10-Q 1 rgs-20221231.htm 10-Q rgs-20221231
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 2022
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from             to       
Commission file number 1-12725
Regis Corporation
(Exact name of registrant as specified in its charter)
Minnesota41-0749934
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
3701 Wayzata Boulevard,MinneapolisMinnesota55416
(Address of principal executive offices)(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to be submit and post such files). Yes ☒ No ☐
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer☐Accelerated filer ☒
Non-accelerated filer☐Smaller reporting company☒
Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes ☐ No ☒  
Title of each classTrading symbolName of exchange
Common Stock, $0.05 par valueRGS NYSE
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of January 26, 2023: 45,564,673

REGIS CORPORATION
 INDEX
 
    
  
   
  
    
  
    
  
    
  
    
  
    
 
    
 
    
 
    
    
 
    
 
    
 
 
    
  


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

REGIS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
(Dollars in thousands, except share data)
 December 31,
2022		June 30,
2022
ASSETS  
Current assets:  
Cash and cash equivalents (Note 7)
$9,406 $17,041 
Receivables, net13,962 14,531 
Inventories, net2,623 3,109 
Other current assets18,138 13,984 
Total current assets44,129 48,665 
Property and equipment, net 8,692 12,835 
Goodwill (Note 1)
173,337 174,360 
Other intangibles, net2,917 3,226 
Right of use asset (Note 8)
430,979 493,749 
Other assets27,622 36,465 
Total assets$687,676 $769,300 
LIABILITIES AND SHAREHOLDERS' DEFICIT  
Current liabilities:  
Accounts payable$17,277 $15,860 
Accrued expenses27,690 33,784 
Short-term lease liability (Note 8)
93,940 103,196 
Total current liabilities138,907 152,840 
Long-term debt, net (Note 9)
174,846 179,994 
Long-term lease liability (Note 8)
352,212 408,445 
Other non-current liabilities53,346 58,974 
Total liabilities719,311 800,253 
Commitments and contingencies (Note 6)
Shareholders' deficit:  
Common stock, $0.05 par value; issued and outstanding, 45,562,555 and 45,510,245 common shares at December 31, 2022 and June 30, 2022, respectively
2,278 2,276 
Additional paid-in capital63,543 62,562 
Accumulated other comprehensive income8,729 9,455 
Accumulated deficit(106,185)(105,246)
Total shareholders' deficit(31,635)(30,953)
Total liabilities and shareholders' deficit$687,676 $769,300 
_______________________________________________________________________________ 
The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.
2

REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
For the Three and Six Months Ended December 31, 2022 and 2021
(Dollars and shares in thousands, except per share amounts)
 Three Months Ended December 31,Six Months Ended December 31,
 2022202120222021
Revenues:
Royalties$16,158 $16,125 $33,338 $32,726 
Fees3,238 3,881 5,791 6,208 
Product sales to franchisees1,107 2,428 1,550 10,436 
Advertising fund contributions7,965 8,021 16,216 16,136 
Franchise rental income (Note 8)
28,886 33,772 59,216 67,534 
Company-owned salon revenue2,613 5,043 5,727 13,048 
Total revenue59,967 69,270 121,838 146,088 
Operating expenses:
Cost of product sales to franchisees1,310 3,117 1,780 10,766 
Inventory reserve1,228 — 1,228 — 
General and administrative11,747 15,082 26,108 35,866 
Rent (Note 8)
2,090 3,042 3,843 4,789 
Advertising fund expense7,965 8,021 16,216 16,136 
Franchise rent expense28,886 33,772 59,216 67,534 
Company-owned salon expense (1)2,218 5,067 5,203 13,011 
Depreciation and amortization3,793 1,605 5,044 3,144 
Long-lived asset impairment— 52 — 215 
Total operating expenses59,237 69,758 118,638 151,461 
Operating income (loss)730 (488)3,200 (5,373)
Other expense:
Interest expense(4,519)(3,270)(8,336)(6,397)
Loss from sale of salon assets to franchisees, net— (615)— (1,695)
Other, net1,248 99 785 (140)
Loss from operations before income taxes(2,541)(4,274)(4,351)(13,605)
Income tax benefit (expense)— 164 (28)213 
Loss from continuing operations(2,541)(4,110)(4,379)(13,392)
Income (loss) from discontinued operations (Note 3)134 (818)3,440 (1,914)
Net loss$(2,407)$(4,928)$(939) $(15,306)
Net loss per share:
Basic and diluted:
Loss from continuing operations$(0.06)$(0.09)$(0.10)$(0.32)
Income (loss) from discontinued operations0.00 (0.02)0.07 (0.05)
Net loss per share, basic and diluted (2)$(0.05)$(0.11)$(0.02)$(0.37)
Weighted average common and common equivalent shares outstanding:
Basic and diluted46,148 45,721 46,091 41,274 
_______________________________________________________________________________
(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 and Six Months Ended December 31, 2022 and 2021
(Dollars in thousands)
 Three Months Ended December 31,Six Months Ended December 31,
 2022202120222021
Net loss$(2,407)$(4,928)$(939)$(15,306)
Foreign currency translation adjustments132 36 (726)(438)
Comprehensive loss$(2,275)$(4,892)$(1,665)$(15,744)
_______________________________________________________________________________ 
 The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.
4

REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT (Unaudited)
For the Three and Six Months Ended December 31, 2022 and 2021
(Dollars in thousands)
Three Months Ended December 31, 2022
 Common StockAdditional
Paid-In
Capital		Accumulated
Other
Comprehensive
Income		Accumulated DeficitTotal
 SharesAmount
Balance, September 30, 202245,536,525 $2,277 $63,044 $8,597 $(103,778)$(29,860)
Net loss— — — — (2,407)(2,407)
Foreign currency translation— — — 132 — 132 
Stock-based compensation— — 524 — — 524 
Net restricted stock activity26,030 1 (25)— — (24)
Balance, December 31, 202245,562,555 $2,278 $63,543 $8,729 $(106,185)$(31,635)
Three Months Ended December 31, 2021
Common StockAdditional
Paid-In
Capital		Accumulated
Other
Comprehensive
Income		Accumulated DeficitTotal
SharesAmount
Balance, September 30, 202143,964,489 $2,198 $58,310 $9,069 $(29,767)$39,810 
Net loss— — — — (4,928)(4,928)
Foreign currency translation— — — 36 — 36 
Issuance of common stock, net of offering costs1,223,314 61 4,931 — — 4,992 
Stock-based compensation— — (1,374)— — (1,374)
Net restricted stock activity302,271 18 (266)— — (248)
Balance, December 31, 202145,490,074 $2,277 $61,601 $9,105 $(34,695)$38,288 
Six Months Ended December 31, 2022
 Common StockAdditional
Paid-In
Capital		Accumulated
Other
Comprehensive
Income		Accumulated DeficitTotal
 SharesAmount
Balance, June 30, 202245,510,245 $2,276 $62,562 $9,455 $(105,246)$(30,953)
Net loss— — — — (939)(939)
Foreign currency translation— — — (726)— (726)
Stock-based compensation— — 1,020 — — 1,020 
Net restricted stock activity52,310 2 (39)— — (37)
Balance, December 31, 202245,562,555 $2,278 $63,543 $8,729 $(106,185)$(31,635)
Six Months Ended December 31, 2021
Common StockAdditional
Paid-In
Capital		Accumulated
Other
Comprehensive
Income		Accumulated DeficitTotal
SharesAmount
Balance, June 30, 202135,795,844 $1,790 $25,102 $9,543 $(19,389)$17,046 
Net loss— — — — (15,306)(15,306)
Foreign currency translation— — — (438)— (438)
Issuance of common stock, net of offering costs9,295,618 465 36,720 — — 37,185 
Stock-based compensation— — 305 — — 305 
Net restricted stock activity398,612 22 (526)— — (504)
Balance, December 31, 202145,490,074 $2,277 $61,601 $9,105 $(34,695)$38,288 
_______________________________________________________________________________ 
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 Six Months Ended December 31, 2022 and 2021
(Dollars in thousands)
 Six Months Ended December 31,
 20222021
Cash flows from operating activities:  
Net loss$(939)$(15,306)
Adjustments to reconcile net loss to cash used in operating activities: 
Gain from sale of OSP (Note 3)(4,034)— 
Depreciation and amortization4,647 3,284 
Long-lived asset impairment— 215 
Deferred income taxes28 (529)
Inventory reserve1,228 — 
Loss from sale of salon assets to franchisees, net— 1,695 
Stock-based compensation1,111 305 
Amortization of debt discount and financing costs1,391 920 
Other non-cash items affecting earnings376 551 
Changes in operating assets and liabilities, excluding the effects of asset sales (1)(10,722)(15,463)
Net cash used in operating activities(6,914)(24,328)
Cash flows from investing activities: 
Capital expenditures(361)(2,947)
Proceeds from sale of OSP, net of fees4,000 — 
Net cash provided by (used in) investing activities3,639 (2,947)
Cash flows from financing activities: 
Borrowings on credit facility11,357 10,000 
Repayments of long-term debt(8,535)(2,734)
Debt refinancing fees(4,383)— 
Proceeds from issuance of common stock, net of offering costs— 37,185 
Taxes paid for shares withheld(35)(823)
Net cash (used in) provided by financing activities(1,596)43,628 
Effect of exchange rate changes on cash and cash equivalents(135)(134)
(Decrease) increase in cash, cash equivalents, and restricted cash(5,006)16,219 
Cash, cash equivalents and restricted cash: 
Beginning of period27,464 29,152 
End of period$22,458 $45,371 
_______________________________________________________________________________        
(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 December 31, 2022 and for the three and six months ended December 31, 2022 and 2021, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of December 31, 2022 and its consolidated results of operations, comprehensive loss, 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, 2022 and other documents filed or furnished with the SEC during the current fiscal year.
Inventories:
The Company has inventory valuation reserves for excess and obsolete inventories or other factors that may render inventories unmarketable at their historical costs. The Company exited its distribution centers in fiscal year 2022 and now stores inventory at a third-party facility. To facilitate the exit of the distribution centers, the Company sold inventory at discounts. The inventory valuation reserve as of December 31, 2022 and June 30, 2022 was $1.9 and $1.9 million, respectively. In the three and six months ended December 31, 2022, an inventory reserve charge of $1.2 million was recorded in Inventory reserve on the unaudited Condensed Consolidated Statement of Operations. In the three and six months ended December 31, 2021, an inventory reserve charge of $1.2 and $1.5 million, respectively, was recorded in Company-owned salon expense on the unaudited Condensed Consolidated Statement of Operations.
As of December 31, 2022 and June 30, 2022, the Company had inventory related to discontinued operations of $1.3 and $1.8 million, respectively, net of a reserve of $1.3 and $1.1 million, respectively. The increase in the reserve during fiscal year 2023 reduced the gain from discontinued operations. See Note 3 to the unaudited Condensed Consolidated Financial Statements.
Goodwill:
As of December 31, 2022 and June 30, 2022, the Franchise reporting unit had $173.3 and $174.4 million, respectively, of goodwill. The change in goodwill for the six months ended December 31, 2022 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 and six months ended December 31, 2022.
Depreciation:
Depreciation expense in the three months ended December 31, 2022 and 2021 includes $0.2 and $0.3 million, respectively, and for the six months ended December 31, 2022 and 2021 includes $0.4 and $0.6 million, respectively, of asset retirement obligations, which are cash expenses. Depreciation expense in the three and six months ended December 31, 2022 includes a $2.6 million accelerated depreciation charge related to the consolidation of office space within the Company's corporate headquarters.
7

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 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 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.
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:
December 31,
2022		June 30,
2022		Balance Sheet Classification
(Dollars in thousands)
Receivables from contracts with customers, net$9,419 $10,263 Receivables, net
Broker fees14,006 15,592 Other assets
Deferred revenue:
     Current
Gift card liability$1,950 $2,037 Accrued expenses
Deferred franchise fees open salons5,533 5,770 Accrued expenses
Total current deferred revenue$7,483 $7,807 
     Non-current
Deferred franchise fees unopened salons$2,664 $3,211 Other non-current liabilities
Deferred franchise fees open salons23,963 26,827 Other non-current liabilities
Total non-current deferred revenue$26,627 $30,038 
8

Receivables relate primarily to payments due for royalties, advertising fees, rent, 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:
Six Months Ended December 31,
20222021
(Dollars in thousands)
Balance at beginning of period$6,559 $7,774 
Provision for doubtful accounts369 (41)
Provision for franchisee rent (1)(208)811 
Reclass of accrued rent (2)73 396 
Write-offs(1,129)(589)
Balance at end of period$5,664 $8,351 
_______________________________________________________________________________
(1)The provision for franchisee rent is recognized as rent in the unaudited Condensed Consolidated Statement of Operations.
(2)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 years 2023 and 2022 and the related accrual were 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. The following table is a rollforward of the broker fee balance for the periods indicated:
Six Months Ended December 31,
20222021
(Dollars in thousands)
Balance at beginning of period$15,592 $19,254 
Additions— 25 
Amortization(1,586)(1,625)
Write-offs— (366)
Balance at end of period$14,006 $17,288 
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 December 31, 2022 and 2021 was $1.7 and $1.6 million, respectively, and for the six months ended December 31, 2022 and 2021 was $3.2 and $3.2 million, respectively. Estimated revenue expected to be recognized in the future related to deferred franchise fees for open salons as of December 31, 2022 is as follows (in thousands):
Remainder of 2023$2,766 
20245,378 
20254,986 
20264,521 
20274,058 
Thereafter7,787 
Total$29,496 
9

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 in the six months ended December 31, 2022, received an additional $4.5 million in proceeds, net of a $0.5 million transaction fee. As a result of the sale, the Company classified the OSP business as discontinued operations in the financial statements for all periods presented. No income taxes have been allocated to discontinued operations based on the methodology required by accounting for income taxes guidance.
The following summarizes the results of discontinued operations for the periods presented:
Three Months Ended December 31,Six Months Ended December 31,
2022202120222021
(Dollars in thousands)
Discontinued operations:
OSP fees$— $986 $(226)$1,924 
Cost of product sales to franchisees— (302)— (766)
General and administrative— (902)(27)(1,907)
Rent26 (46)(341)(102)
Depreciation and amortization— (375)— (705)
Interest expense— (179)— (358)
Gain from sale of OSP 108 — 4,034 — 
Gain (loss) from OSP discontinued operations, net$134 $(818)$3,440 $(1,914)
10

4.    SHAREHOLDERS' EQUITY:
Stock-Based Employee Compensation:
During the three and six months ended December 31, 2022, the Company granted various equity awards including stock options and stock appreciation rights as follows:
Three Months Ended December 31, 2022Six Months Ended December 31, 2022
Stock options (SOs)615,000 1,600,000 
Stock appreciation rights (SARs)— 600,000 
The SOs and SARs granted during the three and six months ended December 31, 2022 vest in equal amounts over a one or three-year period subsequent to the grant date.
Total compensation cost for stock-based payment arrangements totaling $0.6 and $(1.4) million for the three months ended December 31, 2022 and 2021, respectively, and $1.1 and $0.3 million for the six months ended December 31, 2022 and 2021, respectively, were recorded within general and administrative expense on the unaudited Condensed Consolidated Statement of Operations. In the three and six months ended December 31, 2021, stock compensation includes a benefit related to executive forfeitures of $2.0 million.
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 six months ended December 31, 2022, the Company did not issue any shares. During the six months ended December 31, 2021, the Company issued 9.3 million shares and received net proceeds of $37.2 million. As of December 31, 2022, $11.6 million remains under the prospectus supplement, which equates to 9.5 million shares based on the share price as of December 31, 2022.
11

5.     INCOME TAXES:
 A summary of income tax benefit (expense) and corresponding effective tax rates is as follows:
Three Months Ended December 31,Six Months Ended December 31,
2022202120222021
(Dollars in thousands)
Income tax benefit (expense)$— $164 $(28)$213 
Effective tax rate— %3.8 %(0.6)%1.6 %
The recorded tax provision and effective tax rates for the three and six months ended December 31, 2022 and 2021 were different than what would normally be expected, primarily due to the impact of the deferred tax valuation allowance.
On August 16, 2022, the Inflation Reduction Act (the IRA) was signed into law. The IRA contains a number of tax related provisions, including a 15% minimum corporate income tax on certain large corporations, as well as an excise tax on stock repurchases. The Company has evaluated the IRA and does not expect it to have a material impact on the Company's consolidated financial statements.
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.
During the three and six months ended December 31, 2022, the Company recorded $0.4 and $0.9 million, respectively, of expense related to litigation, and $0.6 and $1.1 million was paid during the three and six months ended December 31, 2022, respectively.
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. As of December 31, 2022, the Company has made all payments under the 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.
12

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 Sheet to the amount of cash, cash equivalents and restricted cash reported on the unaudited Condensed Consolidated Statement of Cash Flows:
December 31,
2022		June 30,
2022
(Dollars in thousands)
Cash and cash equivalents$9,406 $17,041 
Restricted cash, included in other current assets (1)13,052 10,423 
Total cash, cash equivalents and restricted cash $22,458 $27,464 
_______________________________________________________________________________
(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 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:
Three Months Ended December 31,Six Months Ended December 31,
2022202120222021
(Dollars in thousands)
Office and warehouse rent $834 $1,202 $1,706 $2,815 
Lease termination expense (1)848 238 1,306 1,578 
Lease liability benefit (2)(615)(496)(1,217)(2,927)
Franchise salon rent (3)9 246 (44)575 
Company-owned salon rent1,014 1,852 2,092 2,748 
Total$2,090 $3,042 $3,843 $4,789 
_______________________________________________________________________________
(1)During the three and six months ended December 31, 2022, the Company incurred costs of $0.8 and $1.3 million, respectively, to exit salons before the lease end date in order to relieve the Company of future lease obligations. During the three months ended December 31, 2021, the Company incurred costs of $0.2 million to exit salons before the lease end date to relieve the Company of future lease obligations. During the six months ended December 31, 2021, the Company paid $0.9 million to exit its distribution centers before the lease end dates and incurred costs of $0.7 million to exit salons before the lease end dates in order to relieve the Company of future lease obligations.
(2)Upon termination of previously impaired leases, the Company derecognizes the corresponding ROU assets and lease liabilities, which results in a net gain. In addition, the Company recognizes a benefit from lease liabilities decreasing in excess of previously impaired ROU assets for ongoing leases that were previously impaired.
(3)Franchise salon rent in fiscal year 2023 includes the benefit of incurring less cost to terminate a lease than estimated.
The Company leases salon premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees. All lease-related costs are passed through to the franchisees. The Company records the rental payments due from franchisees as franchise rental income and the corresponding amounts owed to landlords as franchise rent expense on the unaudited Condensed Consolidated Statement of Operations. For the three months ended December 31, 2022 and 2021, franchise rental income and franchise rent expense were $28.9 and $33.8 million, respectively, and $59.2 and $67.5 million, respectively, for the six months ended December 31, 2022 and 2021. 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.
14

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 any 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 5.77 and 6.02 years and the weighted average discount rate was 4.34% and 4.25% for all salon operating leases as of December 31, 2022 and June 30, 2022, 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 in fiscal years 2023 and 2022 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.
In the three and six months ended December 31, 2022, the Company did not recognize long-lived asset impairment charges related to ROU assets in the unaudited Condensed Consolidated Statement of Operations. In the three and six months ended December 31, 2021, the Company recognized long-lived asset impairment charges of $0.1 and $0.2 million, respectively, primarily related to ROU assets in the unaudited Condensed 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 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.
15

As of December 31, 2022, future operating lease commitments, including one renewal option for leases expected to be renewed, to be paid and received by the Company were as follows (in thousands):
Fiscal YearLeases for Franchise SalonsLeases for Company-owned SalonsCorporate LeasesTotal Operating Lease PaymentsSublease Income to be Received from FranchiseesNet Rent Commitments
Remainder of 2023$54,914 $1,292 $1,061 $57,267 $(54,914)$2,353 
202499,860 1,617 1,301 102,778 (99,860)2,918 
202583,570 536 1,334 85,440 (83,570)1,870 
202669,825 290 1,367 71,482 (69,825)1,657 
202759,363 63 1,401 60,827 (59,363)1,464 
Thereafter122,479 36 4,417 126,932 (122,479)4,453 
Total future obligations$490,011 $3,834 $10,881 $504,726 $(490,011)$14,715 
Less amounts representing interest56,953 121 1,500 58,574 
Present value of lease liability$433,058 $3,713 $9,381 $446,152 
Less short-term lease liability90,342 2,246 1,352 93,940 
Long-term lease liability$342,716 $1,467 $8,029 $352,212 
16

9.    FINANCING ARRANGEMENTS:
The Company's debt consists of the following:
 Maturity DateDecember 31,
2022		December 31,
2022		June 30,
2022
 (Fiscal Year)(Interest rate %)(Dollars in thousands)
Term loan20268.21%$173,816 $— 
Deferred financing fees(7,970)— 
Term loan, net$165,846 $— 
Revolving credit facility20268.21%9,000 179,994 
Total long-term debt, net$174,846 $179,994 
In August of 2022, the Company amended its credit agreement. The amendment, among other things, converted $180.0 million of the previous $295.0 million revolving credit facility to a new term loan, reduced commitments under the revolving credit facility to $55.0 million, and extended the term of the credit facility from March 26, 2023 to August 31, 2025, with no scheduled amortization prior to maturity. The amendment is accounted for as a modification of debt and any unamortized financing fees that existed at the date of the amendment and new financing fees incurred are amortized through the extended term of the credit facility. At December 31, 2022, the Company had outstanding standby letters of credit under the revolving credit facility of $11.8 million, primarily related to the Company's self-insurance program. As of December 31, 2022, total liquidity and available credit under the revolving credit facility, as defined by the agreement, were $43.7 and $34.3 million, respectively. As of December 31, 2022, the Company had cash and cash equivalents of $9.4 million and current liabilities of $138.9 million. The agreement utilizes an interest rate margin that is subject to annual increases. The margin applicable to term secured overnight financing rate (SOFR) loans is currently 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 agreement contains typical provisions and financial covenants regarding minimum EBITDA, maximum leverage and minimum fixed-charge coverage and a mini