What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2020-11-02 compared with 2020-06-18 · 201 added, 323 removed, 376 unchanged (58% of the section changed)

3 unchanged sentences

(Dollars in thousands, except share data)

September 30,

2020 June 30,

7 unchanged sentences

Goodwill (Note 9) 227,896 227,457

Other intangibles, net (Note 9) 7,568 8,761

Other intangibles, net 4,500 4,579

Right of use asset (Note 10) 728,464 786,216

Other assets 42,337 40,934

Non-current assets held for sale (Note 1) — 5,276

Total assets $ 1,251,828 $ 1,342,794

5 unchanged sentences

Total current liabilities 236,309 237,014

Long-term debt, net 273,000 90,000

Long-term debt, net (Note 11) 177,500 177,500

Long-term lease liability (Note 10) 629,328 680,454

Long-term financing liabilities 28,233 28,910

Long-term financing liabilities (Note 11) 27,658 27,981

Other non-current liabilities 91,492 94,142

3 unchanged sentences

Common stock, $ 0.05 par value;

issued and outstanding 35,566,206 and 36,869,249 common shares at March 31, 2020 and June 30, 2019, respectively

issued and outstanding 35,665,783 and 35,625,716 common shares at September 30, 2020 and June 30, 2020, respectively

Additional paid-in capital 20,596 22,011

7 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

For The Three and Nine Months Ended March 31, 2020 and 2019

For The Three Months Ended September 30, 2020 And 2019

(Dollars and shares in thousands, except per share data amounts)

Three Months Ended March 31, Nine Months Ended March 31,

2020 2019 2020 2019

Three Months Ended September 30,

Service $ 36,408 $ 141,941

8 unchanged sentences

General and administrative 26,148 40,625

Rent 19,243 32,332 64,002 102,952

Rent (Note 10) 13,225 24,264

Franchise rent expense 32,283 31,424

Depreciation and amortization 7,376 9,380

Long-lived asset impairment 5,824 —

TBG mall location restructuring (Note 3) — 1,500

Goodwill impairment 44,529 — 44,529 —

Total operating expenses 142,987 256,944

2 unchanged sentences

Interest expense ( 3,762 ) ( 1,439 )

(Loss) gain from sale of salon assets to franchisees, net ( 10,208 ) 11,489 ( 21,760 ) 10,394

Loss from sale of salon assets to franchisees, net ( 662 ) ( 5,860 )

Interest income and other, net 114 171

Loss from continuing operations before income taxes ( 35,901 ) ( 17,034 )

Income tax benefit (expense) 2,253 ( 3,248 ) 5,904 ( 2,988 )

Income tax benefit 635 2,856

Loss from continuing operations ( 35,266 ) ( 14,178 )

14 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS (Unaudited)

For The Three and Nine Months Ended March 31, 2020 and 2019

For The Three Months Ended September 30, 2020 And 2019

(Dollars in thousands)

Three Months Ended March 31, Nine Months Ended March 31,

2020 2019 2020 2019

Three Months Ended September 30,

Net loss $ ( 35,266 ) $ ( 13,805 )

5 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited)

For the Three and Nine Months Ended March 31, 2020 and 2019

(Dollars in thousands)

Three Months Ended March 31, 2020

Common Stock Additional

Capital Accumulated

Comprehensive

Income Retained

Earnings Total

Shares Amount

Balance, December 31, 2019 35,563,611 $ 1,778 $ 21,230 $ 9,480 $ 242,573 $ 275,061

Net loss — — — — ( 75,037 ) ( 75,037 )

Foreign currency translation — — — ( 2,482 ) — ( 2,482 )

Stock-based compensation — — ( 25 ) — — ( 25 )

Net restricted stock activity 2,595 — ( 19 ) — — ( 19 )

Minority interest — — — — 38 38

Balance, March 31, 2020 35,566,206 $ 1,778 $ 21,186 $ 6,998 $ 167,574 $ 197,536

Three Months Ended March 31, 2019

Common Stock Additional

Capital Accumulated

Comprehensive

Income Retained

Earnings Total

Shares Amount

Balance, December 31, 2018 41,472,468 $ 2,074 $ 128,964 $ 8,145 $ 285,827 $ 425,010

Net loss — — — — ( 14,633 ) ( 14,633 )

Foreign currency translation — — — 905 — 905

Stock repurchase program ( 2,050,430 ) ( 102 ) ( 37,818 ) — — ( 37,920 )

Exercise of SARs 7,080 — ( 101 ) — — ( 101 )

Stock-based compensation — — 2,512 — — 2,512

Net restricted stock activity 4,006 — ( 42 ) — — ( 42 )

Minority interest — — — — 79 79

Balance, March 31, 2019 39,433,124 $ 1,972 $ 93,515 $ 9,050 $ 271,273 $ 375,810

REGIS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited)

For the Three and Nine Months Ended March 31, 2020 and 2019 (Continued)

For the Three Months Ended September 30, 2020 And 2019

(Dollars in thousands)

Nine Months Ended March 31, 2020

Three Months Ended September 30, 2020

Common Stock Additional

7 unchanged sentences

Foreign currency translation — — — 502 — 502

Stock repurchase program ( 1,504,000 ) ( 75 ) ( 26,281 ) — — ( 26,356 )

Exercise of SARs 1,776 — 28 — — 28

Stock-based compensation — — ( 1,225 ) — — ( 1,225 )

1 unchanged sentence

Minority interest — — — — 15 15

Balance, March 31, 2020 35,566,206 $ 1,778 $ 21,186 $ 6,998 $ 167,574 $ 197,536

Nine Months Ended March 31, 2019

Balance, September 30, 2020 35,665,783 $ 1,783 $ 20,596 $ 7,951 $ 59,211 $ 89,541

Three Months Ended September 30, 2019

Common Stock Additional

12 unchanged sentences

Minority interest — — — — 40 40

Balance, March 31, 2019 39,433,124 $ 1,972 $ 93,515 $ 9,050 $ 271,273 $ 375,810

Balance, September 30, 2019 35,548,036 $ 1,777 $ 20,880 $ 8,939 $ 252,143 $ 283,739

_______________________________________________________________________________

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

For The Nine Months Ended March 31, 2020 and 2019

For The Three Months Ended September 30, 2020 And 2019

(Dollars in thousands)

Nine Months Ended March 31,

Three Months Ended September 30,

Cash flows from operating activities:

Net loss $ ( 35,266 ) $ ( 13,805 )

Adjustments to reconcile net (loss) to net cash used in operating activities:

Adjustments to reconcile net loss to net cash provided by operating activities:

Non-cash adjustments related to discontinued operations — ( 470 )

Depreciation and amortization 6,087 7,863

Deferred income taxes ( 6,590 ) ( 6,034 )

Gain from sale of company headquarters, net ( 2,513 ) —

Loss (gain) from sale of salon assets to franchisees, net 21,760 ( 10,394 )

Non-cash TBG mall location restructuring charge — 20,711

Goodwill impairment 44,529 —

Salon asset impairments — 1,517

Stock-based compensation 2,114 7,065

Long-lived asset impairment 5,824 —

Deferred income taxes ( 384 ) ( 3,821 )

Loss from sale of salon assets to franchisees, net 662 5,860

Stock-based compensation (Note 5) ( 1,225 ) 1,807

Amortization of debt discount and financing costs 438 69

6 unchanged sentences

Costs associated with sale of salon assets to franchisees ( 125 ) ( 1,019 )

Proceeds from company-owned life insurance policies — 24,617

Proceeds from sale of company headquarters 8,996 —

Net cash provided by investing activities 62,694 56,076

Net cash (used in) provided by investing activities ( 201 ) 32,027

Cash flows from financing activities:

Borrowings on revolving credit facility 213,000 —

Repayments of revolving credit facility ( 30,000 ) —

Repurchase of common stock — ( 28,247 )

Taxes paid for shares withheld ( 187 ) ( 1,808 )

Net proceeds from distribution center sale and leaseback transaction — 18,068

Distribution center lease payments ( 238 ) ( 248 )

Net cash provided by (used in) financing activities 152,109 ( 89,743 )

Net cash (used in) financing activities ( 425 ) ( 30,303 )

Effect of exchange rate changes on cash and cash equivalents 88 3

Increase (decrease) in cash, cash equivalents, and restricted cash 163,403 ( 53,935 )

Decrease in cash, cash equivalents, and restricted cash ( 29,404 ) ( 11,753 )

Cash, cash equivalents and restricted cash:

7 unchanged sentences

BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The unaudited interim Condensed Consolidated Financial Statements of Regis Corporation (the "Company") as of March 31, 2020 and for the three and nine months ended March 31, 2020 and 2019, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of March 31, 2020 and its consolidated results of operations, comprehensive loss, changes in equity and cash flows for the interim periods.

The unaudited interim Condensed Consolidated Financial Statements of Regis Corporation (the "Company") as of September 30, 2020 and for the three months ended September 30, 2020 and 2019, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of September 30, 2020 and its consolidated results of operations, comprehensive loss, changes in 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).

The accompanying unaudited interim 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, 2020 and other documents filed or furnished with the SEC during the current fiscal year.

Impact of COVID-19 on Business Operations:

During the period ended March 31, 2020, the global coronavirus pandemic ("COVID-19") had an adverse impact on operations, including the closure of all company-owned salons and almost all franchise locations in March 2020 due to government mandates.

Salons continued to be closed until April 23, 2020 when franchise salons began re-opening slowly, as government, state and local restrictions eased.

As of June 15, 2020 approximately 76 % of franchise salons were open.

Company-owned salons were closed through May 21, 2020 and are gradually re-opening.

As of June 15, 2020, approximately 45 % of company-owned salons were open.

As salons re-open, the Company is taking additional measures across its portfolio of franchise and company-owned salons to facilitate customer and employee safety.

As a result, COVID-19 has and will continue to negatively affect revenue and profitability.

To offset the loss of revenue, in April 2020, the Company implemented a furlough program for a substantial majority of the workforce across the corporate office, field support, and distribution centers;

and reductions in the pay for executives and other working employees.

Despite actions taken to resume business operations, COVID-19, and the volatile regional and global economic conditions stemming from the pandemic, as well as reactions to future pandemics or resurgences of COVID-19, could potentially prolong and intensify the impact of the global crisis on our business.

The economic disruption due to COVID-19 was determined to be a triggering event in the quarter and as a result, management assessed its long-term assets, including long-lived salon assets, right of use assets, goodwill and other intangibles for impairment.

Impairments were recorded related to long-lived salon assets (Note 12) and goodwill (Notes 1 and 12).

As the COVID-19 pandemic continues, management will reassess all long-term assets and further impairment may result.

Due to the COVID-19 pandemic, the Company is relying on the Securities and Exchange Commission's Order under Section 36 of the Securities Exchange Act of 1934 Modifying Exemptions From the Reporting and Proxy Delivery Requirements for Public Companies dated March 25, 2020 (Release No.

34-88465) to extend the filing of this Quarterly Report.

The Company is relying on the Order due to the limited availability of key Company personnel required to complete the Form 10-Q due to the Company's employee furlough program, as well as suggested and mandated social quarantining and work from home orders.

Additionally, the Company's management team was not able to initially devote the requisite time and attention to the Form 10-Q, as it had to address the emergent business and operational issues resulting from COVID-19.

At the end of the period ended March 31, 2020, the Company determined a triggering event occurred, resulting in quantitative impairment tests performed over the goodwill.

This determination was made considering the reduced sales and profitability projections for the reporting units, driven by the COVID-19 pandemic and related economic disruption.

The triggering events experienced in the third quarter impacted both reporting units of the business, Franchise and Company-owned.

Due to the Company's emphasis on transitioning to a franchise platform, the Company engaged a third-party valuation specialist to perform an impairment analysis on the Franchise reporting unit of the business.

Conversely, the Company-owned reporting unit is comprised of a portfolio of salons that the Company intends to sell to franchisees or close in the short-term as part of the transition to a fully-franchised model.

As a result, the Company-owned reporting unit has a limited life which allows the Company to perform its own impairment analysis on the Company-owned reporting unit.

For the goodwill impairment analysis, management utilized a combination of both a discounted cash flows approach and market approach to evaluate the Franchise reporting unit, and the discounted cash flows approach to evaluate the Company-owned reporting unit.

The discounted cash flow models reflect management's assumptions regarding revenue growth rates, economic and market trends including deterioration from the current COVID-19 pandemic, cost structure, and other expectations about the anticipated short-term and long-term operating results of the reporting units.

For the Franchise reporting unit, the discount rate of 13 percent and the terminal growth rate of 2.5 percent were also key assumptions utilized in the discounted cash flow.

For the Company-owned reporting unit, proceeds from the sale of salons to franchisees and number of salon venditions were the other key assumptions utilized in its discounted cash flow.

For the analysis performed as of March 31, 2020, management decreased the expected proceeds generated from the sale of salons to franchisees and increased the expected number of salon closures as compared to the analysis performed as of April 30, 2019.

The decline in expected proceeds and increase in salon closings is due to the economic downturn resulting from the COVID-19 pandemic.

The analysis also included substantially zero revenue in April and May 2020 and lower than previously expected revenue for the rest of calendar year 2020, which significantly reduced the expected cash flows.

As a result of the impairment testing, the Franchise reporting unit, which has goodwill of $ 226.7 million, was determined to have a fair value that exceeded carrying value by approximately 50 percent.

The Company-owned reporting unit was determined to have a carrying value in excess of its fair value, resulting in a goodwill impairment charge of $ 44.5 million.

Prior to the COVID-19 pandemic, the Company had been derecognizing Company-owned goodwill as part of the calculation of gain or loss on the sale of salons to franchisees.

In the three and nine months ended March 31, 2020, the Company derecognized $ 19.8 and $ 72.6 million of goodwill, respectively.

The Company-owned reporting unit has no remaining goodwill, so there will be no further derecognition of Company-owned goodwill.

Non-Current Assets Held for Sale:

In March 2019, the Company announced that it had entered into a ten -year lease for a new corporate headquarters and would be selling the land and buildings currently used for its headquarters.

The non-current assets held for sale represent the net book value of the land of $ 1.7 million and buildings of $ 3.6 million, as of June 30, 2019.

The sale was completed in December 2019 for proceeds of $ 9.0 million, resulting in a net gain on sale of $ 2.5 million, which was recorded in Interest income and other, net on the Condensed Consolidated Statement of Operations.

In the three month period ended March 31, 2020, the Company recognized $ 1.5 million of incremental charges in Interest income and other, net which corrected and reduced the gain on sale of the Company’s former headquarters that was recorded in the second quarter of fiscal year 2020.

The $ 2.5 million net gain on sale includes the adjustment.

Management evaluated the effect of this out-of-period adjustment on the three and nine month periods ended March 31, 2020, as well as on the previous interim period in which it should have been recognized and concluded for both quantitative and qualitative reasons that the adjustment is not material to any of the periods affected.

Accounting Standards Recently Adopted by the Company:

Simplifying the Test for Goodwill Impairment

The Company adopted ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350)" for the interim impairment test performed due to the triggering event noted above, as of March 31, 2020.

Under this accounting standard, the Company performed its interim impairment test and will perform its annual impairment test by comparing the fair value of a reporting unit to its carrying amount.

The Company then records an impairment charge for the amount that the carrying amount exceeds the fair value.

This eliminates Step 2 from the goodwill impairment test to simplify the subsequent measure of goodwill.

The Company adopted ASU 2016-02, "Leases (Topic 842)” and all subsequent ASUs that modified Topic 842 as of July 1, 2019 using the modified retrospective method and elected the option to not restate comparative periods in the year of adoption.

The Company also elected the package of practical expedients that do not require reassessment of whether existing contracts are or contain leases, lease classifications or initial direct costs.

The Company has also made an accounting policy election to keep leases with an initial term of 12 months or less off the Balance Sheet.

Under adoption of Topic 842, the Company recorded a Right of Use Asset and Lease Liability of $ 980.8 and $ 993.7 million, respectively.

The difference between the assets and liabilities are attributable to the reclassification of certain existing lease-related assets and liabilities as an adjustment to the right of use assets.

The Lease Liability reflects the present value of the Company's estimated future minimum lease payments over the lease term, which includes one option period, as options are reasonably assured of being exercised, are discounted using a collateralized incremental borrowing rate.

The decrease in the Right of Use Asset and Lease Liability from July 1, 2019 to March 31, 2020 was due to lease modifications and salon closures.

The accounting guidance for lessors remained largely unchanged from previous guidance, with the exception of the presentation of rent payments that the Company passes through to franchisees (lessees).

Historically, these costs have been recorded on a net basis in the unaudited Condensed Consolidated Statements of Operations, but are now presented on a gross basis upon adoption of the new guidance.

The adoption of the new guidance resulted in the recognition of franchise rental income and rent expense of $ 31.8 and $ 96.9 million during the three and nine months ended March 31, 2020, respectively.

See Note 10 for further information about our transition to Topic 842 and the newly required disclosures.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income:

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI), which provides the option to reclassify to retained earnings the tax effects resulting from the Tax Act related to items in AOCI.

The Company adopted this guidance on July 1, 2019 and did not elect to reclassify the income tax effects from the Tax Act from AOCI to retained earnings as the impact was not material.

Impact of the COVID-19 Pandemic on Business Operations:

During the period ended September 30, 2020, the global coronavirus pandemic ("COVID-19") had an adverse impact on operations, including the closure of all salons in California for the majority of the quarter due to government-mandated closures.

These restrictions were lifted in September and as of September 30, 2020, system-wide salons are approximately 95 % open.

Management is evaluating the future of the unopened salons, including potential closures.

The COVID-19 pandemic continues to impact salon guest visits leading to a significant reduction in revenue.

Due to the economic disruption caused by the COVID-19 pandemic, the Company faces a greater degree of uncertainty than normal in making judgments and estimates needed to apply the Company's significant accounting policies.

Actual results and outcomes may differ from management's estimates and assumptions.

Salon Long-Lived Asset and Right of Use Asset Impairment Assessments:

The Company assesses impairment of long-lived salon assets and right of use assets at the individual salon level, as this is the lowest level for which identifiable cash flows are largely independent of other groups of assets and liabilities, when events or changes in circumstances indicate the carrying value of the assets or the asset grouping may not be recoverable.

Factors considered in deciding when to perform an impairment review include significant under-performance of an individual salon in relation to expectations, significant economic or geographic trends, and significant changes or planned changes in the use of the assets.

The first step is to assess recoverability, and in doing that, the undiscounted cash flows are compared to the carrying value.

If the undiscounted estimated cash flows are less than the carrying value of the assets, the Company calculates an impairment charge based on the difference between the carrying value of the asset group and its fair value.

The fair value of the salon long-lived asset group is estimated using market participant methods based on the best information available.

The fair value of the right of use asset is estimated by determining what a market participant would pay over the life of the primary asset in the group, discounted back to September 30, 2020.

See Note 10 for further discussion related to the right of use 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 the ongoing maintenance and improvement of the assets, 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.

A long-lived asset impairment charge, including right of use and salon property and equipment, of $ 5.8 million was recorded in the three months ended September 30, 2020, and is separately stated on the unaudited Condensed Consolidated Statement of Operations.

Of the total $ 5.8 million long-lived asset impairment charge, $ 4.6 million was allocated to the right of use asset and $ 1.2 million was allocated to salon property and equipment.

A long-lived salon property and equipment asset impairment charge of $ 1.5 million was recorded during the three months ended September 30, 2019, and is recorded in Depreciation and Amortization in the unaudited Condensed Consolidated Statement of Operations.

As of September 30, 2020 and June 30, 2020, the Franchise reporting unit had $ 227.9 and $ 227.5 million, respectively, of goodwill.

For further information, see Note 9 of the interim unaudited Condensed Consolidated Financial Statements.

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, 2020.

The Company performs its annual impairment assessment as of April 30.

For the fiscal year 2020 annual impairment assessment, due to the impact of the COVID-19 pandemic, the Company elected to forgo the optional Step 0 assessment and performed the quantitative impairment analysis on the Franchise reporting unit.

The Company compared the carrying value of the reporting unit, including goodwill, to the estimated fair value.

The result of the assessment indicated that the estimated fair value of the Company's reporting unit exceeded its carrying value by approximately 50 percent.

For the goodwill impairment analysis, management utilized a combination of both a discounted cash flows approach and a market approach.

The key assumptions utilized in the analysis were the number of salons to be sold to franchisees and using the discount rate.

If a future triggering event occurs or if during the Company's annual impairment assessment the fair value of the Franchise reporting unit has decreased significantly, it may result in a non-cash impairment charge to reduce the carrying value of goodwill.

Depreciation:

Depreciation expense in the three months ended September 30, 2020 includes $ 1.3 million of asset retirement obligations, which are cash expenses.

Additionally, in the three month period ended September 30, 2020, the Company recognized a $ 1.0 million incremental charge in depreciation expense that related to a prior period.

Management evaluated the effect of this out-of-period adjustment on the three months ended September 30, 2020, as well as the previous period in which the charge should have been recognized and concluded for both quantitative and qualitative reasons that the adjustment is not material to the periods affected.

REVENUE RECOGNITION:

11 unchanged sentences

Royalty and advertising fund revenues represent sales-based royalties that are recognized in the period in which the sales occur.

royalty and advertising fund revenue is billed and collected monthly in arrears.

Generally, royalty and advertising fund revenue is 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.

2 unchanged sentences

Recognition of these fees is deferred until the salon opening and is then recognized over the term of the franchise agreement, typically ten years .

Franchise rental income is a result of the Company signing leases on behalf of franchisees and entering into a sublease arrangement with the franchisee.

Franchise rental income is a result of the Company signing the lease on behalf of franchisees and entering into a sublease arrangement with the franchisee.

The Company recognizes franchise rental income and expense when it is due to the landlord.

The following table disaggregates revenue by timing of revenue recognition and is reconciled to reportable segment revenues as follows:

Three Months Ended March 31, 2020 Three Months Ended March 31, 2019

Franchise Company-owned Franchise Company-owned

(Dollars in thousands)

Revenue recognized at a point in time:

Service $ — $ 78,387 $ — $ 181,809

Product 15,318 19,559 14,339 39,427

Total revenue recognized at a point in time $ 15,318 $ 97,946 $ 14,339 $ 221,236

Revenue recognized over time:

Royalty and other franchise fees $ 16,487 $ — $ 14,339 $ —

Advertising fund (refunds) fees ( 7,789 ) — 8,429 —

Franchise rental income 31,821 — — —

Total revenue recognized over time 40,519 — 22,768 —

Total revenue $ 55,837 $ 97,946 $ 37,107 $ 221,236

Nine Months Ended March 31, 2020 Nine Months Ended March 31, 2019

Three Months Ended September 30, 2020 Three Months Ended September 30, 2019

Franchise Company-owned Franchise Company-owned

6 unchanged sentences

Royalty and other franchise fees $ 13,447 $ — $ 17,592 $ —

Advertising fund (refunds) fees 13,341 — 24,272 —

Advertising fund fees 4,509 — 10,425 —

Franchise rental income 32,283 — 31,424 —

1 unchanged sentence

Total revenue $ 63,981 $ 47,415 $ 72,546 $ 174,492

Information about receivables, broker fees and deferred revenue subject to the amended revenue recognition guidance is as follows:

Information about receivables, broker fees and deferred revenue subject to the revenue recognition guidance is as follows:

September 30,

2020 June 30,

11 unchanged sentences

Total non-current deferred revenue $ 44,948 $ 45,478

Receivables relate primarily to payments due for royalties, franchise fees, advertising fees, franchise product sales and sales of salon services and product paid by credit card.

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.

As of March 31, 2020 and June 30, 2019, the balance in the allowance for doubtful accounts was $ 2.6 and $ 2.0 million, respectively.

The following table is a rollforward of the allowance for doubtful accounts for the period:

Balance as of June 30, 2020 $ 6,899

Provision for doubtful accounts (1) 2,289

Provision for franchisee rent (2) 512

Write-offs ( 297 )

Balance as of September 30, 2020 $ 9,403

_______________________________________________________________________________

(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 expense in the unaudited Condensed Consolidated Statement of Operations.

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 agreement.

The following table is a rollforward of the broker fee balance for the periods indicated (in thousands):

The following table is a rollforward of the broker fee balance for the period:

Balance as of June 30, 2020 $ 20,516

1 unchanged sentence

Amortization ( 777 )

Write-offs ( 33 )

Balance as of March 31, 2020 $ 21,193

Balance as of September 30, 2020 $ 20,442

Deferred revenue includes the gift card liability and deferred franchise fees for unopened salons and open salons.

Gift card revenue for the three months ended March 31, 2020 and 2019 was $ 0.8 and $ 1.8 million, respectively, and for the nine months ended March 31, 2020 and 2019 was $ 2.3 and $ 4.0 million, respectively.

Gift card revenue for the three months ended September 30, 2020 and 2019 was $ 0.3 and $ 0.8 million, respectively.

Deferred franchise fees related to open salons are generally recognized on a straight-line basis over the term of the franchise agreement.

Franchise fee revenue for the three months ended March 31, 2020 and 2019 was $ 1.4 and $ 0.9 million, respectively, and for the nine months ended March 31, 2020 and 2019 was $ 3.8 and $ 2.6 million, respectively.

Estimated revenue expected to be recognized in the future related to deferred franchise fees for open salons as of March 31, 2020 is as follows (in thousands):

Franchise fee revenue for the three months ended September 30, 2020 and 2019 was $ 1.6 and $ 1.2 million, respectively.

Estimated revenue expected to be recognized in the future related to deferred franchise fees for open salons as of September 30, 2020 is as follows (in thousands):

Remainder of 2021 $ 4,391

3 unchanged sentences

In October 2017, the Company sold substantially all of its mall-based salon business in North America, representing 858 salons, to The Beautiful Group (TBG), who operated these locations as franchise locations until June 2019.

In June 2019, the Company entered into a settlement agreement with TBG regarding the North America salons, which, among other things, substituted the master franchise agreement for a license agreement.

The Company classified the results of its mall-based business as discontinued operations in the Condensed Consolidated Statement of Operations.

Included in discontinued operations in the fiscal years presented are adjustments to actuarial assumptions related to the discontinued operations and income tax benefits associated with the wind-down and transfer of legal entities in fiscal year 2019.

Other than the items presented in the Consolidated Statement of Cash Flows, there were no other significant non-cash operating activities or non-cash investing activities related to discontinued operations for the nine months ended March 31, 2020 and 2019.

In June 2019, the Company entered into a settlement agreement with TBG regarding the North American salons, which, among other things, substituted the master franchise agreement for a license agreement.

The Company classified the results of its mall-based business as discontinued operations in the unaudited Condensed Consolidated Statement of Operations.

Included in discontinued operations in fiscal year 2020 are adjustments to actuarial assumptions related to the discontinued operations.

Other than the items presented in the unaudited Consolidated Statement of Cash Flows, there were no other significant non-cash operating activities or non-cash investing activities related to discontinued operations for the three months ended September 30, 2020 and 2019.

For the three months ended September 30, 2019 the Company recorded $ 1.5 million of TBG restructuring charges that relate to the Company assisting TBG with operating expenses to mitigate the risk of default associated with TBG's lease obligations.

In the second quarter of fiscal year 2020, TBG transferred 207 of its North American mall-based salons to the Company.

The 207 North American mall-based salons transferred were the salons that the Company was the guarantor of the lease obligation.

The transfer of the 207 mall-based salons occurred on December 31, 2019, so the operational results of these mall-based salons are included in the Condensed Consolidated Statement of Operations beginning in the third quarter.

The assets acquired and liabilities assumed were not material to the Condensed Consolidated Balance Sheet.

Professional fees and other restructuring related charges of $ 0.1 and $ 2.4 million in the three and nine months ended March 31, 2020, respectively, were recorded in the TBG restructuring line on the Condensed Consolidated Statement of Operations.

As of March 31, 2020, prior to any mitigation efforts which may be available, the Company remains liable for up to approximately $ 26 million related to its mall-based salon lease commitments on the 190 salons that remain open, a $ 15 million reduction from June 30, 2019.

In the United States, the transfer was consummated in connection with an assignment for the benefit of TBG US's creditors.

The transfer of the 207 mall-based salons occurred on December 31, 2019, and the operational results of these mall-based salons are included in the unaudited Condensed Consolidated Statement of Operations.

The assets acquired and liabilities assumed were not material to the unaudited Condensed Consolidated Balance Sheet.

As of September 30, 2020, prior to any mitigation efforts which may be available, the Company remains liable for up to approximately $ 18 million related to its mall-based salon lease commitments on the 104 salons that remain open, which is a $ 5 million reduction from June 30, 2020.

The commitments are included in our lease liabilities.

EARNINGS PER SHARE:

2 unchanged sentences

Stock-based awards with exercise prices greater than the average market price of the Company’s common stock are excluded from the computation of diluted earnings per share.

For the three and nine months ended March 31, 2020, there were 663,636 and 1,145,053 , respectively, and for the three and nine months ended March 31, 2019 there were 1,023,038 and 1,006,589 common stock equivalents of dilutive common stock excluded in the diluted earnings per share calculations due to the net loss from continuing operations.

The computation of weighted average shares outstanding, assuming dilution, excluded 670,997 and 608,944 of stock-based awards during the three months ended March 31, 2020 and 2019, respectively, and 174,698 and 542,329 of stock-based awards during the nine months ended March 31, 2020 and 2019, respectively, as they were not dilutive under the treasury stock method.

For the three months ended September 30, 2020 and 2019, there were 310,557 and 902,478 common stock equivalents of dilutive common stock, respectively, excluded in the diluted earnings per share calculations due to the net loss from continuing operations.

The computation of weighted average shares outstanding, assuming dilution, excluded 1,834,999 and 391,531 of stock-based awards during the three months ended September 30, 2020 and 2019, respectively, as they were not dilutive under the treasury stock method.

SHAREHOLDERS’ EQUITY:

Stock-Based Employee Compensation:

During the three and nine months ended March 31, 2020, the Company granted various equity awards including restricted stock units (RSUs) and performance-based restricted stock units (PSUs).

During the three months ended September 30, 2020, the Company granted various equity awards including restricted stock units (RSUs) and performance-based restricted stock units (PSUs).

A summary of equity awards granted is as follows:

For the Three Months Ended March 31, 2020 For the Nine Months Ended March 31, 2020

For the Three Months Ended September 30, 2020

Restricted stock units 246,634

Performance-based restricted stock units 62,290

The RSUs granted to employees during the three and nine months ended March 31, 2020 vest in equal amounts over a three -year period subsequent to the grant date, cliff vest after a three -year period or cliff vest after a five -year period subsequent to the grant date.

The RSUs granted to employees during the three months ended September 30, 2020 vest in equal amounts over a three-year period subsequent to the grant date, cliff vest after a three-year period or cliff vest after a five-year period subsequent to the grant date.

The PSUs granted to employees have a three-year performance period ending June 30, 2023 linked to the Company's stock price reaching a specified volume weighted average closing price for a 50 day period that ends on June 30, 2023.

The PSUs granted have a maximum vesting percentage of 200 % based on the level of performance achieved for the respective award.

Total compensation cost for stock-based payment arrangements totaling $ 0.0 and $ 2.5 million for the three months ended March 31, 2020 and 2019, respectively, and $ 2.1 and $ 7.1 million for the nine months ended March 31, 2020 and 2019, respectively, was recorded within general and administrative expense on the Condensed Consolidated Statement of Operations.

The expense recorded in the three months ended March 31, 2020 was offset by the reversal of expense related to the downward adjustment of a PSU factor.

Total compensation cost for stock-based payment arrangements totaling $( 1.2 ) and $ 1.8 million for the three months ended September 30, 2020 and 2019, respectively, was recorded within General and administrative expense on the unaudited Condensed Consolidated Statement of Operations.

The benefit recorded in the three months ended September 30, 2020 was due to the forfeiture of awards related to the departure of the Company's CEO, resulting in an expense reversal of $ 2.4 million.

Share Repurchases:

During the nine months ended March 31, 2020, the Company repurchased 1.5 million shares for $ 26.4 million under a previously approved stock repurchase program.

At March 31, 2020, $ 54.6 million remains outstanding under the approved stock repurchase program.

During the three months ended September 30, 2020, the Company did no t repurchase shares under the previously approved stock repurchase program.

During the three months ended September 30, 2019, the Company repurchased 1.5 million shares for $ 26.4 million under the previously approved stock repurchase program.

At September 30, 2020, $ 54.6 million remains outstanding under the approved stock repurchase program.

INCOME TAXES:

A summary of income tax benefit (expense) and corresponding effective tax rates is as follows:

For the Three Months Ended March 31, For the Nine Months Ended March 31,

2020 2019 2020 2019

A summary of income tax benefits and corresponding effective tax rates is as follows:

For the Three Months Ended September 30,

(Dollars in thousands)

Income tax benefit (expense) $ 2,253 $ ( 3,248 ) $ 5,904 $ ( 2,988 )

Income tax benefit $ 635 $ 2,856

Effective tax rate 1.8 % 16.8 %

The recorded tax provisions and effective tax rates for the three and nine months ended March 31, 2020 were different than normally expected primarily due to the impact of the deferred tax valuation allowance.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was enacted in response to the COVID-19 pandemic.

The CARES Act included several significant business tax provisions that, among other items, eliminated the taxable income limit and granted businesses a five-year carryback for certain net operating losses ("NOLs"), accelerated refunds of previously generated corporate alternative minimum tax ("AMT") credits, temporarily loosened the business interest limitation under section 163(j) and corrected certain provisions in the Tax Cuts and Jobs Acts ("TCJA").

One of the technical corrections made to the TCJA through the CARES Act provisions modified NOLs resulting from accounting periods which straddled December 31, 2017.

Such NOLs were originally deemed to have no carryback but an indefinite carryforward.

As a result of the correction, the NOLs currently have a 2-year carryback and a 20-year carryforward and are considered definite-lived NOLs.

This technical correction modified the Company's NOLs generated during its fiscal year end 2018 from indefinite-lived to definite-lived.

As the Company has continued to maintain a valuation allowance against its definite-lived NOLs, the Company established a valuation allowance against the NOLs generated during its fiscal year 2018 and recorded a net tax expense of $ 14.7 million in continuing operations during the period ended March 31, 2020.

Due to recent negative financial performance and cumulative losses incurred in recent years, the Company was no longer able to conclude that it was more likely than not that certain Canadian deferred tax assets would be fully realized, and therefore established a $ 0.4 million valuation allowance on the deferred tax assets during the period ended March 31, 2020.

The recorded tax provision and effective tax rate for the three months ended September 30, 2020 were different than what would normally be expected primarily due to the impact of the deferred tax valuation allowance.

The recorded tax provision and effective tax rate for the three months ended September 30, 2019 were different than what would normally be expected primarily due to the impact of the deferred tax valuation allowance and global intangible low-taxed income ("GILTI").

The Company is no longer subject to IRS examinations for years before 2014.

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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.

Regis is a defendant in two wage and hour lawsuits in California.

The Company is a defendant in two wage and hour lawsuits in California.

The first, a class action in US District Court, alleges various violations of the California Labor Code, including, but not limited to failure to pay wages, failure to permit rest breaks, failure to pay all wages due on termination of employment, waiting time penalties, failure to provide accurate wage statements and violation of the business and professions code.

This case has preliminarily settled, pending approval of the court and class, for $ 2.1 million.

This case has been preliminarily settled, pending approval of the court and class, for $ 2.1 million.

The second, a class action filed in California Superior Court, alleges various violations of the California Labor Code as well as PAGA penalties.

Barring successful objection from plaintiffs’ attorneys to the first class action, the second case will be subsumed into the first case’s settlement.

As of June 30, 2019 and March 31, 2020, $ 1.5 and $ 2.1 million, respectively, was included within accrued expenses on the Condensed Consolidated Balance Sheet related to these class action lawsuits.

As of June 30, 2020 and September 30, 2020, $ 2.1 million was included within accrued expenses on the unaudited Condensed Consolidated Balance Sheet related to these class action lawsuits.

In addition, our existing point of sale system supplier has challenged the development of certain parts of our technology systems in litigation brought in the Northern District of California, case No.

20-cv-02181-MMC.

We have vigorously denied the allegations made by this third-party supplier and have asserted certain counterclaims against the third party.

However, the dispute regarding our ownership and involvement of certain key personnel may be costly and distracting, and the outcome is currently uncertain.

The Company has not recorded an expense related to damages in connection with these matters because any potential loss is not currently probable or reasonably estimable under U.S.

Additionally, the Company is unable to reasonably estimate the range of loss, if any, that may result from these matters.

CASH, CASH EQUIVALENTS AND RESTRICTED CASH:

The table below reconciles the cash and cash equivalents balances and restricted cash balances, recorded in other current assets from 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,

2020 June 30,

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(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.

GOODWILL AND OTHER INTANGIBLES:

The table below contains details related to the Company's goodwill:

Franchise Company-owned Consolidated

Franchise Reporting Unit

(Dollars in thousands)

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Translation rate adjustments 439

Derecognition related to sale of salon assets to franchisees (1) — ( 72,601 ) ( 72,601 )

Goodwill impairment — ( 44,529 ) ( 44,529 )

Goodwill, net at March 31, 2020 $ 226,666 $ — $ 226,666

_______________________________________________________________________________

(1) Prior to the impairment charge, goodwill was derecognized for salons sold to franchisees with positive cash flows.

The amount of goodwill derecognized was determined by a fraction (the numerator of which is the trailing-twelve months EBITDA of the salon being sold and the denominator of which is the estimated annualized EBITDA of the Company-owned reporting unit) that is applied to the goodwill balance of the Company-owned reporting unit at the time of the sale.

The table below presents other intangible assets:

March 31, 2020 June 30, 2019

Cost (1) Accumulated

Amortization (1) Net Cost (1) Accumulated

Amortization (1) Net

(Dollars in thousands)

Amortized intangible assets:

Brand assets and trade names $ 6,541 $ ( 3,632 ) $ 2,909 $ 6,909 $ ( 3,659 ) $ 3,250

Franchise agreements 9,356 ( 7,944 ) 1,412 9,783 ( 8,057 ) 1,726

Lease intangibles 13,426 ( 10,516 ) 2,910 13,490 ( 10,065 ) 3,425

Other 865 ( 528 ) 337 883 ( 523 ) 360

Total $ 30,188 $ ( 22,620 ) $ 7,568 $ 31,065 $ ( 22,304 ) $ 8,761

_______________________________________________________________________________

(1) The change in the gross carrying value and accumulated amortization of other intangible assets is impacted by foreign currency.

RIGHT OF USE ASSET AND LEASE LIABILITIES

Goodwill, net at September 30, 2020 $ 227,896

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.

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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 additional 5 to 10 year terms at the option of the Company.

The Company also has variable lease payments that are based on sales levels.

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 expense includes the following:

For the Three Months Ended March 31, For the Nine Months Ended March 31,

2020 2019 2020 2019

For the Three Months Ended September 30,

(Dollars in thousands)

2 unchanged sentences

Real estate taxes and other expenses 2,662 3,307

Lease termination expense (1) 5,551 —

Lease liability benefit (2) ( 6,061 ) —

Corporate segment rent 722 285

Franchise segment non-reimbursable rent 557 190

Total $ 13,225 $ 24,264

The Company also leases the premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees.

_______________________________________________________________________________

(1) During the three months ended September 30, 2020 and 2019, the Company terminated the leases for 131 and 37 company-owned salons, respectively, before the lease end dates.

Lease termination fees include $ 3.1 million of future lease payments for underperforming salons that management closed without a termination agreement.

Lease termination fees also includes $ 2.5 million of early termination payments to close salons before lease end date and relieve the Company of future lease obligations.

The early termination payments will save the Company approximately $ 2 million in future minimum rent plus associated real estate taxes and other lease expenses.

(2) Upon termination of previously impaired leases, the Company derecognized ROU assets of $ 7.1 million and lease liabilities of $ 10.3 million that resulted in a net gain of $ 3.2 million.

In addition, the Company recognized a benefit from lease liabilities decreasing in excess of previously impaired ROU assets.

The benefit recognized was $ 2.9 million and $ 0 in the three months ended September 30, 2020 and 2019, respectively.

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, 2020 and 2019, franchise rental income and franchise rent expense were $ 32.3 and $ 31.4 million, respectively.

These leases, generally with terms of approximately 5 years, are expected to be renewed on expiration.

All additional lease costs are passed through to the franchisees.

Upon adopting Topic 842, the Company now records the rental payments due from franchisees as franchise rental income and the corresponding amounts owed to landlords as franchise rent expense on the Condensed Consolidated Statement of Operations.

For the three and nine months ended March 31, 2020, franchise rental income and franchise rent expense were $ 31.8 and $ 96.9 million, respectively.

For franchise and company-owned salon operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date.

For franchise and company-owned salon operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date, including one lease term option when the lease is expected to be renewed.

The Right of Use (ROU) asset is initially and subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, less any accrued lease payments and unamortized lease incentives received, if any.

Lease expense for lease payments is recognized on a straight-line basis over the lease term.

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 allocated to the lease liability.

Due to the COVID-19 triggering event, the Company assessed its ROU assets for impairment and determined that as of March 31, 2020, the ROU assets were not impaired.

As the COVID-19 pandemic continues, the Company will continue to assess its ROU assets for impairment, which could have a material impact on the Company's results of operations.

The Company's consolidated ROU asset balance was $ 728.5 and $ 786.2 million as of September 30, 2020 and June 30, 2020, 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 original lease term.

The weighted average remaining lease term was 6.86 years and the weighted-average discount rate was 3.95 percent for all salon operating leases as of March 31, 2020.

As of March 31, 2020, future operating lease commitments to be paid and received by the Company were as follows:

The weighted average remaining lease term was 6.85 and 6.87 years and the weighted-average discount rate was 3.98 % and 3.95 % for all salon operating leases as of September 30, 2020 and June 30, 2020, 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.

As a result of the COVID-19 pandemic and the related salon closures that occurred during the fourth fiscal quarter of 2020, the Company determined that a triggering event had occurred pursuant to ASC 360-10-35-21 given that there had been a significant adverse change in the business climate that could affect the value of its salon long-lived asset groups combined with a significant adverse change in the extent or manner in which the salon long-lived groups were being used.

As a result, management assessed all salon asset groups, which included the related ROU assets, for impairment in accordance with ASC 360.

The first step in the impairment test under ASC 360 is to determine whether the long-lived assets are recoverable, which is determined by comparing the net carrying value of the salon asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset group.

Estimating cash flows for purposes of the recoverability test is subjective and requires significant judgment.

Estimated future cash flows used for the purposes of the recoverability test were based upon historical cash flows for the salons, adjusted for expected changes in future market conditions related to the COVID-19 pandemic, and other factors.

The period of time used to determine the estimates of the future cash flows for the recoverability test was based on the remaining useful life of the primary asset of the group, which was the ROU asset in all cases.

Step two of the long-lived asset impairment test requires that the fair value of the asset group be determined when calculating 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 fair value of the salon long-lived asset group is estimated using market participant methods based on the best information available.

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 fiscal years 2021 through 2023 for properties with no recently negotiated leases, and a discount rate.

The Company engaged a third-party valuation specialist to assist with the research related to inputs used in their determination of the fair value of the ROU asset, which included providing information related to significant inputs and assumptions utilized in the measurement of the impairment loss.

In the fourth quarter of fiscal year 2020, the Company recorded a total long-lived asset impairment charge of $ 22.6 million in the Consolidated Statement of Operations, including $ 17.4 million related to the right of use asset in the salon asset groups.

The impairment loss for each salon asset group that was recognized was allocated among the long-lived assets of the group on a pro-rata basis using their relative carrying amounts.

Additionally, the impairment losses did not reduce the carrying amount of an individual asset below its fair value, including for the ROU assets 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.

However, the ultimate severity and longevity of the COVID-19 pandemic is unknown and therefore, if actual results are not consistent with the estimates and assumptions used in the calculations, the Company may be exposed to future impairment losses that could be material.

In the three months ended September 30, 2020, the Company recognized a long-lived impairment charge of $ 5.8 million, which included $ 4.6 million related to the right of use assets, in the unaudited Condensed Consolidated Statement of Operations.

The impairments recorded for the three months ended September 30, 2020 were primarily the result of triggering events identified on certain underperforming salons, salons that were identified in the quarter to close, and certain salons where franchisees are unable to fulfill their rent obligations.

As of September 30, 2020, future operating lease commitments, including one renewal option when leases are expected to be renewed, to be paid and received by the Company were as follows:

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

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Long-term lease liabilities $ 504,292 $ 113,859 $ 11,177 $ 629,328

Excluding the option period, the Company's operating lease commitments as of September 30, 2020 were approximately $ 360 and $ 100 million for franchise salons and company-owned salons, respectively.

FINANCING ARRANGEMENTS:

1 unchanged sentence

Revolving Credit Facility

Maturity Date Interest Rate March 31,

Maturity Date September 30,

2020 September 30,

2020 June 30,

(Fiscal Year) (Dollars in thousands)

(Fiscal Year) (Interest rate %) (Dollars in thousands)

Revolving credit facility 2023 5.50 % $ 177,500 $ 177,500

At March 31, 2020, cash, cash equivalents and marketable securities totaled $ 241.0 million.

As of March 31, 2020, the Company has $ 273.0 million of outstanding borrowings under a $ 295.0 million revolving credit facility.

At March 31, 2020, the Company has outstanding standby letters of credit under the revolving credit facility of $ 21.5 million, primarily related to the Company's self-insurance program.

The unused available credit under the facility was $ 0.5 million as of March 31, 2020.

The Company increased its outstanding borrowings from December 31, 2019 to March 31, 2020 by making a draw on the credit facility of $ 183.0 million in March of 2020.

The $ 183.0 million draw was done to increase the Company's cash position and preserve financial flexibility as the Company experienced significant business interruption due to the COVID-19 pandemic.

As of March 31, 2020, the Company had cash, cash equivalents and restricted cash of $ 255.8 million and current liabilities of $ 232.1 million.

In May of 2020, the Company amended its $ 295.0 million revolving credit facility that expires in March 2023.

The amendment to the revolving credit facility provides relief for the maximum consolidated net leverage ratio covenant and the minimum fixed charge coverage ratio covenant.

Without such amendment, the Company would have been in violation of the covenants as of March 31, 2020 which could have resulted in default.

Under the new terms of the amendment, the Company is required to maintain a minimum liquidity of not less than $ 75.0 million, and provides the Company's lenders security in the Company's assets, adds additional guarantors and grants a first priority lien and security interest to the lenders in substantially all of the Company’s and the guarantors’ existing and future property.

The amendment also increases the applicable interest rate margins and facility fees applicable to the loans and inserts a 1.25 % LIBOR floor.

The applicable margin for loans bearing interest at LIBOR ranges from 3.75 %- 4.25 %, the applicable margin for loans bearing interest at the base rate ranges from 2.75 %- 3.25 % and the facility fee ranges from 0.5 %- 0.75 %, each depending on average utilization of the revolving line of credit.

This amendment gives the Company flexibility throughout the uncertainty generated by the business disruption caused by the COVID-19 pandemic, as well as the Company's navigation through its strategic transformation.

As of the filing date, the Company is in compliance with its amended debt covenants.

The Company was not in compliance with its previous debt covenants as of March 31, 2020, which could have resulted in a default.

This coupled with the closure of most of our salons for a period of time are conditions and events that could have created substantial doubt about our ability to continue as a going concern.

We amended our debt agreement, which removed and amended certain covenants and requirements and also remedied the non-compliance item, in addition to taking other actions that have alleviated the substantial doubt about our ability to continue as a going concern.

Sale and Leaseback Transaction

At September 30, 2020, cash and cash equivalents totaled $ 85.0 million.

As of September 30, 2020, the Company has $ 177.5 million of outstanding borrowings under a $ 295.0 million revolving credit facility.

At September 30, 2020, the Company has outstanding standby letters of credit under the revolving credit facility of $ 18.7 million, primarily related to the Company's self-insurance program.

The unused available credit under the facility was $ 98.8 million as of September 30, 2020.

The Company's liquidity, which includes the unused available balance under the credit facility and unrestricted cash and cash equivalents, totaled $ 183.8 million as of September 30, 2020.

The revolving credit facility has a minimum liquidity covenant of $ 75 million.

As of September 30, 2020, the Company had cash, cash equivalents and restricted cash of $ 93.5 million and current liabilities of $ 236.3 million.

The Company was is in compliance with all covenants and other requirements of the financing arrangements as of September 30, 2020 and believes it will continue to be in compliance for at least one year from our filing date.

Sale and Leasebacks

The Company’s long-term financing liabilities consists of the following:

Maturity Date Interest Rate March 31,

Maturity Date Interest Rate September 30,

2020 June 30,

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This financial liability is reduced based on the rental payments made under the lease that are allocated between principal and interest.

As of March 31, 2020, the current portion of the Company’s lease liability was $ 0.9 million which was recorded in accrued expenses on the unaudited Condensed Consolidated Balance Sheet.

The weighted average remaining lease term was 13.9 years and the weighted-average discount rate was 3.46 % for financing leases as of March 31, 2020.

As of March 31, 2020, future lease payments due are as follows:

As of September 30, 2020, the current portion of the Company’s lease liability was $ 1.0 million, which was recorded in accrued expenses on the unaudited Condensed Consolidated Balance Sheet.

The weighted average remaining lease term was 13.4 years and the weighted-average discount rate was 3.46 % for financing leases as of September 30, 2020.

As of September 30, 2020, future lease payments due are as follows:

Fiscal year Salt Lake City Distribution Center Chattanooga Distribution Center

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Therefore, the total payments do not equal the financing liability.

Total interest expense for the financing lease was $ 0.3 and $ 0.8 million for the three and nine months ended March 31, 2020.

Total interest expense for the financing lease was $ 0.3 million for the three months ended September 30, 2020.

FAIR VALUE MEASUREMENTS:

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of March 31, 2020 and June 30, 2019, the estimated fair value of the Company’s cash, cash equivalents, restricted cash, receivables, accounts payable, debt and long-term financial liabilities approximated their carrying values.

As of September 30, 2020 and June 30, 2020, the estimated fair value of the Company’s cash, cash equivalents, restricted cash, receivables, accounts payable, debt and long-term financial liabilities approximated their carrying values.

The estimated fair values of the Company's debt and long-term financial liability are based on Level 2 inputs.

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The following impairments were based on fair values using Level 3 inputs:

For the Three Months Ended March 31, For the Nine Months Ended March 31,

2020 2019 2020 2019

For the Three Months Ended September 30,

(Dollars in thousands)

Goodwill $ 44,529 $ — $ 44,529 $ —

Long-lived salon assets 1,208 702 3,851 3,005

Long-lived asset impairment (1) 5,824 1,517

_______________________________________________________________________________

(1) See Note 1 to the Condensed Consolidated Financial Statements.

SEGMENT INFORMATION:

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The Company’s reportable operating segments consisted of the following salons:

September 30,

2020 June 30,

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80.0 % 76.1 %

Total Franchisees 955 907

COMPANY-OWNED SALONS:

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They are included in continuing operations under the Company-owned operating segment from January 1, 2020.

As of March 31, 2020, the Franchise operating segment is comprised primarily of Supercuts ® , SmartStyle ® , Cost Cutters ® , First Choice Haircutters ® , Roosters ® and Magicuts ® concepts and the Company-owned operating segment is comprised primarily of SmartStyle ® , Supercuts ® , Cost Cutters ® , and other regional trade names.

As of September 30, 2020, the Franchise operating segment is comprised primarily of Supercuts ® , SmartStyle ® , Cost Cutters ® , First Choice Haircutters ® , Magicuts ® and Roosters ® concepts and the Company-owned operating segment is comprised primarily of SmartStyle ® , Supercuts ® , Cost Cutters ® , and other regional trade names.

Financial information concerning the Company's reportable operating segments is shown in the following tables:

For the Three Months Ended March 31, 2020

For the Three Months Ended September 30, 2020

Franchise Company-owned Corporate Consolidated

13 unchanged sentences

Depreciation and amortization 274 5,082 2,020 7,376

TBG restructuring 146 — — 146

Goodwill impairment — 44,529 — 44,529

Long-lived asset impairment 610 5,214 — 5,824

Total operating expenses 57,636 68,162 17,189 142,987

5 unchanged sentences

Income (loss) from continuing operations before income taxes $ 6,345 $ ( 20,747 ) $ ( 21,499 ) $ ( 35,901 )

(1) Includes the refund of $ 14.9 million of previously collected cooperative adverting fees, which reduced franchise royalties and fees and site operating expense and had no net impact on the operating loss.

For the Three Months Ended March 31, 2019

Franchise Company-owned Corporate Consolidated

(Dollars in thousands)

Service $ — $ 181,809 $ — $ 181,809

Product 14,339 39,427 — 53,766

Royalties and fees 22,768 — — 22,768

Total revenue 37,107 221,236 — 258,343

Operating expenses:

Cost of service — 111,632 — 111,632

Cost of product 11,175 19,992 — 31,167

Site operating expenses 8,445 25,894 — 34,339

General and administrative 7,526 14,505 19,663 41,694

Rent 190 31,964 178 32,332

Depreciation and amortization 240 6,519 1,871 8,630

TBG mall location restructuring 20,711 — — 20,711

Total operating expenses 48,287 210,506 21,712 280,505

Operating (loss) income ( 11,180 ) 10,730 ( 21,712 ) ( 22,162 )

Other (expense) income:

Interest expense — — ( 1,354 ) ( 1,354 )

Gain from sale of salon assets to franchisees, net — — 11,489 11,489

Interest income and other, net — — 464 464

(Loss) income from continuing operations before income taxes $ ( 11,180 ) $ 10,730 $ ( 11,113 ) $ ( 11,563 )

For the Nine Months Ended March 31, 2020

For the Three Months Ended September 30, 2019

Franchise Company-owned Corporate Consolidated

13 unchanged sentences

Depreciation and amortization 160 6,107 3,113 9,380

TBG restructuring 2,368 — — 2,368

Goodwill impairment — 44,529 — 44,529

Total operating expenses 174,807 452,670 63,823 691,300

Operating income (loss) 33,417 ( 51,308 ) ( 63,823 ) ( 81,714 )

Other (expense) income:

Interest expense — — ( 4,615 ) ( 4,615 )

Loss from sale of salon assets to franchisees, net — — ( 21,760 ) ( 21,760 )

Interest income and other, net — — 3,188 3,188

Income (loss) from continuing operations before income taxes $ 33,417 $ ( 51,308 ) $ ( 87,010 ) $ ( 104,901 )

(1) Includes the refund of $ 14.9 million of previously collected cooperative adverting costs, which reduced franchise royalties and fees and site operating expense and had no net impact on the operating loss.

For the Nine Months Ended March 31, 2019

Franchise Company-owned Corporate Consolidated

(Dollars in thousands)

Service $ — $ 580,076 $ — $ 580,076

Product 47,786 125,220 — 173,006

Royalties and fees 67,767 — — 67,767

Total revenue 115,553 705,296 — 820,849

Operating expenses:

Cost of service — 348,060 — 348,060

Cost of product 38,037 61,661 — 99,698

Site operating expenses 24,288 82,435 — 106,723

General and administrative 24,656 45,084 65,517 135,257

Rent 468 101,908 576 102,952

Depreciation and amortization 613 21,304 5,815 27,732

TBG mall location restructuring 1,500 — — 1,500

3 unchanged sentences

Interest expense — — ( 1,439 ) ( 1,439 )

Loss from sale of salon assets to franchisees, net — — 10,394 10,394

Gain from sale of salon assets to franchisees, net — — ( 5,860 ) ( 5,860 )

Interest income and other, net — — 171 171

Income (loss) from continuing operations before income taxes $ 10,209 $ 5,401 $ ( 32,644 ) $ ( 17,034 )

SUBSEQUENT EVENT:

In May of 2020, the Company amended its $ 295.0 million revolving credit facility that expires in March 2023 (See Note 11).

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements