What changed in this filing

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Item 1. Financial Statements

2023-02-01 compared with 2022-11-01 · 144 added, 126 removed, 365 unchanged (43% of the section changed)

3 unchanged sentences

(Dollars in thousands, except share data)

September 30,

2022 June 30,

30 unchanged sentences

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

issued and outstanding, 45,562,555 and 45,510,245 common shares at December 31, 2022 and June 30, 2022, respectively

Additional paid-in capital 63,543 62,562

7 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

For The Three Months Ended September 30, 2022 And 2021

For the Three and Six Months Ended December 31, 2022 and 2021

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

Three Months Ended September 30,

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

2022 2021 2022 2021

Royalties $ 16,158 $ 16,125 $ 33,338 $ 32,726

8 unchanged sentences

Cost of product sales to franchisees 1,310 3,117 1,780 10,766

Inventory reserve 1,228 — 1,228 —

General and administrative 11,747 15,082 26,108 35,866

Rent (Note 8)

2,090 3,042 3,843 4,789

Advertising fund expense 7,965 8,021 16,216 16,136

10 unchanged sentences

Loss from operations before income taxes ( 2,541 ) ( 4,274 ) ( 4,351 ) ( 13,605 )

Income tax (expense) benefit ( 28 ) 48

Income tax benefit (expense) — 164 ( 28 ) 213

Loss from continuing operations ( 2,541 ) ( 4,110 ) ( 4,379 ) ( 13,392 )

Income (loss) from discontinued operations (Note 3) 134 ( 818 ) 3,440 ( 1,914 )

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

Net income (loss) per share:

Net loss $ ( 2,407 ) $ ( 4,928 ) $ ( 939 ) $ ( 15,306 )

Net loss per share:

Basic and diluted:

1 unchanged sentence

Income (loss) from discontinued operations 0.00 ( 0.02 ) 0.07 ( 0.05 )

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

Net loss per share, basic and diluted (2) $ ( 0.05 ) $ ( 0.11 ) $ ( 0.02 ) $ ( 0.37 )

Weighted average common and common equivalent shares outstanding:

7 unchanged sentences

REGIS CORPORATION

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

For The Three Months Ended September 30, 2022 And 2021

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS (Unaudited)

For the Three and Six Months Ended December 31, 2022 and 2021

(Dollars in thousands)

Three Months Ended September 30,

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

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

2022 2021 2022 2021

Net loss $ ( 2,407 ) $ ( 4,928 ) $ ( 939 ) $ ( 15,306 )

Foreign currency translation adjustments 132 36 ( 726 ) ( 438 )

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

Comprehensive loss $ ( 2,275 ) $ ( 4,892 ) $ ( 1,665 ) $ ( 15,744 )

_______________________________________________________________________________

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT (Unaudited)

For The Three Months Ended September 30, 2022 And 2021

For the Three and Six Months Ended December 31, 2022 and 2021

(Dollars in thousands)

Three Months Ended September 30, 2022

Three Months Ended December 31, 2022

Common Stock Additional

3 unchanged sentences

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

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

Net loss — — — — ( 2,407 ) ( 2,407 )

Foreign currency translation — — — 132 — 132

1 unchanged sentence

Net restricted stock activity 26,030 1 ( 25 ) — — ( 24 )

Balance, December 31, 2022 45,562,555 $ 2,278 $ 63,543 $ 8,729 $ ( 106,185 ) $ ( 31,635 )

Three Months Ended December 31, 2021

Common Stock Additional

Capital Accumulated

Comprehensive

Income Accumulated Deficit Total

Shares Amount

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

Three Months Ended September 30, 2021

Net loss — — — — ( 4,928 ) ( 4,928 )

Foreign currency translation — — — 36 — 36

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

Stock-based compensation — — ( 1,374 ) — — ( 1,374 )

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

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

Six Months Ended December 31, 2022

Common Stock Additional

6 unchanged sentences

Foreign currency translation — — — ( 726 ) — ( 726 )

Stock-based compensation — — 1,020 — — 1,020

Net restricted stock activity 52,310 2 ( 39 ) — — ( 37 )

Balance, December 31, 2022 45,562,555 $ 2,278 $ 63,543 $ 8,729 $ ( 106,185 ) $ ( 31,635 )

Six Months Ended December 31, 2021

Common Stock Additional

Capital Accumulated

Comprehensive

Income Accumulated Deficit Total

Shares Amount

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

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

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

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

1 unchanged sentence

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

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

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

_______________________________________________________________________________

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

For The Three Months Ended September 30, 2022 And 2021

For the Six Months Ended December 31, 2022 and 2021

(Dollars in thousands)

Three Months Ended September 30,

Six Months Ended December 31,

Cash flows from operating activities:

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

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

Net loss $ ( 939 ) $ ( 15,306 )

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

Gain from sale of OSP (Note 3) ( 4,034 ) —

2 unchanged sentences

Deferred income taxes 28 ( 529 )

Inventory reserve 1,228 —

Loss from sale of salon assets to franchisees, net — 1,695

6 unchanged sentences

Capital expenditures ( 361 ) ( 2,947 )

Net proceeds from sale of OSP 3,500 —

Proceeds from sale of OSP, net of fees 4,000 —

Net cash provided by (used in) investing activities 3,639 ( 2,947 )

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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.

The unaudited interim Condensed Consolidated Financial Statements of Regis Corporation (the Company) as of December 31, 2022 and for the three and six months ended December 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 December 31, 2022 and its consolidated results of operations, comprehensive 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.

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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.

To facilitate the exit of the distribution centers, the Company sold inventory at discounts.

The inventory valuation reserve as of December 31, 2022 and June 30, 2022 was $ 1.9 and $ 1.9 million, respectively.

In the three and six months ended December 31, 2022, an inventory reserve charge of $ 1.2 million was recorded in Inventory reserve on the unaudited Condensed Consolidated Statement of Operations.

In the three and six months ended December 31, 2021, an inventory reserve charge of $ 1.2 and $ 1.5 million, respectively, was recorded in Company-owned salon expense on the unaudited Condensed Consolidated Statement of Operations.

As of December 31, 2022 and June 30, 2022, the Company had inventory related to discontinued operations of $ 1.3 and $ 1.8 million, respectively, net of a reserve of $ 1.3 and $ 1.1 million, respectively.

The increase in the reserve during fiscal year 2023 reduced the gain from discontinued operations.

See Note 3 to the unaudited Condensed Consolidated Financial Statements.

As of December 31, 2022 and June 30, 2022, the Franchise reporting unit had $ 173.3 and $ 174.4 million, respectively, of goodwill.

The change in goodwill for the six months ended December 31, 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.

An interim impairment analysis was not required in the three and six months ended December 31, 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.

Depreciation expense in the three months ended December 31, 2022 and 2021 includes $ 0.2 and $ 0.3 million, respectively, and for the six months ended December 31, 2022 and 2021 includes $ 0.4 and $ 0.6 million, respectively, of asset retirement obligations, which are cash expenses.

Depreciation expense in the three and six months ended December 31, 2022 includes a $ 2.6 million accelerated depreciation charge related to the consolidation of office space within the Company's corporate headquarters.

REVENUE RECOGNITION:

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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.

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

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

September 30,

2022 June 30,

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Total non-current deferred revenue $ 26,627 $ 30,038

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.

Receivables relate primarily to payments due for royalties, 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,

Six Months Ended December 31,

(Dollars in thousands)

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(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.

The amounts billed in fiscal years 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.

1 unchanged sentence

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

Three Months Ended September 30,

Six Months Ended December 31,

(Dollars in thousands)

5 unchanged sentences

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):

Franchise fee revenue for the three months ended December 31, 2022 and 2021 was $ 1.7 and $ 1.6 million, respectively, and for the six months ended December 31, 2022 and 2021 was $ 3.2 and $ 3.2 million, respectively.

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

Remainder of 2023 $ 2,766

3 unchanged sentences

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.

The Company received $ 13.0 million in proceeds in June 2022 and in the six months ended December 31, 2022, received an additional $ 4.5 million in proceeds, net of a $ 0.5 million transaction fee.

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,

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

2022 2021 2022 2021

(Dollars in thousands)

Discontinued operations:

Fees $ ( 226 ) $ 938

OSP fees $ — $ 986 $ ( 226 ) $ 1,924

Cost of product sales to franchisees — ( 302 ) — ( 766 )

4 unchanged sentences

Gain from sale of OSP 108 — 4,034 —

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

Gain (loss) from OSP discontinued operations, net $ 134 $ ( 818 ) $ 3,440 $ ( 1,914 )

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

During the three and six months ended December 31, 2022, the Company granted various equity awards including stock options and stock appreciation rights as follows:

Three Months Ended December 31, 2022 Six Months Ended December 31, 2022

Stock options (SOs) 615,000 1,600,000

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.

The SOs and SARs granted during the three and six months ended December 31, 2022 vest in equal amounts over a one or three-year period subsequent to the grant date.

Total compensation cost for stock-based payment arrangements totaling $ 0.6 and $( 1.4 ) million for the three months ended December 31, 2022 and 2021, respectively, and $ 1.1 and $ 0.3 million for the six months ended December 31, 2022 and 2021, respectively, were recorded within general and administrative expense on the unaudited Condensed Consolidated Statement of Operations.

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

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.

During the six months ended December 31, 2022, the Company did no t issue any shares.

During the six months ended December 31, 2021, the Company issued 9.3 million shares and received net proceeds of $ 37.2 million.

As of December 31, 2022, $ 11.6 million remains under the prospectus supplement, which equates to 9.5 million shares based on the share price as of December 31, 2022.

INCOME TAXES:

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

Three Months Ended September 30,

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

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

2022 2021 2022 2021

(Dollars in thousands)

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

Income tax benefit (expense) $ — $ 164 $ ( 28 ) $ 213

Effective tax rate — % 3.8 % ( 0.6 ) % 1.6 %

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.

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

6 unchanged sentences

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.

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

During the three and six months ended December 31, 2022, the Company recorded $ 0.4 and $ 0.9 million, respectively, of expense related to litigation, and $ 0.6 and $ 1.1 million was paid during the three and six months ended December 31, 2022, respectively.

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.

As of December 31, 2022, the Company has made all payments under the agreement.

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

2 unchanged sentences

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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Total rent includes the following:

Three Months Ended September 30,

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

2022 2021 2022 2021

(Dollars in thousands)

6 unchanged sentences

_______________________________________________________________________________

(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.

(1) During the three and six months ended December 31, 2022, the Company incurred costs of $ 0.8 and $ 1.3 million, respectively, to exit salons before the lease end date in order to relieve the Company of future lease obligations.

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

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

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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 September 30, 2022 and 2021, franchise rental income and franchise rent expense were $ 30.3 and $ 33.8 million, respectively.

For the three months ended December 31, 2022 and 2021, franchise rental income and franchise rent expense were $ 28.9 and $ 33.8 million, respectively, and $ 59.2 and $ 67.5 million, respectively, for the six months ended December 31, 2022 and 2021.

These leases generally have lease terms of approximately five years .

The Company expects to renew SmartStyle and some franchise leases upon expiration.

The Company expects to renew the SmartStyle ® master lease and some leases for locations subleased to our franchisees upon expiration of those leases.

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

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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 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.

The weighted average remaining lease term was 5.77 and 6.02 years and the weighted average discount rate was 4.34 % and 4.25 % for all salon operating leases as of December 31, 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.

11 unchanged sentences

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.

In the three and six months ended December 31, 2022, the Company did not recognize long-lived asset impairment charges related to ROU assets in the unaudited Condensed Consolidated Statement of Operations.

In the three and six months ended December 31, 2021, the Company recognized long-lived asset impairment charges of $ 0.1 and $ 0.2 million, respectively, primarily 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.

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If actual results are not consistent with the estimates and assumptions used in the calculations, the Company may be exposed to future impairment losses that could be material.

As of September 30, 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 December 31, 2022, future operating lease commitments, including one renewal option for leases expected to be renewed, to be paid and received by the Company were as follows (in thousands):

Fiscal Year Leases for Franchise Salons Leases for Company-owned Salons Corporate Leases Total Operating Lease Payments Sublease Income to be Received from Franchisees Net Rent Commitments

7 unchanged sentences

Less amounts representing interest 56,953 121 1,500 58,574

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

Present value of lease liability $ 433,058 $ 3,713 $ 9,381 $ 446,152

Less short-term lease liability 90,342 2,246 1,352 93,940

Long-term lease liability $ 342,716 $ 1,467 $ 8,029 $ 352,212

FINANCING ARRANGEMENTS:

The Company's debt consists of the following:

Maturity Date September 30,

2022 September 30,

Maturity Date December 31,

2022 December 31,

2022 June 30,

8 unchanged sentences

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.

At December 31, 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 December 31, 2022, total liquidity and available credit under the revolving credit facility, as defined by the agreement, were $ 43.7 and $ 34.3 million, respectively.

As of December 31, 2022, the Company had cash and cash equivalents of $ 9.4 million and current liabilities of $ 138.9 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 %.

The margin applicable to term secured overnight financing rate (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).

2 unchanged sentences

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.

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

FAIR VALUE MEASUREMENTS:

4 unchanged sentences

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.

As of December 31, 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

2 unchanged sentences

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.

The Company's basic earnings per share is calculated as net 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 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.

The computation of weighted average shares outstanding, assuming dilution, excluded 4,143,828 and 2,960,122 of stock-based awards during the three months ended December 31, 2022 and 2021, respectively, and excluded 3,662,602 and 2,635,055 of stock-based awards during the six months ended December 31, 2022 and 2021, respectively, as they were not dilutive under the treasury stock method.

SEGMENT INFORMATION:

1 unchanged sentence

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

September 30,

2022 June 30,

17 unchanged sentences

(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.

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)

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

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

Financial information concerning the Company's reportable operating segments is shown in the tables below.

Segment information is presented in the same way that the Company internally organizes the business for assessing performance and making decisions regarding allocation of resources.

In the second quarter of fiscal year 2023, the Company revised its internal reporting such that the CODM’s primary measures of segment performance are revenue and segment adjusted EBITDA.

Revenue and segment adjusted EBITDA are regularly reviewed by the CODM to make decisions about resources to be allocated to the segments, assess current performance and forecast future performance.

Segment adjusted EBITDA is defined as income from continuing operations before interest, income taxes, depreciation and amortization.

C onsistent with our internal management reporting, unallocated expenses include certain items impacting comparability.

These unallocated items are not defined terms within U.S.

They are based on how management views the business, makes financial, operating and planning decisions and evaluates the Company's ongoing performance and are not attributable to either segment.

Unallocated fees include distribution center wind down fees, inventory reserve, one-time professional fees and settlements, severance expense, the benefit from lease liability decreases in excess of previously impaired ROUA, lease termination fees, asset retirement obligation costs and long-lived asset impairment charges.

Figures for prior reporting periods have been restated to conform to the current period.

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

2022 2021 2022 2021

(Dollars in thousands)

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

Franchise $ 57,354 $ 64,227 $ 116,111 $ 133,040

Company-owned 2,613 5,043 5,727 13,048

Total revenue 59,967 69,270 121,838 146,088

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

Segment adjusted EBITDA:

Franchise 7,532 5,721 12,523 2,256

Company-owned 303 ( 3,133 ) ( 863 ) ( 4,688 )

Total 7,835 2,588 11,660 ( 2,432 )

Unallocated expenses ( 2,064 ) ( 1,935 ) ( 2,631 ) ( 1,417 )

Depreciation and amortization ( 3,793 ) ( 1,605 ) ( 5,044 ) ( 3,144 )

Long-lived asset impairment — ( 52 ) — ( 215 )

Total operating expenses 72,676 9,026 81,702

Operating loss $ ( 3,863 ) $ ( 1,021 ) $ ( 4,884 )

Interest expense ( 4,519 ) ( 3,270 ) ( 8,336 ) ( 6,397 )

Income tax benefit (expense) — 164 ( 28 ) 213

Income (loss) from discontinued operations 134 ( 818 ) 3,440 ( 1,914 )

Total net loss $ ( 2,407 ) $ ( 4,928 ) $ ( 939 ) $ ( 15,306 )

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