What changed in this filing

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Item 1. Financial Statements

2022-05-10 compared with 2022-02-03 · 153 added, 112 removed, 477 unchanged (36% of the section changed)

5 unchanged sentences

Current assets:

Cash and cash equivalents $ 35,442 $ 19,191

Cash and cash equivalents (Note 6)

$ 25,630 $ 19,191

Receivables, net 15,443 27,372

3 unchanged sentences

Property and equipment, net 21,922 23,113

Goodwill 229,028 229,582

Goodwill (Note 1)

213,362 229,582

Other intangibles, net 3,420 3,761

7 unchanged sentences

Accrued expenses 36,469 54,857

Short-term debt, net (Note 8)

Short-term lease liability (Note 7)

107,373 116,471

Total current liabilities 351,975 198,485

Long-term debt, net (Note 8)

194,177 186,911

Long-term lease liability (Note 7)

5 unchanged sentences

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

issued and outstanding 45,505,055 and 35,795,844 common shares at March 31, 2022 and June 30, 2021, respectively

Additional paid-in capital 62,131 25,102

7 unchanged sentences

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,

For The Three And Nine Months Ended March 31, 2022 And 2021

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

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

2022 2021 2022 2021

9 unchanged sentences

Cost of product sales to franchisees 2,598 11,168 14,129 33,171

Inventory reserve (1) 6,420 — 6,420 —

General and administrative 15,569 24,582 53,342 77,419

6 unchanged sentences

Long-lived asset impairment 327 833 542 9,817

Goodwill impairment 16,000 — 16,000 —

Total operating expenses 90,193 118,808 245,133 392,869

13 unchanged sentences

_______________________________________________________________________________

(1) Includes charge in the third quarter associated with liquidation of distribution center inventory.

Excludes reserves for inventory at salons.

(2) 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.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS (Unaudited)

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

For The Three And Nine Months Ended March 31, 2022 And 2021

(Dollars in thousands)

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

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

2022 2021 2022 2021

6 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited)

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

For The Three And Nine Months Ended March 31, 2022 And 2021

(Dollars in thousands)

Three Months Ended December 31, 2021

Three Months Ended March 31, 2022

Common Stock Additional

3 unchanged sentences

Shares Amount

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

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

Net loss — — — — ( 27,918 ) ( 27,918 )

Foreign currency translation — — — 221 — 221

Issuance of common stock, net of offering costs 1,223,314 61 4,931 — — 4,992

Stock-based compensation — — 549 — — 549

Net restricted stock activity 14,981 ( 2 ) ( 19 ) — — ( 21 )

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

Three Months Ended December 31, 2020

Balance, March 31, 2022 45,505,055 $ 2,275 $ 62,131 $ 9,326 $ ( 62,613 ) $ 11,119

Three Months Ended March 31, 2021

Common Stock Additional

3 unchanged sentences

Shares Amount

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

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 )

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

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

Nine Months Ended March 31, 2022

Common Stock Additional

9 unchanged sentences

Net restricted stock activity 413,593 20 ( 545 ) — — ( 525 )

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

Six Months Ended December 31, 2020

Balance, March 31, 2022 45,505,055 $ 2,275 $ 62,131 $ 9,326 $ ( 62,613 ) $ 11,119

Nine Months Ended March 31, 2021

Common Stock Additional

6 unchanged sentences

Foreign currency translation — — — 1,643 — 1,643

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

Stock-based compensation — — 1,792 — — 1,792

1 unchanged sentence

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

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

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

_______________________________________________________________________________

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

For The Six Months Ended December 31, 2021 And 2020

For The Nine Months Ended March 31, 2022 And 2021

(Dollars in thousands)

Six Months Ended December 31,

Nine Months Ended March 31,

Cash flows from operating activities:

4 unchanged sentences

Deferred income taxes ( 1,693 ) ( 806 )

Inventory reserve (1) 9,007 6,875

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

Loss from sale of salon assets to franchisees, net 2,189 8,463

Goodwill impairment 16,000 —

Stock-based compensation 854 1,792

8 unchanged sentences

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

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

Net cash used in investing activities ( 4,258 ) ( 908 )

Cash flows from financing activities:

12 unchanged sentences

_______________________________________________________________________________

(1) Includes salon and distribution center reserves.

(2) Changes in operating assets and liabilities exclude assets and liabilities sold.

3 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 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.

The unaudited interim Condensed Consolidated Financial Statements of Regis Corporation (the Company) as of March 31, 2022 and for the three and nine months ended March 31, 2022 and 2021, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of March 31, 2022 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 December 31, 2021, the global coronavirus pandemic (COVID-19) had an adverse impact on operations.

During the periods ended March 31, 2022 and 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 response to COVID-19, the Canada Emergency Wage Subsidy (CEWS), Canada Emergency Rent Subsidy (CERS) and the U.S.

employee retention payroll tax credit were introduced for eligible employers.

In fiscal years 2022 and 2021, the Company received $ 1.9 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.

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.

Additionally, in December 2021 the Company paid $ 2.5 million of social security contributions that had been deferred under the CARES Act.

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

1 unchanged sentence

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

The Company's debt of $ 193.8 million is due in March 2023 and management's current projected cash flows do not support the ability to repay this obligation in full at maturity.

As a result of the maturity date, our debt is reflected as a current liability at March 31, 2022.

Management is working with advisors to determine alternative financing arrangements and believes the ability to refinance alleviates substantial doubt related to the Company's ability to continue as a going concern.

If the Company is not able to refinance our debt at terms acceptable to us by the maturity date, the lender would be able to call the debt and pursue other remedies that could be harmful to our business.

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.

As a result, the Company exited its distribution centers in fiscal year 2022 and now stores inventory at a third-party facility.

To facilitate the exit of the distribution centers, the Company sold 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 redistribute inventory from closed locations to other salons to be sold or used.

The inventory valuation reserve as of March 31, 2022 and June 30, 2021 was $ 14.3 and $ 11.8 million, respectively.

In the three and nine months ended March 31, 2022, the Company recorded total inventory reserve charges of $ 7.5 and $ 9.0 million, respectively.

In the three months ended March 31, 2022, $ 6.4 and $ 1.1 million were recorded in Inventory reserve and Company-owned salon expense, respectively.

In the nine months ended March 31, 2022, $ 6.4 and $ 2.6 million were recorded in Inventory reserve and Company-owned salon expense, respectively.

Included in Company-owned salon expense is an inventory reserve charge of $ 5.3 and $ 6.9 million in the three and nine months ended March 31, 2021, respectively.

Long-Lived Asset Impairment Assessments:

7 unchanged sentences

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.

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.

The Company assesses goodwill 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 below its carrying value.

At the end of the period ended March 31, 2022, the Company determined a triggering event occurred related to a decrease in forecasted revenue due to slower than expected recovery from COVID-19, resulting in a quantitative impairment test performed over goodwill.

Accordingly, the Company engaged a third-party valuation specialist to perform an impairment analysis on the Franchise reporting unit of the business as of March 31, 2022.

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.

The discounted cash flows 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.

Management's assumptions related to revenue growth rates were reduced and management increased expected salon closures compared to prior valuations.

These changes, along with a decline in value from the market approach, reduced the fair value of the reporting unit from previous valuations.

The discount rate of 19.5 % was also a key assumption utilized in the discounted cash flows which was an increase of 1 % from the second quarter valuation due to an increase in market interest rates.

As a result of the impairment testing as of March 31, 2022, the Franchise reporting unit was determined to have a carrying value in excess of its fair value, resulting in a goodwill impairment charge of $ 16.0 million in the third quarter.

As of March 31, 2022 and June 30, 2021, the Franchise reporting unit had goodwill of $ 213.4 and $ 229.6 million, respectively.

The Company's 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.

The table below contains details related to the Company's goodwill (in thousands):

Franchise Reporting Unit

Goodwill, net at June 30, 2021 $ 229,582

Goodwill impairment ( 16,000 )

Translation rate adjustments ( 220 )

Goodwill, net at March 31, 2022 $ 213,362

Classification of Revenue and Expenses:

19 unchanged sentences

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.

Depreciation expense in the three months ended March 31, 2022 and 2021 include $ 0.3 and $ 0.8 million, respectively, and for the nine months ended March 31, 2022 and 2021 include $ 0.9 and $ 3.4 million, respectively, of asset retirement obligations, which are cash expenses.

REVENUE RECOGNITION:

35 unchanged sentences

Balance as of June 30, 2021 $ 7,774

Provision for doubtful accounts (1) ( 41 )

Benefit to reserve for doubtful accounts (1) ( 88 )

Provision for franchisee rent (2) 847

1 unchanged sentence

Write-offs ( 1,600 )

Balance as of December 31, 2021 $ 8,351

Balance as of March 31, 2022 $ 7,329

_______________________________________________________________________________

(1) The provision for doubtful accounts is recognized as general and administrative expense in the unaudited Condensed Consolidated Statement of Operations.

(1) The benefit to reserve for doubtful accounts is recognized as general and administrative 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.

7 unchanged sentences

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.

Balance as of March 31, 2022 $ 16,515

The decrease in non-current deferred franchise fees for unopened salons from June 30, 2021 to March 31, 2022 is primarily due to $ 1.9 million of deferred fees related to terminated development agreements being recognized as fees in the unaudited Condensed Consolidated Statement of Operations in the nine months ended March 31, 2022, of which $ 0.1 million was recognized in the third 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):

Franchise fee revenue for the three months ended March 31, 2022 and 2021 was $ 1.6 and $ 1.6 million, respectively, and for the nine months ended March 31, 2022 and 2021 was $ 4.9 and $ 4.9 million, respectively.

Estimated revenue expected to be recognized in the future related to deferred franchise fees for open salons as of March 31, 2022 is as follows (in thousands):

Remainder of 2022 $ 1,503

3 unchanged sentences

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

During the three and nine months ended March 31, 2022, the Company granted various equity awards including RSUs, SOs, and SARs as follows:

Three Months Ended March 31, 2022 Nine Months Ended March 31, 2022

Restricted stock units (RSUs) 54,545 827,841

1 unchanged sentence

Stock appreciation rights (SARs) 112,500 600,000

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.

The RSUs granted during the third quarter of fiscal year 2022 were granted to a Board member who was appointed the chairman of the Board and vest on November 14, 2022.

The RSUs granted during the nine months ended March 31, 2022 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 SOs and SARs granted during the third quarter of fiscal year 2022 were granted to newly appointed members of the Company's executive team.

The SOs and SARs granted during the three and nine months ended March 31, 2022 vest 20 %, 20 %, 60 % over a three-year period subsequent to the grant date.

Total compensation cost for stock-based payment arrangements totaling $ 0.5 and $ 1.7 million for the three months ended March 31, 2022 and 2021, respectively, and $ 0.9 and $ 1.8 million for the nine months ended March 31, 2022 and 2021, respectively, were recorded within general and administrative expense on the unaudited Condensed Consolidated Statement of Operations.

In the nine months ended March 31, 2022 and 2021, 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.

During the nine months ended March 31, 2022, the Company received gross proceeds of $ 38.4 million related to the "at-the-market" offering and paid fees to sales agents and other fees of $ 1.2 million.

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 December 31, Six Months Ended December 31,

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

2022 2021 2022 2021

2 unchanged sentences

Effective tax rate 4.4 % 3.0 % 3.3 % 1.7 %

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 recorded tax benefits and effective tax rates for the three and nine months ended March 31, 2022 and 2021 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.

1 unchanged sentence

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.

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

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

Additionally, because the Company may be the tenant under a master lease for a location subleased to a franchisee, the Company has faced allegations of non-payment of rent and associated charges.

Further, 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 and nine months ended March 31, 2022, the Company recorded $ 1.0 and $ 2.0 million of potential settlement exposure related to litigation, respectively, of which $ 1.1 million was paid during the year.

The Company's accrual related to potential settlement fees was $ 0.9 million as of March 31, 2022.

Included in the charge in the third quarter is litigation brought in the 11th Judicial Circuit, St.

Charles County, Missouri, in which the Company challenged a landlord regarding a lease the Company secured but the landlord leased to another tenant.

The landlord in the case prevailed and the court ordered the Company to pay the landlord $ 0.5 million in attorney’s fees.

The Company requested leave to appeal and plans to vigorously pursue overturning this judgment.

In addition, the Company's existing point-of-sale system supplier had challenged the development of certain parts of the Company's technology systems in litigation brought in the Northern District of California.

The Company and the supplier entered into an agreement, effective June 25, 2021, that provided for the dismissal of the lawsuit and set forth a 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 $ 2.6 and $ 3.0 million as of March 31, 2022 and June 30, 2021, respectively.

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'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:

14 unchanged sentences

Total rent includes the following:

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

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

2022 2021 2022 2021

1 unchanged sentence

Office and warehouse rent $ 987 $ 1,351 $ 3,904 $ 3,748

Lease termination expense (1) 238 1,117 1,578 6,670

Lease termination expense (benefit) (1) 225 ( 147 ) 1,803 6,523

Lease liability benefit (2) ( 357 ) ( 3,009 ) ( 3,284 ) ( 11,295 )

3 unchanged sentences

_______________________________________________________________________________

(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.

(1) During the three months ended March 31, 2022, 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 nine months ended March 31, 2022, the Company paid $ 0.9 million to exit its distribution centers before the lease end dates and incurred costs of $ 0.9 million to exit salons before the lease end date in order to relieve the Company of future lease obligations.

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 and $( 0.5 ) and $ 1.5 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.

(3) Includes the provision for uncollectible franchisee rent.

The credit in the three months ended March 31, 2022 relates to lower estimated exposure.

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

1 unchanged sentence

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.

For the three months ended March 31, 2022 and 2021, franchise rental income and franchise rent expense were $ 32.7 and $ 31.3 million, respectively and $ 100.2 and $ 95.9 million, respectively, for the nine months ended March 31, 2022 and 2021.

These leases generally have lease terms of approximately five years .

7 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 6.26 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.

The weighted average remaining lease term was 6.15 and 6.44 years and the weighted average discount rate was 4.22 % and 4.11 % for all salon operating leases as of March 31, 2022 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.

10 unchanged sentences

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 significant judgments and assumptions utilized to determine the fair value of the salon asset groups include the market rent of comparable properties and a discount rate.

In the three months ended March 31, 2022 and 2021, the Company recognized a long-lived impairment charge of $ 0.3 and $ 0.8 million, respectively, which included $ 0.3 and $ 0.3 million, respectively, related to the ROU assets, in the unaudited Condensed Consolidated Statement of Operations.

In the nine months ended March 31, 2022 and 2021, the Company recognized a long-lived impairment charge of $ 0.5 and $ 9.8 million, respectively, which included $ 0.5 and $ 6.3 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.

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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.

The Company's 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 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):

As of March 31, 2022, future operating lease commitments, including one renewal option for leases expected to be renewed, to be paid and received by the Company were as follows (in thousands):

Fiscal 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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FINANCING ARRANGEMENTS:

The Company's long-term debt consists of the following:

The Company's debt consists of the following:

Revolving Credit Facility

Maturity Date December 31,

2021 December 31,

Maturity Date March 31,

2022 March 31,

2022 June 30,

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Revolving credit facility 2023 5.125 % $ 193,814 $ 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.

At March 31, 2022, cash and cash equivalents totaled $ 25.6 million.

As of March 31, 2022, the Company has $ 193.8 million of outstanding borrowings under a $ 291.3 million revolving credit facility.

The credit facility decreased $ 3.1 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 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.

At March 31, 2022, 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 March 31, 2022.

Total liquidity per the agreement was $ 128.3 million as of March 31, 2022.

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.

As of March 31, 2022, the Company had cash, cash equivalents and restricted cash of $ 33.7 million and current liabilities of $ 352.0 million.

The Company was in compliance with all covenants and other requirements of the financing arrangements as of March 31, 2022.

Management's current projected cash flows do not support the ability to repay this obligation in full at maturity, however, management is working with advisors to determine alternative financing arrangements.

FAIR VALUE MEASUREMENTS:

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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.

As of March 31, 2022 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.

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 December 31, Six Months Ended December 31,

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

2022 2021 2022 2021

(Dollars in thousands)

Goodwill impairment (1) $ 16,000 $ — $ 16,000 $ —

Long-lived asset impairment (1) 327 833 542 9,817

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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.

Segment information is prepared on the same basis that the chief operating decision maker (CODM) 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 CODM reviews the business.

The Company re-assessed its CODM conclusion in the second quarter of fiscal year 2022 as part of the CEO transition.

As of March 31, 2022, the Company concluded the Interim CEO was the chief operating decision maker.

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

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(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.

As of March 31, 2022, 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 December 31, 2021

Three Months Ended March 31, 2022

Franchise Company-owned Consolidated (1)

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Cost of product sales to franchisees 2,598 — 2,598

Inventory reserve (1) — — 6,420

General and administrative 14,934 635 15,569

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Long-lived asset impairment 322 5 327

Goodwill impairment 16,000 — 16,000

Total operating expenses 76,517 7,256 90,193

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

Three Months Ended December 31, 2020

Operating loss $ ( 15,317 ) $ ( 3,707 ) $ ( 25,444 )

_______________________________________________________________________________

(1) This charge, primarily related to reserving for personal protective equipment acquired as a result of the COVID-19 pandemic, relates to the wind down of our distribution centers and is reviewed separately from the segment results by the CODM.

Consolidated results will not cross foot as the inventory reserve is not part of the Company's segments.

Three Months Ended March 31, 2021

Franchise Company-owned Consolidated

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Operating loss $ ( 5,918 ) $ ( 12,623 ) $ ( 18,541 )

Six Months Ended December 31, 2021

Nine Months Ended March 31, 2022

Franchise Company-owned Consolidated (1)

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Cost of product sales to franchisees 14,129 — 14,129

Inventory reserve (1) — — 6,420

General and administrative 51,099 2,243 53,342

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Long-lived asset impairment 450 92 542

Goodwill impairment 16,000 — 16,000

Total operating expenses 214,168 24,545 245,133

Operating loss $ ( 18,004 ) $ ( 7,948 ) $ ( 32,372 )

Six Months Ended December 31, 2020

_______________________________________________________________________________

Consolidated results will not cross foot as the inventory reserve is not part of the Company's segments.

Nine Months Ended March 31, 2021

Franchise Company-owned Consolidated

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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