REGIS CORP 10-Q

Item 1. Financial Statements REGIS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) (Dollars in thousands, except share data) September 30, 2021 June 30, 2021 ASSETS Current assets: Cash and cash equivalents $ 45,508 $ 19,191 Receivables, net 21,833 27,372 Inventories 16,774 22,993 Other current assets 16,049 17,103 Total current assets 100,164 86,659 Property and equipment, net 22,588 23,113 Goodwill 229,007 229,582 Other intangibles, net 3,604 3,761 Right of use asset (Note 7) 573,475 611,880 Other assets 40,013 41,388 Total assets $ 968,851 $ 996,383 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 20,784 $ 27,157 Accrued expenses 48,099 54,857 Short-term lease liability (Note 7) 113,585 116,471 Total current liabilities 182,468 198,485 Long-term debt, net (Note 8) 195,805 186,911 Long-term lease liability (Note 7) 480,769 518,866 Other non-current liabilities 69,999 75,075 Total liabilities 929,041 979,337 Commitments and contingencies (Note 5) Shareholders' equity: Common stock, $ 0.05 par value; issued and outstanding 43,964,489 and 35,795,844 common shares at September 30, 2021 and June 30, 2021, respectively 2,198 1,790 Additional paid-in capital 58,310 25,102 Accumulated other comprehensive income 9,069 9,543 Accumulated deficit ( 29,767 ) ( 19,389 ) Total shareholders' equity 39,810 17,046 Total liabilities and shareholders' equity $ 968,851 $ 996,383 _______________________________________________________________________________ The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements. 2 REGIS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) For The Three Months Ended September 30, 2021 And 2020 (Dollars and shares in thousands, except per share data amounts) Three Months Ended September 30, 2021 2020 Revenues: Royalties $ 16,602 $ 11,405 Fees 3,265 2,042 Product sales to franchisees 8,008 13,742 Advertising fund contributions 8,114 4,509 Franchise rental income (Note 7) 33,762 32,283 Company-owned salon revenue 8,005 47,415 Total revenue 77,756 111,396 Operating expenses: Cost of product sales to franchisees 8,112 10,678 General and administrative 21,789 26,148 Rent (Note 7) 1,803 13,225 Advertising fund expense 8,114 4,510 Franchise rent expense 33,762 32,283 Company-owned salon expense (1) 7,945 42,943 Depreciation and amortization 1,869 7,376 Long-lived asset impairment 163 5,824 Total operating expenses 83,557 142,987 Operating loss ( 5,801 ) ( 31,591 ) Other (expense) income: Interest expense ( 3,306 ) ( 3,762 ) Loss from sale of salon assets to franchisees, net ( 1,080 ) ( 662 ) Interest income and other, net ( 239 ) 114 Loss from continuing operations before income taxes ( 10,426 ) ( 35,901 ) Income tax benefit 48 635 Net loss $ ( 10,378 ) $ ( 35,266 ) Net loss per share: Basic and diluted: Net loss per share, basic and diluted (2) $ ( 0.28 ) $ ( 0.98 ) Weighted average common and common equivalent shares outstanding: Basic and diluted 36,850 35,908 _______________________________________________________________________________ (1) Includes cost of service and product sold to guests in our Company-owned salons. Excludes general and administrative expense, rent and depreciation and amortization related to Company-owned salons . (2) Total is a recalculation; line items calculated individually may not sum to total due to rounding. The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements. 3 REGIS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS (Unaudited) For The Three Months Ended September 30, 2021 And 2020 (Dollars in thousands) Three Months Ended September 30, 2021 2020 Net loss $ ( 10,378 ) $ ( 35,266 ) Foreign currency translation adjustments ( 474 ) 502 Comprehensive loss $ ( 10,852 ) $ ( 34,764 ) _______________________________________________________________________________ The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements. 4 REGIS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited) For The Three Months Ended September 30, 2021 And 2020 (Dollars in thousands) Three Months Ended September 30, 2021 Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Shares Amount Balance, June 30, 2021 35,795,844 $ 1,790 $ 25,102 $ 9,543 $ ( 19,389 ) $ 17,046 Net loss — — — — ( 10,378 ) ( 10,378 ) Foreign currency translation — — — ( 474 ) — ( 474 ) Issuance of common stock, net of offering costs 8,072,304 404 31,789 — — 32,193 Stock-based compensation — — 1,678 — — 1,678 Net restricted stock activity 96,341 4 ( 259 ) — — ( 255 ) Balance, September 30, 2021 43,964,489 $ 2,198 $ 58,310 $ 9,069 $ ( 29,767 ) $ 39,810 Three Months Ended September 30, 2020 Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income Retained Earnings Total Shares Amount Balance, June 30, 2020 35,625,716 $ 1,781 $ 22,011 $ 7,449 $ 94,462 $ 125,703 Net loss — — — — ( 35,266 ) ( 35,266 ) Foreign currency translation — — — 502 — 502 Stock-based compensation — — ( 1,225 ) — — ( 1,225 ) Net restricted stock activity 40,067 2 ( 190 ) — — ( 188 ) Minority interest — — — — 15 15 Balance, September 30, 2020 35,665,783 $ 1,783 $ 20,596 $ 7,951 $ 59,211 $ 89,541 _______________________________________________________________________________ The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements. 5 REGIS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) For The Three Months Ended September 30, 2021 And 2020 (Dollars in thousands) Three Months Ended September 30, 2021 2020 Cash flows from operating activities: Net loss $ ( 10,378 ) $ ( 35,266 ) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization 1,574 6,087 Long-lived asset impairment 163 5,824 Deferred income taxes ( 258 ) ( 384 ) Loss from sale of salon assets to franchisees, net 1,080 662 Stock-based compensation 1,678 ( 1,225 ) Amortization of debt discount and financing costs 460 438 Other non-cash items affecting earnings 232 4 Changes in operating assets and liabilities, excluding the effects of asset sales (1) ( 6,805 ) ( 5,006 ) Net cash used in operating activities ( 12,254 ) ( 28,866 ) Cash flows from investing activities: Capital expenditures ( 1,524 ) ( 3,811 ) Proceeds from sale of assets to franchisees — 3,735 Costs associated with sale of salon assets to franchisees — ( 125 ) Net cash used in investing activities ( 1,524 ) ( 201 ) Cash flows from financing activities: Borrowings on revolving credit facility 10,000 — Repayments of revolving credit facility ( 1,106 ) — Proceeds from issuance of common stock, net of offering costs 32,193 — Taxes paid for shares withheld ( 255 ) ( 187 ) Distribution center lease payments — ( 238 ) Net cash provided by (used in) financing activities 40,832 ( 425 ) Effect of exchange rate changes on cash and cash equivalents ( 148 ) 88 Increase (decrease) in cash, cash equivalents, and restricted cash 26,906 ( 29,404 ) Cash, cash equivalents and restricted cash: Beginning of period 29,152 122,880 End of period $ 56,058 $ 93,476 _______________________________________________________________________________ (1) Changes in operating assets and liabilities exclude assets and liabilities sold. The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements. 6 REGIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The unaudited interim Condensed Consolidated Financial Statements of Regis Corporation (the Company) as of September 30, 2021 and for the three months ended September 30, 2021 and 2020, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of September 30, 2021 and its consolidated results of operations, comprehensive loss, shareholders' equity and cash flows for the interim periods. Adjustments consist only of normal recurring items, except for any discussed in the notes below. The results of operations and cash flows for any interim period are not necessarily indicative of results of operations and cash flows for the full year. The accompanying interim unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP). The unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended June 30, 2021 and other documents filed or furnished with the SEC during the current fiscal year. COVID-19 Impact: During the period ended September 30, 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. As a result, COVID-19 has, and may continue to have, a negative affect on revenue and profitability. The ultimate impact of the COVID-19 pandemic in both the short and long term is not currently estimable due to the uncertainty surrounding the duration of the pandemic, the availability and acceptance of preventative vaccines, the emergence and impact of new COVID-19 variants and changing government restrictions. Additional impacts to the business may arise that we are not aware of currently. Inventories: The Company has inventory valuation reserves for excess and obsolete inventories or other factors that may render inventories unmarketable at their historical costs. In fiscal year 2021, the Company announced it would transition away from its wholesale product distribution model in favor of a third-party distribution model. As a result, the Company exited one distribution center in the quarter and plans to exit its other distribution center in fiscal year 2022. To facilitate the exit, the Company is selling inventory at discounts and disposing of hard-to-sell products. Additionally, the reduction in company-owned salons decreases the Company's ability to re-distribute inventory from closed locations to other salons to be sold or used. The inventory valuation reserve as of September 30, 2021 and June 30, 2021 was $ 8.8 and $ 11.8 million, respectively. 7 Salon Long-Lived Asset and Right of Use Asset Impairment Assessments: The Company assesses impairment of long-lived salon assets and right of use (ROU) assets at the individual salon level, as this is the lowest level for which identifiable cash flows are largely independent of other groups of assets and liabilities, when events or changes in circumstances indicate the carrying value of the assets or the asset grouping may not be recoverable. Factors considered in deciding when to perform an impairment review include significant under-performance of an individual salon in relation to expectations, significant economic or geographic trends, and significant changes or planned changes in the use of the assets. The first step is to assess recoverability, and in doing that, the undiscounted salon cash flows are compared to the carrying value of the salon assets. If the undiscounted estimated cash flows are less than the carrying value of the assets, the Company calculates an impairment charge based on the difference between the carrying value of the asset group and its fair value. The fair value of the salon long-lived asset group is estimated using market participant methods based on the best information available. See Note 7 of the unaudited Condensed Consolidated Financial Statements for further discussion related to the ROU asset impairment. Judgments made by management related to the expected useful lives of long-lived assets and the ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as changes in economic conditions and changes in operating performance. As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause the Company to realize material impairment charges. Goodwill: As of September 30, 2021 and June 30, 2021, the Franchise reporting unit had $ 229.0 and $ 229.6 million, respectively, of goodwill. The change in goodwill for the three months ended September 30, 2021 is due to foreign currency translation. The Company assesses goodwill impairment on an annual basis, during the Company's fourth fiscal quarter, and between annual assessments if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. An interim impairment analysis was not required in the three months ended September 30, 2021. The Company performs 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. 8 Classification of Revenue and Expenses: Beginning in the first quarter of fiscal year 2022, the Company adjusted its Statement of Operations for both periods presented to align the presentation of results to its franchise-focused business. Below is a summary of the changes to the financial statement captions. The change does not have a financial impact on the Company's reported revenue, operating loss, reported net loss or cash flows from operations. Royalties - sales-based royalty received from franchisees. In prior years, these fees were included in Royalties and Fees and disclosed in the footnotes. Fees - fees received from franchisees and third parties, including franchise fees, software and hardware fees related to Opensalon ® Pro and fees received from the third-party distributors. Product sales to franchisees - wholesale product sales to franchisees. This caption equates to Product sales in the Franchise segment in prior years. The Company is changing its franchise product sales business in fiscal year 2022 from a wholesale distribution model to a third-party distribution model. This revenue is expected to decrease significantly during fiscal year 2022. Advertising fund contributions - sales-based advertising fund contributions received from franchisees. In prior years, these fees were included in Royalties and Fees and disclosed in the footnotes. Company-owned salon revenue - service revenue and revenue derived from sales of product in Company-owned salons. This caption equates to revenue reported in the Company-owned segment in prior periods. Cost of product sales to franchisees - direct cost of inventory and freight and other costs of sales. In prior years, these sales were included in the Franchise segment cost of product and site operating expenses. Company-owned salon expense - cost of service and product sold to guests in our Company-owned salons and other salon-related costs. In prior years, these costs were classified as Company-owned segment cost of service, cost of product and site operating expenses. Excluded from this caption are general and administrative expense, rent and depreciation and amortization related to company-owned salons. Depreciation: Depreciation expense in the three months ended September 30, 2021 and 2020 include $ 0.3 and $ 1.3 million of asset retirement obligations, which are cash expenses. 9 2. REVENUE RECOGNITION: Revenue Recognition and Deferred Revenue: Revenue recognized at point of sale Product sales to franchisees are recorded at the time product is delivered to the franchisee. Payment for franchisee product revenue is generally collected within 30 to 90 days of delivery. Company-owned salon revenues are recognized at the time when the services are provided or the guest receives and pays for the merchandise. Revenues from purchases made with gift cards are also recorded when the guest takes possession of the merchandise or services are provided. Gift cards issued by the Company are recorded as a liability (deferred revenue) upon sale and recognized as revenue upon redemption by the guest. Gift card breakage, the amount of gift cards which will not be redeemed, is recognized proportional to redemptions using estimates based on historical redemption patterns. Revenue recognized over time Royalty and advertising fund revenues represent sales-based royalties that are recognized in the period in which the sales occur. Generally, royalty and advertising fund revenues are billed and collected monthly in arrears. Advertising fund revenues and expenditures, which must be spent on marketing and related activities per the franchise agreements, are recorded on a gross basis within the unaudited Condensed Consolidated Statement of Operations. The treatment increases both the gross amount of reported revenue and expense and generally has no impact on operating income and net income. Franchise fees are billed and received upon the signing of the franchise agreement. Recognition of these fees is deferred until the salon opening and is then recognized over the term of the franchise agreement, which is typically ten years . Software fees are recognized over the term of the SaaS agreement. Franchise rental income is a result of the Company signing leases on behalf of franchisees and entering into sublease arrangements with the franchisees. The Company recognizes franchise rental income and expense when it is due to the landlord. Information about receivables, broker fees and deferred revenue subject to the current revenue recognition guidance is as follows: September 30, 2021 June 30, 2021 Balance Sheet Classification (Dollars in thousands) Receivables from contracts with customers, net $ 14,612 $ 19,112 Receivables, net Broker fees 18,272 19,254 Other assets Deferred revenue: Current Gift card liability $ 2,150 $ 2,240 Accrued expenses Deferred franchise fees unopened salons 31 40 Accrued expenses Deferred franchise fees open salons 5,901 5,884 Accrued expenses Total current deferred revenue: $ 8,082 $ 8,164 Non-current Deferred franchise fees unopened salons $ 5,824 $ 6,571 Other non-current liabilities Deferred franchise fees open salons 31,101 32,365 Other non-current liabilities Total non-current deferred revenue $ 36,925 $ 38,936 10 Receivables relate primarily to payments due for royalties, franchise fees, advertising fees, rent, franchise product sales and sales of salon services and product paid by credit card. The receivables balance is presented net of an allowance for expected losses (i.e., doubtful accounts), primarily related to receivables from franchisees. The following table is a rollforward of the allowance for doubtful accounts for the period (in thousands): Balance as of June 30, 2021 $ 7,774 Provision for doubtful accounts (1) 237 Provision for franchisee rent (2) 364 Reclass of accrued rent (3) 396 Write-offs ( 102 ) Balance as of September 30, 2021 $ 8,669 _______________________________________________________________________________ (1) The provision for doubtful accounts is recognized as General and administrative expense in the unaudited Condensed Consolidated Statement of Operations. (2) The provision for franchisee rent is recognized as Rent in the unaudited Condensed Consolidated Statement of Operations. (3) The reclass of accrued rent represents franchisee rent obligations guaranteed by the Company that were unbilled and deemed unrecoverable as of June 30, 2021. The amounts were billed in fiscal year 2022 and the related accrual was reclassified to the allowance for doubtful accounts. Broker fees are the costs associated with using external brokers to identify new franchisees. These fees are paid upon the signing of the franchise agreement and recognized as general and administrative expense over the term of the franchise agreement. The following table is a rollforward of the broker fee balance for the periods indicated (in thousands): Balance as of June 30, 2021 $ 19,254 Additions 25 Amortization ( 862 ) Write-offs ( 145 ) Balance as of September 30, 2021 $ 18,272 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 the three months ended September 30, 2021 and 2020 was $ 1.6 and $ 1.6 million, respectively. Estimated revenue expected to be recognized in the future related to deferred franchise fees for open salons as of September 30, 2021 is as follows (in thousands): Remainder of 2022 $ 4,391 2023 5,866 2024 5,631 2025 5,246 2026 4,776 Thereafter 11,092 Total $ 37,002 11 3. SHAREHOLDERS' EQUITY: Stock-Based Employee Compensation: During the three months ended September 30, 2021, the Company granted one equity award as follows: Three Months Ended September 30, 2021 Restricted stock units 2,987 The RSUs granted during the three months ended September 30, 2021 vest on October 27, 2021 and were granted to a Board member who joined the Company during the quarter. Total compensation cost for stock-based payment arrangements totaling $ 1.7 and $( 1.2 ) million for the three months ended September 30, 2021 and 2020, respectively, was recorded within general and administrative expense on the unaudited Condensed Consolidated Statement of Operations. In the three months ended September 30, 2020, stock compensation includes a $ 2.4 million benefit from the forfeiture of awards related to the departure of the Company's former CEO. Share Issuance Program: In fiscal year 2021, the Company filed a $ 150.0 million shelf registration statement and $ 50.0 million prospectus supplement with the Securities and Exchange Commission (SEC) under which it may offer and sell, from time to time, up to $ 50.0 million worth of its Class A common stock in "at-the-market" offerings. During the three months ended September 30, 2021, the Company raised gross proceeds of $ 33.2 million related to the "at-the-market" offering and paid fees to sales agents and other fees of $ 1.0 million. On September 29, 2021, the Company sold 1.2 million shares for net proceeds of $ 5.0 million, which settled on October 1, 2021. The settlement occurred in the second quarter so it is excluded from interim unaudited Condensed Consolidated Statement of Shareholders' Equity and Cash Flows. Net proceeds from sales of shares under the "at-the-market" program, if any, may be used to, among other things, fund working capital requirements, repay debt and support growth strategies. 12 4. INCOME TAXES: A summary of income tax benefits and corresponding effective tax rates is as follows: Three Months Ended September 30, 2021 2020 (Dollars in thousands) Income tax benefit $ 48 $ 635 Effective tax rate 0.5 % 1.8 % The recorded tax provisions and effective tax rates for the three months ended September 30, 2021 and 2020 were different than what would normally be expected primarily due to the impact of the deferred tax valuation allowance. The Company is no longer subject to IRS examinations for years before 2014. Furthermore, with limited exceptions, the Company is no longer subject to state and international income tax examinations by tax authorities for years before 2012. 5. COMMITMENTS AND CONTINGENCIES: The Company is a defendant in various lawsuits and claims arising out of the normal course of business. Like certain other large retail employers, the Company has been faced with allegations of purported class-wide consumer and wage and hour violations. Litigation is inherently unpredictable, and the outcome of these matters cannot presently be determined. Although the actions are being vigorously defended, the Company could in the future, incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period. In addition, our existing point-of-sale system supplier had challenged the development of certain parts of our technology systems in litigation brought in the Northern District of California, case No. 20-cv-02181-MMC. The Company and the supplier entered into an agreement, effective June 25, 2021, that provided for the dismissal of the lawsuit and set forth a commercial services agreement pursuant to which the supplier will assist in the transfer of franchise salons from its point-of-sale system to the Company's salon management system, Opensalon ® Pro. The Company's accrual related to the agreement was $ 3.0 million as of September 30, 2021 and June 30, 2021. 13 6. CASH, CASH EQUIVALENTS AND RESTRICTED CASH: The table below reconciles the cash and cash equivalents balances and restricted cash balances, recorded within other current assets on the unaudited Condensed Consolidated Balance Sheet to the amount of cash, cash equivalents and restricted cash reported on the unaudited Condensed Consolidated Statement of Cash flows: September 30, 2021 June 30, 2021 (Dollars in thousands) Cash and cash equivalents $ 45,508 $ 19,191 Restricted cash, included in other current assets (1) 10,550 9,961 Total cash, cash equivalents and restricted cash $ 56,058 $ 29,152 _______________________________________________________________________________ (1) Restricted cash within other current assets primarily relates to consolidated advertising cooperatives funds, which can only be used to settle obligations of the respective cooperatives and contractual obligations to collateralize the Company's self-insurance programs. 14 7. LEASES: At contract inception, the Company determines whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides the Company the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, the Company considers it to be, or contain, a lease. The Company leases its company-owned salons and some of its corporate facilities under operating leases. The original terms of the salon leases range from 1 to 20 years with many leases renewable for an additional 5 to 10-year term at the option of the Company. In addition to the obligation to make fixed rental payments for the use of the salons, the Company also has variable lease payments that are based on sales levels. For most leases, the Company is required to pay real estate taxes and other occupancy expenses. Total rent includes the following: Three Months Ended September 30, 2021 2020 (Dollars in thousands) Office and warehouse rent $ 1,669 $ 1,203 Lease termination expense (1) 1,340 5,554 Lease liability benefit (2) ( 2,431 ) ( 6,061 ) Franchise salon rent 329 718 Company-owned salon rent 896 11,811 Total $ 1,803 $ 13,225 _______________________________________________________________________________ (1) During the three months ended September 30, 2021, the Company paid $ 0.9 million to exit its distribution centers before the lease end dates and incurred costs of $ 0.4 million to exit salons before the lease end date in order to relieve the Company of future lease obligations. For the three months ended September 30, 2020, lease termination fees includes $ 2.5 million of early termination payments to close salons before the lease end date to relieve the Company of future lease obligations and $ 3.1 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 costs are passed through to the franchisees. The Company records the rental payments due from franchisees as franchise rental income and the corresponding amounts owed to landlords as franchise rent expense on the unaudited Condensed Consolidated Statement of Operations. For the three months ended September 30, 2021 and 2020, franchise rental income and franchise rent expense were $ 33.8 and $ 32.3 million, respectively. These leases generally have lease terms of approximately five years . The Company expects to renew SmartStyle and some franchise leases upon expiration. Other leases are expected to be renewed by the franchisee upon expiration. All lease-related costs are passed through to the franchisees. 15 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. The Company's consolidated ROU asset balance was $ 573.5 and $ 611.9 million as of September 30, 2021 and June 30, 2021, respectively. For leases classified as operating leases, expense for lease payments is recognized on a straight-line basis over the lease term, including the lease renewal option when the lease is expected to be renewed. Generally, the non-lease components, such as real estate taxes and other occupancy expenses, are separate from rent expense within the lease and are not included in the measurement of the lease liability because these charges are variable. The discount rate used to determine the present value of the lease payments is the Company's estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as the interest rate implicit in the lease cannot generally be determined. The Company uses the portfolio approach in applying the discount rate based on the original lease term. The weighted average remaining lease term was 6.38 and 6.44 years and the weighted average discount rate was 4.14 % and 4.11 % for all salon operating leases as of September 30, 2021 and June 30, 2021, respectively. A lessee's ROU asset is subject to the same asset impairment guidance in ASC 360, Property, Plant, and Equipment, applied to other elements of property, plant, and equipment. The Company has identified its asset groups at the individual salon level as this represents the lowest level that identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Poor salon performance, primarily due to the COVID-19 pandemic, resulted in an ASC 360-10-35-21 triggering event. As a result, management assessed underperforming salon asset groups, which included the related ROU assets, for impairment in accordance with ASC 360. The first step in the impairment test under ASC 360 is to determine whether the long-lived assets are recoverable, which is determined by comparing the net carrying value of the salon asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset group. Estimating cash flows for purposes of the recoverability test is subjective and requires significant judgment. Estimated future cash flows used for the purposes of the recoverability test were based upon historical cash flows for the salons, adjusted for expected changes in future market conditions related to the COVID-19 pandemic, and other factors. The period of time used to determine the estimates of the future cash flows for the recoverability test was based on the remaining useful life of the primary asset of the group, which was the ROU asset in all cases. The second step of the long-lived asset impairment test requires that the fair value of the asset group be estimated when determining the amount of any impairment loss. For the salon asset groups that failed the recoverability test, an impairment loss was measured as the amount by which the carrying amount of the asset group exceeds its fair value. The Company applied the fair value guidance within ASC 820-10 to determine the fair value of the asset group from the perspective of a market-participant considering, among other things, appropriate discount rates, multiple valuation techniques, the most advantageous market, and assumptions about the highest and best use of the asset group. To determine the fair value of the salon asset groups, the Company utilized market-participant assumptions rather than the Company's own assumptions about how it intends to use the asset group. The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include: the market rent of comparable properties based on recently negotiated leases as applicable, the asset group's projected sales for properties with no recently negotiated leases, and a discount rate. In the three months ended September 30, 2021 and 2020, the Company recognized a long-lived impairment charge of $ 0.2 and $ 5.8 million, respectively, which included $ 0.1 and $ 4.6 million, respectively, related to the ROU assets, in the unaudited Condensed Consolidated Statement of Operations. The impairments recorded for the three months ended September 30, 2021 were primarily the result of triggering events identified on certain underperforming salons, salons that were identified to close in the year, and certain salons where franchisees were unable to fulfill their rent obligations. Assessing the long-lived assets for impairment requires management to make assumptions and to apply judgment, which can be affected by economic conditions and other factors that can be difficult to predict. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions it uses to calculate impairment losses for its long-lived assets, including its ROU assets. Our projections of future operating performance do not anticipate future salon closures due to the COVID-19 pandemic. However, the ultimate severity and longevity of the COVID-19 pandemic is unknown, therefore; if actual results are not consistent with the estimates and assumptions used in the calculations, the Company may be exposed to future impairment losses that could be material. 16 As of September 30, 2021, future operating lease commitments, including one renewal option for leases expected to be renewed, to be paid and received by the Company were as follows (in thousands): Fiscal Year Leases for Franchise Salons Leases for Company-owned Salons Corporate Leases Total Operating Lease Payments Sublease Income To Be Received From Franchisees Net Rent Commitments Remainder of 2022 $ 96,767 $ 4,460 $ 2,071 $ 103,298 $ ( 96,767 ) $ 6,531 2023 115,343 4,944 2,365 122,652 ( 115,343 ) 7,309 2024 100,818 3,005 1,486 105,309 ( 100,818 ) 4,491 2025 84,740 1,013 1,525 87,278 ( 84,740 ) 2,538 2026 71,674 566 1,563 73,803 ( 71,674 ) 2,129 Thereafter 177,274 904 6,498 184,676 ( 177,274 ) 7,402 Total future obligations $ 646,616 $ 14,892 $ 15,508 $ 677,016 $ ( 646,616 ) $ 30,400 Less amounts representing interest 79,466 925 2,271 82,662 Present value of lease liabilities $ 567,150 $ 13,967 $ 13,237 $ 594,354 Less current lease liabilities 106,010 5,407 2,168 113,585 Long-term lease liabilities $ 461,140 $ 8,560 $ 11,069 $ 480,769 17 8. FINANCING ARRANGEMENTS: The Company's long-term debt consists of the following: Revolving Credit Facility Maturity Date September 30, 2021 September 30, 2021 June 30, 2021 (Fiscal Year) (Interest rate %) (Dollars in thousands) Revolving credit facility 2023 5.00 % $ 195,805 $ 186,911 At September 30, 2021, cash and cash equivalents totaled $ 45.5 million. As of September 30, 2021, the Company has $ 195.8 million of outstanding borrowings under a $ 293.3 million revolving credit facility. The credit facility decreased $ 1.1 million from $ 294.4 million as of June 30, 2021 in accordance with the bulk sale provisions in the revolving credit facility agreement, due to the sale of secured inventory related to our transition to third-party distribution partners. At September 30, 2021, the Company had outstanding standby letters of credit under the revolving credit facility of $ 15.7 million, primarily related to the Company's self-insurance program. The unused available credit under the revolving credit facility was $ 81.8 million as of September 30, 2021. The Company's liquidity per the agreement includes the unused available balance under the credit facility, unrestricted cash and cash equivalents and the shortfall in the gap in expected proceeds from the sale of salon assets of $ 20.9 million as of September 30, 2021. Total liquidity per the agreement was $ 148.2 million as of September 30, 2021. The revolving credit facility has a minimum liquidity covenant of $ 75.0 million. As of September 30, 2021, the Company had cash, cash equivalents and restricted cash of $ 56.1 million and current liabilities of $ 182.5 million. The Company was in compliance with all covenants and other requirements of the financing arrangements as of September 30, 2021 and believes it will continue to be in compliance for at least one year from the filing date. 18 9. FAIR VALUE MEASUREMENTS: Fair value measurements are categorized into one of three levels based on the lowest level of significant input used: Level 1 (unadjusted quoted prices in active markets); Level 2 (observable market inputs available at the measurement date, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data). Assets and Liabilities Measured at Fair Value on a Recurring Basis As of September 30, 2021 and June 30, 2021, the estimated fair value of the Company's cash, cash equivalents, restricted cash, receivables, inventory, deferred compensation assets and accounts payable approximated their carrying values. The estimated fair values of the Company's debt is based on Level 2 inputs. Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis We measure certain assets, including the Company's equity method investments, tangible fixed and other assets and goodwill, at fair value on a nonrecurring basis when they are deemed to be other than temporarily impaired. The fair values of these assets are determined, when applicable, based on valuation techniques using the best information available, and may include quoted market prices, market comparables and discounted cash flow projections. The following impairments were based on fair values using Level 3 inputs: Three Months Ended September 30, 2021 2020 (Dollars in thousands) Long-lived asset impairment (1) $ 163 $ 5,824 _______________________________________________________________________________ (1) See Note 1 to the unaudited Condensed Consolidated Financial Statements. 19 10. SEGMENT INFORMATION: Segment information is prepared on the same basis that the chief operating decision maker reviews financial information for operational decision-making purposes. Beginning in fiscal year 2022, corporate costs are included within the Franchise segment to reflect how the chief operating decision maker reviews the business. The Company's reportable operating segments consisted of the following salons: September 30, 2021 June 30, 2021 FRANCHISE SALONS: SmartStyle/Cost Cutters in Walmart Stores 1,676 1,666 Supercuts 2,369 2,386 Portfolio Brands 1,391 1,357 Total North American salons 5,436 5,409 Total International salons (1) 151 154 Total Franchise salons 5,587 5,563 as a percent of total Franchise and Company-owned salons 96.9 % 95.3 % COMPANY-OWNED SALONS: SmartStyle/Cost Cutters in Walmart Stores 67 91 Supercuts 24 35 Portfolio Brands 88 150 Total Company-owned salons 179 276 as a percent of total Franchise and Company-owned salons 3.1 % 4.7 % OWNERSHIP INTEREST LOCATIONS: Equity ownership interest locations 77 78 Grand Total, System-wide 5,843 5,917 _______________________________________________________________________________ (1) Canadian and Puerto Rican salons are included in the North American salon totals. As of September 30, 2021, the Franchise operating segment is comprised primarily of Supercuts ® , SmartStyle ® , Cost Cutters ® , First Choice Haircutters ® , Magicuts ® , and Roosters ® concepts and the Company-owned operating segment is comprised primarily of SmartStyle ® , Supercuts ® , Cost Cutters ® , and other regional trade names. 20 Financial information concerning the Company's reportable operating segments is shown in the following tables: Three Months Ended September 30, 2021 Franchise Company-owned Consolidated (Dollars in thousands) Revenues: Royalties $ 16,602 $ — $ 16,602 Fees 3,265 — 3,265 Product sales to franchisees 8,008 — 8,008 Advertising fund contributions 8,114 — 8,114 Franchise rental income 33,762 — 33,762 Company-owned salon revenue — 8,005 8,005 Total revenue 69,751 8,005 77,756 Operating expenses: Cost of product sales to franchisees 8,112 — 8,112 General and administrative 21,243 546 21,789 Rent 1,677 126 1,803 Advertising fund expense 8,114 — 8,114 Franchise rent expense 33,762 — 33,762 Company-owned salon expense — 7,945 7,945 Depreciation and amortization 1,623 246 1,869 Long-lived asset impairment — 163 163 Total operating expenses 74,531 9,026 83,557 Operating loss $ ( 4,780 ) $ ( 1,021 ) $ ( 5,801 ) Three Months Ended September 30, 2020 Franchise Company-owned Consolidated (Dollars in thousands) Revenues: Royalties $ 11,405 $ — $ 11,405 Fees 2,042 — 2,042 Product sales to franchisees 13,742 — 13,742 Advertising fund contributions 4,509 — 4,509 Franchise rental income 32,283 — 32,283 Company-owned salon revenue — 47,415 47,415 Total revenue 63,981 47,415 111,396 Operating expenses: Cost of product sales to franchisees 10,678 — 10,678 General and administrative 23,171 2,977 26,148 Rent 1,279 11,946 13,225 Advertising fund expense 4,510 — 4,510 Franchise rent expense 32,283 — 32,283 Company-owned salon expense — 42,943 42,943 Depreciation and amortization 2,294 5,082 7,376 Long-lived asset impairment 610 5,214 5,824 Total operating expenses 74,825 68,162 142,987 Operating loss $ ( 10,844 ) $ ( 20,747 ) $ ( 31,591 ) 21