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 December 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 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 accelerated filer," "accelerated filer," "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 classes of common stock as of January ~~28, 2022: 45,490,592~~26, 2023: 45,564,673

REGIS CORPORATION

~~INDEX~~

INDEX


Part I.	Financial Information

	Item 1.	Financial Statements (Unaudited):

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

		Condensed Consolidated Statement of Operations for the Three and Six Months Ended December 31, ~~2021~~2022 and ~~2020~~2021	3

		Condensed Consolidated Statement of Comprehensive Loss for the Three and Six Months Ended December 31, ~~2021~~2022 and ~~2020~~2021	4

		Condensed Consolidated Statement of Shareholders' ~~Equity~~Deficit for the Three and Six Months Ended December 31, ~~2021~~2022 and ~~2020~~2021	5

		Condensed Consolidated Statement of Cash Flows for the Six Months Ended December 31, ~~2021~~2022 and ~~2020~~2021	6

		Notes to Condensed Consolidated Financial Statements	7

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2321

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3433

	Item 4.	Controls and Procedures	3433

Part II.	Other Information		3534

	Item 1.	Legal Proceedings	3534

	Item 1A.	Risk Factors	3534

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3635



	Item 6.	Exhibits	3736

	Signatures		3837

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

REGIS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)

(Dollars in thousands, except share data)


		December 31, 2021		June 30, 2021			December 31, 2022		June 30, 2022

ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents		$	35,442	$	19,191
Cash and cash equivalents (Note 7)						Cash and cash equivalents (Note 7)	$	9,406	$	17,041
Receivables, net	Receivables, net	16,624		27,372		Receivables, net	13,962		14,531
Inventories		16,008		22,993
Inventories, net						Inventories, net	2,623		3,109
Other current assets	Other current assets	15,439		17,103		Other current assets	18,138		13,984
Total current assets	Total current assets	83,513		86,659		Total current assets	44,129		48,665

Property and equipment, net	Property and equipment, net	22,244		23,113		Property and equipment, net	8,692		12,835
Goodwill		229,028		229,582
Goodwill (Note 1)						Goodwill (Note 1)	173,337		174,360
Other intangibles, net	Other intangibles, net	3,474		3,761		Other intangibles, net	2,917		3,226
Right of use asset (Note 7)		548,598		611,880
Right of use asset (Note 8)						Right of use asset (Note 8)	430,979		493,749
Other assets	Other assets	39,301		41,388		Other assets	27,622		36,465

Total assets	Total assets	$	926,158	$	996,383	Total assets	$	687,676	$	769,300

LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES AND SHAREHOLDERS' DEFICIT						LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	18,579	$	27,157	Accounts payable	$	17,277	$	15,860
Accrued expenses	Accrued expenses	39,041		54,857		Accrued expenses	27,690		33,784
Short-term lease liability (Note 7)		110,597		116,471

Short-term lease liability (Note 8)						Short-term lease liability (Note 8)	93,940		103,196
Total current liabilities	Total current liabilities	168,217		198,485		Total current liabilities	138,907		152,840

Long-term debt, net (Note 8)		194,177		186,911
Long-term lease liability (Note 7)		457,924		518,866
Long-term debt, net (Note 9)						Long-term debt, net (Note 9)	174,846		179,994
Long-term lease liability (Note 8)						Long-term lease liability (Note 8)	352,212		408,445

Other non-current liabilities	Other non-current liabilities	67,552		75,075		Other non-current liabilities	53,346		58,974
Total liabilities	Total liabilities	887,870		979,337		Total liabilities	719,311		800,253
Commitments and contingencies (Note 5)		0		0
Shareholders' equity:
Common stock, $0.05 par value; issued and outstanding 45,490,074 and 35,795,844 common shares at December 31, 2021 and June 30, 2021, respectively		2,277		1,790
Commitments and contingencies (Note 6)						Commitments and contingencies (Note 6)
Shareholders' deficit:						Shareholders' deficit:
Common stock, $0.05 par value; issued and outstanding, 45,562,555 and 45,510,245 common shares at December 31, 2022 and June 30, 2022, respectively						Common stock, $0.05 par value; issued and outstanding, 45,562,555 and 45,510,245 common shares at December 31, 2022 and June 30, 2022, respectively	2,278		2,276
Additional paid-in capital	Additional paid-in capital	61,601		25,102		Additional paid-in capital	63,543		62,562
Accumulated other comprehensive income	Accumulated other comprehensive income	9,105		9,543		Accumulated other comprehensive income	8,729		9,455
Accumulated deficit	Accumulated deficit	(34,695)		(19,389)		Accumulated deficit	(106,185)		(105,246)
Total shareholders' equity		38,288		17,046
Total liabilities and shareholders' equity		$	926,158	$	996,383
Total shareholders' deficit						Total shareholders' deficit	(31,635)		(30,953)
Total liabilities and shareholders' deficit						Total liabilities and shareholders' deficit	$	687,676	$	769,300

_______________________________________________________________________________

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

REGIS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

For ~~The~~the Three ~~And~~and Six Months Ended December 31, 2022 and 2021 ~~And 2020~~

(Dollars and shares in thousands, except per share ~~data~~ amounts)
Three Months Ended December 31, Six Months Ended December 31,
2021 2020 2021 2020
Revenues:
Royalties $ 16,125 $ 12,749 $ 32,726 $ 24,154
Fees 4,867 2,438 8,132 4,480
Product sales to franchisees 2,428 14,236 10,436 27,978
Advertising fund contributions 8,021 4,715 16,136 9,224
Franchise rental income (Note 7) 33,772 32,285 67,534 64,568
Company-owned salon revenue 5,043 37,897 13,048 85,312
Total revenue 70,256 104,320 148,012 215,716
Operating expenses:
Cost of product sales to franchisees 3,419 11,324 11,532 22,003
General and administrative 15,984 26,690 37,773 52,837
Rent (Note 7) 3,088 12,902 4,891 26,127
Advertising fund expense 8,021 4,715 16,136 9,224
Franchise rent expense 33,772 32,285 67,534 64,568
Company-owned salon expense (1) 5,067 33,611 13,011 76,554
Depreciation and amortization 1,980 6,388 3,849 13,764
Long-lived asset impairment 52 3,160 215 8,984
Total operating expenses 71,383 131,075 154,941 274,061
Operating loss (1,127) (26,755) (6,929) (58,345)
Other (expense) income:
Interest expense (3,449) (3,701) (6,755) (7,463)
Loss from sale of salon assets to franchisees, net (615) (3,226) (1,695) (3,888)
Interest income and other, net 99 403 (140) 517
Loss from operations before income taxes (5,092) (33,279) (15,519) (69,179)
Income tax benefit 164 400 213 1,035
Net loss $ (4,928) $ (32,879) $ (15,306) $ (68,144)
Net loss per share:
Basic and diluted:
Net loss per share, basic and diluted (2) $ (0.11) $ (0.92) $ (0.37) $ (1.90)
Weighted average common and common equivalent shares outstanding:
Basic and diluted 45,721 35,931 41,274 35,889


	Three Months Ended December 31,				Six Months Ended December 31,
	2022		2021		2022		2021

Revenues:
Royalties	$	16,158	$	16,125	$	33,338	$	32,726
Fees	3,238		3,881		5,791		6,208
Product sales to franchisees	1,107		2,428		1,550		10,436
Advertising fund contributions	7,965		8,021		16,216		16,136
Franchise rental income (Note 8)	28,886		33,772		59,216		67,534
Company-owned salon revenue	2,613		5,043		5,727		13,048
Total revenue	59,967		69,270		121,838		146,088
Operating expenses:
Cost of product sales to franchisees	1,310		3,117		1,780		10,766
Inventory reserve	1,228		—		1,228		—
General and administrative	11,747		15,082		26,108		35,866
Rent (Note 8)	2,090		3,042		3,843		4,789
Advertising fund expense	7,965		8,021		16,216		16,136
Franchise rent expense	28,886		33,772		59,216		67,534
Company-owned salon expense (1)	2,218		5,067		5,203		13,011
Depreciation and amortization	3,793		1,605		5,044		3,144
Long-lived asset impairment	—		52		—		215

Total operating expenses	59,237		69,758		118,638		151,461

Operating income (loss)	730		(488)		3,200		(5,373)

Other expense:
Interest expense	(4,519)		(3,270)		(8,336)		(6,397)
Loss from sale of salon assets to franchisees, net	—		(615)		—		(1,695)
Other, net	1,248		99		785		(140)

Loss from operations before income taxes	(2,541)		(4,274)		(4,351)		(13,605)

Income tax benefit (expense)	—		164		(28)		213

Loss from continuing operations	(2,541)		(4,110)		(4,379)		(13,392)

Income (loss) from discontinued operations (Note 3)	134		(818)		3,440		(1,914)

Net loss	$	(2,407)	$	(4,928)	$	(939)	$	(15,306)

Net loss per share:
Basic and diluted:
Loss from continuing operations	$	(0.06)	$	(0.09)	$	(0.10)	$	(0.32)
Income (loss) from discontinued operations	0.00		(0.02)		0.07		(0.05)
Net loss per share, basic and diluted (2)	$	(0.05)	$	(0.11)	$	(0.02)	$	(0.37)





Weighted average common and common equivalent shares outstanding:
Basic and diluted	46,148		45,721		46,091		41,274

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

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

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

REGIS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS (Unaudited)

For ~~The~~the Three ~~And~~and Six Months Ended December 31, 2022 and 2021 ~~And 2020~~

(Dollars in thousands)


		Three Months Ended December 31,				Six Months Ended December 31,					Three Months Ended December 31,				Six Months Ended December 31,
		2021		2020		2021		2020			2022		2021		2022		2021

Net loss	Net loss	$	(4,928)	$	(32,879)	$	(15,306)	$	(68,144)	Net loss	$	(2,407)	$	(4,928)	$	(939)	$	(15,306)
Foreign currency translation adjustments	Foreign currency translation adjustments	36		835		(438)		1,337		Foreign currency translation adjustments	132		36		(726)		(438)
Comprehensive loss	Comprehensive loss	$	(4,892)	$	(32,044)	$	(15,744)	$	(66,807)	Comprehensive loss	$	(2,275)	$	(4,892)	$	(1,665)	$	(15,744)

_______________________________________________________________________________

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

REGIS CORPORATION

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

For ~~The~~the Three ~~And~~and Six Months Ended December 31, 2022 and 2021 ~~And 2020~~

(Dollars in thousands)


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

Balance, September 30, 2022																		Balance, September 30, 2022		45,536,525			$	2,277					$	63,044					$	8,597				$	(103,778)				$	(29,860)
Net loss																		Net loss		—			—			—					—					(2,407)					(2,407)
Foreign currency translation																		Foreign currency translation		—			—			—					132					—					132

Stock-based compensation																		Stock-based compensation		—			—			524					—					—					524
Net restricted stock activity																		Net restricted stock activity		26,030			1			(25)					—					—					(24)

Balance, December 31, 2022																		Balance, December 31, 2022		45,562,555			$	2,278		$	63,543				$	8,729				$	(106,185)				$	(31,635)

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

Balance, September 30, 2021	Balance, September 30, 2021	43,964,489	$	2,198			$	58,310					$	9,069			$	(29,767)		$	39,810	Balance, September 30, 2021			43,964,489			$	2,198				$	58,310				$	9,069				$	(29,767)			$	39,810
Net loss	Net loss	—	—		—				—		(4,928)				(4,928)			Net loss		—			—				—					—					(4,928)					(4,928)
Foreign currency translation	Foreign currency translation	—	—		—				36		—				36			Foreign currency translation		—			—			—					36					—					36
Issuance of common stock, net of offering costs	Issuance of common stock, net of offering costs	1,223,314	61		4,931				—		—				4,992			Issuance of common stock, net of offering costs		1,223,314			61			4,931					—					—					4,992

Stock-based compensation	Stock-based compensation	—	—		(1,374)				—		—				(1,374)			Stock-based compensation		—			—			(1,374)					—					—					(1,374)
Net restricted stock activity	Net restricted stock activity	302,271	18		(266)				—		—				(248)			Net restricted stock activity		302,271			18			(266)					—					—					(248)

Balance, December 31, 2021	Balance, December 31, 2021	45,490,074	$	2,277	$	61,601			$	9,105	$	(34,695)			$	38,288		Balance, December 31, 2021		45,490,074			$	2,277		$	61,601				$	9,105				$	(34,695)				$	38,288

Three Months Ended December 31, 2020
Common Stock Additional
Paid-In
Capital Accumulated
Other
Comprehensive
Income Retained Earnings Total
Shares Amount
Balance, September 30, 2020 35,665,783 $ 1,783 $ 20,596 $ 7,951 $ 59,211 $ 89,541
Net loss — — — — (32,879) (32,879)
Foreign currency translation — — — 835 — 835
Stock-based compensation — — 1,314 — — 1,314
Net restricted stock activity 102,303 5 166 — — 171
Minority interest — — — — (534) (534)
Balance, December 31, 2020 35,768,086 $ 1,788 $ 22,076 $ 8,786 $ 25,798 $ 58,448

Six Months Ended December 31, 2021
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 — — — — (15,306) (15,306)
Foreign currency translation — — — (438) — (438)
Issuance of common stock, net of offering costs 9,295,618 465 36,720 — — 37,185
Stock-based compensation — — 305 — — 305
Net restricted stock activity 398,612 22 (526) — — (504)
Balance, December 31, 2021 45,490,074 $ 2,277 $ 61,601 $ 9,105 $ (34,695) $ 38,288


		Six Months Ended December 31, 2020																		Six Months Ended December 31, 2022
		Common Stock			Additional Paid-In Capital				Accumulated Other Comprehensive Income		Retained Earnings				Total					Common Stock				Additional Paid-In Capital					Accumulated Other Comprehensive Income				Accumulated Deficit				Total
		Shares	Amount											Shares					Amount

Balance, June 30, 2020		35,625,716	$	1,781			$	22,011					$	7,449			$	94,462		$	125,703
Balance, June 30, 2022																		Balance, June 30, 2022		45,510,245		$	2,276		$	62,562				$	9,455			$	(105,246)			$	(30,953)
Net loss	Net loss	—	—		—				—		(68,144)				(68,144)			Net loss		—		—		—					—				(939)				(939)
Foreign currency translation	Foreign currency translation	—	—		—				1,337		—				1,337			Foreign currency translation		—		—		—					(726)				—				(726)

Stock-based compensation	Stock-based compensation	—	—		89				—		—				89			Stock-based compensation		—		—		1,020					—				—				1,020
Net restricted stock activity	Net restricted stock activity	142,370	7		(24)				—		—				(17)			Net restricted stock activity		52,310		2		(39)					—				—				(37)
Minority interest		—	—		—				—		(520)				(520)
Balance, December 31, 2020		35,768,086	$	1,788	$	22,076			$	8,786	$	25,798			$	58,448

Balance, December 31, 2022																		Balance, December 31, 2022		45,562,555		$	2,278	$	63,543				$	8,729			$	(106,185)			$	(31,635)

																				Six Months Ended December 31, 2021
																				Common Stock				Additional Paid-In Capital					Accumulated Other Comprehensive Income				Accumulated Deficit				Total
																				Shares		Amount

Balance, June 30, 2021																		Balance, June 30, 2021		35,795,844		$	1,790				$	25,102				$	9,543			$	(19,389)			$	17,046
Net loss																		Net loss		—		—		—					—				(15,306)				(15,306)
Foreign currency translation																		Foreign currency translation		—		—		—					(438)				—				(438)
Issuance of common stock, net of offering costs																		Issuance of common stock, net of offering costs		9,295,618		465		36,720					—				—				37,185

Stock-based compensation																		Stock-based compensation		—		—		305					—				—				305
Net restricted stock activity																		Net restricted stock activity		398,612		22		(526)					—				—				(504)

Balance, December 31, 2021																		Balance, December 31, 2021		45,490,074		$	2,277	$	61,601				$	9,105			$	(34,695)			$	38,288

_______________________________________________________________________________

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~~the Six Months Ended December 31, 2022 and 2021 ~~And 2020~~

(Dollars in thousands)


		Six Months Ended December 31,					Six Months Ended December 31,
		2021		2020			2022		2021

Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net loss	Net loss	$	(15,306)	$	(68,144)	Net loss	$	(939)	$	(15,306)
Adjustments to reconcile net loss to cash used in operating activities:	Adjustments to reconcile net loss to cash used in operating activities:					Adjustments to reconcile net loss to cash used in operating activities:

Gain from sale of OSP (Note 3)						Gain from sale of OSP (Note 3)	(4,034)		—
Depreciation and amortization	Depreciation and amortization	3,284		11,123		Depreciation and amortization	4,647		3,284

Long-lived asset impairment	Long-lived asset impairment	215		8,984		Long-lived asset impairment	—		215
Deferred income taxes	Deferred income taxes	(529)		(669)		Deferred income taxes	28		(529)

Inventory reserve						Inventory reserve	1,228		—

Loss from sale of salon assets to franchisees, net	Loss from sale of salon assets to franchisees, net	1,695		3,888		Loss from sale of salon assets to franchisees, net	—		1,695

Stock-based compensation	Stock-based compensation	305		89		Stock-based compensation	1,111		305
Amortization of debt discount and financing costs	Amortization of debt discount and financing costs	920		875		Amortization of debt discount and financing costs	1,391		920
Other non-cash items affecting earnings	Other non-cash items affecting earnings	551		202		Other non-cash items affecting earnings	376		551
Changes in operating assets and liabilities, excluding the effects of asset sales (1)	Changes in operating assets and liabilities, excluding the effects of asset sales (1)	(15,463)		(21,812)		Changes in operating assets and liabilities, excluding the effects of asset sales (1)	(10,722)		(15,463)
Net cash used in operating activities	Net cash used in operating activities	(24,328)		(65,464)		Net cash used in operating activities	(6,914)		(24,328)

Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Capital expenditures	Capital expenditures	(2,947)		(7,502)		Capital expenditures	(361)		(2,947)
Proceeds from sale of assets to franchisees		—		7,148
Costs associated with sale of salon assets to franchisees		—		(222)
Proceeds from company-owned life insurance policies		—		1,200

Net cash (used in) provided by investing activities		(2,947)		624

Proceeds from sale of OSP, net of fees						Proceeds from sale of OSP, net of fees	4,000		—
Net cash provided by (used in) investing activities						Net cash provided by (used in) investing activities	3,639		(2,947)

Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Borrowings on revolving credit facility		10,000		—
Repayments of revolving credit facility		(2,734)		—
Borrowings on credit facility						Borrowings on credit facility	11,357		10,000
Repayments of long-term debt						Repayments of long-term debt	(8,535)		(2,734)
Debt refinancing fees						Debt refinancing fees	(4,383)		—
Proceeds from issuance of common stock, net of offering costs	Proceeds from issuance of common stock, net of offering costs	37,185		—		Proceeds from issuance of common stock, net of offering costs	—		37,185

Taxes paid for shares withheld	Taxes paid for shares withheld	(823)		(212)		Taxes paid for shares withheld	(35)		(823)

Minority interest buyout		—		(562)

Distribution center lease payments		—		(478)
Net cash provided by (used in) financing activities		43,628		(1,252)

Net cash (used in) provided by financing activities						Net cash (used in) provided by financing activities	(1,596)		43,628

Effect of exchange rate changes on cash and cash equivalents	Effect of exchange rate changes on cash and cash equivalents	(134)		(68)		Effect of exchange rate changes on cash and cash equivalents	(135)		(134)

Increase (decrease) in cash, cash equivalents, and restricted cash		16,219		(66,160)
(Decrease) increase in cash, cash equivalents, and restricted cash						(Decrease) increase in cash, cash equivalents, and restricted cash	(5,006)		16,219

Cash, cash equivalents and restricted cash:	Cash, cash equivalents and restricted cash:					Cash, cash equivalents and restricted cash:
Beginning of period	Beginning of period	29,152		122,880		Beginning of period	27,464		29,152
End of period	End of period	$	45,371	$	56,720	End of period	$	22,458	$	45,371

_______________________________________________________________________________

(1)Changes in operating assets and liabilities exclude assets and liabilities sold.

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

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 December 31, ~~2021~~2022 and for the three and six months ended December 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 December 31, ~~2021~~2022 and its consolidated results of operations, comprehensive loss, shareholders' ~~equity~~deficit and cash flows for the interim periods. Adjustments consist only of normal recurring items, except for any discussed in the notes below. The results of operations and cash flows for any interim period are not necessarily indicative of results of operations and cash flows for the full year.

The accompanying 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 Annual Report on Form 10-K for the year ended June 30, ~~2021~~2022 and other documents filed or furnished with the SEC during the current fiscal year.

~~COVID-19 Impact:~~

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

Inventories:

The Company has inventory valuation reserves for excess and obsolete inventories or other factors that may render inventories unmarketable at their historical costs. ~~In fiscal year 2021, the Company announced it would transition away from its wholesale product distribution model in favor of a third-party distribution model. As a result, the~~The Company exited its distribution centers in fiscal year ~~2022.~~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 re-distribute inventory from closed locations to other salons to be sold or used.discounts. The inventory valuation reserve as of December 31, ~~2021~~2022 and June 30, ~~2021~~2022 was ~~$7.8~~$1.9 and ~~$11.8~~$1.9 million, respectively. ~~Included~~In the three and six months ended December 31, 2022, an inventory reserve charge of $1.2 million was recorded in ~~Company-owned salon expense is~~Inventory reserve on the unaudited Condensed Consolidated Statement of Operations. In the three and six months ended December 31, 2021, an inventory reserve charge of $1.2 and $1.5 million, ~~in the three and six months ended December 31, 2021, respectively. Included~~respectively, was recorded in Company-owned salon expense ~~is an~~on the unaudited Condensed Consolidated Statement of Operations.

As of December 31, 2022 and June 30, 2022, the Company had inventory related to discontinued operations of $1.3 and $1.8 million, respectively, net of a reserve ~~charge~~ of $1.3 and $1.1 ~~and $1.6~~ million, respectively. The increase in the ~~three and six months ended December 31, 2020, respectively.~~

~~Long-Lived Asset Impairment Assessments:~~

~~The Company assesses impairment of long-lived salon assets and right of use (ROU) assets at~~reserve during fiscal year 2023 reduced the individual salon level, as this is the lowest level for which identifiable cash flows are largely independent of other groups of assets and liabilities, when events or changes in circumstances indicate the carrying value of the assets or the asset grouping may not be recoverable. Factors considered in deciding when to perform an impairment review include significant under-performance of an individual salon in relation to expectations, significant economic or geographic trends, and significant changes or planned changes in the use of the assets. The first step is to assess recoverability, and in doing that, the undiscounted salon cash flows are compared to the carrying value of the salon assets. If the undiscounted estimated cash flows are less than the carrying value of the assets, the Company calculates an impairment charge based on the difference between the carrying value of the asset group and its fair value. The fair value of the long-lived asset group is estimated using market participant methods based on the best information available.gain from discontinued operations. See Note ~~7 of~~3 to 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.Statements.

Goodwill:

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

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

As ~~a result of the impairment testing, the Franchise reporting unit, which has goodwill of $229.0 million, was determined to have a fair value that exceeded its carrying value by 15% as~~ of December 31, 2021. At the time of the Company's annual goodwill impairment test in the fourth quarter of fiscal year 2021, the fair value exceeded the book value by 30%. The decrease in headroom is primarily due to an increase in the company-specific risk factor that drove an increase in discount rate from 14% to 18.5%. As of2022 and June 30, ~~2021,~~2022, the Franchise reporting unit had ~~goodwill~~$173.3 and $174.4 million, respectively, of ~~$229.6 million.~~goodwill. The change in goodwill for the six months ended December 31, ~~2021~~2022 is due to foreign currency translation.

~~Classification~~ 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 ~~Revenue and Expenses:~~

~~Beginning~~a reporting unit below its carrying value. An interim impairment analysis was not required 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~~three 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 yearsix months ended December 31, 2022.

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

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

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

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

Depreciation:

Depreciation expense in the three months ended December 31, 2022 and 2021 includes $0.2 and ~~2020 include~~ $0.3 ~~and $1.4~~ million, respectively, and for the six months ended December 31, 2022 and 2021 includes $0.4 and ~~2020 include~~ $0.6 ~~and $2.7~~ million, respectively, of asset retirement obligations, which are cash expenses. Depreciation expense in the three and six months ended December 31, 2022 includes a $2.6 million accelerated depreciation charge related to the consolidation of office space within the Company's corporate headquarters.

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 or the guest receives and pays for the merchandise. Revenues from purchases made with gift cards are also recorded when the guest takes possession of the merchandise or services are provided. Gift cards issued by the Company are recorded as a liability (deferred revenue) upon sale and recognized as revenue upon redemption by the guest. Gift card breakage, the amount of gift cards which will not be redeemed, is recognized proportional to redemptions using estimates based on historical redemption patterns.

Revenue recognized over time

Royalty and advertising fund revenues represent sales-based royalties that are recognized in the period in which the sales occur. Generally, royalty and advertising fund revenues are billed and collected monthly in arrears. Advertising fund revenues and expenditures, which must be spent on marketing and related activities per the franchise agreements, are recorded on a gross basis within the unaudited Condensed Consolidated Statement of Operations. The treatment increases both the gross amount of reported revenue and expense and generally has no impact on operating income and net income. Franchise fees are billed and received upon the signing of the franchise agreement. Recognition of these fees is deferred until the salon ~~opening~~opens and is then recognized over the term of the franchise agreement, which is typically ~~ten~~10 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 sublease arrangements with the franchisees. The Company recognizes franchise rental income and expense when it is due to the landlord.

Revenue recognized at point of sale

Company-owned salon revenues are recognized at the time when the services are provided or the guest receives and pays for the merchandise. Revenues from purchases made with gift cards are also recorded when the guest takes possession of the merchandise or services are provided. Gift cards issued by the Company are recorded as a liability (deferred revenue) upon sale and recognized as revenue upon redemption by the guest. Gift card breakage, the amount of gift cards which will not be redeemed, is recognized proportional to redemptions using estimates based on historical redemption patterns. Product sales to franchisees and other partners are recorded at the time product is delivered.

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


		December 31, 2021		June 30, 2021		Balance Sheet Classification		December 31, 2022		June 30, 2022		Balance Sheet Classification

		(Dollars in thousands)						(Dollars in thousands)

Receivables from contracts with customers, net	Receivables from contracts with customers, net	$	9,238	$	19,112	Receivables, net	Receivables from contracts with customers, net	$	9,419	$	10,263	Receivables, net
Broker fees	Broker fees	17,288		19,254		Other assets	Broker fees	14,006		15,592		Other assets

Deferred revenue:	Deferred revenue:						Deferred revenue:
Current	Current						Current
Gift card liability	Gift card liability	$	2,131	$	2,240	Accrued expenses	Gift card liability	$	1,950	$	2,037	Accrued expenses
Deferred franchise fees unopened salons		21		40		Accrued expenses

Deferred franchise fees open salons	Deferred franchise fees open salons	5,897		5,884		Accrued expenses	Deferred franchise fees open salons	5,533		5,770		Accrued expenses
Total current deferred revenue	Total current deferred revenue	$	8,049	$	8,164		Total current deferred revenue	$	7,483	$	7,807
Non-current	Non-current						Non-current
Deferred franchise fees unopened salons	Deferred franchise fees unopened salons	$	4,128	$	6,571	Other non-current liabilities	Deferred franchise fees unopened salons	$	2,664	$	3,211	Other non-current liabilities
Deferred franchise fees open salons	Deferred franchise fees open salons	29,761		32,365		Other non-current liabilities	Deferred franchise fees open salons	23,963		26,827		Other non-current liabilities
Total non-current deferred revenue	Total non-current deferred revenue	$	33,889	$	38,936		Total non-current deferred revenue	$	26,627	$	30,038

108

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):~~period:


~~Balance as of June 30, 2021~~	$	~~7,774~~
~~Provision for doubtful accounts (1)~~	~~(41)~~
~~Provision for franchisee rent (2)~~	~~811~~
~~Reclass of accrued rent (3)~~	~~396~~
~~Write-offs~~	~~(589)~~
~~Balance as of December 31, 2021~~	$	~~8,351~~


	Six Months Ended December 31,
	2022		2021

	(Dollars in thousands)

Balance at beginning of period	$	6,559	$	7,774
Provision for doubtful accounts	369		(41)
Provision for franchisee rent (1)	(208)		811
Reclass of accrued rent (2)	73		396
Write-offs	(1,129)		(589)
Balance at end of period	$	5,664	$	8,351

_______________________________________________________________________________

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

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

~~(3)~~(2)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~~years 2023 and 2022 and the related accrual ~~was~~were 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 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):~~indicated:


~~Balance as of June 30, 2021~~	$	~~19,254~~
~~Additions~~	25
~~Amortization~~	~~(1,625)~~
~~Write-offs~~	~~(366)~~
~~Balance as of December 31, 2021~~	$	~~17,288~~


	Six Months Ended December 31,
	2022		2021

	(Dollars in thousands)

Balance at beginning of period	$	15,592	$	19,254
Additions	—		25
Amortization	(1,586)		(1,625)
Write-offs	—		(366)
Balance at end of period	$	14,006	$	17,288

The decrease in non-current deferred franchise fees for unopened salons from June 30, 2021 to December 31, 2021 is primarily due to $1.7 million of deferred fees related to terminated development agreements being recognized as fees in the unaudited Condensed Consolidated Statement of Operations in the six months ended December 31, 2021, of which $1.5 million was recognized in the second 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 December 31, 2022 and 2021 ~~and 2020~~ was ~~$1.6~~$1.7 and $1.6 million, respectively, and for the six months ended December 31, ~~2021~~2022 and ~~2020~~2021 was $3.2 and ~~$3.3~~$3.2 million, respectively. Estimated revenue expected to be recognized in the future related to deferred franchise fees for open salons as of December 31, ~~2021~~2022 is as follows (in thousands):


Remainder of 2022		$	3,034
2023		5,724
Remainder of 2023				Remainder of 2023	$	2,766
2024	2024	5,489		2024	5,378
2025	2025	5,096		2025	4,986
2026	2026	4,630		2026	4,521
2027				2027	4,058
Thereafter	Thereafter	11,685		Thereafter	7,787
Total	Total	$	35,658	Total	$	29,496

3. DISCONTINUED OPERATIONS:

On June 30, 2022, the Company sold its Opensalon® Pro (OSP) solution to Soham Inc. The Company received $13.0 million in proceeds in June 2022 and in the six months ended December 31, 2022, received an additional $4.5 million in proceeds, net of a $0.5 million transaction fee. As a result of the sale, the Company classified the OSP business as discontinued operations in the financial statements for all periods presented. No income taxes have been allocated to discontinued operations based on the methodology required by accounting for income taxes guidance.

The following summarizes the results of discontinued operations for the periods presented:


	Three Months Ended December 31,				Six Months Ended December 31,
	2022		2021		2022		2021

	(Dollars in thousands)

Discontinued operations:
OSP fees	$	—	$	986	$	(226)	$	1,924
Cost of product sales to franchisees	—		(302)		—		(766)
General and administrative	—		(902)		(27)		(1,907)
Rent	26		(46)		(341)		(102)
Depreciation and amortization	—		(375)		—		(705)

Interest expense	—		(179)		—		(358)
Gain from sale of OSP	108		—		4,034		—


Gain (loss) from OSP discontinued operations, net	$	134	$	(818)	$	3,440	$	(1,914)

1110

3.4. SHAREHOLDERS' EQUITY:

Stock-Based Employee Compensation:

During the three and six months ended December 31, ~~2021,~~2022, the Company granted various equity awards including ~~RSUs, SOs,~~stock options and ~~SARs~~stock appreciation rights as follows:


		Three Months Ended December 31, 2021	Six Months Ended December 31, 2021		Three Months Ended December 31, 2022	Six Months Ended December 31, 2022

Restricted stock units (RSUs)		770,309	773,296

Stock options (SOs)	Stock options (SOs)	537,500	537,500	Stock options (SOs)	615,000	1,600,000
Stock appreciation rights (SARs)	Stock appreciation rights (SARs)	487,500	487,500	Stock appreciation rights (SARs)	—	600,000

The RSUs granted during the three months ended December 31, 2021 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 RSUs granted during the first quarter of fiscal year 2022 were granted to a Board member who joined the Company during the quarter and vested on October 27, 2021. The SOs and SARs granted during the three and six months ended December 31, ~~2021~~2022 vest ~~20%,20%,60%~~in equal amounts over aone or three-year period subsequent to the grant date.

Total compensation cost for stock-based payment arrangements totaling ~~$(1.4)~~$0.6 and ~~$1.3~~$(1.4) million for the three months ended December 31, ~~2021~~2022 and ~~2020,~~2021, respectively, and ~~$0.3~~$1.1 and ~~$0.1~~$0.3 million for the six months ended December 31, ~~2021~~2022 and ~~2020,~~2021, respectively, were recorded within general and administrative expense on the unaudited Condensed Consolidated Statement of Operations. In the three and six months ended December 31, 2021, ~~and 2020,~~ stock compensation includes a benefit related to executive forfeitures of $2.0 ~~and $0.3 million, respectively. In the six months ended December 31, 2021 and 2020, stock compensation includes a benefit related to executive forfeitures of $2.0 and $2.7 million, respectively.~~million.

Share 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 ~~three and~~six months ended December 31, 2022, the Company did not issue any shares. During the six months ended December 31, 2021, the Company issued 9.3 million shares and received ~~gross~~net proceeds of ~~$5.2 and $38.4~~$37.2 million. As of December 31, 2022, $11.6 million ~~respectively, related to the "at-the-market" offering and paid fees to sales agents and other fees of $0.2 and $1.2 million, respectively. Net proceeds from sales of shares~~remains under the ~~"at-the-market" program, if any, may be used~~prospectus supplement, which equates to ~~among other things, fund working capital requirements, repay debt and support growth strategies.~~9.5 million shares based on the share price as of December 31, 2022.

1211

4.5. INCOME TAXES:

A summary of income tax ~~benefits~~benefit (expense) and corresponding effective tax rates is as follows:


		Three Months Ended December 31,						Six Months Ended December 31,							Three Months Ended December 31,						Six Months Ended December 31,
		2021			2020			2021			2020				2022			2021			2022			2021

		(Dollars in thousands)													(Dollars in thousands)

Income tax benefit		$	164		$	400		$	213		$	1,035
Income tax benefit (expense)														Income tax benefit (expense)	$	—		$	164		$	(28)		$	213
Effective tax rate	Effective tax rate	3.2		%	1.2		%	1.4		%	1.5		%	Effective tax rate	—		%	3.8		%	(0.6)		%	1.6		%

The recorded tax ~~provisions~~provision and effective tax rates for the three and six months ended December 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.

On August 16, 2022, the Inflation Reduction Act (the IRA) was signed into law. The IRA contains a number of tax related provisions, including a 15% minimum corporate income tax on certain large corporations, as well as an excise tax on stock repurchases. The Company ~~is no longer subject~~has evaluated the IRA and does not expect it to ~~IRS examinations for years before 2014. Furthermore, with~~have a material impact on the Company's consolidated financial statements.

With limited exceptions, ~~the Company is no longer subject~~due to net operating loss carryforwards, our federal, state and ~~international income~~foreign tax ~~examinations by tax authorities~~returns are open to examination for all years ~~before 2012.~~since 2014, 2012 and 2016, respectively.

5.6. COMMITMENTS AND CONTINGENCIES:

The Company is a plaintiff or defendant in various lawsuits and claims arising out of the normal course of business. Like certain other franchisors, the Company has ~~been~~ faced ~~with~~ allegations of franchise regulation and agreement violations. Additionally, because the Company may be the tenant under a master lease for a location subleased to a franchisee, the Company has faced allegations of nonpayment of rent and associated charges. Further, similar to other large retail employers, the Company has ~~been~~ faced, ~~with~~and may continue to face, allegations of purported class-wide consumer and wage and hour violations. In

During the three and six months ended December 31, ~~2021,~~2022, the Company recorded ~~$1.0~~$0.4 and $0.9 million, respectively, of ~~settlement and legal fees~~expense related to litigation, and $0.6 and $1.1 million was paid during the three and six months ended December 31, 2022, respectively.

The Company's previous point-of-sale system supplier had challenged the development of certain parts of the Company's technology systems in litigation brought in the ~~quarter. Other litigation~~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 Transition 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, OSP. The Company and the supplier entered into an amendment to the Settlement Agreement, effective June 15, 2022, in which the Company agreed to pay $2.0 million to the supplier in installments commencing on June 15, 2022, and ending on December 10, 2022, in consideration of a release of claims arising out of or related to the Transition Services Agreement and for the supplier to continue to provide the services set forth in that agreement. As of December 31, 2022, the Company has made all payments under the agreement.

Litigation is inherently unpredictable, and the outcome of these matters cannot presently be determined. Although the actions are being vigorously defended, the Company could incur judgments in the future or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period. In addition, our existing point-of-sale system supplier had 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. 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 $2.7 and $3.0 million as of December 31, 2021 and June 30, 2021, respectively.~~

1312

6.7. CASH, CASH EQUIVALENTS AND RESTRICTED CASH:

The table below reconciles the cash and cash equivalents balances and restricted cash balances, recorded within other current assets on the unaudited Condensed Consolidated Balance Sheet to the amount of cash, cash equivalents and restricted cash reported on the unaudited Condensed Consolidated Statement of Cash ~~flows:~~Flows:


		December 31, 2021		June 30, 2021			December 31, 2022		June 30, 2022

		(Dollars in thousands)					(Dollars in thousands)

Cash and cash equivalents	Cash and cash equivalents	$	35,442	$	19,191	Cash and cash equivalents	$	9,406	$	17,041
Restricted cash, included in other current assets (1)	Restricted cash, included in other current assets (1)	9,929		9,961		Restricted cash, included in other current assets (1)	13,052		10,423
Total cash, cash equivalents and restricted cash	Total cash, cash equivalents and restricted cash	$	45,371	$	29,152	Total cash, cash equivalents and restricted cash	$	22,458	$	27,464

_______________________________________________________________________________

(1)Restricted cash within other current assets primarily relates to consolidated advertising cooperatives funds, which can only be used to settle obligations of the respective cooperatives, and contractual obligations to collateralize the Company's self-insurance programs.

1413

7.8. LEASES:

At contract inception, the Company determines whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides the Company the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, the Company considers it to be, or contain, a lease. The Company leases its company-owned salons and some of its corporate facilities under operating leases. The original terms of the salon leases range from 1one to 20 years with many leases renewable for an additional 5five to 10-year term at the option of the Company. In addition to the obligation to make fixed rental payments for the use of the salons, the Company also has variable lease payments that are based on sales levels. For most leases, the Company is required to pay real estate taxes and other occupancy expenses. Total rent includes the following:


		Three Months Ended December 31,				Six Months Ended December 31,					Three Months Ended December 31,				Six Months Ended December 31,
		2021		2020		2021		2020			2022		2021		2022		2021

		(Dollars in thousands)									(Dollars in thousands)

Office and warehouse rent	Office and warehouse rent	$	1,248	$	1,194	$	2,917	$	2,397	Office and warehouse rent	$	834	$	1,202	$	1,706	$	2,815
Lease termination expense (1)	Lease termination expense (1)	238		1,117		1,578		6,670		Lease termination expense (1)	848		238		1,306		1,578
Lease liability benefit (2)	Lease liability benefit (2)	(496)		(2,226)		(2,927)		(8,286)		Lease liability benefit (2)	(615)		(496)		(1,217)		(2,927)
Franchise salon rent(3)	Franchise salon rent(3)	246		440		575		1,158		Franchise salon rent(3)	9		246		(44)		575
Company-owned salon rent	Company-owned salon rent	1,852		12,377		2,748		24,188		Company-owned salon rent	1,014		1,852		2,092		2,748
Total	Total	$	3,088	$	12,902	$	4,891	$	26,127	Total	$	2,090	$	3,042	$	3,843	$	4,789

_______________________________________________________________________________

(1)During the three and six months ended December 31, 2022, the Company incurred costs of $0.8 and $1.3 million, respectively, to exit salons before the lease end date in order to relieve the Company of future lease obligations. During the three months ended December 31, 2021, 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 six months ended December 31, 2021, the Company paid $0.9 million to exit its distribution centers before the lease end dates and incurred costs of $0.7 million to exit salons before the lease end ~~date~~dates in order to relieve the Company of future lease obligations. For the three and six months ended December 31, 2020, lease termination fees includes $2.2 and $4.6 million, respectively, of early termination payments to close salons before the lease end date to relieve the Company of future lease obligations and $(1.1) and $2.0 million, respectively, of adjustments to accrue future lease payments for salons that are no longer operating.

(2)Upon termination of previously impaired leases, the Company derecognizes the corresponding ROU assets and lease liabilities, which results in a net gain. In addition, the Company recognizes a benefit from lease liabilities decreasing in excess of previously impaired ROU assets for ongoing leases that were previously impaired.

(3)Franchise salon rent in fiscal year 2023 includes the benefit of incurring less cost to terminate a lease than estimated.

The Company leases salon premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees. All lease-related costs are passed through to the franchisees. The Company records the rental payments due from franchisees as franchise rental income and the corresponding amounts owed to landlords as franchise rent expense on the unaudited Condensed Consolidated Statement of Operations. For the three months ended December 31, ~~2021~~2022 and ~~2020,~~2021, franchise rental income and franchise rent expense were ~~$33.8~~$28.9 and ~~$32.3~~$33.8 million, respectively, and ~~$67.5~~$59.2 and ~~$64.6~~$67.5 million, respectively, for the six months ended December 31, ~~2021~~2022 and ~~2020.~~2021. These leases generally have lease terms of approximately five years. The Company expects to renew the SmartStyle® master lease and some ~~franchise~~ leases for locations subleased to our franchisees upon ~~expiration.~~expiration of those leases. Other leases are expected to be renewed by the franchisee upon expiration.

1514

~~For salon~~All the Company's leases are operating ~~leases, the~~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. ~~For leases classified as operating leases, expense~~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 ~~6.26~~5.77 and ~~6.44~~6.02 years and the weighted average discount rate was ~~4.17%~~4.34% and ~~4.11%~~4.25% for all salon operating leases as of December 31, ~~2021~~2022 and June 30, ~~2021,~~2022, respectively.

A 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,~~in fiscal years 2023 and 2022 resulted in an ASC 360-10-35-21 triggering ~~event.~~events. 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.

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 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.

In the three and six months ended December 31, ~~2021 and 2020,~~2022, the Company ~~recognized a~~did not recognize long-lived asset impairment ~~charge of $0.1 and $3.2 million, respectively, which included $0.0 and $1.5 million, respectively,~~charges related to ~~the~~ ROU assets in the unaudited Condensed Consolidated Statement of Operations. In the three and six months ended December 31, 2021, ~~and 2020,~~ the Company recognized a long-lived asset impairment ~~charge~~charges of ~~$0.2~~$0.1 and ~~$9.0~~$0.2 million, respectively, ~~which included $0.2 and $6.0 million, respectively,~~primarily related to ~~the~~ ROU assets in the unaudited Condensed Consolidated Statement of Operations. The ~~impairments recorded were primarily~~impairment loss for each salon asset group that was recognized was allocated among the ~~result~~long-lived assets of ~~triggering events identified~~the group on ~~certain underperforming salons, salons that were identified to close~~a pro-rata basis using their relative carrying amounts. Additionally, the impairment losses did not reduce the carrying amount of an individual asset below its fair value, including the ROU assets included in the ~~year, and certain salons where franchisees were unable to fulfill their rent obligations.~~salon asset groups. 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,~~asset, including its ROU assets. Our 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; ifIf 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.

1615

As of December 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	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		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		$	64,122	$	2,548	$	1,163	$	67,833	$	(64,122)	$	3,711
2023		116,691		4,361		2,365		123,417		(116,691)		6,726
Remainder of 2023														Remainder of 2023	$	54,914	$	1,292	$	1,061	$	57,267	$	(54,914)	$	2,353
2024	2024	102,001		2,579		1,486		106,066		(102,001)		4,065		2024	99,860		1,617		1,301		102,778		(99,860)		2,918
2025	2025	85,465		808		1,525		87,798		(85,465)		2,333		2025	83,570		536		1,334		85,440		(83,570)		1,870
2026	2026	72,253		447		1,563		74,263		(72,253)		2,010		2026	69,825		290		1,367		71,482		(69,825)		1,657
2027														2027	59,363		63		1,401		60,827		(59,363)		1,464
Thereafter	Thereafter	180,236		499		6,498		187,233		(180,236)		6,997		Thereafter	122,479		36		4,417		126,932		(122,479)		4,453
Total future obligations	Total future obligations	$	620,768	$	11,242	$	14,600	$	646,610	$	(620,768)	$	25,842	Total future obligations	$	490,011	$	3,834	$	10,881	$	504,726	$	(490,011)	$	14,715
Less amounts representing interest	Less amounts representing interest	75,330		619		2,140		78,089						Less amounts representing interest	56,953		121		1,500		58,574
Present value of lease liabilities		$	545,438	$	10,623	$	12,460	$	568,521
Less current lease liabilities		104,122		4,606		1,869		110,597
Long-term lease liabilities		$	441,316	$	6,017	$	10,591	$	457,924
Present value of lease liability														Present value of lease liability	$	433,058	$	3,713	$	9,381	$	446,152
Less short-term lease liability														Less short-term lease liability	90,342		2,246		1,352		93,940
Long-term lease liability														Long-term lease liability	$	342,716	$	1,467	$	8,029	$	352,212

1716

8.9. FINANCING ARRANGEMENTS:

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

~~Revolving Credit Facility~~


	Maturity Date	December 31, 2022	December 31, 2022		June 30, 2022

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

Term loan	2026	8.21%	$	173,816	$	—
Deferred financing fees			(7,970)		—
Term loan, net			$	165,846	$	—
Revolving credit facility	2026	8.21%	9,000		179,994
Total long-term debt, net			$	174,846	$	179,994

Maturity Date December 31,
2021 December 31,
2021 June 30,
2021
(Fiscal Year) (Interest rate %) (Dollars in thousands)
Revolving credit facility 2023 5.125% $ 194,177 $ 186,911

~~At December 31, 2021, cash and cash equivalents totaled $35.4 million. As~~In August of ~~December 31, 2021,~~2022, the Company ~~has $194.2~~amended its credit agreement. The amendment, among other things, converted $180.0 million of ~~outstanding borrowings under a $291.7~~the previous $295.0 million revolving credit ~~facility. The credit~~ facility ~~decreased $2.7 million from $294.4 million as of June 30, 2021 in accordance with the bulk sale provisions in~~to a new term loan, reduced commitments under the revolving credit facility ~~agreement, due~~ to $55.0 million, and extended the ~~sale~~term of ~~secured inventory related~~the credit facility from March 26, 2023 to ~~our transition~~August 31, 2025, with no scheduled amortization prior to ~~third-party distribution partners.~~maturity. The amendment is accounted for as a modification of debt and any unamortized financing fees that existed at the date of the amendment and new financing fees incurred are amortized through the extended term of the credit facility. At December 31, ~~2021,~~2022, the Company had outstanding standby letters of credit under the revolving credit facility of ~~$15.7~~$11.8 million, primarily related to the Company's self-insurance program. ~~The unused~~As of December 31, 2022, total liquidity and available credit under the revolving credit facility, ~~was $81.8~~as defined by the agreement, were $43.7 and $34.3 million, asrespectively. As of December 31, ~~2021. The Company's liquidity per~~2022, the ~~agreement includes the unused available balance under the credit facility, unrestricted~~Company had cash and cash equivalents ~~and the shortfall in the gap in expected proceeds from the sale~~ of salon assets of $20.9 million as of December 31, 2021. Total liquidity per the agreement was $138.1 million as of December 31, 2021. The revolving credit facility has a minimum liquidity covenant of $75.0 million. As of December 31, 2021, the Company had cash, cash equivalents and restricted cash of $45.4$9.4 million and current liabilities of ~~$168.2~~$138.9 million.

The agreement utilizes an interest rate margin that is subject to annual increases. The margin applicable to term secured overnight financing rate (SOFR) loans is currently 3.875%. Effective March 27, 2023, the margin will increase to 6.25%, of which 4.25% will be paid currently in cash and 2.00% will be PIK interest (added to the principal balance and thereafter accruing interest). Effective March 27, 2024, the margin will increase to 7.25%, of which 4.25% will be paid currently in cash and 3.00% will be PIK interest. The margin applicable to base rate loans will be 100 basis points (1.00%) less than the margin applicable to term SOFR loans. The agreement contains typical provisions and financial covenants regarding minimum EBITDA, maximum leverage and minimum fixed-charge coverage and a minimum liquidity threshold of $10.0 million. The Company was in compliance with ~~all~~its covenants and other requirements of the financing arrangements as of December 31, ~~2021 and believes it will continue to be in compliance for at least one year from the filing date.~~2022.

1817

9.10. FAIR VALUE MEASUREMENTS:

Fair value measurements are categorized into one of three levels based on the lowest level of significant input used: Level 1 (unadjusted quoted prices in active markets); Level 2 (observable market inputs available at the measurement date, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data).

Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of December 31, ~~2021~~2022 and June 30, ~~2021,~~2022, the estimated fair value of the Company's cash, cash equivalents, restricted cash, receivables, inventory, deferred compensation assets, ~~and~~ accounts payable and debt approximated their carrying values. ~~The estimated fair values of the Company's debt is based on Level 2 inputs.~~

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

We measure certain assets, including the 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.

11.EARNINGS PER SHARE:

The ~~following impairments~~Company's basic earnings per share is calculated as net loss divided by weighted average common shares outstanding, excluding unvested outstanding stock options (SOs), stock appreciation rights (SARs), restricted stock units (RSUs) and stock-settled performance units (PSUs). The Company's diluted earnings per share is calculated as net loss 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. The computation of weighted average shares outstanding, assuming dilution, excluded 4,143,828 and 2,960,122 of stock-based awards during the three months ended December 31, 2022 and 2021, respectively, and excluded 3,662,602 and 2,635,055 of stock-based awards during the six months ended December 31, 2022 and 2021, respectively, as they were ~~based on fair values using Level 3 inputs:~~

Three Months Ended December 31, Six Months Ended December 31,
2021 2020 2021 2020
(Dollars in thousands)
Long-lived asset impairment (1) $ 52 $ 3,160 $ 215 $ 8,984

~~(1)See Note 1 to~~not dilutive under the ~~unaudited Condensed Consolidated Financial Statements.~~treasury stock method.

1918

~~10.~~12. SEGMENT INFORMATION:

Segment information is prepared on the same basis that the chief operating decision maker (CODM) reviews financial information for operational decision-making purposes. Beginning in fiscal year 2022, corporate costs are included within the Franchise segment to reflect how the chief operating decision maker reviews the business. The Company re-assessed its chief operating decision maker conclusion in the second quarter of fiscal year 2022 as part of the CEO transition. The Company concluded the Interim CEO was the chief operating decision maker.

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


		December 31, 2021		June 30, 2021			December 31, 2022		June 30, 2022

FRANCHISE SALONS:	FRANCHISE SALONS:					FRANCHISE SALONS:
Supercuts						Supercuts	2,160		2,264
SmartStyle/Cost Cutters in Walmart Stores	SmartStyle/Cost Cutters in Walmart Stores	1,676		1,666		SmartStyle/Cost Cutters in Walmart Stores	1,605		1,646
Supercuts		2,345		2,386
Portfolio Brands	Portfolio Brands	1,386		1,357		Portfolio Brands	1,293		1,344
Total North American salons	Total North American salons	5,407		5,409		Total North American salons	5,058		5,254
Total International salons (1)	Total International salons (1)	146		154		Total International salons (1)	138		141
Total Franchise salons	Total Franchise salons	5,553		5,563		Total Franchise salons	5,196		5,395
as a percent of total Franchise and Company-owned salons	as a percent of total Franchise and Company-owned salons	97.4	%	95.3	%	as a percent of total Franchise and Company-owned salons	98.6	%	98.1	%

COMPANY-OWNED SALONS:	COMPANY-OWNED SALONS:					COMPANY-OWNED SALONS:
Supercuts						Supercuts	10		18
SmartStyle/Cost Cutters in Walmart Stores	SmartStyle/Cost Cutters in Walmart Stores	63		91		SmartStyle/Cost Cutters in Walmart Stores	48		49
Supercuts		22		35
Portfolio Brands	Portfolio Brands	65		150		Portfolio Brands	17		38
Total Company-owned salons	Total Company-owned salons	150		276		Total Company-owned salons	75		105
as a percent of total Franchise and Company-owned salons	as a percent of total Franchise and Company-owned salons	2.6	%	4.7	%	as a percent of total Franchise and Company-owned salons	1.4	%	1.9	%

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

Grand Total, System-wide	Grand Total, System-wide	5,779		5,917		Grand Total, System-wide	5,347		5,576

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

As of December 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~~SmartStyle®, and other regional trade names.

2019

Financial information concerning the Company's reportable operating segments is shown in the ~~following tables:~~tables below. Segment information is presented in the same way that the Company internally organizes the business for assessing performance and making decisions regarding allocation of resources. In the second quarter of fiscal year 2023, the Company revised its internal reporting such that the CODM’s primary measures of segment performance are revenue and segment adjusted EBITDA. Revenue and segment adjusted EBITDA are regularly reviewed by the CODM to make decisions about resources to be allocated to the segments, assess current performance and forecast future performance. Segment adjusted EBITDA is defined as income from continuing operations before interest, income taxes, depreciation and amortization. C
Three Months Ended December 31, 2021
Franchise Company-owned Consolidated
(Dollars in thousands)
Revenues:
Royalties $ 16,125 $ — $ 16,125
Fees 4,867 — 4,867
Product sales to franchisees 2,428 — 2,428
Advertising fund contributions 8,021 — 8,021
Franchise rental income 33,772 — 33,772
Company-owned salon revenue — 5,043 5,043
Total revenue 65,213 5,043 70,256
Operating expenses:
Cost of product sales to franchisees 3,419 — 3,419
General and administrative 14,922 1,062 15,984
Rent 1,355 1,733 3,088
Advertising fund expense 8,021 — 8,021
Franchise rent expense 33,772 — 33,772
Company-owned salon expense — 5,067 5,067
Depreciation and amortization 1,503 477 1,980
Long-lived asset impairment 128 (76) 52
Total operating expenses 63,120 8,263 71,383
Operating income (loss) $ 2,093 $ (3,220) $ (1,127)
onsistent with our internal management reporting, unallocated expenses include certain items impacting comparability. These unallocated items are not defined terms within U.S. GAAP. They are based on how management views the business, makes financial, operating and planning decisions and evaluates the Company's ongoing performance and are not attributable to either segment. Unallocated fees include distribution center wind down fees, inventory reserve, one-time professional fees and settlements, severance expense, the benefit from lease liability decreases in excess of previously impaired ROUA, lease termination fees, asset retirement obligation costs and long-lived asset impairment charges. Figures for prior reporting periods have been restated to conform to the current period.

Three Months Ended December 31, 2020
Franchise Company-owned Consolidated
(Dollars in thousands)
Revenues:
Royalties $ 12,749 $ — $ 12,749
Fees 2,438 — 2,438
Product sales to franchisees 14,236 — 14,236
Advertising fund contributions 4,715 — 4,715
Franchise rental income 32,285 — 32,285
Company-owned salon revenue — 37,897 37,897
Total revenue 66,423 37,897 104,320
Operating expenses:
Cost of product sales to franchisees 11,324 — 11,324
General and administrative 24,255 2,435 26,690
Rent 1,058 11,844 12,902
Advertising fund expense 4,715 — 4,715
Franchise rent expense 32,285 — 32,285
Company-owned salon expense — 33,611 33,611
Depreciation and amortization 2,077 4,311 6,388
Long-lived asset impairment 94 3,066 3,160
Total operating expenses 75,808 55,267 131,075
Operating loss $ (9,385) $ (17,370) $ (26,755)


	Three Months Ended December 31,				Six Months Ended December 31,
	2022		2021		2022		2021

	(Dollars in thousands)

Revenues:
Franchise	$	57,354	$	64,227	$	116,111	$	133,040
Company-owned	2,613		5,043		5,727		13,048
Total revenue	59,967		69,270		121,838		146,088

Segment adjusted EBITDA:
Franchise	7,532		5,721		12,523		2,256
Company-owned	303		(3,133)		(863)		(4,688)
Total	7,835		2,588		11,660		(2,432)
Unallocated expenses	(2,064)		(1,935)		(2,631)		(1,417)
Depreciation and amortization	(3,793)		(1,605)		(5,044)		(3,144)
Long-lived asset impairment	—		(52)		—		(215)
Interest expense	(4,519)		(3,270)		(8,336)		(6,397)
Income tax benefit (expense)	—		164		(28)		213
Income (loss) from discontinued operations	134		(818)		3,440		(1,914)
Total net loss	$	(2,407)	$	(4,928)	$	(939)	$	(15,306)

Six Months Ended December 31, 2021
Franchise Company-owned Consolidated
(Dollars in thousands)
Revenues:
Royalties $ 32,726 $ — $ 32,726
Fees 8,132 — 8,132
Product sales to franchisees 10,436 — 10,436
Advertising fund contributions 16,136 — 16,136
Franchise rental income 67,534 — 67,534
Company-owned salon revenue — 13,048 13,048
Total revenue 134,964 13,048 148,012
Operating expenses:
Cost of product sales to franchisees 11,532 — 11,532
General and administrative 36,165 1,608 37,773
Rent 3,032 1,859 4,891
Advertising fund expense 16,136 — 16,136
Franchise rent expense 67,534 — 67,534
Company-owned salon expense — 13,011 13,011
Depreciation and amortization 3,125 724 3,849
Long-lived asset impairment 128 87 215
Total operating expenses 137,652 17,289 154,941
Operating loss $ (2,688) $ (4,241) $ (6,929)

Six Months Ended December 31, 2020
Franchise Company-owned Consolidated
(Dollars in thousands)
Revenues:
Royalties $ 24,154 $ — $ 24,154
Fees 4,480 — 4,480
Product sales to franchisees 27,978 — 27,978
Advertising fund contributions 9,224 — 9,224
Franchise rental income 64,568 — 64,568
Company-owned salon revenue — 85,312 85,312
Total revenue 130,404 85,312 215,716
Operating expenses:
Cost of product sales to franchisees 22,003 — 22,003
General and administrative 47,426 5,411 52,837
Rent 2,337 23,790 26,127
Advertising fund expense 9,224 — 9,224
Franchise rent expense 64,568 — 64,568
Company-owned salon expense — 76,554 76,554
Depreciation and amortization 4,371 9,393 13,764
Long-lived asset impairment 704 8,280 8,984
Total operating expenses 150,633 123,428 274,061
Operating loss $ (20,229) $ (38,116) $ (58,345)

2220

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

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, ~~2021~~2022 Annual Report on Form 10-K and other documents filed or furnished with the SEC during the current fiscal year.

MANAGEMENT'S OVERVIEW

Regis Corporation ~~(RGS) franchises technology-enabled hairstyling and hair care salons throughout~~(NYSE:RGS) is a leader in the ~~United States, Canada, Puerto Rico and the United Kingdom.~~beauty salon industry. As of December 31, ~~2021,~~2022, the Company franchised, owned or held ownership interests in ~~5,779~~5,347 worldwide locations. Our locations consisted of ~~5,703~~5,271 system-wide North American and international salons, and in 76 locations in which we maintained a non-controlling ownership interest less than 100 percent. ~~Each of~~Regis’ franchised and corporate locations operate under concepts such as Supercuts®, SmartStyle®, Cost Cutters®, Roosters® and First Choice Haircutters®. Regis maintains an ownership interest in Empire Education Group in the ~~Company's salon concepts generally offer similar salon products and services and serve the mass market.~~United States. As of December 31, ~~2021,~~2022, the Company had ~~853~~545 employees worldwide.

~~COVID-19 Impact~~

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

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 of fiscal year 2021. The~~ Company ~~is shifting~~shifted its product business from a wholesale model to a third-party distribution ~~model.~~model in fiscal year 2022. 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~~receives a ~~fee~~rebate from the third-party ~~distributors~~distributor, which is included in fees on the interim unaudited Condensed Consolidated Statement of Operations. ~~The~~As a result of the change, ~~is expected to result in~~ product sales to franchisees ~~providing significantly~~will continue to decrease and are expected to provide less revenue ~~by the end of~~and costs in fiscal year ~~2022.~~2023 as compared to prior year.

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, ~~2021~~2022 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 and 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 Accounting Policies" in Part II, Item 7 of our June 30, ~~2021~~2022 Annual Report on Form 10-K. Our policies related to revenue recognition guidance can be found in Note 2 to the unaudited Condensed Consolidated Financial Statements.

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RESULTS OF OPERATIONS

System-wide results

As an asset-light franchise platform, our results are impacted by our system-wide sales, which include sales by all points of distribution, whether owned by our franchisees or the Company. While we do not record sales by franchisees as revenue, and such sales are not included in our 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 December 31,				Six Months Ended December 31,					Three Months Ended December 31,				Six Months Ended December 31,
		2021		2020		2021		2020			2022		2021		2022		2021

Supercuts										Supercuts	7.2	%	30.8	%	8.0	%	30.6	%
SmartStyle	SmartStyle	13.2	%	(32.2)	%	15.1	%	(33.0)	%	SmartStyle	(2.9)		13.2		(3.1)		15.1
Supercuts		30.8		(32.9)		30.6		(33.2)
Portfolio Brands	Portfolio Brands	16.6		(30.0)		17.6		(30.1)		Portfolio Brands	6.0		16.6		4.8		17.6
Consolidated system-wide same-store sales		22.1	%	(32.0)	%	22.6	%	(32.3)	%
Consolidated system-wide same-store sales (1)										Consolidated system-wide same-store sales (1)	4.5	%	22.1	%	4.5	%	22.6	%

_______________________________________________________________________________

(1)~~Fiscal year 2022 system-wide~~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 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. System-wide same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.

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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) is measured in basis points. Variances calculated on amounts shown in millions may result in rounding differences.


		Three Months Ended December 31,									Six Months Ended December 31,										Three Months Ended December 31,									Six Months Ended December 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)				Increase (Decrease)	($ in millions)				% of Total Revenues (1)				Increase (Decrease)		($ in millions)				% of Total Revenues (1)				Increase (Decrease)	($ in millions)				% of Total Revenues (1)				Increase (Decrease)

Royalties	Royalties	$	16.1	$	12.7	23.0	%	12.2	%	1,080	$	32.7	$	24.2	22.1	%	11.2	%	1,090	Royalties	$	16.2	$	16.1	27.0	%	23.2	%	380	$	33.3	$	32.7	27.3	%	22.5	%	480
Fees	Fees	4.9		2.4		7.0		2.3		470	8.1		4.5		5.5		2.1		340	Fees	3.2		3.9		5.4		5.6		(20)	5.8		6.2		4.8		4.2		60
Product sales to franchisees	Product sales to franchisees	2.4		14.2		3.4		13.6		(1,020)	10.4		28.0		7.0		13.0		(600)	Product sales to franchisees	1.1		2.4		1.8		3.5		(170)	1.6		10.4		1.3		7.1		(580)
Advertising fund contributions	Advertising fund contributions	8.0		4.7		11.4		4.5		690	16.1		9.2		10.9		4.3		660	Advertising fund contributions	8.0		8.0		13.3		11.7		160	16.2		16.1		13.3		11.0		230
Franchise rental income	Franchise rental income	33.8		32.3		48.1		31.0		1,710	67.5		64.6		45.7		29.9		1,580	Franchise rental income	28.9		33.8		48.2		48.8		(60)	59.2		67.5		48.6		46.3		230
Company-owned salon revenue	Company-owned salon revenue	5.0		37.9		7.1		36.4		(2,930)	13.0		85.3		8.8		39.5		(3,070)	Company-owned salon revenue	2.6		5.0		4.3		7.2		(290)	5.7		13.0		4.7		8.9		(420)

Cost of product sales to franchisees ~~(2)~~	Cost of product sales to franchisees ~~(2)~~	3.4		11.3		141.7		79.6		6,210	11.5		22.0		110.6		78.6		3,200	Cost of product sales to franchisees ~~(2)~~	1.3		3.1		118.2		129.2		(1,100)	1.8		10.8		112.5		103.8		870
Inventory reserve																				Inventory reserve	1.2		—		2.0		—		N/A	1.2		—		1.0		—		N/A
General and administrative	General and administrative	16.0		26.7		22.8		25.6		(280)	37.8		52.8		25.6		24.5		110	General and administrative	11.7		15.1		19.6		21.8		(220)	26.1		35.9		21.4		24.6		(320)
Rent	Rent	3.1		12.9		4.4		12.4		(800)	4.9		26.1		3.3		12.1		(880)	Rent	2.1		3.0		3.5		4.3		(80)	3.8		4.8		3.1		3.3		(20)
Advertising fund expense	Advertising fund expense	8.0		4.7		11.4		4.5		690	16.1		9.2		10.9		4.3		660	Advertising fund expense	8.0		8.0		13.3		11.7		160	16.2		16.1		13.3		11.0		230
Franchise rent expense	Franchise rent expense	33.8		32.3		48.1		31.0		1,710	67.5		64.6		45.7		29.9		1,580	Franchise rent expense	28.9		33.8		48.2		48.8		(60)	59.2		67.5		48.6		46.3		230
Company-owned salon expense	Company-owned salon expense	5.1		33.6		7.3		32.2		(2,490)	13.0		76.6		8.8		35.5		(2,670)	Company-owned salon expense	2.2		5.1		3.7		7.4		(370)	5.2		13.0		4.3		8.9		(460)
Depreciation and amortization	Depreciation and amortization	2.0		6.4		2.8		6.1		(330)	3.8		13.8		2.6		6.4		(380)	Depreciation and amortization	3.8		1.6		6.3		2.3		400	5.0		3.1		4.1		2.1		200
Long-lived asset impairment	Long-lived asset impairment	0.1		3.2		0.1		3.1		(300)	0.2		9.0		0.1		4.2		(410)	Long-lived asset impairment	—		0.1		—		0.1		(10)	—		0.2		—		0.1		(10)

Operating loss (3)		(1.1)		(26.8)		(1.6)		(25.7)		2,410	(6.9)		(58.3)		(4.7)		(27.0)		2,230
Operating income (loss) (2)																				Operating income (loss) (2)	0.7		(0.5)		1.2		(0.7)		190	3.2		(5.4)		2.6		(3.7)		630

Interest expense	Interest expense	(3.4)		(3.7)		(4.8)		(3.5)		(130)	(6.8)		(7.5)		(4.6)		(3.5)		(110)	Interest expense	(4.5)		(3.3)		(7.5)		(4.8)		(270)	(8.3)		(6.4)		(6.8)		(4.4)		(240)
Loss from sale of salon assets to franchisees, net	Loss from sale of salon assets to franchisees, net	(0.6)		(3.2)		(0.9)		(3.1)		220	(1.7)		(3.9)		(1.2)		(1.8)		60	Loss from sale of salon assets to franchisees, net	—		(0.6)		—		(0.9)		90	—		(1.7)		—		(1.2)		120
Interest income and other, net		0.1		0.4		0.1		0.4		(30)	(0.1)		0.5		(0.1)		0.2		(30)
Other, net																				Other, net	1.2		0.1		2.0		0.1		190	0.8		(0.1)		0.7		(0.1)		80

Income tax benefit (4)		0.2		0.4		3.2		1.2		N/A	0.2		1.0		1.4		1.5		N/A
Income tax benefit (expense) (3)																				Income tax benefit (expense) (3)	—		0.2		—		3.8		N/A	—		0.2		(0.6)		1.6		N/A

Net loss (3)		(4.9)		(32.9)		(7.0)		(31.6)		2,460	(15.3)		(68.1)		(10.4)		(31.6)		2,120
Income (loss) from discontinued operations																				Income (loss) from discontinued operations	0.1		(0.8)		0.2		(1.2)		140	3.4		(1.9)		2.8		(1.3)		410

Net loss (2)																				Net loss (2)	(2.4)		(4.9)		(4.0)		(7.1)		310	(0.9)		(15.3)		(0.7)		(10.5)		980

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

(2)~~Excludes depreciation and amortization expense.~~

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

~~(4)~~(3)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.

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Three and Six Months Ended December 31, ~~2021~~2022 Compared with Three and Six Months Ended December 31, ~~2020~~2021

Consolidated Revenues

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

Consolidated revenue decreased ~~$34.0~~$9.3 and ~~$67.7~~$24.3 million, or ~~32.6%~~13.4% and ~~31.4%~~16.6%, for the three and six months ended December 31, ~~2021,~~2022, respectively. Royalty revenue increased ~~$3.4~~$0.1 and ~~$8.5~~$0.6 million ~~respectively,~~ in the three and six months ended December 31, ~~2021~~2022, respectively, due to ~~higher franchise~~improved system-wide same-store sales and higher franchise salon counts. During the twelve months ended December 31, 2021, 560 salons were sold to franchisees and 628 and 25 system-wide salons were closed and constructed, respectively (2022 Net Salon Count Changes). Duringaverage royalty rates. The overall decrease in revenue for the three and six months ended December 31, ~~2021,~~2022 is due to the decrease in company-owned salon revenue ~~decreased $32.9~~of $2.4 and ~~$72.3~~$7.3 million, respectively, due primarily to salon closures, the ~~sale of salons~~decline in product sales to franchisees of $1.3 and ~~salon closures. For~~$8.8 million, respectively, and the ~~three~~decline in franchise rental income of $4.9 and ~~six~~$8.3 million, respectively. During the twelve months ended December 31, ~~2021, the impact to consolidated revenue due to the sale of~~2022, 17 salons were sold to franchisees and ~~closure of~~452 and 20 system-wide salons ~~was $28.8~~were closed and ~~$64.0 million, respectively.~~constructed, respectively (2023 Net Salon Count Changes).

Royalties

During the three and six months ended December 31, ~~2021,~~2022, royalties increased ~~$3.4~~$0.1 and ~~$8.5~~$0.6 million, or ~~26.8%~~0.6% and ~~35.1%~~1.8%, respectively, primarily due to ~~the increase~~higher average royalty rates and improved system-wide same-store sales partially offset by a decrease in franchise ~~salons and higher franchise system-wide sales. Total franchised locations open at December 31, 2021 were 5,553 as compared to 5,269 at December 31, 2020.~~salon count.

Fees

During the three and six months ended December 31, ~~2021,~~2022, fees ~~increased $2.5~~decreased $0.7 and ~~$3.6~~$0.4 million, or 17.9% and 6.5%, respectively, primarily due to ~~the increase in franchise salons, an increase in salons running Opensalon~~® ~~Pro and an increase~~a decrease in terminated development agreements ~~(see Note 3~~in fiscal year 2023 partially offset by an increase in the rebate received from the Company's shift in its product business to ~~the unaudited Condensed Consolidated Financial Statements).~~a third-party distribution model.

Product Sales to Franchisees

Product sales to franchisees decreased ~~$11.8~~$1.3 and ~~$17.6~~$8.8 million, or ~~83.1%~~54.2% and ~~62.9%~~84.6%, respectively, during the three and six months ended December 31, ~~2021,~~2022, primarily due to the Company's shift in its product business to a third-party distribution ~~partners. The Company expects revenue from product sales to decrease significantly during fiscal year 2022.~~model.

Advertising Fund Contributions

Advertising fund contributions ~~increased $3.3 and $6.9 million, or 70.2% and 75.0%, respectively, during the three and six months ended December 31, 2021, primarily~~did not change significantly year-over-year, declining slightly due to ~~the~~a reduction in salon count partially offset by an increase in ~~franchise salon count and~~ system-wide same-store sales.

Franchise Rental Income

During the three and six months ended December 31, ~~2021,~~2022, franchise rental income ~~increased $1.5~~decreased $4.9 and ~~$2.9~~$8.3 million, or ~~4.6%~~14.5% and ~~4.5%~~12.3%, respectively, primarily due to ~~the increase in~~a lower franchise salon count.

Company-owned Salon Revenue

During the three and six months ended December 31, ~~2021,~~2022, company-owned salon revenue decreased ~~$32.9~~$2.4 and ~~$72.3~~$7.3 million, or ~~86.8%~~48.0% and ~~84.8%~~56.2%, respectively, due to the decrease in ~~Company-owned salons as a result of the sale of salons to franchisees~~company-owned salon count and ~~salon closures,~~ a decline in product ~~sales, and exiting our third-party logistic revenue.~~sales.

Cost of Product Sales to Franchisees

The ~~6,210 and 3,200~~1,100 basis point ~~increases~~decrease in cost of product as a percent of product revenues during the three months ended December 31, 2022 was primarily due to higher marketing and freight expense in fiscal year 2022. The 870 basis point increase in cost of product as a percent of product revenues during the six months ended December 31, ~~2021, respectively, were~~2022 was primarily due to the Company reducing prices to liquidate distribution center inventory.

Inventory Reserve

In the three and six months ended December 31, 2022, the Company recorded an inventory ~~at its distribution centers~~reserve charge of $1.2 million related to ~~facilitate exiting the distribution centers.~~

~~General and Administrative~~

~~The decreases of $10.7 and $15.0 million, or 40.1% and 28.4%, in general and administrative expense during~~slow moving products. During the three and six months ended December 31, 2021, the Company recorded inventory reserve charges of $1.2 and $1.5 million, respectively, which were ~~primarily due~~included in company-owned salon expense related 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 $1.0 million of legal expenses (see Note 5 to the unaudited Condensed Consolidated Financial Statements). Additionally, the provision for doubtful accounts expense also contributed to the decline in the six months ended December 31, 2021.distribution center inventory.

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~~Rent~~General and Administrative

~~The decreases of~~General and administrative expense decreased $3.4 and $9.8 ~~and $21.2~~ million, or ~~76.0%~~22.5% and 81.2%, in rent expense during the three and six months ended December 31, 2021, respectively, were primarily due to the net reduction in the number of company-owned salons. Partially offsetting the decrease in the six month period was a $0.9 million broker fee incurred in the six months ended December 31, 2021 related to exiting the Company's distribution centers.

~~Advertising Fund Expense~~

~~Advertising fund expense increased $3.3 and $6.9 million, or 70.2% and 75.0%~~27.3%, during the three and six months ended December 31, 2022, respectively. Lower administrative and field management compensation resulting from headcount reductions, a decrease in expenses associated with the distribution center closures in fiscal year 2022 and a favorable actuarial adjustment of $0.6 million contributed to the decrease.

Rent

Rent expense decreased $0.9 and $1.0 million, or 30.0% and 20.8%, during the three and six months ended December 31, 2022, respectively. There was a benefit of $0.1 and $1.2 million in the three and six months ended December 31, 2021 ~~respectively, primarily~~related to Canadian COVID-19 rent relief, which was offset by the net reduction in the number of company-owned salons in fiscal year 2023.

Advertising Fund Expense

Advertising fund expense did not change significantly year-over-year, declining slightly due to ~~the~~a reduction in salon count partially offset by an increase in ~~franchise salon count and~~ system-wide same-store sales.

Franchise Rent Expense

During the three and six months ended December 31, ~~2021,~~2022, franchise rent expense ~~increased $1.5~~decreased $4.9 and ~~$2.9~~$8.3 million, or ~~4.6%~~14.5% and ~~4.5%~~12.3%, respectively, primarily due to ~~the increase in~~a lower franchise salon count.

Company-owned Salon Expense

Company-owned salon expense for the three and six months ended December 31, ~~2021~~2022 decreased ~~$28.5~~$2.9 and ~~$63.6~~$7.8 million, or ~~84.8%~~56.9% and ~~83.0%~~60.0%, respectively, primarily due to the reduction in company-owned ~~salons,~~salon count and a decline in product sales, partially offset by $0.8 and ~~exiting third-party logistics.~~$1.4 million of Canadian wage relief received in the three and six months ended December 31, 2021, respectively.

Depreciation and Amortization

The ~~decreases~~increases of ~~$4.4~~$2.2 and ~~$10.0~~$1.9 million, or ~~68.8%~~137.5% and ~~72.5%~~61.3%, in depreciation and amortization during the three and six months ended December 31, ~~2021,~~2022, respectively, were primarily due to a $2.6 million accelerated depreciation charge related to the consolidation of office space within the Company's corporate headquarters, partially offset by lower asset retirement obligations ("white boxing" salons at lease end) and 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.~~count.

Long-Lived Asset Impairment

In the three and six months ended December 31, ~~2021 and 2020,~~2022, the Company ~~recorded~~did not record a long-lived asset impairment charge, ~~of $0.1~~ and ~~$3.2 million, respectively, which included an ROU asset impairment charge of $0.0~~in the three and ~~$1.5 million, respectively. In the~~ six months ended December 31, 2021, ~~and 2020,~~ the Company recorded a long-lived asset impairment ~~charge~~charges of ~~$0.2~~$0.1 and ~~$9.0 million, respectively, which included an ROU asset impairment charge of~~ $0.2 ~~and $6.0~~ million, respectively. The decreases in long-lived asset impairment ~~were~~was primarily due to ~~more~~ salons being impaired in prior periods.

Interest Expense

The ~~$0.3~~$1.2 and ~~$0.7~~$1.9 million ~~decreases~~increases in interest expense for the three and six months ended December 31, ~~2021,~~2022, respectively, were primarily due to the amortization of fees related to the credit amendment that was signed in the first quarter of fiscal year 2023 and a ~~lower average~~higher interest rate ~~in fiscal year 2022.~~on outstanding borrowings.

Loss from Sale of Salon Assets to Franchisees, ~~net~~Net

~~The $2.6 and $2.2 million decreases~~There was one salon sold in the ~~loss from the sale of salon assets~~six months ended December 31, 2022 compared to ~~franchisees, net~~13 and 94 in the three and six months ended December 31, 2021, respectively, ~~were~~which resulted in $0.6 and $1.7 million decreases in the loss from sale of salon assets to franchisees, net.

Other, Net

Other, net increased $1.1 and $0.9 million during the three and six months ended December 31, 2022, respectively, primarily due to ~~fewer salons sold in fiscal year 2022.~~a $1.1 million grant received from the state of North Carolina related to COVID-19 relief.

~~Interest~~ Income ~~and Other, net~~Tax Benefit (Expense)

~~The decrease~~During the three months ended December 31, 2022, the Company recognized no tax benefit or expense, as compared to recognizing a tax benefit of ~~$0.3~~$0.2 million, ~~in interest income and other, net~~with a corresponding effective tax rate of 3.8% during the three months ended December 31, ~~2021 was primarily due to~~2021. During the ~~foreign exchange gains of $0.3 million in the three~~six months ended December 31, ~~2020~~2022, the Company recognized tax expense of $0.03 million, with a corresponding effective tax rate of (0.6)%, as compared to ~~no gain in the three months ended December 31, 2021. The decrease~~recognizing a tax benefit of ~~$0.6~~$0.2 million, ~~in interest income and other, net~~with a corresponding effective tax rate of 1.6% during the six months ended December 31, ~~2021 was primarily due~~2021. See Note 5 to the ~~foreign exchange losses of $0.3 million in~~unaudited Condensed Consolidated Financial Statements.

Income (Loss) from Discontinued Operations

In the three and six months ended December 31, ~~2021 compared to foreign exchange gains~~2022, the Company recorded a gain from discontinued operations of ~~$0.3~~$0.1 and $3.4 million, respectively, and in ~~the six months ended December 31, 2020.~~

~~Income Tax Benefit~~

~~During~~ the three and six months ended December 31, 2021, the Company ~~recognized tax benefits~~recorded a loss of ~~$0.2~~$0.8 and ~~$0.2~~$1.9 million, ~~respectively, with corresponding effective tax rates~~respectively. The gain in fiscal year 2023 is primarily due to receipt of ~~3.2% and 1.4% as compared to recognizing tax benefits~~$4.5 million in sales proceeds, of ~~$0.4 and $1.0~~which $0.5 million ~~respectively, with corresponding effective tax rates of 1.2% and 1.5% during~~were received in the ~~three and six months ended December 31, 2020.~~

second quarter, which were previously held back. See Note 43 to the unaudited Condensed Consolidated Financial Statements.

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Results of Operations by Segment

Based on our internal management structure, we report two segments: Franchise and Company-owned salons. See Note 1012 to the unaudited Condensed Consolidated Financial Statements. Significant results of continuing operations are discussed below with respect to each of these segments.

Franchise


		Three Months Ended December 31,										Six Months Ended December 31,																Three Months Ended December 31,													Six Months Ended December 31,
		2021			2020			Increase (Decrease) (1)				2021					2020					Increase (Decrease) (1)						2022				2021					Increase (Decrease) (1)				2022					2021					Increase (Decrease) (1)

		(Dollars in millions)								(Dollars in millions)														(Dollars in millions)											(Dollars in millions)

Royalties	Royalties	$	16.1		$	12.7				$	3.4				$	32.7				$	24.2					$	8.5		Royalties			$	16.2						$	16.1				$	0.1				$	33.3			$	32.7		$	0.6
Fees	Fees	4.9			2.4					2.5					8.1					4.5					3.6			Fees			3.2					3.9						(0.7)					5.8					6.2			(0.4)
Product sales to franchisees	Product sales to franchisees	2.4			14.2			(11.8)				10.4					28.0					(17.6)		Product sales to franchisees				1.1				2.4						(1.3)				1.6					10.4					(8.8)
Advertising fund contributions	Advertising fund contributions	8.0			4.7			3.3				16.1					9.2					6.9		Advertising fund contributions				8.0				8.0					—				16.2					16.1					0.1
Franchise rental income	Franchise rental income	33.8			32.3			1.5				67.5					64.6					2.9		Franchise rental income				28.9				33.8					(4.9)				59.2					67.5					(8.3)
Total franchise revenue (1)	Total franchise revenue (1)	$	65.2		$	66.4		$	(1.2)			$	135.0				$	130.4				$	4.6	Total franchise revenue (1)				$	57.4			$	64.2				$	(6.8)			$	116.1				$	133.0				$	(16.9)

Franchise same-store sales (2)	Franchise same-store sales (2)	22.4		%	(31.1)		%					23.0		%			(31.5)		%					Franchise same-store sales (2)				4.5		%		22.4		%							4.6		%			23.0		%

Operating income (loss)		$	2.1		$	(9.4)		$	11.5			$	(2.7)				$	(20.2)				$	17.5
Franchise adjusted EBITDA																								Franchise adjusted EBITDA				$	7.5			$	5.7				$	1.8			$	12.5				$	2.3				$	10.2
Total franchise salons																								Total franchise salons				5,196				5,553					(357)

(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 franchise locations that 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 locations 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. Franchise same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.

Franchise ~~Revenues~~Revenue

Franchise revenues decreased ~~$1.2~~$6.8 and $16.9 million during the three ~~months ended December 31, 2021~~ and ~~increased $4.6 million during the~~ six months ended December 31, ~~2021.~~2022, respectively. The ~~decrease~~decreases in franchise salon revenue during the three and six months ended December 31, ~~2021 was~~2022 were primarily due to the decrease in product sales to franchisees due to the Company's shift to a third-party ~~distributors, partially offset by higher royalties~~distributor and ~~advertising fund contributions. The increase in~~ franchise ~~revenue during the six months ended December 31, 2021 was primarily due to higher royalties and advertising contributions due to an increase in salon count and system-wide sales.~~rental income. During the twelve months ended December 31, ~~2021,~~2022, franchisees purchased 17 salons from the Company and constructed (net of relocations) and closed 2319 and ~~299~~393 franchise salons, respectively, and purchased 560 salons from the Company during the same period. The increases in royalties and advertising contributions were partially offset by a decline in franchise product sales, which the Company expects revenue to significantly decrease throughout fiscal year 2022 due to the Company exiting its whole-sale product business.respectively.

Franchise ~~Operating Income (Loss)~~Adjusted EBITDA

During the three and six months ended December 31, ~~2021,~~2022, franchise ~~salon operations generated operating income~~adjusted EBITDA totaled $7.5 and $12.5 million, respectively, an improvement of ~~$2.1~~$1.8 and $10.2 million ~~and operating loss of $2.7 million, an $11.5 and $17.5 million improvement from the prior comparable period. The improvement in~~compared to the three and six months ended December 31, 2021, ~~was~~respectively. The improvements are primarily due to ~~increases~~an increase in ~~royalties~~average royalty revenues and ~~reduced~~a decrease in general and administrative ~~expense related primarily to cost saving initiatives.~~expense.

2827

Company-owned Salons


		Three Months Ended December 31,							Six Months Ended December 31,											Three Months Ended December 31,								Six Months Ended December 31,
		2021		2020		(Decrease) Increase (1)			2021			2020			(Decrease) Increase (1)					2022		2021			(Decrease) Increase (1)			2022			2021			(Decrease) Increase (1)

		(Dollars in millions)					(Dollars in millions)									(Dollars in millions)								(Dollars in millions)

Total revenue	Total revenue	$	5.0	$	37.9		$	(32.9)		$	13.0		$	85.3				$	(72.3)		Total revenue	$	2.6			$	5.0		$	(2.4)		$	5.7		$	13.0	$	(7.3)

Operating loss		$	(3.2)	$	(17.4)		$	14.2		$	(4.2)		$	(38.1)			$	33.9
Company-owned salon adjusted EBITDA																Company-owned salon adjusted EBITDA				$	0.3	$	(3.1)			$	3.4		$	(0.9)		$	(4.7)		$	3.8
Total company-owned salons	Total company-owned salons	150		1,037		(887)										Total company-owned salons				75		150			(75)

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

Company-owned Salon ~~Revenues~~Revenue

Company-owned salon revenues decreased ~~$32.9~~$2.4 and ~~$72.3~~$7.3 million during the three and six months ended December 31, ~~2021,~~2022, respectively, primarily due to the ~~2022~~2023 Net Salon Count ~~Changes.~~Changes and a decline in product sales in salons.

Company-owned Salon ~~Operating Loss~~Adjusted EBITDA

During the three and six months ended December 31, ~~2021,~~2022, company-owned salon ~~operating loss~~adjusted EBITDA improved ~~$14.2~~$3.4 and ~~$33.9~~$3.8 million, respectively, ~~compared~~primarily due to the ~~prior comparable period. The improvement~~closure of unprofitable salons and a $1.1 million grant received from the state of North Carolina related to COVID-19 relief in the ~~loss during the~~ three ~~and six~~ months ended December 31, 2021 was primarily due to reduced general and administrative expense primarily related to salaries, a decrease in depreciation and long-lived asset impairment and the exiting of loss making company-owned salons.

2022.

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LIQUIDITY AND CAPITAL RESOURCES

In August 2022, the Company reached an agreement to amend its credit agreement and extend the maturity to August 2025 from March 2023. Under the amendment, the $295.0 million revolving credit facility was converted to a $180.0 million term loan and $55.0 million revolving credit facility with the minimum liquidity covenant reduced to $10.0 million from $75.0 million. The amended credit agreement includes typical provisions and financial covenants, including minimum EBITDA, leverage and fixed-charge coverage ratio covenants, the latter two of which are not tested until December 31, 2023. See Note 9 to the unaudited Condensed Consolidated Financial Statements.

Sources of Liquidity

Funds generated by operating activities, available cash and cash equivalents and our borrowing agreements are our most significant sources of liquidity. The Company believes it has sufficient liquidity, cash on hand and borrowing capacity, to meet its obligations in the next twelve months and beyond.

As of December 31, ~~2021,~~2022, cash and cash equivalents were ~~$35.4~~$9.4 million, with ~~$33.1~~$8.4 and ~~$2.3~~$1.0 million within the United States and Canada, respectively.

~~The~~As of December 31, 2022, the Company's borrowing arrangements include a ~~$291.7~~$173.8 million ~~five-year~~term loan and a $55.0 million revolving credit facility that expires in ~~March 2023, of which $81.8 million was available as~~August 2025. As of December 31, ~~2021. The Company's liquidity per the agreement includes~~2022, the unused available ~~balance~~credit under the credit facility, unrestricted cash and cash equivalents and the shortfall in the gap in expected proceeds from the sale of salon assets of $20.9 million as of December 31, 2021. Total liquidity per the agreement was $138.1 million as of December 31, 2021. The revolving credit facility was $34.3 million, the credit agreement has a minimum liquidity covenant of ~~$75.0~~$10.0 million, ~~(see~~and total liquidity per the agreement was $43.7 million. See Note 89 to the unaudited Condensed Consolidated Financial ~~Statements).~~Statements.

Additionally, onin 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." Net proceeds from sales of shares under the "at-the-market" program, if any, may be used to, among other things, fund working capital requirements, repay debt and support ~~growth strategies. Such strategies may include positioning~~our brands and franchisees. The timing and amount of sales of shares, if any, will depend on a variety of factors, including prevailing market conditions, the trading price of shares, and other factors as determined by the Company. During the three and six months ended December 31, 2022, 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® ~~Pro.~~did not issue shares under the prospectus supplement. During the six months ended December 31, 2021, the Company issued 9.3 million shares and received net proceeds of $37.2 million. As of December 31, 2022, $11.6 million remains outstanding under the share issuance program.

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 as discussed within Part I, Item 1 of our Annual Report on Form 10-K for the fiscal year ended June 30, ~~2021.~~2022.

Cash Requirements

The Company's most significant contractual cash requirements as of December 31, 2022 were lease commitments and interest payments. See Note 8 to the unaudited Condensed Consolidated Financial Statements for further lease commitment detail.

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Cash Flows

Cash Flows from Operating Activities

During the six months ended December 31, ~~2021,~~2022, cash used in operating activities was $6.9 million compared to $24.3 ~~million.~~million in the prior year. Cash used in operations improved due to ~~higher royalties,~~ lower general and administrative expense, a $1.1 million cash grant received from the state of North Carolina related to COVID-19 relief and ~~the exiting of loss making company-owned salons. These improvements were partially offset by~~less cash used for working capital. Cash use in fiscal year 2023 included a $2.5 million payment of previously deferred social security ~~contributions remitted in the second quarter that had been deferred under the CARES Act.~~contributions.

Cash Flows from Investing Activities

During the six months ended December 31, 2022, cash provided by investing activities of $3.6 million, primarily related to cash received of $4.5 million from the sale of OSP, net of a $0.5 million transaction fee. During the six months ended December 31, 2021, cash used in investing activities of $2.9 million was primarily due to capital expenditures, primarily related to internally-developed capitalized software.

Cash Flows from Financing Activities

During the six months ended December 31, ~~2020,~~2022, cash ~~provided by investing~~used in financing activities was $1.6 million, primarily as a result of ~~$0.6~~debt refinancing fees of $4.4 million, ~~was primarily due to proceeds from the sale of salon assets,~~ partially offset by ~~capital expenditures.~~

~~Cash Flows from Financing Activities~~

a net $2.8 million borrowing under the Company's revolving credit facility. During the six months ended December 31, 2021, cash provided by financing activities was $43.6 million, primarily as a result of net proceeds ~~of $37.2 million~~ related to the issuance of common stock and a net ~~$7.3 million~~ draw on the Company's revolving credit facility. During the six months ended December 31, 2020, cash used in financing activities was $1.3 million, primarily due to the Company's purchase of its non-controlling interest from the minority shareholders.

Financing Arrangements

The Company's existing revolving credit facility is due in March 2023 and management expects to refinance the debt prior to the expiration date. 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 89 of the Notes to the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended December 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, ~~2021,~~2022, 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' ~~equity~~deficit at fiscal quarter end, was as follows:


	Debt to Capitalization (1)

December 31, ~~2021~~2022	~~83.5~~120.9	%
June 30, ~~2021~~2022	~~91.6~~120.8	%

_______________________________________________________________________________

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

The ~~decrease in the~~ debt to capitalization ratio as of December 31, ~~2021 as~~2022 did not change significantly compared to June 30, ~~2021, was primarily due to the increase in shareholders' equity as a result of the common stock issued in the first quarter.~~

2022.

3130

Share Issuance Program

OnIn 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 ~~three and~~ six months ended December 31, ~~2021,~~2022, the Company ~~issued 1.2 and~~did not issue shares under the prospectus supplement. As of December 31, 2022, 9.3 million shares have been cumulatively issued for ~~net proceeds of $5.0~~$38.4 million, and ~~$37.2~~$11.6 million ~~respectively.~~remains outstanding under the share issuance program.

Share Repurchase Program

In May 2000, the Board approved a stock repurchase program with no stated expiration date. Since that time and through December 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~~ six months ended December 31, ~~2021,~~2022, the Company did not repurchase any shares. As of December 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.

3231

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" 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 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," and "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, including any adverse impact from ~~Delta, Omicron and other~~ variants; ~~the impact of the COVID-19 pandemic on our key suppliers;~~ consumer shopping trends and changes in manufacturer distribution channels; changes in regulatory and statutory laws including increases in minimum wages; laws and regulations could require us to modify current business practices and incur increased costs; changes in economic conditions; changes in consumer tastes, fashion trends and ~~fashion trends; the continued ability of the Company to implement its strategy, priorities~~consumer spending patterns; compliance with New York Stock Exchange listing requirements; reliance on franchise royalties and ~~initiatives including the re-engineering~~overall success of our ~~corporate and field infrastructure;~~franchisees’ salons; the return of sales at franchise locations to pre-pandemic levels; new merchandising ~~strategy;~~strategy that utilizes third-party preferred supplier arrangements; our franchisees' ability to attract, train and retain talented ~~stylists; financial performance~~stylists and salon leaders; the success of our ~~franchisees; the ability to~~franchisees, which operate ~~or sell the salons transferred back from TBG;~~independently; our ability to manage cyber threats and protect the security of potentially sensitive information about our guests, franchisees, employees, vendors or Company information; the ability of the Company to maintain a satisfactory relationship with Walmart; marketing efforts to drive traffic to our franchisees' salons; the successful migration of our franchisees to the Zenoti® salon technology platform; our ability to maintain and enhance the value of our brands; reliance on information technology systems; reliance on external vendors; 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;~~effectiveness of our enterprise risk management program; compliance with ~~credit facility~~ covenants ~~and~~in our financing arrangement, access to the existing revolving credit ~~facility;~~ facility, and we may face an accelerated obligation to repay our indebtedness;~~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 technology may not achieve appropriate returns; premature termination of agreements with our franchisees; financial performance of Empire Education ~~Group;~~Group, Inc.; the 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; the ability to use U.S. net operating loss carryforwards; potential litigation and other legal or regulatory proceedings could have an adverse effect on our ~~business~~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.

3332

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 June 30, ~~2021~~2022 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) reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange 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 December 31, ~~2021.~~2022.

Changes in Internal Controls over Financial Reporting

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

3433

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. Like certain other franchisors, the Company currently faces, and in the past has ~~been~~ faced, ~~with~~ allegations of franchise regulation violations, breach of franchise agreements, fraud and ~~agreement violations.~~unfair or deceptive trade practices. These claims have increased following the Company's franchising of its company-owned locations. Additionally, ~~similar to other large retail employers,~~ the Company currently faces, and in the past has ~~been~~ faced, ~~with~~ allegations of ~~purported class-wide consumer~~non-payment of rent and ~~wage~~associated charges pursuant to leases in which the Company is the tenant under a master lease for a location subleased to a franchisee. These claims have increased since the advent of COVID-19 and ~~hour violations~~ ~~(See Note 5~~ can be attributed in part to ~~the unaudited Condensed Consolidated Financial Statements~~).decreases in salon revenue causing franchisees to fail to pay rent or cease operations. The Company has incurred judgments and settled these lawsuits and claims. Litigation is inherently unpredictable, and the outcome of these matters cannot presently be determined. Although the actions are being vigorously defended, in the future, the Company could ~~in the future,~~ incur judgments or ~~enter into settlements of~~settle 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, ~~2021.~~2022.

3534

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

Share Issuance Program

OnIn 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 ~~three and~~ six months ended December 31, ~~2021,~~2022, the Company ~~issued 1.2 million and 9.3 million~~did not issue shares ~~for proceeds of $5.2 million and $38.4 million offset by fees of $0.2 million and $1.2 million, respectively.~~

~~The following table shows~~under the ~~stock issuance activity for the three months ended December 31, 2021:~~

Period Total Number of Shares Issued (1) Average Price per Share Total Number of Shares Issued As Part of Publicly Announced Plans Gross Proceeds Received in Q2
10/1/21 - 10/31/21 1,223,314 $ 4.25 9,295,618 $ 5,197,617
11/1/21 - 11/30/21 — — 9,295,618 —
12/1/21 - 12/31/21 — — 9,295,618 —
Total 1,223,314 $ 4.25 9,295,618 $ 5,197,617
~~_______________________________________________________________________________~~

~~(1)These shares were issued before September 30, 2021, but settled in the second quarter due to timing.~~

prospectus supplement. On December 31, ~~2021,~~2022, $11.6 million remains under the prospectus supplement, which equates to ~~6.6~~9.5 million shares based on the share price as of December 31, ~~2021.~~2022.

Share Repurchase Program

In May 2000, the Board approved a stock repurchase program with no stated expiration date. Since that time and through December 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 Company last purchased shares in fiscal year 2020. As of December 31, ~~2021,~~2022, a total accumulated 30.0 million shares have been repurchased for $595.4 million. At December 31, ~~2021,~~2022, $54.6 million remains outstanding under the approved stock repurchase program. The Company does not expect to repurchase shares in fiscal year ~~2022.~~2023.

3635

Item 6. Exhibits


~~Exhibit 10.1~~						~~Offer letter, between Matthew Doctor and Regis Corporation, dated December 22, 2021.~~
~~Exhibit 10.2~~						~~Offer letter, between Jim B. Lain and Regis Corporation, dated December 22, 2021.~~
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 December 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 Operations; (iii) the Condensed Consolidated Statements of Comprehensive Loss; (iv) the Condensed Consolidated Statements of Shareholders' ~~Equity;~~Deficit; (v) the Condensed Consolidated Statements of Cash Flows; and (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 December 31, ~~2021,~~2022, formatted in iXBRL (included as Exhibit 101).

3736

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: February ~~3, 2022~~1, 2023	By:	/s/ Kersten D. Zupfer
		Kersten D. Zupfer
		Executive Vice President and Chief Financial Officer
		(Principal Accounting Officer)

3837


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

Balance, September 30, 2020	35,665,783	$	1,783	$	20,596	$	7,951	$	59,211	$	89,541
Net loss	—	—		—		—		(32,879)		(32,879)
Foreign currency translation	—	—		—		835		—		835


Stock-based compensation	—	—		1,314		—		—		1,314
Net restricted stock activity	102,303	5		166		—		—		171
Minority interest	—	—		—		—		(534)		(534)
Balance, December 31, 2020	35,768,086	$	1,788	$	22,076	$	8,786	$	25,798	$	58,448


Period	Total Number of Shares Issued (1)	Average Price per Share		Total Number of Shares Issued As Part of Publicly Announced Plans	Gross Proceeds Received in Q2

10/1/21 - 10/31/21	1,223,314	$	4.25	9,295,618	$	5,197,617
11/1/21 - 11/30/21	—	—		9,295,618	—
12/1/21 - 12/31/21	—	—		9,295,618	—
Total	1,223,314	$	4.25	9,295,618	$	5,197,617