Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The primary market risk exposure of the Company relates to changes in interest rates in connection with its debt, specifically the revolving credit facility, which bears interest at variable rates based on SOFR plus an applicable borrowing margin. Additionally, the Company is exposed to foreign currency translation risk related to changes in the Canadian dollar, and to a lesser extent, the British pound. The Company has established policies and procedures that govern the management of these exposures through the use of derivative financial instrument contracts. By policy, the Company does not enter into such contracts for the purpose of speculation. The following details the Company's policies and use of financial instruments.
Interest Rate Risk:
The Company has established an interest rate management policy that attempts to minimize its overall cost of debt, while taking into consideration earnings implications associated with volatility in short-term interest rates. In the past, the Company has used interest rate swaps to further mitigate the risk associated with changing interest rates and to maintain its desired balances of fixed and floating rate debt. In addition, access to variable rate debt is available through the Company's revolving credit facility. The Company reviews its policy and interest rate risk management quarterly and adjusts in accordance with market conditions and the Company's short- and long-term borrowing needs. As of June 30, 2022, the Company had outstanding variable rate debt of $180.0 million and the Company did not have any outstanding interest rate swaps.
In August 2022, the Company amended and extended its revolving credit facility to convert it to a $180.0 million term loan and $55.0 million revolving credit facility with varying interest rates. See Note 16 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.
Foreign Currency Exchange Risk:
Over 90% of the Company's operations are transacted in U.S. dollars. However, because a portion of the Company's operations consist of activities outside of the U.S., the Company has transactions in other currencies, primarily the Canadian dollar, and to a lesser extent, the British pound. In preparing the Consolidated Financial Statements, the Company is required to translate the financial statements of its foreign subsidiaries from the currency in which they keep their accounting records, generally the local currency, into U.S. dollars. Different exchange rates from period to period impact the amounts of reported income and the amount of foreign currency translation recorded in accumulated other comprehensive income (AOCI). As part of its risk management strategy, the Company frequently evaluates its foreign currency exchange risk by monitoring market data and external factors that may influence exchange rate fluctuations. As a result, the Company may engage in transactions involving various derivative instruments to hedge assets, liabilities and purchases denominated in foreign currencies. As of June 30, 2022, the Company did not have any derivative instruments to manage its foreign currency risk.
During fiscal years 2022 and 2021, a $0.6 million foreign currency loss and $0.3 million foreign currency gain is included in loss from continuing operations, respectively.
Item 8. Financial Statements and Supplementary Data | | | | | | | | |
| Index to Consolidated Financial Statements: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Regis Corporation
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Regis Corporation (a Minnesota corporation) and subsidiaries (the "Company") as of June 30, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, shareholders' (deficit) equity, and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of June 30, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated August 22, 2022 expressed as an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill impairment analysis
As described further in Note 1 to the financial statements, the Company’s consolidated goodwill balance was $174.4 million as of June 30, 2022 and is assigned to the Franchise reporting unit. Goodwill is tested annually for impairment on April 30th or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired. At March 31, 2022, a triggering event was identified and a quantitative goodwill impairment test was performed which resulted in impairment expense of $16.0 million. We identified the Company’s March 31, 2022 goodwill impairment analysis as a critical audit matter.
The principal considerations for our determination that the goodwill impairment analysis is a critical audit matter are that the significant estimates and assumptions made by management involve subjectivity and judgment in determining the fair value of the reporting unit using the discounted future cash flows valuation technique. The reporting unit discounted future cash flows include certain management assumptions that are complex and have a higher degree of estimation uncertainty and changes in these assumptions could have a significant impact on the results of the impairment analysis. These assumptions include forward-looking projections related to salon counts, revenue, EBITDA margin and determination of discount rates. Performing audit procedures to evaluate management's assumptions required a high degree of auditor judgement and an increased extent of effort, including the need to involve valuation specialists.
Our audit procedures related to the annual goodwill impairment analysis included the following, among others.
•We tested the design and operating effectiveness of controls relating to management's goodwill impairment test, including the controls over the determination of key inputs such as the forecasting of future cash flows and determination of the discount rate;
•We tested the reasonableness of management's forecasts of future revenues and EBITDA margin by comparing to third-party industry projections and historical operating results;
•We performed sensitivity analysis on the Company's future revenue and salon counts to evaluate the reasonableness of management's forecasts;
•We utilized a valuation specialist to assist in recalculating the Company's discounted future cash flows model and in evaluating the reasonableness of significant assumptions including the discount rate; and
•We evaluated the competency and objectivity of management's specialists who assisted with preparing the discounted cash flow analysis.
Accounting for Discontinued Operations
As discussed in Note 3 of the consolidated financial statements, on June 29, 2022, the Company completed the sale of its OSP software-as-a-service business ("OSP") to Soham Inc. ("Buyer") for $20.0 million in cash plus up to an additional $19.0 million in proceeds contingent upon the number of salons that transition to the Buyer's salon technology platform. In connection with the sale, the Company recognized a pre-tax loss of $36.6 million in discontinued operations. As a result of the discontinued operations classification, the comparative period consolidated financial statements for fiscal year 2021 have been recast to reclassify balance sheet, operations and cash flow amounts related to OSP discontinued operations. We identified the Company’s accounting for the OSP discontinued operations as a critical audit matter.
The principal considerations for our determination that the discontinued operations is a critical audit matter are that auditing the Company's discontinued operations was complex due to judgments made by management in applying the relevant accounting principles including management's determination that OSP is a business, that the sale is a strategic shift, and the fair value determinations used in allocating goodwill attributable to the OSP component of the Franchise reporting unit.
Our audit procedures related to the discontinued operations included the following, among others.
•We tested the design and operating effectiveness of financial reporting controls over the Company's accounting for the discontinued operations.
•We evaluated the appropriateness of the Company's application of the criteria for reporting of discontinued operations by inspecting management's supporting documentation, reading board of directors meeting minutes and other entity information, and evaluating whether there was contrary evidence, based on our understanding of the business.
•We consulted with our national office as to the appropriateness of the conclusion reached regarding discontinued operations treatment.
•To test the allocation of goodwill to the OSP component for purposes of computing the loss, we evaluated the determination of the fair value of OSP based on the terms of the sale and the fair value of the overall Franchise reporting unit based on the most recent fair value determinations used in conjunction with goodwill impairment testing.
•We evaluated the presentation of the discontinued operations in the consolidated financial statements, including testing significant balances for appropriate allocation to discontinued operations in 2022 and 2021 and assessing the reasonableness of key judgments applied by management in allocating expenses to the discontinued operations.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2020.
Minneapolis, Minnesota
August 22, 2022
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Regis Corporation
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Regis Corporation (a Minnesota Corporation) and subsidiaries (the "Company") as of June 30, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated financial statements of the Company as of and for the year ended June 30, 2022, and our report dated August 22, 2022, expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting ("Management’s Report"). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Minneapolis, Minnesota
August 22, 2022
REGIS CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share data) | | | | | | | | | | | | | | |
| | | June 30, |
| | | 2022 | | 2021 |
| | | | |
| ASSETS | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 17,041 | | | $ | 19,191 | |
| Receivables, net | | 14,531 | | | 26,270 | |
| Inventories | | 3,109 | | | 20,639 | |
| Other current assets | | 13,984 | | | 17,017 | |
Current assets related to discontinued operations (Note 3) | | — | | | 3,542 | |
| Total current assets | | 48,665 | | | 86,659 | |
| | | | |
| Property and equipment, net | | 12,835 | | | 16,906 | |
Goodwill (Note 5) | | 174,360 | | | 188,257 | |
| Other intangibles, net | | 3,226 | | | 3,761 | |
Right of use asset (Note 6) | | 493,749 | | | 610,599 | |
| Other assets | | 36,465 | | | 41,388 | |
Non-current assets related to discontinued operations (Note 3) | | — | | | 48,813 | |
| Total assets | | $ | 769,300 | | | $ | 996,383 | |
| | | | |
| LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY | | | | |
| Current liabilities: | | | | |
| Accounts payable | | $ | 15,860 | | | $ | 27,157 | |
| Accrued expenses | | 33,784 | | | 51,242 | |
| | | | |
Short-term lease liability (Note 6) | | 103,196 | | | 116,348 | |
Current liabilities related to discontinued operations (Note 3) | | — | | | 3,738 | |
| Total current liabilities | | 152,840 | | | 198,485 | |
| | | | |
Long-term debt, net (Note 8) | | 179,994 | | | 186,911 | |
Long-term lease liability (Note 6) | | 408,445 | | | 517,626 | |
| | | | |
| Other non-current liabilities | | 58,974 | | | 75,075 | |
Non-current liabilities related to discontinued operations (Note 3) | | — | | | 1,240 | |
| Total liabilities | | 800,253 | | | 979,337 | |
Commitments and contingencies (Note 9) | | | | |
| Shareholders' (deficit) equity: | | | | |
Common stock, $0.05 par value; issued and outstanding, 45,510,245 and 35,795,844 common shares at June 30, 2022 and 2021, respectively | | 2,276 | | | 1,790 | |
| Additional paid-in capital | | 62,562 | | | 25,102 | |
| Accumulated other comprehensive income | | 9,455 | | | 9,543 | |
| Accumulated deficit | | (105,246) | | | (19,389) | |
| Total shareholders' (deficit) equity | | (30,953) | | | 17,046 | |
| Total liabilities and shareholders' (deficit) equity | | $ | 769,300 | | | $ | 996,383 | |
______________________________________________________________________________
The accompanying notes are an integral part of the Consolidated Financial Statements.
REGIS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars and shares in thousands, except per share data) | | | | | | | | | | | | | | | | |
| | | Fiscal Years |
| | | 2022 | | 2021 | | |
| | | | | | |
| Revenues: | | | | | | |
| Royalties | | $ | 65,753 | | | $ | 52,357 | | | |
| Fees | | 11,587 | | | 10,215 | | | |
| Product sales to franchisees | | 15,072 | | | 56,699 | | | |
| Advertising fund contributions | | 32,573 | | | 22,023 | | | |
Franchise rental income (Note 6) | | 130,777 | | | 127,392 | | | |
| Company-owned salon revenue | | 20,205 | | | 142,965 | | | |
| Total revenue | | 275,967 | | | 411,651 | | | |
| Operating expenses: | | | | | | |
| Cost of product sales to franchisees | | 17,391 | | | 43,756 | | | |
| Inventory reserve (1) | | 7,655 | | | — | | | |
| General and administrative | | 65,274 | | | 96,427 | | | |
Rent (Note 6) | | 9,357 | | | 40,754 | | | |
| Advertising fund expense | | 32,573 | | | 22,023 | | | |
| Franchise rent expense | | 130,777 | | | 127,392 | | | |
| Company-owned salon expense (2) | | 21,952 | | | 141,204 | | | |
| Depreciation and amortization | | 6,224 | | | 21,749 | | | |
Long-lived asset impairment (Note 1) | | 542 | | | 13,023 | | | |
| | | | | | |
Goodwill impairment (Note 5) | | 13,120 | | | — | | | |
| Total operating expenses | | 304,865 | | | 506,328 | | | |
| | | | | | |
| Operating loss | | (28,898) | | | (94,677) | | | |
| | | | | | |
| Other (expense) income: | | | | | | |
| Interest expense | | (12,914) | | | (13,163) | | | |
| Loss from sale of salon assets to franchisees, net | | (2,334) | | | (16,696) | | | |
| Interest income and other, net | | (296) | | | 15,902 | | | |
| | | | | | |
| Loss from operations before income taxes | | (44,442) | | | (108,634) | | | |
| | | | | | |
| Income tax (expense) benefit | | (2,017) | | | 5,428 | | | |
| | | | | | |
| Loss from continuing operations | | (46,459) | | | (103,206) | | | |
| | | | | | |
| Loss from discontinued operations, net of income taxes (Note 3) | | (39,398) | | | (10,125) | | | |
| | | | | | |
| Net loss | | $ | (85,857) | | | $ | (113,331) | | | |
| | | | | | |
| Net loss per share: | | | | | | |
| Basic and diluted: | | | | | | |
| Loss from continuing operations | | $ | (1.07) | | | $ | (2.87) | | | |
| Loss from discontinued operations | | (0.90) | | | (0.28) | | | |
| Net loss per share, basic and diluted (3) | | $ | (1.97) | | | $ | (3.15) | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Weighted average common and common equivalent shares outstanding: | | | | | | |
| Basic and diluted | | 43,582 | | | 35,956 | | | |
| | | | | | |
_____________________________________________________________________________
(1)Includes charges in the third and fourth quarter associated with liquidation of distribution center inventory. Excludes reserves for inventory at salons.
(2)Includes cost of service and product sold to guests in our Company-owned salons. Excludes general and administrative expense, rent and depreciation and amortization related to Company-owned salons.
(3)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 Consolidated Financial Statements.
REGIS CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
(Dollars in thousands) | | | | | | | | | | | | | | | | |
| | | Fiscal Years |
| | | 2022 | | 2021 | | |
| | | | | | |
| Net loss | | $ | (85,857) | | | $ | (113,331) | | | |
| Other comprehensive (loss) income, net of tax: | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Net current period foreign currency translation adjustments | | (547) | | | 1,888 | | | |
| Recognition of deferred compensation | | 459 | | | 206 | | | |
| Other comprehensive (loss) income | | (88) | | | 2,094 | | | |
| Comprehensive loss | | $ | (85,945) | | | $ | (111,237) | | | |
_______________________________________________________________________________
The accompanying notes are an integral part of the Consolidated Financial Statements.
REGIS CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY
(Dollars in thousands, except share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | Additional
Paid-In
Capital | | Accumulated
Other
Comprehensive
Income | | Retained Earnings (Deficit) | | Total |
| | | Shares | | Amount | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Balance, June 30, 2020 | | 35,625,716 | | | $ | 1,781 | | | $ | 22,011 | | | $ | 7,449 | | | $ | 94,462 | | | $ | 125,703 | |
| Net loss | | — | | | — | | | — | | | — | | | (113,331) | | | (113,331) | |
| Foreign currency translation (Note 1) | | — | | | — | | | — | | | 1,888 | | | — | | | 1,888 | |
| | | | | | | | | | | | |
| Exercise of SARs | | 3,775 | | | — | | | (24) | | | — | | | — | | | (24) | |
| Stock-based compensation | | — | | | — | | | 3,254 | | | — | | | — | | | 3,254 | |
Recognition of deferred compensation (Note 11) | | — | | | — | | | — | | | 206 | | | — | | | 206 | |
| Net restricted stock activity | | 166,353 | | | 9 | | | (139) | | | — | | | — | | | (130) | |
| Minority interest | | — | | | — | | | — | | | — | | | (520) | | | (520) | |
| Balance, June 30, 2021 | | 35,795,844 | | | 1,790 | | | 25,102 | | | 9,543 | | | (19,389) | | | 17,046 | |
| Net loss | | — | | | — | | | — | | | — | | | (85,857) | | | (85,857) | |
Foreign currency translation (Note 1) | | — | | | — | | | — | | | (547) | | | — | | | (547) | |
| Issuance of common stock, net of offering costs | | 9,295,618 | | | 465 | | | 36,720 | | | — | | | — | | | 37,185 | |
| | | | | | | | | | | | |
| Stock-based compensation | | — | | | — | | | 1,285 | | | — | | | — | | | 1,285 | |
Recognition of deferred compensation (Note 11) | | — | | | — | | | — | | | 459 | | | — | | | 459 | |
| Net restricted stock activity | | 418,783 | | | 21 | | | (545) | | | — | | | — | | | (524) | |
| | | | | | | | | | | | |
| Balance, June 30, 2022 | | 45,510,245 | | | $ | 2,276 | | | $ | 62,562 | | | $ | 9,455 | | | $ | (105,246) | | | $ | (30,953) | |
_______________________________________________________________________________
The accompanying notes are an integral part of the Consolidated Financial Statements.
REGIS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands) | | | | | | | | | | | | | | | | |
| | | Fiscal Years |
| | | 2022 | | 2021 | | |
| | | | | | |
| Cash flows from operating activities: | | | | | | |
| Net loss | | $ | (85,857) | | | $ | (113,331) | | | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | |
| Loss from sale of OSP (Note 3) | | 36,143 | | | — | | | |
| Depreciation and amortization (Note 1) | | 6,504 | | | 17,871 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Long-lived asset impairment | | 542 | | | 13,023 | | | |
| Deferred income taxes | | 391 | | | (3,388) | | | |
| Inventory reserve | | 10,478 | | | 12,068 | | | |
| | | | | | |
| Gain from disposal of distribution center assets | | — | | | (14,997) | | | |
| | | | | | |
| Loss from sale of salon assets to franchisees, net | | 2,334 | | | 16,696 | | | |
| | | | | | |
| Goodwill impairment | | 16,000 | | | — | | | |
| | | | | | |
| Stock-based compensation | | 1,334 | | | 3,254 | | | |
| Amortization of debt discount and financing costs | | 1,839 | | | 1,839 | | | |
| Other non-cash items affecting earnings | | 709 | | | (351) | | | |
| Changes in operating assets and liabilities (1): | | | | | | |
| Receivables | | 11,896 | | | (279) | | | |
| Inventories | | 7,886 | | | 17,879 | | | |
| Income tax receivable | | 1,118 | | | 1,295 | | | |
| Other current assets | | 2,118 | | | 1,658 | | | |
| Other assets | | 2,703 | | | (2,896) | | | |
| Accounts payable | | (10,966) | | | (21,669) | | | |
| Accrued expenses | | (21,983) | | | 5,296 | | | |
| Net lease liabilities | | (5,960) | | | (19,248) | | | |
| Other non-current liabilities | | (15,867) | | | (14,603) | | | |
| Net cash used in operating activities: | | (38,638) | | | (99,883) | | | |
| Cash flows from investing activities: | | | | | | |
| Capital expenditures | | (5,316) | | | (11,475) | | | |
| | | | | | |
| | | | | | |
| Proceeds from sale of OSP | | 13,000 | | | — | | | |
| Proceeds from sale of assets to franchisees | | — | | | 8,437 | | | |
| Costs associated with sale of assets to franchisees | | — | | | (261) | | | |
| Proceeds from company-owned life insurance policies | | — | | | 1,200 | | | |
| Net cash provided by (used in) investing activities: | | 7,684 | | | (2,099) | | | |
| Cash flows from financing activities: | | | | | | |
| Borrowings on revolving credit facility | | 10,000 | | | 10,000 | | | |
| Repayments of revolving credit facility | | (16,916) | | | (589) | | | |
| Proceeds from issuance of common stock, net of offering costs | | 37,185 | | | — | | | |
| | | | | | |
| | | | | | |
| Taxes paid for shares withheld | | (845) | | | (348) | | | |
| Minority interest buyout | | — | | | (562) | | | |
| Distribution center lease payments | | — | | | (724) | | | |
| | | | | | |
| Net cash provided by financing activities: | | 29,424 | | | 7,777 | | | |
| Effect of exchange rate changes on cash and cash equivalents | | (158) | | | 477 | | | |
| Decrease in cash, cash equivalents and restricted cash | | (1,688) | | | (93,728) | | | |
| Cash, cash equivalents and restricted cash: | | | | | | |
| Beginning of year | | 29,152 | | | 122,880 | | | |
| | | | | | |
| | | | | | |
| End of year | | $ | 27,464 | | | $ | 29,152 | | | |
_______________________________________________________________________________
(1)Changes in operating assets and liabilities exclude assets and liabilities sold or acquired.
The accompanying notes are an integral part of the Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description:
Regis Corporation (the Company) franchises hairstyling and hair care salons throughout the United States (U.S.), Canada, Puerto Rico and the United Kingdom (U.K.). The business is evaluated in two segments, Franchise salons and Company-owned salons. Franchise salons in operation decreased from 5,563 to 5,395 at June 30, 2021 compared to June 30, 2022, primarily due to the closure of 299 salons, which was partially offset by the conversion of 110 salons from company-owned. Company-owned salons in operation decreased from 276 to 105 at June 30, 2021 compared to June 30, 2022, primarily due to the conversion of 110 salons to franchise. See Note 15 to the Consolidated Financial Statements. Salons are located in leased space in strip center locations, malls or Walmart.
COVID-19 Impact:
During fiscal years 2022 and 2021, the global coronavirus pandemic (COVID-19) had an adverse impact on operations. The COVID-19 pandemic continues to impact salon guest visits and franchisee staffing, resulting in a significant reduction in revenue and profitability. In response to COVID-19, the Company received Canadian rent relief, Canadian wage relief and U.S. employee retention payroll tax credits. In fiscal years 2022 and 2021, the Company received the following amounts in rent and wage assistance:
| | | | | | | | | | | | | | | | | | | | |
| | | | | Fiscal Years |
| | | Financial Statement Caption | | 2022 | | 2021 |
| | | | | | |
| | | | | (Dollars in thousands) |
| Canadian rent relief | | Rent | | $ | 1,235 | | | $ | — | |
| Canadian wage relief | | Company-owned salon expense | | 1,966 | | | 1,629 | |
| U.S. employee retention payroll tax credit | | Company-owned salon expense | | — | | | 1,547 | |
Additionally, in December 2021 the Company paid $2.5 million of social security contributions that had been deferred under the CARES Act. Overall, COVID-19 has, and may continue to have, a negative effect on revenue and profitability. The ultimate impact of the COVID-19 pandemic in both the short- and long-term is not currently estimable due to the uncertainty surrounding the duration of the pandemic, the emergence and impact of new COVID-19 variants and changing government restrictions. Additional impacts to the business may arise that we are not aware of currently.
Consolidation:
The Consolidated Financial Statements include the accounts of the Company and its subsidiaries after the elimination of intercompany accounts and transactions. All material subsidiaries are wholly owned. The Company consolidates variable interest entities where it has determined it is the primary beneficiary of those entities' operations.
Variable Interest Entities:
The Company has interests in certain privately-held entities through arrangements that do not involve voting interests. Such entities, known as a variable interest entities (VIE), are required to be consolidated by its primary beneficiary. The Company evaluates whether or not it is the primary beneficiary for each VIE using a qualitative assessment that considers the VIE's purpose and design, the involvement of each of the interest holders and the risk and benefits of the VIE. As of June 30, 2022, the Company has no VIEs where the Company is the primary beneficiary.
The Company has an investment in Empire Education Group, Inc. (EEG). During fiscal year 2020, the Company signed an agreement to sell its interest in EEG to the other shareholder. Until the transaction closes, the Company continues to account for EEG as an equity investment under the voting interest model. The Company has granted the other shareholder of EEG an irrevocable proxy to vote a certain number of the Company's shares such that the other shareholder of EEG has voting control of EEG's common stock, as well as the right to appoint four of the five members of EEG's Board of Directors. The Company wrote off its investment balance in EEG in fiscal year 2016.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Use of Estimates:
The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Due to the economic disruption caused by the COVID-19 pandemic, the Company faces a greater degree of uncertainty than normal in making judgments and estimates needed to apply the Company's significant accounting policies. Actual results and outcomes may differ from management's estimates and assumptions.
Cash, Cash Equivalents and Restricted Cash:
Cash equivalents consist of investments in short-term, highly liquid securities having original maturities of three months or less, which are made as a part of the Company's cash management activity. The carrying values of these assets approximate their fair market values. The Company primarily utilizes a cash management system with a series of separate accounts consisting of lockbox accounts for receiving cash, concentration accounts that funds are moved to, and several "zero balance" disbursement accounts for funding of payroll and accounts payable. As a result of the Company's cash management system, checks issued, but not presented to the banks for payment, may create negative book cash balances. There were no checks outstanding in excess of related book cash balances at June 30, 2022 and 2021.
Restricted cash within other current assets primarily relates to consolidated advertising cooperatives funds, which can only be used to settle obligations of the respective cooperatives and contractual obligations to collateralize the Company's self-insurance programs. The self-insurance restricted cash arrangement can be canceled by the Company at any time if substituted with letters of credit. The table below reconciles the cash and cash equivalents balances and restricted cash balances, recorded within other current assets on the Consolidated Balance Sheet to the amount of cash, cash equivalents and restricted cash reported on the Consolidated Statement of Cash Flows: | | | | | | | | | | | | | | |
| | June 30, |
| | 2022 | | 2021 |
| | | | |
| | (Dollars in thousands) |
| Cash and cash equivalents | | $ | 17,041 | | | $ | 19,191 | |
| Restricted cash, included in other current assets | | 10,423 | | | 9,961 | |
| Total cash, cash equivalents and restricted cash | | $ | 27,464 | | | $ | 29,152 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Receivables and Allowance for Doubtful Accounts:
The receivable balance on the Company's Consolidated Balance Sheet primarily includes accounts and notes receivable from franchisees, credit card receivables and receivables related to salons sold to franchisees. The balance is presented net of an allowance for expected losses (i.e., doubtful accounts), related to receivables from the Company's franchisees. The Company monitors the financial condition of its franchisees and records provisions for estimated losses on receivables when it believes franchisees are unable to make their required payments based on factors such as delinquencies and aging trends. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses related to existing accounts and notes receivables. As of June 30, 2022 and 2021, the allowance for doubtful accounts was $6.6 and $7.8 million, respectively. The allowance for doubtful accounts decreased in fiscal year 2022 due to higher write-offs. See Note 2 to the Consolidated Financial Statements.
Inventories:
Inventories of finished goods consist principally of hair care products for retail product sales. A portion of inventories are also used for salon services consisting of hair color, hair care products including shampoo and conditioner and hair care treatments including permanents, neutralizers and relaxers. Inventories are stated at the lower of cost or market, with cost determined on a weighted average cost basis.
Physical inventory is held at salons and a third-party distribution center as of June 30, 2022. A physical inventory count is conducted annually at the third-party distribution center. Product and service inventories are adjusted based on the physical inventory counts. During the fiscal year, cost of retail product sold to salon guests is determined based on the weighted average cost of product sold, adjusted for an estimated shrinkage factor. The cost of product used in salon services is determined by applying an estimated percentage of total cost of service to service revenues.
The Company has inventory valuation reserves for excess and obsolete inventories, or other factors that may render inventories unmarketable at their historical costs. In fiscal year 2021, the Company announced it would transition away from its wholesale product distribution model in favor of a third-party distribution model. As a result, the Company exited its two distribution centers in fiscal year 2022 and now stores inventory at a third-party facility. To facilitate the exit of the distribution centers, the Company sold and continues to sell inventory at discounts and dispose of hard-to-sell products. Additionally, the reduction in company-owned salons decreases the Company's ability to redistribute inventory from closed locations to other salons to be sold or used. The inventory valuation reserve as of June 30, 2022 and 2021 was $1.9 and $11.8 million, respectively. During fiscal year 2022, the Company recorded total inventory reserve charges of $10.5 million, of which $7.7 and $2.8 million were recorded in Inventory reserve and Company-owned salon expense, respectively, in the Consolidated Statement of Operations. Included in Company-owned salon expense in the Consolidated Statement of Operations is an inventory reserve charge of $12.1 million during fiscal year 2021.
Property and Equipment:
Property and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation of property and equipment is computed using the straight-line method over their estimated useful asset lives (i.e., 30 to 39 years for buildings, 10 years or lease life for improvements and three to 10 years or lease life for equipment, furniture and software). Depreciation expense was $5.8 and $20.9 million in fiscal years 2022 and 2021, respectively. Depreciation expense for fiscal years 2022 and 2021 include $1.0 and $4.7 million of asset retirement obligations, which are cash expenses.
The Company capitalizes both internal and external costs of developing or obtaining computer software for internal use. Costs incurred to develop internal-use software during the application development stage are capitalized, while data conversion, training and maintenance costs associated with internal-use software are expensed as incurred. Estimated useful lives range from three to seven years.
Expenditures for maintenance and repairs and minor renewals and betterments, which do not improve or extend the life of the respective assets, are expensed. All other expenditures for renewals and betterments are capitalized. The assets and related depreciation and amortization accounts are adjusted for property retirements and disposals with the resulting gain or loss included in operating income. Fully depreciated or amortized assets remain in the accounts until retired from service.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Right of Use Asset, Lease Liabilities and Rent Expense:
At contract inception, the Company determines whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides the Company the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, the Company considers it to be, or contain, a lease. The Company leases its company-owned salons and some of its corporate facilities under operating leases. The original terms of the salon leases range from 1 to 20 years with many leases renewable for an additional 5 to 10 year term at the option of the Company. In addition to the obligation to make fixed rental payments for the use of the salons, the Company also has variable lease payments that are based on sales levels. For most leases, the Company is required to pay real estate taxes and other occupancy expenses.
The Company leases salon premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees. All lease-related costs are passed through to 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 Consolidated Statement of Operations.
For salon operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date, including one lease term option when the lease is expected to be renewed. The right of use (ROU) asset is initially and subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, less any accrued lease payments and unamortized lease incentives received, if any. For leases classified as operating leases, expense for lease payments is recognized on a straight-line basis over the lease term, including the lease renewal option when the lease is expected to be renewed. Generally, the non-lease components, such as real estate taxes and other occupancy expenses, are separate from rent expense within the lease and are not included in the measurement of the lease liability because these charges are variable.
The discount rate used to determine the present value of the lease payments is the Company's estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as the interest rate implicit in the lease cannot generally be determined. The Company uses the portfolio approach in applying the discount rate based on the original lease term.
Certain leases provide for contingent rents that are determined as a percentage of revenues in excess of specified levels. The Company records a contingent rent liability in accrued expenses on the Consolidated Balance Sheet, along with the corresponding rent expense in the Consolidated Statement of Operations, when specified levels have been achieved or when management determines that achieving the specified levels during the fiscal year is probable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Salon Long-Lived Asset and Right of Use Asset Impairment Assessments:
A lessee's ROU asset is subject to the same asset impairment guidance in ASC 360, Property, Plant, and Equipment, applied to other elements of property, plant, and equipment. The Company has identified its asset groups at the individual salon level as this represents the lowest level that identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Poor salon performance in fiscal years 2022 and 2021, primarily due to the COVID-19 pandemic, resulted in ASC 360-10-35-21 triggering events. As a result, management assessed underperforming salon asset groups, which included the related ROU assets, for impairment in accordance with ASC 360.
The Company assesses impairment of long-lived salon assets and right of use 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 our use of the assets. The first step is to assess recoverability, and in doing that, the undiscounted cash flows are compared to the carrying value. 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. The fair value of the right of use asset is estimated by determining what a market participant would pay over the life of the primary asset in the group, discounted back to June 30, 2022. See Note 6 to the Consolidated Financial Statements for further discussion related to right of use asset impairment.
The first step in the impairment test under ASC 360 is to determine whether the long-lived assets are recoverable, which is determined by comparing the net carrying value of the salon asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset group. Estimating cash flows for purposes of the recoverability test is subjective and requires significant judgment. Estimated future cash flows used for the purposes of the recoverability test were based upon historical cash flows for the salons, adjusted for expected changes in future market conditions related to the COVID-19 pandemic, and other factors. The period of time used to determine the estimates of the future cash flows for the recoverability test was based on the remaining useful life of the primary asset of the group, which was the ROU asset in all cases.
The second step of the long-lived asset impairment test requires that the fair value of the asset group be estimated when determining the amount of any impairment loss. For the salon asset groups that failed the recoverability test, an impairment loss was measured as the amount by which the carrying amount of the asset group exceeds its fair value. The Company applied the fair value guidance within ASC 820-10 to determine the fair value of the asset group from the perspective of a market-participant considering, among other things, appropriate discount rates, multiple valuation techniques, the most advantageous market, and assumptions about the highest and best use of the asset group. To determine the fair value of the salon asset groups, the Company utilized market-participant assumptions rather than the Company's own assumptions about how it intends to use the asset group. The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include the market rent of comparable properties and a discount rate. The fair value of the salon long-lived asset group is estimated using market participant methods based on the best information available.
For fiscal years 2022 and 2021, the Company recognized long-lived asset impairment charges of $0.5 and $13.0 million, respectively, which included $0.5 and $9.5 million, respectively, related to ROU assets on the Consolidated Statement of Operations. The impairment loss for each salon asset group that was recognized was allocated among the long-lived assets of the group on a pro-rata basis using their relative carrying amounts. Additionally, the impairment losses did not reduce the carrying amount of an individual asset below its fair value, including for the ROU assets included in the salon asset groups. 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 asset, including its ROU assets. 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. See Note 6 to the Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill:
As of June 30, 2022 and 2021, the Franchise reporting unit had $174.4 and $229.6 million, respectively, of goodwill and the Company-owned reporting unit had no goodwill for both periods. See Note 5 to the Consolidated Financial Statements for changes to the goodwill balance. The Company assesses goodwill impairment on an annual basis as of April 30, 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.
Goodwill impairment assessments are performed at the reporting unit level, which is the same as the Company's operating segments. The Company performed its interim impairment tests and annual impairment tests by comparing the fair value of a reporting unit to its carrying amount. The Company then records an impairment charge for the amount that the carrying amount exceeds the fair value. In applying the goodwill impairment assessment, the Company could assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting units was less than its carrying value (Step 0). Qualitative factors could include, but were not limited to, economic, market and industry conditions, cost factors and overall financial performance of the reporting unit. If after assessing these qualitative factors, the Company determined it is more likely than not that the carrying value was less than the fair value, then performing Step 1 of the goodwill impairment assessment was unnecessary.
The carrying value of each reporting unit is based on the assets and liabilities associated with the operations of the reporting unit, including allocation of shared or corporate balances among reporting units. Allocations are generally based on the number of salons in each reporting unit as a percent of total company-owned salons or expenses of the reporting unit as a percent of total company expenses.
The Company calculates estimated fair values of the reporting units based on discounted cash flows utilizing estimates in annual revenue, service and product margins, fixed expense rates, allocated corporate overhead, franchise and company-owned salon counts, proceeds from the sale of company-owned salons to franchisees and long-term growth rates for determining terminal value. Where available and as appropriate, comparative market multiples are used in conjunction with the results of the discounted cash flows. The Company engages third-party valuation consultants to assist in evaluating the Company's estimated fair value calculations.
Following is a description of the goodwill impairment assessments for each of the fiscal years:
Fiscal 2022
During fiscal year 2022, the Company performed a quantitative impairment test over goodwill during the second quarter due to a triggering event experienced in the quarter. This determination was made considering the sustained decrease in share price and a change in the Company's chief operating decision maker. In the second quarter, the Franchise reporting unit was determined to have a fair value in excess of its carrying value and no impairment was recorded. A quantitative goodwill impairment was performed in the third quarter due to a triggering event experienced during the quarter. This determination was made considering a decrease in forecasted revenue due to slower than expected recovery from COVID-19. In the third quarter, the Franchise reporting unit was determined to have a carrying value in excess of its fair value, resulting in a goodwill impairment charge of $16.0 million.
The Company performed its annual impairment assessment as of April 30. For the goodwill impairment analysis, management utilized a combination of both a discounted cash flows approach and market approach to evaluate the Franchise reporting unit. The discounted cash flows model reflects management's assumptions regarding revenue growth rates, economic and market trends, cost structure, and other expectations about the anticipated short-term and long-term operating results. Management's assumptions related to revenue growth rates were reduced and management increased expected salon closures compared to valuations in prior years. These changes, along with a decline in value from the market approach, reduced the fair value of the reporting unit. The discount rate of 20.0% was also a key assumption utilized in the discounted cash flows, which was an increase of 0.5% from the third quarter valuation due to an increase in market interest rates. As a result of the impairment testing, the Franchise reporting unit was determined to have a fair value in excess of its carrying value.
The Company derecognized $38.4 million of goodwill in fiscal year 2022 in connection to the sale of OSP. The $38.4 million represents the portion of goodwill related to the OSP business based on relative fair value. See Notes 3 and 5 to the Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fiscal 2021
During fiscal year 2021, the Company did not experience any triggering events that required an interim goodwill analysis. The Company performed its annual impairment assessment as of April 30. For the fiscal year 2021 annual impairment assessment, the Company performed a Step 1 impairment test for the Franchise reporting unit. The Company compared the carrying value of the Franchise reporting unit, including goodwill, to the estimated fair value. The results of this assessment indicated that the estimated fair value of the Company's Franchise reporting unit significantly exceeded the carrying value.
Self-Insurance Accruals:
The Company uses a combination of third-party insurance and self-insurance for a number of risks including workers' compensation, health insurance, employment practice liability and general liability claims. The liability represents the Company's estimate of the undiscounted ultimate cost of uninsured claims incurred as of the Consolidated Balance Sheet date.
The Company estimates self-insurance liabilities using a number of factors, primarily based on independent third-party actuarially-determined amounts, historical claims experience, estimates of incurred but not reported claims, demographic factors and severity factors.
Although the Company does not expect the amounts ultimately paid to differ significantly from the estimates, self-insurance accruals could be affected if future claims experience differs significantly from historical trends and actuarial assumptions. For fiscal years 2022 and 2021, the Company recorded decreases in expense for changes in estimates related to prior year open policy periods of $0.5 and $3.6 million, respectively. The Company updates loss projections bi-annually and adjusts its liability to reflect updated projections. The updated loss projections consider new claims and developments associated with existing claims for each open policy period. As certain claims can take years to settle, the Company has multiple policy periods open at any point in time.
As of June 30, 2022, the Company had $4.7 and $9.7 million recorded in current liabilities and non-current liabilities, respectively, related to the Company's workers' compensation and general liability self-insurance accruals. As of June 30, 2021, the Company had $6.8 and $12.7 million recorded in current liabilities and non-current liabilities, respectively, related to the Company's workers' compensation and general liability self-insurance accruals.
Revenue Recognition and Deferred Revenue:
Franchise revenues primarily include royalties, fees, product sales to franchisees and advertising fund fees. Royalties and advertising fund revenues represent sales-based royalties that are recognized as revenue in the period in which the sales occur. The Company defers franchise fees until the salon is open and then recognizes the revenue over the term of the franchise agreement. See Note 2 to the Consolidated Financial Statements. Product sales by the Company to its franchisees are recorded at the time product is delivered to franchise locations. Company-owned salon revenues are recognized at the time when the services are provided or the guest receives and pays for merchandise.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Classification of Revenue and Expenses:
Beginning in the first quarter of fiscal year 2022, the Company adjusted its Statement of Operations for all 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 changed its franchise product sales business in fiscal year 2022 from a wholesale distribution model to a third-party distribution model. This revenue was expected to decrease significantly during fiscal year 2022 and into fiscal year 2023.
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.
Consideration Received from Vendors:
The Company receives consideration for a variety of vendor-sponsored programs. These programs primarily include volume rebates and promotion and advertising reimbursements.
With respect to volume rebates, the Company estimates the amount of rebate it will receive and accrues it as a reduction to the cost of inventory over the period in which the rebate is earned based upon historical purchasing patterns and the terms of the volume rebate program. A quarterly analysis is performed in order to ensure the estimated rebate accrued is reasonable and any necessary adjustments are recorded.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Distribution Costs:
Distribution costs are incurred to store, move and ship product from the Company's distribution centers to salons and includes distribution center overhead. Such distribution costs related to product shipped to company-owned locations are included in Company-owned salon expenses in the Consolidated Statement of Operations. Distribution costs, including distribution center overhead, related to shipping product to franchise locations totaled $2.3 and $12.1 million during fiscal years 2022 and 2021, respectively, and are included within general and administrative on the Consolidated Statement of Operations. In fiscal year 2022, the Company exited its two distribution centers and changed the wholesale product distribution model in favor of a third-party distribution model, reducing the cost in fiscal year 2022. The Company now stores inventory at a third-party facility.
Advertising and Advertising Funds:
Advertising costs consist of the Company's corporate funded advertising costs, the Company's advertising fund contributions and franchisee's advertising fund contributions. Corporate funded advertising costs are expensed as incurred. The Company has various franchising programs supporting specific franchise salon concepts. Most maintain advertising funds that provide comprehensive advertising and sales promotion support. All salons are required to participate in the advertising funds for the same salon concept. The Company administers the advertising funds in accordance with franchise operating and other agreements. Advertising fund contributions are expensed when the contribution is made.
The Company's advertising costs included in the Consolidated Statement of Operations consist of the following: | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
| | (Dollars in thousands) |
| Advertising fund contributions from franchisees | | $ | 32,573 | | | $ | 22,023 | | | |
| Advertising fund contributions from company-owned salons (1) | | 154 | | | 897 | | | |
| Corporate funded advertising costs (1) | | 671 | | | 7,015 | | | |
| Total advertising costs | | $ | 33,398 | | | $ | 29,935 | | | |
_____________________________________________________________________________ (1)Included in General and administrative expense in the Consolidated Statement of Operations.
The Company records all advertising funds as assets and liabilities within the Company's Consolidated Balance Sheet. As of June 30, 2022 and 2021, approximately $10.5 and $9.9 million, respectively, representing the advertising funds' assets and liabilities were recorded within total assets and total liabilities in the Company's Consolidated Balance Sheet.
Stock-Based Employee Compensation Plans:
The Company recognizes stock-based compensation expense based on the fair value of the awards at the grant date. Compensation expense is recognized on a straight-line basis over the requisite service period of the award (or to the date a participant becomes eligible for retirement, if earlier). The Company uses fair value methods that require the input of subjective assumptions, including the expected term, expected volatility, dividend yield and risk-free interest rate.
The Company estimates the likelihood and the rate of achievement for performance sensitive stock-based awards at the end of each reporting period. Changes in the estimated rate of achievement can have a significant effect on the recorded stock-based compensation expense as the effect of a change in the estimated achievement level is recognized in the period the change occurs.
Interest Income and Other, Net:
In March 2021, the Company recorded a gain of $15.0 million related to the Company's distribution centers. The gain on distribution centers was recorded to Interest income and other, net in the Consolidated Statement of Operations in fiscal year 2021.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Sales Taxes:
Sales taxes are recorded on a net basis (rather than as both revenue and an expense) within the Company's Consolidated Statement of Operations.
Income Taxes:
Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the Consolidated Financial Statements or income tax returns. Deferred income tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using currently enacted tax rates in effect for the years in which the differences are expected to reverse.
We recognize deferred tax assets to the extent we believe these assets are more likely than not to be realized. The Company evaluates all evidence, including recent financial performance, the existence of cumulative year losses and our forecast of future taxable income, to assess the need for a valuation allowance against our deferred tax assets. While the determination of whether or not to record a valuation allowance is not fully governed by a specific objective test, accounting guidance places significant weight on recent financial performance.
The Company has a valuation allowance on its deferred tax assets of $201.7 and $192.5 million at June 30, 2022 and 2021, respectively. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make necessary adjustments to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
Significant components of the valuation allowance which occurred during fiscal year 2022 are as follows:
•The Company determined that it no longer had sufficient U.S. state indefinite-lived taxable temporary differences to support realization of its U.S. state indefinite-lived NOLs and its existing U.S. deferred tax assets that upon reversal are expected to generate state indefinite-lived NOLs. As a result, the Company recorded a $4.1 million valuation allowance on its U.S. state indefinite-lived deferred tax assets.
Significant components of the valuation allowance which occurred during fiscal year 2021 are as follows:
•The Company recognized a tax loss on its investment in Luxembourg and established a corresponding valuation allowance of $34.4 million.
The Company reserves for unrecognized tax benefits, interest and penalties related to anticipated tax audit positions in the U.S. and other tax jurisdictions based on an estimate of whether additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of these liabilities would result in tax benefits being recognized in the period in which it is determined that the liabilities are no longer necessary. If the estimate of unrecognized tax benefits, interest and penalties proves to be less than the ultimate assessment, additional expenses would result.
Inherent in the measurement of deferred balances are certain judgments and interpretations of tax laws and published guidance with respect to the Company's operations. Income tax expense is primarily the current tax payable for the period and the change during the period in certain deferred tax assets and liabilities.
See Note 10 to the Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net Loss Per Share:
The Company's basic earnings per share is calculated as net loss divided by weighted average common shares outstanding, excluding unvested outstanding restricted stock awards and restricted stock units. The Company's dilutive earnings per share is calculated as net income divided by weighted average common shares and common share equivalents outstanding, which includes shares issuable under the Company's stock option plan and long-term incentive plan and dilutive securities. Stock-based awards with exercise prices greater than the average market value of the Company's common stock are excluded from the computation of diluted earnings per share. Due to the Company's net loss in all periods presented, basic and dilutive earnings per share are equal.
Comprehensive Loss:
Components of comprehensive loss include net loss, foreign currency translation adjustments and recognition of deferred compensation, net of tax within shareholders' (deficit) equity.
Foreign Currency Translation:
The Consolidated Balance Sheet, Consolidated Statement of Operations and Consolidated Statement of Cash Flows of the Company's international operations are measured using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rates in effect at each Balance Sheet date. Translation adjustments arising from the use of differing exchange rates from period to period are included in accumulated other comprehensive income within shareholders' (deficit) equity. Statement of Operations accounts are translated at the average rates of exchange prevailing during the year. During fiscal years 2022 and 2021, a $0.6 million foreign currency loss and $0.3 million foreign currency gain is included in loss from continuing operations, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accounting Standards Recently Adopted by the Company:
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740)," which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Depending on the amendment, adoption may have been applied on the retrospective, modified retrospective or prospective basis. The adoption of this new guidance during fiscal year 2022 using the prospective method did not have a material impact on our Consolidated Financial Statements.
Recently Issued Accounting Standards Not Yet Adopted:
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and it does not believe any of these pronouncements will have a material impact to the Company's financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 30 to 90 days of delivery. Company-owned salon revenues are recognized at the time when the services are provided or the guest receives and pays for the merchandise. Revenues from purchases made with gift cards are also recorded when the guest takes possession of the merchandise or services are provided. Gift cards issued by the Company are recorded as a liability (deferred revenue) upon sale and recognized as revenue upon redemption by the guest. Gift card breakage, the amount of gift cards which will not be redeemed, is recognized proportional to redemptions using estimates based on historical redemption patterns.
Revenue recognized over time
Royalty and advertising fund revenues represent sales-based royalties that are recognized in the period in which the sales occur. Generally, royalty and advertising fund revenues are billed and collected monthly in arrears. Advertising fund revenues and expenditures, which must be spent on marketing and related activities per the franchise agreements, are recorded on a gross basis within the Consolidated Statement of Operations. The treatment increases both the gross amount of reported revenue and expense and generally has no impact on operating income and net income. Franchise fees are billed and received upon the signing of the franchise agreement. Recognition of these fees is deferred until the salon opening and is then recognized over the term of the franchise agreement, which is typically 10 years. Franchise rental income is a result of the Company signing leases on behalf of franchisees and entering into sublease arrangements with the franchisees. The Company recognizes franchise rental income and expense when it is due to the landlord.
Information about receivables, broker fees and deferred revenue subject to the revenue recognition guidance is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | June 30,
2022 | | June 30,
2021 | | Balance Sheet Classification |
| | | | | | |
| | (Dollars in thousands) | | |
| Receivables from contracts with customers, net | | $ | 10,263 | | | $ | 18,011 | | | Receivable, net |
| Broker fees | | 15,592 | | | 19,254 | | | Other assets |
| | | | | | |
| Deferred revenue: | | | | | | |
| Current | | | | | | |
| Gift card liability | | $ | 2,037 | | | $ | 2,240 | | | Accrued expenses |
| Deferred franchise fees unopened salons | | 16 | | | 40 | | | Accrued expenses |
| Deferred franchise fees open salons | | 5,770 | | | 5,884 | | | Accrued expenses |
| Total current deferred revenue | | $ | 7,823 | | | $ | 8,164 | | | |
| Non-current | | | | | | |
| Deferred franchise fees unopened salons | | $ | 3,211 | | | $ | 6,571 | | | Other non-current liabilities |
| Deferred franchise fees open salons | | 26,827 | | | 32,365 | | | Other non-current liabilities |
| Total non-current deferred revenue | | $ | 30,038 | | | $ | 38,936 | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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), related to receivables from franchisees. The following table is a rollforward of the allowance for doubtful accounts for the periods indicated:
| | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 |
| | | | |
| | (Dollars in thousands) |
| Balance at beginning of period | | $ | 7,774 | | | $ | 6,899 | |
| Provision for doubtful accounts (1) | | 967 | | | 509 | |
| Provision for franchisee rent (2) | | 1,421 | | | 1,920 | |
| Reclass of accrued rent (3) | | 149 | | | — | |
| Write-offs | | (3,752) | | | (1,554) | |
| Balance at end of period | | $ | 6,559 | | | $ | 7,774 | |
_____________________________________________________________________________(1)The provision for doubtful accounts is recognized as general and administrative expense in the Consolidated Statement of Operations.
(2)The provision for franchisee rent is recognized as rent in the 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 billed in fiscal year 2022 and the related accrual was reclassified to allowance for doubtful accounts.
Broker fees are the costs associated with using external brokers to identify new franchisees. These fees are paid upon the signing of the franchise agreement and recognized as general and administrative expense over the term of the franchise agreement in the Consolidated Statement of Operations. The following table is a rollforward of the broker fee balance for the periods indicated:
| | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 |
| | | | |
| | (Dollars in thousands) |
| Balance at beginning of period | | $ | 19,254 | | | $ | 20,516 | |
| Additions | | 25 | | | 2,112 | |
| Amortization | | (3,189) | | | (3,180) | |
| Write-offs | | (498) | | | (194) | |
| Balance at end of period | | $ | 15,592 | | | $ | 19,254 | |
The decrease in non-current deferred franchise fees for unopened salons in fiscal year 2022 is primarily due to $2.4 million of deferred fees related to terminated development agreements being recognized as fees in the Consolidated Statement of Operations in the year ended June 30, 2022. Deferred revenue includes the gift card liability and deferred franchise fees for unopened salons and open salons. 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 fiscal years 2022 and 2021 was $6.5 and $6.6 million, respectively. Estimated revenue expected to be recognized in the future related to deferred franchise fees for open salons as of June 30, 2022 is as follows (in thousands):
| | | | | | | | |
| 2023 | | $ | 5,770 | |
| 2024 | | 5,468 | |
| 2025 | | 5,092 | |
| 2026 | | 4,618 | |
| 2027 | | 4,157 | |
| Thereafter | | 7,492 | |
| Total | | $ | 32,597 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. DISCONTINUED OPERATIONS
Opensalon Pro (OSP):
On June 30, 2022, the Company sold its OSP software-as-a-service solution to Soham Inc. for a purchase price of $20.0 million in cash plus up to an additional $19.0 million in cash contingent upon the number of salons that migrate to Soham's Zenoti product as their salon technology platform. The Company received $13.0 million in proceeds in June 2022. The remaining $7.0 million of the purchase price is subject to holdbacks including $4.0 million of the proceeds retained in escrow to be paid upon completion of the Company's refinancing, $1.0 million once the Company ends its arrangement with ProPoint in December 2022 and $2.0 million of proceeds held back until general indemnity provisions are satisfied within 18 months from closing. As a result of the sale, the Company classified the OSP business as discontinued operations in the financial statements for all years presented. Discontinued operations is included in the Franchise segment in the Consolidated Statement of Operations for all periods presented.
The following summarizes the components of the loss from sale of OSP for fiscal year 2022 included in discontinued operations (in thousands):
| | | | | | | | |
| Cash proceeds | | $ | 13,000 | |
| Goodwill derecognition | | (38,358) | |
| Software write-off (1) | | (8,408) | |
| Hardware write-down (2) | | (1,825) | |
| Other, net, including professional fees | | (552) | |
| Loss from sale of OSP | | $ | (36,143) | |
_______________________________________________________________________________(1)Internally developed capitalized software is included in non-current assets related to discontinued operations as of June 30, 2021 and written off in June 2022 upon completion of the sale.
(2)Prior to the sale, hardware used to run OSP was sold to franchisees. As a result of the sale, the Company wrote-down the value of the hardware to its net realizable value and the charge is included in the loss on the sale of OSP. The hardware is included in inventory as of June 30, 2022 and current assets related to discontinued operations as of June 30, 2021 in the Consolidated Balance Sheet.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following summarizes the results of discontinued operations for the periods presented: | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
| | (Dollars in thousands) |
| Discontinued operations: | | | | | | |
| Fees | | $ | 3,811 | | | $ | 3,461 | | | |
| Cost of product sales to franchisees | | (1,037) | | | (2,790) | | | |
| General and administrative | | (3,517) | | | (9,006) | | | |
| Rent | | (194) | | | (176) | | | |
| Depreciation and amortization | | (1,322) | | | (964) | | | |
| Goodwill impairment (1) | | (2,880) | | | — | | | |
| Interest expense | | (715) | | | (650) | | | |
| Loss from sale of OSP | | (36,143) | | | — | | | |
| Loss from discontinued operations, before taxes | | (41,997) | | | (10,125) | | | |
| Income tax benefit from discontinued operations (2) | | 2,599 | | | — | | | |
| Loss from discontinued operations, net of tax | | $ | (39,398) | | | $ | (10,125) | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
_______________________________________________________________________________ (1)Goodwill impairment included in discontinued operations represents the portion of impairment allocated to the OSP business based on relative fair value.
(2)Income taxes have been allocated to continuing and discontinued operations based on the methodology required by accounting for income taxes guidance.
The Company leases office space in Fremont, California. The lease related liabilities are included in long-term lease liability as of June 30, 2022, and the lease related assets and liabilities are included in non-current assets, current liabilities and non-current liabilities related to discontinued operations as of June 30, 2021 in the Consolidated Balance Sheet.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. OTHER FINANCIAL STATEMENT DATA
The following provides additional information concerning selected balance sheet accounts: | | | | | | | | | | | | | | |
| | | June 30, |
| | | 2022 | | 2021 |
| | | | |
| | | (Dollars in thousands) |
| Other current assets: | | | | |
| Prepaid assets | | $ | 1,816 | | | $ | 4,121 | |
| Restricted cash | | 10,423 | | | 9,961 | |
| Other | | 1,745 | | | 2,935 | |
| Total other current assets | | $ | 13,984 | | | $ | 17,017 | |
| | | | |
| Property and equipment: | | | | |
| Buildings and improvements | | $ | 8,228 | | | $ | 8,251 | |
| Equipment, furniture and leasehold improvements | | 14,260 | | | 28,782 | |
| Internal use software | | 34,824 | | | 34,644 | |
| Total property and equipment | | 57,312 | | | 71,677 | |
| Less accumulated depreciation and amortization | | (44,477) | | | (54,771) | |
| Total property and equipment, net | | $ | 12,835 | | | $ | 16,906 | |
| | | | |
| Accrued expenses: | | | | |
| Payroll and payroll related costs | | $ | 7,767 | | | $ | 16,175 | |
| Insurance | | 5,012 | | | 7,525 | |
| Rent and related real estate costs | | 4,585 | | | 11,197 | |
| Deferred revenue | | 7,823 | | | 8,164 | |
| Other | | 8,597 | | | 8,181 | |
| Total accrued expenses | | $ | 33,784 | | | $ | 51,242 | |
| | | | |
| Other non-current liabilities: | | | | |
| Deferred income taxes | | $ | 10,979 | | | $ | 10,650 | |
| Insurance | | 9,744 | | | 12,722 | |
| Deferred benefits | | 6,308 | | | 10,028 | |
| Deferred franchise fees | | 30,038 | | | 38,936 | |
| Other | | 1,905 | | | 2,739 | |
| Total other non-current liabilities | | $ | 58,974 | | | $ | 75,075 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following provides additional information concerning other intangibles, net:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, |
| | | 2022 | | 2021 |
| | | Weighted Average Amortization Periods (1) | | Cost (2) | | Accumulated
Amortization (2) | | Net | | Weighted Average Amortization Periods (1) | | Cost (2) | | Accumulated
Amortization (2) | | Net |
| | | | | | | | | | | | | | | | |
| | | (In years) | | (Dollars in thousands) | | (In years) | | (Dollars in thousands) |
| Brand assets and trade names | | 36 | | $ | 5,421 | | | $ | (3,234) | | | $ | 2,187 | | | 35 | | $ | 6,040 | | | $ | (3,568) | | | $ | 2,472 | |
| Franchise agreements | | 20 | | 7,719 | | | (6,756) | | | 963 | | | 19 | | 10,099 | | | (8,901) | | | 1,198 | |
| | | | | | | | | | | | | | | | |
| Other | | 20 | | 354 | | | (278) | | | 76 | | | 20 | | 366 | | | (275) | | | 91 | |
| Total | | 26 | | $ | 13,494 | | | $ | (10,268) | | | $ | 3,226 | | | 24 | | $ | 16,505 | | | $ | (12,744) | | | $ | 3,761 | |
_______________________________________________________________________________(1)All intangible assets have been assigned an estimated finite useful life and are amortized on a straight-line basis over the number of years that approximate their expected period of benefit (ranging from three to 40 years).
(2)The change in the gross carrying value and accumulated amortization of other intangible assets is impacted by foreign currency.
Total amortization expense related to intangible assets during fiscal years 2022 and 2021 was approximately $0.4 and $0.8 million, respectively. As of June 30, 2022, future estimated amortization expense related to intangible assets is estimated as follows (in thousands):
| | | | | | | | |
| 2023 | | $ | 365 | |
| 2024 | | 302 | |
| 2025 | | 302 | |
| 2026 | | 302 | |
| 2027 | | 302 | |
| Thereafter | | 1,653 | |
| Total | | $ | 3,226 | |
The following provides supplemental disclosures of cash flow activity: | | | | | | | | | | | | | | | | |
| | | Fiscal Years |
| | | 2022 | | 2021 | | |
| | | | | | |
| | | (Dollars in thousands) |
| Cash paid (received) for: | | | | | | |
| Interest | | $ | 11,786 | | | $ | 11,940 | | | |
| Taxes and penalties, net | | (1,400) | | | (2,636) | | | |
| Non-cash investing activities: | | | | | | |
| Unpaid capital expenditures | | 35 | | | 312 | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. GOODWILL
The table below contains details related to the Company's goodwill:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, |
| | | 2022 | | 2021 |
| | | | | | | | | | | | |
| | | Gross
Carrying
Value (1) | | Accumulated
Impairment | | Net | | Gross
Carrying
Value (1) | | Accumulated
Impairment | | Net |
| | | | | | | | | | | | |
| | | (Dollars in thousands) |
| Goodwill | | $ | 304,624 | | | $ | (130,264) | | | $ | 174,360 | | | $ | 343,846 | | | $ | (114,264) | | | $ | 229,582 | |
_______________________________________________________________________________(1)The change in the gross carrying value of goodwill relates to foreign currency translation adjustments.
The table below contains details related to the Company's goodwill related to the Franchise reporting unit: | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 |
| | | | |
| | (Dollars in thousands) |
| Balance at beginning of period (1) | | $ | 229,582 | | | $ | 227,457 | |
| Derecognition of OSP goodwill | | (38,358) | | | — | |
| Goodwill impairment related to continuing operations | | (13,120) | | | — | |
| Goodwill impairment related to discontinued operations | | (2,880) | | | — | |
| Translation rate adjustments | | (864) | | | 2,125 | |
| | | | |
| Balance at end of period (1) | | $ | 174,360 | | | $ | 229,582 | |
_______________________________________________________________________________ (1)The goodwill balance as of June 30, 2021 includes $41.3 million related to discontinued operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. 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 one to 20 years with many leases renewable for an additional five to 10-year term at the option of the Company. In addition to the obligation to make fixed rental payments for the use of the salons, the Company also has variable lease payments that are based on sales levels. For most leases, the Company is required to pay real estate taxes and other occupancy expenses. Total rent includes the following:
| | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
| | (Dollars in thousands) |
| Office and warehouse rent | | $ | 4,575 | | | $ | 5,234 | | | |
| Lease termination expense (1) | | 1,835 | | | 13,544 | | | |
| Lease liability benefit (2) | | (3,620) | | | (20,022) | | | |
| Franchise salon rent | | 1,695 | | | 3,376 | | | |
| Company-owned salon rent | | 4,872 | | | 38,622 | | | |
| Total | | $ | 9,357 | | | $ | 40,754 | | | |
_______________________________________________________________________________(1)During fiscal year 2022, lease termination expense includes $0.9 million to exit the Company's distribution centers before the lease end dates and $0.9 million to exit salons before the lease end dates in order to relieve the Company of future lease obligations. During fiscal year 2021, lease termination fees include $8.3 million of early termination payments to close salons before the lease end date to relieve the Company of future lease obligations and $5.3 million to accrue future lease payments for salons that are no longer operating.
(2)Upon termination of previously impaired leases, the Company derecognizes the corresponding ROU assets and lease liabilities which results in a net gain. In addition, the Company recognizes a benefit from lease liabilities decreasing in excess of previously impaired ROU assets for ongoing leases that were previously impaired.
The Company leases salon premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees. All lease-related costs are passed through to the franchisees. The Company records the rental payments due from franchisees as franchise rental income and the corresponding amounts owed to landlords as franchise rent expense on the Consolidated Statement of Operations. In fiscal years 2022 and 2021, Franchise rental income and Franchise rent expense were $130.8 and $127.4 million, respectively. These leases generally have lease terms of approximately five years. The Company expects to renew SmartStyle and some franchise leases upon expiration. Some other leases are expected to be renewed by the franchisee upon expiration.
For salon operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date, including one lease term option when the lease is expected to be renewed. The ROU asset is initially and subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, less any accrued lease payments and unamortized lease incentives received, if any. For leases classified as operating leases, expense for lease payments is recognized on a straight-line basis over the lease term, including the lease renewal option when the lease is expected to be renewed. Generally, the non-lease components, such as real estate taxes and other occupancy expenses, are separate from rent expense within the lease and are not included in the measurement of the lease liability because these charges are variable.
The discount rate used to determine the present value of the lease payments is the Company's estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as the interest rate implicit in the lease cannot generally be determined. The Company uses the portfolio approach in applying the discount rate based on the original lease term. The weighted average remaining lease term was 6.02 and 6.44 years and the weighted average discount rate was 4.25% and 4.11% for all salon operating leases as of June 30, 2022 and 2021, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A lessee's ROU asset is subject to the same asset impairment guidance in ASC 360, Property, Plant, and Equipment, applied to other elements of property, plant, and equipment. The Company has identified its asset groups at the individual salon level as this represents the lowest level that identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Poor salon performance in fiscal years 2022 and 2021 resulted in ASC 360-10-35-21 triggering events. As a result, management assessed underperforming salon asset groups, which included the related ROU assets, for impairment in accordance with ASC 360.
The first step in the impairment test under ASC 360 is to determine whether the long-lived assets are recoverable, which is determined by comparing the net carrying value of the salon asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset group. Estimating cash flows for purposes of the recoverability test is subjective and requires significant judgment. Estimated future cash flows used for the purposes of the recoverability test were based upon historical cash flows for the salons, adjusted for expected changes in future market conditions related to the COVID-19 pandemic, and other factors. The period of time used to determine the estimates of the future cash flows for the recoverability test was based on the remaining useful life of the primary asset of the group, which was the ROU asset in all cases.
The second step of the long-lived asset impairment test requires that the fair value of the asset group be estimated when determining the amount of any impairment loss. For the salon asset groups that failed the recoverability test, an impairment loss was measured as the amount by which the carrying amount of the asset group exceeds its fair value. The Company applied the fair value guidance within ASC 820-10 to determine the fair value of the asset group from the perspective of a market-participant considering, among other things, appropriate discount rates, multiple valuation techniques, the most advantageous market, and assumptions about the highest and best use of the asset group. To determine the fair value of the salon asset groups, the Company utilized market-participant assumptions rather than the Company's own assumptions about how it intends to use the asset group. The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include the market rent of comparable properties and a discount rate.
The fair value of the salon long-lived asset group is estimated using market participant methods based on the best information available. The Company engaged a third-party valuation specialist to assist with the research related to inputs used in their determination of the fair value of the ROU asset which included providing information related to significant inputs and assumptions utilized in the measurement of the impairment loss.
For fiscal years 2022 and 2021, the Company recognized long-lived impairment charges of $0.5 and $13.0 million, respectively, which included $0.5 and $9.5 million, respectively, related to ROU assets on the Consolidated Statement of Operations. The impairment loss for each salon asset group that was recognized was allocated among the long-lived assets of the group on a pro-rata basis using their relative carrying amounts. Additionally, the impairment losses did not reduce the carrying amount of an individual asset below its fair value, including for the ROU assets included in the salon asset groups. 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 asset, including its ROU assets. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of June 30, 2022, future operating lease commitments, including one renewal option for leases expected to be renewed, to be paid and received by the Company were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal 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 |
| | | | | | | | | | | | |
| 2023 | | $ | 116,644 | | | $ | 3,590 | | | $ | 2,229 | | | $ | 122,463 | | | $ | (116,644) | | | $ | 5,819 | |
| 2024 | | 102,360 | | | 2,049 | | | 1,301 | | | 105,710 | | | (102,360) | | | 3,350 | |
| 2025 | | 85,788 | | | 710 | | | 1,334 | | | 87,832 | | | (85,788) | | | 2,044 | |
| 2026 | | 72,155 | | | 385 | | | 1,367 | | | 73,907 | | | (72,155) | | | 1,752 | |
| 2027 | | 61,698 | | | 143 | | | 1,401 | | | 63,242 | | | (61,698) | | | 1,544 | |
| Thereafter | | 122,570 | | | 256 | | | 4,417 | | | 127,243 | | | (122,570) | | | 4,673 | |
| Total future obligations | | $ | 561,215 | | | $ | 7,133 | | | $ | 12,049 | | | $ | 580,397 | | | $ | (561,215) | | | $ | 19,182 | |
| Less amounts representing interest | | 66,693 | | | 361 | | | 1,702 | | | 68,756 | | | | | |
| Present value of lease liabilities | | $ | 494,522 | | | $ | 6,772 | | | $ | 10,347 | | | $ | 511,641 | | | | | |
| Less current lease liabilities | | 97,954 | | | 3,399 | | | 1,843 | | | 103,196 | | | | | |
| Long-term lease liabilities | | $ | 396,568 | | | $ | 3,373 | | | $ | 8,504 | | | $ | 408,445 | | | | | |
Supplemental operating cash flow information and non-cash activity related to our operating leases are as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
| | (Dollars in thousands) |
| Cash paid for amounts included in the measurement of lease liabilities (1) | | $ | 74,507 | | | $ | 130,039 | | | |
| Right of use assets obtained in exchange for new lease liabilities | | 2,011 | | | 4,242 | | | |
_______________________________________________________________________________(1)Cash paid for amounts included in the measurement of lease liabilities includes rent, termination fees, settlements and legal fees, and commission payments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. 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 June 30, 2022 and 2021, the estimated fair value of the Company's cash, cash equivalents, restricted cash, receivables, inventory, deferred compensation assets, debt and accounts payable approximated their carrying values.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We measure certain assets, including the Company's equity method investments, tangible fixed and other assets and goodwill, at fair value on a nonrecurring basis when they are deemed to be other than temporarily impaired. The fair values of these assets are determined, when applicable, based on valuation techniques using the best information available, and may include quoted market prices, market comparables and discounted cash flow projections.
The following impairment charges were based on fair values using Level 3 inputs (1): | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
| | (Dollars in thousands) |
| Goodwill impairment | | $ | 16,000 | | | $ | — | | | |
| Long-lived asset impairment | | 542 | | | 13,023 | | | |
_______________________________________________________________________________ (1)See Notes 1 and 5 to the Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. FINANCING ARRANGEMENTS
The Company's debt consists of the following:
Revolving Credit Facility | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | June 30, |
| | | Maturity Date (1) | | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | | | |
| | | (Fiscal year) | | (Interest rate %) | | (Dollars in thousands) |
| Revolving credit facility | | 2023 | | 5.50% | | 5.00% | | $ | 179,994 | | | $ | 186,911 | |
_______________________________________________________________________________ (1)As of June 30, 2022 the Company's borrowings matured in March 2023. On August 12, 2022, the Company amended its credit agreement. In connection with the amendment, the maturity of the credit agreement was extended to August 31, 2025. Accordingly, the debt is classified as non-current on the Consolidated Balance Sheet. See Note 16 to the Consolidated Financial Statements.
At June 30, 2022, cash and cash equivalents totaled $17.0 million. As of June 30, 2022, the Company had $180.0 million of outstanding borrowings under the original $295.0 million revolving credit facility, of which $277.5 million was available as of June 30, 2022. The credit facility decreased $16.9 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 OSP and secured inventory related to our transition to a third-party distribution partner. At June 30, 2022, the Company had outstanding standby letters of credit under the revolving credit facility of $15.7 million, primarily related to the Company's self-insurance program. The unused available credit under the facility was $81.9 million at June 30, 2022. Total liquidity per the agreement was $119.8 million as of June 30, 2022. As of June 30, 2022, the Company had cash, cash equivalents and restricted cash of $27.5 million and current liabilities of $152.8 million.
Under the terms of the revolving credit facility as of June 30, 2022, the Company is required to maintain a minimum liquidity of $75.0 million and the Company's lenders are secured in the Company's assets. The applicable margin for loans bearing interest at SOFR ranges from 3.75%-4.25%, the applicable margin for loans bearing interest at the base rate ranges from 2.75%-3.25% and the facility fee ranges from 0.50%-0.75%, each depending on average utilization of the revolving line of credit. The Company was in compliance with all covenants and other requirements of the financing arrangements as of June 30, 2022. On August 12, 2022, the Company amended and extended its credit facility which, among other things, converted the revolving credit facility to a $180.0 million term loan and $55.0 million revolving credit facility. The amendment also extends the maturity date to August 31, 2025. See Note 16 to the Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. COMMITMENTS AND CONTINGENCIES
Contingencies:
The Company is self-insured for most workers' compensation, employment practice liability and general liability. Workers' compensation and general liability losses are subject to per occurrence and aggregate annual liability limitations. The Company is insured for losses in excess of these limitations. The Company is also self-insured for health care claims for eligible participating employees subject to certain deductibles and limitations. The Company determines its liability for claims incurred but not reported on an actuarial basis.
Litigation and Settlements:
The Company is a plaintiff or defendant in various lawsuits and claims arising out of the normal course of business. Like certain other franchisors, the Company has faced allegations of franchise regulation and agreement violations. Additionally, because the Company may be the tenant under a master lease for a location subleased to a franchisee, the Company has faced allegations of nonpayment of rent and associated charges. Further, similar to other large retail employers, the Company has been faced with allegations of purported class-wide consumer and wage and hour violations.
During fiscal year 2022, the Company recorded $2.2 million of expense related to litigation, of which $1.7 million was paid during the year. The Company's accrual related to potential settlement liability was $0.5 million as of June 30, 2022. Included in the expense is litigation brought in the 11th Judicial Circuit, St. Charles County, Missouri, in which the Company challenged a landlord regarding a lease the Company secured but the landlord leased to another tenant. The landlord in the case prevailed and the court ordered the Company to pay the landlord $0.5 million in attorney's fees. The Company requested leave to appeal and plans to vigorously pursue overturning this judgment.
The Company's previous point-of-sale system supplier had challenged the development of certain parts of the Company's technology systems in litigation brought in the Northern District of California. The Company and the supplier entered into an agreement, effective June 25, 2021, that provided for the dismissal of the lawsuit and set forth a Transition 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, OSP. The Company and the supplier entered into an amendment to the Settlement Agreement, effective June 15, 2022, in which the Company agreed to pay $2.0 million to the supplier in installments commencing on June 15, 2022, and ending on December 10, 2022, in consideration of a release of claims arising out of or related to the Transition Services Agreement and for the supplier to continue to provide the services set forth in that agreement.
Litigation is inherently unpredictable, and the outcome of these matters cannot presently be determined. Although the actions are being vigorously defended, the Company could incur judgments in the future or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. INCOME TAXES
The components of loss from continuing operations before income taxes are as follows: | | | | | | | | | | | | | | | | |
| | | Fiscal Years |
| | | 2022 | | 2021 | | |
| | | | | | |
| | | (Dollars in thousands) |
| Loss before income taxes | | | | | | |
| U.S. | | $ | (41,231) | | | $ | (143,104) | | | |
| International | | (3,211) | | | 34,470 | | | |
| | $ | (44,442) | | | $ | (108,634) | | | |
The provision (benefit) for income taxes consists of: | | | | | | | | | | | | | | | | |
| | | Fiscal Years |
| | | 2022 | | 2021 | | |
| | | | | | |
| | | (Dollars in thousands) |
| Current: | | | | | | |
| U.S. | | $ | (535) | | | $ | (620) | | | |
| International | | (425) | | | (1,421) | | | |
| Deferred: | | | | | | |
| U.S. | | 3,130 | | | (3,701) | | | |
| International | | (153) | | | 314 | | | |
| | $ | 2,017 | | | $ | (5,428) | | | |
The provision (benefit) for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory rate to loss from continuing operations before income taxes, as a result of the following: | | | | | | | | | | | | | | | | |
| | | Fiscal Years |
| | | 2022 | | 2021 | | |
| | | | | | |
| U.S. statutory rate | | 21.0 | % | | 21.0 | % | | |
| State income taxes, net of federal income tax benefit | | 1.4 | | | 7.9 | | | |
| Valuation allowance (1) | | (6.6) | | | (61.5) | | | |
| Foreign income taxes at other than U.S. rates | | 3.0 | | | 9.4 | | | |
| | | | | | |
| | | | | | |
| Uncertain tax positions | | (17.9) | | | 0.2 | | | |
| Stock-based compensation | | (2.8) | | | (0.7) | | | |
| | | | | | |
| Loss on investment in Luxembourg | | — | | | 29.3 | | | |
| Other, net (2) | | (2.6) | | | (0.6) | | | |
| Effective tax rate | | (4.5) | % | | 5.0 | % | | |
_______________________________________________________________________________ (1)See Note 1 to the Consolidated Financial Statements.
(2)The (2.6)% of Other, net in fiscal year 2022 includes the rate impact of the federal provision to return true-up and miscellaneous items of (2.0)% and (0.6)%, respectively. The (0.6)% of Other, net in fiscal year 2021 does not include the rate impact of any items in excess of 5% of computed tax.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of the net deferred tax assets and liabilities are as follows: | | | | | | | | | | | | | | |
| | | June 30, |
| | | 2022 | | 2021 |
| | | | |
| | | (Dollars in thousands) |
| Deferred tax assets: | | | | |
| | | | |
| Payroll and payroll related costs | | $ | 5,267 | | | $ | 8,523 | |
| Net operating loss carryforwards | | 153,190 | | | 145,823 | |
| Tax credit carryforwards | | 37,664 | | | 37,433 | |
| Capital loss carryforwards | | 5,338 | | | 14,179 | |
| Deferred franchise fees | | 8,694 | | | 10,153 | |
| Operating lease liabilities | | 124,905 | | | 154,255 | |
| | | | |
| Other (1) | | 17,542 | | | 12,608 | |
| Subtotal | | 352,600 | | | 382,974 | |
| Valuation allowance (1) | | (201,731) | | | (192,522) | |
| Total deferred tax assets | | $ | 150,869 | | | $ | 190,452 | |
| | | | |
| Deferred tax liabilities: | | | | |
| Goodwill and intangibles | | $ | (33,466) | | | $ | (43,375) | |
| Operating lease assets | | (123,333) | | | (150,573) | |
| Other | | (5,049) | | | (7,154) | |
| Total deferred tax liabilities | | (161,848) | | | (201,102) | |
| Net deferred tax liability | | $ | (10,979) | | | $ | (10,650) | |
_______________________________________________________________________________ (1)The $17.5 million of Other in fiscal year 2022 includes $5.3 million of deferred tax assets with a corresponding valuation allowance of the same amount related to discontinued operations.
Significant components of the valuation allowance which occurred during fiscal year 2022 are as follows:
•The Company determined that it no longer had sufficient U.S. state indefinite-lived taxable temporary differences to support realization of its U.S. state indefinite-lived NOLs and its existing U.S. deferred tax assets that upon reversal are expected to generate state indefinite-lived NOLs. As a result, the Company recorded a $4.1 million valuation allowance on its U.S. state indefinite-lived deferred tax assets.
Significant components of the valuation allowance which occurred during fiscal year 2021 are as follows:
•The Company recognized a tax loss on its investment in Luxembourg and established a corresponding valuation allowance of $34.4 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At June 30, 2022, the Company has tax-effected federal, state, Canada, and U.K. net operating loss carryforwards of approximately $116.8, $28.1, $7.8 and $0.5 million, respectively. The Company's federal loss carryforward consists of $27.3 million that will expire from fiscal years 2034 to 2038 and $89.5 million that has no expiration. The state loss carryforwards consist of $24.4 million that will expire from fiscal years 2023 to 2042 and $3.7 million that has no expiration. The Canada loss carryforward will expire from fiscal years 2036 to 2042. The U.K. loss carryforward has no expiration.
The Company's tax credit carryforward of $37.7 million primarily consists of Work Opportunity Tax Credits that will expire from fiscal years 2031 to 2042.
The Company's capital loss carryforward of $5.3 million will expire in fiscal year 2025.
We consider the earnings of certain non-U.S. subsidiaries to be indefinitely invested outside the U.S. Accordingly, we have not recorded deferred taxes related to the U.S. federal and state income taxes and foreign withholding taxes on approximately $7.8 million of undistributed earnings of foreign subsidiaries, which have been reinvested outside the U.S. As a result of the Tax Cuts and Jobs Act of 2017, taxes payable on the remittance of such earnings is expected to be minimal.
The Company files tax returns and pays tax primarily in the U.S., Canada, the U.K. and Luxembourg, as well as states, cities, and provinces within these jurisdictions. The Company is no longer subject to Internal Revenue Service examinations for years before 2014. With limited exceptions, the Company is no longer subject to state and international income tax examination by tax authorities for years before 2012.
A rollforward of the unrecognized tax benefits is as follows: | | | | | | | | | | | | | | | | |
| | | Fiscal Years |
| | | 2022 | | 2021 | | |
| | | | | | |
| | | (Dollars in thousands) |
| Balance at beginning of period | | $ | 13,858 | | | $ | 14,045 | | | |
| Additions based on tax positions related to the current year, primarily salon vendition activity and tax positions related to a capital loss | | 8,636 | | | 292 | | | |
| Additions based on tax positions of prior years | | 81 | | | 50 | | | |
| Reductions on tax positions related to the expiration of the statute of limitations | | (402) | | | (529) | | | |
| | | | | | |
| Balance at end of period | | $ | 22,173 | | | $ | 13,858 | | | |
If the Company were to prevail on all unrecognized tax benefits recorded, a net benefit of approximately $1.0 million would be recorded in the effective tax rate. Interest and penalties associated with unrecognized tax benefits are recorded within income tax expense. During each of the fiscal years 2022 and 2021, the Company recorded interest and penalties of approximately $0.2 million as reductions to the accrual, net of the respective reversal of previously accrued interest and penalties. As of June 30, 2022, the Company had accrued interest and penalties related to unrecognized tax benefits of $0.7 million. This amount is not included in the gross unrecognized tax benefits noted above.
It is reasonably possible the amount of the unrecognized tax benefit with respect to certain of our unrecognized tax positions will increase or decrease during the next fiscal year. However, an estimate of the amount or range of the change cannot be made at this time.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. BENEFIT PLANS
Regis Retirement Savings Plan:
The Company maintains a defined contribution 401(k) plan, the Regis Retirement Savings Plan (RRSP). The RRSP is a defined contribution profit sharing plan with a 401(k) feature that is intended to qualify under Section 401(a) of the Internal Revenue Code (the Code) and is subject to the Employee Retirement Income Security Act of 1974 (ERISA).
The 401(k) portion of the RRSP is a cash or deferred arrangement intended to qualify under section 401(k) of the Code and under which eligible employees may elect to contribute a percentage of their eligible compensation. Employees who are 18 years of age or older and who were not highly compensated employees as defined by the Code during the preceding RRSP year are eligible to participate in the RRSP commencing with the first day of the month following their completion of one month of service.
The discretionary employer contribution profit sharing portion of the RRSP is a noncontributory defined contribution component covering full-time and part-time employees of the Company who have at least one year of eligible service, defined as 1,000 hours of service during the RRSP year, are employed by the Company on the last day of the RRSP year and are Salon Support employees, distribution center employees, field leaders, artistic directors or consultants, and that are not highly compensated employees as defined by the Code. Participants' interest in the noncontributory defined contribution component become 20.0% vested after completing two years of service with vesting increasing 20.0% for each additional year of service with participants becoming fully vested after six full years of service.
Nonqualified Deferred Salary Plan:
The Company maintains a Nonqualified Deferred Salary Plan (Executive Plan), which covers Company officers and all other employees who are highly compensated as defined by the Code. The discretionary employer contribution portion of the Executive Plan is a profit sharing component in which a participant's interest becomes 20.0% vested after completing two years of service with vesting increasing 20.0% for each additional year of service with participants becoming fully vested after six full years of service. Certain participants within the Executive Plan also receive a matching contribution from the Company.
Regis Individual Secured Retirement Plan (RiSRP):
The Company maintains a Regis Individual Secured Retirement Plan (RiSRP), pursuant to which eligible employees may use post-tax dollars to purchase life insurance benefits. Salon Support employees at the director level and above qualify. The Company may make discretionary contributions on behalf of participants within the RiSRP, which may be calculated as a matching contribution. The participant is the owner of the life insurance policy under the RiSRP.
Stock Purchase Plan:
The Company has an employee stock purchase plan (ESPP) available to qualifying employees. Under the terms of the ESPP, eligible employees may purchase the Company's common stock through payroll deductions. The Company contributes an amount equal to 15.0% of the purchase price of the stock to be purchased on the open market and pays all expenses of the ESPP and its administration, not to exceed an aggregate contribution of $14.0 million or when 4.6 million shares registered under the SEC for issuance under the plan have been purchased. As of June 30, 2022, the Company's cumulative contributions to the ESPP totaled $11.2 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred Compensation Contracts:
The Company has unfunded deferred compensation contracts covering certain current and former key executives. Effective June 30, 2012, these contracts were amended and the benefits were frozen.
The table below presents the projected benefit obligation of these deferred compensation contracts in the Consolidated Balance Sheet: | | | | | | | | | | | | | | |
| | June 30, |
| | 2022 | | 2021 |
| | | | |
| | (Dollars in thousands) |
| Current portion (included in accrued expenses) | | $ | 303 | | | $ | 1,660 | |
| Long-term portion (included in other non-current liabilities) | | 2,320 | | | 3,115 | |
| Total | | $ | 2,623 | | | $ | 4,775 | |
The accumulated other comprehensive loss for the deferred compensation contracts, consisting of primarily unrecognized actuarial income, was $0.7 and $0.3 million at June 30, 2022 and 2021, respectively.
Additionally, the Company had previously agreed to pay the former Vice Chairman and his spouse an annual benefit for life. Costs associated with this benefit included in general and administrative expense on the Consolidated Statement of Operations totaled $0.5 and $0.4 million for fiscal years 2022 and 2021, respectively. The fair value of the related obligations totaled $2.3 and $2.3 million at June 30, 2022 and 2021, respectively, with $0.5 million within accrued expenses at June 30, 2022 and 2021, and the remainder included in other non-current liabilities in the Consolidated Balance Sheet.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. EARNINGS PER SHARE
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), outstanding stock appreciation rights (SARs), restricted stock units (RSUs) and stock-settled performance units (PSUs). The Company's diluted earnings per share is calculated as net income 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. As the Company is in a net loss position, basic earnings per share is equivalent to dilutive earnings per share.
For fiscal years 2022 and 2021, 608,503 and 636,310 of common stock equivalents of dilutive common stock, respectively, were excluded from the diluted earnings per share calculation due to net loss from continuing operations.
The computation of weighted average shares outstanding, assuming dilution, excluded the following stock-based awards as they were not dilutive under the treasury stock method: | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
| Equity-based compensation awards | | 2,269,335 | | | 2,322,006 | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. STOCK-BASED COMPENSATION
The Company grants long-term equity-based awards under the 2018 Long Term Incentive Plan (the 2018 Plan). The 2018 Plan, which was approved by the Company's shareholders at its 2018 Annual Meeting, provides for the granting of nonqualified stock options (SOs), equity-based stock appreciation rights and cash-settled stock appreciation rights (SARs), restricted stock units (RSUs) and stock-settled performance units (PSUs), to employees and non-employee directors of the Company. Under the 2018 Plan, a maximum of 3,818,895 shares are approved for issuance. The 2018 Plan incorporates a fungible share design, under which full value awards (such as RSUs and PSUs) count against the shares reserved for issuance at a rate 2.0 times higher than appreciation awards (such as SARs and SOs). As of June 30, 2022, a maximum of 2,793,494 shares were available for grant under the 2018 Plan. All unvested awards are subject to forfeiture in the event of termination of employment, unless accelerated. SAR and RSU awards granted under the 2018 Plan generally include various acceleration terms, including upon retirement for participants aged 62 years or older or who are aged 55 years or older and have 15 years of continuous service.
The Company also has outstanding awards under the 2016 Long Term Incentive Plan (the 2016 Plan), although the 2016 Plan terminated in October 2018 and no additional awards have since been or will be made under the 2016 Plan. The 2016 Plan provided for the granting of SARs, restricted stock awards (RSAs), RSUs and PSUs, as well as cash-based performance grants, to employees and non-employee directors of the Company.
The Company also has outstanding awards under the Amended and Restated 2004 Long Term Incentive Plan (the 2004 Plan), although the 2004 Plan terminated in October 2016 and no additional awards have since been or will be made under the 2004 Plan. The 2004 Plan provided for the granting of nonqualified SOs, SARs, RSAs, RSUs and PSUs, as well as cash-based performance grants, to employees and non-employee directors of the Company.
Under the 2018 Plan, 2016 Plan and the 2004 Plan, stock-based awards are granted at an exercise price or initial value equal to the fair market value on the date of grant. The fair value of cash-settled SARs granted in fiscal year 2022 are re-valued on a quarterly basis.
Using the fair value of each grant on the date of grant, the weighted average fair values per stock-based compensation award granted during fiscal years 2022 and 2021 were as follows (1): | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
| SARs | | $ | 2.56 | | | $ | — | | | |
| SOs | | 1.82 | | | 2.89 | | | |
| RSUs | | 2.69 | | | 7.15 | | | |
| PSUs | | — | | | 5.83 | | | |
_______________________________________________________________________________ (1)The fair value of cash-settled SARs granted are estimated on the date of grant using a Black-Scholes valuation model, with the fair value recalculated on a quarterly basis. The fair value of market-based SOs granted are estimated on the date of grant using either a Monte Carlo valuation model or a Black-Scholes valuation model. The fair value of market-based RSUs and PSUs granted are estimated on the date of grant using a Monte Carlo valuation model. The significant assumptions used in determining the estimated fair value of the market-based awards granted during fiscal years 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
| Risk-free interest rate | | 1.25 - 3.04% | | 0.16 - 0.78% | | |
| Expected volatility | | 58.3 - 64.5% | | 44.9 - 66.8% | | |
| Expected dividend yield | | — | % | | — | % | | |
| Expected term of share options | | 6.1 - 7.7 years | | 7.0 years | | |
The risk-free interest rate is determined based on the U.S. Treasury rates approximating the expected life of the market-based SARs, SOs, RSUs and PSUs granted. Expected volatility is established based on historical volatility of the Company's stock price. The Company uses historical data to estimate pre-vesting forfeiture rates. The expected term is based on a review of historical exercise experience.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock-based compensation expense was as follows: | | | | | | | | | | | | | | | | |
| | Fiscal Years |
| | 2022 | | 2021 | | |
| | | | | | |
| | (Dollars in thousands) |
| SARs & SOs (1) | | $ | (241) | | | $ | 456 | | | |
| RSUs & PSUs | | 1,575 | | | 2,798 | | | |
| Total stock-based compensation expense (recorded in general and administrative) | | 1,334 | | | 3,254 | | | |
| Less: Income tax benefit (2) | | — | | | — | | | |
| Total stock-based compensation expense, net of tax | | $ | 1,334 | | | $ | 3,254 | | | |
| | | | | | |
| | | | | | |
_______________________________________________________________________________ (1)A benefit was recognized in fiscal year 2022 due to forfeiture of SARs and SOs.
(2)Federal statutory income tax rate utilized of 0% due to a valuation allowance in fiscal years 2022 and 2021.
Stock Appreciation Rights:
SARs granted under the 2018 Plan, 2016 Plan and the 2004 Plan generally vest 20%, 20%, and 60% over a three-year period subsequent to the grant date or vest ratably over a three to five year period on each of the annual grant date anniversaries and expire 10 years from the grant date. SARs granted in fiscal year 2022 were awarded to the Company's executives and are liability-classified awards that vest 20%, 20%, and 60% over a three-year period and are revalued on a quarterly basis. SARs granted before fiscal year 2022 vest ratably over a three year period with the exception of the April 2017 grant to the former Chief Executive Officer, which vested in full after two years.
Activity for all the Company's outstanding SARs is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Shares/Units
(in thousands) | | Weighted
Average
Exercise Price | | Weighted
Average
Remaining
Contractual Life | | Aggregate
Intrinsic Value
(in thousands) |
| | | SARs | | | |
| | | | | | | | |
| Outstanding balance at June 30, 2021 | | 1,041 | | | $ | 11.32 | | | | | |
| Granted | | 600 | | | 2.56 | | | | | |
| Forfeited/Expired | | (30) | | | 16.95 | | | | | |
| Exercised | | — | | | — | | | | | |
| Outstanding balance at June 30, 2022 | | 1,611 | | | $ | 7.95 | | | 6.50 | | $ | (11,068) | |
| Exercisable at June 30, 2022 | | 1,011 | | | $ | 11.15 | | | 4.78 | | $ | (10,181) | |
| Unvested awards, net of estimated forfeitures | | 466 | | | $ | 2.56 | | | 9.40 | | $ | (690) | |
As of June 30, 2022, there was $0.2 million of unrecognized expense related to SARs that is to be recognized over a weighted average period of 2.5 years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock Options:
SOs granted under the 2018 Plan, 2016 Plan and the 2004 Plan generally vest 20%, 20%, and 60% over a three-year period subsequent to the grant date or vest ratably over a three to five year period on each of the annual grant date anniversaries and expire 10 years from the grant date. The SOs granted during fiscal year 2022 were awarded to the Company's executives and vest 20%, 20%, and 60% over a three-year period.
Activity for all the Company's outstanding SOs is as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Shares/Units
(in thousands) | | Weighted
Average
Exercise Price | | Weighted
Average
Remaining
Contractual Life | | Aggregate
Intrinsic Value
(in thousands) |
| | | SOs | | | |
| | | | | | | | |
| Outstanding balance at June 30, 2021 | | 1,459 | | | $ | 6.53 | | | | | |
| Granted | | 1,505 | | | 1.82 | | | | | |
| Forfeited/Expired | | (1,469) | | | 6.50 | | | | | |
| Exercised | | — | | | — | | | | | |
| Outstanding balance at June 30, 2022 | | 1,495 | | | $ | 1.81 | | | 9.66 | | $ | (1,091) | |
| Exercisable at June 30, 2022 | | — | | | $ | — | | | — | | | $ | — | |
| Unvested awards, net of estimated forfeitures | | 1,079 | | | $ | 1.84 | | | 9.66 | | $ | (820) | |
As of June 30, 2022, there was $1.0 million of unrecognized expense related to SOs that is to be recognized over a weighted average period of 2.7 years.
Restricted Stock Units:
RSUs granted to employees under the 2018 Plan, 2016 Plan and 2004 Plan generally vest 20%, 20%, and 60% over a three-year period subsequent to the grant date, vest ratably over a three to five year period on each of the annual grant date anniversaries or vest entirely after a one, three or five year period subsequent to the grant date. RSUs granted to non-employee directors under the 2018 Plan, 2016 Plan and 2004 Plan generally vest in equal monthly amounts over a one year period from the Company's previous annual shareholder meeting date and distributions are deferred until the director's board service ends. RSUs granted in fiscal year 2022 were issued under the Company's matching program, as well as to the Company's Board members.
Activity for all the Company's RSUs is as follows: | | | | | | | | | | | | | | | | | | | | |
| | | Shares/Units
(in thousands) | | Weighted
Average
Grant Date
Fair Value | | Aggregate Intrinsic
Value
(in thousands) |
| | | RSUs | | |
| | | | | | |
| Outstanding balance at June 30, 2021 | | 1,175 | | | $ | 10.30 | | | |
| Granted | | 828 | | | 2.69 | | | |
| Forfeited | | (437) | | | 6.44 | | | |
| Vested | | (659) | | | 8.84 | | | |
| Outstanding balance at June 30, 2022 | | 907 | | | $ | 6.27 | | | $ | 980 | |
| Vested at June 30, 2022 | | 413 | | | $ | 8.73 | | | $ | 446 | |
| Unvested awards, net of estimated forfeitures | | 310 | | | $ | 4.59 | | | $ | 335 | |
As of June 30, 2022, there was $1.0 million of unrecognized expense related to RSUs that is expected to be recognized over a weighted average period of 1.9 years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Performance Share Units:
PSUs are grants of restricted stock units which are earned based on the achievement of performance goals established by the Compensation Committee over a performance period, typically three years. There were no PSUs granted in fiscal year 2022.
Activity for all the Company's PSUs is as follows: | | | | | | | | | | | | | | | | | | | | |
| | | Shares/Units
(in thousands) | | Weighted
Average
Grant Date
Fair Value | | Aggregate Intrinsic
Value
(in thousands) |
| | | PSUs | | |
| | | | | | |
| Outstanding balance at June 30, 2021 | | 164 | | | $ | 12.56 | | | |
| Granted | | — | | | — | | | |
| Forfeited | | (90) | | | 13.68 | | | |
| Vested | | — | | | — | | | |
| Outstanding balance at June 30, 2022 | | 74 | | | $ | 9.82 | | | $ | 80 | |
| Vested at June 30, 2022 | | — | | | $ | — | | | $ | — | |
| Unvested awards, net of estimated forfeitures | | 62 | | | $ | 9.20 | | | $ | 67 | |
There was $0.3 million of total unrecognized compensation expense related to the unvested awards to be recognized over 1.8 years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. SHAREHOLDERS' (DEFICIT) EQUITY
Authorized Shares and Designation of Preferred Class:
The Company has 100.0 million shares of capital stock authorized, par value $0.05, of which all outstanding shares, and shares available under the Stock Option Plans, have been designated as common.
Share Issuance Program:
In February 2021, the Company filed a $150.0 million shelf registration statement and $50.0 million prospectus supplement with the Securities and Exchange Commission (SEC) under which it may offer and sell, from time to time, up to $50.0 million worth of its common stock in "at-the-market" offerings. During fiscal year 2022, the Company received gross proceeds of $38.4 million related to the "at-the-market" offering and paid fees to sales agents and other fees of $1.2 million. Net proceeds from sales of shares under the "at-the-market" program, if any, may be used to, among other things, fund working capital requirements, repay debt and support growth strategies.
Share Repurchase Program:
In May 2000, the Company's Board approved a stock repurchase program with no stated expiration date. Originally, the program authorized up to $50.0 million to be expended for the repurchase of the Company's stock. The Board elected to increase this maximum to $100.0 million in August 2003, to $200.0 million in May 2005, to $300.0 million in April 2007, to $350.0 million in April 2015, to $400.0 million in September 2015, to $450.0 million in January 2016, and to $650.0 million in August 2018. All repurchased shares become authorized but unissued shares of the Company. As of June 30, 2022, 30.0 million shares have been cumulatively repurchased for $595.4 million, and $54.6 million remained authorized for repurchase. The Company does not anticipate repurchasing shares of common stock for the foreseeable future.
Accumulated Other Comprehensive Income:
The components of accumulated other comprehensive income are as follows: | | | | | | | | | | | | | | | | |
| | | June 30, |
| | | 2022 | | 2021 | | |
| | | | | | |
| | | (Dollars in thousands) |
| Foreign currency translation | | $ | 8,732 | | | $ | 9,279 | | | |
| Unrealized gain on deferred compensation contracts | | 723 | | | 264 | | | |
| Accumulated other comprehensive income | | $ | 9,455 | | | $ | 9,543 | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. SEGMENT INFORMATION
Segment information is prepared on the same basis the chief operating decision maker (CODM) reviews financial information for operational decision-making purposes. The Franchise reportable operating segment is comprised of 5,395 franchised salons located mainly in strip center locations and Walmart. Franchise salons offer high quality, convenient and value priced hair care and beauty services and retail products. This segment operates primarily in the U.S., Puerto Rico and Canada and primarily includes the Supercuts, SmartStyle, Cost Cutters, First Choice Haircutters, Roosters and Magicuts concepts.
The Company-owned salons reportable operating segment is comprised of 105 company-owned salons located mainly in strip center locations and Walmart. Company-owned salons offer high quality, convenient and value priced hair care and beauty services and retail products. SmartStyle, Supercuts, Cost Cutters and other regional trade names operating in the United States and Canada are generally within the Company-owned salons segment.
Financial information concerning the Company's reportable operating segments is shown in the following table: | | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended June 30, 2022 |
| | Franchise | | Company - owned | | Consolidated (1) |
| | | | | | |
| | | (Dollars in thousands) |
| Revenues: | | | | | | |
| Royalties | | $ | 65,753 | | | $ | — | | | $ | 65,753 | |
| Fees | | 11,587 | | | — | | | 11,587 | |
| Product sales to franchisees | | 15,072 | | | — | | | 15,072 | |
| Advertising fund contributions | | 32,573 | | | — | | | 32,573 | |
| Franchise rental income | | 130,777 | | | — | | | 130,777 | |
| Company-owned salon revenue | | — | | | 20,205 | | | 20,205 | |
| Total revenue | | 255,762 | | | 20,205 | | | 275,967 | |
| | | | | | |
| Operating expenses: | | | | | | |
| Cost of product sales to franchisees | | 17,391 | | | — | | | 17,391 | |
| Inventory reserve (1) | | — | | | — | | | 7,655 | |
| General and administrative | | 62,816 | | | 2,458 | | | 65,274 | |
| Rent | | 5,498 | | | 3,859 | | | 9,357 | |
| Advertising fund expense | | 32,573 | | | — | | | 32,573 | |
| Franchise rent expense | | 130,777 | | | — | | | 130,777 | |
| Company-owned salon expense | | — | | | 21,952 | | | 21,952 | |
| Depreciation and amortization | | 4,913 | | | 1,311 | | | 6,224 | |
| Long-lived asset impairment | | 450 | | | 92 | | | 542 | |
| | | | | | |
| Goodwill impairment | | 13,120 | | | — | | | 13,120 | |
| Total operating expenses | | 267,538 | | | 29,672 | | | 304,865 | |
| Operating loss | | $ | (11,776) | | | $ | (9,467) | | | $ | (28,898) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
_______________________________________________________________________________ (1)This charge, primarily related to reserving for personal protective equipment acquired as a result of the COVID-19 pandemic, relates to the wind down of our distribution centers and is reviewed separately from the segment results by the CODM. Consolidated results will not cross foot as the inventory reserve is not part of the Company's segments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended June 30, 2021 |
| | Franchise | | Company - owned | | Consolidated |
| | | | | | |
| | | (Dollars in thousands) |
| Revenues: | | | | | | |
| Royalties | | $ | 52,357 | | | $ | — | | | $ | 52,357 | |
| Fees | | 10,215 | | | — | | | 10,215 | |
| Product sales to franchisees | | 56,699 | | | — | | | 56,699 | |
| Advertising fund contributions | | 22,023 | | | — | | | 22,023 | |
| Franchise rental income | | 127,392 | | | — | | | 127,392 | |
| Company-owned salon revenue | | — | | | 142,965 | | | 142,965 | |
| Total revenue | | 268,686 | | | 142,965 | | | 411,651 | |
| | | | | | |
| Operating expenses: | | | | | | |
| Cost of product sales to franchisees | | 43,756 | | | — | | | 43,756 | |
| | | | | | |
| General and administrative | | 87,493 | | | 8,934 | | | 96,427 | |
| Rent | | 4,922 | | | 35,832 | | | 40,754 | |
| Advertising fund expense | | 22,023 | | | — | | | 22,023 | |
| Franchise rent expense | | 127,392 | | | — | | | 127,392 | |
| Company-owned salon expense | | — | | | 141,204 | | | 141,204 | |
| Depreciation and amortization | | 7,019 | | | 14,730 | | | 21,749 | |
| Long-lived asset impairment | | 726 | | | 12,297 | | | 13,023 | |
| | | | | | |
| | | | | | |
| Total operating expenses | | 293,331 | | | 212,997 | | | 506,328 | |
| Operating loss | | $ | (24,645) | | | $ | (70,032) | | | $ | (94,677) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
The Company's CODM does not evaluate reportable segments using assets and capital expenditure information.
Total revenues and property and equipment, net associated with business operations in the U.S. and all other countries in aggregate were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, |
| | | 2022 | | 2021 | | |
| | | Total
Revenues | | Property and
Equipment, Net | | Total
Revenues | | Property and
Equipment, Net | | | | |
| | | | | | | | | | | | |
| | | (Dollars in thousands) |
| U.S. | | $ | 249,285 | | | $ | 12,808 | | | $ | 380,506 | | | $ | 16,807 | | | | | |
| Other countries | | 26,682 | | | 27 | | | 31,145 | | | 99 | | | | | |
| Total | | $ | 275,967 | | | $ | 12,835 | | | $ | 411,651 | | | $ | 16,906 | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. SUBSEQUENT EVENT:
On August 12, 2022, the Company amended its credit agreement. The amendment, among other things, converts $180.0 million of the existing $295.0 million revolving credit facility to a new term loan, reduces commitments under the revolving credit facility to $55.0 million, and extends the term of the credit facility from March 26, 2023 to August 31, 2025, with no scheduled amortization prior to maturity.
The Company's obligations will continue to be guaranteed by certain of its subsidiaries and secured by substantially all real and personal property of the Company and such subsidiaries.
The amendment replaces the current utilization-based interest rate margins applicable to borrowings with a margin that is subject to annual increases. The margin applicable to term SOFR loans will initially be 3.875%. Effective March 27, 2023, the margin will increase to 6.25%, of which 4.25% will be paid currently in cash and 2.00% will be PIK interest (added to the principal balance and thereafter accruing interest). Effective March 27, 2024, the margin will increase to 7.25%, of which 4.25% will be paid currently in cash and 3.00% will be PIK interest. The margin applicable to base rate loans will be 100 basis points (1.00%) less than the margin applicable to term SOFR loans.
The amendment also eliminates the $115.0 million incremental loan facility; requires the Company to prepay the credit facilities each quarter in an amount equal to 75% to 100% of its excess cash flow (as defined in the agreement, if any); reduces the threshold for prepayment due to excess cash on hand from $100.0 million to $15.0 million; reduces the existing minimum liquidity covenant from $75.0 million to $10.0 million; and includes new financial covenants regarding minimum EBITDA, maximum leverage and minimum fixed charge coverage.
Upon closing the agreement, the Company paid $4.9 million of fees and other costs.