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

9 Months Ended

Mar. 31, 2020

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 March 31, 2020 and for the three and nine months ended March 31, 2020 and 2019, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of March 31, 2020 and its consolidated results of operations, comprehensive loss, changes in 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, 2019 and other documents filed or furnished with the SEC during the current fiscal year.

Impact of COVID-19 on Business Operations:

During the period ended March 31, 2020, the global coronavirus pandemic ("COVID-19") had an adverse impact on operations, including the closure of all company-owned salons and almost all franchise locations in March 2020 due to government mandates. Salons continued to be closed until April 23, 2020 when franchise salons began re-opening slowly, as government, state and local restrictions eased. As of June 15, 2020 approximately 76% of franchise salons were open. Company-owned salons were closed through May 21, 2020 and are gradually re-opening. As of June 15, 2020, approximately 45% of company-owned salons were open. As salons re-open, the Company is taking additional measures across its portfolio of franchise and company-owned salons to facilitate customer and employee safety. As a result, COVID-19 has and will continue to negatively affect revenue and profitability. To offset the loss of revenue, in April 2020, the Company implemented a furlough program for a substantial majority of the workforce across the corporate office, field support, and distribution centers; and reductions in the pay for executives and other working employees. Despite actions taken to resume business operations, COVID-19, and the volatile regional and global economic conditions stemming from the pandemic, as well as reactions to future pandemics or resurgences of COVID-19, could potentially prolong and intensify the impact of the global crisis on our business.

The economic disruption due to COVID-19 was determined to be a triggering event in the quarter and as a result, management assessed its long-term assets, including long-lived salon assets, right of use assets, goodwill and other intangibles for impairment. Impairments were recorded related to long-lived salon assets (Note 12) and goodwill (Notes 1 and 12). As the COVID-19 pandemic continues, management will reassess all long-term assets and further impairment may result.

Due to the COVID-19 pandemic, the Company is relying on the Securities and Exchange Commission's Order under Section 36 of the Securities Exchange Act of 1934 Modifying Exemptions From the Reporting and Proxy Delivery Requirements for Public Companies dated March 25, 2020 (Release No. 34-88465) to extend the filing of this Quarterly Report. The Company is relying on the Order due to the limited availability of key Company personnel required to complete the Form 10-Q due to the Company's employee furlough program, as well as suggested and mandated social quarantining and work from home orders. Additionally, the Company's management team was not able to initially devote the requisite time and attention to the Form 10-Q, as it had to address the emergent business and operational issues resulting from COVID-19.

Goodwill:

At the end of the period ended March 31, 2020, the Company determined a triggering event occurred, resulting in quantitative impairment tests performed over the goodwill. This determination was made considering the reduced sales and profitability projections for the reporting units, driven by the COVID-19 pandemic and related economic disruption.

The triggering events experienced in the third quarter impacted both reporting units of the business, Franchise and Company-owned. Due to the Company's emphasis on transitioning to a franchise platform, the Company engaged a third-party valuation specialist to perform an impairment analysis on the Franchise reporting unit of the business. Conversely, the Company-owned reporting unit is comprised of a portfolio of salons that the Company intends to sell to franchisees or close in the short-term as part of the transition to a fully-franchised model. As a result, the Company-owned reporting unit has a limited life which allows the Company to perform its own impairment analysis on the Company-owned reporting unit.

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, and the discounted cash flows approach to evaluate the Company-owned reporting unit. The discounted cash flow models reflect management's assumptions regarding revenue growth rates, economic and market trends including deterioration from the current COVID-19 pandemic, cost structure, and other expectations about the anticipated short-term and long-term operating results of the reporting units. For the Franchise reporting unit, the discount rate of 13 percent and the terminal growth rate of 2.5 percent were also key assumptions utilized in the discounted cash flow. For the Company-owned reporting unit, proceeds from the sale of salons to franchisees and number of salon venditions were the other key assumptions utilized in its discounted cash flow. For the analysis performed as of March 31, 2020, management decreased the expected proceeds generated from the sale of salons to franchisees and increased the expected number of salon closures as compared to the analysis performed as of April 30, 2019. The decline in expected proceeds and increase in salon closings is due to the economic downturn resulting from the COVID-19 pandemic. The analysis also included substantially zero revenue in April and May 2020 and lower than previously expected revenue for the rest of calendar year 2020, which significantly reduced the expected cash flows.

As a result of the impairment testing, the Franchise reporting unit, which has goodwill of $226.7 million, was determined to have a fair value that exceeded carrying value by approximately 50 percent. The Company-owned reporting unit was determined to have a carrying value in excess of its fair value, resulting in a goodwill impairment charge of $44.5 million. Prior to the COVID-19 pandemic, the Company had been derecognizing Company-owned goodwill as part of the calculation of gain or loss on the sale of salons to franchisees. In the three and nine months ended March 31, 2020, the Company derecognized $19.8 and $72.6 million of goodwill, respectively. The Company-owned reporting unit has no remaining goodwill, so there will be no further derecognition of Company-owned goodwill.

Non-Current Assets Held for Sale:

In March 2019, the Company announced that it had entered into a ten-year lease for a new corporate headquarters and would be selling the land and buildings currently used for its headquarters. The non-current assets held for sale represent the net book value of the land of $1.7 million and buildings of $3.6 million, as of June 30, 2019. The sale was completed in December 2019 for proceeds of $9.0 million, resulting in a net gain on sale of $2.5 million, which was recorded in Interest income and other, net on the Condensed Consolidated Statement of Operations. In the three month period ended March 31, 2020, the Company recognized $1.5 million of incremental charges in Interest income and other, net which corrected and reduced the gain on sale of the Company’s former headquarters that was recorded in the second quarter of fiscal year 2020. The $2.5 million net gain on sale includes the adjustment. Management evaluated the effect of this out-of-period adjustment on the three and nine month periods ended March 31, 2020, as well as on the previous interim period in which it should have been recognized and concluded for both quantitative and qualitative reasons that the adjustment is not material to any of the periods affected.

Accounting Standards Recently Adopted by the Company:

Simplifying the Test for Goodwill Impairment

The Company adopted ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350)" for the interim impairment test performed due to the triggering event noted above, as of March 31, 2020. Under this accounting standard, the Company performed its interim impairment test and will perform its annual impairment test by comparing the fair value of a reporting unit to its carrying amount. The Company then records an impairment charge for the amount that the carrying amount exceeds the fair value. This eliminates Step 2 from the goodwill impairment test to simplify the subsequent measure of goodwill.

Leases

The Company adopted ASU 2016-02, "Leases (Topic 842)” and all subsequent ASUs that modified Topic 842 as of July 1, 2019 using the modified retrospective method and elected the option to not restate comparative periods in the year of adoption. The Company also elected the package of practical expedients that do not require reassessment of whether existing contracts are or contain leases, lease classifications or initial direct costs. The Company has also made an accounting policy election to keep leases with an initial term of 12 months or less off the Balance Sheet.

Under adoption of Topic 842, the Company recorded a Right of Use Asset and Lease Liability of $980.8 and $993.7 million, respectively. The difference between the assets and liabilities are attributable to the reclassification of certain existing lease-related assets and liabilities as an adjustment to the right of use assets. The Lease Liability reflects the present value of the Company's estimated future minimum lease payments over the lease term, which includes one option period, as options are reasonably assured of being exercised, are discounted using a collateralized incremental borrowing rate. The decrease in the Right of Use Asset and Lease Liability from July 1, 2019 to March 31, 2020 was due to lease modifications and salon closures.

The accounting guidance for lessors remained largely unchanged from previous guidance, with the exception of the presentation of rent payments that the Company passes through to franchisees (lessees). Historically, these costs have been recorded on a net basis in the unaudited Condensed Consolidated Statements of Operations, but are now presented on a gross basis upon adoption of the new guidance. The adoption of the new guidance resulted in the recognition of franchise rental income and rent expense of $31.8 and $96.9 million during the three and nine months ended March 31, 2020, respectively. See Note 10 for further information about our transition to Topic 842 and the newly required disclosures.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI), which provides the option to reclassify to retained earnings the tax effects resulting from the Tax Act related to items in AOCI. The Company adopted this guidance on July 1, 2019 and did not elect to reclassify the income tax effects from the Tax Act from AOCI to retained earnings as the impact was not material.