REGIS CORP 10-Q

Item 1. Financial Statements REGIS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) (Dollars in thousands, except share data) September 30, 2022 June 30, 2022 ASSETS Current assets: Cash and cash equivalents (Note 7) $ 9,505 $ 17,041 Receivables, net 12,999 14,531 Inventories, net 5,127 3,109 Other current assets 15,730 13,984 Total current assets 43,361 48,665 Property and equipment, net 12,070 12,835 Goodwill (Note 1) 173,057 174,360 Other intangibles, net 2,975 3,226 Right of use asset (Note 8) 461,579 493,749 Other assets 28,976 36,465 Total assets $ 722,018 $ 769,300 LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Accounts payable $ 16,080 $ 15,860 Accrued expenses 28,980 33,784 Short-term lease liability (Note 8) 98,270 103,196 Total current liabilities 143,330 152,840 Long-term debt, net (Note 9) 171,879 179,994 Long-term lease liability (Note 8) 379,915 408,445 Other non-current liabilities 56,754 58,974 Total liabilities 751,878 800,253 Commitments and contingencies (Note 6) Shareholders' deficit: Common stock, $ 0.05 par value; issued and outstanding, 45,536,525 and 45,510,245 common shares at September 30, 2022 and June 30, 2022, respectively 2,277 2,276 Additional paid-in capital 63,044 62,562 Accumulated other comprehensive income 8,597 9,455 Accumulated deficit ( 103,778 ) ( 105,246 ) Total shareholders' deficit ( 29,860 ) ( 30,953 ) Total liabilities and shareholders' deficit $ 722,018 $ 769,300 _______________________________________________________________________________ The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements. 2 REGIS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) For The Three Months Ended September 30, 2022 And 2021 (Dollars and shares in thousands, except per share amounts) Three Months Ended September 30, 2022 2021 Revenues: Royalties $ 17,180 $ 16,602 Fees 2,553 2,327 Product sales to franchisees 443 8,008 Advertising fund contributions 8,251 8,114 Franchise rental income (Note 8) 30,330 33,762 Company-owned salon revenue 3,114 8,005 Total revenue 61,871 76,818 Operating expenses: Cost of product sales to franchisees 470 7,648 General and administrative 14,361 20,784 Rent (Note 8) 1,753 1,747 Advertising fund expense 8,251 8,114 Franchise rent expense 30,330 33,762 Company-owned salon expense (1) 2,985 7,945 Depreciation and amortization 1,251 1,539 Long-lived asset impairment — 163 Total operating expenses 59,401 81,702 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 ) Other, net ( 463 ) ( 239 ) Loss from operations before income taxes ( 1,810 ) ( 9,330 ) 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: 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: Basic and diluted 46,054 36,850 _______________________________________________________________________________ (1) Includes cost of service and product sold to guests in our Company-owned salons. Excludes general and administrative expense, rent and depreciation and amortization related to Company-owned salons . (2) Total is a recalculation; line items calculated individually may not sum to total due to rounding. The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements. 3 REGIS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (Unaudited) For The Three Months Ended September 30, 2022 And 2021 (Dollars in thousands) Three Months Ended September 30, 2022 2021 Net income (loss) $ 1,468 $ ( 10,378 ) Foreign currency translation adjustments ( 858 ) ( 474 ) Comprehensive income (loss) $ 610 $ ( 10,852 ) _______________________________________________________________________________ The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements. 4 REGIS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT (Unaudited) For The Three Months Ended September 30, 2022 And 2021 (Dollars in thousands) Three Months Ended September 30, 2022 Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Shares Amount 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 ) Stock-based compensation — — 496 — — 496 Net restricted stock activity 26,280 1 ( 14 ) — — ( 13 ) 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 Paid-In Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Shares Amount Balance, June 30, 2021 35,795,844 $ 1,790 $ 25,102 $ 9,543 $ ( 19,389 ) $ 17,046 Net loss — — — — ( 10,378 ) ( 10,378 ) Foreign currency translation — — — ( 474 ) — ( 474 ) Issuance of common stock, net of offering costs 8,072,304 404 31,789 — — 32,193 Stock-based compensation — — 1,678 — — 1,678 Net restricted stock activity 96,341 4 ( 259 ) — — ( 255 ) Balance, September 30, 2021 43,964,489 $ 2,198 $ 58,310 $ 9,069 $ ( 29,767 ) $ 39,810 _______________________________________________________________________________ The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements. 5 REGIS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) For The Three Months Ended September 30, 2022 And 2021 (Dollars in thousands) Three Months Ended September 30, 2022 2021 Cash flows from 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 Long-lived asset impairment — 163 Deferred income taxes 28 ( 258 ) Loss from sale of salon assets to franchisees, net — 1,080 Stock-based compensation 531 1,678 Amortization of debt discount and financing costs 648 460 Other non-cash items affecting earnings 481 232 Changes in operating assets and liabilities, excluding the effects of asset sales (1) ( 5,321 ) ( 6,805 ) Net cash used in operating activities ( 5,057 ) ( 12,254 ) Cash flows from investing activities: Capital expenditures ( 184 ) ( 1,524 ) 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 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 ) Net cash (used in) provided by financing activities ( 3,798 ) 40,832 Effect of exchange rate changes on cash and cash equivalents ( 166 ) ( 148 ) (Decrease) increase in cash, cash equivalents, and restricted cash ( 5,705 ) 26,906 Cash, cash equivalents and restricted cash: Beginning of period 27,464 29,152 End of period $ 21,759 $ 56,058 _______________________________________________________________________________ (1) Changes in operating assets and liabilities exclude assets and liabilities sold. The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements. 6 REGIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The unaudited interim Condensed Consolidated Financial Statements of Regis Corporation (the Company) as of 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. The results of operations and cash flows for any interim period are not necessarily indicative of results of operations and cash flows for the full year. The accompanying interim unaudited Condensed Consolidated Financial Statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP). The unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended June 30, 2022 and other documents filed or furnished with the SEC during the current fiscal year. Inventories: The Company has inventory valuation reserves for excess and obsolete inventories or other factors that may render inventories unmarketable at their historical costs. 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. Goodwill: 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 September 30, 2022 and 2021 include $ 0.2 and $ 0.3 million, respectively, of asset retirement obligations, which are cash expenses. 7 2. REVENUE RECOGNITION: Revenue Recognition and Deferred Revenue: Revenue recognized over time Royalty and advertising fund revenues represent sales-based royalties that are recognized in the period in which the sales occur. Generally, royalty and advertising fund revenues are billed and collected monthly in arrears. Advertising fund revenues and expenditures, which must be spent on marketing and related activities per the franchise agreements, are recorded on a gross basis within the unaudited Condensed Consolidated Statement of Operations. The treatment increases both the gross amount of reported revenue and expense and generally has no impact on operating income and net income. Franchise fees are billed and received upon the signing of the franchise agreement. Recognition of these fees is deferred until the salon 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, 2022 Balance Sheet Classification (Dollars in thousands) Receivables from contracts with customers, net $ 8,675 $ 10,263 Receivables, net Broker fees 14,765 15,592 Other assets Deferred revenue: Current Gift card liability $ 1,951 $ 2,037 Accrued expenses Deferred franchise fees open salons 5,674 5,770 Accrued expenses Total current deferred revenue $ 7,625 $ 7,807 Non-current Deferred franchise fees unopened salons $ 3,107 $ 3,211 Other non-current liabilities Deferred franchise fees open salons 25,391 26,827 Other non-current liabilities Total non-current deferred revenue $ 28,498 $ 30,038 8 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: Three Months Ended September 30, 2022 2021 (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 Reclass of accrued rent (2) 60 396 Write-offs ( 725 ) ( 102 ) Balance at end of period $ 6,374 $ 8,669 _______________________________________________________________________________ (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 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: Three Months Ended September 30, 2022 2021 (Dollars in thousands) Balance at beginning of period $ 15,592 $ 19,254 Additions — 25 Amortization ( 827 ) ( 862 ) Write-offs — ( 145 ) 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 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 2024 5,447 2025 5,064 2026 4,594 2027 4,132 Thereafter 7,573 Total $ 31,065 9 3. 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, 2022 2021 (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 ) 10 4. SHAREHOLDERS' EQUITY: Stock-Based Employee Compensation: 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 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 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. 11 5. INCOME TAXES: A summary of income tax (expense) benefit and corresponding effective tax rates is as follows: Three Months Ended September 30, 2022 2021 (Dollars in thousands) Income tax (expense) benefit $ ( 28 ) $ 48 Effective tax rate ( 1.5 %) 0.5 % 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. 6. COMMITMENTS AND CONTINGENCIES: 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 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. 12 7. CASH, CASH EQUIVALENTS AND RESTRICTED CASH: The table below reconciles the cash and cash equivalents balances and restricted cash balances, recorded within other current assets on the unaudited Condensed Consolidated Balance Sheet to the amount of cash, cash equivalents and restricted cash reported on the unaudited Condensed Consolidated Statement of Cash Flows: September 30, 2022 June 30, 2022 (Dollars in thousands) Cash and cash equivalents $ 9,505 $ 17,041 Restricted cash, included in other current assets (1) 12,254 10,423 Total cash, cash equivalents and restricted cash $ 21,759 $ 27,464 _______________________________________________________________________________ (1) Restricted cash within other current assets primarily relates to consolidated advertising cooperatives funds, which can only be used to settle obligations of the respective cooperatives and contractual obligations to collateralize the Company's self-insurance programs. 13 8. LEASES: At contract inception, the Company determines whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides the Company the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, the Company considers it to be, or contain, a lease. The Company leases its company-owned salons and some of its corporate facilities under operating leases. The original terms of the salon leases range from 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. For most leases, the Company is required to pay real estate taxes and other occupancy expenses. Total rent includes the following: Three Months Ended September 30, 2022 2021 (Dollars in thousands) Office and warehouse rent $ 872 $ 1,613 Lease termination expense (1) 458 1,340 Lease liability benefit (2) ( 602 ) ( 2,431 ) Franchise salon rent (3) ( 53 ) 329 Company-owned salon rent 1,078 896 Total $ 1,753 $ 1,747 _______________________________________________________________________________ (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) 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. All lease-related costs are passed through to the franchisees. The Company records the rental payments due from franchisees as franchise rental income and the corresponding amounts owed to landlords as franchise rent expense on the unaudited Condensed Consolidated Statement of Operations. For the three months ended September 30, 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 . The Company expects to renew SmartStyle and some franchise leases upon expiration. Other leases are expected to be renewed by the franchisee upon expiration. 14 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. Expense for lease payments is recognized on a straight-line basis over the lease term, including the lease renewal option when the lease is expected to be renewed. Generally, the non-lease components, such as real estate taxes and other occupancy expenses, are separate from rent expense within the lease and are not included in the measurement of the lease liability because these charges are variable. The discount rate used to determine the present value of the lease payments is the Company's estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as the interest rate implicit in the lease cannot generally be determined. The Company uses the portfolio approach in applying the discount rate based on the original lease term. The weighted average remaining lease term was 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 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. The first step in the impairment test under ASC 360 is to determine whether the long-lived assets are recoverable, which is determined by comparing the net carrying value of the salon asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset group. Estimating cash flows for purposes of the recoverability test is subjective and requires significant judgment. Estimated future cash flows used for the purposes of the recoverability test were based upon historical cash flows for the salons, adjusted for expected changes in future market conditions related to the COVID-19 pandemic, and other factors. The period of time used to determine the estimates of the future cash flows for the recoverability test was based on the remaining useful life of the primary asset of the group, which was the ROU asset in all cases. The second step of the long-lived asset impairment test requires that the fair value of the asset group be estimated when determining the amount of any impairment loss. For the salon asset groups that failed the recoverability test, an impairment loss was measured as the amount by which the carrying amount of the asset group exceeds its fair value. The Company applied the fair value guidance within ASC 820-10 to determine the fair value of the asset group from the perspective of a market-participant considering, among other things, appropriate discount rates, multiple valuation techniques, the most advantageous market, and assumptions about the highest and best use of the asset group. To determine the fair value of the salon asset groups, the Company utilized market-participant assumptions rather than the Company's own assumptions about how it intends to use the asset group. The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include the market rent of comparable properties and a discount rate. 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 asset, including its ROU assets. 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. 15 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 Remainder of 2023 $ 84,843 $ 2,245 $ 1,641 $ 88,729 $ ( 84,843 ) $ 3,886 2024 100,949 1,809 1,301 104,059 ( 100,949 ) 3,110 2025 84,593 636 1,334 86,563 ( 84,593 ) 1,970 2026 71,111 314 1,367 72,792 ( 71,111 ) 1,681 2027 60,718 79 1,401 62,198 ( 60,718 ) 1,480 Thereafter 122,790 106 4,417 127,313 ( 122,790 ) 4,523 Total future obligations $ 525,004 $ 5,189 $ 11,461 $ 541,654 $ ( 525,004 ) $ 16,650 Less amounts representing interest 61,640 230 1,599 63,469 Present value of lease liabilities $ 463,364 $ 4,959 $ 9,862 $ 478,185 Less current lease liabilities 93,915 2,760 1,595 98,270 Long-term lease liabilities $ 369,449 $ 2,199 $ 8,267 $ 379,915 16 9. FINANCING ARRANGEMENTS: The Company's debt consists of the following: Maturity Date September 30, 2022 September 30, 2022 June 30, 2022 (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 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. 17 10. FAIR VALUE MEASUREMENTS: Fair value measurements are categorized into one of three levels based on the lowest level of significant input used: Level 1 (unadjusted quoted prices in active markets); Level 2 (observable market inputs available at the measurement date, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data). Assets and Liabilities Measured at Fair Value on a Recurring Basis As of 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 We measure certain assets, including the Company's equity method investments, tangible fixed and other assets and goodwill, at fair value on a nonrecurring basis when they are deemed to be other than temporarily impaired. The fair values of these assets are determined, when applicable, based on valuation techniques using the best information available, and may include quoted market prices, market comparables and discounted cash flow projections. 11. 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. 18 12. 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. The Company's reportable operating segments consisted of the following salons: September 30, 2022 June 30, 2022 FRANCHISE SALONS: Supercuts 2,233 2,264 SmartStyle/Cost Cutters in Walmart Stores 1,625 1,646 Portfolio Brands 1,325 1,344 Total North American salons 5,183 5,254 Total International salons (1) 140 141 Total Franchise salons 5,323 5,395 as a percent of total Franchise and Company-owned salons 98.2 % 98.1 % COMPANY-OWNED SALONS: Supercuts 15 18 SmartStyle/Cost Cutters in Walmart Stores 49 49 Portfolio Brands 31 38 Total Company-owned salons 95 105 as a percent of total Franchise and Company-owned salons 1.8 % 1.9 % OWNERSHIP INTEREST LOCATIONS: Equity ownership interest locations 76 76 Grand Total, System-wide 5,494 5,576 _______________________________________________________________________________ (1) Canadian and Puerto Rican salons are included in the North American salon totals. 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. 19 Financial information concerning the Company's reportable operating segments is shown in the following tables: Three Months Ended September 30, 2022 Franchise Company-owned Consolidated (Dollars in thousands) Revenues: Royalties $ 17,180 $ — $ 17,180 Fees 2,553 — 2,553 Product sales to franchisees 443 — 443 Advertising fund contributions 8,251 — 8,251 Franchise rental income 30,330 — 30,330 Company-owned salon revenue — 3,114 3,114 Total revenue 58,757 3,114 61,871 Operating expenses: Cost of product sales to franchisees 470 — 470 General and administrative 14,182 179 14,361 Rent 509 1,244 1,753 Advertising fund expense 8,251 — 8,251 Franchise rent expense 30,330 — 30,330 Company-owned salon expense — 2,985 2,985 Depreciation and amortization 950 301 1,251 Total operating expenses 54,692 4,709 59,401 Operating income (loss) $ 4,065 $ ( 1,595 ) $ 2,470 Three Months Ended September 30, 2021 Franchise Company-owned Consolidated (Dollars in thousands) Revenues: Royalties $ 16,602 $ — $ 16,602 Fees 2,327 — 2,327 Product sales to franchisees 8,008 — 8,008 Advertising fund contributions 8,114 — 8,114 Franchise rental income 33,762 — 33,762 Company-owned salon revenue — 8,005 8,005 Total revenue 68,813 8,005 76,818 Operating expenses: Cost of product sales to franchisees 7,648 — 7,648 General and administrative 20,238 546 20,784 Rent 1,621 126 1,747 Advertising fund expense 8,114 — 8,114 Franchise rent expense 33,762 — 33,762 Company-owned salon expense — 7,945 7,945 Depreciation and amortization 1,293 246 1,539 Long-lived asset impairment — 163 163 Total operating expenses 72,676 9,026 81,702 Operating loss $ ( 3,863 ) $ ( 1,021 ) $ ( 4,884 ) 20