REGIS CORP 10-Q

Item 1. Financial Statements (Unaudited) REGIS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) As of September 30, 2024, and June 30, 2024 (Dollars in thousands, except per share data) September 30, 2024 June 30, 2024 ASSETS Current assets: Cash and cash equivalents (Note 7) $ 6,259 $ 10,066 Receivables, net 9,082 9,434 Other current assets 20,085 22,550 Total current assets 35,426 42,050 Property and equipment, net 3,342 3,664 Goodwill (Note 1) 173,386 173,146 Other intangibles, net 2,377 2,427 Right of use asset (Note 8) 273,970 287,912 Other assets 20,430 21,297 Total assets $ 508,931 $ 530,496 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 15,181 $ 12,747 Accrued expenses 18,615 21,644 Short-term lease liability (Note 8) 67,161 69,127 Total current liabilities 100,957 103,518 Long-term debt, net (Note 9) 95,176 99,545 Long-term lease liability (Note 8) 218,105 230,607 Other non-current liabilities 38,295 40,039 Total liabilities 452,533 473,709 Commitments and contingencies (Note 6) Shareholders' equity: Common stock, $ 0.05 par value; issued and outstanding, 2,282,395 and 2,279,948 common shares at September 30, 2024, and June 30, 2024, respectively 114 114 Additional paid-in capital 69,972 69,660 Accumulated other comprehensive income 8,736 8,584 Accumulated deficit ( 22,424 ) ( 21,571 ) Total shareholders' equity 56,398 56,787 Total liabilities and shareholders' equity $ 508,931 $ 530,496 _______________________________________________________________________________ The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements. 3 REGIS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For the Three Months Ended September 30, 2024, and 2023 (Dollars and shares in thousands, except per share amounts) Three Months Ended September 30, 2024 2023 Revenues: Royalties $ 15,646 $ 16,528 Fees 2,352 2,631 Product sales to franchisees — 384 Advertising fund contributions 5,641 7,226 Franchise rental income (Note 8) 21,636 24,667 Company-owned salon revenue 785 1,936 Total revenue 46,060 53,372 Operating expenses: Cost of product sales to franchisees — 359 General and administrative 14,034 10,729 Rent (Note 8) 1,064 1,097 Advertising fund expense 5,641 7,226 Franchise rent expense 21,636 24,667 Company-owned salon expense (1) 753 1,490 Depreciation and amortization 446 370 Long-lived asset impairment 352 — Total operating expenses 43,926 45,938 Operating income 2,134 7,434 Other (expense) income: Interest expense ( 4,846 ) ( 6,188 ) Other, net 677 ( 200 ) (Loss) income from operations before income taxes ( 2,035 ) 1,046 Income tax benefit 225 148 (Loss) income from continuing operations ( 1,810 ) 1,194 Income from discontinued operations (Note 3) 957 — Net (loss) income $ ( 853 ) $ 1,194 Net (loss) income per share: Basic: (Loss) income from continuing operations $ ( 0.77 ) $ 0.51 Income from discontinued operations 0.41 — Net (loss) income per share (2) $ ( 0.36 ) $ 0.51 Diluted: (Loss) income from continuing operations $ ( 0.77 ) $ 0.51 Income from discontinued operations 0.41 — Net (loss) income per share, diluted (2) $ ( 0.36 ) $ 0.51 Weighted average common and common equivalent shares outstanding: Basic 2,343 2,332 Diluted 2,343 2,362 _______________________________________________________________________________ (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. 4 REGIS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited) For the Three Months Ended September 30, 2024, and 2023 (Dollars in thousands) Three Months Ended September 30, 2024 2023 Net (loss) income $ ( 853 ) $ 1,194 Foreign currency translation adjustments 152 ( 289 ) Comprehensive (loss) income $ ( 701 ) $ 905 _______________________________________________________________________________ The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements. 5 REGIS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (Unaudited) For the Three Months Ended September 30, 2024, and 2023 (Dollars in thousands) Three Months Ended September 30, 2024 Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Shares Amount Balance, June 30, 2024 2,279,948 $ 114 $ 69,660 $ 8,584 $ ( 21,571 ) $ 56,787 Net loss — — — — ( 853 ) ( 853 ) Foreign currency translation — — — 152 — 152 Stock-based compensation — — 335 — — 335 Net restricted stock activity 2,447 — ( 23 ) — — ( 23 ) Balance, September 30, 2024 2,282,395 $ 114 $ 69,972 $ 8,736 $ ( 22,424 ) $ 56,398 Three Months Ended September 30, 2023 Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Shares Amount Balance, June 30, 2023 2,277,828 $ 114 $ 66,764 $ 9,023 $ ( 112,631 ) $ ( 36,730 ) Net income — — — — 1,194 1,194 Foreign currency translation — — — ( 289 ) — ( 289 ) Stock-based compensation — — 567 — — 567 Net restricted stock activity 651 — ( 6 ) — — ( 6 ) Balance, September 30, 2023 2,278,479 $ 114 $ 67,325 $ 8,734 $ ( 111,437 ) $ ( 35,264 ) _______________________________________________________________________________ The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements. 6 REGIS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Three Months Ended September 30, 2024, and 2023 (Dollars in thousands) Three Months Ended September 30, 2024 2023 Cash flows used in operating activities: Net (loss) income $ ( 853 ) $ 1,194 Adjustments to reconcile net (loss) income to cash used in operating activities: Gain from sale of OSP (Note 3) ( 957 ) — Depreciation and amortization 425 375 Deferred income taxes ( 221 ) ( 59 ) Non-cash interest 1,264 640 Long lived asset impairment 352 — Stock-based compensation 1,430 630 Amortization of debt discount and financing costs 719 747 Other non-cash items affecting earnings ( 80 ) 238 Changes in operating assets and liabilities, excluding the effects of asset sales (1) ( 3,423 ) ( 6,589 ) Net cash used in operating activities ( 1,344 ) ( 2,824 ) Cash flows provided by (used in) investing activities: Capital expenditures ( 16 ) ( 163 ) Proceeds from sale of OSP, net of fees 957 — Net cash provided by (used in) investing activities 941 ( 163 ) Cash flows (used in) provided by financing activities: Borrowings on revolving credit facility 4,326 2,000 Repayments of revolving credit facility ( 10,237 ) — Repayments of long-term debt ( 263 ) ( 162 ) Debt refinancing fees ( 298 ) ( 152 ) Taxes paid for shares withheld ( 23 ) ( 6 ) Net cash (used in) provided by financing activities ( 6,495 ) 1,680 Effect of exchange rate changes on cash and cash equivalents 27 ( 42 ) Decrease in cash, cash equivalents, and restricted cash ( 6,871 ) ( 1,349 ) Cash, cash equivalents and restricted cash: Beginning of period 29,312 21,396 End of period $ 22,441 $ 20,047 _______________________________________________________________________________ (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. 7 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, 2024 and for the three months ended September 30, 2024 and 2023, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of September 30, 2024 and its consolidated results of operations, comprehensive (loss) income, shareholders' equity (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 unaudited interim 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, 2024, and other documents filed or furnished to the SEC during the current fiscal year. Goodwill: 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, 2024. As of September 30, 2024, and June 30, 2024, the franchise reporting unit had goodwill of $ 173.4 million and $ 173.1 million, respectively, and the company-owned reporting unit had no goodwill for both periods. Reverse stock split: On November 29, 2023, the Company effected a one-for-20 reverse stock split of its outstanding common stock, par value $ 0.05 per share. As a result of the reverse stock split, every 20 shares of common stock issued and outstanding was converted into one share of common stock. The reverse stock split affected all shareholders uniformly and did not alter any shareholder’s percentage interest in the Company’s equity. No fractional shares were issued in connection with the reverse stock split. Shareholders who would otherwise be entitled to a fractional share of common stock were instead entitled to receive a proportional cash payment. All common share and per share amounts presented in the unaudited condensed consolidated financial statements and accompanying notes have been retroactively adjusted to reflect the reverse stock split. The reverse stock split affected all issued and outstanding shares of the Company’s common stock, as well as the number of shares of common stock available for issuance under the Company’s outstanding stock options and stock unit awards. The reverse stock split reduced the number of shares of common stock issuable upon the exercise of stock options outstanding and the vesting of stock unit awards outstanding immediately prior to the reverse stock split and correspondingly increased the respective exercise prices or other price dependent terms. Tax Benefits Preservation Plan: On January 28, 2024, the Board authorized and declared a dividend of one preferred stock purchase right (a Right) for each outstanding share of common stock. The dividend was payable on February 9, 2024 (the Record Date) to the holders of record of shares of common stock as of the close of business on the Record Date. The description and terms of the Rights are set forth in a Tax Benefits Preservation Plan (the Plan), dated as of January 29, 2024, as the same may be amended from time to time between the Company and Equiniti Trust Company, LLC, as Rights Agent. The Rights and the Plan will expire on the earliest of (i) the close of business on January 29, 2025 (or such later date as may be established by the Board of Directors prior to the Expiration Date as long as the extension is submitted to the shareholders of the Company for ratification at the next annual or special meeting of shareholders succeeding such extension), (ii) the time at which the Rights are redeemed or exchanged pursuant to the Plan, (iii) the time at which the Rights (other than Rights owned by an Acquiring Person) are exchanged pursuant to the Plan, (iv) the repeal of Section 382 of the Code or any successor statute if the Board determines that the Plan is no longer necessary or desirable for the preservation of the Tax Benefits, or (v) the beginning of a taxable year to which the Board determines that no Tax Benefits may be carried forward. Recently Issued Accounting Standards Not Yet Adopted: In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires disclosure of significant segment expenses that are regularly provided to the chief operating 8 decision maker (CODM) and a description of other segment items (the difference between segment revenue less the segment expenses disclosed under the significant expense principle and each reported measure of segment profit or loss) by reportable segment, as well as disclosure of the title and position of the entity’s CODM and an explanation of how the CODM uses the reported measures of segment profit or loss in assessing segment performance and deciding how to allocate resources. The pronouncement is effective for annual reporting periods in fiscal years beginning after December 15, 2023, and for interim periods in fiscal years beginning after December 15, 2024. We do not expect the adoption of this pronouncement to impact our consolidated financial statements beyond the expansion of our reportable segment disclosures. In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The ASU includes amendments requiring enhanced income tax disclosures, primarily related to standardization and disaggregation of rate reconciliation categories and income taxes paid by jurisdiction. The ASU is effective for fiscal years beginning after December 15, 2024, and shall be applied prospectively. The Company is evaluating the standard and determining the extent of additional disclosures that will be required. 9 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 Statements 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 based on gift card balances with no activity over a 36-month basis. Product sales to franchisees 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, 2024 June 30, 2024 Balance Sheet Classification (Dollars in thousands) Receivables from contracts with customers, net $ 6,799 $ 6,887 Receivables, net Broker fees 8,560 9,369 Other assets Deferred revenue: Current Gift card liability $ 334 $ 366 Accrued expenses Deferred franchise fees open salons 4,549 4,738 Accrued expenses Total current deferred revenue $ 4,883 $ 5,104 Non-current Deferred franchise fees unopened salons $ 1,755 $ 1,783 Other non-current liabilities Deferred franchise fees open salons 13,608 14,972 Other non-current liabilities Total non-current deferred revenue $ 15,363 $ 16,755 10 Receivables relate primarily to payments due for royalties, advertising fees and rent. The receivables balance is presented net of an allowance for expected credit losses (i.e., doubtful accounts). The Company monitors the financial condition of its franchisees and records provisions for estimated losses on receivables when it believes franchisees are unable to make their required payments based on factors such as delinquencies and aging trends. The allowance for credit losses is the Company's best estimate of the amount of probable credit losses related to existing accounts and notes receivables. The Company offers financing to SmartStyle ® franchisees when they remodel their salons. Included in other assets is a receivable of $ 0.8 million, partially offset by a credit loss reserve of $ 0.2 million, related to this financing program. The following table is a rollforward of the allowance for credit losses for the period: Three Months Ended September 30, 2024 2023 (Dollars in thousands) Balance at beginning of period $ 6,227 $ 7,297 Provision for doubtful accounts 689 211 Provision for franchisee rent 127 167 Recoveries ( 237 ) ( 237 ) Write-offs ( 142 ) ( 991 ) Other (1) 243 ( 56 ) Balance at end of period $ 6,907 $ 6,391 ________________________________________________________________________________________ (1) Includes currency fluctuation. 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, 2024 2023 (Dollars in thousands) Balance at beginning of period $ 9,369 $ 12,471 Amortization ( 617 ) ( 739 ) Write-offs ( 192 ) ( 109 ) Balance at end of period $ 8,560 $ 11,623 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, 2024, and 2023 was $ 1.6 million and $ 1.7 million, respectively. Estimated revenue expected to be recognized in the future related to deferred franchise fees for open salons as of September 30, 2024, is as follows (dollars in thousands): Remainder of 2025 $ 3,412 2026 4,176 2027 3,717 2028 3,037 2029 2,046 Thereafter 1,769 Total $ 18,157 11 3. DISCONTINUED OPERATIONS: On June 30, 2022, the Company sold its Opensalon ® Pro (OSP) software-as-a-service solution to Soham, Inc. As a result of the sale, the Company classified the OSP business as discontinued operations in the financial statements for all periods presented. In the three months ended September 30, 2024, the Company received $ 957 thousand of proceeds related to the number of salons migrating to Soham's Zenoti product. No income taxes have been allocated to discontinued operations based on the methodology required by accounting for income taxes guidance. Cash provided by operations includes $ 957 thousand of cash from discontinued operations. 12 4. SHAREHOLDERS' EQUITY (DEFICIT): Stock-Based Employee Compensation: During the three months ended September 30, 2024, and 2023, the Company granted restricted stock units as follows: Three Months Ended September 30, 2024 2023 Restricted stock units (RSUs) — 12,970 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 $ 1.4 million and $ 0.6 million for the three months ended September 30, 2024, and 2023, respectively, was recorded within general and administrative on the unaudited Condensed Consolidated Statements of Operations. Stock Warrants Issued in Connection with Long-Term Debt: In connection with the 2024 Credit agreement (as defined in Note 9 to the unaudited Condensed Consolidated Financial Statements), the Company issued detachable warrants to affiliates of TCW Asset Management Company, LLC, and Asilia Investments. Pursuant to the warrants, the holders can purchase up to an aggregate 407,542 shares of the Company’s common stock, par value $ 0.05 per share, at an exercise price equal to $ 7.00 per share. The warrants are exercisable for a seven-year period beginning June 24, 2024. The warrants may also be exercised on a cashless basis under certain circumstances under the agreement. In addition, in connection with the issuance of the warrants, the Company granted an exemption in favor of each holder pursuant to Section 36 of the Tax Benefits Preservation Plan (the Plan), dated January 29, 2024 , among the Company and Equiniti Trust Company, LLC, such that neither holder was deemed to be an “Acquiring Person” (as defined in the Plan) solely in connection with (i) the issuance of the warrants nor (ii) the acquisition of beneficial ownership of securities of the Company pursuant to the exercise of the warrants. The warrants and the shares of common stock issuable upon the exercise of such warrants have not been registered under the Securities Act of 1933, as amended (the Securities Act), and may not be sold absent registration or an applicable exemption from the registration requirements of the Securities Act. Based in part upon the representations of each holder in each warrant, the offering and sale of each warrant is exempt from registration under Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated under the Securities Act. The warrants are valued at $ 1.5 million using a relative fair value method and were accounted for through additional paid-in capital. Further, the related financing fees incurred as a result of warrant issuance is recorded through a contra-equity account and amounts to $ 0.2 million. Prior to the second anniversary of the issue date, the Company may call for cancellation up to an aggregate 203,771 shares of common stock underlying the warrants for consideration equal to $ 15.00 per share; provided, that the volume weighted average price on the trading day immediately preceding the date the Company delivers a written call notice to a holder exceeds $ 20.00 . As of September 30, 2024, the Company has no intentions of exercising this call provision. The Company will reassess this provision on a quarterly basis. Share Issuance Program: In fiscal year 2021, the Company filed a $ 150.0 million shelf registration statement and $ 50.0 million prospectus supplement (collectively, the Share Issuance Program) with the Securities and Exchange Commission (SEC) under which it could offer and sell, from time to time, up to $ 50.0 million worth of its common stock in "at-the-market" offerings. During the three months ended September 30, 2023, the Company did no t issue any shares under this prospectus. The Share Issuance Program expired on February 10, 2024. 13 5. INCOME TAXES: A summary of the income tax benefit and corresponding effective tax rate is as follows: Three Months Ended September 30, 2024 2023 (Dollars in thousands) Income tax benefit $ 225 $ 148 Effective tax rate 11.1 % ( 14.1 ) % The recorded tax provision and effective tax rate for the three months ended September 30, 2024, and 2023 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, 2013, 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 retail employers, the Company has faced, and may continue to face, allegations of purported class-wide consumer and wage and hour violations. 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. 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 Sheets to the amount of cash, cash equivalents and restricted cash reported on the unaudited Condensed Consolidated Statements of Cash Flows: September 30, 2024 June 30, 2024 (Dollars in thousands) Cash and cash equivalents $ 6,259 $ 10,066 Restricted cash, included in other current assets (1) 16,182 19,246 Total cash, cash equivalents and restricted cash $ 22,441 $ 29,312 _______________________________________________________________________________ (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. 14 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 its corporate facilities under operating leases. The original terms range from one to 11 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, 2024 2023 (Dollars in thousands) Office rent (1) $ 726 $ 825 Lease termination expense (benefit) 52 ( 13 ) Lease liability benefit (2) ( 62 ) ( 128 ) Franchise salon rent (3) 71 ( 337 ) Company-owned salon rent 277 750 Total $ 1,064 $ 1,097 _______________________________________________________________________________ (1) The company leases four floors at its corporate office location. Three of the four floors have been subleased to third party tenants. Rental income associated with the sublease of the corporate office space is recorded in other income and was $ 0.2 million and $ 0 for the three months ended September 30, 2024, and 2023, respectively. (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 is a benefit in the three months ended September 30, 2023, due 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 Statements of Operations. For the three months ended September 30, 2024, and 2023, franchise rental income and franchise rent expense were $ 21.6 million and $ 24.7 million, respectively. These leases generally have lease terms of approximately five years . 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. 15 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 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 4.91 and 5.05 years, and the weighted average discount rate was 5.26 % and 5.13 % for all salon operating leases as of September 30, 2024, and June 30, 2024, respectively. 16 As of September 30, 2024, 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 Remainder of 2025 $ 59,802 $ 500 $ 1,003 $ 61,305 $ ( 59,802 ) $ 1,503 2026 68,758 500 1,367 70,625 ( 68,758 ) 1,867 2027 58,678 295 1,401 60,374 ( 58,678 ) 1,696 2028 49,238 286 1,436 50,960 ( 49,238 ) 1,722 2029 38,466 126 1,472 40,064 ( 38,466 ) 1,598 Thereafter 38,604 12 1,509 40,125 ( 38,604 ) 1,521 Total future obligations $ 313,546 $ 1,719 $ 8,188 $ 323,453 $ ( 313,546 ) $ 9,907 Less amounts representing interest 37,102 175 910 38,187 Present value of lease liability $ 276,444 $ 1,544 $ 7,278 $ 285,266 Less short-term lease liability 65,533 564 1,064 67,161 Long-term lease liability $ 210,911 $ 980 $ 6,214 $ 218,105 17 9. FINANCING ARRANGEMENTS: The Company's debt consists of the following: Three Months Ended September 30, 2024 Fiscal Year Balance at September 30, 2024 Balance at June 30, 2024 2024 (Average cash interest rate %) (Dollars in thousands) Term loan 9.10 % 9.68 % $ 104,738 $ 105,000 Deferred financing fees ( 13,728 ) ( 14,244 ) Term loan, net 91,010 90,756 Revolving credit facility 9.10 % 9.68 % 4,326 10,237 Paid-in-kind interest 1,341 53 Fair value of warrants issued to lenders ( 1,501 ) ( 1,501 ) Total long-term debt, net $ 95,176 $ 99,545 In June 2024, the Company entered into a new credit agreement (the “2024 Credit Agreement”). The 2024 Credit Agreement includes a $ 105.0 million term loan and a $ 25.0 million revolving credit facility, with a $ 10.0 million minimum liquidity covenant and matures June 24, 2029. The Company incurred $ 14.2 million of refinancing fees (including $ 3.9 million of Original Issue Discount fee) that will be amortized on a straight-line basis over the term of the agreement. As of September 30, 2024, the Company had outstanding standby letters of credit under the revolving credit facility of $ 9.2 million, primarily related to the Company's self-insurance program. As of September 30, 2024, total available liquidity and available credit under the $ 25.0 million revolving credit facility, as defined by the amended agreement, were $ 11.9 million and $ 15.7 million, respectively. As of September 30, 2024, the Company had cash and cash equivalents of $ 6.3 million and current liabilities of $ 101.0 million. The interest rate on the 2024 Credit Agreement is based on secured overnight financing rate (SOFR) plus margin. The margin applicable to the 2024 Credit Agreement is subject to change based on the Company's total leverage ratio, remeasured annually on a predetermined date set by the lender. When the Company's total leverage ratio is greater than or equal to 3.75 to 1.00, the margin applicable to the new term loan and revolving credit facility is 9.00 %. If the Company's leverage ratio is less than 3.75 to 1.00, the margin rate is 8.50 %. In either scenario, 4.5 % of the margin is paid-in-kind (PIK) interest (added to the principal balance and thereafter accruing interest), and the remainder is paid in cash. The SOFR base rate applicable to the debt has a floor of 2.5 % per annum. The margin applicable to any letter of credit is 5.25 % and paid in cash. The agreement contains typical provisions and financial covenants regarding maximum leverage and minimum fixed-charge coverage and a minimum liquidity threshold of $ 10.0 million. In connection with the 2024 Credit Agreement, the Company issued detachable stock warrants to the debt lenders. The Company was in compliance with its covenants and other requirements of the financing arrangements as of September 30, 2024. The Company's assets serve as collateral to the new credit facility. The agreement includes scheduled quarterly payments totaling $ 1.1 million in fiscal years 2025 and 2026. In fiscal years 2027, 2028 and 2029, scheduled payments total $ 2.6 million. Additionally, excess cash swept annually per terms of the agreement. 18 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, 2024, and June 30, 2024, 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 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 (loss) 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 (loss) income divided by weighted average common shares and common share equivalents outstanding, which includes shares issued under the Company's stock-based compensation plans and warrants issued in connection with the June 2024 refinancing. 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 194,612 and 208,819 of stock-based awards during the three months ended September 30, 2024, and 2023, respectively, as they were not dilutive under the treasury stock method. The following table sets forth the presentation of shares outstanding used in the calculation of basic and diluted earnings per share (EPS): Three Months Ended September 30, 2024 2023 (Shares in thousands) Denominator for basic EPS - weighted average common shares 2,343 2,332 Dilutive shares associated with option plans — 30 Denominator for diluted EPS - weighted average common shares and dilutive potential common shares 2,343 2,362 Options excluded from EPS calculation - anti-dilutive 195 209 19 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, 2024 June 30, 2024 FRANCHISE SALONS: Supercuts 1,932 1,946 SmartStyle/Cost Cutters in Walmart stores 1,216 1,232 Portfolio Brands 1,106 1,117 Total North American salons 4,254 4,295 Total International salons (1) 96 96 Total franchise salons 4,350 4,391 as a percent of total franchise and company-owned salons 99.8 % 99.6 % COMPANY-OWNED SALONS: Supercuts 3 3 SmartStyle/Cost Cutters in Walmart stores 1 8 Portfolio Brands 5 6 Total company-owned salons 9 17 as a percent of total franchise and company-owned salons 0.2 % 0.4 % Total franchise and company-owned salons 4,359 4,408 _______________________________________________________________________________ (1) Canadian and Puerto Rican salons are included in the North American salon totals. 20 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 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. Asset information by segment is not provided to the CODM. Segment adjusted EBITDA is defined as income from continuing operations before interest, income taxes, depreciation, amortization, and impairment. Beginning in fiscal year 2025, management determined that stock-based compensation expenses will be excluded from adjusted EBITDA. This change has been retrospectively applied to all prior periods presented in this report. C onsistent with our internal management reporting, unallocated expenses include certain items impacting comparability. These unallocated items are not defined terms within U.S. GAAP. 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 one-time professional fees and settlements, severance expense, the benefit from lease liability decreases in excess of previously impaired ROU assets, lease termination fees, asset retirement obligation costs and long-lived asset impairment charges. Three Months Ended September 30, 2024 2023 (Dollars in thousands) Revenues: Franchise $ 45,275 $ 51,436 Company-owned 785 1,936 Total revenue 46,060 53,372 Segment adjusted EBITDA: Franchise 7,986 8,590 Company-owned ( 349 ) ( 497 ) Total 7,637 8,093 Unallocated expenses (1) ( 2,597 ) 141 Depreciation and amortization ( 446 ) ( 370 ) Long-lived asset impairment ( 352 ) — Stock-based compensation ( 1,430 ) ( 630 ) Interest expense ( 4,846 ) ( 6,188 ) Income tax benefit 225 148 Income from discontinued operations 957 — Total net (loss) income (2) $ ( 853 ) $ 1,194 _______________________________________________________________________________ (1) Unallocated expenses for the three months ended September 30, 2024, includes severance expenses of $ 2.3 million. (2) Total is a recalculation; line items calculated individually may not sum to total due to rounding. 21