REGIS CORP 10-Q

Item 1. Financial Statements REGIS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) (Dollars in thousands, except share data) December 31, 2021 June 30, 2021 ASSETS Current assets: Cash and cash equivalents $ 35,442 $ 19,191 Receivables, net 16,624 27,372 Inventories 16,008 22,993 Other current assets 15,439 17,103 Total current assets 83,513 86,659 Property and equipment, net 22,244 23,113 Goodwill 229,028 229,582 Other intangibles, net 3,474 3,761 Right of use asset (Note 7) 548,598 611,880 Other assets 39,301 41,388 Total assets $ 926,158 $ 996,383 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 18,579 $ 27,157 Accrued expenses 39,041 54,857 Short-term lease liability (Note 7) 110,597 116,471 Total current liabilities 168,217 198,485 Long-term debt, net (Note 8) 194,177 186,911 Long-term lease liability (Note 7) 457,924 518,866 Other non-current liabilities 67,552 75,075 Total liabilities 887,870 979,337 Commitments and contingencies (Note 5) Shareholders' equity: Common stock, $ 0.05 par value; issued and outstanding 45,490,074 and 35,795,844 common shares at December 31, 2021 and June 30, 2021, respectively 2,277 1,790 Additional paid-in capital 61,601 25,102 Accumulated other comprehensive income 9,105 9,543 Accumulated deficit ( 34,695 ) ( 19,389 ) Total shareholders' equity 38,288 17,046 Total liabilities and shareholders' equity $ 926,158 $ 996,383 _______________________________________________________________________________ The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements. 2 REGIS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) For The Three And Six Months Ended December 31, 2021 And 2020 (Dollars and shares in thousands, except per share data amounts) Three Months Ended December 31, Six Months Ended December 31, 2021 2020 2021 2020 Revenues: Royalties $ 16,125 $ 12,749 $ 32,726 $ 24,154 Fees 4,867 2,438 8,132 4,480 Product sales to franchisees 2,428 14,236 10,436 27,978 Advertising fund contributions 8,021 4,715 16,136 9,224 Franchise rental income (Note 7) 33,772 32,285 67,534 64,568 Company-owned salon revenue 5,043 37,897 13,048 85,312 Total revenue 70,256 104,320 148,012 215,716 Operating expenses: Cost of product sales to franchisees 3,419 11,324 11,532 22,003 General and administrative 15,984 26,690 37,773 52,837 Rent (Note 7) 3,088 12,902 4,891 26,127 Advertising fund expense 8,021 4,715 16,136 9,224 Franchise rent expense 33,772 32,285 67,534 64,568 Company-owned salon expense (1) 5,067 33,611 13,011 76,554 Depreciation and amortization 1,980 6,388 3,849 13,764 Long-lived asset impairment 52 3,160 215 8,984 Total operating expenses 71,383 131,075 154,941 274,061 Operating loss ( 1,127 ) ( 26,755 ) ( 6,929 ) ( 58,345 ) Other (expense) income: Interest expense ( 3,449 ) ( 3,701 ) ( 6,755 ) ( 7,463 ) Loss from sale of salon assets to franchisees, net ( 615 ) ( 3,226 ) ( 1,695 ) ( 3,888 ) Interest income and other, net 99 403 ( 140 ) 517 Loss from operations before income taxes ( 5,092 ) ( 33,279 ) ( 15,519 ) ( 69,179 ) Income tax benefit 164 400 213 1,035 Net loss $ ( 4,928 ) $ ( 32,879 ) $ ( 15,306 ) $ ( 68,144 ) Net loss per share: Basic and diluted: Net loss per share, basic and diluted (2) $ ( 0.11 ) $ ( 0.92 ) $ ( 0.37 ) $ ( 1.90 ) Weighted average common and common equivalent shares outstanding: Basic and diluted 45,721 35,931 41,274 35,889 _______________________________________________________________________________ (1) Includes cost of service and product sold to guests in our Company-owned salons. Excludes general and administrative expense, rent and depreciation and amortization related to Company-owned salons . (2) Total is a recalculation; line items calculated individually may not sum to total due to rounding. The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements. 3 REGIS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS (Unaudited) For The Three And Six Months Ended December 31, 2021 And 2020 (Dollars in thousands) Three Months Ended December 31, Six Months Ended December 31, 2021 2020 2021 2020 Net loss $ ( 4,928 ) $ ( 32,879 ) $ ( 15,306 ) $ ( 68,144 ) Foreign currency translation adjustments 36 835 ( 438 ) 1,337 Comprehensive loss $ ( 4,892 ) $ ( 32,044 ) $ ( 15,744 ) $ ( 66,807 ) _______________________________________________________________________________ The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements. 4 REGIS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited) For The Three And Six Months Ended December 31, 2021 And 2020 (Dollars in thousands) Three Months Ended December 31, 2021 Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Shares Amount Balance, September 30, 2021 43,964,489 $ 2,198 $ 58,310 $ 9,069 $ ( 29,767 ) $ 39,810 Net loss — — — — ( 4,928 ) ( 4,928 ) Foreign currency translation — — — 36 — 36 Issuance of common stock, net of offering costs 1,223,314 61 4,931 — — 4,992 Stock-based compensation — — ( 1,374 ) — — ( 1,374 ) 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 Paid-In Capital Accumulated Other Comprehensive Income Retained Earnings Total Shares Amount Balance, September 30, 2020 35,665,783 $ 1,783 $ 20,596 $ 7,951 $ 59,211 $ 89,541 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 Paid-In Capital Accumulated Other 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 Paid-In Capital Accumulated Other Comprehensive Income Retained Earnings Total Shares Amount Balance, June 30, 2020 35,625,716 $ 1,781 $ 22,011 $ 7,449 $ 94,462 $ 125,703 Net loss — — — — ( 68,144 ) ( 68,144 ) Foreign currency translation — — — 1,337 — 1,337 Stock-based compensation — — 89 — — 89 Net restricted stock activity 142,370 7 ( 24 ) — — ( 17 ) Minority interest — — — — ( 520 ) ( 520 ) Balance, December 31, 2020 35,768,086 $ 1,788 $ 22,076 $ 8,786 $ 25,798 $ 58,448 _______________________________________________________________________________ The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements. 5 REGIS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) For The Six Months Ended December 31, 2021 And 2020 (Dollars in thousands) Six Months Ended December 31, 2021 2020 Cash flows from operating activities: Net loss $ ( 15,306 ) $ ( 68,144 ) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization 3,284 11,123 Long-lived asset impairment 215 8,984 Deferred income taxes ( 529 ) ( 669 ) Loss from sale of salon assets to franchisees, net 1,695 3,888 Stock-based compensation 305 89 Amortization of debt discount and financing costs 920 875 Other non-cash items affecting earnings 551 202 Changes in operating assets and liabilities, excluding the effects of asset sales (1) ( 15,463 ) ( 21,812 ) Net cash used in operating activities ( 24,328 ) ( 65,464 ) Cash flows from investing activities: Capital expenditures ( 2,947 ) ( 7,502 ) Proceeds from sale of assets to franchisees — 7,148 Costs associated with sale of salon assets to franchisees — ( 222 ) 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: Borrowings on revolving credit facility 10,000 — Repayments of revolving credit facility ( 2,734 ) — Proceeds from issuance of common stock, net of offering costs 37,185 — Taxes paid for shares withheld ( 823 ) ( 212 ) Minority interest buyout — ( 562 ) Distribution center lease payments — ( 478 ) Net cash provided by (used in) financing activities 43,628 ( 1,252 ) Effect of exchange rate changes on cash and cash equivalents ( 134 ) ( 68 ) Increase (decrease) in cash, cash equivalents, and restricted cash 16,219 ( 66,160 ) Cash, cash equivalents and restricted cash: Beginning of period 29,152 122,880 End of period $ 45,371 $ 56,720 _______________________________________________________________________________ (1) Changes in operating assets and liabilities exclude assets and liabilities sold. The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements. 6 REGIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The unaudited interim Condensed Consolidated Financial Statements of Regis Corporation (the Company) as of December 31, 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. The results of operations and cash flows for any interim period are not necessarily indicative of results of operations and cash flows for the full year. The accompanying interim unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP). The unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended June 30, 2021 and other documents filed or furnished with the SEC during the current fiscal year. COVID-19 Impact: 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. Additional impacts to the business may arise that we are not aware of currently. Inventories: The Company has inventory valuation reserves for excess and obsolete inventories or other factors that may render inventories unmarketable at their historical costs. 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 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 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. 7 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. Factors considered in deciding when to perform an impairment review include significant under-performance of an individual salon in relation to expectations, significant economic or geographic trends, and significant changes or planned changes in the use of the assets. The first step is to assess recoverability, and in doing that, the undiscounted salon cash flows are compared to the carrying value of the salon assets. 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 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. Judgments made by management related to the expected useful lives of long-lived assets and the ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as changes in economic conditions and changes in operating performance. As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause the Company to realize material impairment charges. Goodwill: 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. 8 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 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. 9 2. REVENUE RECOGNITION: Revenue Recognition and Deferred Revenue: Revenue recognized at point of sale 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 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. Revenue recognized over time Royalty and advertising fund revenues represent sales-based royalties that are recognized in the period in which the sales occur. Generally, royalty and advertising fund revenues are billed and collected monthly in arrears. Advertising fund revenues and expenditures, which must be spent on marketing and related activities per the franchise agreements, are recorded on a gross basis within the unaudited Condensed Consolidated Statement of Operations. The treatment increases both the gross amount of reported revenue and expense and generally has no impact on operating income and net income. Franchise fees are billed and received upon the signing of the franchise agreement. Recognition of these fees is deferred until the salon 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. Information about receivables, broker fees and deferred revenue subject to the current revenue recognition guidance is as follows: December 31, 2021 June 30, 2021 Balance Sheet Classification (Dollars in thousands) Receivables from contracts with customers, net $ 9,238 $ 19,112 Receivables, net Broker fees 17,288 19,254 Other assets Deferred revenue: Current Gift card liability $ 2,131 $ 2,240 Accrued expenses Deferred franchise fees unopened salons 21 40 Accrued expenses Deferred franchise fees open salons 5,897 5,884 Accrued expenses Total current deferred revenue $ 8,049 $ 8,164 Non-current Deferred franchise fees unopened salons $ 4,128 $ 6,571 Other non-current liabilities Deferred franchise fees open salons 29,761 32,365 Other non-current liabilities Total non-current deferred revenue $ 33,889 $ 38,936 10 Receivables relate primarily to payments due for royalties, franchise fees, advertising fees, rent, franchise product sales and sales of salon services and product paid by credit card. The receivables balance is presented net of an allowance for expected losses (i.e., doubtful accounts), primarily related to receivables from franchisees. The following table is a rollforward of the allowance for doubtful accounts for the period (in thousands): Balance as of June 30, 2021 $ 7,774 Provision for doubtful accounts (1) ( 41 ) Provision for franchisee rent (2) 811 Reclass of accrued rent (3) 396 Write-offs ( 589 ) Balance as of December 31, 2021 $ 8,351 _______________________________________________________________________________ (1) The provision for doubtful accounts is recognized as general and administrative expense in the unaudited Condensed Consolidated Statement of Operations. (2) The provision for franchisee rent is recognized as rent 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 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 25 Amortization ( 1,625 ) Write-offs ( 366 ) 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 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 2023 5,724 2024 5,489 2025 5,096 2026 4,630 Thereafter 11,685 Total $ 35,658 11 3. SHAREHOLDERS' EQUITY: Stock-Based Employee Compensation: 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 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. 12 4. INCOME TAXES: A summary of income tax benefits and corresponding effective tax rates is as follows: Three Months Ended December 31, Six Months Ended December 31, 2021 2020 2021 2020 (Dollars in thousands) Income tax benefit $ 164 $ 400 $ 213 $ 1,035 Effective tax rate 3.2 % 1.2 % 1.4 % 1.5 % 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. Furthermore, with limited exceptions, the Company is no longer subject to state and international income tax examinations by tax authorities for years before 2012. 5. COMMITMENTS AND CONTINGENCIES: The Company is a defendant in various lawsuits and claims arising out of the normal course of business. 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. 20-cv-02181-MMC. 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 $ 2.7 and $ 3.0 million as of December 31, 2021 and June 30, 2021, respectively. 13 6. CASH, CASH EQUIVALENTS AND RESTRICTED CASH: The table below reconciles the cash and cash equivalents balances and restricted cash balances, recorded within other current assets on the unaudited Condensed Consolidated Balance Sheet to the amount of cash, cash equivalents and restricted cash reported on the unaudited Condensed Consolidated Statement of Cash flows: December 31, 2021 June 30, 2021 (Dollars in thousands) Cash and cash equivalents $ 35,442 $ 19,191 Restricted cash, included in other current assets (1) 9,929 9,961 Total cash, cash equivalents and restricted cash $ 45,371 $ 29,152 _______________________________________________________________________________ (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. 14 7. LEASES: At contract inception, the Company determines whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides the Company the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, the Company considers it to be, or contain, a lease. The Company leases its company-owned salons and some of its corporate facilities under operating leases. The original terms of the salon leases range from 1 to 20 years with many leases renewable for an additional 5 to 10-year term at the option of the Company. In addition to the obligation to make fixed rental payments for the use of the salons, the Company also has variable lease payments that are based on sales levels. For most leases, the Company is required to pay real estate taxes and other occupancy expenses. Total rent includes the following: Three Months Ended December 31, Six Months Ended December 31, 2021 2020 2021 2020 (Dollars in thousands) Office and warehouse rent $ 1,248 $ 1,194 $ 2,917 $ 2,397 Lease termination expense (1) 238 1,117 1,578 6,670 Lease liability benefit (2) ( 496 ) ( 2,226 ) ( 2,927 ) ( 8,286 ) Franchise salon rent 246 440 575 1,158 Company-owned salon rent 1,852 12,377 2,748 24,188 Total $ 3,088 $ 12,902 $ 4,891 $ 26,127 _______________________________________________________________________________ (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. 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. All lease-related costs are passed through to the franchisees. The Company records the rental payments due from franchisees as franchise rental income and the corresponding amounts owed to landlords as franchise rent expense on the unaudited Condensed Consolidated Statement of Operations. For the three months ended December 31, 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 . The Company expects to renew SmartStyle and some franchise leases upon expiration. Other leases are expected to be renewed by the franchisee upon expiration. 15 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. For leases classified as operating leases, expense for lease payments is recognized on a straight-line basis over the lease term, including the lease renewal option when the lease is expected to be renewed. Generally, the non-lease components, such as real estate taxes and other occupancy expenses, are separate from rent expense within the lease and are not included in the measurement of the lease liability because these charges are variable. The discount rate used to determine the present value of the lease payments is the Company's estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as the interest rate implicit in the lease cannot generally be determined. The Company uses the portfolio approach in applying the discount rate based on the original lease term. 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. The Company has identified its asset groups at the individual salon level as this represents the lowest level that identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Poor salon performance, primarily due to the COVID-19 pandemic, resulted in an ASC 360-10-35-21 triggering event. As a result, management assessed underperforming salon asset groups, which included the related ROU assets, for impairment in accordance with ASC 360. The first step in the impairment test under ASC 360 is to determine whether the long-lived assets are recoverable, which is determined by comparing the net carrying value of the salon asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset group. Estimating cash flows for purposes of the recoverability test is subjective and requires significant judgment. Estimated future cash flows used for the purposes of the recoverability test were based upon historical cash flows for the salons, adjusted for expected changes in future market conditions related to the COVID-19 pandemic, and other factors. The period of time used to determine the estimates of the future cash flows for the recoverability test was based on the remaining useful life of the primary asset of the group, which was the ROU asset in all cases. The second step of the long-lived asset impairment test requires that the fair value of the asset group be estimated when determining the amount of any impairment loss. For the salon asset groups that failed the recoverability test, an impairment loss was measured as the amount by which the carrying amount of the asset group exceeds its fair value. The Company applied the fair value guidance within ASC 820-10 to determine the fair value of the asset group from the perspective of a market-participant considering, among other things, appropriate discount rates, multiple valuation techniques, the most advantageous market, and assumptions about the highest and best use of the asset group. To determine the fair value of the salon asset groups, the Company utilized market-participant assumptions rather than the Company's own assumptions about how it intends to use the asset group. The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include: the market rent of comparable properties 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 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. 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. 16 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 Remainder of 2022 $ 64,122 $ 2,548 $ 1,163 $ 67,833 $ ( 64,122 ) $ 3,711 2023 116,691 4,361 2,365 123,417 ( 116,691 ) 6,726 2024 102,001 2,579 1,486 106,066 ( 102,001 ) 4,065 2025 85,465 808 1,525 87,798 ( 85,465 ) 2,333 2026 72,253 447 1,563 74,263 ( 72,253 ) 2,010 Thereafter 180,236 499 6,498 187,233 ( 180,236 ) 6,997 Total future obligations $ 620,768 $ 11,242 $ 14,600 $ 646,610 $ ( 620,768 ) $ 25,842 Less amounts representing interest 75,330 619 2,140 78,089 Present value of lease liabilities $ 545,438 $ 10,623 $ 12,460 $ 568,521 Less current lease liabilities 104,122 4,606 1,869 110,597 Long-term lease liabilities $ 441,316 $ 6,017 $ 10,591 $ 457,924 17 8. FINANCING ARRANGEMENTS: The Company's long-term debt consists of the following: Revolving Credit Facility Maturity Date December 31, 2021 December 31, 2021 June 30, 2021 (Fiscal Year) (Interest rate %) (Dollars in thousands) Revolving credit facility 2023 5.125 % $ 194,177 $ 186,911 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 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. 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 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 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. 18 9. FAIR VALUE MEASUREMENTS: Fair value measurements are categorized into one of three levels based on the lowest level of significant input used: Level 1 (unadjusted quoted prices in active markets); Level 2 (observable market inputs available at the measurement date, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data). Assets and Liabilities Measured at Fair Value on a Recurring Basis As of 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. Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis We measure certain assets, including the Company's equity method investments, tangible fixed and other assets and goodwill, at fair value on a nonrecurring basis when they are deemed to be other than temporarily impaired. The fair values of these assets are determined, when applicable, based on valuation techniques using the best information available, and may include quoted market prices, market comparables and discounted cash flow projections. The following impairments were based on fair values using Level 3 inputs: Three Months Ended December 31, Six Months Ended December 31, 2021 2020 2021 2020 (Dollars in thousands) Long-lived asset impairment (1) $ 52 $ 3,160 $ 215 $ 8,984 _______________________________________________________________________________ (1) See Note 1 to the unaudited Condensed Consolidated Financial Statements. 19 10. SEGMENT INFORMATION: 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 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: December 31, 2021 June 30, 2021 FRANCHISE SALONS: SmartStyle/Cost Cutters in Walmart Stores 1,676 1,666 Supercuts 2,345 2,386 Portfolio Brands 1,386 1,357 Total North American salons 5,407 5,409 Total International salons (1) 146 154 Total Franchise salons 5,553 5,563 as a percent of total Franchise and Company-owned salons 97.4 % 95.3 % COMPANY-OWNED SALONS: SmartStyle/Cost Cutters in Walmart Stores 63 91 Supercuts 22 35 Portfolio Brands 65 150 Total Company-owned salons 150 276 as a percent of total Franchise and Company-owned salons 2.6 % 4.7 % OWNERSHIP INTEREST LOCATIONS: Equity ownership interest locations 76 78 Grand Total, System-wide 5,779 5,917 _______________________________________________________________________________ (1) Canadian and Puerto Rican salons are included in the North American salon totals. 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. 20 Financial information concerning the Company's reportable operating segments is shown in the following tables: Three Months Ended December 31, 2021 Franchise Company-owned Consolidated (Dollars in thousands) Revenues: Royalties $ 16,125 $ — $ 16,125 Fees 4,867 — 4,867 Product sales to franchisees 2,428 — 2,428 Advertising fund contributions 8,021 — 8,021 Franchise rental income 33,772 — 33,772 Company-owned salon revenue — 5,043 5,043 Total revenue 65,213 5,043 70,256 Operating expenses: Cost of product sales to franchisees 3,419 — 3,419 General and administrative 14,922 1,062 15,984 Rent 1,355 1,733 3,088 Advertising fund expense 8,021 — 8,021 Franchise rent expense 33,772 — 33,772 Company-owned salon expense — 5,067 5,067 Depreciation and amortization 1,503 477 1,980 Long-lived asset impairment 128 ( 76 ) 52 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) Revenues: 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 ) 21 Six Months Ended December 31, 2021 Franchise Company-owned Consolidated (Dollars in thousands) Revenues: Royalties $ 32,726 $ — $ 32,726 Fees 8,132 — 8,132 Product sales to franchisees 10,436 — 10,436 Advertising fund contributions 16,136 — 16,136 Franchise rental income 67,534 — 67,534 Company-owned salon revenue — 13,048 13,048 Total revenue 134,964 13,048 148,012 Operating expenses: Cost of product sales to franchisees 11,532 — 11,532 General and administrative 36,165 1,608 37,773 Rent 3,032 1,859 4,891 Advertising fund expense 16,136 — 16,136 Franchise rent expense 67,534 — 67,534 Company-owned salon expense — 13,011 13,011 Depreciation and amortization 3,125 724 3,849 Long-lived asset impairment 128 87 215 Total operating expenses 137,652 17,289 154,941 Operating loss $ ( 2,688 ) $ ( 4,241 ) $ ( 6,929 ) Six Months Ended December 31, 2020 Franchise Company-owned Consolidated (Dollars in thousands) Revenues: 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 ) 22