UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			For the quarterly period ended March 31, ~~2021~~2022
			OR
☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			For the transition period from to

Commission file number 1-12725

Regis Corporation

(Exact name of registrant as specified in its charter)

Minnesota

41-0749934

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

3701 Wayzata Boulevard,

Minneapolis

Minnesota

55416

(Address of principal executive offices)

(Zip Code)

(952) 947-7777

(~~Registrant’s~~Registrant's telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to be submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of ~~“large~~"large accelerated filer,~~” “accelerated~~" "accelerated filer,~~” “smaller~~" "smaller reporting company,”" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes ☐ No ☒

Title of each class

Trading symbol

Name of exchange

Common Stock, $0.05 par value

RGS

NYSE

Indicate the number of shares outstanding of each of the ~~issuer’s~~issuer's classes of common stock as of ~~April 30, 2021: 35,789,820~~

May 4, 2022: 45,505,055

REGIS CORPORATION

INDEX


Part I.	Financial Information

	Item 1.	Financial Statements (Unaudited):

		Condensed Consolidated Balance Sheet as of March 31, ~~2021~~2022 and June 30, ~~2020~~2021	2

		Condensed Consolidated Statement of Operations for the ~~three~~Three and ~~nine months ended~~Nine Months Ended March 31, ~~2021~~2022 and ~~2020~~2021	3

		Condensed Consolidated Statement of Comprehensive Loss for the ~~three~~Three and ~~nine months ended~~Nine Months Ended March 31, ~~2021~~2022 and ~~2020~~2021	4

		Condensed Consolidated Statement of Shareholders' Equity for the ~~three~~Three and ~~nine months ended~~Nine Months Ended March 31, ~~2021~~2022 and ~~2020~~2021	5

		Condensed Consolidated Statement of Cash Flows for the ~~nine months ended~~Nine Months Ended March 31, ~~2021~~2022 and ~~2020~~2021	76

		Notes to Condensed Consolidated Financial Statements	87

	Item 2.	~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of Operations	2823

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4235

	Item 4.	Controls and Procedures	4235

Part II.	Other Information		4336

	Item 1.	Legal Proceedings	4336

	Item 1A.	Risk Factors	4336

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4437



	Item 6.	Exhibits	4438

	Signatures		4539

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

REGIS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)

(Dollars in thousands, except share data)

March 31,
2021 June 30,
2020
ASSETS
Current assets:
Cash and cash equivalents $ 34,510 $ 113,667
Receivables, net 31,254 31,030
Inventories 38,221 62,597
Other current assets 14,082 19,138
Total current assets 118,067 226,432
Property and equipment, net 27,080 57,176
Goodwill (Note 9) 229,221 227,457
Other intangibles, net 4,186 4,579
Right of use asset (Note 10) 629,006 786,216
Other assets 40,423 40,934
Total assets $ 1,047,983 $ 1,342,794
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 28,840 $ 50,918
Accrued expenses 51,164 48,825
Short-term lease liability (Note 10) 123,224 137,271
Total current liabilities 203,228 237,014
Long-term debt, net (Note 11) 177,500 177,500
Long-term lease liability (Note 10) 536,234 680,454
Long-term financing liabilities (Note 11) 0 27,981
Other non-current liabilities 81,517 94,142
Total liabilities 998,479 1,217,091
Commitments and contingencies (Note 7) 0 0
Shareholders’ equity:
Common stock, $0.05 par value; issued and outstanding 35,789,825 and 35,625,716 common shares at March 31, 2021 and June 30, 2020, respectively 1,789 1,781
Additional paid-in capital 23,672 22,011
Accumulated other comprehensive income 9,092 7,449
Retained earnings 14,951 94,462
Total shareholders’ equity 49,504 125,703
Total liabilities and shareholders’ equity $ 1,047,983 $ 1,342,794


	March 31, 2022		June 30, 2021

ASSETS
Current assets:
Cash and cash equivalents (Note 6)	$	25,630	$	19,191
Receivables, net	15,443		27,372
Inventories	8,606		22,993
Other current assets	13,254		17,103
Total current assets	62,933		86,659

Property and equipment, net	21,922		23,113
Goodwill (Note 1)	213,362		229,582
Other intangibles, net	3,420		3,761
Right of use asset (Note 7)	525,429		611,880
Other assets	35,712		41,388

Total assets	$	862,778	$	996,383

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	14,319	$	27,157
Accrued expenses	36,469		54,857
Short-term debt, net (Note 8)	193,814		—
Short-term lease liability (Note 7)	107,373		116,471
Total current liabilities	351,975		198,485

Long-term debt, net (Note 8)	—		186,911
Long-term lease liability (Note 7)	437,117		518,866

Other non-current liabilities	62,567		75,075
Total liabilities	851,659		979,337
Commitments and contingencies (Note 5)	0		0
Shareholders' equity:
Common stock, $0.05 par value; issued and outstanding 45,505,055 and 35,795,844 common shares at March 31, 2022 and June 30, 2021, respectively	2,275		1,790
Additional paid-in capital	62,131		25,102
Accumulated other comprehensive income	9,326		9,543
Accumulated deficit	(62,613)		(19,389)
Total shareholders' equity	11,119		17,046
Total liabilities and shareholders' equity	$	862,778	$	996,383

_______________________________________________________________________________

The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.

REGIS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

For The Three And Nine Months Ended March 31, ~~2021~~2022 And ~~2020~~2021

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


		Three Months Ended March 31,				Nine Months Ended March 31,					Three Months Ended March 31,				Nine Months Ended March 31,
		2021		2020		2021		2020			2022		2021		2022		2021

Revenues:	Revenues:									Revenues:
Service		$	24,645	$	78,387	$	90,040	$	322,133
Product		20,770		34,877		68,665		124,516
Royalties and fees		23,535		8,698		61,393		66,062
Franchise rental income (Note 10)		31,317		31,821		95,885		96,875
Royalties										Royalties	$	15,799	$	12,835	$	48,526	$	36,989
Fees										Fees	3,364		5,120		11,496		9,600
Product sales to franchisees										Product sales to franchisees	1,293		13,079		11,729		41,057
Advertising fund contributions										Advertising fund contributions	8,078		5,580		24,213		14,804
Franchise rental income (Note 7)										Franchise rental income (Note 7)	32,666		31,317		100,200		95,885
Company-owned salon revenue										Company-owned salon revenue	3,549		32,336		16,597		117,648
Total revenue	Total revenue	100,267		153,783		315,983		609,586		Total revenue	64,749		100,267		212,761		315,983
Operating expenses:	Operating expenses:									Operating expenses:
Cost of service		15,821		54,824		66,441		212,664
Cost of product		21,268		21,672		54,840		75,257
Site operating expenses		13,366		3,660		36,955		62,932
Cost of product sales to franchisees										Cost of product sales to franchisees	2,598		11,168		14,129		33,171
Inventory reserve (1)										Inventory reserve (1)	6,420		—		6,420		—
General and administrative	General and administrative	24,582		31,871		77,419		105,187		General and administrative	15,569		24,582		53,342		77,419
Rent (Note 10)		8,001		18,665		34,128		63,424
Rent (Note 7)										Rent (Note 7)	1,246		8,001		6,137		34,128
Advertising fund expense										Advertising fund expense	8,078		5,580		24,213		14,804
Franchise rent expense	Franchise rent expense	31,317		31,821		95,885		96,875		Franchise rent expense	32,666		31,317		100,200		95,885
Company-owned salon expense (2)										Company-owned salon expense (2)	5,292		33,707		18,304		110,261
Depreciation and amortization	Depreciation and amortization	3,620		10,359		17,384		27,486		Depreciation and amortization	1,997		3,620		5,846		17,384
Long-lived asset impairment	Long-lived asset impairment	833		0		9,817		0		Long-lived asset impairment	327		833		542		9,817
TBG mall location restructuring (Note 3)		0		146		0		2,368
Goodwill impairment	Goodwill impairment	0		40,164		0		40,164		Goodwill impairment	16,000		—		16,000		—
Total operating expenses	Total operating expenses	118,808		213,182		392,869		686,357		Total operating expenses	90,193		118,808		245,133		392,869

Operating loss	Operating loss	(18,541)		(59,399)		(76,886)		(76,771)		Operating loss	(25,444)		(18,541)		(32,372)		(76,886)

Other (expense) income:	Other (expense) income:									Other (expense) income:
Interest expense	Interest expense	(3,163)		(1,712)		(10,626)		(4,615)		Interest expense	(3,403)		(3,163)		(10,158)		(10,626)
Loss from sale of salon assets to franchisees, net	Loss from sale of salon assets to franchisees, net	(4,575)		(7,858)		(8,463)		(26,125)		Loss from sale of salon assets to franchisees, net	(494)		(4,575)		(2,189)		(8,463)
Interest income and other, net	Interest income and other, net	15,099		148		15,616		3,188		Interest income and other, net	153		15,099		13		15,616

Loss from continuing operations before income taxes		(11,180)		(68,821)		(80,359)		(104,323)
Loss from operations before income taxes										Loss from operations before income taxes	(29,188)		(11,180)		(44,706)		(80,359)

Income tax benefit	Income tax benefit	333		979		1,368		5,783		Income tax benefit	1,270		333		1,482		1,368

Loss from continuing operations		(10,847)		(67,842)		(78,991)		(98,540)

Income from discontinued operations, net of taxes (Note 3)		0		301		0		753

Net loss	Net loss	$	(10,847)	$	(67,541)	$	(78,991)	$	(97,787)	Net loss	$	(27,918)	$	(10,847)	$	(43,224)	$	(78,991)

Net loss per share:	Net loss per share:									Net loss per share:
Basic and diluted:	Basic and diluted:									Basic and diluted:
Loss from continuing operations		$	(0.30)	$	(1.89)	$	(2.20)	$	(2.74)
Income from discontinued operations		0.00		0.01		0.00		0.02
Net loss per share, basic and diluted (1)		$	(0.30)	$	(1.88)	$	(2.20)	$	(2.72)

Net loss per share, basic and diluted										Net loss per share, basic and diluted	$	(0.61)	$	(0.30)	$	(1.01)	$	(2.20)

Weighted average common and common equivalent shares outstanding:	Weighted average common and common equivalent shares outstanding:									Weighted average common and common equivalent shares outstanding:
Basic and diluted	Basic and diluted	36,011		35,815		35,929		35,958		Basic and diluted	45,886		36,011		42,789		35,929

(1)~~Total is a recalculation; line items calculated individually may not sum~~Includes charge in the third quarter associated with liquidation of distribution center inventory. Excludes reserves for inventory at salons.

(2)Includes cost of service and product sold to ~~total due~~guests in our Company-owned salons. Excludes general and administrative expense, rent and depreciation and amortization related to ~~rounding.~~Company-owned salons.

The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.

REGIS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS (Unaudited)

For The Three And Nine Months Ended March 31, ~~2021~~2022 And ~~2020~~2021

(Dollars in thousands)


		Three Months Ended March 31,				Nine Months Ended March 31,					Three Months Ended March 31,				Nine Months Ended March 31,
		2021		2020		2021		2020			2022		2021		2022		2021

Net loss	Net loss	$	(10,847)	$	(67,541)	$	(78,991)	$	(97,787)	Net loss	$	(27,918)	$	(10,847)	$	(43,224)	$	(78,991)
Foreign currency translation adjustments	Foreign currency translation adjustments	306		(2,482)		1,643		(2,344)		Foreign currency translation adjustments	221		306		(217)		1,643
Comprehensive loss	Comprehensive loss	$	(10,541)	$	(70,023)	$	(77,348)	$	(100,131)	Comprehensive loss	$	(27,697)	$	(10,541)	$	(43,441)	$	(77,348)

_______________________________________________________________________________

The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.

REGIS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited)

For The Three And Nine Months Ended March 31, ~~2021~~2022 And ~~2020~~2021

(Dollars in thousands)


	Three Months Ended March 31, 2022
	Common Stock			Additional Paid-In Capital		Accumulated Other 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


		Three Months Ended March 31, 2021																		Three Months Ended March 31, 2021
		Common Stock			Additional Paid-In Capital				Accumulated Other Comprehensive Income		Retained Earnings				Total					Common Stock						Additional Paid-In Capital				Accumulated Other Comprehensive Income				Retained Earnings				Total
		Shares	Amount											Shares					Amount

Balance, December 31, 2020	Balance, December 31, 2020	35,768,086	$	1,788			$	22,076					$	8,786			$	25,798		$	58,448	Balance, December 31, 2020			35,768,086			$	1,788			$	22,076			$	8,786			$	25,798	$	58,448
Net loss	Net loss	—	—		—				—		(10,847)				(10,847)			Net loss		—			—				—				—				(10,847)				(10,847)
Foreign currency translation	Foreign currency translation	—	—		—				306		—				306			Foreign currency translation		—			—			—				306				—				306

Exercise of SARs	Exercise of SARs	3,775	—		(24)				—		—				(24)			Exercise of SARs		3,775			—			(24)				—				—				(24)
Stock-based compensation	Stock-based compensation	—	—		1,703				—		—				1,703			Stock-based compensation		—			—			1,703				—				—				1,703
Net restricted stock activity	Net restricted stock activity	17,964	1		(83)				—		—				(82)			Net restricted stock activity		17,964			1			(83)				—				—				(82)

Balance, March 31, 2021	Balance, March 31, 2021	35,789,825	$	1,789	$	23,672			$	9,092	$	14,951			$	49,504		Balance, March 31, 2021		35,789,825			$	1,789		$	23,672			$	9,092			$	14,951			$	49,504


	Nine Months Ended March 31, 2022
	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total
	Shares	Amount

Balance, June 30, 2021	35,795,844	$	1,790	$	25,102	$	9,543	$	(19,389)	$	17,046
Net loss	—	—		—		—		(43,224)		(43,224)
Foreign currency translation	—	—		—		(217)		—		(217)
Issuance of common stock, net of offering costs	9,295,618	465		36,720		.		—		37,185

Stock-based compensation	—	—		854		—		—		854
Net restricted stock activity	413,593	20		(545)		—		—		(525)

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

Three Months Ended March 31, 2020
Common Stock Additional
Paid-In
Capital Accumulated
Other
Comprehensive
Income Retained
Earnings Total
Shares Amount
Balance, December 31, 2019 35,563,611 $ 1,778 $ 21,230 $ 9,480 $ 235,534 $ 268,022
Net loss — — — — (67,541) (67,541)
Foreign currency translation — — — (2,482) — (2,482)
Stock-based compensation — — (25) — — (25)
Net restricted stock activity 2,595 — (19) — — (19)
Minority interest — — — — 38 38
Balance, March 31, 2020 35,566,206 $ 1,778 $ 21,186 $ 6,998 $ 168,031 $ 197,993

~~REGIS CORPORATION~~

~~CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited)~~

~~For The Three And Nine Months Ended March 31, 2021 And 2020 (Continued)~~

~~(Dollars in thousands)~~

Nine Months Ended March 31, 2021
Common Stock Additional
Paid-In
Capital Accumulated
Other
Comprehensive
Income Retained
Earnings Total
Shares Amount
Balance, June 30, 2020 35,625,716 $ 1,781 $ 22,011 $ 7,449 $ 94,462 $ 125,703
Net loss — — — — (78,991) (78,991)
Foreign currency translation — — — 1,643 — 1,643
Exercise of SARs 3,775 — (24) — — (24)
Stock-based compensation — — 1,792 — — 1,792
Net restricted stock activity 160,334 8 (107) — — (99)
Minority interest — — — — (520) (520)
Balance, March 31, 2021 35,789,825 $ 1,789 $ 23,672 $ 9,092 $ 14,951 $ 49,504


		Nine Months Ended March 31, 2020																		Nine Months Ended March 31, 2021
		Common Stock			Additional Paid-In Capital				Accumulated Other Comprehensive Income		Retained Earnings				Total					Common Stock				Additional Paid-In Capital			Accumulated Other Comprehensive Income			Retained Earnings			Total
		Shares	Amount											Shares					Amount

Balance, June 30, 2019		36,869,249	$	1,843			$	47,152					$	9,342			$	265,908		$	324,245
Balance, June 30, 2020																		Balance, June 30, 2020		35,625,716		$	1,781		$	22,011		$	7,449		$	94,462		$	125,703
Net loss	Net loss	—	—		—				—		(97,787)				(97,787)			Net loss		—		—		—			—			(78,991)			(78,991)
Foreign currency translation	Foreign currency translation	—	—		—				(2,344)		—				(2,344)			Foreign currency translation		—		—		—			1,643			—			1,643
Stock repurchase program		(1,504,000)	(75)		(26,281)				—		—				(26,356)

Exercise of SARs	Exercise of SARs	1,776	—		28				—		—				28			Exercise of SARs		3,775		—		(24)			—			—			(24)
Stock-based compensation	Stock-based compensation	—	—		2,114				—		—				2,114			Stock-based compensation		—		—		1,792			—			—			1,792
Net restricted stock activity	Net restricted stock activity	199,181	10		(1,827)				—		—				(1,817)			Net restricted stock activity		160,334		8		(107)			—			—			(99)
Minority interest	Minority interest	—	—		—				—		(90)				(90)			Minority interest		—		—		—			—			(520)			(520)
Balance, March 31, 2020		35,566,206	$	1,778	$	21,186			$	6,998	$	168,031			$	197,993
Balance, March 31, 2021																		Balance, March 31, 2021		35,789,825		$	1,789	$	23,672		$	9,092		$	14,951		$	49,504

_______________________________________________________________________________

The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements.

REGIS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)

For The Nine Months Ended March 31, ~~2021~~2022 And ~~2020~~2021

(Dollars in thousands)

Nine Months Ended March 31,
2021 2020
Cash flows from operating activities:
Net loss $ (78,991) $ (97,787)
Adjustments to reconcile net loss to cash used in operating activities:
Non-cash adjustments related to discontinued operations 0 (967)
Depreciation and amortization 13,968 23,635
Salon asset impairment 0 3,851
Long-lived asset impairment 9,817 0
Deferred income taxes (806) (6,469)
Inventory reserve 6,875 0
Gain from disposal of distribution center assets (14,878) 0
Gain from sale of company headquarters, net 0 (2,513)
Loss from sale of salon assets to franchisees, net 8,463 26,125
Goodwill impairment 0 40,164
Stock-based compensation 1,792 2,114
Amortization of debt discount and financing costs 1,313 206
Other non-cash items affecting earnings 183 (442)
Changes in operating assets and liabilities, excluding the effects of asset sales (1) (27,743) (38,938)
Net cash used in operating activities (80,007) (51,021)
Cash flows from investing activities:
Capital expenditures (9,609) (32,331)
Proceeds from sale of assets to franchisees 7,743 87,916
Costs associated with sale of salon assets to franchisees (242) (1,887)
Proceeds from company-owned life insurance policies 1,200 0
Proceeds from sale of company headquarters 0 8,996
Net cash (used in) provided by investing activities (908) 62,694
Cash flows from financing activities:
Borrowings on revolving credit facility 0 213,000
Repayments of revolving credit facility 0 (30,000)
Repurchase of common stock 0 (28,246)
Taxes paid for shares withheld (316) (1,968)
Minority interest buyout (562) 0
Distribution center lease payments (724) (677)
Net cash (used in) provided by financing activities (1,602) 152,109
Effect of exchange rate changes on cash and cash equivalents 6 (379)
(Decrease) increase in cash, cash equivalents, and restricted cash (82,511) 163,403
Cash, cash equivalents and restricted cash:
Beginning of period 122,880 92,379
End of period $ 40,369 $ 255,782


	Nine Months Ended March 31,
	2022		2021

Cash flows from operating activities:
Net loss	$	(43,224)	$	(78,991)
Adjustments to reconcile net loss to cash used in operating activities:

Depreciation and amortization	4,944		13,968

Long-lived asset impairment	542		9,817
Deferred income taxes	(1,693)		(806)
Inventory reserve (1)	9,007		6,875
Gain from disposal of distribution center assets	—		(14,878)

Loss from sale of salon assets to franchisees, net	2,189		8,463

Goodwill impairment	16,000		—
Stock-based compensation	854		1,792
Amortization of debt discount and financing costs	1,379		1,313
Other non-cash items affecting earnings	419		183
Changes in operating assets and liabilities, excluding the effects of asset sales (2)	(24,770)		(27,743)
Net cash used in operating activities	(34,353)		(80,007)

Cash flows from investing activities:
Capital expenditures	(4,258)		(9,609)
Proceeds from sale of assets to franchisees	—		7,743
Costs associated with sale of salon assets to franchisees	—		(242)
Proceeds from company-owned life insurance policies	—		1,200

Net cash used in investing activities	(4,258)		(908)

Cash flows from financing activities:
Borrowings on revolving credit facility	10,000		—
Repayments of revolving credit facility	(3,096)		—
Proceeds from issuance of common stock, net of offering costs	37,185		—

Taxes paid for shares withheld	(844)		(316)

Minority interest buyout	—		(562)

Distribution center lease payments	—		(724)
Net cash provided by (used in) financing activities	43,245		(1,602)

Effect of exchange rate changes on cash and cash equivalents	(88)		6

Increase (decrease) in cash, cash equivalents, and restricted cash	4,546		(82,511)

Cash, cash equivalents and restricted cash:
Beginning of period	29,152		122,880
End of period	$	33,698	$	40,369

_______________________________________________________________________________

(1)Includes salon and distribution center reserves.

(2)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.

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 March 31, ~~2021~~2022 and for the three and nine months ended March 31, ~~2021~~2022 and ~~2020,~~2021, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of March 31, ~~2021~~2022 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~~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~~Company's Annual Report on Form 10-K for the year ended June 30, ~~2020~~2021 and other documents filed or furnished with the SEC during the current fiscal year.

~~Impact of~~ COVID-19 ~~on Business Operations:~~Impact:

During the ~~period~~periods ended March 31, 2022 and 2021, the global coronavirus pandemic (COVID-19) had an adverse impact on operations, including prolonged government-mandated salon closures in California and Ontario, in addition to other U.S. states and Canadian provinces during the three and nine months ended March 31, 2021.operations. The COVID-19 pandemic continues to impact salon guest visits and franchisee staffing, resulting in a significant reduction in revenue and ~~traffic. Due~~profitability. In response to COVID-19, the Canada Emergency Wage Subsidy (CEWS), Canada Emergency Rent Subsidy (CERS) and the U.S. employee retention payroll tax credit were introduced for eligible employers. In fiscal years 2022 and 2021, the Company received $1.9 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. In fiscal year 2021, the Company recorded a $1.5 million benefit related to the ~~economic disruption caused by~~U.S. employee retention tax credit. Additionally, in December 2021 the Company paid $2.5 million of social security contributions that had been deferred under the CARES Act. 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.

Liquidity:

The Company's debt of $193.8 million is due in March 2023 and management's current projected cash flows do not support the ability to repay this obligation in full at maturity. As a result of the maturity date, our debt is reflected as a current liability at March 31, 2022. Management is working with advisors to determine alternative financing arrangements and believes the ability to refinance alleviates substantial doubt related to the Company's ability to continue as a going concern. If the Company ~~faces a greater degree of uncertainty than normal in making judgments~~is not able to refinance our debt at terms acceptable to us by the maturity date, the lender would be able to call the debt and ~~estimates needed~~pursue other remedies that could be harmful to ~~apply the Company's significant accounting policies. Actual results and outcomes may differ from management's estimates and assumptions.~~our business.

~~Inventory:~~Inventories:

The Company has inventory valuation reserves for excess and obsolete inventories or other factors that may render inventories unmarketable at their historical costs. ~~For~~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 and now stores inventory at a third-party facility. To facilitate the exit of the distribution centers, 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 redistribute inventory from closed locations to other salons to be sold or used. The inventory valuation reserve as of March 31, 2022 and June 30, 2021 was $14.3 and $11.8 million, respectively. 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. 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. Included in Company-owned salon expense is an inventory reserve charge of $5.3 and $6.9 million in the three and nine months ended March 31, 2021, ~~the Company recorded $5.3 and $6.9 million of inventory excess and obsolescence charges,~~ respectively. The increase in the reserve in the three months ended March 31, 2021 was related to management's decision to exit its product sales business and wind down operations at the Company's two distribution centers. The expense was recorded to Cost of product in the unaudited Condensed Consolidated Statement of Operations and is a non-cash add back to Net loss on the unaudited Condensed Consolidated Statement of Cash Flows.

~~Salon~~ Long-Lived ~~Asset and Right of Use~~ 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 ~~salon~~ long-lived asset group is estimated using market participant methods based on the best information available. See Note 107 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.

Long-lived asset impairment charges, including ROU and salon property and equipment, of $0.8 and $9.8 million were recorded in the three and nine months ended March 31, 2021, respectively, on the unaudited Condensed Consolidated Statement of Operations. Of the total long-lived asset impairment charges, $0.3 and $6.3 million, respectively, were allocated to the ROU asset and $0.5 and $3.5 million, respectively, were allocated to salon property and equipment. Long-lived salon property and equipment asset impairment charges of $1.2 and $3.9 million were recorded during the three and nine months ended March 31, 2020, respectively, and are recorded in Depreciation and amortization in the unaudited Condensed Consolidated Statement of Operations.

Goodwill:

As of March 31, 2021 and June 30, 2020, the Franchise reporting unit had $229.2 and $227.5 million, respectively, of goodwill. For further information, see Note 9 of the unaudited Condensed Consolidated Financial Statements. 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 ~~amount. An interim impairment analysis was not required in~~value. At the ~~three and nine months~~end of the period ended March 31, ~~2021. The COVID-19 pandemic, which began in March 2020, was an interim~~2022, the Company determined a triggering event occurred related to a decrease in ~~fiscal year 2020. The Company assessed its goodwill as of March 31, 2020 and determined that the Company-owned goodwill was fully impaired. As~~forecasted revenue due to slower than expected recovery from COVID-19, resulting in a ~~result,~~quantitative impairment test performed over goodwill. Accordingly, the Company ~~recorded~~engaged a ~~goodwill impairment charge of $40.2 million in the three and nine months ended March 31, 2020.~~

~~The Company performs its annual impairment assessment as of April 30. For the fiscal year 2020 annual impairment assessment, due~~third-party valuation specialist to ~~the impact of the COVID-19 pandemic, the Company elected to forgo the optional Step 0 assessment and performed the quantitative~~perform an impairment analysis on the Franchise reporting ~~unit. The Company compared the carrying value~~unit of the ~~reporting unit, including goodwill, to the estimated fair value. The result~~business as of ~~the assessment indicated that the estimated fair value of the Company's reporting unit exceeded its carrying value by approximately 50 percent.~~March 31, 2022. 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 flows 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. Management's assumptions related to revenue growth rates were reduced and management increased expected salon closures compared to prior valuations. These changes, along with a decline in value from the market approach. The key assumptions utilized in the analysis were the number of salons to be sold to franchisees and the discount rate. If a future triggering event occurs or if during the Company's annual impairment assessmentapproach, reduced the fair value of the reporting unit from previous valuations. The discount rate of 19.5% was also a key assumption utilized in the discounted cash flows which was an increase of 1% from the second quarter valuation due to an increase in market interest rates.

As a result of the impairment testing as of March 31, 2022, the Franchise reporting unit ~~has decreased significantly, it may result~~was determined to have a carrying value in excess of its fair value, resulting in a ~~non-cash~~goodwill impairment charge of $16.0 million in the third quarter. As of March 31, 2022 and June 30, 2021, the Franchise reporting unit had goodwill of $213.4 and $229.6 million, respectively. The Company's projections of future operating performance do not anticipate future salon closures due to the COVID-19 pandemic. However, the ultimate severity and longevity of the COVID-19 pandemic is unknown, therefore; 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 ~~reduces~~could be material.

The table below contains details related to the ~~carrying value~~Company's goodwill (in thousands):


	Franchise Reporting Unit

Goodwill, net at June 30, 2021	$	229,582
Goodwill impairment	(16,000)
Translation rate adjustments	(220)

Goodwill, net at March 31, 2022	$	213,362

Classification of ~~goodwill.~~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 March 31, 2022 and 2021 include $0.3 and $0.8 million, respectively, and for the nine months ended March 31, 2022 and 2021 ~~includes $0.8~~include $0.9 and $3.4 million, respectively, of asset retirement obligations, which are cash expenses.

~~Minority Interest:~~

In December 2020, the Company purchased its non-controlling interest in Roosters from the minority shareholders. The Company paid $0.6 million to obtain 100% ownership. The payment is recorded in cash used in financing activities on the unaudited Condensed Consolidated Statement of Cash Flows.

109

2. REVENUE RECOGNITION:

Revenue Recognition and Deferred Revenue:

Revenue recognized at point of sale

Product sales to franchisees are recorded at the time product is delivered to the franchisee. Payment for franchisee product revenue is generally collected within 30 to 90 days of delivery. Company-owned salon revenues are recognized at the time when the services are ~~provided. Product revenues for company-owned salons are recognized when~~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 ~~customer.~~guest. Gift card breakage, the amount of gift cards which will not be redeemed, is recognized proportional to redemptions using estimates based on historical redemption patterns. Product sales, including sales of the hardware related to our proprietary cloud-based management and point-of-sale commerce solution, to franchisees are included within product revenues in the unaudited Condensed Consolidated Statement of Operations and recorded at the time product is delivered to the franchisee. Payment for franchisee product revenue is generally collected within 30 to 90 days of delivery.

Revenue recognized over time

~~Franchise revenues primarily include royalties, advertising fund cooperatives fees, franchise fees and other fees.~~ 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 ~~revenue is~~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 ~~gross presentation~~treatment increases both the gross amount of reported ~~franchise~~ revenue and ~~site operating~~ 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 opening and is then recognized over the term of the franchise agreement, which is typically ten years. Software fees are recognized over the term of the SaaS agreement. Franchise rental income is a result of the Company signing leases on behalf of franchisees and entering into a sublease ~~arrangement~~arrangements with the ~~franchisee.~~franchisees. The Company recognizes franchise rental income and expense when it is due to the landlord.

~~The following table disaggregates revenue by timing of revenue recognition and is reconciled to reportable segment revenues as follows:~~

Three Months Ended March 31, 2021 Three Months Ended March 31, 2020
Franchise Company-owned Franchise Company-owned
(Dollars in thousands)
Revenue recognized at a point in time:
Service $ 0 $ 24,645 $ 0 $ 78,387
Product 13,079 7,691 15,318 19,559
Total revenue recognized at a point in time $ 13,079 $ 32,336 $ 15,318 $ 97,946
Revenue recognized over time:
Royalty and other franchise fees $ 17,955 $ 0 $ 16,487 $ 0
Advertising fund fees (refunds), net (1) 5,580 0 (7,789) 0
Franchise rental income 31,317 0 31,821 0
Total revenue recognized over time 54,852 0 40,519 0
Total revenue $ 67,931 $ 32,336 $ 55,837 $ 97,946

~~(1)Fiscal year 2020 includes the refund of $14.9 million of previously collected cooperative advertising fees. Cooperative advertising fees were not refunded in fiscal year 2021.~~

Nine Months Ended March 31, 2021 Nine Months Ended March 31, 2020
Franchise Company-owned Franchise Company-owned
(Dollars in thousands)
Revenue recognized at a point in time:
Service $ 0 $ 90,040 $ 0 $ 322,133
Product 41,057 27,608 45,287 79,229
Total revenue recognized at a point in time $ 41,057 $ 117,648 $ 45,287 $ 401,362
Revenue recognized over time:
Royalty and other franchise fees $ 46,589 $ 0 $ 52,721 $ 0
Advertising fund fees 14,804 0 13,341 0
Franchise rental income 95,885 0 96,875 0
Total revenue recognized over time 157,278 0 162,937 0
Total revenue $ 198,335 $ 117,648 $ 208,224 $ 401,362

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

March 31,
2021 June 30,
2020 Balance Sheet Classification
(Dollars in thousands)
Receivables from contracts with customers, net $ 22,106 $ 22,991 Accounts receivable, net
Broker fees 19,599 20,516 Other assets
Deferred revenue:
Current
Gift card liability $ 2,336 $ 2,543 Accrued expenses
Deferred franchise fees unopened salons 80 77 Accrued expenses
Deferred franchise fees open salons 5,929 5,537 Accrued expenses
Total current deferred revenue: $ 8,345 $ 8,157
Non-current
Deferred franchise fees unopened salons $ 7,656 $ 11,855 Other non-current liabilities
Deferred franchise fees open salons 33,001 33,623 Other non-current liabilities
Total non-current deferred revenue $ 40,657 $ 45,478


	March 31, 2022		June 30, 2021		Balance Sheet Classification

	(Dollars in thousands)

Receivables from contracts with customers, net	$	10,209	$	19,112	Receivables, net
Broker fees	16,515		19,254		Other assets

Deferred revenue:
Current
Gift card liability	$	2,097	$	2,240	Accrued expenses
Deferred franchise fees unopened salons	25		40		Accrued expenses
Deferred franchise fees open salons	5,801		5,884		Accrued expenses
Total current deferred revenue	$	7,923	$	8,164
Non-current
Deferred franchise fees unopened salons	$	3,778	$	6,571	Other non-current liabilities
Deferred franchise fees open salons	28,473		32,365		Other non-current liabilities
Total non-current deferred revenue	$	32,251	$	38,936

1210

Receivables relate primarily to payments due for royalties, franchise fees, advertising fees, rent, franchise 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. The following table is a rollforward of the allowance for doubtful accounts for the period (in thousands):


Balance as of June 30, ~~2020~~2021	$	~~6,899~~7,774
~~Provision~~Benefit to reserve for doubtful accounts (1)	~~792~~ (88)
Provision for franchisee rent (2)	~~907~~847
Reclass of accrued rent (3)	396
Write-offs	~~(1,436)~~(1,600)
Balance as of March 31, ~~2021~~2022	$	~~7,162~~7,329

_______________________________________________________________________________

(1)The ~~provision~~benefit to reserve for doubtful accounts is recognized as ~~General~~general and administrative ~~expense~~ in the unaudited Condensed Consolidated Statement of Operations.

(2)The provision for franchisee rent is recognized as ~~Rent~~rent in the unaudited Condensed Consolidated Statement of Operations.

(3)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 were billed in fiscal year 2022 and the related accrual was reclassified to the allowance for doubtful accounts.

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~~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 (in thousands):


Balance as of June 30, ~~2020~~2021	$	~~20,516~~19,254
Additions	~~1,573~~25
Amortization	~~(2,369)~~(2,398)
Write-offs	~~(121)~~(366)
Balance as of March 31, ~~2021~~2022	$	~~19,599~~16,515

~~Deferred revenue includes the gift card liability and~~The decrease in non-current deferred franchise fees for unopened salons ~~and open salons. Gift card revenue for the three months ended~~from June 30, 2021 to March 31, ~~2021 and 2020 was $0.3 and $0.8~~2022 is primarily due to $1.9 million ~~respectively, and for~~of deferred fees related to terminated development agreements being recognized as fees in the unaudited Condensed Consolidated Statement of Operations in the nine months ended March 31, ~~2021 and 2020~~2022, of which $0.1 million was ~~$0.7 and $2.3 million, respectively.~~recognized in the third quarter. 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, ~~2021~~2022 and ~~2020~~2021 was $1.6 and ~~$1.4~~$1.6 million, respectively, and for the nine months ended March 31, ~~2021~~2022 and ~~2020~~2021 was $4.9 and ~~$3.8~~$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, ~~2021~~2022 is as follows (in thousands):

Remainder of 2021 $ 1,505
2022 5,901
2023 5,725
2024 5,483
2025 5,092
Thereafter 15,224
Total $ 38,930


Remainder of 2022	$	1,503
2023	5,731
2024	5,489
2025	5,100
2026	4,632
Thereafter	11,819
Total	$	34,274

1311

3. ~~TBG RESTRUCTURING AND DISCONTINUED OPERATIONS:~~

~~In October 2017, the Company sold substantially all of~~ ~~its mall-based salon business in~~ ~~North America,~~ ~~representing 858 salons, to The Beautiful Group (TBG).~~ The Company classified the results of its mall-based business as discontinued operations in the unaudited Condensed Consolidated Statement of Operations. Included in discontinued operations in fiscal year 2020 are adjustments to actuarial assumptions related to the discontinued operations. Other than the items presented in the unaudited Consolidated Statement of Cash Flows, there were no other significant non-cash operating activities or non-cash investing activities related to discontinued operations for the nine months ended March 31, 2021 and 2020.

For the three and nine months ended March 31, 2020, the Company recorded $0.1 and $2.4 million of professional fees and restructuring charges related to the Company assisting TBG with operating expenses to mitigate the risk of default associated with TBG's lease obligations. In the second quarter of fiscal year 2020, TBG transferred 207 of its North American mall-based salons to the Company. The 207 North American mall-based salons transferred were the salons that the Company was the guarantor of the lease obligation. As of March 31, 2021, prior to any mitigation efforts which may be available, the Company remains liable for up to approximately $12 million related to its mall-based salon lease commitments on the 62 salons that remain open, an $11 million reduction from June 30, 2020. The commitments are included in our lease liabilities.

4.~~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), 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. 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.

For the three and nine months ended March 31, 2021, there were 972,485 and 511,970, respectively, and for the three and nine months ended March 31, 2020 there were 663,636 and 1,145,053, respectively, common stock equivalents of dilutive common stock excluded in the diluted earnings per share calculations due to the net loss from continuing operations.

The computation of weighted average shares outstanding, assuming dilution, excluded 1,261,200 and 670,997 of stock-based awards during the three months ended March 31, 2021 and 2020, respectively, and 2,240,743 and 174,698 of stock-based awards during the nine months ended March 31, 2021 and 2020, respectively, as they were not dilutive under the treasury stock method.

5.~~SHAREHOLDERS’~~SHAREHOLDERS' EQUITY:

Stock-Based Employee Compensation:

During the three and nine months ended March 31, ~~2021,~~2022, the Company granted various equity awards including RSUs, ~~PSUs~~SOs, and ~~SOs.~~

~~A summary of equity awards granted is~~SARs as follows:

Three Months Ended March 31, 2021 Nine Months Ended March 31, 2021
Restricted stock units 47,303 891,825
Performance-based restricted stock units 0 62,290
Stock option units 0 1,458,680


	Three Months Ended March 31, 2022	Nine Months Ended March 31, 2022

Restricted stock units (RSUs)	54,545	827,841

Stock options (SOs)	92,500	630,000
Stock appreciation rights (SARs)	112,500	600,000

The RSUs granted during the third quarter of fiscal year 2022 were granted to ~~employees~~a Board member who was appointed the chairman of the Board and vest on November 14, 2022. The RSUs granted during the nine months ended March 31, 2022 vest 20%, 20%, 60% over a three-year period subsequent to the grant date or cliff vest after a one-year period subsequent to the grant date. The SOs and SARs granted during the third quarter of fiscal year 2022 were granted to newly appointed members of the Company's executive team. The SOs and SARs granted during the three and nine months ended March 31, ~~2021~~2022 vest ~~in equal amounts~~20%, 20%, 60% over a three-year period subsequent to the grant ~~date, cliff vest after a one-year period, cliff vest after a three-year period or cliff vest after a five-year period subsequent to the grant~~ date. ~~The CEO, who was appointed in October 2020, was granted 0.4 million "sign-on" RSUs that vest pro-rated over one year.~~

The PSUs granted to employees have a three-year performance period ending June 30, 2023 linked to the Company's stock price reaching a specified volume weighted average closing price for a 50-day period that ends on June 30, 2023. The PSUs granted have a maximum vesting percentage of 200% based on the level of performance achieved for the respective award.

The SOs granted during the nine months ended March 31, 2021 were granted in connection with the appointment of the Company's CEO and consist of options to purchase shares of the Company's common stock. The SOs are subject to both a four-year service-based vesting condition and a performance-based vesting condition. Additionally, 0.4 million SOs are matching options that vest on the ~~fourth~~ ~~anniversary of employment up to the number of RSUs the CEO still holds of the "sign-on" RSUs.~~

Total compensation cost for stock-based payment arrangements totaling ~~$1.7~~$0.5 and ~~$0.0~~$1.7 million for the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, respectively, and ~~$1.8~~$0.9 and ~~$2.1~~$1.8 million for the nine months ended March 31, 2022 and 2021, ~~and 2020,~~ respectively, ~~was~~were recorded within ~~General~~general and administrative expense on the unaudited Condensed Consolidated Statement of Operations. In the nine months ended March 31, 2022 and 2021, stock compensation includes a ~~$2.4 million~~ benefit ~~from the forfeiture of awards~~ related to ~~the departure~~executive forfeitures of ~~the Company's former CEO.~~$2.0 and $2.7 million, respectively.

Share ~~Repurchases:~~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, ~~2021,~~2022, the Company ~~did 0t repurchase~~received gross proceeds of $38.4 million related to the "at-the-market" offering and paid fees to sales agents and other fees of $1.2 million. Net proceeds from sales of shares under the previously approved stock repurchase program. During the nine months ended March 31, 2020, the Company repurchased 1.5 million shares for $26.4 million under a previously approved stock repurchase program. At March 31, 2021, $54.6 million remains outstanding under the approved stock repurchase program."at-the-market" program, if any, may be used to, among other things, fund working capital requirements, repay debt and support growth strategies.

1512

6.4. INCOME TAXES:

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

Three Months Ended March 31, Nine Months Ended March 31,
2021 2020 2021 2020
(Dollars in thousands)
Income tax benefit $ 333 $ 979 $ 1,368 $ 5,783
Effective tax rate 3.0 % 1.4 % 1.7 % 5.5 %


	Three Months Ended March 31,						Nine Months Ended March 31,
	2022			2021			2022			2021

	(Dollars in thousands)




Income tax benefit	$	1,270		$	333		$	1,482		$	1,368
Effective tax rate	4.4		%	3.0		%	3.3		%	1.7		%

The recorded tax ~~provisions~~benefits and effective tax rates for the three and nine months ended March 31, ~~2021~~2022 and ~~2020~~2021 were different than what would normally be expected primarily due to the impact of the deferred tax valuation allowance.

The Company is no longer subject to IRS examinations for years before 2014. Furthermore, with limited exceptions, the Company is no longer subject to state and international income tax examinations by tax authorities for years before 2012.

7.5. 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 non-payment of rent and associated charges. Further, similar to other large retail employers, the Company has been faced with allegations of purported class-wide consumer and wage and hour violations. ~~Litigation~~In the three and nine months ended March 31, 2022, the Company recorded $1.0 and $2.0 million of potential settlement exposure related to litigation, respectively, of which $1.1 million was paid during the year. The Company's accrual related to potential settlement fees was $0.9 million as of March 31, 2022. Included in the charge in the third quarter is litigation brought in the 11th Judicial Circuit, St. Charles County, Missouri, in which the Company challenged a landlord regarding a lease the Company secured but the landlord leased to another tenant. The landlord in the case prevailed and the court ordered the Company to pay the landlord $0.5 million in attorney’s fees. The Company requested leave to appeal and plans to vigorously pursue overturning this judgment. In addition, the Company's existing 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 commercial 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, Opensalon® Pro. The Company's accrual related to the agreement was $2.6 and $3.0 million as of March 31, 2022 and June 30, 2021, respectively. Other 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 ~~incur judgments~~ or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period. The Company is a defendant in two wage and hour lawsuits in California. The first, a class action in US District Court, alleges various violations of the California Labor Code, including, but not limited to failure to pay wages, failure to permit rest breaks, failure to pay all wages due on termination of employment, waiting time penalties, failure to provide accurate wage statements and violation of the business and professions code. This case has been preliminarily settled, pending approval of the court and class, for $2.1 million. The second, a class action filed in California Superior Court, alleges various violations of the California Labor Code as well as PAGA penalties. Barring successful objection from plaintiffs’ attorneys to the first class action, the second case will be subsumed into the first case’s settlement. As of June 30, 2020 and March 31, 2021, $2.1 million was included within accrued expenses on the unaudited Condensed Consolidated Balance Sheet related to these class action lawsuits. In addition, our existing point-of-sale system supplier has challenged the development of certain parts of our technology systems in litigation brought in the Northern District of California, case No. 20-cv-02181-MMC. We have vigorously denied the allegations made by this third-party supplier and have asserted certain counterclaims against the third party. However, the dispute regarding our ownership and involvement of certain key personnel may be costly and distracting, and the outcome is currently uncertain. The Company has not recorded an expense related to damages in connection with these matters because any potential loss is not currently probable or reasonably estimable under U.S. GAAP. Additionally, the Company is unable to reasonably estimate the range of loss, if any, that may result from these matters.

1613

8.6. CASH, CASH EQUIVALENTS AND RESTRICTED CASH:

The table below reconciles the cash and cash equivalents balances and restricted cash balances, recorded inwithin other current assets ~~from~~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:


		March 31, 2021		June 30, 2020			March 31, 2022		June 30, 2021

		(Dollars in thousands)					(Dollars in thousands)

Cash and cash equivalents	Cash and cash equivalents	$	34,510	$	113,667	Cash and cash equivalents	$	25,630	$	19,191
Restricted cash, included in Other current assets (1)		5,859		9,213
Restricted cash, included in other current assets (1)						Restricted cash, included in other current assets (1)	8,068		9,961
Total cash, cash equivalents and restricted cash	Total cash, cash equivalents and restricted cash	$	40,369	$	122,880	Total cash, cash equivalents and restricted cash	$	33,698	$	29,152

(1)Restricted cash within ~~Other~~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.

~~9. GOODWILL:~~

~~The table below contains details related to the Company's goodwill:~~


	~~Franchise Reporting Unit~~

	~~(Dollars in thousands)~~

~~Goodwill, net at June 30, 2020~~	$	~~227,457~~
~~Translation rate adjustments~~	~~1,764~~


~~Goodwill, net at March 31, 2021~~	$	~~229,221~~

1714

~~10. LEASES~~7. 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 some of its corporate facilities under operating leases. The original terms of the salon leases range from 1 to 20 years with many leases renewable for an additional 5 to ~~10 year~~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~~rent includes the following:

Three Months Ended March 31, Nine Months Ended March 31,
2021 2020 2021 2020
(Dollars in thousands)
Minimum rent $ 8,400 $ 13,571 $ 28,605 $ 48,638
Percentage rent based on sales 3 298 78 2,145
Real estate taxes and other expenses 1,989 3,672 7,147 9,842
Lease termination (benefit) expense (1) (154) 44 6,484 123
Lease liability benefit (2) (3,009) 0 (11,295) 0
Corporate segment rent 671 904 2,046 1,909
Franchise segment non-reimbursable rent 101 176 1,063 767
Total $ 8,001 $ 18,665 $ 34,128 $ 63,424


	Three Months Ended March 31,				Nine Months Ended March 31,
	2022		2021		2022		2021

	(Dollars in thousands)

Office and warehouse rent	$	987	$	1,351	$	3,904	$	3,748
Lease termination expense (benefit) (1)	225		(147)		1,803		6,523
Lease liability benefit (2)	(357)		(3,009)		(3,284)		(11,295)
Franchise salon rent (3)	(464)		297		111		1,455
Company-owned salon rent	855		9,509		3,603		33,697
Total	$	1,246	$	8,001	$	6,137	$	34,128

(1)During the three ~~and~~months ended March 31, 2022, the Company incurred costs of $0.2 million to exit salons before the lease end date in order to relieve the Company of future lease obligations. During the nine months ended March 31, ~~2021,~~2022, the Company ~~terminated the leases for 15 and 244 company-owned salons, respectively,~~paid $0.9 million to exit its distribution centers before the lease end ~~dates. During the three~~dates and ~~nine months ended March 31, 2020, the Company terminated the leases for 3 and 60 company-owned~~incurred costs of $0.9 million to exit salons ~~respectively,~~ before the lease end ~~dates.~~date in order to relieve the Company of future lease obligations. For the three and nine months ended March 31, 2021, lease termination fees include $0.3 and $4.9 million, respectively, of early termination payments to close salons before the lease end date to relieve the Company of future lease ~~obligations. For the three~~obligations and ~~nine months ended March 31, 2021, lease termination fees also include~~ $(0.5) and $1.5 million, respectively, of adjustments to accrue future lease payments for salons that are no longer operating. The early termination payments made in the nine months ended March 31, 2021 decreased the future minimum rent liability by $9.5 million plus saved the Company from the associated real estate taxes and other lease expenses.

(2)~~For the three and nine months ended March 31, 2021, upon~~Upon termination of previously impaired leases, the Company ~~derecognized~~derecognizes the corresponding ROU assets ~~of $3.2 and $13.3 million, respectively,~~ and lease liabilities ~~of $5.2 and $19.7 million, respectively, that resulted~~which results in a net ~~gain of $2.0 and $6.4 million, respectively.~~gain. In addition, the Company ~~recognized~~recognizes a benefit from lease liabilities decreasing in excess of previously impaired ROU ~~assets.~~assets for ongoing leases that were previously impaired.

(3)Includes the provision for uncollectible franchisee rent. The ~~benefit recognized was $1.0 and $4.9 million~~credit in the three ~~and nine~~ months ended March 31, ~~2021, respectively.~~2022 relates to lower estimated exposure.

The Company leases salon premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees. All ~~lease~~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, ~~2021~~2022 and ~~2020,~~2021, franchise rental income and franchise rent expense were $32.7 and $31.3 million, respectively and ~~$31.8~~$100.2 and $95.9 million, ~~respectively. For~~respectively, for the nine months ended March 31, ~~2021~~2022 and ~~2020, franchise rental income and franchise rent expense were $95.9 and $96.9 million.~~2021. These leases generally have lease terms of approximately 5five years. The Company expects to renew SmartStyle and ~~Supercuts~~some franchise leases upon expiration. Other leases are expected to be renewed by the franchisee upon expiration. This represents a Board-approved change in estimate that occurred in the second quarter of fiscal year 2021 and was intended to reduce lease exposure. The change in estimate resulted in a decrease to lease liabilities and right of use assets of $72.9 million, with no impact to net income.

1815

For ~~franchise and company-owned~~ salon 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 any accrued lease payments and unamortized lease incentives received, if any. ~~The Company's consolidated ROU asset balance was $629.0 and $786.2 million as of March 31, 2021 and June 30, 2020, respectively.~~ For leases classified as operating leases, 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 ~~6.44~~6.15 and ~~6.87~~6.44 years and the weighted average discount rate was ~~4.07%~~4.22% and ~~3.95%~~4.11% for all salon operating leases as of March 31, ~~2021~~2022 and June 30, ~~2020,~~2021, respectively.

A ~~lessee’s~~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, primarily due to the COVID-19 pandemic, resulted in an ASC 360-10-35-21 triggering event. 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.

~~Step two~~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~~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;~~include the market rent of comparable properties ~~based on recently negotiated leases as applicable, the asset group’s projected sales for properties with no recently negotiated leases,~~ and a discount rate.

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 ultimate severity and longevity of the COVID-19 pandemic is unknown and therefore, 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. In the three ~~and nine~~ months ended March 31, 2022 and 2021, the Company recognized a long-lived impairment charge of $0.3 and $0.8 million, respectively, which included $0.3 and $0.3 million, respectively, related to the ROU assets, in the unaudited Condensed Consolidated Statement of Operations. In the nine months ended March 31, 2022 and 2021, the Company recognized a long-lived impairment charge of $0.5 and $9.8 million, respectively, which included ~~$0.3~~$0.5 and $6.3 million, respectively, related to the ~~right of use~~ROU assets, in the unaudited Condensed Consolidated Statement of Operations. The impairments recorded ~~for the three and nine months ended March 31, 2021~~ were primarily the result of triggering events identified on certain underperforming salons, salons that were identified to close in the year, and certain salons where franchisees were unable to fulfill their rent obligations. 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 assets, including its ROU assets. The Company's projections of future operating performance do not anticipate future salon closures due to the COVID-19 pandemic. However, the ultimate severity and longevity of the COVID-19 pandemic is unknown, therefore; 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.

1916

As of March 31, ~~2021,~~2022, 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 (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 2021 $ 30,985 $ 6,537 $ 976 $ 38,498 $ (30,985) $ 7,513
2022 116,803 22,514 3,566 142,883 (116,803) 26,080
2023 103,418 16,936 3,550 123,904 (103,418) 20,486
2024 91,108 11,803 3,616 106,527 (91,108) 15,419
2025 77,655 5,911 3,683 87,249 (77,655) 9,594
Thereafter 216,156 12,559 27,331 256,046 (216,156) 39,890
Total future obligations $ 636,125 $ 76,260 $ 42,722 $ 755,107 $ (636,125) $ 118,982
Less amounts representing interest 78,998 6,462 10,189 95,649
Present value of lease liabilities $ 557,127 $ 69,798 $ 32,533 $ 659,458
Less current lease liabilities 99,351 21,705 2,168 123,224
Long-term lease liabilities $ 457,776 $ 48,093 $ 30,365 $ 536,234


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 2022	$	31,816	$	1,091	$	584	$	33,491	$	(31,816)	$	1,675
2023	117,500		3,743		2,365		123,608		(117,500)		6,108
2024	102,920		2,133		1,486		106,539		(102,920)		3,619
2025	86,453		735		1,525		88,713		(86,453)		2,260
2026	73,152		414		1,563		75,129		(73,152)		1,977
Thereafter	184,351		370		6,498		191,219		(184,351)		6,868
Total future obligations	$	596,192	$	8,486	$	14,021	$	618,699	$	(596,192)	$	22,507
Less amounts representing interest	71,797		396		2,016		74,209
Present value of lease liabilities	$	524,395	$	8,090	$	12,005	$	544,490
Less current lease liabilities	101,655		3,818		1,900		107,373
Long-term lease liabilities	$	422,740	$	4,272	$	10,105	$	437,117

2017

~~11.~~8. FINANCING ARRANGEMENTS:

The ~~Company’s long-term~~Company's debt consists of the following:

Revolving Credit Facility

Maturity Date March 31,
2021 March 31,
2021 June 30,
2020
(Fiscal Year) (Interest rate %) (Dollars in thousands)
Revolving credit facility 2023 5.00% $ 177,500 $ 177,500


	Maturity Date	March 31, 2022	March 31, 2022		June 30, 2021

	(Fiscal Year)	(Interest rate %)	(Dollars in thousands)

Revolving credit facility	2023	5.125%	$	193,814	$	186,911

At March 31, ~~2021,~~2022, cash and cash equivalents totaled ~~$34.5~~$25.6 million. As of March 31, ~~2021,~~2022, the Company has ~~$177.5~~$193.8 million of outstanding borrowings under a ~~$295.0~~$291.3 million revolving credit facility. The credit facility decreased $3.1 million from $294.4 million as of June 30, 2021 in accordance with the bulk sale provisions in the revolving credit facility agreement, due to the sale of secured inventory related to our transition to third-party distribution partners. At March 31, ~~2021,~~2022, the Company ~~has~~had outstanding standby letters of credit under the revolving credit facility of ~~$18.7~~$15.7 million, primarily related to the Company's self-insurance program. The unused available credit under the revolving credit facility was ~~$98.8~~$81.8 million as of March 31, ~~2021.~~2022. The Company's liquidity ~~which~~per the agreement includes the unused available balance under the credit facility, ~~and~~ unrestricted cash and cash equivalents ~~totaled $133.3~~and the shortfall in the gap in expected proceeds from the sale of salon assets of $20.9 million as of March 31, ~~2021.~~2022. Total liquidity per the agreement was $128.3 million as of March 31, 2022. The revolving credit facility has a minimum liquidity covenant of $75.0 million. As of March 31, ~~2021,~~2022, the Company had cash, cash equivalents and restricted cash of ~~$40.4~~$33.7 million and current liabilities of ~~$203.2~~$352.0 million.

The Company iswas in compliance with all covenants and other requirements of the financing arrangements as of March 31, ~~2021 and believes it will continue~~2022. Management's current projected cash flows do not support the ability to berepay this obligation in ~~compliance for~~full at ~~least one year from our filing date.~~

~~Sale and Leaseback Transaction~~

~~The Company’s long-term~~maturity, however, management is working with advisors to determine alternative financing ~~liabilities consists of the following:~~

Maturity Date Interest Rate March 31,
2021 June 30,
2020
(Fiscal Year) (Dollars in thousands)
Financial liability - Salt Lake City Distribution Center 2034 3.30% $ 0 $ 16,773
Financial liability - Chattanooga Distribution Center 2034 3.70% 0 11,208
Long- term financing liability $ 0 $ 27,981

In fiscal year 2019, the Company sold its Salt Lake City and Chattanooga Distribution Centers to an unrelated party. At the time of the sale, the transactions were considered failed sale and leaseback transactions, as the Company had planned to lease the property for more than 75% of its economic life. The sale proceeds received from the buyer-lessor were recognized as a financial liability, which was reduced based on the rental payments made under the lease that were allocated between principal and interest. In the third quarter of fiscal year 2021, as a result of the Company exiting its wholesale product sales business, the Company informed the landlord of its intention to exit the leased spaces. Because the Company no longer plans to lease the distribution centers for the majority of the assets’ useful lives, these transactions are subsequently considered sale and leaseback transactions. As a result, the Company derecognized the financial liability of $28.5 million and the carrying value of the related assets of $13.6 million and recognized a gain of $14.9 million for the difference between the liability and asset. The gain on distribution centers was recorded to Interest income and other, net in the unaudited Condensed Consolidation Statement of Operations. As the leases for the 2 distribution centers meet the sale and leaseback criteria, the Company recognized a right of use asset and lease liability of $20.3 million on the unaudited Condensed Consolidated Balance Sheet as of March 31, 2021.arrangements.

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~~12.~~9. 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 March 31, ~~2021~~2022 and June 30, ~~2020,~~2021, the estimated fair value of the ~~Company’s~~Company's cash, cash equivalents, restricted cash, receivables, inventory, deferred compensation assets and accounts payable ~~debt and long-term financial liabilities~~ approximated their carrying values. ~~The estimated fair values of the Company's debt and long-term financial liability are based on Level 2 inputs.~~

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

We measure certain assets, including the ~~Company’s~~Company's equity method investments, 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.

The following impairments were based on fair values using Level 3 inputs:


		Three Months Ended March 31,				Nine Months Ended March 31,					Three Months Ended March 31,				Nine Months Ended March 31,
		2021		2020		2021		2020			2022		2021		2022		2021

		(Dollars in thousands)									(Dollars in thousands)

Goodwill		$	0	$	40,164	$	0	$	40,164
Goodwill impairment (1)										Goodwill impairment (1)	$	16,000	$	—	$	16,000	$	—
Long-lived asset impairment (1)	Long-lived asset impairment (1)	833		1,208		9,817		3,851		Long-lived asset impairment (1)	327		833		542		9,817

(1)Long-lived asset impairment charges, including right of use and salon property and equipment, are separately stated on the unaudited Condensed Consolidated Statement of Operations for the three and nine months ended March 31, 2021. Long-lived salon property and equipment asset impairment charges are recorded in Depreciation and amortization in the unaudited Condensed Consolidated Statement of Operations for the three and nine months ended March 31, 2020. See Note 1 to the unaudited Condensed Consolidated Financial Statements.

2219

~~13.~~10. 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. Beginning in fiscal year 2022, corporate costs are included within the Franchise segment to reflect how the CODM reviews the business. The Company re-assessed its CODM conclusion in the second quarter of fiscal year 2022 as part of the CEO transition. As of March 31, 2022, the Company concluded the Interim CEO was the chief operating decision maker.

The ~~Company’s~~Company's reportable operating segments consisted of the following salons:


		March 31, 2021		June 30, 2020			March 31, 2022		June 30, 2021

FRANCHISE SALONS:	FRANCHISE SALONS:					FRANCHISE SALONS:
SmartStyle/Cost Cutters in Walmart Stores	SmartStyle/Cost Cutters in Walmart Stores	1,569		1,317		SmartStyle/Cost Cutters in Walmart Stores	1,667		1,666
Supercuts	Supercuts	2,357		2,508		Supercuts	2,316		2,386
Portfolio Brands ~~(1)~~	Portfolio Brands ~~(1)~~	1,233		1,217		Portfolio Brands ~~(1)~~	1,378		1,357
Total North American salons	Total North American salons	5,159		5,042		Total North American salons	5,361		5,409
Total International salons ~~(2)~~(1)	Total International salons ~~(2)~~(1)	158		167		Total International salons ~~(2)~~(1)	143		154
Total Franchise salons	Total Franchise salons	5,317		5,209		Total Franchise salons	5,504		5,563
as a percent of total Franchise and Company-owned salons	as a percent of total Franchise and Company-owned salons	86.6	%	76.1	%	as a percent of total Franchise and Company-owned salons	97.9	%	95.3	%

COMPANY-OWNED SALONS:	COMPANY-OWNED SALONS:					COMPANY-OWNED SALONS:
SmartStyle/Cost Cutters in Walmart Stores	SmartStyle/Cost Cutters in Walmart Stores	373		751		SmartStyle/Cost Cutters in Walmart Stores	52		91
Supercuts	Supercuts	124		210		Supercuts	19		35
Portfolio Brands ~~(1)~~	Portfolio Brands ~~(1)~~	267		505		Portfolio Brands ~~(1)~~	46		150
Mall-based (3)		62		166
Total Company-owned salons	Total Company-owned salons	826		1,632		Total Company-owned salons	117		276
as a percent of total Franchise and Company-owned salons	as a percent of total Franchise and Company-owned salons	13.4	%	23.9	%	as a percent of total Franchise and Company-owned salons	2.1	%	4.7	%

OWNERSHIP INTEREST LOCATIONS:	OWNERSHIP INTEREST LOCATIONS:					OWNERSHIP INTEREST LOCATIONS:
Equity ownership interest locations	Equity ownership interest locations	78		82		Equity ownership interest locations	76		78

Grand Total, System-wide	Grand Total, System-wide	6,221		6,923		Grand Total, System-wide	5,697		5,917

(1)~~Portfolio Brands was previously referred to as Signature Style.~~

~~(2)~~Canadian and Puerto Rican salons are included in the North American salon totals.

~~(3)The mall-based salons were acquired from TBG on December 31, 2019. They are included in continuing operations under the Company-owned operating segment from January 1, 2020.~~

As of March 31, ~~2021,~~2022, 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 SmartStyle®, Supercuts®, Cost Cutters®, and other regional trade names.

2320

Financial information concerning the Company's reportable operating segments is shown in the following tables:


	Three Months Ended March 31, 2022
	Franchise		Company-owned		Consolidated (1)

	(Dollars in thousands)

Revenues:
Royalties	$	15,799	$	—	$	15,799
Fees	3,364		—		3,364
Product sales to franchisees	1,293		—		1,293
Advertising fund contributions	8,078		—		8,078
Franchise rental income	32,666		—		32,666
Company-owned salon revenue	—		3,549		3,549
Total revenue	61,200		3,549		64,749

Operating expenses:
Cost of product sales to franchisees	2,598		—		2,598
Inventory reserve (1)	—		—		6,420
General and administrative	14,934		635		15,569
Rent	327		919		1,246
Advertising fund expense	8,078		—		8,078
Franchise rent expense	32,666		—		32,666
Company-owned salon expense	—		5,292		5,292
Depreciation and amortization	1,592		405		1,997
Long-lived asset impairment	322		5		327
Goodwill impairment	16,000		—		16,000
Total operating expenses	76,517		7,256		90,193
Operating loss	$	(15,317)	$	(3,707)	$	(25,444)

_______________________________________________________________________________

Three Months Ended March 31, 2021
Franchise Company-owned Corporate Consolidated
(Dollars in thousands)
Revenues:
Service $ 0 $ 24,645 $ 0 $ 24,645
Product 13,079 7,691 0 20,770
Royalties and fees 23,535 0 0 23,535
Franchise rental income 31,317 0 0 31,317
Total revenue 67,931 32,336 0 100,267
Operating expenses:
Cost of service 0 15,821 0 15,821
Cost of product 11,148 10,120 0 21,268
Site operating expenses 5,600 7,766 0 13,366
General and administrative 7,450 1,525 15,607 24,582
Rent 101 7,229 671 8,001
Franchise rent expense 31,317 0 0 31,317
Depreciation and amortization 333 1,687 1,600 3,620
Long-lived asset impairment 22 811 0 833
Total operating expenses 55,971 44,959 17,878 118,808
Operating income (loss) 11,960 (12,623) (17,878) (18,541)
Other (expense) income:
Interest expense 0 0 (3,163) (3,163)
Loss from sale of salon assets to franchisees, net 0 0 (4,575) (4,575)
Interest income and other, net 0 0 15,099 15,099
Income (loss) from continuing operations before income taxes $ 11,960 $ (12,623) $ (10,517) $ (11,180)
(1)This charge, primarily related to reserving for personal protective equipment acquired as a result of the COVID-19 pandemic, relates to the wind down of our distribution centers and is reviewed separately from the segment results by the CODM. Consolidated results will not cross foot as the inventory reserve is not part of the Company's segments.

Three Months Ended March 31, 2020
Franchise Company-owned Corporate Consolidated
(Dollars in thousands)
Revenues:
Service $ 0 $ 78,387 $ 0 $ 78,387
Product 15,318 19,559 0 34,877
Royalties and fees 8,698 0 0 8,698
Franchise rental income 31,821 0 0 31,821
Total revenue 55,837 97,946 0 153,783
Operating expenses:
Cost of service 0 54,824 0 54,824
Cost of product 11,452 10,220 0 21,672
Site operating expenses (7,789) 11,449 0 3,660
General and administrative 8,657 4,566 18,648 31,871
Rent 176 17,585 904 18,665
Franchise rent expense 31,821 0 0 31,821
Depreciation and amortization 292 9,799 268 10,359
TBG mall location restructuring 146 0 0 146
Goodwill impairment 0 40,164 0 40,164
Total operating expenses 44,755 148,607 19,820 213,182
Operating income (loss) 11,082 (50,661) (19,820) (59,399)
Other (expense) income:
Interest expense 0 0 (1,712) (1,712)
Loss from sale of salon assets to franchisees, net 0 0 (7,858) (7,858)
Interest income and other, net 0 0 148 148
Income (loss) from continuing operations before income taxes $ 11,082 $ (50,661) $ (29,242) $ (68,821)


	Three Months Ended March 31, 2021
	Franchise		Company-owned		Consolidated

	(Dollars in thousands)

Revenues:
Royalties	$	12,835	$	—	$	12,835
Fees	5,120		—		5,120
Product sales to franchisees	13,079		—		13,079
Advertising fund contributions	5,580		—		5,580
Franchise rental income	31,317		—		31,317
Company-owned salon revenue	—		32,336		32,336
Total revenue	67,931		32,336		100,267

Operating expenses:
Cost of product sales to franchisees	11,168		—		11,168
General and administrative	23,057		1,525		24,582
Rent	772		7,229		8,001
Advertising fund expense	5,580		—		5,580
Franchise rent expense	31,317		—		31,317
Company-owned salon expense	—		33,707		33,707
Depreciation and amortization	1,933		1,687		3,620
Long-lived asset impairment	22		811		833

Total operating expenses	73,849		44,959		118,808
Operating loss	$	(5,918)	$	(12,623)	$	(18,541)

2421

Nine Months Ended March 31, 2021
Franchise Company-owned Corporate Consolidated
(Dollars in thousands)
Revenues:
Service $ 0 $ 90,040 $ 0 $ 90,040
Product 41,057 27,608 0 68,665
Royalties and fees 61,393 0 0 61,393
Franchise rental income 95,885 0 0 95,885
Total revenue 198,335 117,648 0 315,983
Operating expenses:
Cost of service 0 66,441 0 66,441
Cost of product 33,117 21,723 0 54,840
Site operating expenses 14,858 22,097 0 36,955
General and administrative 23,055 6,936 47,428 77,419
Rent 1,063 31,019 2,046 34,128
Franchise rent expense 95,885 0 0 95,885
Depreciation and amortization 896 11,080 5,408 17,384
Long-lived asset impairment 726 9,091 0 9,817
Total operating expenses 169,600 168,387 54,882 392,869
Operating income (loss) 28,735 (50,739) (54,882) (76,886)
Other (expense) income:
Interest expense 0 0 (10,626) (10,626)
Loss from sale of salon assets to franchisees, net 0 0 (8,463) (8,463)
Interest income and other, net 0 0 15,616 15,616
Income (loss) from continuing operations before income taxes $ 28,735 $ (50,739) $ (58,355) $ (80,359)


	Nine Months Ended March 31, 2022
	Franchise		Company-owned		Consolidated (1)

	(Dollars in thousands)

Revenues:
Royalties	$	48,526	$	—	$	48,526
Fees	11,496		—		11,496
Product sales to franchisees	11,729		—		11,729
Advertising fund contributions	24,213		—		24,213
Franchise rental income	100,200		—		100,200
Company-owned salon revenue	—		16,597		16,597
Total revenue	196,164		16,597		212,761

Operating expenses:
Cost of product sales to franchisees	14,129		—		14,129
Inventory reserve (1)	—		—		6,420
General and administrative	51,099		2,243		53,342
Rent	3,359		2,778		6,137
Advertising fund expense	24,213		—		24,213
Franchise rent expense	100,200		—		100,200
Company-owned salon expense	—		18,304		18,304
Depreciation and amortization	4,718		1,128		5,846
Long-lived asset impairment	450		92		542
Goodwill impairment	16,000		—		16,000
Total operating expenses	214,168		24,545		245,133
Operating loss	$	(18,004)	$	(7,948)	$	(32,372)

_______________________________________________________________________________

(1)This charge, primarily related to reserving for personal protective equipment acquired as a result of the COVID-19 pandemic, relates to the wind down of our distribution centers and is reviewed separately from the segment results by the CODM. Consolidated results will not cross foot as the inventory reserve is not part of the Company's segments.

Nine Months Ended March 31, 2020
Franchise Company-owned Corporate Consolidated
(Dollars in thousands)
Revenues:
Service $ 0 $ 322,133 $ 0 $ 322,133
Product 45,287 79,229 0 124,516
Royalties and fees 66,062 0 0 66,062
Franchise rental income 96,875 0 0 96,875
Total revenue 208,224 401,362 0 609,586
Operating expenses:
Cost of service 0 212,664 0 212,664
Cost of product 34,804 40,453 0 75,257
Site operating expenses 13,341 49,591 0 62,932
General and administrative 25,990 22,263 56,934 105,187
Rent 767 60,748 1,909 63,424
Franchise rent expense 96,875 0 0 96,875
Depreciation and amortization 662 21,844 4,980 27,486
TBG mall location restructuring 2,368 0 0 2,368
Goodwill impairment 0 40,164 0 40,164
Total operating expenses 174,807 447,727 63,823 686,357
Operating income (loss) 33,417 (46,365) (63,823) (76,771)
Other (expense) income:
Interest expense 0 0 (4,615) (4,615)
Loss from sale of salon assets to franchisees, net 0 0 (26,125) (26,125)
Interest income and other, net 0 0 3,188 3,188
Income (loss) from continuing operations before income taxes $ 33,417 (46,365) $ (91,375) $ (104,323)


	Nine Months Ended March 31, 2021
	Franchise		Company-owned		Consolidated

	(Dollars in thousands)

Revenues:
Royalties	$	36,989	$	—	$	36,989
Fees	9,600		—		9,600
Product sales to franchisees	41,057		—		41,057
Advertising fund contributions	14,804		—		14,804
Franchise rental income	95,885		—		95,885
Company-owned salon revenue	—		117,648		117,648
Total revenue	198,335		117,648		315,983

Operating expenses:
Cost of product sales to franchisees	33,171		—		33,171
General and administrative	70,483		6,936		77,419
Rent	3,109		31,019		34,128
Advertising fund expense	14,804		—		14,804
Franchise rent expense	95,885		—		95,885
Company-owned salon expense	—		110,261		110,261
Depreciation and amortization	6,304		11,080		17,384
Long-lived asset impairment	726		9,091		9,817

Total operating expenses	224,482		168,387		392,869
Operating loss	$	(26,147)	$	(50,739)	$	(76,886)

2522

~~14.REVISION OF THIRD QUARTER 2020 UNAUDITED RESULTS:~~

During the fourth quarter of 2020, the Company identified an error in the calculation of the goodwill derecognition associated with the sale of salons to franchisees in the second quarter and third quarter. During the third quarter, goodwill derecognition was overstated by $2.4 million. As of March 31, 2020, the Company fully impaired its remaining Company-owned goodwill with the amount of goodwill impairment being overstated by $4.4 million in the third quarter. The Company assessed the applicable guidance issued by the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) and concluded these misstatements were not material, individually or in the aggregate, to the Company’s Unaudited Condensed Consolidated Financial Statements for the aforementioned interim periods. However, to facilitate comparisons among periods, the Company has decided to revise its previously issued second and third quarter unaudited condensed consolidated financial information.

Three Months Ended March 31, 2020
As Previously Reported Adjustments As Revised
(Dollars in thousands, except per share amounts)
Rent expense (1) $ 19,243 $ (578) $ 18,665
Goodwill impairment (2) 44,529 (4,365) 40,164
Operating loss (64,342) 4,943 (59,399)
Loss from sale of salon assets to franchisees, net (10,208) 2,350 (7,858)
Interest income and other, net (1,329) 1,477 148
Loss from continuing operations before income taxes (77,591) 8,770 (68,821)
Income tax benefit 2,253 (1,274) 979
Net loss (75,037) 7,496 (67,541)
Net loss per share (2.10) 0.22 (1.88)
Comprehensive loss (77,519) 7,496 (70,023)

Nine Months Ended March 31, 2020
As Previously Reported Adjustments As Revised
(Dollars in thousands, except per share amounts)
Rent expense (1) $ 64,002 $ (578) $ 63,424
Goodwill impairment (2) 44,529 (4,365) 40,164
Operating loss (81,714) 4,943 (76,771)
Loss from sale of salon assets to franchisees, net (21,760) (4,365) (26,125)
Interest income and other, net 3,188 0 3,188
Loss from continuing operations before income taxes (104,901) 578 (104,323)
Income tax benefit 5,904 (121) 5,783
Net loss (98,244) 457 (97,787)
Net loss per share (2.73) 0.01 (2.72)
Comprehensive loss (100,588) 457 (100,131)

~~The Company revised the amounts originally reported for the third quarter of fiscal year 2020 for the following items:~~

~~(1)~~Adjusted third quarter rent expense includes a $0.6 million benefit related to leases signed in the third quarter, but not identified until the fourth quarter. The net loss for the three and nine months ended March 31, 2020 were both impacted by the misstatement.

~~(2)~~During the third quarter, goodwill derecognition was overstated by $2.4 million. As of March 31, 2020, the Company impaired its remaining Company-owned goodwill, with the amount of goodwill impairment being overstated by $4.4 million. As the second quarter error which understated goodwill derecognition was not identified until the fourth quarter, goodwill impairment and loss from the sale of salons to franchisees, net were misstated in the third quarter. The Company recorded a $4.4 million decrease to goodwill impairment and a $2.4 million decrease to loss from the sale of salon assets to franchisees, net to correct the error. Net loss for the nine months ended March 31, 2020 was not misstated. However, goodwill impairment and the loss from the sales of salons to franchisees, net were misstated in the nine months ended March 31, 2020, with goodwill impairment overstated by $4.4 million and loss from the sale of salons to franchisees, net understated by $4.4 million.

Item 2. ~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of Operations

~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our consolidated financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. This MD&A should be read in conjunction with the MD&A included in our June 30, ~~2020~~2021 Annual Report on Form 10-K and other documents filed or furnished with the ~~Securities and Exchange Commission (SEC)~~SEC during the current fiscal year.

~~MANAGEMENT’S~~MANAGEMENT'S OVERVIEW

Regis Corporation (RGS) franchises ~~owns,~~hairstyling and ~~operates beauty salons.~~hair care salons throughout the United States, Canada, Puerto Rico and the United Kingdom. As of March 31, ~~2021,~~2022, the Company franchised, owned or held ownership interests in ~~6,221~~5,697 worldwide locations. Our locations consisted of ~~6,143~~5,621 system-wide North American and ~~International~~international salons, and in 7876 locations we maintained a non-controlling ownership interest less than 100 percent. Each of the ~~Company’s~~Company's salon concepts generally offer similar salon products and services and serve the mass market. As of March 31, ~~2021, we~~2022, the Company had ~~approximately 4,000 corporate~~735 employees worldwide.

~~Impact of~~ COVID-19 ~~on Business Operations~~Impact

During the ~~period~~periods ended March 31, 2022 and 2021, the ~~global coronavirus~~COVID-19 pandemic ~~(COVID-19)~~ had an adverse impact on operations, including prolonged government-mandated salon closures in California and Ontario, in addition to other U.S. states and Canadian provinces during the three and nine months ended March 31, 2021.operations. The COVID-19 pandemic continues to impact salon guest visits and franchisee staffing, resulting in a significant reduction in revenue and ~~traffic. Due~~profitability. In response to COVID-19, the Canada Emergency Wage Subsidy (CEWS), Canada Emergency Rent Subsidy (CERS) and the U.S. employee retention payroll tax credit were introduced for eligible employers. In fiscal years 2022 and 2021, the Company received $1.9 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. In fiscal year 2021, the Company recorded a $1.5 million benefit related to the ~~economic disruption caused by~~U.S. employee retention payroll tax credit. Additionally, in December 2021 the Company paid $2.5 million of social security contributions that had been deferred under the CARES Act. 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 ~~Company faces a greater degree~~short and long term is not currently estimable due to the uncertainty surrounding the duration of ~~uncertainty than normal in making judgments~~the pandemic, the availability and ~~estimates needed~~acceptance of preventative vaccines, the emergence and impact of new COVID-19 variants, and changing government restrictions. Additional impacts to ~~apply~~ the ~~Company's significant accounting policies. Actual results and outcomes~~business may ~~differ from management's estimates and assumptions.~~arise that we are not aware of currently.

Merchandising Strategy

As part of the Company's transformation to focus on managing and nurturing brands, and in line with its capital-light business, a new merchandise strategy to outsource product distribution was adopted in the third ~~quarter.~~quarter of fiscal year 2021. The Company ~~plans to shifts~~has shifted its product business from a ~~whole-sale~~wholesale model to a third-party distribution model. Management expects the change will positively impact franchisees by providing them access to industry-leading pricing, loyalty programs, promotional benefits, educational assets, and ongoing support. The Company will receive a fee from the third-party distributors which is included in fees on the interim unaudited Condensed Consolidated Statement of Operations. The change ~~will results~~is expected to result in ~~a decrease in~~product sales to franchisees providing significantly less revenue ~~cost~~by the end of ~~product and general and administrative expense going forward.~~fiscal year 2022.

CRITICAL ACCOUNTING POLICIES

The interim unaudited Condensed Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the interim unaudited Condensed Consolidated Financial Statements, we are required to make various judgments, estimates and assumptions that could have a significant impact on the results reported in the interim unaudited Condensed Consolidated Financial Statements. We base these estimates on historical experience and other assumptions believed to be reasonable under the circumstances. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Changes in these estimates could have a material effect on our interim unaudited Condensed Consolidated Financial Statements.

Our significant accounting policies can be found in Note 1 to the Consolidated Financial Statements contained in Part II, Item 8 of the June 30, ~~2020~~2021 Annual Report on Form 10-K, as well as Notes 1 and 2 to the unaudited Condensed Consolidated Financial Statements contained within this Quarterly Report on Form 10-Q. We believe the accounting policies related to the valuation of goodwill, the valuation and estimated useful lives of long-lived assets, estimates used in relation to tax liabilities and deferred taxes are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations. Discussion of each of these policies is contained under ~~“Critical~~"Critical Accounting ~~Policies”~~Policies" in Part II, Item 7 of our June 30, ~~2020~~2021 Annual Report on Form 10-K. Our policies related to revenue recognition guidance ~~ASC Topic 606,~~ can be found in Note 2 to the unaudited Condensed Consolidated Financial Statements.

2823

RESULTS OF OPERATIONS

~~Impact of salons sold to franchisees on operations.~~

~~In the three and nine months ended March 31, 2021, the Company sold 126 and 408, respectively, company-owned salons to franchisees. The impact of these transactions are as follows:~~

Three Months Ended March 31, Increase (Decrease) Nine Months Ended March 31, Increase (Decrease)
2021 2020 2021 2020
(Dollars in thousands)
Salons sold to franchisees 126 375 (249) 408 1,363 (955)
Cash proceeds received $ 595 $ 18,502 $ (17,907) $ 7,743 $ 87,916 $ (80,173)
(Loss) gain on venditions, excluding goodwill derecognition $ (4,575) $ 9,628 $ (14,203) $ (8,463) $ 50,841 $ (59,304)
Non-cash goodwill derecognition — (17,486) 17,486 — (76,966) 76,966
Loss from sale of salon assets to franchisees, net $ (4,575) $ (7,858) $ 3,283 $ (8,463) $ (26,125) $ 17,662

System-wide results

As ~~we continue to transition to~~ an asset-light franchise platform, our results ~~will be more~~are impacted by our system-wide sales, which include sales by all points of distribution, whether owned by our franchisees or the ~~Company or our franchisees.~~Company. While we do not record sales by franchisees as revenue, and such sales are not included in our ~~consolidated financial statements,~~unaudited Condensed Consolidated Financial Statements, we believe that this operating measure is important in obtaining an understanding of our financial performance. We believe system-wide sales information aids in understanding how we derive royalty revenue and in evaluating performance.

System-wide same-store sales (1) by concept are detailed in the table below:


		Three Months Ended March 31,				Nine Months Ended March 31,					Three Months Ended March 31,				Nine Months Ended March 31,
		2021		2020		2021		2020			2022		2021		2022		2021

SmartStyle	SmartStyle	(19.6)	%	(9.5)	%	(28.7)	%	(4.8)	%	SmartStyle	(2.5)	%	(19.6)	%	8.8	%	(28.7)	%
Supercuts	Supercuts	(22.3)		(3.7)		(29.9)		(1.4)		Supercuts	17.8		(22.3)		26.0		(29.9)
Portfolio Brands	Portfolio Brands	(17.9)		(4.8)		(26.6)		(2.7)		Portfolio Brands	4.0		(17.9)		13.2		(26.6)
Consolidated system-wide same store sales		(20.7)	%	(5.4)	%	(28.7)	%	(2.7)	%
Consolidated system-wide same-store sales										Consolidated system-wide same-store sales	8.6	%	(20.7)	%	17.8	%	(28.7)	%

(1)~~System-wide~~Fiscal year 2022 system-wide same-store sales are calculated as the total change in sales for system-wide franchise and company-owned locations that were open on a specific day of the week during the current period and the corresponding prior period. Fiscal year 2021 system-wide same-store sales are calculated as the total change in sales for system-wide franchise and company-owned locations open for more than one year that were open on a specific day of the week during the current period and the corresponding prior period. Quarterly and year-to-date system-wide same-store sales are the sum of the system-wide same-store sales computed on a daily basis. Franchise salons that do not report daily sales are excluded from same-store sales. ~~Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period.~~ System-wide same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.

2924

Condensed Consolidated Results of Operations (Unaudited)

The following table sets forth, for the periods indicated, certain information derived from our unaudited Condensed Consolidated Statement of Operations. The percentages are computed as a percent of total consolidated revenues, except as otherwise indicated, and the increase (decrease) ~~increase~~ is measured in basis points.


		Three Months Ended March 31,									Nine Months Ended March 31,										Three Months Ended March 31,									Nine Months Ended March 31,
		2021		2020		2021		2020		2021	2021		2020		2021		2020		2021		2022		2021		2022		2021		2022	2022		2021		2022		2021		2022

		($ in millions)				% of Total Revenues (1)				(Decrease) Increase	($ in millions)				% of Total Revenues (1)				(Decrease) Increase		($ in millions)				% of Total Revenues (1)				Increase (Decrease)	($ in millions)				% of Total Revenues (1)				Increase (Decrease)

Service revenues		$	24.6	$	78.4	24.5	%	51.0	%	(2,650)	$	90.0	$	322.1	28.6	%	52.8	%	(2,420)
Product revenues		20.8		34.9		20.8		22.7		(190)	68.7		124.5		21.7		20.4		130
Royalties and fees		23.5		8.7		23.5		5.7		1,780	61.4		66.1		19.4		10.8		860
Royalties																				Royalties	$	15.8	$	12.8	24.4	%	12.8	%	1,160	$	48.5	$	37.0	22.8	%	11.7	%	1,110
Fees																				Fees	3.4		5.1		5.2		5.1		10	11.5		9.6		5.4		3.0		240
Product sales to franchisees																				Product sales to franchisees	1.3		13.1		2.0		13.1		(1,110)	11.7		41.1		5.5		13.0		(750)
Advertising fund contributions																				Advertising fund contributions	8.1		5.6		12.5		5.6		690	24.2		14.8		11.4		4.7		670
Franchise rental income	Franchise rental income	31.3		31.8		31.2		20.7		1,050	95.9		96.9		30.3		15.9		1,440	Franchise rental income	32.7		31.3		50.5		31.2		1,930	100.2		95.9		47.1		30.3		1,680
Company-owned salon revenue																				Company-owned salon revenue	3.5		32.3		5.4		32.2		(2,680)	16.6		117.6		7.8		37.3		(2,950)

Cost of service (2)		15.8		54.8		64.2		69.9		(570)	66.4		212.7		73.8		66.0		780
Cost of product (2)		21.3		21.7		102.4		62.2		4,020	54.8		75.3		79.8		60.5		1,930
Site operating expenses		13.4		3.7		13.4		2.4		1,100	37.0		62.9		11.7		10.3		140
Cost of product sales to franchisees (2)																				Cost of product sales to franchisees (2)	2.6		11.2		200.0		85.5		11,450	14.1		33.2		120.5		80.8		3,970
Inventory reserve																				Inventory reserve	6.4		—		9.9		—		N/A	6.4		—		3.0		—		N/A
General and administrative	General and administrative	24.6		31.9		24.6		20.7		390	77.4		105.2		24.5		17.3		720	General and administrative	15.6		24.6		24.1		24.6		(50)	53.3		77.4		25.0		24.5		50
Rent	Rent	8.0		18.7		8.0		12.2		(420)	34.1		63.4		10.8		10.4		40	Rent	1.2		8.0		1.9		8.0		(610)	6.1		34.1		2.9		10.8		(790)
Advertising fund expense																				Advertising fund expense	8.1		5.6		12.5		5.6		690	24.2		14.8		11.4		4.7		670
Franchise rent expense	Franchise rent expense	31.3		31.8		31.2		20.7		1,050	95.9		96.9		30.3		15.9		1,440	Franchise rent expense	32.7		31.3		50.5		31.2		1,930	100.2		95.9		47.1		30.3		1,680
Company-owned salon expense																				Company-owned salon expense	5.3		33.7		8.2		33.6		(2,540)	18.3		110.3		8.6		34.9		(2,630)
Depreciation and amortization	Depreciation and amortization	3.6		10.4		3.6		6.8		(320)	17.4		27.5		5.5		4.5		100	Depreciation and amortization	2.0		3.6		3.1		3.6		(50)	5.8		17.4		2.7		5.5		(280)
Long-lived asset impairment	Long-lived asset impairment	0.8		—		0.8		—		N/A	9.8		—		3.1		—		N/A	Long-lived asset impairment	0.3		0.8		0.5		0.8		(30)	0.5		9.8		0.2		3.1		(290)
TBG restructuring		—		0.1		—		0.1		(10)	—		2.4		—		0.4		(40)
Goodwill impairment	Goodwill impairment	—		40.2		—		26.1		(2,610)	—		40.2		—		6.6		(660)	Goodwill impairment	16.0		—		24.7		—		N/A	16.0		—		7.5		—		N/A

Operating loss (3)	Operating loss (3)	(18.5)		(59.4)		(18.5)		(38.6)		2,010	(76.9)		(76.8)		(24.3)		(12.6)		(1,170)	Operating loss (3)	(25.4)		(18.5)		(39.2)		(18.5)		(2,070)	(32.4)		(76.9)		(15.2)		(24.3)		910

Interest expense	Interest expense	(3.2)		(1.7)		(3.2)		(1.1)		(210)	(10.6)		(4.6)		(3.4)		(0.8)		(260)	Interest expense	(3.4)		(3.2)		(5.2)		(3.2)		(200)	(10.2)		(10.6)		(4.8)		(3.4)		(140)
Loss from sale of salon assets to franchisees, net	Loss from sale of salon assets to franchisees, net	(4.6)		(7.9)		(4.6)		(5.1)		50	(8.5)		(26.1)		(2.7)		(4.3)		160	Loss from sale of salon assets to franchisees, net	(0.5)		(4.6)		(0.8)		(4.6)		380	(2.2)		(8.5)		(1.0)		(2.7)		170
Interest income and other, net	Interest income and other, net	15.1		0.1		15.1		0.1		1,500	15.6		3.2		4.9		0.5		440	Interest income and other, net	0.2		15.1		0.3		15.1		(1,480)	—		15.6		—		4.9		(490)

Income tax benefit (4)	Income tax benefit (4)	0.3		1.0		3.0		1.4		N/A	1.4		5.8		1.7		5.5		N/A	Income tax benefit (4)	1.3		0.3		4.4		3.0		N/A	1.5		1.4		3.3		1.7		N/A

Income from discontinued operations, net of income taxes		—		0.3		—		0.2		(20)	—		0.8		—		0.1		(10)
Net loss (3)																				Net loss (3)	(27.9)		(10.8)		(43.1)		(10.8)		(3,230)	(43.2)		(79.0)		(20.3)		(25.0)		470

(1)Cost of ~~service is computed as a percent of service revenues. Cost of~~ product sales to franchisees is computed as a percent of product ~~revenues.~~sales to franchisees.

(2)Excludes depreciation and amortization expense. The Company exited its warehouses in fiscal year 2022 and is selling inventory below cost to facilitate the wind down of the whole-sale distribution business.

(3)Total is a recalculation; line items calculated individually may not sum to total due to rounding.

(4)Computed as a percent of loss from continuing operations before income taxes. The income ~~taxes~~tax basis point change is noted as not applicable (N/A) as the discussion within MD&A is related to the effective income tax rate.

3025

Three and Nine Months Ended March 31, 2022 Compared with Three and Nine Months Ended March 31, 2021

Consolidated Revenues

Consolidated revenues ~~primarily include revenues~~are comprised of ~~company-owned salons,~~royalties, fees, advertising fund contributions, product ~~and equipment~~ sales to franchisees, franchise rental income and company-owned salon revenue.

Consolidated revenue decreased $35.6 and $103.2 million, or 35.5% and 32.7%, for the three and nine months ended March 31, 2022, respectively. Royalty revenue increased $3.0 and $11.5 million, respectively, in the three and nine months ended March 31, 2022 due to higher franchise system-wide sales and higher franchise salon counts. The overall decrease in revenue is due to the decrease in company-owned salons. During the twelve months ended March 31, 2022, 448 salons were sold to franchisees and 544 and 22 system-wide salons were closed and constructed, respectively (2022 Net Salon Count Changes). During the three and nine months ended March 31, 2022, company-owned salon revenue decreased $28.8 and $101.0 million, respectively, due primarily to the sale of salons to franchisees and salon closures. For the three and nine months ended March 31, 2022, the impact to consolidated revenue due to the sale of salons to franchisees and closure of salons was $24.8 and $88.8 million, respectively.

Royalties

During the three and nine months ended March 31, 2022, royalties increased $3.0 and $11.5 million, or 23.4% and 31.1%, respectively, primarily due to the increase in franchise salons and higher franchise system-wide sales. Total franchised locations open at March 31, 2022 were 5,504 as compared to 5,317 at March 31, 2021.

Fees

During the three months ended March 31, 2022, fees decreased $1.7 million, or 33.3%, primarily due an increase in terminated development agreements in the three months ended March 31, 2021, partially offset by the increase in franchise salons and an increase in salons running Opensalon® Pro in the three months ended March 31, 2022. In fiscal year 2022, the Company recorded $1.5 million of terminated development agreement fees in the second quarter. During the nine months ended March 31, 2022, fees increased $1.9 million, or 19.8%, primarily due to the increase in franchise salons and an increase in salons running Opensalon® Pro.

Product Sales to Franchisees

Product sales to franchisees decreased $11.8 and $29.4 million, or 90.1% and 71.5%, respectively, during the three and nine months ended March 31, 2022, primarily due to the Company's shift to third-party distribution partners. The Company expects revenue from product sales to decrease significantly during fiscal year 2022.

Advertising Fund Contributions

Advertising fund contributions increased $2.5 and $9.4 million, or 44.6% and 63.5%, respectively, during the three and nine months ended March 31, 2022, primarily due to the increase in franchise salon count and system-wide sales. Additionally, the increase in the nine months ended March 31, 2022 is also due to an increase in the contribution rate that had been reduced in the first half of fiscal year 2021 in response to COVID-19.

Franchise Rental Income

During the three and nine months ended March 31, 2022, franchise rental ~~income.~~ income increased $1.4 and $4.3 million, or 4.5% and 4.5%, respectively, primarily due to the increase in franchise salon count.

Company-owned Salon Revenue

During the three and nine months ended March 31, 2022, company-owned salon revenue decreased $28.8 and $101.0 million, or 89.2% and 85.9%, respectively, due to the decrease in Company-owned salons as a result of the sale of salons to franchisees and salon closures, a decline in product sales, and exiting our third-party logistic revenue associated with the closure of our warehouses in fiscal year 2022.

Cost of Product Sales to Franchisees

The ~~following tables summarize~~11,450 and 3,970 basis point increases in cost of product as a percent of product revenues during the three and ~~same-store sales~~nine months ended March 31, 2022, respectively, were primarily due to the Company reducing prices to liquidate distribution center inventory.

Inventory Reserve

During the three and nine months ended March 31, 2022, the Company recorded an inventory reserve of $6.4 million related to distribution center inventory, primarily consisting of personal protective equipment the Company no longer believes is marketable.

General and Administrative

The decreases of $9.0 and $24.1 million, or 36.6% and 31.1%, in general and administrative expense during the three and nine months ended March 31, 2022, respectively, were primarily due to lower administrative and field management compensation due to reductions in headcount as we align our cost structure with our asset-light franchise model, partially offset by ~~concept, as well as~~$1.0 and $2.0 million, respectively, of estimated potential legal settlements (see Note 5 to the ~~reasons~~unaudited Condensed Consolidated Financial Statements). Additionally, the provision for doubtful accounts expense also contributed to the decline in the nine months ended March 31, 2022.

Rent

The decreases of $6.8 and $28.0 million, or 85.0% and 82.1%, in rent expense during the three and nine months ended March 31, 2022, respectively, were primarily due to the net reduction in the number of company-owned salons. Additionally, in the three months ended March 31, 2022 the Company accrued less rent deemed uncollectible from franchisees. Partially offsetting the decrease in the nine month period was a $0.9 million broker fee incurred in the nine months ended March 31, 2022 related to exiting the Company's distribution centers.

Advertising Fund Expense

Advertising fund expense increased $2.5 and $9.4 million, or 44.6% and 63.5%, during the three and nine months ended March 31, 2022, respectively, primarily due to the increase in franchise salon count and system-wide sales. Additionally, the increase in the nine months ended March 31, 2022 is also due to an increase in the contribution rate that had been reduced in the first half of fiscal year 2021 in response to COVID-19.

Franchise Rent Expense

During the three and nine months ended March 31, 2022, franchise rent expense increased $1.4 and $4.3 million, or 4.5% and 4.5%, respectively, primarily due to the increase in franchise salon count.

Company-owned Salon Expense

Company-owned salon expense for the ~~percentage change:~~three and nine months ended March 31, 2022 decreased $28.4 and $92.0 million, or 84.3% and 83.4%, respectively, primarily due to the reduction in company-owned salons, a decline in product sales, and exiting third-party logistics.

Three Months Ended March 31, Nine Months Ended March 31,
2021 2020 2021 2020
(Dollars in thousands)
Franchise salons:
Product $ 13,079 $ 15,318 $ 41,057 $ 45,287
Royalties and fees 23,535 8,698 61,393 66,062
Franchise rental income 31,317 31,821 95,885 96,875
Total, Franchise salons $ 67,931 $ 55,837 $ 198,335 $ 208,224
Franchise salon same-store sales decrease (1) (19.3) % (4.1) % (27.6) % (1.8) %
Company-owned salons:
SmartStyle $ 11,056 $ 46,277 $ 43,802 $ 197,912
Supercuts 5,743 11,743 17,562 53,063
Portfolio Brands 15,537 39,926 56,284 150,387
Total, Company-owned salons $ 32,336 $ 97,946 $ 117,648 $ 401,362
Company-owned salon same-store sales decrease (2) (28.8) % (7.9) % (33.8) % (3.9) %
Consolidated revenues $ 100,267 $ 153,783 $ 315,983 $ 609,586
Percent change from prior year (34.8) % (40.5) % (48.2) % (25.7) %
Depreciation and Amortization

The decreases of $1.6 and $11.6 million, or 44.4% and 66.7%, in depreciation and amortization during the three and nine months ended March 31, 2022, respectively, were primarily due to the net reduction in company-owned salon counts and no depreciation expense in the current year related to the distribution center assets that were derecognized in the third quarter of fiscal year 2021.

Long-Lived Asset Impairment

In the three months ended March 31, 2022 and 2021, the Company recorded a long-lived asset impairment charge of $0.3 and $0.8 million, respectively, which included an ROU asset impairment charge of $0.3 and $0.3 million, respectively. In the nine months ended March 31, 2022 and 2021, the Company recorded a long-lived asset impairment charge of $0.5 and $9.8 million, respectively, which included an ROU asset impairment charge of $0.5 and $6.3 million, respectively. The decreases in long-lived asset impairment were primarily due to more salons being impaired in prior periods.

Goodwill Impairment

In the three and nine months ended March 31, 2022, the Company recorded a goodwill impairment charge of $16.0 million (see Note 1 to the unaudited Condensed Consolidated Financial Statements).

Interest Expense

The $0.2 million increase in interest expense for the three months ended March 31, 2022 was primarily due to increased borrowings. The $0.4 million decrease in interest expense for the nine months ended March 31, 2022 was primarily due to interest incurred related to the financing liabilities associated with our sale leasebacks that ended in fiscal year 2021, partially offset by an increase in borrowings.

Loss from Sale of Salon Assets to Franchisees, net

The $4.1 and $6.3 million decreases in the loss from the sale of salon assets to franchisees, net in the three and nine months ended March 31, 2022, respectively, were primarily due to fewer salons sold in fiscal year 2022.

Interest Income and Other, net

The decreases of $14.9 and $15.6 million in interest income and other, net during the three and nine months ended March 31, 2022 were primarily due to the gain associated with the leases for the Company's distribution centers recognized in the three months ended March 31, 2021.

Income Tax Benefit

During the three and nine months ended March 31, 2022, the Company recognized tax benefits of $1.3 and $1.5 million, respectively, with corresponding effective tax rates of 4.4% and 3.3% as compared to recognizing tax benefits of $0.3 and $1.4 million, respectively, with corresponding effective tax rates of 3.0% and 1.7% during the three and nine months ended March 31, 2021.

See Note 4 to the unaudited Condensed Consolidated Financial Statements.

Results of Operations by Segment

Based on our internal management structure, we report two segments: Franchise and Company-owned salons. See Note 10 to the unaudited Condensed Consolidated Financial Statements. Significant results of operations are discussed below with respect to each of these segments.

Franchise


	Three Months Ended March 31,								Nine Months Ended March 31,
	2022			2021			Increase (Decrease) (1)		2022			2021			Increase (Decrease) (1)

	(Dollars in millions)								(Dollars in millions)

Royalties	$	15.8		$	12.8		$	3.0	$	48.5		$	37.0		$	11.5
Fees	3.4			5.1			(1.7)		11.5			9.6			1.9
Product sales to franchisees	1.3			13.1			(11.8)		11.7			41.1			(29.4)
Advertising fund contributions	8.1			5.6			2.5		24.2			14.8			9.4
Franchise rental income	32.7			31.3			1.4		100.2			95.9			4.3
Total franchise revenue (1)	$	61.2		$	67.9		$	(6.7)	$	196.2		$	198.3		$	(2.1)

Franchise same-store sales (2)	8.8		%	(19.3)		%			18.0		%	(27.6)		%

Operating loss	$	(15.3)		$	(5.9)		$	(9.4)	$	(18.0)		$	(26.1)		$	8.1
Total franchise salons	5,504			5,317			187

(1)Total is a recalculation; line items calculated individually may not sum to total due to rounding.

(2)Franchise same-store sales in fiscal year 2022 are calculated as the total change in sales for ~~salons~~franchise locations that ~~have been~~were open on a specific day of the week during the current period and the corresponding prior period. Franchise same-store sales in fiscal year 2021 are calculated as the total change in sales for franchise ~~location~~locations open for more than one year that were open on a specific day of the week during the current period and the corresponding prior period. Quarterly and year-to-date franchise same-store sales are the sum of the franchise same-store sales computed on a daily basis. Franchise salons that do not report daily sales are excluded from same-store sales. ~~Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period.~~ Franchise same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.

~~(2)Company-owned same-store sales are calculated as the total change in sales for company-owned locations that were open on a specific day of the week during the current period~~Franchise Revenues

Franchise revenues decreased $6.7 and the corresponding prior period. Quarterly and year-to-date company-owned same-store sales are the sum of the company-owned same-store sales computed on a daily basis. Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period. Company-owned same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.

~~Three and Nine Months Ended March 31, 2021 Compared with Three and Nine Months Ended March 31, 2020~~

~~Consolidated Revenues~~

~~Consolidated revenues are primarily comprised of service and product revenues, as well as franchise royalties and fees, advertising and rental income.~~

~~Consolidated revenue decreased $53.5 and $293.6~~$2.1 million or 34.8% and 48.2%, for the three and nine months ended March 31, 2021, respectively. Service revenue and product revenue decreased $53.8 and $14.1 million, respectively, in the three months ended March 31, 2021 and decreased $232.1 and $55.8 million, respectively, in the nine months ended March 31, 2021. The decline in service and product revenue is primarily due to the Company's sale of salons to franchisees. During the twelve months ended March 31, 2021, 519 salons were sold to franchisees, net of buy backs and 833 and 35 system-wide salons were closed and constructed, respectively (2021 Net Salon Count Changes). For the three and nine months ended March 31, 2021, the impact to consolidated revenue due to the sale of salons to franchisees and closure of salons was $44.9 and $214.0 million, respectively. System-wide sales also declined, primarily due to fewer guest visits and government-mandated closures related to the COVID-19 pandemic, in the three and nine months ended March 31, 2021, which also contributed to the decline in service, product and royalties and fees revenue. In the three months ended March 31, 2020, the Company refunded $14.9 million of previously collected cooperative advertising fees, which reduced royalties and fees in the prior period.

~~Service Revenues~~

~~The decreases of $53.8 and $232.1 million, or 68.6% and 72.0%, in service revenues~~ during the three and nine months ended March 31, ~~2021, respectively, were primarily due to~~2022. The decrease in franchise salon revenue during the ~~2021 Net Salon Count Changes. For the~~ three months and nine months ended March 31, ~~2021, the impact to service revenue~~2022 was primarily due to the ~~sale of salons~~decrease in product sales to franchisees due to the Company's shift to third-party distributors, partially offset by higher royalties and ~~closure of salons was $35.0~~advertising fund contributions due to an increase in salon count and ~~$172.5 million, respectively. The remaining decrease in service revenue relates primarily to fewer guest visits as a result of~~system-wide sales. During the ~~COVID-19 pandemic.~~

~~Product Revenues~~

~~The decreases of $14.1 and $55.8 million, or 40.4% and 44.9%, in product revenues during the three and nine~~twelve months ended March 31, ~~2021,~~2022, franchisees constructed (net of relocations) and closed 22 and 283 franchise salons, respectively, ~~were primarily due to~~and purchased 448 salons from the ~~2021 Net Salon Count Changes. For~~Company during the ~~three and nine months ended March 31, 2021, the impact to~~same period. The Company expects product revenue ~~due~~ to ~~the sale of salons~~continue to franchisees and closure of salons was $9.9 and $41.5 million, respectively. Additionally, franchise same-store product sales declined 20.0% and 24.2% for the three and nine months ended March 31, 2021, respectively, contributing to the decline.

~~Royalties and Fees~~

~~During the three months ended March 31, 2021, royalties and fees increased $14.8 million, or 170.6%, primarily~~decrease throughout fiscal year 2022 due to the Company refunding cooperative advertising fund contributions in the third quarter of fiscal year 2020. During the nine months ended March 31, 2021, royalties and fees decreased $4.7 million, or 7.1%, primarily due to a $1.5 million decline in cooperative advertising funds charged to franchisees during the nine months ended March 31, 2021. For the three and nine months ended March 31, 2021, cooperative advertising funds were temporarily reduced as part of our COVID-19 pandemic relief effort and also declined due to lower same-store sales. The declines in cooperative advertising are offset in site expense and have no impact on operating income. Royalties and fees were also impacted by the decreases in franchise same-store sales of 19.3% and 27.6% for the three and nine months ended March 31, 2021, respectively, partially offset by an increase in franchise salons. Total franchised locations open at March 31, 2021 were 5,317 as compared to 5,126 at March 31, 2020.exiting its wholesale product business.

Franchise ~~Rental Income~~Operating Loss

During the three and nine months ended March 31, ~~2021,~~2022, franchise ~~rental income decreased $0.5~~salon operations generated operating losses of $15.3 million and ~~$1.0~~$18.0 million, ~~or 1.6% and 1.0%,~~ respectively. The ~~decrease~~loss in the three months ended March 31, ~~2021 is~~2022 was $9.4 million higher than the prior year due to a goodwill impairment charge of $16.0 million in the period. Excluding the goodwill impairment, operating income increased primarily due to ~~an increase in rent considered uncollectible~~higher royalty revenue and ~~to the change in the lease renewal assumption.~~decreased general and administrative expense and rent. The ~~decrease~~operating loss improved $8.1 million in the nine months ended March 31, ~~2021 is~~2022 from the prior comparable period due to the ~~rental income from TBG salons included in fiscal year 2020 and an~~ increase in royalties and decrease in general and administrative expense and rent, ~~considered uncollectible.~~

~~Cost of Service~~

~~During~~partially offset by the three months ended March 31, 2021, cost of service as a percent of service revenues decreased 570 basis points, primarily due to payroll related COVID-19 relief tax credits. During the nine months ended March 31, 2021, cost of service as a percent of service revenues increased 780 basis points, primarily due to inefficient and non-productive stylist hours as a result of reduced guest visits related to the COVID-19 pandemic and higher minimum wages.goodwill impairment charge.

3229

~~Cost of Product~~

The 4,020 and 1,930 basis point increases in cost of product as a percent of product revenues during the three and nine months ended March 31, 2021, respectively, were primarily due to a $5.3 million reserve for excess and obsolete inventory related to the change in the Company's merchandising strategy and the shift from retail sales to franchise product sales. Excluding the excess and obsolescence reserve, margins on retail product sales were 37.4% and 47.7% in the three months ended March 31, 2021 and 2020, respectively. Margins on franchise product sales were 14.8% and 25.2% in the three months ended March 31, 2021 and 2020, respectively. Excluding the excess and obsolescence reserve, margins on retail product sales were 46.2% and 48.9% in the nine months ended March 31, 2021 and 2020, respectively. Margins on franchise product sales were 19.3% and 23.1% in the nine months ended March 31, 2021 and 2020, respectively. Decreases in franchise product margins were primarily driven by a shift to lower-margin customers and products.

~~Site Operating Expenses~~

Site operating expenses increased $9.7 million, or 265.2%, during the three months ended March 31, 2021 and decreased $25.9 million, or 41.3%, during the nine months ended March 31, 2021. Site operating expenses during the three months ended March 31, 2020 were reduced by the refunding of $14.9 million of previously collected advertising fees in the prior period, as noted above in ~~Royalties and fees.~~ Excluding the refund, site operating expenses decreased due to a net reduction in salon counts and decreases in marketing spend. The decrease in site operating expenses during the nine months ended March 31, 2021 was primarily due to a net reduction in salon counts and decreases in marketing spend, partially offset by a $1.5 million increase in cooperative advertising expense, as noted above in ~~Royalties and fees.~~

~~General and Administrative~~

The decreases of $7.3 and $27.8 million, or 22.9% and 26.4%, in general and administrative (G&A) during the three and nine months ended March 31, 2021, respectively, were primarily due to lower administrative and field management salaries due to reductions in headcount as we align our cost structure with our transition to an asset-light franchise model. A benefit from the forfeiture of equity awards related to the departure of the Company's former CEO contributed $2.4 million to the decrease in the nine months ended March 31, 2021. Additionally, $1.3 million of the decline in the nine months ended March 31, 2021 is due to the Company not holding its annual franchise convention in fiscal year 2021 due to the COVID-19 pandemic.

~~Rent~~

The decreases of $10.7 and $29.3 million, or 57.1% and 46.2%, in rent expense during the three and nine months ended March 31, 2021, respectively, were primarily due to the net reduction in the number of company-owned salons associated with the Company's transformation to a fully-franchised portfolio.

~~Franchise Rent Expense~~

During the three and nine months ended March 31, 2021, franchise rent expense decreased $0.5 and $1.0 million, or 1.6% and 1.0%, respectively. The decrease in the three months ended March 31, 2021 is primarily due to an increase in rent considered uncollectible and the change in the lease renewal assumption. The decrease in the nine months ended March 31, 2021 is due to the rental income from TBG salons included in fiscal year 2020 and an increase in rent considered uncollectible.

~~Depreciation and Amortization~~

The decreases of $6.8 and $10.1 million, or 65.1% and 36.8%, in depreciation and amortization during the three and nine months ended March 31, 2021, respectively, were primarily due to the net reduction in company-owned salon counts. Additionally, salon asset impairment of $1.2 and $3.9 million were recorded to depreciation expense in the three and nine months ended March 31, 2020, respectively. Salon asset impairment in fiscal year 2021 was recorded to long-lived asset impairment.

~~Long-Lived Asset Impairment~~

In the three and nine months ended March 31, 2021, the Company recorded a long-lived asset impairment charge of $0.8 and $9.8 million, respectively, which included a right of use asset impairment charge of $0.3 and $6.3 million, respectively, and salon asset impairment of $0.5 and $3.5 million, respectively. Prior to the COVID-19 pandemic that began in fiscal year 2020, the Company had not recorded a right of use asset impairment charge.

~~TBG Mall Location Restructuring~~

In the three and nine months ended March 31, 2020, the Company recorded $0.1 and $2.4 million, respectively, of TBG restructuring charges, which related to professional fees and the Company assisting TBG with operating expenses to mitigate the risk of default associated with TBG's lease obligations. See Note 3 to the unaudited Condensed Consolidated Financial Statements.

~~Goodwill Impairment~~

The Company recorded $40.2 million of goodwill impairment for the three and nine months ended March 31, 2020. Management concluded that the COVID-19 pandemic in March 2020 was a triggering event requiring an assessment of the Company’s goodwill. The Company concluded the carrying value of the Company-owned ~~reporting unit exceeded its fair value resulting in a full impairment.~~

~~Interest Expense~~

The increases of $1.5 and $6.0 million in interest expense for the three and nine months ended March 31, 2021, respectively, were primarily due to the increased interest rate and greater levels of debt.

~~Loss from sale of salon assets to franchisees, net~~

In the three and nine months ended March 31, 2021, the loss from sale of salon assets to franchisees was $4.6 and $8.5 million, respectively. In the three and nine months ended March 31, 2020, the loss from the sale of salon assets to franchisees was $7.9 and $26.1 million, respectively, including non-cash goodwill derecognition of $17.5 and $77.0 million, respectively. There was no goodwill derecognition in fiscal year 2021 due to the company-owned goodwill impairment in the third quarter of fiscal year 2020.

~~Interest Income and Other, net~~

The increases of $15.0 and $12.4 million, respectively, in interest income and other, net during the three and nine months ended March 31, 2021 were primarily due to the gain associated with the leases for the Company's distribution centers (see Note 11 to the unaudited Condensed Consolidated Financial Statements), partially offset by the sale of the Company's headquarters recorded in the period ended December 31, 2019.

~~Income Taxes~~

During the three and nine months ended March 31, 2021, the Company recognized tax benefits of $0.3 and $1.4 million, respectively, with corresponding effective tax rates of 3.0% and 1.7% as compared to recognizing tax benefits of $1.0 and $5.8 million, respectively, with corresponding effective tax rates of 1.4% and 5.5% during the three and nine months ended March 31, 2020.

~~See Note 6 to the unaudited Condensed Consolidated Financial Statements.~~

~~Income from Discontinued Operations~~

Income from discontinued operations was $0.3 and $0.8 million during the three and nine months ended March 31, 2020, respectively, due to actuarial insurance reserve adjustments. Similar adjustments did not occur in the three and nine months ended March 31, 2021.

Salons

~~Results of Operations by Segment~~

Based on our internal management structure, we report two segments: Franchise salons and Company-owned salons. See Note 13 to the unaudited Condensed Consolidated Financial Statements. Significant results of operations are discussed below with respect to each of these segments.

~~Franchise Salons~~

Three Months Ended March 31, Nine Months Ended March 31,
2021 2020 Increase (Decrease) 2021 2020 Increase (Decrease)
(Dollars in millions) (Dollars in millions)
Revenue
Product 13.1 15.3 (2.2) 41.1 45.3 (4.2)
Royalties and fees 23.5 8.7 14.8 61.4 66.1 (4.7)
Franchise rental income 31.3 31.8 (0.5) 95.9 96.9 (1.0)
Total franchise salons revenue (1) $ 67.9 $ 55.8 $ 12.1 $ 198.3 $ 208.2 $ (9.9)
Franchise same-store sales (2) (19.3) % (4.1) % (27.6) % (1.8) %
Operating income $ 12.0 $ 11.2 $ 0.8 $ 28.7 $ 35.8 $ (7.1)
Operating loss from TBG restructuring — (0.1) 0.1 — (2.4) 2.4
Total operating income (1) $ 12.0 $ 11.1 $ 0.9 $ 28.7 $ 33.4 $ (4.7)


	Three Months Ended March 31,						Nine Months Ended March 31,
	2022		2021		(Decrease) Increase (1)		2022		2021		(Decrease) Increase (1)

	(Dollars in millions)						(Dollars in millions)

Total revenue	$	3.5	$	32.3	$	(28.8)	$	16.6	$	117.6	$	(101.0)

Operating loss	$	(3.7)	$	(12.6)	$	8.9	$	(7.9)	$	(50.7)	$	42.8
Total company-owned salons	117		826		(709)

(1)Total is a recalculation; line items calculated individually may not sum to total due to rounding.

~~(2)~~Franchise same-store sales are calculated as the total change in sales for salons that have been a franchise location for more than one year that were open on a specific day of the week during the current period and the corresponding prior period. Quarterly and year-to-date franchise same-store sales are the sum of the franchise same-store sales computed on a daily basis. Franchise salons that do not report daily sales are excluded from same-store sales. Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period. Franchise same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.

~~Franchise same-store sales by concept are detailed in the table below:~~

Three Months Ended March 31, Nine Months Ended March 31,
2021 2020 2021 2020
SmartStyle (18.1) % (10.9) % (25.8) % (8.6) %
Supercuts (21.5) (3.3) (29.4) (0.9)
Portfolio Brands (15.1) (3.5) (24.6) (1.7)
Total (19.3) % (4.1) % (27.6) % (1.8) %

~~Franchise Salon Revenues~~

Franchise salon revenues increased $12.1 million during the three months ended March 31, 2021 and decreased $9.9 million during the nine months ended March 31, 2021. The increase in franchise salon revenue during the three months ended March 31, 2021 was primarily due to the refund of previously collected contributions to the cooperative advertising funds in the third quarter of fiscal year 2020. The decrease in franchise salon revenue during the nine months ended March 31, 2021 was primarily due to decreases in royalties and cooperative fund contributions due to the COVID-19 pandemic. During the twelve months ended March 31, 2021, franchisees constructed (net of relocations) and closed 31 and 359 Franchise-owned salons, respectively, and purchased (net of Company buybacks) 519 salons from the Company during the same period.

~~Franchise Salon Operating Income~~

During the three months ended March 31, 2021, franchise salon operations generated operating income of $12.0 million, an increase of $0.9 million compared to the prior comparable period. During the nine months ended March 31, 2021, franchise salon operations generated operating income of $28.7 million, a decrease of $4.7 million compared to the prior comparable period. The increase in the three months ended March 31, 2021 was primarily due to an increase in franchise fees due to the increase in salon count. The decrease in the nine months ended March 31, 2021 was primarily due to the decrease in royalties due to the COVID-19 pandemic.

~~Company-owned Salons~~

Three Months Ended March 31, Nine Months Ended March 31,
2021 2020 Increase (Decrease) (1) 2021 2020 Increase (Decrease) (1)
(Dollars in millions) (Dollars in millions)
Total revenue $ 32.3 $ 97.9 $ (65.6) $ 117.6 $ 401.4 $ (283.7)
Company-owned same-store sales (28.8) % (7.9) % (33.8) % (3.9) %
Operating loss $ (12.6) $ (50.7) $ 38.0 $ (50.7) $ (46.4) $ (4.4)

~~(1)Total is a recalculation; line items calculated individually may not sum to total due to rounding.~~

~~Company-owned same-store sales by concept are detailed in the table below:~~

Three Months Ended March 31, Nine Months Ended March 31,
2021 2020 2021 2020
SmartStyle (24.4) % (9.0) % (33.3) % (3.8) %
Supercuts (34.1) (6.7) (38.0) (4.9)
Portfolio Brands (28.4) (6.5) (32.4) (3.5)
Total (28.8) % (7.9) % (33.8) % (3.9) %

Company-owned Salon Revenues

Company-owned salon revenues decreased ~~$65.6~~$28.8 and ~~$283.7~~$101.0 million during the three and nine months ended March 31, ~~2021,~~2022, respectively, primarily due to the ~~2021~~2022 Net Salon Count ~~Changes~~Changes.

Company-owned Salon Operating Loss

During the three and ~~a decline~~nine months ended March 31, 2022, company-owned salon operating loss improved $8.9 and $42.8 million, respectively, compared to the prior comparable period. The improvement in ~~sales as a result of~~ the ~~COVID-19 pandemic. Company-owned same-store sales decreased 28.8% and 33.8%~~loss during the three and nine months ended March 31, ~~2021, respectively, due primarily to decreases in same-store guest transactions.~~

~~Company-owned Salon Operating Loss~~

During the three months ended March 31, 2021, company-owned salon operating loss decreased $38.0 million to a loss of $12.6 million, and during the nine months ended March 31, 2021, company-owned salon operating loss increased $4.4 million to a loss of $50.7 million compared to the prior comparable period. The decrease in the loss during the three months ended March 31, 20212022 was primarily due to the goodwill impairment of $40.2 million recorded in the third quarter of fiscal year 2020. The increase in the loss during the nine months ended March 31, 2021 was primarily due to the overall decline in margin related primarily to COVID-19 and a $5.3 million inventory reserve charge recorded in the third quarter of fiscal year 2021, partially offset by the goodwill impairment recorded in the third quarter of fiscal year 2020.

~~Corporate~~

~~Corporate Operating Loss~~

Corporate operating loss decreased $1.9 million during the three months ended March 31, 2021, primarily driven by lapping stock compensation benefits associated with a change in performance awards assumptions and executive departures in fiscal year 2020, as well as higher severance costs in fiscal year 2021. Corporate operating loss decreased $8.9 million during the nine months ended March 31, 2021, primarily driven by lowerreduced general and administrative expense primarily related to salaries, ~~due to lower headcount~~a decrease in depreciation and long-lived asset impairment and the ~~cancellation~~exiting of ~~the traditional in-person franchise convention in fiscal year 2021.~~loss making company-owned salons.

3730

LIQUIDITY AND CAPITAL RESOURCES

The Company's debt of $193.8 million is due in March 2023 and management's current projected cash flows do not support the ability to repay this obligation in full at maturity. As a result of the maturity date, our debt is reflected as a current liability at March 31, 2022. Management is working with advisors to determine alternative financing arrangements and believes the ability to refinance alleviates substantial doubt related to the Company's ability to continue as a going concern. If the Company is not able to refinance our debt at terms acceptable to us by the maturity date, the lender would be able to call the debt and pursue other remedies that could be harmful to our business.

Sources of Liquidity

Funds generated by operating activities, available cash and cash equivalents ~~proceeds from sale of salon assets to franchisees,~~ and our borrowing agreements are our most significant sources of liquidity.

As of March 31, ~~2021,~~2022, cash and cash equivalents were ~~$34.5~~$25.6 million, with ~~$32.0~~$23.7 and ~~$2.5~~$1.9 million within the United States and Canada, respectively.

The Company's borrowing arrangements include a ~~$295.0~~$291.3 million five-year revolving credit facility that expires in March 2023, of which ~~$98.8~~$81.8 million was available as of March 31, ~~2021.~~2022. The Company's liquidity ~~which~~per the agreement includes the unused available balance under the credit facility, ~~and~~ unrestricted cash and cash equivalents ~~totaled $133.3~~and the shortfall in the gap in expected proceeds from the sale of salon assets of $20.9 million as of March 31, ~~2021. As~~2022. Total liquidity per the agreement was $128.3 million as of March 31, ~~2021, the~~2022. The revolving credit facility has a minimum liquidity covenant of $75.0 million (see Note 118 to the unaudited Condensed Consolidated Financial Statements). In accordance with the credit agreement, beginning with periods ending June 30, 2021, the Company’s minimum liquidity calculation will be adjusted related to certain net cash proceeds generated from historical venditions. The Company expects that as of June 30, 2021, after using the vendition proceeds adjustment, the minimum liquidity covenant will change such that the unused available balance under the credit facility and unrestricted cash and cash equivalents be in the range of $53-$55 million.

OnAdditionally, on February 3, 2021, the Company filed a ~~$150~~$150.0 million shelf registration statement and ~~$50~~$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~~$50.0 million worth ~~of its~~ of its Class A common stock in ~~“at-the-market~~"at-the-market offerings.”" Net proceeds from sales of shares under the ~~“at-the-market”~~"at-the-market" program ~~if any,~~ may be used to, among other things, fund working capital requirements, repay debt and support ~~of our~~ growth strategies. Such strategies may include positioning the Company for potential expansion through targeted industry acquisitions and alternatives to fund additional capital investment requirements related to potential partnership opportunities to facilitate continued growth of our proprietary technology, ~~Opensalon®~~ Opensalon® Pro. ~~The timing and amount of sales of shares, if any, will depend on a variety of factors, including prevailing market conditions,~~During the ~~trading price of~~nine months ended March 31, 2022, the Company issued 9.3 million shares and ~~other factors as determined by the Company. No shares have been issued under the shelf registration.~~received net proceeds of $37.2 million.

Uses of Cash

The Company closely manages its liquidity and capital resources. The Company's liquidity requirements depend on key variables, including the level of investment needed to support its business strategies, the performance of the business, capital expenditures, credit facilities and borrowing arrangements, and working capital management. Capital expenditures are a component of the Company's cash flow and capital management strategy, which can be adjusted in response to economic and other changes to the Company's business environment. The Company has a disciplined approach to capital allocation, which focuses on investing in key priorities ~~to support the Company's response to the COVID-19 pandemic, as well as its multi-year strategic plan~~ as discussed within Part I, Item 1 of our Annual Report on Form 10-K for the fiscal year ended June 30, ~~2020.~~2021.

3831

Cash Flows

Cash Flows from Operating Activities

During the nine months ended March 31, ~~2021,~~2022, cash used in operating activities was $34.4 million compared to $80.0 ~~million.~~million in the prior year. Cash used in operations ~~increased~~improved due to higher royalties, lower ~~revenues~~general and ~~margins, payments of $14.0 million to catch up on payables related to fiscal year 2020,~~administrative expense, lower rent and the ~~CEO sign-on bonus~~exiting of ~~$2.5 million,~~loss making company-owned salons. These improvements were partially offset by ~~the elimination~~$2.5 million of ~~certain general and administrative costs and a $0.8 million COVID-19 payroll relief payment from the Canadian government received~~social security contributions remitted in the ~~third~~second quarter ~~of fiscal year 2021.~~that had been deferred under the CARES Act.

Cash Flows from Investing Activities

During the nine months ended March 31, 2022, cash used in investing activities of $4.3 million was due to capital expenditures primarily related to internally-developed capitalized software. During the nine months ended March 31, 2021, cash used in investing activities of $0.9 million was primarily due to capital expenditures, ~~of $9.6 million, of which approximately $3.0 million was internally developed capitalized software,~~ partially offset by proceeds from the sale of salon ~~assets of $7.7 million.~~assets.

Cash Flows from Financing Activities

During the nine months ended March 31, 2022, cash provided by financing activities was $43.2 million, primarily as a result of net proceeds of $37.2 million related to the issuance of common stock and a net $6.9 million draw on the Company's revolving credit facility. During the nine months ended March 31, 2021, cash used in financing activities was $1.6 million compared to cash provided by financing activities of $152.1 million in the prior comparable period. In the nine months ended March 31, 2020, the Company borrowed a net $183.0 million and used $28.2 million to purchase common stock.million.

Financing Arrangements

The Company's existing revolving credit facility is due in March 2023 and management is working with advisors to determine alternate financing. Uncertainty in the business, including the impact of COVID-19, may reduce our borrowing options and increase the interest rate. An increase to the rate or a decrease to the facility may impact our ability to achieve our strategic objectives and may materially impact our operations. Additionally, the Company may need to look to other sources of financing, including additional use of the Company's At-The-Market (ATM) offering or other equity offerings that may be dilutive to shareholders. See Note 118 of the Notes to the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended March 31, ~~2021~~2022 and Note 8 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, ~~2020,~~2021, for additional information regarding our financing arrangements.

Debt to Capitalization Ratio

Our debt to capitalization ratio, calculated as the principal amount of debt as a percentage of the principal amount of debt and ~~shareholders’~~shareholders' equity at fiscal quarter end, was as follows:


	Debt to Capitalization (1)

March 31, 2022	94.6	%
June 30, 2021	91.6	%

_______________________________________________________________________________

As of Debt to
Capitalization (1) Basis Point Increase (Decrease) (2)
March 31, 2021 78.2 % 1,620
June 30, 2020 62.0 % 3,520

(1)~~Debt includes long-term debt and financing liabilities. It excludes~~Excludes the long-term lease liability as that liability is offset by the ~~right of use~~ROU asset.

~~(2)Represents the basis point change in debt to capitalization as compared to the prior fiscal year end (June 30, 2020 and June 30, 2019, respectively).~~

The ~~1,620 basis point~~ increase in the debt to capitalization ratio as of March 31, ~~2021~~2022 as compared to June 30, ~~2020,~~2021, was primarily due to the ~~decreases~~decrease in shareholders' equity as a result of the loss from ~~operations, partially offset by~~operations.

Share Issuance Program

On February 3, 2021, the ~~decrease~~Company filed a $150.0 million shelf registration statement and $50.0 million prospectus supplement with the 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 ~~debt as a result~~"at-the-market" offerings. During the nine months ended March 31, 2022, the Company issued 9.3 million shares for net proceeds of ~~the derecognition of the Company's financing lease liability (see Note 11 to the unaudited Condensed Consolidated Financial Statements).~~$37.2 million.

Share Repurchase Program

In May 2000, the ~~Company’s~~ Board ~~of Directors (Board)~~ approved a stock repurchase program with no stated expiration date. Since that time and through March 31, ~~2021,~~2022, the Board has authorized $650.0 million to be expended for the repurchase of the Company's stock under this program. All repurchased shares become authorized, but unissued shares of the Company. The timing and amounts of any repurchases depend on many factors, including the market price of the common stock and overall market conditions. During the three and nine months ended March 31, ~~2021,~~2022, the Company did not repurchase any shares. As of March 31, ~~2021,~~2022, 30.0 million shares have been cumulatively repurchased for $595.4 million, and $54.6 million remains outstanding under the approved stock repurchase program.

4033

SAFE HARBOR PROVISIONS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Quarterly Report on Form 10-Q, as well as information included in, or incorporated by reference from, future filings by the Company with the Securities and Exchange Commission and information contained in written material, press releases and oral statements issued by or on behalf of the Company contains or may contain ~~“forward-looking statements”~~"forward-looking statements" within the meaning of the federal securities laws, including statements concerning anticipated future events and expectations that are not historical facts. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this document reflect ~~management’s~~management's best judgment at the time they are made, but all such statements are subject to numerous risks and uncertainties, which could cause actual results to differ materially from those expressed in or implied by the statements herein. Such forward-looking statements are often identified herein by use of words including, but not limited to, ~~“may,” “believe,” “project,” “forecast,” “expect,” “estimate,” “anticipate,”~~"may," "believe," "project," "forecast," "expect," "estimate," "anticipate," and ~~“plan.”~~"plan." These uncertainties include a potential material adverse impact on our business and results of operations as a result of the uncertain duration and severity of the COVID-19 pandemic, ~~as well as~~including any adverse impact from Delta, Omicron and other variants; the ~~health~~impact of the COVID-19 pandemic on our key suppliers; consumer shopping trends and ~~risk appetite of our stylists, customers~~changes in manufacturer distribution channels; changes in regulatory and ~~employees~~statutory laws including increases in minimum wages; laws and regulations could require us to ~~return to the salon environment;~~modify current business practices and incur increased costs; changes in economic conditions; changes in consumer tastes and fashion trends; the continued ability of the Company to implement its strategy, priorities and initiatives including the re-engineering of our corporate and field infrastructure; Opensalon® Pro may not yield the intended results on timing and amounts due to the COVID-19 pandemic, efforts by our current third-party back office management system vendor to make it difficult for our franchisees to convert to our new company-owned system and the pending litigation with that third-party vendor; the impact of the COVID-19 pandemic on our key suppliers; the ability to address rent obligations incurred during the government-mandated hibernation of our salons related to the COVID-19 pandemic and the ability to obtain long-term rent concessions; the ability to operate or sell the salons transferred back from TBG; the outcome of the review by the administrator in TBG's insolvency proceedings in the United Kingdom; compliance with credit facility covenants and access to the existing revolving credit facility; our andmerchandising strategy; our franchisees' ability to attract, train and retain talented stylists; financial performance of our franchisees; ~~success of~~ the ~~sale of~~ability to operate or sell the salons ~~to franchisees; if our capital investments in technology do not achieve appropriate returns;~~transferred back from TBG; our ability to manage cyber threats and protect the security of potentially sensitive information about our guests, employees, vendors or Company information; the ability of the Company to maintain a satisfactory relationship with Walmart; ~~the impact of recent actions by Walmart;~~ marketing efforts to drive traffic to our franchisees' salons; ~~changes in regulatory and statutory laws including increases in minimum wages;~~ our ability to maintain and enhance the value of our brands; ~~premature termination of agreements with our franchisees;~~ reliance on information technology systems; reliance on external vendors; ~~consumer shopping trends~~the use of social media; failure to standardize operating processes across brands; exposure to uninsured or unidentified risks; Opensalon® Pro may not yield the intended results; compliance with credit facility covenants and ~~changes~~access to the existing revolving credit facility; ability to re-finance our existing credit facility, including our ability to re-finance at a similar rate, and our ability to raise additional debt or equity capital; our capital investments in ~~manufacturer distribution channels; competition within~~technology may not achieve appropriate returns; premature termination of agreements with our franchisees; financial performance of Empire Education Group; the ~~personal hair care industry;~~continued ability of the Company to implement cost reduction initiatives and achieve expected cost savings; continued ability to compete in our business markets; reliance on our management team and other key personnel; the continued ability to maintain an effective system of internal controls over financial reporting; changes in tax exposure; ~~failure~~the ability to ~~standardize~~use U.S. net operating processes across brands; financial performance of Empire Education Group; the continued ability of the Company to implement cost reduction initiatives; changes in economic conditions; changes in consumer tastesloss carryforwards; potential litigation and ~~fashion trends; failure at our distribution centers; exposure to uninsured~~other legal or ~~unidentified risks; reliance~~regulatory proceedings could have an adverse effect on our ~~management team and other key personnel; new merchandising strategy~~ business or other factors not listed above. Additional information concerning potential factors that could affect future financial results is set forth under Item 1A on Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made in our subsequent annual and periodic reports filed or furnished with the SEC on Forms 10-K, 10-Q and 8-K and Proxy Statements on Schedule 14A.

4134

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from changes in interest rates and changes in foreign currency exchange rates. There has been no material change to the factors discussed within Part II, Item 7A in the ~~Company’s~~Company's June 30, ~~2020~~2021 Annual Report on Form 10-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Securities Exchange Act of 1934, as amended (the ~~"Exchange Act”)~~Exchange Act) reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange ~~Commission’s~~Commission's rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure.

Management, with the participation of the CEO and CFO, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of the end of the period. Based on their evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of March 31, ~~2021.~~2022.

Changes in Internal Controls over Financial Reporting

There were no material changes in our internal ~~control~~controls over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal ~~control~~controls over financial reporting.

4235

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

The Company is a defendant in various lawsuits and claims arising out of the normal course of business. ~~Our~~ ~~existing point-of-sale system supplier~~Like certain other franchisors, the Company has ~~challenged~~been faced with allegations of franchise regulation and agreement violations. Additionally, because the ~~development~~Company may be the tenant under a master lease for a location subleased to a franchisee, the Company faces allegations of ~~certain parts~~non-payment of ~~our technology systems (See Note 7~~ ~~to the Condensed Consolidated Financial Statements~~)rent and associated charges. Further, similar to ~~certain~~ other large retail employers, the Company has been faced with allegations of purported class-wide consumer and wage and hour ~~violations.~~violations (See Note 5 to the unaudited Condensed Consolidated Financial Statements). Litigation is inherently unpredictable, and the outcome of these matters cannot presently be determined. Although the actions are being vigorously defended, the Company could in the future, incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, ~~2020,~~2021, except for the revision toof the ~~thirty-third~~ninth and fourteenth risk factor listed below and the addition of the last risk factor listed below.

We ~~rely on~~are moving away from our ~~management team~~wholesale distribution model to third-party preferred supplier arrangements.

We are exiting the wholesale distribution model and have entered into a preferred supplier agreement with a supplier. This change has and will continue to reduce our future revenue and we have and may continue to incur significant costs related to the transition. We have sold inventory at a loss and have significantly reduced our inventory balance to management’s estimated realizable value. These inventory related losses may continue and we may have to reduce the value of our existing inventory in the future. In addition, if our new supplier is unable to source the products at the prices expected by our franchisees, our franchisees' profitability and our profitability may be adversely impacted. Further, economic instability and other ~~key personnel.~~impactful events and circumstances in the regions in which our supplier and their manufacturers are located (such as in the ongoing COVID-19 pandemic), the financial instability of our supplier, our supplier's failure to meet our terms and conditions or our supplier standards, product safety and quality issues, disruption or delay in the transportation of products from our supplier and their manufacturers to our salons, transport availability and cost, transport security, inflation and other factors relating to the suppliers and the areas in which they are located are beyond our control.

~~We depend on the skills, working relationships,~~Our ability to franchise our company-owned SmartStyle salons and ~~continued services of key personnel, including our management team and others throughout our organization. We are also~~successfully operate this business is dependent on our relationship with Walmart.

As of March 31, 2022, we had 1,719 SmartStyle or Cost Cutters salons within Walmart locations. Walmart is our largest landlord, and we believe we are Walmart's largest tenant. Our business within each of those 1,719 salons relies primarily on the traffic of visitors to the Walmart location, so our success is tied to Walmart's success in bringing shoppers into their stores. We have limited control over the locations and markets in which we open new SmartStyle locations, as we only have potential opportunities in locations offered to us by Walmart. Furthermore, Walmart has the right to close up to 100 of our salons per year for any reason, upon payment of certain penalties, to terminate lease agreements for breach, such as if we failed to conform with required operating hours, subject to a notice and cure period, and to terminate the lease if the Walmart store is closed. In fiscal year 2017, we began franchising SmartStyle salons. Future franchising activity will require, and be limited, by the approval of Walmart on a location-by-location basis. Walmart may not give its approval to franchise some or all of our company-owned salons. Further, Walmart may attempt to impose changes to the terms and conditions of our agreements, which may be contrary to our economic interests. Operating SmartStyle salons adds complexity in overseeing franchise compliance and coordination with Walmart. Additionally, there are various remodel requirements of our franchisees, whether it be upon lease expiration or the remodeling of a Walmart location. To the extent Walmart accelerates the pace of their own store remodels, our stores in remodeled Walmart locations would be held to the same standard. The cost of these remodels may be prohibitive to our franchisees and could lead to the Company bearing a portion of the cost, or closures if the remodel requirement is not satisfied.

Our ability to ~~attract and retain qualified personnel, for whom we compete with other companies both inside and outside~~use our ~~industry. Our business, financial condition or results of operations~~U.S. net operating loss carryforwards to offset future taxable income may be ~~adversely impacted~~subject to certain limitations.

Utilization of the net operating loss carryforwards may be subject to an annual limitation if an ownership change under Section 382 of the Internal Revenue Code of 1986 occurs. An ownership change could be triggered by ~~the unexpected loss~~subsequent sales of ~~any~~securities by us or our stockholders and such a change of ownership may limit our management team or other key personnel, or more generally if we fail to identify, recruit, train and/or retain talented personnel. Effective October 5, 2020, our new Chief Executive Officer commenced his employment as partutilization of ~~a leadership transition. Any transition in senior executive leadership can impact relationships with our suppliers, franchisees, and employees and can lead to shifts in our operations.~~

~~We adopted a new merchandising strategy under which the Company will outsource product distribution to third-party distributors~~.

~~The Company is in the process of implementing our new merchandising strategy where we will exit the product distribution business and outsource distribution to third-party distributors.~~

Our success depends, in part, on our ability to rely upon third-party distributors to procure and deliver beauty products in quantities sufficient to meet the needs of our customers. Any material delay in the delivery of beauty products, and/or any reduction to, or material change in, the assortment of beauty products supplied to our salons could result in reduced retail sales and service offerings. In addition, disruptions and delays in the beauty supply chain, as a result of COVID-19 or otherwise, could adversely impact the third-party distributors’ abilities to meet our customer demands, which could negatively impact our business andnet operating ~~results.~~losses.

4336

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Share Issuance Program

On February 3, 2021, the Company filed a $150.0 million shelf registration statement and $50.0 million prospectus supplement with the 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, 2022, the Company issued 9.3 million shares for proceeds of $38.4 million offset by fees of $1.2 million.

The following table shows the stock issuance activity for the three months ended March 31, 2022:


Period	Total Number of Shares Issued	Average Price per Share		Total Number of Shares Issued As Part of Publicly Announced Plans	Gross Proceeds Received

1/1/22 - 1/31/22	—	$	—	9,295,618	$	—
2/1/22 - 2/28/22	—	—		9,295,618	—
3/1/22 - 3/31/22	—	—		9,295,618	—
Total	—	$	—	9,295,618	$	—

On March 31, 2022, $11.6 million remains under the prospectus supplement, which equates to 5.5 million shares based on the share price as of March 31, 2022.

Share Repurchase Program

In May 2000, the ~~Company’s~~ Board ~~of Directors (Board)~~ approved a stock repurchase program with no stated expiration date. Since that time and through March 31, ~~2021,~~2022, the Board has authorized $650.0 million to be expended for the repurchase of the Company's stock under this program. All repurchased shares become authorized but unissued shares of the Company. The timing and amounts of any repurchases depend on many factors, including the market price of the common stock and overall market conditions. During the three and nine months ended March 31, 2021, the Company ~~did not repurchase any shares.~~last purchased shares in fiscal year 2020. As of March 31, ~~2021,~~2022, a total accumulated 30.0 million shares have been repurchased for $595.4 million. At March 31, ~~2021,~~2022, $54.6 million remains outstanding under the approved stock repurchase program.

The ~~following table shows the stock~~Company does not expect to repurchase ~~activity by the Company or any “affiliated purchaser” of the Company, as defined~~shares in ~~Rule 10b-18(a)(3) under the Exchange Act, by month for the three months ended March 31, 2021:~~

Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased As Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs (in thousands)
1/1/21 - 1/31/21 — $ — 29,974,657 $ 54,573
2/1/21 - 2/28/21 — — 29,974,657 54,573
3/1/21 - 3/31/21 — — 29,974,657 54,573
Total — $ — 29,974,657 $ 54,573
fiscal year 2022.

Item 6. Exhibits


Exhibit 10.1						Offer Letter, Non-Compete, Non-Disclosure, Non-Solicitation and Non-Hire Agreement, between Matthew Doctor and Regis Corporation, dated May 4, 2022. (Incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed on May 5, 2022.)
Exhibit 31.1						President and Chief Executive Officer of Regis Corporation: Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2						Executive Vice President and Chief Financial Officer of Regis Corporation: Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32						Chief Executive Officer and Chief Financial Officer of Regis Corporation: Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 101						The following financial information from Regis Corporation's Quarterly Report on Form 10-Q for the quarterly and year-to-date periods ended March 31, ~~2021,~~2022, formatted in Inline Xtensible Business Reporting Language (iXBRL) and filed electronically herewith: (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of ~~Earnings;~~Operations; (iii) the Condensed Consolidated Statements of Comprehensive ~~Income;~~Loss; (iv) the Condensed Consolidated Statements of Shareholders' Equity; (v) the Condensed Consolidated Statements of Cash Flows; and ~~(v)~~(vi) the Notes to the Condensed Consolidated Financial Statements.
Exhibit 104						The cover page from Regis Corporation's Quarterly Report on Form 10-Q for the quarterly and year-to-date periods ended March 31, ~~2021,~~2022, formatted in iXBRL (included as Exhibit 101).

4438

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Date: May ~~6, 2021~~10, 2022	By:	/s/ Kersten D. Zupfer
		Kersten D. Zupfer
		Executive Vice President and Chief Financial Officer
		(Principal Accounting Officer)

4539


	Three Months Ended March 31, 2020
	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income		Retained Earnings		Total
	Shares	Amount

Balance, December 31, 2019	35,563,611	$	1,778	$	21,230	$	9,480	$	235,534	$	268,022
Net loss	—	—		—		—		(67,541)		(67,541)
Foreign currency translation	—	—		—		(2,482)		—		(2,482)


Stock-based compensation	—	—		(25)		—		—		(25)
Net restricted stock activity	2,595	—		(19)		—		—		(19)
Minority interest	—	—		—		—		38		38
Balance, March 31, 2020	35,566,206	$	1,778	$	21,186	$	6,998	$	168,031	$	197,993


Remainder of 2021	$	1,505
2022	5,901
2023	5,725
2024	5,483
2025	5,092
Thereafter	15,224
Total	$	38,930


	Three Months Ended March 31, 2021	Nine Months Ended March 31, 2021


Restricted stock units	47,303	891,825
Performance-based restricted stock units	0	62,290
Stock option units	0	1,458,680


	Maturity Date	Interest Rate	March 31, 2021		June 30, 2020

	(Fiscal Year)		(Dollars in thousands)

Financial liability - Salt Lake City Distribution Center	2034	3.30%	$	0	$	16,773
Financial liability - Chattanooga Distribution Center	2034	3.70%	0		11,208
Long- term financing liability			$	0	$	27,981


	Three Months Ended March 31, 2020
	As Previously Reported		Adjustments		As Revised

	(Dollars in thousands, except per share amounts)

Rent expense (1)	$	19,243	$	(578)	$	18,665
Goodwill impairment (2)	44,529		(4,365)		40,164
Operating loss	(64,342)		4,943		(59,399)
Loss from sale of salon assets to franchisees, net	(10,208)		2,350		(7,858)
Interest income and other, net	(1,329)		1,477		148
Loss from continuing operations before income taxes	(77,591)		8,770		(68,821)
Income tax benefit	2,253		(1,274)		979
Net loss	(75,037)		7,496		(67,541)
Net loss per share	(2.10)		0.22		(1.88)
Comprehensive loss	(77,519)		7,496		(70,023)


As of	Debt to Capitalization (1)		Basis Point Increase (Decrease) (2)

March 31, 2021	78.2	%	1,620
June 30, 2020	62.0	%	3,520


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased As Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs (in thousands)

1/1/21 - 1/31/21	—	$	—	29,974,657	$	54,573
2/1/21 - 2/28/21	—	—		29,974,657	54,573
3/1/21 - 3/31/21	—	—		29,974,657	54,573
Total	—	$	—	29,974,657	$	54,573