What changed in this filing

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Item 1. Financial Statements

2022-02-03 compared with 2021-11-04 · 171 added, 84 removed, 418 unchanged (38% of the section changed)

3 unchanged sentences

(Dollars in thousands, except share data)

September 30,

2021 June 30,

17 unchanged sentences

Short-term lease liability (Note 7) 110,597 116,471

113,585 116,471

Total current liabilities 168,217 198,485

8 unchanged sentences

Common stock, $ 0.05 par value;

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

issued and outstanding 45,490,074 and 35,795,844 common shares at December 31, 2021 and June 30, 2021, respectively

Additional paid-in capital 61,601 25,102

7 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

For The Three Months Ended September 30, 2021 And 2020

For The Three And Six Months Ended December 31, 2021 And 2020

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

Three Months Ended September 30,

Three Months Ended December 31, Six Months Ended December 31,

2021 2020 2021 2020

Royalties $ 16,125 $ 12,749 $ 32,726 $ 24,154

10 unchanged sentences

Rent (Note 7)

3,088 12,902 4,891 26,127

Advertising fund expense 8,021 4,715 16,136 9,224

9 unchanged sentences

Interest income and other, net 99 403 ( 140 ) 517

Loss from continuing operations before income taxes ( 10,426 ) ( 35,901 )

Loss from operations before income taxes ( 5,092 ) ( 33,279 ) ( 15,519 ) ( 69,179 )

Income tax benefit 164 400 213 1,035

13 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS (Unaudited)

For The Three Months Ended September 30, 2021 And 2020

For The Three And Six Months Ended December 31, 2021 And 2020

(Dollars in thousands)

Three Months Ended September 30,

Three Months Ended December 31, Six Months Ended December 31,

2021 2020 2021 2020

Net loss $ ( 4,928 ) $ ( 32,879 ) $ ( 15,306 ) $ ( 68,144 )

5 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited)

For The Three Months Ended September 30, 2021 And 2020

For The Three And Six Months Ended December 31, 2021 And 2020

(Dollars in thousands)

Three Months Ended September 30, 2021

Three Months Ended December 31, 2021

Common Stock Additional

3 unchanged sentences

Shares Amount

Balance, June 30, 2021 35,795,844 $ 1,790 $ 25,102 $ 9,543 $ ( 19,389 ) $ 17,046

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

Net loss — — — — ( 4,928 ) ( 4,928 )

3 unchanged sentences

Net restricted stock activity 302,271 18 ( 266 ) — — ( 248 )

Balance, December 31, 2021 45,490,074 $ 2,277 $ 61,601 $ 9,105 $ ( 34,695 ) $ 38,288

Three Months Ended December 31, 2020

Common Stock Additional

Capital Accumulated

Comprehensive

Income Retained Earnings Total

Shares Amount

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

Three Months Ended September 30, 2020

Net loss — — — — ( 32,879 ) ( 32,879 )

Foreign currency translation — — — 835 — 835

Stock-based compensation — — 1,314 — — 1,314

Net restricted stock activity 102,303 5 166 — — 171

Minority interest — — — — ( 534 ) ( 534 )

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

Six Months Ended December 31, 2021

Common Stock Additional

1 unchanged sentence

Comprehensive

Income Accumulated Deficit Total

Shares Amount

Balance, June 30, 2021 35,795,844 $ 1,790 $ 25,102 $ 9,543 $ ( 19,389 ) $ 17,046

Net loss — — — — ( 15,306 ) ( 15,306 )

Foreign currency translation — — — ( 438 ) — ( 438 )

Issuance of common stock, net of offering costs 9,295,618 465 36,720 — — 37,185

Stock-based compensation — — 305 — — 305

Net restricted stock activity 398,612 22 ( 526 ) — — ( 504 )

Balance, December 31, 2021 45,490,074 $ 2,277 $ 61,601 $ 9,105 $ ( 34,695 ) $ 38,288

Six Months Ended December 31, 2020

Common Stock Additional

Capital Accumulated

Comprehensive

Income Retained Earnings Total

6 unchanged sentences

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

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

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

_______________________________________________________________________________

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

For The Three Months Ended September 30, 2021 And 2020

For The Six Months Ended December 31, 2021 And 2020

(Dollars in thousands)

Three Months Ended September 30,

Six Months Ended December 31,

Cash flows from operating activities:

14 unchanged sentences

Costs associated with sale of salon assets to franchisees — ( 222 )

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

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

Net cash (used in) provided by investing activities ( 2,947 ) 624

Cash flows from financing activities:

3 unchanged sentences

Taxes paid for shares withheld ( 823 ) ( 212 )

Minority interest buyout — ( 562 )

Distribution center lease payments — ( 478 )

11 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 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.

The unaudited interim Condensed Consolidated Financial Statements of Regis Corporation (the Company) as of December 31, 2021 and for the three and six months ended December 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 December 31, 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.

4 unchanged sentences

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.

During the period ended December 31, 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 and profitability.

In response to COVID-19, the U.S.

employee retention payroll tax credit, Canada Emergency Wage Subsidy (CEWS) and Canada Emergency Rent Subsidy (CERS) were introduced for eligible employers.

In fiscal year 2021, the Company recorded a $ 1.5 million benefit related to the U.S.

employee retention tax credit.

In fiscal years 2022 and 2021, the Company received $ 1.4 and $ 1.6 million, respectively, in CEWS and $ 1.2 and $ 0.0 million , respectively, in CERS that partially cover expenses incurred in Canada during those years.

Overall, COVID-19 has, and may continue to have, a negative effect 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.

2 unchanged sentences

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.

As a result, the Company exited its distribution centers in fiscal year 2022.

To facilitate the exit, the Company sold and continues to sell inventory at discounts and dispose 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:

The inventory valuation reserve as of December 31, 2021 and June 30, 2021 was $ 7.8 and $ 11.8 million, respectively.

Included in Company-owned salon expense is an inventory reserve charge of $ 1.2 and $ 1.5 million in the three and six months ended December 31, 2021, respectively.

Included in Company-owned salon expense is an inventory reserve charge of $ 1.1 and $ 1.6 million in the three and six months ended December 31, 2020, respectively.

Long-Lived Asset Impairment Assessments:

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

2 unchanged sentences

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 long-lived asset group is estimated using market participant methods based on the best information available.

See Note 7 of the unaudited Condensed Consolidated Financial Statements for further discussion related to the ROU asset impairment.

1 unchanged sentence

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.

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

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

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

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

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

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

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

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

During the three months ended December 31, 2021, the Company determined a triggering event occurred, resulting in a quantitative impairment test performed over goodwill.

This determination was made considering the sustained decrease in share price and a change in the Company's chief operating decision maker in the three months ended December 31, 2021.

Due to the triggering event experienced in the second quarter, the Company engaged a third-party valuation specialist to perform an impairment analysis on the Franchise reporting unit of the business.

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.

The discounted cash flow model reflects management's assumptions regarding revenue growth rates, economic and market trends, cost structure, and other expectations about the anticipated short-term and long-term operating results.

The discount rate of 18.5 % was also a key assumption utilized in the discounted cash flow.

As a result of the impairment testing, the Franchise reporting unit, which has goodwill of $ 229.0 million, was determined to have a fair value that exceeded its carrying value by 15 % as of December 31, 2021.

At the time of the Company's annual goodwill impairment test in the fourth quarter of fiscal year 2021, the fair value exceeded the book value by 30 %.

The decrease in headroom is primarily due to an increase in the company-specific risk factor that drove an increase in discount rate from 14 % to 18.5 %.

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

The change in goodwill for the six months ended December 31, 2021 is due to foreign currency translation.

Classification of Revenue and Expenses:

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Depreciation:

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

Depreciation expense in the three months ended December 31, 2021 and 2020 include $ 0.3 and $ 1.4 million, respectively, and for the six months ended December 31, 2021 and 2020 include $ 0.6 and $ 2.7 million, respectively, of asset retirement obligations, which are cash expenses.

REVENUE RECOGNITION:

18 unchanged sentences

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

September 30,

2021 June 30,

8 unchanged sentences

Total current deferred revenue $ 8,049 $ 8,164

$ 8,082 $ 8,164

Deferred franchise fees unopened salons $ 4,128 $ 6,571 Other non-current liabilities

9 unchanged sentences

Write-offs ( 589 )

Balance as of September 30, 2021 $ 8,669

Balance as of December 31, 2021 $ 8,351

_______________________________________________________________________________

9 unchanged sentences

Write-offs ( 366 )

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.

Balance as of December 31, 2021 $ 17,288

The decrease in non-current deferred franchise fees for unopened salons from June 30, 2021 to December 31, 2021 is primarily due to $ 1.7 million of deferred fees related to terminated development agreements being recognized as fees in the unaudited Condensed Consolidated Statement of Operations in the six months ended December 31, 2021, of which $ 1.5 million was recognized in the second quarter.

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

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

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

Franchise fee revenue for the three months ended December 31, 2021 and 2020 was $ 1.6 and $ 1.6 million, respectively, and for the six months ended December 31, 2021 and 2020 was $ 3.2 and $ 3.3 million, respectively.

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

Remainder of 2022 $ 3,034

3 unchanged sentences

Stock-Based Employee Compensation:

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

Three Months Ended September 30, 2021

Restricted stock units 2,987

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

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

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

During the three and six months ended December 31, 2021, the Company granted various equity awards including RSUs, SOs, and SARs as follows:

Three Months Ended December 31, 2021 Six Months Ended December 31, 2021

Restricted stock units (RSUs) 770,309 773,296

Stock options (SOs) 537,500 537,500

Stock appreciation rights (SARs) 487,500 487,500

The RSUs granted during the three months ended December 31, 2021 vest 20 %, 20 %, 60 % over a three-year period subsequent to the grant date or cliff vest after a one-year period subsequent to the grant date.

The RSUs granted during the first quarter of fiscal year 2022 were granted to a Board member who joined the Company during the quarter and vested on October 27, 2021.

The SOs and SARs granted during the three months ended December 31, 2021 vest 20 %, 20 %, 60 % over a three-year period subsequent to the grant date.

Total compensation cost for stock-based payment arrangements totaling $( 1.4 ) and $ 1.3 million for the three months ended December 31, 2021 and 2020, respectively, and $ 0.3 and $ 0.1 million for the six months ended December 31, 2021 and 2020, respectively, were recorded within general and administrative expense on the unaudited Condensed Consolidated Statement of Operations.

In the three months ended December 31, 2021 and 2020, stock compensation includes a benefit related to executive forfeitures of $ 2.0 and $ 0.3 million, respectively.

In the six months ended December 31, 2021 and 2020, stock compensation includes a benefit related to executive forfeitures of $ 2.0 and $ 2.7 million, respectively.

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.

During the three and six months ended December 31, 2021, the Company received gross proceeds of $ 5.2 and $ 38.4 million, respectively, related to the "at-the-market" offering and paid fees to sales agents and other fees of $ 0.2 and $ 1.2 million, respectively.

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.

1 unchanged sentence

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

Three Months Ended September 30,

Three Months Ended December 31, Six Months Ended December 31,

2021 2020 2021 2020

(Dollars in thousands)

1 unchanged sentence

Effective tax rate 3.2 % 1.2 % 1.4 % 1.5 %

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 recorded tax provisions and effective tax rates for the three and six months ended December 31, 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.

2 unchanged sentences

The Company is a defendant in various lawsuits and claims arising out of the normal course of business.

Like certain other large retail employers, the Company has been faced with allegations of purported class-wide consumer and wage and hour violations.

Litigation is inherently unpredictable, and the outcome of these matters cannot presently be determined.

Although the actions are being vigorously defended, the Company could in the future, incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period.

Like certain other franchisors, the Company has been faced with allegations of franchise regulation and agreement violations.

Additionally, similar to other large retail employers, the Company has been faced with allegations of purported class-wide consumer and wage and hour violations.

In the three months ended December 31, 2021, the Company recorded $ 1.0 million of settlement and legal fees related to litigation in the quarter.

Other litigation is inherently unpredictable, and the outcome of these matters cannot presently be determined.

Although the actions are being vigorously defended, the Company could incur judgments in the future or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period.

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.

1 unchanged sentence

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.

The Company's accrual related to the agreement was $ 2.7 and $ 3.0 million as of December 31, 2021 and June 30, 2021, respectively.

CASH, CASH EQUIVALENTS AND RESTRICTED CASH:

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

September 30,

2021 June 30,

12 unchanged sentences

Total rent includes the following:

Three Months Ended September 30,

Three Months Ended December 31, Six Months Ended December 31,

2021 2020 2021 2020

(Dollars in thousands)

6 unchanged sentences

_______________________________________________________________________________

(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.

(1) During the three months ended December 31, 2021, the Company incurred costs of $ 0.2 million to exit salons before the lease end date in order to relieve the Company of future lease obligations.

During the six months ended December 31, 2021, the Company paid $ 0.9 million to exit its distribution centers before the lease end dates and incurred costs of $ 0.7 million to exit salons before the lease end date in order to relieve the Company of future lease obligations.

For the three and six months ended December 31, 2020, lease termination fees includes $ 2.2 and $ 4.6 million, respectively, of early termination payments to close salons before the lease end date to relieve the Company of future lease obligations and $( 1.1 ) and $ 2.0 million, respectively, of adjustments 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.

1 unchanged sentence

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.

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

The Company records the rental payments due from franchisees as franchise rental income and the corresponding amounts owed to landlords as franchise rent expense on the unaudited Condensed Consolidated Statement of Operations.

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

For the three months ended December 31, 2021 and 2020, franchise rental income and franchise rent expense were $ 33.8 and $ 32.3 million, respectively and $ 67.5 and $ 64.6 million, respectively, for the six months ended December 31, 2021 and 2020.

These leases generally have lease terms of approximately five years .

1 unchanged sentence

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

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 $ 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.

2 unchanged sentences

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

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

The weighted average remaining lease term was 6.26 and 6.44 years and the weighted average discount rate was 4.17 % and 4.11 % for all salon operating leases as of December 31, 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.

12 unchanged sentences

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.

In the three months ended December 31, 2021 and 2020, the Company recognized a long-lived impairment charge of $ 0.1 and $ 3.2 million, respectively, which included $ 0.0 and $ 1.5 million, respectively, related to the ROU assets, in the unaudited Condensed Consolidated Statement of Operations.

In the six months ended December 31, 2021 and 2020, the Company recognized a long-lived impairment charge of $ 0.2 and $ 9.0 million, respectively, which included $ 0.2 and $ 6.0 million, respectively, related to the ROU assets, in the unaudited Condensed Consolidated Statement of Operations.

The impairments recorded 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.

3 unchanged sentences

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):

As of December 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):

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

13 unchanged sentences

Revolving Credit Facility

Maturity Date September 30,

2021 September 30,

Maturity Date December 31,

2021 December 31,

2021 June 30,

1 unchanged sentence

Revolving credit facility 2023 5.125 % $ 194,177 $ 186,911

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

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

At December 31, 2021, cash and cash equivalents totaled $ 35.4 million.

As of December 31, 2021, the Company has $ 194.2 million of outstanding borrowings under a $ 291.7 million revolving credit facility.

The credit facility decreased $ 2.7 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.

At December 31, 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 December 31, 2021.

Total liquidity per the agreement was $ 138.1 million as of December 31, 2021.

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

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

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

As of December 31, 2021, the Company had cash, cash equivalents and restricted cash of $ 45.4 million and current liabilities of $ 168.2 million.

The Company was in compliance with all covenants and other requirements of the financing arrangements as of December 31, 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 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.

As of December 31, 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.

3 unchanged sentences

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

Three Months Ended September 30,

Three Months Ended December 31, Six Months Ended December 31,

2021 2020 2021 2020

(Dollars in thousands)

5 unchanged sentences

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 re-assessed its chief operating decision maker conclusion in the second quarter of fiscal year 2022 as part of the CEO transition.

The Company concluded the Interim CEO was the chief operating decision maker.

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

September 30,

2021 June 30,

17 unchanged sentences

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

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

As of December 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.

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

Three Months Ended September 30, 2021

Three Months Ended December 31, 2021

Franchise Company-owned Consolidated

17 unchanged sentences

Total operating expenses 63,120 8,263 71,383

Operating income (loss) $ 2,093 $ ( 3,220 ) $ ( 1,127 )

Three Months Ended December 31, 2020

Franchise Company-owned Consolidated

(Dollars in thousands)

Royalties $ 12,749 $ — $ 12,749

Fees 2,438 — 2,438

Product sales to franchisees 14,236 — 14,236

Advertising fund contributions 4,715 — 4,715

Franchise rental income 32,285 — 32,285

Company-owned salon revenue — 37,897 37,897

Total revenue 66,423 37,897 104,320

Operating expenses:

Cost of product sales to franchisees 11,324 — 11,324

General and administrative 24,255 2,435 26,690

Rent 1,058 11,844 12,902

Advertising fund expense 4,715 — 4,715

Franchise rent expense 32,285 — 32,285

Company-owned salon expense — 33,611 33,611

Depreciation and amortization 2,077 4,311 6,388

Long-lived asset impairment 94 3,066 3,160

Total operating expenses 75,808 55,267 131,075

Operating loss $ ( 9,385 ) $ ( 17,370 ) $ ( 26,755 )

Three Months Ended September 30, 2020

Six Months Ended December 31, 2021

Franchise Company-owned Consolidated

18 unchanged sentences

Operating loss $ ( 2,688 ) $ ( 4,241 ) $ ( 6,929 )

Six Months Ended December 31, 2020

Franchise Company-owned Consolidated

(Dollars in thousands)

Royalties $ 24,154 $ — $ 24,154

Fees 4,480 — 4,480

Product sales to franchisees 27,978 — 27,978

Advertising fund contributions 9,224 — 9,224

Franchise rental income 64,568 — 64,568

Company-owned salon revenue — 85,312 85,312

Total revenue 130,404 85,312 215,716

Operating expenses:

Cost of product sales to franchisees 22,003 — 22,003

General and administrative 47,426 5,411 52,837

Rent 2,337 23,790 26,127

Advertising fund expense 9,224 — 9,224

Franchise rent expense 64,568 — 64,568

Company-owned salon expense — 76,554 76,554

Depreciation and amortization 4,371 9,393 13,764

Long-lived asset impairment 704 8,280 8,984

Total operating expenses 150,633 123,428 274,061

Operating loss $ ( 20,229 ) $ ( 38,116 ) $ ( 58,345 )

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