BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Dec. 31, 2021

Accounting Policies [Abstract]

BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 December 31, 2021 and for the three and six months ended December 31, 2021 and 2020, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of December 31, 2021 and its consolidated results of operations, comprehensive loss, shareholders' equity and cash flows for the interim periods. Adjustments consist only of normal recurring items, except for any discussed in the notes below. The results of operations and cash flows for any interim period are not necessarily indicative of results of operations and cash flows for the full year.

The accompanying interim unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP). The unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended June 30, 2021 and other documents filed or furnished with the SEC during the current fiscal year.

COVID-19 Impact:

During the period ended December 31, 2021, the global coronavirus pandemic (COVID-19) had an adverse impact on operations. The COVID-19 pandemic continues to impact salon guest visits and franchisee staffing, resulting in a significant reduction in revenue and profitability. In response to COVID-19, the U.S. employee retention payroll tax credit, Canada Emergency Wage Subsidy (CEWS) and Canada Emergency Rent Subsidy (CERS) were introduced for eligible employers. In fiscal year 2021, the Company recorded a $1.5 million benefit related to the U.S. employee retention tax credit. In fiscal years 2022 and 2021, the Company received $1.4 and $1.6 million, respectively, in CEWS and $1.2 and $0.0 million, respectively, in CERS that partially cover expenses incurred in Canada during those years. Overall, COVID-19 has, and may continue to have, a negative effect on revenue and profitability. The ultimate impact of the COVID-19 pandemic in both the short and long term is not currently estimable due to the uncertainty surrounding the duration of the pandemic, the availability and acceptance of preventative vaccines, the emergence and impact of new COVID-19 variants and changing government restrictions. Additional impacts to the business may arise that we are not aware of currently.

Inventories:

The Company has inventory valuation reserves for excess and obsolete inventories or other factors that may render inventories unmarketable at their historical costs. In fiscal year 2021, the Company announced it would transition away from its wholesale product distribution model in favor of a third-party distribution model. As a result, the Company exited its distribution centers in fiscal year 2022. To facilitate the exit, the Company sold and continues to sell inventory at discounts and dispose of hard-to-sell products. Additionally, the reduction in company-owned salons decreases the Company's ability to re-distribute inventory from closed locations to other salons to be sold or used. The inventory valuation reserve as of December 31, 2021 and June 30, 2021 was $7.8 and $11.8 million, respectively. Included in Company-owned salon expense is an inventory reserve charge of $1.2 and $1.5 million in the three and six months ended December 31, 2021, respectively. Included in Company-owned salon expense is an inventory reserve charge of $1.1 and $1.6 million in the three and six months ended December 31, 2020, respectively.

Long-Lived Asset Impairment Assessments:

The Company assesses impairment of long-lived salon assets and right of use (ROU) assets at the individual salon level, as this is the lowest level for which identifiable cash flows are largely independent of other groups of assets and liabilities, when events or changes in circumstances indicate the carrying value of the assets or the asset grouping may not be recoverable. Factors considered in deciding when to perform an impairment review include significant under-performance of an individual salon in relation to expectations, significant economic or geographic trends, and significant changes or planned changes in the use of the assets. The first step is to assess recoverability, and in doing that, the undiscounted salon cash flows are compared to the carrying value of the salon assets. If the undiscounted estimated cash flows are less than the carrying value of the assets, the Company calculates an impairment charge based on the difference between the carrying value of the asset group and its fair value. The fair value of the long-lived asset group is estimated using market participant methods based on the best information available. See Note 7 of the unaudited Condensed Consolidated Financial Statements for further discussion related to the ROU asset impairment.

Judgments made by management related to the expected useful lives of long-lived assets and the ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as changes in economic conditions and changes in operating performance. As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause the Company to realize material impairment charges.

Goodwill:

During the three months ended December 31, 2021, the Company determined a triggering event occurred, resulting in a quantitative impairment test performed over goodwill. This determination was made considering the sustained decrease in share price and a change in the Company's chief operating decision maker in the three months ended December 31, 2021.

Due to the triggering event experienced in the second quarter, the Company engaged a third-party valuation specialist to perform an impairment analysis on the Franchise reporting unit of the business. For the goodwill impairment analysis, management utilized a combination of both a discounted cash flows approach and market approach to evaluate the Franchise reporting unit. The discounted cash flow model reflects management's assumptions regarding revenue growth rates, economic and market trends, cost structure, and other expectations about the anticipated short-term and long-term operating results. The discount rate of 18.5% was also a key assumption utilized in the discounted cash flow.

As a result of the impairment testing, the Franchise reporting unit, which has goodwill of $229.0 million, was determined to have a fair value that exceeded its carrying value by 15% as of December 31, 2021. At the time of the Company's annual goodwill impairment test in the fourth quarter of fiscal year 2021, the fair value exceeded the book value by 30%. The decrease in headroom is primarily due to an increase in the company-specific risk factor that drove an increase in discount rate from 14% to 18.5%. As of June 30, 2021, the Franchise reporting unit had goodwill of $229.6 million. The change in goodwill for the six months ended December 31, 2021 is due to foreign currency translation.

Classification of Revenue and Expenses:

Beginning in the first quarter of fiscal year 2022, the Company adjusted its Statement of Operations for both periods presented to align the presentation of results to its franchise-focused business. Below is a summary of the changes to the financial statement captions. The change does not have a financial impact on the Company's reported revenue, operating loss, reported net loss or cash flows from operations.

Royalties - sales-based royalty received from franchisees. In prior years, these fees were included in Royalties and Fees and disclosed in the footnotes.

Fees - fees received from franchisees and third parties, including franchise fees, software and hardware fees related to Opensalon® Pro and fees received from the third-party distributors.

Product sales to franchisees - wholesale product sales to franchisees. This caption equates to Product sales in the Franchise segment in prior years. The Company is changing its franchise product sales business in fiscal year 2022 from a wholesale distribution model to a third-party distribution model. This revenue is expected to decrease significantly during fiscal year 2022.

Advertising fund contributions - sales-based advertising fund contributions received from franchisees. In prior years, these fees were included in Royalties and Fees and disclosed in the footnotes.

Company-owned salon revenue - service revenue and revenue derived from sales of product in Company-owned salons. This caption equates to revenue reported in the Company-owned segment in prior periods.

Cost of product sales to franchisees - direct cost of inventory and freight and other costs of sales. In prior years, these sales were included in the Franchise segment cost of product and site operating expenses.

Company-owned salon expense - cost of service and product sold to guests in our Company-owned salons and other salon-related costs. In prior years, these costs were classified as Company-owned segment cost of service, cost of product and site operating expenses. Excluded from this caption are general and administrative expense, rent and depreciation and amortization related to company-owned salons.

Depreciation:

Depreciation expense in the three months ended December 31, 2021 and 2020 include $0.3 and $1.4 million, respectively, and for the six months ended December 31, 2021 and 2020 include $0.6 and $2.7 million, respectively, of asset retirement obligations, which are cash expenses.