What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2023-11-01 compared with 2023-05-03 · 131 added, 201 removed, 317 unchanged (51% of the section changed)

1 unchanged sentence

REGIS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)

As of March 31, 2023 and June 30, 2022

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

As of September 30, 2023 and June 30, 2023

(Dollars in thousands, except per share data)

September 30,

2023 June 30,

30 unchanged sentences

Common stock, $ 0.05 par value;

issued and outstanding, 45,564,673 and 45,510,245 common shares at March 31, 2023 and June 30, 2022, respectively

issued and outstanding, 45,579,248 and 45,566,228 common shares at September 30, 2023 and June 30, 2023, respectively

Additional paid-in capital 65,160 64,600

6 unchanged sentences

REGIS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

For the Three and Nine Months Ended March 31, 2023 and 2022

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

For the Three Months Ended September 30, 2023 and 2022

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

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

2023 2022 2023 2022

Three Months Ended September 30,

Royalties $ 16,528 $ 17,180

8 unchanged sentences

Cost of product sales to franchisees 359 470

Inventory reserve — 6,420 1,228 6,420

General and administrative 10,729 14,361

Rent (Note 8)

2,077 1,200 5,920 5,989

Advertising fund expense 7,226 8,251

2 unchanged sentences

Depreciation and amortization 370 1,251

Long-lived asset impairment 36 327 36 542

Goodwill impairment — 13,120 — 13,120

Total operating expenses 45,938 59,401

Operating income (loss) 2,004 ( 22,212 ) 5,204 ( 27,584 )

Operating income 7,434 2,470

Other expense:

Interest expense ( 6,188 ) ( 3,817 )

Loss from sale of salon assets to franchisees, net — ( 494 ) — ( 2,189 )

Other, net ( 200 ) ( 463 )

Loss from operations before income taxes ( 2,402 ) ( 25,777 ) ( 6,753 ) ( 39,381 )

Income tax benefit 241 1,270 213 1,482

Loss from continuing operations ( 2,161 ) ( 24,507 ) ( 6,540 ) ( 37,899 )

Income (loss) from discontinued operations (Note 3) 518 ( 3,411 ) 3,958 ( 5,325 )

Net loss $ ( 1,643 ) $ ( 27,918 ) $ ( 2,582 ) $ ( 43,224 )

Net loss per share:

Basic and diluted:

Loss from continuing operations $ ( 0.05 ) $ ( 0.53 ) $ ( 0.14 ) $ ( 0.89 )

Income (loss) from discontinued operations 0.01 ( 0.07 ) 0.09 ( 0.12 )

Net loss per share, basic and diluted (2) $ ( 0.04 ) $ ( 0.61 ) $ ( 0.06 ) $ ( 1.01 )

Income (loss) from operations before income taxes 1,046 ( 1,810 )

Income tax benefit (expense) 148 ( 28 )

Income (loss) from continuing operations 1,194 ( 1,838 )

Income from discontinued operations (Note 3) — 3,306

Net income $ 1,194 $ 1,468

Net income per share:

Income (loss) from continuing operations 0.03 ( 0.04 )

Income from discontinued operations 0.00 0.07

Net income per share, basic (2) $ 0.03 $ 0.03

Income (loss) from continuing operations 0.03 ( 0.04 )

Income from discontinued operations 0.00 0.07

Net income per share, diluted (2) $ 0.03 $ 0.03

Weighted average common and common equivalent shares outstanding:

Basic and diluted 46,301 45,886 46,160 42,789

Basic 46,640 46,054

Diluted 47,243 46,054

_______________________________________________________________________________

5 unchanged sentences

REGIS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS (Unaudited)

For the Three and Nine Months Ended March 31, 2023 and 2022

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

For the Three Months Ended September 30, 2023 and 2022

(Dollars in thousands)

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

2023 2022 2023 2022

Net loss $ ( 1,643 ) $ ( 27,918 ) $ ( 2,582 ) $ ( 43,224 )

Three Months Ended September 30,

Net income $ 1,194 $ 1,468

Foreign currency translation adjustments ( 289 ) ( 858 )

Comprehensive loss $ ( 1,614 ) $ ( 27,697 ) $ ( 3,279 ) $ ( 43,441 )

Comprehensive income $ 905 $ 610

_______________________________________________________________________________

1 unchanged sentence

REGIS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT (Unaudited)

For the Three and Nine Months Ended March 31, 2023 and 2022

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT (Unaudited)

For the Three Months Ended September 30, 2023 and 2022

(Dollars in thousands)

Three Months Ended March 31, 2023

Common Stock Additional

Capital Accumulated

Comprehensive

Income Accumulated Deficit Total

Shares Amount

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

Net loss — — — — ( 1,643 ) ( 1,643 )

Foreign currency translation — — — 29 — 29

Stock-based compensation — — 502 — — 502

Net restricted stock activity 2,118 — — — — —

Balance, March 31, 2023 45,564,673 $ 2,278 $ 64,045 $ 8,758 $ ( 107,828 ) $ ( 32,747 )

Three Months Ended March 31, 2022

Common Stock Additional

Capital Accumulated

Comprehensive

Income Accumulated Deficit Total

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

Nine Months Ended March 31, 2023

Three Months Ended September 30, 2023

Common Stock Additional

4 unchanged sentences

Balance, June 30, 2023 45,566,228 $ 2,278 $ 64,600 $ 9,023 $ ( 112,631 ) $ ( 36,730 )

Net loss — — — — ( 2,582 ) ( 2,582 )

Net income — — — — 1,194 1,194

Foreign currency translation — — — ( 289 ) — ( 289 )

1 unchanged sentence

Net restricted stock activity 13,020 1 ( 7 ) — — ( 6 )

Balance, March 31, 2023 45,564,673 $ 2,278 $ 64,045 $ 8,758 $ ( 107,828 ) $ ( 32,747 )

Nine Months Ended March 31, 2022

Balance, September 30, 2023 45,579,248 $ 2,279 $ 65,160 $ 8,734 $ ( 111,437 ) $ ( 35,264 )

Three Months Ended September 30, 2022

Common Stock Additional

4 unchanged sentences

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

Net loss — — — — ( 43,224 ) ( 43,224 )

Net income — — — — 1,468 1,468

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

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

Stock-based compensation — — 496 — — 496

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

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

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

_______________________________________________________________________________

1 unchanged sentence

REGIS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

For the Nine Months Ended March 31, 2023 and 2022

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

For the Three Months Ended September 30, 2023 and 2022

(Dollars in thousands)

Nine Months Ended March 31,

Three Months Ended September 30,

Cash flows from operating activities:

Net loss $ ( 2,582 ) $ ( 43,224 )

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

Net income $ 1,194 $ 1,468

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

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

Depreciation and amortization 375 1,035

Long-lived asset impairment 36 542

Deferred income taxes ( 59 ) 28

Inventory reserve 1,228 9,007

Paid-in-kind interest 51 —

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

Goodwill impairment — 16,000

Non-cash interest 640 —

Stock-based compensation 630 531

6 unchanged sentences

Proceeds from sale of OSP, net of fees — 3,500

Net cash provided by (used in) investing activities 4,161 ( 4,258 )

Net cash (used in) provided by investing activities ( 163 ) 3,316

Cash flows from financing activities:

2 unchanged sentences

Debt refinancing fees ( 152 ) ( 4,341 )

Proceeds from issuance of common stock, net of offering costs — 37,185

Taxes paid for shares withheld ( 6 ) ( 13 )

Net cash (used in) provided by financing activities ( 2,552 ) 43,245

Net cash provided by (used in) financing activities 1,680 ( 3,798 )

Effect of exchange rate changes on cash and cash equivalents ( 42 ) ( 166 )

(Decrease) increase in cash, cash equivalents, and restricted cash ( 6,959 ) 4,546

Decrease in cash, cash equivalents, and restricted cash ( 1,349 ) ( 5,705 )

Cash, cash equivalents and restricted cash:

7 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, 2023 and for the three and nine months ended March 31, 2023 and 2022, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of March 31, 2023 and its consolidated results of operations, comprehensive loss, shareholders' deficit and cash flows for the interim periods.

The unaudited interim Condensed Consolidated Financial Statements of Regis Corporation (the Company) as of September 30, 2023 and for the three months ended September 30, 2023 and 2022, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of September 30, 2023 and its consolidated results of operations, comprehensive income, 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, 2023 and other documents filed or furnished with the SEC during the current fiscal year.

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 inventory at discounts.

The inventory valuation reserve as of March 31, 2023 and June 30, 2022 was $ 1.8 and $ 1.9 million, respectively.

In the three months ended March 31, 2023, the Company did no t record an inventory reserve charge and in the nine months ended March 31, 2023, the Company recorded an inventory reserve charge of $ 1.2 million in inventory reserve on the unaudited Condensed Consolidated Statement of Operations.

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, on the unaudited Condensed Consolidated Statement of Operations.

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, on the unaudited Condensed Consolidated Statement of Operations.

As of March 31, 2023 and June 30, 2022, the Company had inventory related to discontinued operations of $ 1.3 and $ 1.8 million, respectively, offset by 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 March 31, 2023 and June 30, 2022, the Franchise reporting unit had $ 173.4 and $ 174.4 million, respectively, of goodwill.

The change in goodwill for the nine months ended March 31, 2023 is due to foreign currency translation.

As of September 30, 2023 and June 30, 2023, the Franchise reporting unit had $ 173.3 and $ 173.8 million, respectively, of goodwill.

The change in goodwill for the three months ended September 30, 2023 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 or nine months ended March 31, 2023.

An interim impairment analysis was not required in the three months ended September 30, 2023.

Depreciation:

Depreciation expense in the three months ended March 31, 2023 and 2022 includes $ 0.2 and $ 0.3 million, respectively, and for the nine months ended March 31, 2023 and 2022 includes $ 0.6 and $ 0.9 million, respectively, of asset retirement obligations, which are cash expenses.

Depreciation expense in the nine months ended March 31, 2023 includes a $ 2.6 million accelerated depreciation charge in the second quarter related to the consolidation of office space within the Company's corporate headquarters.

Depreciation expense in the three months ended September 30, 2023 and 2022 includes $ 0.0 and $ 0.2 million, respectively, of asset retirement obligations, which are cash expenses.

REVENUE RECOGNITION:

3 unchanged sentences

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.

2 unchanged sentences

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.

The Company recognizes franchise rental income and expense when it is due to the landlord and has no impact on net income.

Revenue recognized at point of sale

5 unchanged sentences

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

September 30,

2023 June 30,

10 unchanged sentences

Total non-current deferred revenue $ 21,540 $ 23,151

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.

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

The receivables balance is presented net of an allowance for expected losses (i.e., doubtful accounts).

Provisions for credit losses are recorded based on management’s judgment regarding our ability to collect as well as the age of the receivables.

Receivable are written off when they are deemed uncollectible.

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

Nine Months Ended March 31,

Three Months Ended September 30,

(Dollars in thousands)

2 unchanged sentences

Provision for franchisee rent 167 19

Reclass of accrued rent (2) 74 396

Recoveries ( 237 ) —

Write-offs ( 991 ) ( 725 )

Reclass of accrued rent (1) — 60

Other (2) ( 56 ) —

Balance at end of period $ 6,391 $ 6,374

_______________________________________________________________________________

(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 years 2023 and 2022 and the related accrual were reclassified to allowance for doubtful accounts.

(1) The reclass of accrued rent represents franchisee rent obligations guaranteed by the Company that were unbilled and deemed unrecoverable as of June 30, 2022, and subsequently billed, so the related accruals were reclassified to allowance for doubtful accounts.

(2) Includes currency fluctuation.

The Company offers financing to Smartstyle franchisees when they remodel their salons.

Included in Other assets is a receivable of $ 0.9 million, partially offset by a credit loss reserve of $ 0.2 million, related to this financing program.

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:

Nine Months Ended March 31,

Three Months Ended September 30,

(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 March 31, 2023 and 2022 was $ 1.6 and $ 1.6 million, respectively, and for the nine months ended March 31, 2023 and 2022 was $ 4.8 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, 2023 is as follows (dollars in thousands):

Franchise fee revenue for the three months ended September 30, 2023 and 2022 was $ 1.7 and $ 1.5 million, respectively.

Estimated revenue expected to be recognized in the future related to deferred franchise fees for open salons as of September 30, 2023 is as follows (dollars in thousands):

Remainder of 2024 $ 3,881

3 unchanged sentences

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

The Company received $ 13.0 million in proceeds in June 2022 and in the nine months ended March 31, 2023, received an additional $ 5.0 million in proceeds, of which $ 0.5 million were received in the third quarter, offset by a $ 0.5 million transaction fee.

The Company received $ 13.0 million in proceeds in June 2022 and received $ 5.0 million in fiscal year 2023, offset by 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.

1 unchanged sentence

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

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

2023 2022 2023 2022

Three Months Ended September 30,

(Dollars in thousands)

1 unchanged sentence

OSP fees $ — $ ( 226 )

Cost of product sales to franchisees — ( 145 ) — ( 910 )

General and administrative — ( 27 )

Rent — ( 368 )

Depreciation and amortization — ( 375 ) — ( 1,080 )

Goodwill impairment — ( 2,880 ) — ( 2,880 )

Interest expense — ( 179 ) — ( 537 )

Gain from sale of OSP — 3,927

Income (loss) from OSP discontinued operations, net $ 518 $ ( 3,411 ) $ 3,958 $ ( 5,325 )

SHAREHOLDERS' EQUITY:

Income from OSP discontinued operations, net $ — $ 3,306

SHAREHOLDERS' DEFICIT:

Stock-Based Employee Compensation:

During the nine months ended March 31, 2023, the Company granted various equity awards including stock options and stock appreciation rights as follows:

Three Months Ended March 31, 2023 Nine Months Ended March 31, 2023

Stock options (SOs) — 1,600,000

Stock appreciation rights (SARs) — 600,000

The SOs and SARs granted during the nine months ended March 31, 2023 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 $ 0.5 million for the three months ended March 31, 2023 and 2022, respectively, and $ 1.7 and $ 0.9 million for the nine months ended March 31, 2023 and 2022, respectively, were recorded within general and administrative expense on the unaudited Condensed Consolidated Statement of Operations.

In the nine months ended March 31, 2022, stock compensation includes a benefit related to executive forfeitures of $ 2.0 million.

During the three months ended September 30, 2023, the Company granted restricted stock units as follows:

Three Months Ended September 30, 2023

Restricted stock units (RSUs) 259,403

The RSUs granted during the three months ended September 30, 2023, vest in equal amounts over a three-year period subsequent to the grant date.

Total compensation cost for stock-based payment arrangements totaling $ 0.6 and $ 0.5 million for the three months ended September 30, 2023 and 2022, respectively, was recorded within general and administrative on the unaudited Condensed Consolidated Statements 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, 2023, the Company did no t issue any shares.

During the nine months ended March 31, 2022, the Company issued 9.3 million shares and received net proceeds of $ 37.2 million.

As of March 31, 2023, $ 11.6 million remains under the prospectus supplement, which equates to 10.4 million shares based on the share price as of March 31, 2023.

During the three months ended September 30, 2023 and 2022, the Company did no t issue any shares.

As of September 30, 2023, $ 11.6 million remains under the prospectus supplement, which equates to 16.5 million shares based on the share price as of September 30, 2023.

INCOME TAXES:

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

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

2023 2022 2023 2022

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

Three Months Ended September 30,

(Dollars in thousands)

Income tax benefit $ 241 $ 1,270 $ 213 $ 1,482

Income tax benefit (expense) $ 148 $ ( 28 )

Effective tax rate ( 14.1 ) % ( 1.5 ) %

The recorded tax provision and effective tax rates for the three and nine months ended March 31, 2023 and 2022 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.

The recorded tax provision and effective tax rate for the three months ended September 30, 2023 and 2022 were different than what would normally be expected, primarily due to the impact of the deferred tax valuation allowance.

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.

4 unchanged sentences

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 nine months ended March 31, 2023, the Company recorded $ 0.0 and $ 0.9 million, respectively, of expense related to litigation, and $ 0.2 and $ 1.3 million was paid during the three and nine months ended March 31, 2023, 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.

As of March 31, 2023, the Company has made all payments under the agreement.

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.

The Company owns a majority stake in Empire Education Group Inc.

To be eligible to participate in Title IV programs, the schools operated by EEG must comply with specific standards and procedures set forth in the Higher Education Act and the regulations issued thereunder by the Department of Education.

On October 10, 2023, the Department of Education issued a final rule applicable to “gainful employment” programs, which under the Higher Education Act, include all programs offered by the Empire Education Group schools and other proprietary institutions.

Under this final rule, which becomes effective July 1, 2024, the continued Title IV eligibility of such programs will be based on meeting both a debt-to-earnings metric and an earnings premium metric.

A program that fails either metric in a single year will be required to provide warnings to current and prospective students that it could be at risk of losing Title IV program eligibility.

A program that fails to meet the same metric twice in a three-year period will lose Title IV program eligibility.

The first measurement will be assessed in fiscal year 2025.

Upon a loss of institutional or programmatic eligibility, EEG’s students would lose access to Title IV program funds and that could be detrimental to EEG's business model.

Additionally, EEG students who are unable to complete their educational program with EEG, or who do not accept a teach-out opportunity with another institution, may be eligible for discharges of their federal student loan debt.

Those discharged loan amounts and other Title IV funds disbursed to EEG students that do not complete their program, as well as other Title IV program funds, may constitute liabilities to the Department of Education.

Because the Company holds a majority ownership interest in EEG and is a co-signatory to the Title IV program participation agreements of the EEG schools with the Department of Education, the Department of Education could hold the Company responsible for EEG's Title IV program liabilities.

As of September 30, 2023, EEG had $ 8.7 million of Title IV liabilities.

If EEG is unable to meet the required metrics for gainful employment programs and subsequently unable to allow students to complete their programs, then it is possible the Company could be liable for all or some of the Title IV liabilities.

The Company does not believe that it is probable that it would be liable for a material portion of these liabilities because there is time for EEG to reduce its exposure to these liabilities and therefore has not recorded any accrual for this potential liability.

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:

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 Sheets to the amount of cash, cash equivalents and restricted cash reported on the unaudited Condensed Consolidated Statements of Cash Flows:

September 30,

2023 June 30,

7 unchanged sentences

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.

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

The original terms 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.

1 unchanged sentence

Total rent includes the following:

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

2023 2022 2023 2022

Three Months Ended September 30,

(Dollars in thousands)

Office and warehouse rent $ 875 $ 941 $ 2,581 $ 3,756

Lease termination expense (1) 266 225 1,571 1,803

Office rent $ 825 $ 872

Lease termination (benefit) expense ( 13 ) 458

Lease liability benefit (1) ( 128 ) ( 602 )

3 unchanged sentences

_______________________________________________________________________________

(1) During the three and nine months ended March 31, 2023, the Company incurred costs of $ 0.3 and $ 1.6 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 March 31, 2022, 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 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 dates in order to relieve the Company of future lease obligations.

(1) 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) The credit in franchise salon rent in the three months ended March 31, 2022 related to lower estimated exposure.

(2) The credit in franchise salon rent is related to settlements with landlords for less than previously accrued.

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 March 31, 2023 and 2022, franchise rental income and franchise rent expense were $ 26.6 and $ 32.7 million, respectively, and $ 85.8 and $ 100.2 million, respectively, for the nine months ended March 31, 2023 and 2022.

For the three months ended September 30, 2023 and 2022, franchise rental income and franchise rent expense were $ 24.7 and $ 30.3 million, respectively.

These leases generally have lease terms of approximately five years .

8 unchanged sentences

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

The weighted average remaining lease term was 5.65 and 6.02 years and the weighted average discount rate was 4.44 % and 4.25 % for all salon operating leases as of March 31, 2023 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 and nine months ended March 31, 2023, the Company recognized a long-lived asset impairment charge of $ 0.04 million related to ROU assets in the unaudited Condensed Consolidated Statement of Operations.

In the three and nine months ended March 31, 2022, the Company recognized long-lived asset impairment charges of $ 0.3 and $ 0.5 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.

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.

As of March 31, 2023, 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 (dollars in thousands):

The weighted average remaining lease term was 5.65 years and 5.52 years and the weighted average discount rate was 4.60 % and 4.55 % for all salon operating leases as of September 30, 2023 and June 30, 2023, respectively.

As of September 30, 2023, 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 (dollars 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

12 unchanged sentences

The Company's debt consists of the following:

Maturity Date March 31,

2023 March 31,

Maturity Date September 30,

2023 September 30,

2023 June 30,

6 unchanged sentences

Total long-term debt, net $ 179,732 $ 176,830

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 March 31, 2023, 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 March 31, 2023, total liquidity and available credit under the revolving credit facility, as defined by the agreement, were $ 43.0 and $ 34.3 million, respectively.

As of March 31, 2023, the Company had cash and cash equivalents of $ 8.8 million and current liabilities of $ 129.1 million.

The Company's credit facility matures in August 2025.

In addition to a $ 10.0 million minimum liquidity covenant, the amended credit agreement includes typical provisions and financial covenants, including minimum EBITDA, leverage and fixed-charge coverage ratio covenants, the latter two of which are not tested until December 31, 2023.

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

3 unchanged sentences

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 its covenants and other requirements of the financing arrangements as of March 31, 2023.

Interest expense is recorded based on a weighted average effective interest rate method.

The significant assumptions used in the weighted average estimate are the future SOFR rates and debt balance, as well as the length of time the debt will be outstanding.

Cash interest paid in the three months ended September 30, 2023 and 2022 was $ 4.8 and $ 3.2 million, respectively.

At September 30, 2023, the Company had outstanding standby letters of credit under the revolving credit facility of $ 9.8 million, primarily related to the Company's self-insurance program.

As of September 30, 2023, total liquidity and available credit under the revolving credit facility, as defined by the agreement, were $ 42.4 and $ 33.1 million, respectively.

As of September 30, 2023, the Company had cash and cash equivalents of $ 9.3 million and current liabilities of $ 117.2 million.

The Company was in compliance with its covenants and other requirements of the financing arrangements as of September 30, 2023.

FAIR VALUE MEASUREMENTS:

4 unchanged sentences

Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of March 31, 2023 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 September 30, 2023 and June 30, 2023, 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 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.

The Company's basic earnings per share is calculated as net income 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 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 4,293,687 and 2,286,499 of stock-based awards during the three months ended March 31, 2023 and 2022, respectively, and excluded 3,881,869 and 2,473,185 of stock-based awards during the nine months ended March 31, 2023 and 2022, respectively, as they were not dilutive under the treasury stock method.

The computation of weighted average shares outstanding, assuming dilution, excluded 4,176,371 and 3,211,485 of stock-based awards during the three months ended September 30, 2023 and 2022, 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,

2023 June 30,

12 unchanged sentences

as a percent of total Franchise and Company-owned salons

OWNERSHIP INTEREST LOCATIONS:

Equity ownership interest locations

Grand Total, System-wide

Total Franchise and Company-owned salons

_______________________________________________________________________________

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

As of March 31, 2023, 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 table 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.

In the second quarter of fiscal year 2023, the Company revised its internal reporting such 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.

4 unchanged sentences

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 goodwill and long-lived asset impairment charges.

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

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

2023 2022 2023 2022

Unallocated fees include one-time professional fees and settlements, severance expense, the benefit from lease liability decreases in excess of previously impaired ROUA, lease termination fees and asset retirement obligation costs.

Three Months Ended September 30,

(Dollars in thousands)

8 unchanged sentences

Depreciation and amortization ( 370 ) ( 1,251 )

Long-lived asset impairment ( 36 ) ( 327 ) ( 36 ) ( 542 )

Goodwill impairment — ( 13,120 ) — ( 13,120 )

Interest expense ( 6,188 ) ( 3,817 )

Income tax benefit 241 1,270 213 1,482

Income (loss) from discontinued operations 518 ( 3,411 ) 3,958 ( 5,325 )

Total net loss $ ( 1,643 ) $ ( 27,918 ) $ ( 2,582 ) $ ( 43,224 )

Income tax benefit (expense) 148 ( 28 )

Income from discontinued operations — 3,306

Total net income $ 1,194 $ 1,468

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