Item 1. Financial Statements
Item 1. Financial Statements
REGIS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
As of September 30, 2023 and June 30, 2023
(Dollars in thousands, except per share data)
September 30,
2023 June 30,
2023
ASSETS
Current assets:
Cash and cash equivalents (Note 7)
$ 9,298 $ 9,508
Receivables, net 9,697 10,885
Inventories, net 1,011 1,681
Other current assets 14,628 15,164
Total current assets 34,634 37,238
Property and equipment, net 6,336 6,422
Goodwill (Note 1)
173,291 173,791
Other intangibles, net 2,691 2,783
Right of use asset (Note 8)
337,481 360,836
Other assets 25,737 26,307
Total assets $ 580,170 $ 607,377
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 13,069 $ 14,309
Accrued expenses 26,142 30,109
Short-term lease liability (Note 8)
78,006 81,917
Total current liabilities 117,217 126,335
Long-term debt, net (Note 9)
179,732 176,830
Long-term lease liability (Note 8)
271,942 291,901
Other non-current liabilities 46,543 49,041
Total liabilities 615,434 644,107
Commitments and contingencies (Note 6)
Shareholders' deficit:
Common stock, $ 0.05 par value; issued and outstanding, 45,579,248 and 45,566,228 common shares at September 30, 2023 and June 30, 2023, respectively
2,279 2,278
Additional paid-in capital 65,160 64,600
Accumulated other comprehensive income 8,734 9,023
Accumulated deficit ( 111,437 ) ( 112,631 )
Total shareholders' deficit ( 35,264 ) ( 36,730 )
Total liabilities and shareholders' deficit $ 580,170 $ 607,377
_______________________________________________________________________________
The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.
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REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Three Months Ended September 30, 2023 and 2022
(Dollars and shares in thousands, except per share amounts)
Three Months Ended September 30,
2023 2022
Revenues:
Royalties $ 16,528 $ 17,180
Fees 2,631 2,553
Product sales to franchisees 384 443
Advertising fund contributions 7,226 8,251
Franchise rental income (Note 8)
24,667 30,330
Company-owned salon revenue 1,936 3,114
Total revenue 53,372 61,871
Operating expenses:
Cost of product sales to franchisees 359 470
General and administrative 10,729 14,361
Rent (Note 8)
1,097 1,753
Advertising fund expense 7,226 8,251
Franchise rent expense 24,667 30,330
Company-owned salon expense (1) 1,490 2,985
Depreciation and amortization 370 1,251
Total operating expenses 45,938 59,401
Operating income 7,434 2,470
Other expense:
Interest expense ( 6,188 ) ( 3,817 )
Other, net ( 200 ) ( 463 )
Income (loss) from operations before income taxes 1,046 ( 1,810 )
Income tax benefit (expense) 148 ( 28 )
Income (loss) from continuing operations 1,194 ( 1,838 )
Income from discontinued operations (Note 3) — 3,306
Net income $ 1,194 $ 1,468
Net income per share:
Basic:
Income (loss) from continuing operations 0.03 ( 0.04 )
Income from discontinued operations 0.00 0.07
Net income per share, basic (2) $ 0.03 $ 0.03
Diluted:
Income (loss) from continuing operations 0.03 ( 0.04 )
Income from discontinued operations 0.00 0.07
Net income per share, diluted (2) $ 0.03 $ 0.03
Weighted average common and common equivalent shares outstanding:
Basic 46,640 46,054
Diluted 47,243 46,054
_______________________________________________________________________________
(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.
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REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
For the Three Months Ended September 30, 2023 and 2022
(Dollars in thousands)
Three Months Ended September 30,
2023 2022
Net income $ 1,194 $ 1,468
Foreign currency translation adjustments ( 289 ) ( 858 )
Comprehensive income $ 905 $ 610
_______________________________________________________________________________
The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.
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REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT (Unaudited)
For the Three Months Ended September 30, 2023 and 2022
(Dollars in thousands)
Three Months Ended September 30, 2023
Common Stock Additional
Paid-In
Capital Accumulated
Other
Comprehensive
Income Accumulated Deficit Total
Shares Amount
Balance, June 30, 2023 45,566,228 $ 2,278 $ 64,600 $ 9,023 $ ( 112,631 ) $ ( 36,730 )
Net income — — — — 1,194 1,194
Foreign currency translation — — — ( 289 ) — ( 289 )
Stock-based compensation — — 567 — — 567
Net restricted stock activity 13,020 1 ( 7 ) — — ( 6 )
Balance, September 30, 2023 45,579,248 $ 2,279 $ 65,160 $ 8,734 $ ( 111,437 ) $ ( 35,264 )
Three Months Ended September 30, 2022
Common Stock Additional
Paid-In
Capital Accumulated
Other
Comprehensive
Income Accumulated Deficit Total
Shares Amount
Balance, June 30, 2022 45,510,245 $ 2,276 $ 62,562 $ 9,455 $ ( 105,246 ) $ ( 30,953 )
Net income — — — — 1,468 1,468
Foreign currency translation — — — ( 858 ) — ( 858 )
Stock-based compensation — — 496 — — 496
Net restricted stock activity 26,280 1 ( 14 ) — — ( 13 )
Balance, September 30, 2022 45,536,525 $ 2,277 $ 63,044 $ 8,597 $ ( 103,778 ) $ ( 29,860 )
_______________________________________________________________________________
The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.
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REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Three Months Ended September 30, 2023 and 2022
(Dollars in thousands)
Three Months Ended September 30,
2023 2022
Cash flows from operating activities:
Net income $ 1,194 $ 1,468
Adjustments to reconcile net income to cash used in operating activities:
Gain from sale of OSP (Note 3) — ( 3,927 )
Depreciation and amortization 375 1,035
Deferred income taxes ( 59 ) 28
Non-cash interest 640 —
Stock-based compensation 630 531
Amortization of debt discount and financing costs 747 648
Other non-cash items affecting earnings 238 481
Changes in operating assets and liabilities, excluding the effects of asset sales (1) ( 6,589 ) ( 5,321 )
Net cash used in operating activities ( 2,824 ) ( 5,057 )
Cash flows from investing activities:
Capital expenditures ( 163 ) ( 184 )
Proceeds from sale of OSP, net of fees — 3,500
Net cash (used in) provided by investing activities ( 163 ) 3,316
Cash flows from financing activities:
Borrowings on credit facility 2,000 6,357
Repayments of long-term debt ( 162 ) ( 5,801 )
Debt refinancing fees ( 152 ) ( 4,341 )
Taxes paid for shares withheld ( 6 ) ( 13 )
Net cash provided by (used in) financing activities 1,680 ( 3,798 )
Effect of exchange rate changes on cash and cash equivalents ( 42 ) ( 166 )
Decrease in cash, cash equivalents, and restricted cash ( 1,349 ) ( 5,705 )
Cash, cash equivalents and restricted cash:
Beginning of period 21,396 27,464
End of period $ 20,047 $ 21,759
_______________________________________________________________________________
(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.
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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, 2023 and for the three months ended September 30, 2023 and 2022, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of September 30, 2023 and its consolidated results of operations, comprehensive income, shareholders' deficit 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, 2023 and other documents filed or furnished with the SEC during the current fiscal year.
Goodwill:
As of September 30, 2023 and June 30, 2023, the Franchise reporting unit had $ 173.3 and $ 173.8 million, respectively, of goodwill. The change in goodwill for the three months ended September 30, 2023 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 value. An interim impairment analysis was not required in the three months ended September 30, 2023.
Depreciation:
Depreciation expense in the three months ended September 30, 2023 and 2022 includes $ 0.0 and $ 0.2 million, respectively, of asset retirement obligations, which are cash expenses.
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2. REVENUE RECOGNITION:
Revenue Recognition and Deferred Revenue:
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 Statements 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 opens 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 and has no impact on net income.
Revenue recognized at point of sale
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. Product sales to franchisees and other partners are recorded at the time product is delivered.
Information about receivables, broker fees and deferred revenue subject to the current revenue recognition guidance is as follows:
September 30,
2023 June 30,
2023 Balance Sheet Classification
(Dollars in thousands)
Receivables from contracts with customers, net $ 6,426 $ 5,683 Receivables, net
Broker fees 11,623 12,471 Other assets
Deferred revenue:
Current
Gift card liability $ 1,764 $ 1,823 Accrued expenses
Deferred franchise fees open salons 5,175 5,325 Accrued expenses
Total current deferred revenue $ 6,939 $ 7,148
Non-current
Deferred franchise fees unopened salons $ 2,217 $ 2,312 Other non-current liabilities
Deferred franchise fees open salons 19,323 20,839 Other non-current liabilities
Total non-current deferred revenue $ 21,540 $ 23,151
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Receivables relate primarily to payments due for royalties, advertising fees and rent. The receivables balance is presented net of an allowance for expected losses (i.e., doubtful accounts). Provisions for credit losses are recorded based on management’s judgment regarding our ability to collect as well as the age of the receivables. Receivable are written off when they are deemed uncollectible. The following table is a rollforward of the allowance for doubtful accounts for the periods indicated:
Three Months Ended September 30,
2023 2022
(Dollars in thousands)
Balance at beginning of period $ 7,297 $ 6,559
Provision for doubtful accounts 211 461
Provision for franchisee rent 167 19
Recoveries ( 237 ) —
Write-offs ( 991 ) ( 725 )
Reclass of accrued rent (1) — 60
Other (2) ( 56 ) —
Balance at end of period $ 6,391 $ 6,374
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(1) The reclass of accrued rent represents franchisee rent obligations guaranteed by the Company that were unbilled and deemed unrecoverable as of June 30, 2022, and subsequently billed, so the related accruals were reclassified to allowance for doubtful accounts.
(2) Includes currency fluctuation.
The Company offers financing to Smartstyle franchisees when they remodel their salons. Included in Other assets is a receivable of $ 0.9 million, partially offset by a credit loss reserve of $ 0.2 million, related to this financing program.
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:
Three Months Ended September 30,
2023 2022
(Dollars in thousands)
Balance at beginning of period $ 12,471 $ 15,592
Additions — —
Amortization ( 739 ) ( 827 )
Write-offs ( 109 ) —
Balance at end of period $ 11,623 $ 14,765
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, 2023 and 2022 was $ 1.7 and $ 1.5 million, respectively. Estimated revenue expected to be recognized in the future related to deferred franchise fees for open salons as of September 30, 2023 is as follows (dollars in thousands):
Remainder of 2024 $ 3,881
2025 4,889
2026 4,420
2027 3,959
2028 3,276
Thereafter 4,073
Total $ 24,498
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3. DISCONTINUED OPERATIONS:
On June 30, 2022, the Company sold its Opensalon ® Pro (OSP) solution to Soham Inc. The Company received $ 13.0 million in proceeds in June 2022 and received $ 5.0 million in fiscal year 2023, offset by a $ 0.5 million transaction fee. As a result of the sale, the Company classified the OSP business as discontinued operations in the financial statements for all periods presented. No income taxes have been allocated to discontinued operations based on the methodology required by accounting for income taxes guidance.
The following summarizes the results of discontinued operations for the periods presented:
Three Months Ended September 30,
2023 2022
(Dollars in thousands)
Discontinued operations:
OSP fees $ — $ ( 226 )
General and administrative — ( 27 )
Rent — ( 368 )
Gain from sale of OSP — 3,927
Income from OSP discontinued operations, net $ — $ 3,306
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4. SHAREHOLDERS' DEFICIT:
Stock-Based Employee Compensation:
During the three months ended September 30, 2023, the Company granted restricted stock units as follows:
Three Months Ended September 30, 2023
Restricted stock units (RSUs) 259,403
The RSUs granted during the three months ended September 30, 2023, vest in equal amounts over a three-year period subsequent to the grant date.
Total compensation cost for stock-based payment arrangements totaling $ 0.6 and $ 0.5 million for the three months ended September 30, 2023 and 2022, respectively, was recorded within general and administrative on the unaudited Condensed Consolidated Statements of Operations.
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, 2023 and 2022, the Company did no t issue any shares. As of September 30, 2023, $ 11.6 million remains under the prospectus supplement, which equates to 16.5 million shares based on the share price as of September 30, 2023.
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5. INCOME TAXES:
A summary of the income tax benefit (expense) and corresponding effective tax rates is as follows:
Three Months Ended September 30,
2023 2022
(Dollars in thousands)
Income tax benefit (expense) $ 148 $ ( 28 )
Effective tax rate ( 14.1 ) % ( 1.5 ) %
The recorded tax provision and effective tax rate for the three months ended September 30, 2023 and 2022 were different than what would normally be expected, primarily due to the impact of the deferred tax valuation allowance.
With limited exceptions, due to net operating loss carryforwards, our federal, state and foreign tax returns are open to examination for all years since 2014, 2012 and 2016, respectively.
6. COMMITMENTS AND CONTINGENCIES:
The Company is a plaintiff or defendant in various lawsuits and claims arising out of the normal course of business. Like certain other franchisors, the Company has faced allegations of franchise regulation and agreement violations. Additionally, because the Company may be the tenant under a master lease for a location subleased to a franchisee, the Company has faced allegations of nonpayment of rent and associated charges. Further, similar to other large retail employers, the Company has faced, and may continue to face, 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 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.
The Company owns a majority stake in Empire Education Group Inc. (EEG). To be eligible to participate in Title IV programs, the schools operated by EEG must comply with specific standards and procedures set forth in the Higher Education Act and the regulations issued thereunder by the Department of Education. On October 10, 2023, the Department of Education issued a final rule applicable to “gainful employment” programs, which under the Higher Education Act, include all programs offered by the Empire Education Group schools and other proprietary institutions. Under this final rule, which becomes effective July 1, 2024, the continued Title IV eligibility of such programs will be based on meeting both a debt-to-earnings metric and an earnings premium metric. A program that fails either metric in a single year will be required to provide warnings to current and prospective students that it could be at risk of losing Title IV program eligibility. A program that fails to meet the same metric twice in a three-year period will lose Title IV program eligibility. The first measurement will be assessed in fiscal year 2025. Upon a loss of institutional or programmatic eligibility, EEG’s students would lose access to Title IV program funds and that could be detrimental to EEG's business model. Additionally, EEG students who are unable to complete their educational program with EEG, or who do not accept a teach-out opportunity with another institution, may be eligible for discharges of their federal student loan debt. Those discharged loan amounts and other Title IV funds disbursed to EEG students that do not complete their program, as well as other Title IV program funds, may constitute liabilities to the Department of Education. Because the Company holds a majority ownership interest in EEG and is a co-signatory to the Title IV program participation agreements of the EEG schools with the Department of Education, the Department of Education could hold the Company responsible for EEG's Title IV program liabilities. As of September 30, 2023, EEG had $ 8.7 million of Title IV liabilities. If EEG is unable to meet the required metrics for gainful employment programs and subsequently unable to allow students to complete their programs, then it is possible the Company could be liable for all or some of the Title IV liabilities. The Company does not believe that it is probable that it would be liable for a material portion of these liabilities because there is time for EEG to reduce its exposure to these liabilities and therefore has not recorded any accrual for this potential liability.
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7. 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 Sheets to the amount of cash, cash equivalents and restricted cash reported on the unaudited Condensed Consolidated Statements of Cash Flows:
September 30,
2023 June 30,
2023
(Dollars in thousands)
Cash and cash equivalents $ 9,298 $ 9,508
Restricted cash, included in other current assets (1) 10,749 11,888
Total cash, cash equivalents and restricted cash $ 20,047 $ 21,396
_______________________________________________________________________________
(1) Restricted cash within other current assets primarily relates to consolidated advertising cooperatives funds, which can only be used to settle obligations of the respective cooperatives, and contractual obligations to collateralize the Company's self-insurance programs.
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8. 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 its corporate facilities under operating leases. The original terms 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:
Three Months Ended September 30,
2023 2022
(Dollars in thousands)
Office rent $ 825 $ 872
Lease termination (benefit) expense ( 13 ) 458
Lease liability benefit (1) ( 128 ) ( 602 )
Franchise salon rent (2) ( 337 ) ( 53 )
Company-owned salon rent 750 1,078
Total $ 1,097 $ 1,753
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(1) 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.
(2) The credit in franchise salon rent is related to settlements with landlords for less than previously accrued.
The Company leases salon premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees. All lease-related costs are passed through to the franchisees. The Company records the rental payments due from franchisees as franchise rental income and the corresponding amounts owed to landlords as franchise rent expense on the unaudited Condensed Consolidated Statements of Operations. For the three months ended September 30, 2023 and 2022, franchise rental income and franchise rent expense were $ 24.7 and $ 30.3 million, respectively. These leases generally have lease terms of approximately five years . The Company expects to renew the SmartStyle ® master lease and some leases for locations subleased to our franchisees upon expiration of those leases. Other leases are expected to be renewed by the franchisee upon expiration.
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All the Company's leases are 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 accrued lease payments and unamortized lease incentives received, if any. 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 5.65 years and 5.52 years and the weighted average discount rate was 4.60 % and 4.55 % for all salon operating leases as of September 30, 2023 and June 30, 2023, respectively.
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As of September 30, 2023, 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 (dollars 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 2024 $ 68,629 $ 1,044 $ 978 $ 70,651 $ ( 68,629 ) $ 2,022
2025 77,882 674 1,334 79,890 ( 77,882 ) 2,008
2026 64,605 454 1,367 66,426 ( 64,605 ) 1,821
2027 54,830 229 1,401 56,460 ( 54,830 ) 1,630
2028 46,254 218 1,436 47,908 ( 46,254 ) 1,654
Thereafter 70,459 56 2,981 73,496 ( 70,459 ) 3,037
Total future obligations $ 382,659 $ 2,675 $ 9,497 $ 394,831 $ ( 382,659 ) $ 12,172
Less amounts representing interest 43,445 208 1,230 44,883
Present value of lease liability $ 339,214 $ 2,467 $ 8,267 $ 349,948
Less short-term lease liability 75,885 1,132 989 78,006
Long-term lease liability $ 263,329 $ 1,335 $ 7,278 $ 271,942
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9. FINANCING ARRANGEMENTS:
The Company's debt consists of the following:
Maturity Date September 30,
2023 September 30,
2023 June 30,
2023
(Fiscal Year) (Interest rate %) (Dollars in thousands)
Term loan 2026 9.69 % $ 172,106 $ 172,268
Deferred financing fees ( 6,406 ) ( 6,471 )
Term loan, net $ 165,700 $ 165,797
Revolving credit facility 2026 9.69 % 12,000 10,000
Paid-in-kind interest 2,032 1,033
Total long-term debt, net $ 179,732 $ 176,830
The Company's credit facility matures in August 2025. In addition to a $ 10.0 million minimum liquidity covenant, the amended credit agreement includes typical provisions and financial covenants, including minimum EBITDA, leverage and fixed-charge coverage ratio covenants, the latter two of which are not tested until December 31, 2023. The agreement utilizes an interest rate margin that is subject to annual increases. The margin applicable to term secured overnight financing rate (SOFR) loans was 3.875 % through March 27, 2023. Effective March 27, 2023, the margin increased to 6.25 %, of which 4.25 % is paid currently in cash and 2.00 % is 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. Interest expense is recorded based on a weighted average effective interest rate method. The significant assumptions used in the weighted average estimate are the future SOFR rates and debt balance, as well as the length of time the debt will be outstanding. Cash interest paid in the three months ended September 30, 2023 and 2022 was $ 4.8 and $ 3.2 million, respectively.
At September 30, 2023, the Company had outstanding standby letters of credit under the revolving credit facility of $ 9.8 million, primarily related to the Company's self-insurance program. As of September 30, 2023, total liquidity and available credit under the revolving credit facility, as defined by the agreement, were $ 42.4 and $ 33.1 million, respectively. As of September 30, 2023, the Company had cash and cash equivalents of $ 9.3 million and current liabilities of $ 117.2 million.
The Company was in compliance with its covenants and other requirements of the financing arrangements as of September 30, 2023.
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10. 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, 2023 and June 30, 2023, the estimated fair value of the Company's cash, cash equivalents, restricted cash, receivables, inventory, deferred compensation assets, accounts payable and debt 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.
11. EARNINGS PER SHARE:
The Company's basic earnings per share is calculated as net income divided by weighted average common shares outstanding, excluding unvested outstanding stock options (SOs), 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. The computation of weighted average shares outstanding, assuming dilution, excluded 4,176,371 and 3,211,485 of stock-based awards during the three months ended September 30, 2023 and 2022, respectively, as they were not dilutive under the treasury stock method.
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12. SEGMENT INFORMATION:
Segment information is prepared on the same basis that the chief operating decision maker (CODM) reviews financial information for operational decision-making purposes. The Company's reportable operating segments consisted of the following salons:
September 30,
2023 June 30,
2023
FRANCHISE SALONS:
Supercuts
2,060 2,082
SmartStyle/Cost Cutters in Walmart Stores
1,373 1,388
Portfolio Brands
1,210 1,223
Total North American salons
4,643 4,693
Total International salons (1)
102 102
Total Franchise salons
4,745 4,795
as a percent of total Franchise and Company-owned salons
98.6 % 98.6 %
COMPANY-OWNED SALONS:
Supercuts
7 7
SmartStyle/Cost Cutters in Walmart Stores
48 48
Portfolio Brands
11 13
Total Company-owned salons
66 68
as a percent of total Franchise and Company-owned salons
1.4 % 1.4 %
Total Franchise and Company-owned salons
4,811 4,863
_______________________________________________________________________________
(1) Canadian and Puerto Rican salons are included in the North American salon totals.
20
Financial information concerning the Company's reportable operating segments is shown in the table below. Segment information is presented in the same way that the Company internally organizes the business for assessing performance and making decisions regarding allocation of resources. In the second quarter of fiscal year 2023, the Company revised its internal reporting such the CODM’s primary measures of segment performance are revenue and segment adjusted EBITDA. Revenue and segment adjusted EBITDA are regularly reviewed by the CODM to make decisions about resources to be allocated to the segments, assess current performance and forecast future performance. Asset information by segment is not provided to the CODM. Segment adjusted EBITDA is defined as income from continuing operations before interest, income taxes, depreciation, amortization and impairment. C onsistent with our internal management reporting, unallocated expenses include certain items impacting comparability. These unallocated items are not defined terms within U.S. GAAP. They are based on how management views the business, makes financial, operating and planning decisions and evaluates the Company's ongoing performance and are not attributable to either segment. Unallocated fees include one-time professional fees and settlements, severance expense, the benefit from lease liability decreases in excess of previously impaired ROUA, lease termination fees and asset retirement obligation costs.
Three Months Ended September 30,
2023 2022
(Dollars in thousands)
Revenues:
Franchise $ 51,436 $ 58,757
Company-owned 1,936 3,114
Total revenue 53,372 61,871
Segment adjusted EBITDA:
Franchise 7,960 4,993
Company-owned ( 497 ) ( 1,169 )
Total 7,463 3,824
Unallocated expenses 141 ( 566 )
Depreciation and amortization ( 370 ) ( 1,251 )
Interest expense ( 6,188 ) ( 3,817 )
Income tax benefit (expense) 148 ( 28 )
Income from discontinued operations — 3,306
Total net income $ 1,194 $ 1,468
21
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.