8%74.3%, in depreciation and amortization during the three and nine months ended March 31,September 30, 2021 respectively, werewas primarily due to the net reduction in company-owned salon counts. Additionally, salon asset impairment of $1.2counts and $3.9 million were recorded tono depreciation expense in the three and nine months ended March 31, 2020, respectively. Salon asset impairmentcurrent year related to the distribution center assets that were derecognized in the third quarter of fiscal year 2021 was recorded to long-lived asset impairment.2021.
Long-Lived Asset Impairment
In the three and nine months ended March 31,September 30, 2021 and 2020, the Company recorded a long-lived asset impairment charge of $0.8$0.2 and $9.8$5.8 million, respectively, which included a right of useROU asset impairment charge of $0.3$0.1 and $6.3$4.6 million, respectively, and salon asset impairment of $0.5$0.1 and $3.5$1.2 million, respectively. Prior to the COVID-19 pandemic that beganThe decrease in fiscal year 2020, the Company had not recorded a right of uselong-lived asset impairment charge.
TBG Mall Location Restructuring
In the three and nine months ended March 31, 2020, the Company recorded $0.1 and $2.4 million, respectively, of TBG restructuring charges, which relatedis primarily due to professional fees and the Company assisting TBG with operating expenses to mitigate the risk of default associated with TBG's lease obligations. See Note 3 to the unaudited Condensed Consolidated Financial Statements.
Goodwill Impairment
The Company recorded $40.2 million of goodwill impairment for the three and nine months ended March 31, 2020. Management concluded that the COVID-19 pandemicmore salons being impaired in March 2020 was a triggering event requiring an assessment of the Company’s goodwill. The Company concluded the carrying value of the Company-owned reporting unit exceeded its fair value resulting in a full impairment.prior periods.
Interest Expense
The increases of $1.5 and $6.0$0.5 million decrease in interest expense for the three and nine months ended March 31,September 30, 2021 respectively, werewas primarily due to the increaseda lower interest rate and greater levels of debt.in fiscal year 2022.
Loss from saleSale of salon assetsSalon Assets to franchisees,Franchisees, net
In the three and nine months ended March 31, 2021, the loss from sale of salon assets to franchisees was $4.6 and $8.5The $0.4 million respectively. In the three and nine months ended March 31, 2020,increase in the loss from the sale of salon assets to franchisees, net in the three months ended September 30, 2021 was $7.9 and $26.1 million, respectively, including non-cash goodwill derecognition of $17.5 and $77.0 million, respectively. There wasprimarily due to no goodwill derecognitionproceeds being received for the salons sold in fiscal year 2021 due2022 compared to the company-owned goodwill impairment$3.7 million of proceeds in the third quarter of fiscal year 2020.2021.
Interest Income and Other, net
The increasesdecrease of $15.0 and $12.4$0.3 million respectively, in interest income and other, net during the three and nine months ended March 31,September 30, 2021 werewas primarily due to the gain associated with the leases for the Company's distribution centers (see Note 11foreign exchange loss of $0.3 million in fiscal year 2022 compared to the unaudited Condensed Consolidated Financial Statements), partially offset by the sale of the Company's headquarters recordedno loss in the period ended December 31, 2019.fiscal year 2021.
Income TaxesTax Benefit
During the three and nine months ended March 31,September 30, 2021, the Company recognized a tax benefitsbenefit of $0.3 and $1.4$0.05 million, respectively, with a corresponding effective tax ratesrate of 3.0% and 1.7%0.5% as compared to recognizing a tax benefitsbenefit of $1.0 and $5.8$0.6 million, respectively, with a corresponding effective tax ratesrate of 1.4% and 5.5%1.8% during the three and nine months ended March 31,September 30, 2020.
See Note 64 to the unaudited Condensed Consolidated Financial Statements.
Income from Discontinued Operations
Income from discontinued operations was $0.3 and $0.8 million during the three and nine months ended March 31, 2020, respectively, due to actuarial insurance reserve adjustments. Similar adjustments did not occur in the three and nine months ended March 31, 2021.
Results of Operations by Segment
Based on our internal management structure, we report two segments: Franchise salons and Company-owned salons. See Note 1310 to the unaudited Condensed Consolidated Financial Statements. Significant results of operations are discussed below with respect to each of these segments.
Franchise Salons
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Nine Months Ended March 31, |
| 2021 | | 2020 | | Increase (Decrease) | | 2021 | | 2020 | | Increase (Decrease) |
| | | | | | | | | |
| (Dollars in millions) | | | (Dollars in millions) | |
| | | | | | | | | | | |
Revenue | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Product | 13.1 | | | 15.3 | | | (2.2) | | | 41.1 | | | 45.3 | | | (4.2) | |
Royalties and fees | 23.5 | | | 8.7 | | | 14.8 | | | 61.4 | | | 66.1 | | | (4.7) | |
Franchise rental income | 31.3 | | | 31.8 | | | (0.5) | | | 95.9 | | | 96.9 | | | (1.0) | |
Total franchise salons revenue (1) | $ | 67.9 | | | $ | 55.8 | | | $ | 12.1 | | | $ | 198.3 | | | $ | 208.2 | | | $ | (9.9) | |
| | | | | | | | | | | |
Franchise same-store sales (2) | (19.3) | % | | (4.1) | % | | | | (27.6) | % | | (1.8) | % | | |
| | | | | | | | | | | |
Operating income | $ | 12.0 | | | $ | 11.2 | | | $ | 0.8 | | | $ | 28.7 | | | $ | 35.8 | | | $ | (7.1) | |
Operating loss from TBG restructuring | — | | | (0.1) | | | 0.1 | | | — | | | (2.4) | | | 2.4 | |
Total operating income (1) | $ | 12.0 | | | $ | 11.1 | | | $ | 0.9 | | | $ | 28.7 | | | $ | 33.4 | | | $ | (4.7) | |
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2021 | | 2020 | | Increase (Decrease) (1) |
| | | | | |
| | (Dollars in millions) | |
| | | | | | |
Royalties | | $ | 16.6 | | | $ | 11.4 | | | $ | 5.2 | |
Fees | | 3.3 | | | 2.0 | | | 1.3 | |
Product sales to franchisees | | 8.0 | | | 13.7 | | | (5.7) | |
Advertising fund contributions | | 8.1 | | | 4.5 | | | 3.6 | |
Franchise rental income | | 33.8 | | | 32.3 | | | 1.5 | |
Total franchise revenue (1) | | $ | 69.8 | | | $ | 64.0 | | | $ | 5.8 | |
| | | | | | |
Franchise same-store sales (2) | | 23.7 | % | | (31.9) | % | | |
| | | | | | |
Operating loss | | $ | (4.8) | | | $ | (10.8) | | | $ | 6.0 | |
(1)Total is a recalculation; line items calculated individually may not sum to total due to rounding.
(2)Franchise same-store sales in fiscal year 2022 are calculated as the total change in sales for salonsfranchise locations that have beenwere open on a specific day of the week during the current period and the corresponding prior period. Franchise same-store sales in fiscal year 2021 are calculated as the total change in sales for franchise locationlocations for more than one year that were open on a specific day of the week during the current period and the corresponding prior period. Quarterly and year-to-date franchise same-store sales are the sum of the franchise same-store sales computed on a daily basis. Franchise salons that do not report daily sales are excluded from same-store sales. Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period. Franchise same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.
Franchise same-store sales by concept are detailed in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Nine Months Ended March 31, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | | |
SmartStyle | | (18.1) | % | | (10.9) | % | | (25.8) | % | | (8.6) | % |
Supercuts | | (21.5) | | | (3.3) | | | (29.4) | | | (0.9) | |
Portfolio Brands | | (15.1) | | | (3.5) | | | (24.6) | | | (1.7) | |
Total | | (19.3) | % | | (4.1) | % | | (27.6) | % | | (1.8) | % |
Franchise Salon Revenues
Franchise salon revenues increased $12.1$5.8 million during the three months ended March 31, 2021 and decreased $9.9 million during the nine months ended March 31,September 30, 2021. The increase in franchise salon revenue during the three months ended March 31,September 30, 2021 was primarily due to the refund of previously collected contributions to the cooperative advertising funds in the third quarter of fiscal year 2020. The decrease in franchise salon revenue during the nine months ended March 31, 2021 was primarily due to decreases inhigher royalties and cooperative fundadvertising contributions due to the COVID-19 pandemic.an increase in salon count and system-wide sales. During the twelve months ended March 31,September 30, 2021, franchisees constructed (net of relocations) and closed 3127 and 359358 Franchise-owned salons, respectively, and purchased (net of Company buybacks) 519692 salons from the Company during the same period. The increase in royalties and advertising contributions was partially offset by a decline in franchise product sales, which the Company expects revenue to significantly decrease throughout fiscal year 2022 due to the Company exiting its whole-sale product business.
Franchise Salon Operating IncomeLoss
During the three months ended March 31,September 30, 2021, franchise salon operations generated an operating incomeloss of $12.0 million, an increase of $0.9 million compared to the prior comparable period. During the nine months ended March 31, 2021, franchise salon operations generated operating income of $28.7$4.8 million, a decrease of $4.7$6.0 million compared toimprovement from the prior comparable period. The increaseimprovement in the three months ended March 31,September 30, 2021 was primarily due to an increase in franchise fees dueroyalties and reduced general and administrative expense related primarily to the increase in salon count. The decrease in the nine months ended March 31, 2021 was primarily due to the decrease in royalties due to the COVID-19 pandemic.salaries and bad debt expense.
Company-owned Salons
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Nine Months Ended March 31, |
| 2021 | | 2020 | | Increase (Decrease) (1) | | 2021 | | 2020 | | Increase (Decrease) (1) |
| | | | | | | | | |
| (Dollars in millions) | | | (Dollars in millions) | |
| | | | | | | | | | | |
Total revenue | $ | 32.3 | | | $ | 97.9 | | | $ | (65.6) | | | $ | 117.6 | | | $ | 401.4 | | | $ | (283.7) | |
Company-owned same-store sales | (28.8) | % | | (7.9) | % | | | | (33.8) | % | | (3.9) | % | | |
Operating loss | $ | (12.6) | | | $ | (50.7) | | | $ | 38.0 | | | $ | (50.7) | | | $ | (46.4) | | | $ | (4.4) | |
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2021 | | 2020 | | (Decrease) Increase (1) |
| | | | | |
| | (Dollars in millions) | |
| | | | | | |
Total revenue | | $ | 8.0 | | | $ | 47.4 | | | $ | (39.4) | |
| | | | | | |
Operating loss | | (1.0) | | | (20.7) | | | 19.7 | |
Total company-owned salons | | 179 | | | 1,308 | | | (1,129) | |
(1)Total is a recalculation; line items calculated individually may not sum to total due to rounding.
Company-owned same-store sales by concept are detailed in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Nine Months Ended March 31, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | | |
SmartStyle | | (24.4) | % | | (9.0) | % | | (33.3) | % | | (3.8) | % |
Supercuts | | (34.1) | | | (6.7) | | | (38.0) | | | (4.9) | |
Portfolio Brands | | (28.4) | | | (6.5) | | | (32.4) | | | (3.5) | |
Total | | (28.8) | % | | (7.9) | % | | (33.8) | % | | (3.9) | % |
Company-owned Salon Revenues
Company-owned salon revenues decreased $65.6 and $283.7$39.4 million during the three and nine months ended March 31,September 30, 2021, respectively, primarily due to the 20212022 Net Salon Count Changes and a decline in sales as a result of the COVID-19 pandemic. Company-owned same-store sales decreased 28.8% and 33.8% during the three and nine months ended March 31, 2021, respectively, due primarily to decreases in same-store guest transactions.Changes.
Company-owned Salon Operating Loss
During the three months ended March 31,September 30, 2021, company-owned salon operating loss decreased $38.0 million to a loss of $12.6 million, and during the nine months ended March 31, 2021, company-owned salon operating loss increased $4.4 million to a loss of $50.7improved $19.7 million compared to the prior comparable period. The decreaseimprovement in the loss during the three months ended March 31,September 30, 2021 was primarily due to the goodwill impairment of $40.2 million recorded in the third quarter of fiscal year 2020. The increase in the loss during the nine months ended March 31, 2021 was primarily due to the overall decline in margin related primarily to COVID-19 and a $5.3 million inventory reserve charge recorded in the third quarter of fiscal year 2021, partially offset by the goodwill impairment recorded in the third quarter of fiscal year 2020.
Corporate
Corporate Operating Loss
Corporate operating loss decreased $1.9 million during the three months ended March 31, 2021, primarily driven by lapping stock compensation benefits associated with a change in performance awards assumptions and executive departures in fiscal year 2020, as well as higher severance costs in fiscal year 2021. Corporate operating loss decreased $8.9 million during the nine months ended March 31, 2021, primarily driven by lowerreduced general and administrative expense primarily related to salaries due to lower headcount and the cancellation of the traditional in-person franchise conventiona decrease in fiscal year 2021.marketing expense.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity
Funds generated by operating activities, available cash and cash equivalents, proceeds from sale of salon assetssalons sold to franchisees, and our borrowing agreements are our most significant sources of liquidity.
As of March 31,September 30, 2021, cash and cash equivalents were $34.5$45.5 million, with $32.0$42.3 and $2.5$3.2 million within the United States and Canada, respectively.
The Company's borrowing arrangements include a $295.0$293.3 million five-year revolving credit facility that expires in March 2023, of which $98.8$81.8 million was available as of March 31,September 30, 2021. The Company's liquidity, which includes the unused available balance under the credit facility and unrestricted cash and cash equivalents, totaled $133.3 million as of March 31, 2021. As of March 31, 2021, the revolving credit facility has a minimum liquidity covenant of $75.0 million (see Note 118 to the unaudited Condensed Consolidated Financial Statements). In accordance with the credit agreement, beginning with periods ending June 30, 2021, the Company’s minimum liquidity calculation will be adjusted related to certain net cash proceeds generated from historical venditions. The Company expects that as of June 30, 2021, after using the vendition proceeds adjustment, the minimum liquidity covenant will change such that the unused available balance under the credit facility and unrestricted cash and cash equivalents be in the range of $53-$55 million.
OnAdditionally, on February 3, 2021, the Company filed a $150$150.0 million shelf registration statement and $50$50.0 million prospectus supplement with the Securities and Exchange CommissionSEC under which it may offer and sell, from time to time, up to $50$50.0 million worth of its of its Class A common stock in “at-the-market"at-the-market offerings.”" Net proceeds from sales of shares under the “at-the-market”"at-the-market" program, if any, may be used to, among other things, fund working capital requirements, repay debt and support of our growth strategies. Such strategies may include positioning the Company for potential expansion through targeted industry acquisitions and alternatives to fund additional capital investment requirements related to potential partnership opportunities to facilitate continued growth of our proprietary technology, Opensalon® Opensalon® Pro. The timing and amount of sales of shares, if any, will depend on a variety of factors, including prevailing market conditions,During the trading price ofthree months ended September 30, 2021, the Company issued 8.1 million shares and other factors as determined byreceived net proceeds of $32.2 million. On September 29, 2021, the Company. NoCompany sold 1.2 million shares have been issued under the shelf registration.for net proceeds of $5.0 million, which settled on October 1, 2021.
Uses of Cash
The Company closely manages its liquidity and capital resources. The Company's liquidity requirements depend on key variables, including the level of investment needed to support its business strategies, the performance of the business, capital expenditures, credit facilities and borrowing arrangements, and working capital management. Capital expenditures are a component of the Company's cash flow and capital management strategy, which can be adjusted in response to economic and other changes to the Company's business environment. The Company has a disciplined approach to capital allocation, which focuses on investing in key priorities to support the Company's response to the COVID-19 pandemic, as well as its multi-year strategic plan as discussed within Part I, Item 1 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2020.2021.
Cash Flows
Cash Flows from Operating Activities
During the ninethree months ended March 31,September 30, 2021, cash used in operating activities was $80.0$12.3 million. Cash used in operations increaseddecreased due to higher royalties and lower revenuesgeneral and margins, payments of $14.0 million to catch up on payables related to fiscal year 2020, and the CEO sign-on bonus of $2.5 million,administrative expense. These cash inflows were partially offset by the eliminationCompany's bonus payment of certain general and administrative costs and a $0.8$2.1 million COVID-19 payroll relief payment fromto non-executives paid during the Canadian government receivedfirst quarter. In the prior year, bonuses were paid in the third quarter of fiscal year 2021.second quarter.
Cash Flows from Investing Activities
During the ninethree months ended March 31,September 30, 2021, cash used in investing activities of $0.9$1.5 million was primarilydue to capital expenditures of $9.6 million, of which approximately $3.0 million was internally developedprimarily related to internally-developed capitalized software, partially offset by proceeds from the sale of salon assets of $7.7 million.software.
Cash Flows from Financing Activities
During the ninethree months ended March 31,September 30, 2021, cash used in financing activities was $1.6 million compared to cash provided by financing activities was $40.8 million, primarily as a result of $152.1net proceeds of $32.2 million inrelated to the prior comparable period. In the nine months ended March 31, 2020, the Company borrowedissuance of common stock and a net $183.0$8.9 million and used $28.2 million to purchase common stock.draw on the Company's revolving credit facility.
Financing Arrangements
See Note 118 of the Notes to the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended March 31,September 30, 2021 and Note 8 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020,2021, for additional information regarding our financing arrangements.
Debt to Capitalization Ratio
Our debt to capitalization ratio, calculated as the principal amount of debt as a percentage of the principal amount of debt and shareholders’shareholders' equity at fiscal quarter end, was as follows:
| | | | | | | | | | | | | | |
As of | | Debt to Capitalization (1) | | Basis Point Increase (Decrease) (2) |
| | | | |
March 31, 2021 | | 78.2 | % | | 1,620 | |
June 30, 2020 | | 62.0 | % | | 3,520 | |
| | | | | | | | |
| | Debt to Capitalization (1) |
| | |
September 30, 2021 | | 83.1 | % |
June 30, 2021 | | 91.6 | % |
(1)Debt includes long-term debt and financing liabilities.debt. It excludes the long-term lease liability as that liability is offset by the right of useROU asset.
(2)Represents the basis point change in debt to capitalization as compared to the prior fiscal year end (June 30, 2020 and June 30, 2019, respectively).
The 1,620 basis point increasedecrease in the debt to capitalization ratio as of March 31,September 30, 2021 as compared to June 30, 2020,2021, was primarily due to the decreasesincrease in shareholders' equity as a result of the losscommon stock issued in the quarter
Share Issuance Program
On February 3, 2021, the Company filed a $150.0 million shelf registration statement and $50.0 million prospectus supplement with the SEC under which it may offer and sell, from operations, partially offset bytime to time, up to $50.0 million worth of its Class A common stock in "at-the-market" offerings. During the decrease in debt as a resultthree months ended September 30, 2021, the Company issued 8.1 million shares for net proceeds of the derecognition of the Company's financing lease liability (see Note 11 to the unaudited Condensed Consolidated Financial Statements).$32.2 million.
Share Repurchase Program
In May 2000, the Company’s Board of Directors (Board) approved a stock repurchase program with no stated expiration date. Since that time and through March 31,September 30, 2021, the Board has authorized $650.0 million to be expended for the repurchase of the Company's stock under this program. All repurchased shares become authorized, but unissued shares of the Company. The timing and amounts of any repurchases depend on many factors, including the market price of the common stock and overall market conditions. During the three and nine months ended March 31,September 30, 2021, the Company did not repurchase any shares. As of March 31,September 30, 2021, 30.0 million shares have been cumulatively repurchased for $595.4 million, and $54.6 million remains outstanding under the approved stock repurchase program.
SAFE HARBOR PROVISIONS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Report on Form 10-Q, as well as information included in, or incorporated by reference from, future filings by the Company with the Securities and Exchange Commission and information contained in written material, press releases and oral statements issued by or on behalf of the Company contains or may contain “forward-looking statements”"forward-looking statements" within the meaning of the federal securities laws, including statements concerning anticipated future events and expectations that are not historical facts. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this document reflect management’smanagement's best judgment at the time they are made, but all such statements are subject to numerous risks and uncertainties, which could cause actual results to differ materially from those expressed in or implied by the statements herein. Such forward-looking statements are often identified herein by use of words including, but not limited to, “may,” “believe,” “project,” “forecast,” “expect,” “estimate,” “anticipate,”"may," "believe," "project," "forecast," "expect," "estimate," "anticipate," and “plan.”"plan." These uncertainties include a potential material adverse impact on our business and results of operations as a result of the uncertain duration and severity of the COVID-19 pandemic, as well asincluding any adverse impact from the healthDelta variant; the impact of the COVID-19 pandemic on our key suppliers; consumer shopping trends and risk appetite of our stylists, customerschanges in manufacturer distribution channels; changes in regulatory and employeesstatutory laws including increases in minimum wages; laws and regulations could require us to return to the salon environment;modify current business practices and incur increased costs; changes in economic conditions; changes in consumer tastes and fashion trends; the continued ability of the Company to implement its strategy, priorities and initiatives including the re-engineering of our corporate and field infrastructure; Opensalon® Pro may not yield the intended results on timing and amounts due to the COVID-19 pandemic, efforts by our current third-party back office management system vendor to make it difficult for our franchisees to convert to our new company-owned system and the pending litigation with that third-party vendor; the impact of the COVID-19 pandemic on our key suppliers; the ability to address rent obligations incurred during the government-mandated hibernation of our salons related to the COVID-19 pandemic and the ability to obtain long-term rent concessions; the ability to operate or sell the salons transferred back from TBG; the outcome of the review by the administrator in TBG's insolvency proceedings in the United Kingdom; compliance with credit facility covenants and access to the existing revolving credit facility; our andmerchandising strategy; our franchisees' ability to attract, train and retain talented stylists; financial performance of our franchisees; success of the sale ofability to operate or sell the salons to franchisees; if our capital investments in technology do not achieve appropriate returns;transferred back from TBG; our ability to manage cyber threats and protect the security of potentially sensitive information about our guests, employees, vendors or Company information; the ability of the Company to maintain a satisfactory relationship with Walmart; the impact of recent actions by Walmart; marketing efforts to drive traffic to our franchisees' salons; changes in regulatory and statutory laws including increases in minimum wages; our ability to maintain and enhance the value of our brands; premature termination of agreements with our franchisees; reliance on information technology systems; reliance on external vendors; consumer shopping trendsthe use of social media; failure to standardize operating processes across brands; exposure to uninsured or unidentified risks; Opensalon® Pro may not yield the intended results; compliance with credit facility covenants and changesaccess to the existing revolving credit facility; ability to re-finance our existing credit facility or the ability to re-finance at a similar rate; our capital investments in manufacturer distribution channels; competition withintechnology may not achieve appropriate returns; premature termination of agreements with our franchisees; financial performance of Empire Education Group; the personal hair care industry;continued ability of the Company to implement cost reduction initiatives; continued ability to compete in our business markets; reliance on our management team and other key personnel; the continued ability to maintain an effective system of internal controls over financial reporting; changes in tax exposure; failure to standardize operating processes across brands; financial performance of Empire Education Group; the continued ability of the Company to implement cost reduction initiatives; changes in economic conditions; changes in consumer tastespotential litigation and fashion trends; failure at our distribution centers; exposure to uninsuredother legal or unidentified risks; relianceregulatory proceedings could have an adverse effect on our management team and other key personnel; new merchandising strategy business or other factors not listed above. Additional information concerning potential factors that could affect future financial results is set forth under Item 1A on Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made in our subsequent annual and periodic reports filed or furnished with the SEC on Forms 10-K, 10-Q and 8-K and Proxy Statements on Schedule 14A.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in interest rates and changes in foreign currency exchange rates. There has been no material change to the factors discussed within Part II, Item 7A in the Company’sCompany's June 30, 20202021 Annual Report on Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Securities Exchange Act of 1934, as amended (the "Exchange Act”)Exchange Act) reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’sCommission's rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure.
Management, with the participation of the CEO and CFO, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of the end of the period. Based on their evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of March 31,September 30, 2021.
Changes in Internal Controls over Financial Reporting
There were no material changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a defendant in various lawsuits and claims arising out of the normal course of business. Our businessexisting point-of-sale system supplier has challenged the development of certain parts of our technology systems (See Note 7 to the Condensed Consolidated Financial Statements) and similar to certain other large retail employers, the Company has been faced with allegations of purported class-wide consumer and wage and hour violations.violations (See Note 5 to the unaudited Condensed Consolidated Financial Statements). Litigation is inherently unpredictable, and the outcome of these matters cannot presently be determined. Although the actions are being vigorously defended, the Company could in the future, incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2020, except for the revision to the thirty-third risk factor listed below and the addition of the last risk factor listed below.
We rely on our management team and other key personnel.
We depend on the skills, working relationships, and continued services of key personnel, including our management team and others throughout our organization. We are also dependent on our ability to attract and retain qualified personnel, for whom we compete with other companies both inside and outside our industry. Our business, financial condition or results of operations may be adversely impacted by the unexpected loss of any of our management team or other key personnel, or more generally if we fail to identify, recruit, train and/or retain talented personnel. Effective October 5, 2020, our new Chief Executive Officer commenced his employment as part of a leadership transition. Any transition in senior executive leadership can impact relationships with our suppliers, franchisees, and employees and can lead to shifts in our operations.
We adopted a new merchandising strategy under which the Company will outsource product distribution to third-party distributors.
The Company is in the process of implementing our new merchandising strategy where we will exit the product distribution business and outsource distribution to third-party distributors.
Our success depends, in part, on our ability to rely upon third-party distributors to procure and deliver beauty products in quantities sufficient to meet the needs of our customers. Any material delay in the delivery of beauty products, and/or any reduction to, or material change in, the assortment of beauty products supplied to our salons could result in reduced retail sales and service offerings. In addition, disruptions and delays in the beauty supply chain, as a result of COVID-19 or otherwise, could adversely impact the third-party distributors’ abilities to meet our customer demands, which could negatively impact our business and operating results.2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share Issuance Program
On February 3, 2021, the Company filed a $150.0 million shelf registration statement and $50.0 million prospectus supplement with the 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 three months ended September 30, 2021, the Company issued 8.1 million shares for proceeds of $33.2 million offset by fees of $1.0 million.
The following table shows the stock issuance activity for the three months ended September 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Issued | | Average Price per Share | | Total Number of Shares Issued As Part of Publicly Announced Plans | | Gross Proceeds Received in Q1 |
| | | | | | | | |
7/1/21 - 7/31/21 | | — | | | $ | — | | | — | | | $ | — | |
8/1/21 - 8/31/21 | | 46,212 | | | 5.99 | | | 46,212 | | | 276,593 | |
9/1/21 - 9/28/21 | | 8,026,092 | | | 4.11 | | | 8,072,304 | | | 32,960,804 | |
Total | | 8,072,304 | | | $ | 4.12 | | | 8,072,304 | | | $ | 33,237,397 | |
On September 29, 2021, the Company sold 1.2 million shares for net proceeds of $5.0 million, which settled on October 1, 2021. The settlement occurred in the second quarter, so it is excluded from the table above. Including the shares settled in the second quarter, $11.6 million remains under the prospectus supplement, which equates to 3.3 million shares based on the share price as of September 30, 2021.
Share Repurchase Program
In May 2000, the Company’s Board of Directors (Board) approved a stock repurchase program with no stated expiration date. Since that time and through March 31,September 30, 2021, the Board has authorized $650.0 million to be expended for the repurchase of the Company's stock under this program. All repurchased shares become authorized but unissued shares of the Company. The timing and amounts of any repurchases depend on many factors, including the market price of the common stock and overall market conditions. During the three and nine months ended March 31, 2021, the Company did not repurchase any shares.last purchased shares in fiscal year 2020. As of March 31,September 30, 2021, a total accumulated 30.0 million shares have been repurchased for $595.4 million. At March 31,September 30, 2021, $54.6 million remains outstanding under the approved stock repurchase program.
The following table shows the stockCompany does not expect to repurchase activity by the Company or any “affiliated purchaser” of the Company, as definedshares in Rule 10b-18(a)(3) under the Exchange Act, by month for the three months ended March 31, 2021:
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Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased As Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs (in thousands) |
| | | | | | | | |
1/1/21 - 1/31/21 | | — | | | $ | — | | | 29,974,657 | | | $ | 54,573 | |
2/1/21 - 2/28/21 | | — | | | — | | | 29,974,657 | | | 54,573 | |
3/1/21 - 3/31/21 | | — | | | — | | | 29,974,657 | | | 54,573 | |
Total | | — | | | $ | — | | | 29,974,657 | | | $ | 54,573 | |
fiscal year 2022.
Item 5. Other Information
As previously disclosed in the Company’s definitive proxy statement for its 2021 annual meeting of shareholders filed September 13, 2021, the Compensation Committee of the Board approved certain fiscal 2022 long term incentive awards to the Company’s continuing executive officers, which will be granted in the form of stock options and cash-settled stock appreciation rights (SARs) on November 5, 2021. The forms of awards agreements for the stock options and SARs are filed as Exhibits 10.1 and 10.2, respectively.
Item 6. Exhibits
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| | Form of Stock Option Award Agreement (Annual Executive Grants). |
| | Form of Cash-Settled SAR Agreement (Annual Executive Grants). |
| | President and Chief Executive Officer of Regis Corporation: Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | Executive Vice President and Chief Financial Officer of Regis Corporation: Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | Chief Executive Officer and Chief Financial Officer of Regis Corporation: Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Exhibit 101 | | The following financial information from Regis Corporation's Quarterly Report on Form 10-Q for the quarterly and year-to-date periods ended March 31,September 30, 2021, formatted in Inline Xtensible Business Reporting Language (iXBRL) and filed electronically herewith: (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Earnings;Operations; (iii) the Condensed Consolidated Statements of Comprehensive Income;Loss; (iv) the Condensed Consolidated Statements of Shareholders' Equity; (v) the Condensed Consolidated Statements of Cash Flows; and (v)(vi) the Notes to the Condensed Consolidated Financial Statements. |
Exhibit 104 | | The cover page from Regis Corporation's Quarterly Report on Form 10-Q for the quarterly and year-to-date periods ended March 31,September 30, 2021, formatted in iXBRL (included as Exhibit 101). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Date: May 6,November 4, 2021 | By: | /s/ Kersten D. Zupfer |
| | Kersten D. Zupfer |
| | Executive Vice President and Chief Financial Officer |
| | (Principal Accounting Officer) |
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