Regis (RGS) - 2022 Q2 - Quarterly Report

Part I - Financial Information The company's financial statements reflect a strategic shift to a franchise model, resulting in decreased assets and liabilities, improved net loss, and increased shareholders' equity from stock issuance Item 1. Financial Statements The unaudited condensed consolidated financial statements for the period ended December 31, 2021, show a decrease in total assets and liabilities, a significant improvement in net loss, and a net cash inflow from financing activities Condensed Consolidated Balance Sheet As of December 31, 2021, total assets and liabilities decreased, while shareholders' equity increased due to capital raised from stock issuance Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | | Total Assets | $926,158 | $996,383 | | Cash and cash equivalents | $35,442 | $19,191 | | Right of use asset | $548,598 | $611,880 | | Total Liabilities | $887,870 | $979,337 | | Long-term debt, net | $194,177 | $186,911 | | Long-term lease liability | $457,924 | $518,866 | | Total Shareholders' Equity | $38,288 | $17,046 | Condensed Consolidated Statement of Operations For the three months ended December 31, 2021, total revenue decreased due to the franchise model transition, but the net loss narrowed significantly Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended Dec 31, 2021 | Three Months Ended Dec 31, 2020 | Six Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $70,256 | $104,320 | $148,012 | $215,716 | | Operating Loss | $(1,127) | $(26,755) | $(6,929) | $(58,345) | | Net Loss | $(4,928) | $(32,879) | $(15,306) | $(68,144) | | Net Loss Per Share | $(0.11) | $(0.92) | $(0.37) | $(1.90) | - The shift to a franchise model is evident in the revenue composition change: Royalties and Fees increased, while Company-owned salon revenue and Product sales to franchisees decreased significantly year-over-year[10] Condensed Consolidated Statement of Cash Flows For the six months ended December 31, 2021, net cash used in operating activities improved, with financing activities providing a significant cash inflow primarily from stock issuance Cash Flow Summary for Six Months Ended Dec 31 (in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(24,328) | $(65,464) | | Net cash (used in) provided by investing activities | $(2,947) | $624 | | Net cash provided by (used in) financing activities | $43,628 | $(1,252) | | Increase (decrease) in cash | $16,219 | $(66,160) | Notes to Condensed Consolidated Financial Statements The notes detail the ongoing impact of COVID-19, the transition from a wholesale product distribution model, and a goodwill impairment test that resulted in no impairment - The COVID-19 pandemic continues to adversely impact salon guest visits and franchisee staffing, reducing revenue and profitability, with government subsidies partially offsetting expenses[22] - The company is transitioning from a wholesale product distribution model to a third-party model, leading to inventory sales at discounts and the exit of distribution centers in fiscal year 2022[23] - A goodwill impairment test on the Franchise reporting unit showed its fair value of $229.0 million exceeded its carrying value by 15%, resulting in no impairment charge[27][29] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's transition to an asset-light franchise model, the negative impact of COVID-19, the shift to a third-party product distribution, and improved liquidity Results of Operations Consolidated revenue decreased by 32.6% due to refranchising efforts, partially offset by increased royalty revenue, while the operating loss significantly improved System-Wide Same-Store Sales Growth | Concept | Three Months Ended Dec 31, 2021 | Three Months Ended Dec 31, 2020 | | :--- | :--- | :--- | | SmartStyle | 13.2% | (32.2)% | | Supercuts | 30.8% | (32.9)% | | Portfolio Brands | 16.6% | (30.0)% | | Consolidated | 22.1% | (32.0)% | - Consolidated revenue decreased by $34.0 million for the three months ended Dec 31, 2021, primarily due to the sale and closure of company-owned salons, accounting for a $28.8 million impact[90] - General and administrative expenses decreased by $10.7 million (40.1%) in the quarter due to headcount reductions aligning with the asset-light franchise model[97] Results of Operations by Segment The Franchise segment reported improved operating income, while the Company-owned segment's operating loss narrowed significantly due to a reduction in corporate-owned salons Segment Operating Income (Loss) (in millions) | Segment | Three Months Ended Dec 31, 2021 | Three Months Ended Dec 31, 2020 | | :--- | :--- | :--- | | Franchise | $2.1 | $(9.4) | | Company-owned Salons | $(3.2) | $(17.4) | - The number of company-owned salons decreased from 1,037 as of December 31, 2020, to 150 as of December 31, 2021, driving significant changes in segment performance[113] Liquidity and Capital Resources As of December 31, 2021, the company maintained strong liquidity with $35.4 million in cash and $138.1 million available under its credit facility, and improved its debt-to-capitalization ratio through stock issuance - The company has a $291.7 million revolving credit facility expiring in March 2023, with $194.2 million outstanding and $81.8 million available as of December 31, 2021[62][119] - The company utilized its "at-the-market" (ATM) offering, issuing 9.3 million shares for net proceeds of $37.2 million during the six months ended December 31, 2021[120][130] Debt to Capitalization Ratio | Date | Debt to Capitalization | | :--- | :--- | | December 31, 2021 | 83.5% | | June 30, 2021 | 91.6% | Item 3. Quantitative and Qualitative Disclosures about Market Risk No material changes were reported in the company's market risk exposures, which include interest rate and foreign currency exchange rate fluctuations - The company is exposed to market risk from changes in interest rates and foreign currency exchange rates, with no material changes reported during the quarter[134] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021, with no material changes to internal controls over financial reporting - Based on an evaluation by management, the CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[136] - There were no material changes in internal controls over financial reporting during the most recent fiscal quarter[137] Part II - Other Information This section covers legal proceedings, risk factors, equity sales, and exhibits, providing additional context to the company's operations and compliance Item 1. Legal Proceedings The company is involved in various lawsuits and claims arising from normal business operations, including allegations related to franchise regulations and class-wide consumer and wage and hour violations - Regis Corporation is a defendant in various lawsuits arising from its normal business operations, including allegations of franchise regulation violations and class-wide consumer and wage/hour issues[139] Item 1A. Risk Factors No material changes in the company's risk factors were reported compared to its Annual Report on Form 10-K for the fiscal year ended June 30, 2021 - No material changes to risk factors were reported compared to the Annual Report on Form 10-K for the fiscal year ended June 30, 2021[140] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company issued 1.2 million shares for $5.2 million in gross proceeds under its "at-the-market" offering, with $54.6 million remaining authorized for share repurchases, though none occurred - Under its "at-the-market" offering, the company issued 1.2 million shares in the three months and 9.3 million shares in the six months ended December 31, 2021, for gross proceeds of $5.2 million and $38.4 million, respectively[142] - The company did not repurchase any shares during the quarter, with $54.6 million remaining available under the approved stock repurchase program[131][145] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including employment offer letters for executives, CEO and CFO certifications, and financial statements in iXBRL format - Exhibits filed include executive offer letters, Sarbanes-Oxley Act certifications (Sections 302 and 906), and financial data in iXBRL format[147]