What changed in this filing

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Item 1. Financial Statements

2022-11-01 compared with 2022-05-10 · 174 added, 313 removed, 317 unchanged (61% of the section changed)

3 unchanged sentences

(Dollars in thousands, except share data)

September 30,

2022 June 30,

3 unchanged sentences

Receivables, net 12,999 14,531

Inventories 8,606 22,993

Inventories, net 5,127 3,109

Other current assets 15,730 13,984

8 unchanged sentences

Total assets $ 722,018 $ 769,300

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES AND SHAREHOLDERS' DEFICIT

Current liabilities:

1 unchanged sentence

Accrued expenses 28,980 33,784

Short-term debt, net (Note 8)

Short-term lease liability (Note 8)

2 unchanged sentences

Long-term debt, net (Note 9)

171,879 179,994

Long-term lease liability (Note 8)

3 unchanged sentences

Commitments and contingencies (Note 6)

Shareholders' equity:

Shareholders' deficit:

Common stock, $ 0.05 par value;

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

issued and outstanding, 45,536,525 and 45,510,245 common shares at September 30, 2022 and June 30, 2022, respectively

Additional paid-in capital 63,044 62,562

1 unchanged sentence

Accumulated deficit ( 103,778 ) ( 105,246 )

Total shareholders' equity 11,119 17,046

Total liabilities and shareholders' equity $ 862,778 $ 996,383

Total shareholders' deficit ( 29,860 ) ( 30,953 )

Total liabilities and shareholders' deficit $ 722,018 $ 769,300

_______________________________________________________________________________

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

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

For The Three Months Ended September 30, 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

Three Months Ended September 30,

Royalties $ 17,180 $ 16,602

8 unchanged sentences

Cost of product sales to franchisees 470 7,648

Inventory reserve (1) 6,420 — 6,420 —

General and administrative 14,361 20,784

Rent (Note 8)

1,246 8,001 6,137 34,128

Advertising fund expense 8,251 8,114

3 unchanged sentences

Long-lived asset impairment — 163

Goodwill impairment 16,000 — 16,000 —

Total operating expenses 59,401 81,702

Operating loss ( 25,444 ) ( 18,541 ) ( 32,372 ) ( 76,886 )

Other (expense) income:

Operating income (loss) 2,470 ( 4,884 )

Other expense:

Interest expense ( 3,817 ) ( 3,127 )

Loss from sale of salon assets to franchisees, net — ( 1,080 )

Interest income and other, net 153 15,099 13 15,616

Other, net ( 463 ) ( 239 )

Loss from operations before income taxes ( 1,810 ) ( 9,330 )

Income tax benefit 1,270 333 1,482 1,368

Net loss $ ( 27,918 ) $ ( 10,847 ) $ ( 43,224 ) $ ( 78,991 )

Net loss per share:

Income tax (expense) benefit ( 28 ) 48

Loss from continuing operations ( 1,838 ) ( 9,282 )

Income (loss) from discontinued operations (Note 3) 3,306 ( 1,096 )

Net income (loss) $ 1,468 $ ( 10,378 )

Net income (loss) per share:

Basic and diluted:

Net loss per share, basic and diluted $ ( 0.61 ) $ ( 0.30 ) $ ( 1.01 ) $ ( 2.20 )

Loss from continuing operations $ ( 0.04 ) $ ( 0.25 )

Income (loss) from discontinued operations 0.07 ( 0.03 )

Net income (loss) per share, basic and diluted (2) $ 0.03 $ ( 0.28 )

Weighted average common and common equivalent shares outstanding:

1 unchanged sentence

_______________________________________________________________________________

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

Excludes reserves for inventory at salons.

(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.

REGIS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS (Unaudited)

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

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

For The Three Months Ended September 30, 2022 And 2021

(Dollars in thousands)

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

2022 2021 2022 2021

Net loss $ ( 27,918 ) $ ( 10,847 ) $ ( 43,224 ) $ ( 78,991 )

Three Months Ended September 30,

Net income (loss) $ 1,468 $ ( 10,378 )

Foreign currency translation adjustments ( 858 ) ( 474 )

Comprehensive loss $ ( 27,697 ) $ ( 10,541 ) $ ( 43,441 ) $ ( 77,348 )

Comprehensive income (loss) $ 610 $ ( 10,852 )

_______________________________________________________________________________

1 unchanged sentence

REGIS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited)

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

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT (Unaudited)

For The Three Months Ended September 30, 2022 And 2021

(Dollars in thousands)

Three Months Ended March 31, 2022

Three Months Ended September 30, 2022

Common Stock Additional

3 unchanged sentences

Shares Amount

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

Stock-based compensation — — 549 — — 549

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

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

Capital Accumulated

Comprehensive

Income Retained Earnings Total

Shares Amount

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

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

Balance, June 30, 2022 45,510,245 $ 2,276 $ 62,562 $ 9,455 $ ( 105,246 ) $ ( 30,953 )

Net income — — — — 1,468 1,468

Foreign currency translation — — — ( 858 ) — ( 858 )

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

Stock-based compensation — — 496 — — 496

Net restricted stock activity 26,280 1 ( 14 ) — — ( 13 )

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

Nine Months Ended March 31, 2022

Balance, September 30, 2022 45,536,525 $ 2,277 $ 63,044 $ 8,597 $ ( 103,778 ) $ ( 29,860 )

Three Months Ended September 30, 2021

Common Stock Additional

9 unchanged sentences

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

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

Capital Accumulated

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 — — — — ( 78,991 ) ( 78,991 )

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

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

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

Net restricted stock activity 160,334 8 ( 107 ) — — ( 99 )

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

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

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

_______________________________________________________________________________

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

For The Nine Months Ended March 31, 2022 And 2021

For The Three Months Ended September 30, 2022 And 2021

(Dollars in thousands)

Nine Months Ended March 31,

Three Months Ended September 30,

Cash flows from operating activities:

Net loss $ ( 43,224 ) $ ( 78,991 )

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

Net income (loss) $ 1,468 $ ( 10,378 )

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

Gain from sale of OSP (Note 3) ( 3,927 ) —

Depreciation and amortization 1,035 1,574

1 unchanged sentence

Deferred income taxes 28 ( 258 )

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 — 1,080

Goodwill impairment 16,000 —

Stock-based compensation 531 1,678

5 unchanged sentences

Capital expenditures ( 184 ) ( 1,524 )

Proceeds from sale of assets to franchisees — 7,743

Costs associated with sale of salon assets to franchisees — ( 242 )

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

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

Net proceeds from sale of OSP 3,500 —

Net cash provided by (used in) investing activities 3,316 ( 1,524 )

Cash flows from financing activities:

Borrowings on revolving credit facility 10,000 —

Repayments of revolving credit facility ( 3,096 ) —

Borrowings on credit facility 6,357 10,000

Repayments of long-term debt ( 5,801 ) ( 1,106 )

Debt refinancing fees ( 4,341 ) —

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

Taxes paid for shares withheld ( 13 ) ( 255 )

Minority interest buyout — ( 562 )

Distribution center lease payments — ( 724 )

Net cash provided by (used in) financing activities 43,245 ( 1,602 )

Net cash (used in) provided by financing activities ( 3,798 ) 40,832

Effect of exchange rate changes on cash and cash equivalents ( 166 ) ( 148 )

Increase (decrease) in cash, cash equivalents, and restricted cash 4,546 ( 82,511 )

(Decrease) increase in cash, cash equivalents, and restricted cash ( 5,705 ) 26,906

Cash, cash equivalents and restricted cash:

2 unchanged sentences

_______________________________________________________________________________

(1) Includes salon and distribution center reserves.

(1) 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 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.

The unaudited interim Condensed Consolidated Financial Statements of Regis Corporation (the Company) as of September 30, 2022 and for the three months ended September 30, 2022 and 2021, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of September 30, 2022 and its consolidated results of operations, comprehensive income (loss), shareholders' deficit and cash flows for the interim periods.

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

3 unchanged sentences

The unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended June 30, 2022 and other documents filed or furnished with the SEC during the current fiscal year.

COVID-19 Impact:

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 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.

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.

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

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

The Company'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 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:

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.

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 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:

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.

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.

The inventory valuation reserve as of September 30, 2022 and June 30, 2022 was $ 0.9 and $ 1.9 million, respectively.

As of September 30, 2022 and June 30, 2022, the Franchise reporting unit had $ 173.1 and $ 174.4 million, respectively, of goodwill.

The change in goodwill for the three months ended September 30, 2022 is due to foreign currency translation.

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

An interim impairment analysis was not required in the three months ended September 30, 2022.

Depreciation:

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.

Depreciation expense in the three months ended September 30, 2022 and 2021 include $ 0.2 and $ 0.3 million, respectively, of asset retirement obligations, which are cash expenses.

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

4 unchanged sentences

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.

Recognition of these fees is deferred until the salon opens and is then recognized over the term of the franchise agreement, which is typically 10 years .

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.

Revenue recognized at point of sale

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.

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

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

September 30,

2022 June 30,

5 unchanged sentences

Gift card liability $ 1,951 $ 2,037 Accrued expenses

Deferred franchise fees unopened salons 25 40 Accrued expenses

Deferred franchise fees open salons 5,674 5,770 Accrued expenses

3 unchanged sentences

Total non-current deferred revenue $ 28,498 $ 30,038

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.

Receivables relate primarily to payments due for royalties, franchise fees, advertising fees, rent, 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

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

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

Three Months Ended September 30,

(Dollars in thousands)

Balance at beginning of period $ 6,559 $ 7,774

Provision for doubtful accounts 461 237

Provision for franchisee rent (1) 19 364

1 unchanged sentence

Write-offs ( 725 ) ( 102 )

Balance as of March 31, 2022 $ 7,329

Balance at end of period $ 6,374 $ 8,669

_______________________________________________________________________________

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

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

(2) 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.

The amounts billed in fiscal year 2023 and 2022 and the related accrual were reclassified to 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

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

Three Months Ended September 30,

(Dollars in thousands)

Balance at beginning of period $ 15,592 $ 19,254

Additions — 25

Amortization ( 827 ) ( 862 )

Write-offs — ( 145 )

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.

Balance at end of period $ 14,765 $ 18,272

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

Franchise fee revenue for the three months ended March 31, 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):

Franchise fee revenue for the three months ended September 30, 2022 and 2021 was $ 1.5 and $ 1.6 million, respectively.

Estimated revenue expected to be recognized in the future related to deferred franchise fees for open salons as of September 30, 2022 is as follows (in thousands):

Remainder of 2023 $ 4,255

1 unchanged sentence

Total $ 31,065

DISCONTINUED OPERATIONS:

On June 30, 2022, the Company sold its Opensalon ® Pro (OSP) solution to Soham Inc.

for a purchase price of $ 20.0 million in cash plus up to an additional $ 19.0 million in cash contingent upon the number of salons that migrate to Soham's Zenoti product as their salon technology platform.

The Company received $ 13.0 million in proceeds in June 2022 and an additional $ 4.0 million in the first quarter of fiscal year 2023.

The remaining $ 3.0 million of the purchase price is subject to holdbacks including $ 1.0 million which is payable once the Company ends its arrangement with ProPoint in December 2022 and $ 2.0 million of proceeds held back until general indemnity provisions are satisfied within 18 months from closing.

As a result of the sale, the Company classified the OSP business as discontinued operations in the financial statements for all periods presented.

Discontinued operations is included in the Franchise segment in the Consolidated Statement of Operations for all periods presented.

No income taxes have been allocated to discontinued operations based on the methodology required by accounting for income taxes guidance.

The following summarizes the results of discontinued operations for the periods presented:

Three Months Ended September 30,

(Dollars in thousands)

Discontinued operations:

Fees $ ( 226 ) $ 938

Cost of product sales to franchisees — ( 464 )

General and administrative ( 27 ) ( 1,005 )

Rent ( 368 ) ( 56 )

Depreciation and amortization — ( 330 )

Interest expense — ( 179 )

Gain from sale of OSP 3,927 —

Gain (loss) from OSP discontinued operations $ 3,306 $ ( 1,096 )

SHAREHOLDERS' EQUITY:

Stock-Based Employee Compensation:

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

During the three months ended September 30, 2022, the Company granted various equity awards including stock options and stock appreciation rights as follows:

Three Months Ended September 30, 2022

Stock options (SOs) 985,000

Stock appreciation rights (SARs) 600,000

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.

The SOs and SARs granted during the three months ended September 30, 2022 vest in equal amounts 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 September 30, 2022 and 2021, respectively, were recorded within general and administrative expense on the unaudited Condensed Consolidated Statement of Operations.

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 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.

During the three months ended September 30, 2022, the Company did no t issue any shares.

During the three months ended September 30, 2021, the Company issued 8.1 million shares and received net proceeds of $ 32.2 million.

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

As of September 30, 2022, $ 11.6 million remains under the prospectus supplement, which equates to 11.5 million shares based on the share price as of September 30, 2022.

INCOME TAXES:

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

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

2022 2021 2022 2021

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

Three Months Ended September 30,

(Dollars in thousands)

Income tax benefit $ 1,270 $ 333 $ 1,482 $ 1,368

Income tax (expense) benefit $ ( 28 ) $ 48

Effective tax rate ( 1.5 %) 0.5 %

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.

Furthermore, with limited exceptions, the Company is no longer subject to state and international income tax examinations by tax authorities for years before 2012.

The recorded tax provision and effective tax rates for the three months ended September 30, 2022 and 2021 were different than what would normally be expected, primarily due to the impact of the deferred tax valuation allowance.

On August 16, 2022, the Inflation Reduction Act (the "IRA") was signed into law.

The IRA contains a number of tax related provisions, including a 15% minimum corporate income tax on certain large corporations, as well as an excise tax on stock repurchases.

The Company has evaluated the IRA and does not expect it to have a material impact on the Company's consolidated financial statements.

With limited exceptions, due to net operating loss carryforwards, our federal, state and foreign tax returns are open to examination for all years since 2014, 2012 and 2016, respectively.

COMMITMENTS AND CONTINGENCIES:

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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.

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 nonpayment of rent and associated charges.

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

During the three months ended September 30, 2022, the Company recorded $ 0.5 million of expense related to litigation, and $ 0.5 million was paid during the period.

The Company's previous 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 Transition 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, OSP.

The Company and the supplier entered into an amendment to the Settlement Agreement, effective June 15, 2022, in which the Company agreed to pay $ 2.0 million to the supplier in installments commencing on June 15, 2022, and ending on December 10, 2022, in consideration of a release of claims arising out of or related to the Transition Services Agreement and for the supplier to continue to provide the services set forth in that agreement through December 31, 2022.

As of September 30, 2022, the Company had $ 0.5 million remaining to pay.

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.

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

September 30,

2022 June 30,

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The Company leases its company-owned salons and some of its corporate facilities under operating leases.

The original terms of the salon leases range from 1 to 20 years with many leases renewable for an additional 5 to 10-year term at the option of the Company.

The original terms of the salon leases range from one to 20 years with many leases renewable for an additional five 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.

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Total rent includes the following:

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

2022 2021 2022 2021

Three Months Ended September 30,

(Dollars in thousands)

Office and warehouse rent $ 872 $ 1,613

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

Lease termination expense (1) 458 1,340

Lease liability benefit (2) ( 602 ) ( 2,431 )

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_______________________________________________________________________________

(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.

(1) During the three months ended September 30, 2022, the Company incurred costs of $ 0.5 million to exit salons before the lease end date in order to relieve the Company of future lease obligations.

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

(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.

(3) Franchise salon rent in fiscal year 2023 includes the benefit of incurring less cost to terminate a lease than estimated.

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

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

For the three months ended March 31, 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.

For the three months ended September 30, 2022 and 2021, franchise rental income and franchise rent expense were $ 30.3 and $ 33.8 million, respectively.

These leases generally have lease terms of approximately five years .

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

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.

All the Company's leases are 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.

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.

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

The weighted average remaining lease term was 6.15 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.

The weighted average remaining lease term was 5.89 and 6.02 years and the weighted average discount rate was 4.29 % and 4.25 % for all salon operating leases as of September 30, 2022 and June 30, 2022, 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.

Poor salon performance in fiscal years 2023 and 2022 resulted in ASC 360-10-35-21 triggering events.

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

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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.

In the three months ended September 30, 2022, the Company did not recognize a long-lived asset impairment charge related to ROU assets in the unaudited Condensed Consolidated Statement of Operations.

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

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

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

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

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

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 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):

As of September 30, 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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The Company's debt consists of the following:

Revolving Credit Facility

Maturity Date March 31,

2022 March 31,

Maturity Date September 30,

2022 September 30,

2022 June 30,

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

Term loan 2026 6.74 % $ 175,550 $ —

Deferred financing fees ( 8,671 ) —

Term loan, net $ 166,879 $ —

Revolving credit facility 2026 6.61 % 5,000 179,994

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 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.

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 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 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.

Total long-term debt, net $ 171,879 $ 179,994

In August of 2022, the Company amended its credit agreement.

The amendment, among other things, converted $ 180.0 million of the previous $ 295.0 million revolving credit facility to a new term loan, reduced commitments under the revolving credit facility to $ 55.0 million, and extended the term of the credit facility from March 26, 2023 to August 31, 2025, with no scheduled amortization prior to maturity.

The amendment is accounted for as a modification of debt and any unamortized financing fees that existed at the date of the amendment and new financing fees incurred are amortized through the extended term of the credit facility.

At September 30, 2022, the Company had outstanding standby letters of credit under the revolving credit facility of $ 11.8 million, primarily related to the Company's self-insurance program.

As of September 30, 2022, total liquidity and available credit under the revolving credit facility, as defined by the agreement, are $ 47.8 and $ 38.3 million, respectively.

As of September 30, 2022, the Company had cash and cash equivalents of $ 9.5 million and current liabilities of $ 143.3 million.

The agreement utilizes an interest rate margin that is subject to annual increases.

The margin applicable to term SOFR loans is currently 3.875 %.

Effective March 27, 2023, the margin will increase to 6.25 %, of which 4.25 % will be paid currently in cash and 2.00 % will be PIK interest (added to the principal balance and thereafter accruing interest).

Effective March 27, 2024, the margin will increase to 7.25 %, of which 4.25 % will be paid currently in cash and 3.00 % will be PIK interest.

The margin applicable to base rate loans will be 100 basis points ( 1.00 %) less than the margin applicable to term SOFR loans.

The agreement contains typical provisions and financial covenants regarding minimum EBITDA, maximum leverage and minimum fixed-charge coverage and a minimum liquidity threshold of $ 10.0 million.

The Company was in compliance with all covenants and other requirements of the financing arrangements as of September 30, 2022.

FAIR VALUE MEASUREMENTS:

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

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.

As of September 30, 2022 and June 30, 2022, the estimated fair value of the Company's cash, cash equivalents, restricted cash, receivables, inventory, deferred compensation assets, accounts payable and debt approximated their carrying values.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

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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 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

_______________________________________________________________________________

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

EARNINGS PER SHARE:

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

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

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

The computation of weighted average shares outstanding, assuming dilution, excluded 3,211,485 and 2,769,743 of stock-based awards during the three months ended September 30, 2022 and 2021, respectively, as they were not dilutive under the treasury stock method.

SEGMENT INFORMATION:

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:

September 30,

2022 June 30,

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

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.

As of September 30, 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 Supercuts ® , SmartStyle ® , and other regional trade names.

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

Three Months Ended March 31, 2022

Franchise Company-owned Consolidated (1)

(Dollars in thousands)

Royalties $ 15,799 $ — $ 15,799

Fees 3,364 — 3,364

Product sales to franchisees 1,293 — 1,293

Advertising fund contributions 8,078 — 8,078

Franchise rental income 32,666 — 32,666

Company-owned salon revenue — 3,549 3,549

Total revenue 61,200 3,549 64,749

Operating expenses:

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

Inventory reserve (1) — — 6,420

General and administrative 14,934 635 15,569

Rent 327 919 1,246

Advertising fund expense 8,078 — 8,078

Franchise rent expense 32,666 — 32,666

Company-owned salon expense — 5,292 5,292

Depreciation and amortization 1,592 405 1,997

Long-lived asset impairment 322 5 327

Goodwill impairment 16,000 — 16,000

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

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

(Dollars in thousands)

Royalties $ 12,835 $ — $ 12,835

Fees 5,120 — 5,120

Product sales to franchisees 13,079 — 13,079

Advertising fund contributions 5,580 — 5,580

Franchise rental income 31,317 — 31,317

Company-owned salon revenue — 32,336 32,336

Total revenue 67,931 32,336 100,267

Operating expenses:

Cost of product sales to franchisees 11,168 — 11,168

General and administrative 23,057 1,525 24,582

Rent 772 7,229 8,001

Advertising fund expense 5,580 — 5,580

Franchise rent expense 31,317 — 31,317

Company-owned salon expense — 33,707 33,707

Depreciation and amortization 1,933 1,687 3,620

Long-lived asset impairment 22 811 833

Total operating expenses 73,849 44,959 118,808

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

Nine Months Ended March 31, 2022

Three Months Ended September 30, 2022

Franchise Company-owned Consolidated

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Cost of product sales to franchisees 470 — 470

Inventory reserve (1) — — 6,420

General and administrative 14,182 179 14,361

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Depreciation and amortization 950 301 1,251

Long-lived asset impairment 450 92 542

Goodwill impairment 16,000 — 16,000

Total operating expenses 54,692 4,709 59,401

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

_______________________________________________________________________________

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

Nine Months Ended March 31, 2021

Operating income (loss) $ 4,065 $ ( 1,595 ) $ 2,470

Three Months Ended September 30, 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