What changed in this filing

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Item 1. Financial Statements

2021-11-04 compared with 2021-05-06 · 175 added, 402 removed, 327 unchanged (64% of the section changed)

3 unchanged sentences

(Dollars in thousands, except share data)

September 30,

2021 June 30,

6 unchanged sentences

Property and equipment, net 22,588 23,113

Goodwill (Note 9) 229,221 227,457

Goodwill 229,007 229,582

Other intangibles, net 3,604 3,761

Right of use asset (Note 7)

573,475 611,880

Other assets 40,013 41,388

5 unchanged sentences

Short-term lease liability (Note 7)

113,585 116,471

Total current liabilities 182,468 198,485

Long-term debt, net (Note 8)

195,805 186,911

Long-term lease liability (Note 7)

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

480,769 518,866

Other non-current liabilities 69,999 75,075

3 unchanged sentences

Common stock, $ 0.05 par value;

issued and outstanding 35,789,825 and 35,625,716 common shares at March 31, 2021 and June 30, 2020, respectively

issued and outstanding 43,964,489 and 35,795,844 common shares at September 30, 2021 and June 30, 2021, respectively

Additional paid-in capital 58,310 25,102

Accumulated other comprehensive income 9,069 9,543

Retained earnings 14,951 94,462

Accumulated deficit ( 29,767 ) ( 19,389 )

Total shareholders' equity 39,810 17,046

4 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

For The Three And Nine Months Ended March 31, 2021 And 2020

For The Three Months Ended September 30, 2021 And 2020

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

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

2021 2020 2021 2020

Service $ 24,645 $ 78,387 $ 90,040 $ 322,133

Product 20,770 34,877 68,665 124,516

Royalties and fees 23,535 8,698 61,393 66,062

Three Months Ended September 30,

Royalties $ 16,602 $ 11,405

Fees 3,265 2,042

Product sales to franchisees 8,008 13,742

Advertising fund contributions 8,114 4,509

Franchise rental income (Note 7)

33,762 32,283

Company-owned salon revenue 8,005 47,415

Total revenue 77,756 111,396

Operating expenses:

Cost of service 15,821 54,824 66,441 212,664

Cost of product 21,268 21,672 54,840 75,257

Site operating expenses 13,366 3,660 36,955 62,932

Cost of product sales to franchisees 8,112 10,678

General and administrative 21,789 26,148

Rent (Note 7)

Advertising fund expense 8,114 4,510

Franchise rent expense 33,762 32,283

Company-owned salon expense (1) 7,945 42,943

Depreciation and amortization 1,869 7,376

Long-lived asset impairment 163 5,824

TBG mall location restructuring (Note 3) — 146 — 2,368

Goodwill impairment — 40,164 — 40,164

Total operating expenses 83,557 142,987

6 unchanged sentences

Income tax benefit 48 635

Loss from continuing operations ( 10,847 ) ( 67,842 ) ( 78,991 ) ( 98,540 )

Income from discontinued operations, net of taxes (Note 3) — 301 — 753

Net loss $ ( 10,378 ) $ ( 35,266 )

1 unchanged sentence

Basic and diluted:

Loss from continuing operations $ ( 0.30 ) $ ( 1.89 ) $ ( 2.20 ) $ ( 2.74 )

Income from discontinued operations 0.00 0.01 0.00 0.02

Net loss per share, basic and diluted (2) $ ( 0.28 ) $ ( 0.98 )

2 unchanged sentences

_______________________________________________________________________________

(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;

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CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS (Unaudited)

For The Three And Nine Months Ended March 31, 2021 And 2020

For The Three Months Ended September 30, 2021 And 2020

(Dollars in thousands)

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

2021 2020 2021 2020

Three Months Ended September 30,

Net loss $ ( 10,378 ) $ ( 35,266 )

5 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited)

For The Three And Nine Months Ended March 31, 2021 And 2020

(Dollars in thousands)

Three Months Ended March 31, 2021

Common Stock Additional

Capital Accumulated

Comprehensive

Income Retained

Earnings Total

Shares Amount

Balance, December 31, 2020 35,768,086 $ 1,788 $ 22,076 $ 8,786 $ 25,798 $ 58,448

Net loss — — — — ( 10,847 ) ( 10,847 )

Foreign currency translation — — — 306 — 306

Exercise of SARs 3,775 — ( 24 ) — — ( 24 )

Stock-based compensation — — 1,703 — — 1,703

Net restricted stock activity 17,964 1 ( 83 ) — — ( 82 )

Balance, March 31, 2021 35,789,825 $ 1,789 $ 23,672 $ 9,092 $ 14,951 $ 49,504

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 $ 235,534 $ 268,022

Net loss — — — — ( 67,541 ) ( 67,541 )

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 $ 168,031 $ 197,993

REGIS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited)

For The Three And Nine Months Ended March 31, 2021 And 2020 (Continued)

For The Three Months Ended September 30, 2021 And 2020

(Dollars in thousands)

Nine Months Ended March 31, 2021

Three Months Ended September 30, 2021

Common Stock Additional

1 unchanged sentence

Comprehensive

Income Retained

Earnings Total

Income Accumulated Deficit Total

Shares Amount

2 unchanged sentences

Foreign currency translation — — — ( 474 ) — ( 474 )

Exercise of SARs 3,775 — ( 24 ) — — ( 24 )

Issuance of common stock, net of offering costs 8,072,304 404 31,789 — — 32,193

Stock-based compensation — — 1,678 — — 1,678

Net restricted stock activity 96,341 4 ( 259 ) — — ( 255 )

Minority interest — — — — ( 520 ) ( 520 )

Balance, March 31, 2021 35,789,825 $ 1,789 $ 23,672 $ 9,092 $ 14,951 $ 49,504

Nine Months Ended March 31, 2020

Balance, September 30, 2021 43,964,489 $ 2,198 $ 58,310 $ 9,069 $ ( 29,767 ) $ 39,810

Three Months Ended September 30, 2020

Common Stock Additional

1 unchanged sentence

Comprehensive

Income Retained

Earnings Total

Income Retained Earnings Total

Shares Amount

2 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 $ 168,031 $ 197,993

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

_______________________________________________________________________________

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

For The Nine Months Ended March 31, 2021 And 2020

For The Three Months Ended September 30, 2021 And 2020

(Dollars in thousands)

Nine Months Ended March 31,

Three Months Ended September 30,

Cash flows from operating activities:

1 unchanged sentence

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

Non-cash adjustments related to discontinued operations — ( 967 )

Depreciation and amortization 1,574 6,087

Salon asset impairment — 3,851

Long-lived asset impairment 163 5,824

Deferred income taxes ( 258 ) ( 384 )

Inventory reserve 6,875 —

Gain from disposal of distribution center assets ( 14,878 ) —

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

Loss from sale of salon assets to franchisees, net 1,080 662

Goodwill impairment — 40,164

Stock-based compensation 1,678 ( 1,225 )

7 unchanged sentences

Costs associated with sale of salon assets to franchisees — ( 125 )

Proceeds from company-owned life insurance policies 1,200 —

Proceeds from sale of company headquarters — 8,996

Net cash (used in) provided by investing activities ( 908 ) 62,694

Net cash used in investing activities ( 1,524 ) ( 201 )

Cash flows from financing activities:

1 unchanged sentence

Repayments of revolving credit facility ( 1,106 ) —

Repurchase of common stock — ( 28,246 )

Proceeds from issuance of common stock, net of offering costs 32,193 —

Taxes paid for shares withheld ( 255 ) ( 187 )

Minority interest buyout ( 562 ) —

Distribution center lease payments — ( 238 )

Net cash (used in) provided by financing activities ( 1,602 ) 152,109

Net cash provided by (used in) financing activities 40,832 ( 425 )

Effect of exchange rate changes on cash and cash equivalents ( 148 ) 88

(Decrease) increase in cash, cash equivalents, and restricted cash ( 82,511 ) 163,403

Increase (decrease) in cash, cash equivalents, and restricted cash 26,906 ( 29,404 )

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, 2021 and for the three and nine months ended March 31, 2021 and 2020, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of March 31, 2021 and its consolidated results of operations, comprehensive loss, shareholders' equity and cash flows for the interim periods.

The unaudited interim Condensed Consolidated Financial Statements of Regis Corporation (the Company) as of September 30, 2021 and for the three months ended September 30, 2021 and 2020, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of September 30, 2021 and its consolidated results of operations, comprehensive loss, shareholders' equity and cash flows for the interim periods.

Adjustments consist only of normal recurring items, except for any discussed in the notes below.

3 unchanged sentences

The unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended June 30, 2021 and other documents filed or furnished with the SEC during the current fiscal year.

Impact of COVID-19 on Business Operations:

During the period ended March 31, 2021, the global coronavirus pandemic (COVID-19) had an adverse impact on operations, including prolonged government-mandated salon closures in California and Ontario, in addition to other U.S.

states and Canadian provinces during the three and nine months ended March 31, 2021.

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

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.

COVID-19 Impact:

During the period ended September 30, 2021, the global coronavirus pandemic (COVID-19) had an adverse impact on operations.

The COVID-19 pandemic continues to impact salon guest visits and franchisee staffing, resulting in a significant reduction in revenue.

As a result, COVID-19 has, and may continue to have, a negative affect on revenue and profitability.

The ultimate impact of the COVID-19 pandemic in both the short and long term is not currently estimable due to the uncertainty surrounding the duration of the pandemic, the availability and acceptance of preventative vaccines, the emergence and impact of new COVID-19 variants and changing government restrictions.

Additional impacts to the business may arise that we are not aware of currently.

The Company has inventory valuation reserves for excess and obsolete inventories or other factors that may render inventories unmarketable at their historical costs.

For the three and nine months ended March 31, 2021, the Company recorded $ 5.3 and $ 6.9 million of inventory excess and obsolescence charges, respectively.

The increase in the reserve in the three months ended March 31, 2021 was related to management's decision to exit its product sales business and wind down operations at the Company's two distribution centers.

The expense was recorded to Cost of product in the unaudited Condensed Consolidated Statement of Operations and is a non-cash add back to Net loss on the unaudited Condensed Consolidated Statement of Cash Flows.

In fiscal year 2021, the Company announced it would transition away from its wholesale product distribution model in favor of a third-party distribution model.

As a result, the Company exited one distribution center in the quarter and plans to exit its other distribution center in fiscal year 2022.

To facilitate the exit, the Company is selling inventory at discounts and disposing of hard-to-sell products.

Additionally, the reduction in company-owned salons decreases the Company's ability to re-distribute inventory from closed locations to other salons to be sold or used.

The inventory valuation reserve as of September 30, 2021 and June 30, 2021 was $ 8.8 and $ 11.8 million, respectively.

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

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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.

Long-lived asset impairment charges, including ROU and salon property and equipment, of $ 0.8 and $ 9.8 million were recorded in the three and nine months ended March 31, 2021, respectively, on the unaudited Condensed Consolidated Statement of Operations.

Of the total long-lived asset impairment charges, $ 0.3 and $ 6.3 million, respectively, were allocated to the ROU asset and $ 0.5 and $ 3.5 million, respectively, were allocated to salon property and equipment.

Long-lived salon property and equipment asset impairment charges of $ 1.2 and $ 3.9 million were recorded during the three and nine months ended March 31, 2020, respectively, and are recorded in Depreciation and amortization in the unaudited Condensed Consolidated Statement of Operations.

As of March 31, 2021 and June 30, 2020, the Franchise reporting unit had $ 229.2 and $ 227.5 million, respectively, of goodwill.

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

As of September 30, 2021 and June 30, 2021, the Franchise reporting unit had $ 229.0 and $ 229.6 million, respectively, of goodwill.

The change in goodwill for the three months ended September 30, 2021 is due to foreign currency translation.

The Company assesses goodwill impairment on an annual basis, during the Company's fourth fiscal quarter, and between annual assessments if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

An interim impairment analysis was not required in the three and nine months ended March 31, 2021.

The COVID-19 pandemic, which began in March 2020, was an interim triggering event in fiscal year 2020.

The Company assessed its goodwill as of March 31, 2020 and determined that the Company-owned goodwill was fully impaired.

As a result, the Company recorded a goodwill impairment charge of $ 40.2 million in the three and nine months ended March 31, 2020.

An interim impairment analysis was not required in the three months ended September 30, 2021.

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

For the fiscal year 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 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 that reduces the carrying value of goodwill.

For the fiscal year 2021 annual impairment assessment, the Company performed a Step 1 impairment test for the Franchise reporting unit.

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

The results of this assessment indicated that the estimated fair value of the Company's Franchise reporting unit significantly exceeded the carrying value.

Classification of Revenue and Expenses:

Beginning in the first quarter of fiscal year 2022, the Company adjusted its Statement of Operations for both periods presented to align the presentation of results to its franchise-focused business.

Below is a summary of the changes to the financial statement captions.

The change does not have a financial impact on the Company's reported revenue, operating loss, reported net loss or cash flows from operations.

Royalties - sales-based royalty received from franchisees.

In prior years, these fees were included in Royalties and Fees and disclosed in the footnotes.

Fees - fees received from franchisees and third parties, including franchise fees, software and hardware fees related to Opensalon ® Pro and fees received from the third-party distributors.

Product sales to franchisees - wholesale product sales to franchisees.

This caption equates to Product sales in the Franchise segment in prior years.

The Company is changing its franchise product sales business in fiscal year 2022 from a wholesale distribution model to a third-party distribution model.

This revenue is expected to decrease significantly during fiscal year 2022.

Advertising fund contributions - sales-based advertising fund contributions received from franchisees.

In prior years, these fees were included in Royalties and Fees and disclosed in the footnotes.

Company-owned salon revenue - service revenue and revenue derived from sales of product in Company-owned salons.

This caption equates to revenue reported in the Company-owned segment in prior periods.

Cost of product sales to franchisees - direct cost of inventory and freight and other costs of sales.

In prior years, these sales were included in the Franchise segment cost of product and site operating expenses.

Company-owned salon expense - cost of service and product sold to guests in our Company-owned salons and other salon-related costs.

In prior years, these costs were classified as Company-owned segment cost of service, cost of product and site operating expenses.

Excluded from this caption are general and administrative expense, rent and depreciation and amortization related to company-owned salons.

Depreciation:

Depreciation expense in the three and nine months ended March 31, 2021 includes $ 0.8 and $ 3.4 million of asset retirement obligations, which are cash expenses.

Minority Interest:

In December 2020, the Company purchased its non-controlling interest in Roosters from the minority shareholders.

The Company paid $ 0.6 million to obtain 100 % ownership.

The payment is recorded in cash used in financing activities on the unaudited Condensed Consolidated Statement of Cash Flows.

Depreciation expense in the three months ended September 30, 2021 and 2020 include $ 0.3 and $ 1.3 million of asset retirement obligations, which are cash expenses.

REVENUE RECOGNITION:

1 unchanged sentence

Revenue recognized at point of sale

Company-owned salon revenues are recognized at the time when the services are provided.

Product revenues for company-owned salons are recognized when the guest receives and pays for the merchandise.

Product sales to franchisees are recorded at the time product is delivered to the franchisee.

Payment for franchisee product revenue is generally collected within 30 to 90 days of delivery.

Company-owned salon revenues are recognized at the time when the services are provided or the guest receives and pays for the merchandise.

Revenues from purchases made with gift cards are also recorded when the guest takes possession of the merchandise or services are provided.

Gift cards issued by the Company are recorded as a liability (deferred revenue) upon sale and recognized as revenue upon redemption by the customer.

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, including sales of the hardware related to our proprietary cloud-based management and point-of-sale commerce solution, to franchisees are included within product revenues in the unaudited Condensed Consolidated Statement of Operations and recorded at the time product is delivered to the franchisee.

Payment for franchisee product revenue is generally collected within 30 to 90 days of delivery.

Revenue recognized over time

Franchise revenues primarily include royalties, advertising fund cooperatives fees, franchise fees and other fees.

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 revenue is billed and collected monthly in arrears.

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 gross presentation increases both the reported franchise revenue and site operating expense and generally has no impact on operating income and net income.

The treatment increases both the gross amount of reported revenue and expense and generally has no impact on operating income and net income.

Franchise fees are billed and received upon the signing of the franchise agreement.

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

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

Software fees are recognized over the term of the SaaS agreement.

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

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

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

Three Months Ended March 31, 2021 Three Months Ended March 31, 2020

Franchise Company-owned Franchise Company-owned

(Dollars in thousands)

Revenue recognized at a point in time:

Service $ — $ 24,645 $ — $ 78,387

Product 13,079 7,691 15,318 19,559

Total revenue recognized at a point in time $ 13,079 $ 32,336 $ 15,318 $ 97,946

Revenue recognized over time:

Royalty and other franchise fees $ 17,955 $ — $ 16,487 $ —

Advertising fund fees (refunds), net (1) 5,580 — ( 7,789 ) —

Franchise rental income 31,317 — 31,821 —

Total revenue recognized over time 54,852 — 40,519 —

Total revenue $ 67,931 $ 32,336 $ 55,837 $ 97,946

_______________________________________________________________________________

(1) Fiscal year 2020 includes the refund of $ 14.9 million of previously collected cooperative advertising fees.

Cooperative advertising fees were not refunded in fiscal year 2021.

Nine Months Ended March 31, 2021 Nine Months Ended March 31, 2020

Franchise Company-owned Franchise Company-owned

(Dollars in thousands)

Revenue recognized at a point in time:

Service $ — $ 90,040 $ — $ 322,133

Product 41,057 27,608 45,287 79,229

Total revenue recognized at a point in time $ 41,057 $ 117,648 $ 45,287 $ 401,362

Revenue recognized over time:

Royalty and other franchise fees $ 46,589 $ — $ 52,721 $ —

Advertising fund fees 14,804 — 13,341 —

Franchise rental income 95,885 — 96,875 —

Total revenue recognized over time 157,278 — 162,937 —

Total revenue $ 198,335 $ 117,648 $ 208,224 $ 401,362

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

September 30,

2021 June 30,

1 unchanged sentence

(Dollars in thousands)

Receivables from contracts with customers, net $ 22,106 $ 22,991 Accounts receivable, net

Receivables from contracts with customers, net $ 14,612 $ 19,112 Receivables, net

Broker fees 18,272 19,254 Other assets

14 unchanged sentences

Provision for franchisee rent (2) 364

Reclass of accrued rent (3) 396

Write-offs ( 102 )

Balance as of March 31, 2021 $ 7,162

Balance as of September 30, 2021 $ 8,669

_______________________________________________________________________________

1 unchanged sentence

(2) The provision for franchisee rent is recognized as Rent in the unaudited Condensed Consolidated Statement of Operations.

(3) The reclass of accrued rent represents franchisee rent obligations guaranteed by the Company that were unbilled and deemed unrecoverable as of June 30, 2021.

The amounts were billed in fiscal year 2022 and the related accrual was reclassified to the allowance for doubtful accounts.

Broker fees are the costs associated with using external brokers to identify new franchisees.

These fees are paid upon the signing of the franchise agreement and recognized as General and administrative expense over the term of the agreement.

These fees are paid upon the signing of the franchise agreement and recognized as general and administrative expense over the term of the franchise agreement.

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

Balance as of June 30, 2021 $ 19,254

Additions 1,573

Amortization ( 862 )

Write-offs ( 145 )

Balance as of March 31, 2021 $ 19,599

Balance as of September 30, 2021 $ 18,272

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

Gift card revenue for the three months ended March 31, 2021 and 2020 was $ 0.3 and $ 0.8 million, respectively, and for the nine months ended March 31, 2021 and 2020 was $ 0.7 and $ 2.3 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, 2021 and 2020 was $ 1.6 and $ 1.4 million, respectively, and for the nine months ended March 31, 2021 and 2020 was $ 4.9 and $ 3.8 million, respectively.

Estimated revenue expected to be recognized in the future related to deferred franchise fees for open salons as of March 31, 2021 is as follows (in thousands):

Franchise fee revenue for the three months ended September 30, 2021 and 2020 was $ 1.6 and $ 1.6 million, respectively.

Estimated revenue expected to be recognized in the future related to deferred franchise fees for open salons as of September 30, 2021 is as follows (in thousands):

Remainder of 2022 $ 4,391

1 unchanged sentence

Total $ 37,002

TBG RESTRUCTURING AND DISCONTINUED OPERATIONS:

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).

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 nine months ended March 31, 2021 and 2020.

For the three and nine months ended March 31, 2020, the Company recorded $ 0.1 and $ 2.4 million of professional fees and restructuring charges related 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.

As of March 31, 2021, prior to any mitigation efforts which may be available, the Company remains liable for up to approximately $ 12 million related to its mall-based salon lease commitments on the 62 salons that remain open, an $ 11 million reduction from June 30, 2020.

The commitments are included in our lease liabilities.

EARNINGS PER SHARE:

The Company’s basic earnings per share is calculated as net loss divided by weighted average common shares outstanding, excluding unvested outstanding stock options (SOs), restricted stock units (RSUs) and stock-settled performance units (PSUs).

The Company’s diluted earnings per share is calculated as net loss divided by weighted average common shares and common share equivalents outstanding, which includes shares issued under the Company’s stock-based compensation plans.

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

For the three and nine months ended March 31, 2021, there were 972,485 and 511,970 , respectively, and for the three and nine months ended March 31, 2020 there were 663,636 and 1,145,053 , respectively, 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 1,261,200 and 670,997 of stock-based awards during the three months ended March 31, 2021 and 2020, respectively, and 2,240,743 and 174,698 of stock-based awards during the nine months ended March 31, 2021 and 2020, 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, 2021, the Company granted various equity awards including RSUs, PSUs and SOs.

A summary of equity awards granted is as follows:

Three Months Ended March 31, 2021 Nine Months Ended March 31, 2021

During the three months ended September 30, 2021, the Company granted one equity award as follows:

Three Months Ended September 30, 2021

Restricted stock units 2,987

Performance-based restricted stock units — 62,290

Stock option units — 1,458,680

The RSUs granted to employees during the three and nine months ended March 31, 2021 vest in equal amounts over a three-year period subsequent to the grant date, cliff vest after a one-year period, cliff vest after a three-year period or cliff vest after a five-year period subsequent to the grant date.

The CEO, who was appointed in October 2020, was granted 0.4 million "sign-on" RSUs that vest pro-rated over one year .

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.

The SOs granted during the nine months ended March 31, 2021 were granted in connection with the appointment of the Company's CEO and consist of options to purchase shares of the Company's common stock.

The SOs are subject to both a four-year service-based vesting condition and a performance-based vesting condition.

Additionally, 0.4 million SOs are matching options that vest on the fourth anniversary of employment up to the number of RSUs the CEO still holds of the "sign-on" RSUs.

Total compensation cost for stock-based payment arrangements totaling $ 1.7 and $ 0.0 million for the three months ended March 31, 2021 and 2020, respectively, and $ 1.8 and $ 2.1 million for the nine months ended March 31, 2021 and 2020, respectively, was recorded within General and administrative expense on the unaudited Condensed Consolidated Statement of Operations.

In the nine months ended March 31, 2021, stock compensation includes a $ 2.4 million benefit from the forfeiture of awards related to the departure of the Company's former CEO.

Share Repurchases:

During the nine months ended March 31, 2021, the Company did no t repurchase shares under the previously approved stock repurchase program.

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, 2021, $ 54.6 million remains outstanding under the approved stock repurchase program.

The RSUs granted during the three months ended September 30, 2021 vest on October 27, 2021 and were granted to a Board member who joined the Company during the quarter.

Total compensation cost for stock-based payment arrangements totaling $ 1.7 and $( 1.2 ) million for the three months ended September 30, 2021 and 2020, respectively, was recorded within general and administrative expense on the unaudited Condensed Consolidated Statement of Operations.

In the three months ended September 30, 2020, stock compensation includes a $ 2.4 million benefit from the forfeiture of awards related to the departure of the Company's former CEO.

Share Issuance Program:

In fiscal year 2021, the Company filed a $ 150.0 million shelf registration statement and $ 50.0 million prospectus supplement with the Securities and Exchange Commission (SEC) under which it may offer and sell, from time to time, up to $ 50.0 million worth of its Class A common stock in "at-the-market" offerings.

During the three months ended September 30, 2021, the Company raised gross proceeds of $ 33.2 million related to the "at-the-market" offering and paid fees to sales agents and other fees of $ 1.0 million.

On September 29, 2021, the Company sold 1.2 million shares for net proceeds of $ 5.0 million, which settled on October 1, 2021.

The settlement occurred in the second quarter so it is excluded from interim unaudited Condensed Consolidated Statement of Shareholders' Equity and Cash Flows.

Net proceeds from sales of shares under the "at-the-market" program, if any, may be used to, among other things, fund working capital requirements, repay debt and support growth strategies.

INCOME TAXES:

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

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

2021 2020 2021 2020

Three Months Ended September 30,

(Dollars in thousands)

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Effective tax rate 0.5 % 1.8 %

The recorded tax provisions and effective tax rates for the three and nine months ended March 31, 2021 and 2020 were different than what would normally be expected primarily due to the impact of the deferred tax valuation allowance.

The recorded tax provisions and effective tax rates for the three months ended September 30, 2021 and 2020 were different than what would normally be expected primarily due to the impact of the deferred tax valuation allowance.

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

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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.

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 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, 2020 and March 31, 2021, $ 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.

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

20-cv-02181-MMC.

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.

The Company and the supplier entered into an agreement, effective June 25, 2021, that provided for the dismissal of the lawsuit and set forth a commercial services agreement pursuant to which the supplier will assist in the transfer of franchise salons from its point-of-sale system to the Company's salon management system, Opensalon ® Pro.

The Company's accrual related to the agreement was $ 3.0 million as of September 30, 2021 and June 30, 2021.

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:

The table below reconciles the cash and cash equivalents balances and restricted cash balances, recorded within other current assets on the unaudited Condensed Consolidated Balance Sheet to the amount of cash, cash equivalents and restricted cash reported on the unaudited Condensed Consolidated Statement of Cash flows:

September 30,

2021 June 30,

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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.

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

Franchise Reporting Unit

(Dollars in thousands)

Goodwill, net at June 30, 2020 $ 227,457

Translation rate adjustments 1,764

Goodwill, net at March 31, 2021 $ 229,221

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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Total rent includes the following:

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

2021 2020 2021 2020

Three Months Ended September 30,

(Dollars in thousands)

Minimum rent $ 8,400 $ 13,571 $ 28,605 $ 48,638

Percentage rent based on sales 3 298 78 2,145

Real estate taxes and other expenses 1,989 3,672 7,147 9,842

Lease termination (benefit) expense (1) ( 154 ) 44 6,484 123

Office and warehouse rent $ 1,669 $ 1,203

Lease termination expense (1) 1,340 5,554

Lease liability benefit (2) ( 2,431 ) ( 6,061 )

Corporate segment rent 671 904 2,046 1,909

Franchise segment non-reimbursable rent 101 176 1,063 767

Franchise salon rent 329 718

Company-owned salon rent 896 11,811

Total $ 1,803 $ 13,225

_______________________________________________________________________________

(1) During the three and nine months ended March 31, 2021, the Company terminated the leases for 15 and 244 company-owned salons, respectively, before the lease end dates.

During the three and nine months ended March 31, 2020, the Company terminated the leases for 3 and 60 company-owned salons, respectively, before the lease end dates.

For the three and nine months ended March 31, 2021, lease termination fees include $ 0.3 and $ 4.9 million, respectively, of early termination payments to close salons before the lease end date to relieve the Company of future lease obligations.

For the three and nine months ended March 31, 2021, lease termination fees also include $( 0.5 ) and $ 1.5 million, respectively, of adjustments to accrue future lease payments for salons that are no longer operating.

The early termination payments made in the nine months ended March 31, 2021 decreased the future minimum rent liability by $ 9.5 million plus saved the Company from the associated real estate taxes and other lease expenses.

(2) For the three and nine months ended March 31, 2021, upon termination of previously impaired leases, the Company derecognized ROU assets of $ 3.2 and $ 13.3 million, respectively, and lease liabilities of $ 5.2 and $ 19.7 million, respectively, that resulted in a net gain of $ 2.0 and $ 6.4 million, respectively.

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

The benefit recognized was $ 1.0 and $ 4.9 million in the three and nine months ended March 31, 2021, respectively.

(1) During the three months ended September 30, 2021, the Company paid $ 0.9 million to exit its distribution centers before the lease end dates and incurred costs of $ 0.4 million to exit salons before the lease end date in order to relieve the Company of future lease obligations.

For the three months ended September 30, 2020, lease termination fees includes $ 2.5 million of early termination payments to close salons before the lease end date to relieve the Company of future lease obligations and $ 3.1 million to accrue future lease payments for salons that are no longer operating.

(2) Upon termination of previously impaired leases, the Company derecognizes the corresponding ROU assets and lease liabilities which results in a net gain.

In addition, the Company recognizes a benefit from lease liabilities decreasing in excess of previously impaired ROU assets for ongoing leases that were previously impaired.

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

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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 March 31, 2021 and 2020, franchise rental income and franchise rent expense were $ 31.3 and $ 31.8 million, respectively.

For the nine months ended March 31, 2021 and 2020, franchise rental income and franchise rent expense were $ 95.9 and $ 96.9 million.

These leases generally have lease terms of approximately 5 years.

The Company expects to renew SmartStyle and Supercuts franchise leases upon expiration.

For the three months ended September 30, 2021 and 2020, franchise rental income and franchise rent expense were $ 33.8 and $ 32.3 million, respectively.

These leases generally have lease terms of approximately five years .

The Company expects to renew SmartStyle and some franchise leases upon expiration.

Other leases are expected to be renewed by the franchisee upon expiration.

This represents a Board-approved change in estimate that occurred in the second quarter of fiscal year 2021 and was intended to reduce lease exposure.

The change in estimate resulted in a decrease to lease liabilities and right of use assets of $ 72.9 million, with no impact to net income.

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.

All lease-related costs are passed through to the franchisees.

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

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

The Company's consolidated ROU asset balance was $ 629.0 and $ 786.2 million as of March 31, 2021 and June 30, 2020, respectively.

The Company's consolidated ROU asset balance was $ 573.5 and $ 611.9 million as of September 30, 2021 and June 30, 2021, respectively.

For leases classified as operating leases, expense for lease payments is recognized on a straight-line basis over the lease term, including the lease renewal option when the lease is expected to be renewed.

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The Company uses the portfolio approach in applying the discount rate based on the original lease term.

The weighted average remaining lease term was 6.44 and 6.87 years and the weighted average discount rate was 4.07 % and 3.95 % for all salon operating leases as of March 31, 2021 and June 30, 2020, respectively.

The weighted average remaining lease term was 6.38 and 6.44 years and the weighted average discount rate was 4.14 % and 4.11 % for all salon operating leases as of September 30, 2021 and June 30, 2021, respectively.

A lessee's ROU asset is subject to the same asset impairment guidance in ASC 360, Property, Plant, and Equipment, applied to other elements of property, plant, and equipment.

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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 estimated when determining the amount of any impairment loss.

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.

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the market rent of comparable properties based on recently negotiated leases as applicable, the asset group's projected sales for properties with no recently negotiated leases, and a discount rate.

In the three months ended September 30, 2021 and 2020, the Company recognized a long-lived impairment charge of $ 0.2 and $ 5.8 million, respectively, which included $ 0.1 and $ 4.6 million, respectively, related to the ROU assets, in the unaudited Condensed Consolidated Statement of Operations.

The impairments recorded for the three months ended September 30, 2021 were primarily the result of triggering events identified on certain underperforming salons, salons that were identified to close in the year, and certain salons where franchisees were unable to fulfill their rent obligations.

Assessing the long-lived assets for impairment requires management to make assumptions and to apply judgment, which can be affected by economic conditions and other factors that can be difficult to predict.

The 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 and nine months ended March 31, 2021, the Company recognized a long-lived impairment charge of $ 0.8 and $ 9.8 million, respectively, which included $ 0.3 and $ 6.3 million, respectively, related to the right of use assets, in the unaudited Condensed Consolidated Statement of Operations.

The impairments recorded for the three and nine months ended March 31, 2021 were primarily the result of triggering events identified on certain underperforming salons, salons that were identified to close in the year, and certain salons where franchisees were unable to fulfill their rent obligations.

As of March 31, 2021, future operating lease commitments, including one renewal option for leases expected to be renewed, to be paid and received by the Company were as follows (in thousands):

The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions it uses to calculate impairment losses for its long-lived assets, including its ROU assets.

Our projections of future operating performance do not anticipate future salon closures due to the COVID-19 pandemic.

However, the ultimate severity and longevity of the COVID-19 pandemic is unknown, therefore;

if actual results are not consistent with the estimates and assumptions used in the calculations, the Company may be exposed to future impairment losses that could be material.

As of September 30, 2021, future operating lease commitments, including one renewal option for leases expected to be renewed, to be paid and received by the Company were as follows (in thousands):

Fiscal Year Leases for Franchise Salons Leases for Company-owned Salons Corporate Leases Total Operating Lease Payments Sublease Income To Be Received From Franchisees Net Rent Commitments

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Revolving Credit Facility

Maturity Date March 31,

2021 March 31,

Maturity Date September 30,

2021 September 30,

2021 June 30,

1 unchanged sentence

Revolving credit facility 2023 5.00 % $ 195,805 $ 186,911

At March 31, 2021, cash and cash equivalents totaled $ 34.5 million.

As of March 31, 2021, the Company has $ 177.5 million of outstanding borrowings under a $ 295.0 million revolving credit facility.

At March 31, 2021, 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 March 31, 2021.

The Company's liquidity, which includes the unused available balance under the credit facility and unrestricted cash and cash equivalents, totaled $ 133.3 million as of March 31, 2021.

At September 30, 2021, cash and cash equivalents totaled $ 45.5 million.

As of September 30, 2021, the Company has $ 195.8 million of outstanding borrowings under a $ 293.3 million revolving credit facility.

The credit facility decreased $ 1.1 million from $ 294.4 million as of June 30, 2021 in accordance with the bulk sale provisions in the revolving credit facility agreement, due to the sale of secured inventory related to our transition to third-party distribution partners.

At September 30, 2021, the Company had outstanding standby letters of credit under the revolving credit facility of $ 15.7 million, primarily related to the Company's self-insurance program.

The unused available credit under the revolving credit facility was $ 81.8 million as of September 30, 2021.

The Company's liquidity per the agreement includes the unused available balance under the credit facility, unrestricted cash and cash equivalents and the shortfall in the gap in expected proceeds from the sale of salon assets of $ 20.9 million as of September 30, 2021.

Total liquidity per the agreement was $ 148.2 million as of September 30, 2021.

The revolving credit facility has a minimum liquidity covenant of $ 75.0 million.

As of March 31, 2021, the Company had cash, cash equivalents and restricted cash of $ 40.4 million and current liabilities of $ 203.2 million.

The Company is in compliance with all covenants and other requirements of the financing arrangements as of March 31, 2021 and believes it will continue to be in compliance for at least one year from our filing date.

Sale and Leaseback Transaction

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

Maturity Date Interest Rate March 31,

2021 June 30,

(Fiscal Year) (Dollars in thousands)

Financial liability - Salt Lake City Distribution Center 2034 3.30 % $ — $ 16,773

Financial liability - Chattanooga Distribution Center 2034 3.70 % — 11,208

Long- term financing liability $ — $ 27,981

In fiscal year 2019, the Company sold its Salt Lake City and Chattanooga Distribution Centers to an unrelated party.

At the time of the sale, the transactions were considered failed sale and leaseback transactions, as the Company had planned to lease the property for more than 75% of its economic life.

The sale proceeds received from the buyer-lessor were recognized as a financial liability, which was reduced based on the rental payments made under the lease that were allocated between principal and interest.

In the third quarter of fiscal year 2021, as a result of the Company exiting its wholesale product sales business, the Company informed the landlord of its intention to exit the leased spaces.

Because the Company no longer plans to lease the distribution centers for the majority of the assets’ useful lives, these transactions are subsequently considered sale and leaseback transactions.

As a result, the Company derecognized the financial liability of $ 28.5 million and the carrying value of the related assets of $ 13.6 million and recognized a gain of $ 14.9 million for the difference between the liability and asset.

The gain on distribution centers was recorded to Interest income and other, net in the unaudited Condensed Consolidation Statement of Operations.

As the leases for the two distribution centers meet the sale and leaseback criteria, the Company recognized a right of use asset and lease liability of $ 20.3 million on the unaudited Condensed Consolidated Balance Sheet as of March 31, 2021.

As of September 30, 2021, the Company had cash, cash equivalents and restricted cash of $ 56.1 million and current liabilities of $ 182.5 million.

The Company was in compliance with all covenants and other requirements of the financing arrangements as of September 30, 2021 and believes it will continue to be in compliance for at least one year from the filing date.

FAIR VALUE MEASUREMENTS:

4 unchanged sentences

Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of March 31, 2021 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.

As of September 30, 2021 and June 30, 2021, the estimated fair value of the Company's cash, cash equivalents, restricted cash, receivables, inventory, deferred compensation assets and accounts payable approximated their carrying values.

The estimated fair values of the Company's debt is based on Level 2 inputs.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

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

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

2021 2020 2021 2020

Three Months Ended September 30,

(Dollars in thousands)

Goodwill $ — $ 40,164 $ — $ 40,164

Long-lived asset impairment (1) $ 163 $ 5,824

_______________________________________________________________________________

(1) Long-lived asset impairment charges, including right of use and salon property and equipment, are separately stated on the unaudited Condensed Consolidated Statement of Operations for the three and nine months ended March 31, 2021.

Long-lived salon property and equipment asset impairment charges are recorded in Depreciation and amortization in the unaudited Condensed Consolidated Statement of Operations for the three and nine months ended March 31, 2020.

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

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Segment information is prepared on the same basis that the chief operating decision maker reviews financial information for operational decision-making purposes.

Beginning in fiscal year 2022, corporate costs are included within the Franchise segment to reflect how the chief operating decision maker reviews the business.

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

September 30,

2021 June 30,

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Portfolio Brands

Mall-based (3)

Total Company-owned salons

as a percent of total Franchise and Company-owned salons

13.4 % 23.9 %

OWNERSHIP INTEREST LOCATIONS:

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_______________________________________________________________________________

(1) Portfolio Brands was previously referred to as Signature Style.

(1) Canadian and Puerto Rican salons are included in the North American salon totals.

(3) The mall-based salons were acquired from TBG on December 31, 2019.

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

As of March 31, 2021, the Franchise operating segment is comprised primarily of Supercuts ® , SmartStyle ® , Cost Cutters ® , First Choice Haircutters ® , Magicuts ® , and Roosters ® concepts and the Company-owned operating segment is comprised primarily of SmartStyle ® , Supercuts ® , Cost Cutters ® , and other regional trade names.

As of September 30, 2021, the Franchise operating segment is comprised primarily of Supercuts ® , SmartStyle ® , Cost Cutters ® , First Choice Haircutters ® , Magicuts ® , and Roosters ® concepts and the Company-owned operating segment is comprised primarily of SmartStyle ® , Supercuts ® , Cost Cutters ® , and other regional trade names.

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

Three Months Ended March 31, 2021

Franchise Company-owned Corporate Consolidated

Three Months Ended September 30, 2021

Franchise Company-owned Consolidated

(Dollars in thousands)

Service $ — $ 24,645 $ — $ 24,645

Product 13,079 7,691 — 20,770

Royalties and fees 23,535 — — 23,535

Royalties $ 16,602 $ — $ 16,602

Fees 3,265 — 3,265

Product sales to franchisees 8,008 — 8,008

Advertising fund contributions 8,114 — 8,114

Franchise rental income 33,762 — 33,762

Company-owned salon revenue — 8,005 8,005

Total revenue 69,751 8,005 77,756

Operating expenses:

Cost of service — 15,821 — 15,821

Cost of product 11,148 10,120 — 21,268

Site operating expenses 5,600 7,766 — 13,366

Cost of product sales to franchisees 8,112 — 8,112

General and administrative 21,243 546 21,789

Rent 1,677 126 1,803

Advertising fund expense 8,114 — 8,114

Franchise rent expense 33,762 — 33,762

Company-owned salon expense — 7,945 7,945

Depreciation and amortization 1,623 246 1,869

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Total operating expenses 74,531 9,026 83,557

Operating income (loss) 11,960 ( 12,623 ) ( 17,878 ) ( 18,541 )

Other (expense) income:

Interest expense — — ( 3,163 ) ( 3,163 )

Loss from sale of salon assets to franchisees, net — — ( 4,575 ) ( 4,575 )

Interest income and other, net — — 15,099 15,099

Income (loss) from continuing operations before income taxes $ 11,960 $ ( 12,623 ) $ ( 10,517 ) $ ( 11,180 )

Three Months Ended March 31, 2020

Franchise Company-owned Corporate Consolidated

(Dollars in thousands)

Service $ — $ 78,387 $ — $ 78,387

Product 15,318 19,559 — 34,877

Royalties and fees 8,698 — — 8,698

Franchise rental income 31,821 — — 31,821

Total revenue 55,837 97,946 — 153,783

Operating expenses:

Cost of service — 54,824 — 54,824

Cost of product 11,452 10,220 — 21,672

Site operating expenses ( 7,789 ) 11,449 — 3,660

General and administrative 8,657 4,566 18,648 31,871

Rent 176 17,585 904 18,665

Franchise rent expense 31,821 — — 31,821

Depreciation and amortization 292 9,799 268 10,359

TBG mall location restructuring 146 — — 146

Goodwill impairment — 40,164 — 40,164

Total operating expenses 44,755 148,607 19,820 213,182

Operating income (loss) 11,082 ( 50,661 ) ( 19,820 ) ( 59,399 )

Other (expense) income:

Interest expense — — ( 1,712 ) ( 1,712 )

Loss from sale of salon assets to franchisees, net — — ( 7,858 ) ( 7,858 )

Interest income and other, net — — 148 148

Income (loss) from continuing operations before income taxes $ 11,082 $ ( 50,661 ) $ ( 29,242 ) $ ( 68,821 )

Nine Months Ended March 31, 2021

Franchise Company-owned Corporate Consolidated

Operating loss $ ( 4,780 ) $ ( 1,021 ) $ ( 5,801 )

Three Months Ended September 30, 2020

Franchise Company-owned Consolidated

(Dollars in thousands)

Service $ — $ 90,040 $ — $ 90,040

Product 41,057 27,608 — 68,665

Royalties and fees 61,393 — — 61,393

Royalties $ 11,405 $ — $ 11,405

Fees 2,042 — 2,042

Product sales to franchisees 13,742 — 13,742

Advertising fund contributions 4,509 — 4,509

Franchise rental income 32,283 — 32,283

Company-owned salon revenue — 47,415 47,415

Total revenue 63,981 47,415 111,396

Operating expenses:

Cost of service — 66,441 — 66,441

Cost of product 33,117 21,723 — 54,840

Site operating expenses 14,858 22,097 — 36,955

Cost of product sales to franchisees 10,678 — 10,678

General and administrative 23,171 2,977 26,148

Rent 1,279 11,946 13,225

Advertising fund expense 4,510 — 4,510

Franchise rent expense 32,283 — 32,283

Company-owned salon expense — 42,943 42,943

Depreciation and amortization 2,294 5,082 7,376

1 unchanged sentence

Total operating expenses 74,825 68,162 142,987

Operating income (loss) 28,735 ( 50,739 ) ( 54,882 ) ( 76,886 )

Other (expense) income:

Interest expense — — ( 10,626 ) ( 10,626 )

Loss from sale of salon assets to franchisees, net — — ( 8,463 ) ( 8,463 )

Interest income and other, net — — 15,616 15,616

Income (loss) from continuing operations before income taxes $ 28,735 $ ( 50,739 ) $ ( 58,355 ) $ ( 80,359 )

Nine Months Ended March 31, 2020

Franchise Company-owned Corporate Consolidated

(Dollars in thousands)

Service $ — $ 322,133 $ — $ 322,133

Product 45,287 79,229 — 124,516

Royalties and fees 66,062 — — 66,062

Franchise rental income 96,875 — — 96,875

Total revenue 208,224 401,362 — 609,586

Operating expenses:

Cost of service — 212,664 — 212,664

Cost of product 34,804 40,453 — 75,257

Site operating expenses 13,341 49,591 — 62,932

General and administrative 25,990 22,263 56,934 105,187

Rent 767 60,748 1,909 63,424

Franchise rent expense 96,875 — — 96,875

Depreciation and amortization 662 21,844 4,980 27,486

TBG mall location restructuring 2,368 — — 2,368

Goodwill impairment — 40,164 — 40,164

Total operating expenses 174,807 447,727 63,823 686,357

Operating income (loss) 33,417 ( 46,365 ) ( 63,823 ) ( 76,771 )

Other (expense) income:

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

Loss from sale of salon assets to franchisees, net — — ( 26,125 ) ( 26,125 )

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

Income (loss) from continuing operations before income taxes $ 33,417 ( 46,365 ) $ ( 91,375 ) $ ( 104,323 )

REVISION OF THIRD QUARTER 2020 UNAUDITED RESULTS:

During the fourth quarter of 2020, the Company identified an error in the calculation of the goodwill derecognition associated with the sale of salons to franchisees in the second quarter and third quarter.

During the third quarter, goodwill derecognition was overstated by $ 2.4 million.

As of March 31, 2020, the Company fully impaired its remaining Company-owned goodwill with the amount of goodwill impairment being overstated by $ 4.4 million in the third quarter.

The Company assessed the applicable guidance issued by the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) and concluded these misstatements were not material, individually or in the aggregate, to the Company’s Unaudited Condensed Consolidated Financial Statements for the aforementioned interim periods.

However, to facilitate comparisons among periods, the Company has decided to revise its previously issued second and third quarter unaudited condensed consolidated financial information.

Three Months Ended March 31, 2020

As Previously Reported Adjustments As Revised

(Dollars in thousands, except per share amounts)

Rent expense (1) $ 19,243 $ ( 578 ) $ 18,665

Goodwill impairment (2) 44,529 ( 4,365 ) 40,164

Operating loss $ ( 10,844 ) $ ( 20,747 ) $ ( 31,591 )

Loss from sale of salon assets to franchisees, net ( 10,208 ) 2,350 ( 7,858 )

Interest income and other, net ( 1,329 ) 1,477 148

Loss from continuing operations before income taxes ( 77,591 ) 8,770 ( 68,821 )

Income tax benefit 2,253 ( 1,274 ) 979

Net loss ( 75,037 ) 7,496 ( 67,541 )

Net loss per share ( 2.10 ) 0.22 ( 1.88 )

Comprehensive loss ( 77,519 ) 7,496 ( 70,023 )

Nine Months Ended March 31, 2020

As Previously Reported Adjustments As Revised

(Dollars in thousands, except per share amounts)

Rent expense (1) $ 64,002 $ ( 578 ) $ 63,424

Goodwill impairment (2) 44,529 ( 4,365 ) 40,164

Operating loss ( 81,714 ) 4,943 ( 76,771 )

Loss from sale of salon assets to franchisees, net ( 21,760 ) ( 4,365 ) ( 26,125 )

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

Loss from continuing operations before income taxes ( 104,901 ) 578 ( 104,323 )

Income tax benefit 5,904 ( 121 ) 5,783

Net loss ( 98,244 ) 457 ( 97,787 )

Net loss per share ( 2.73 ) 0.01 ( 2.72 )

Comprehensive loss ( 100,588 ) 457 ( 100,131 )

_______________________________________________________________________________

The Company revised the amounts originally reported for the third quarter of fiscal year 2020 for the following items:

(1) Adjusted third quarter rent expense includes a $ 0.6 million benefit related to leases signed in the third quarter, but not identified until the fourth quarter.

The net loss for the three and nine months ended March 31, 2020 were both impacted by the misstatement.

(2) During the third quarter, goodwill derecognition was overstated by $ 2.4 million.

As of March 31, 2020, the Company impaired its remaining Company-owned goodwill, with the amount of goodwill impairment being overstated by $ 4.4 million.

As the second quarter error which understated goodwill derecognition was not identified until the fourth quarter, goodwill impairment and loss from the sale of salons to franchisees, net were misstated in the third quarter.

The Company recorded a $ 4.4 million decrease to goodwill impairment and a $ 2.4 million decrease to loss from the sale of salon assets to franchisees, net to correct the error.

Net loss for the nine months ended March 31, 2020 was not misstated.

However, goodwill impairment and the loss from the sales of salons to franchisees, net were misstated in the nine months ended March 31, 2020, with goodwill impairment overstated by $ 4.4 million and loss from the sale of salons to franchisees, net understated by $ 4.4 million.

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