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, 2022~~September 30, 2023
			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)

~~(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 on which registered

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 26,~~October 25, 2023: ~~45,564,673~~45,579,248

REGIS CORPORATION

INDEX


Part I.	Financial Information

	Item 1.	Financial Statements (Unaudited):

		Condensed Consolidated Balance ~~Sheet~~Sheets as of ~~December 31, 2022~~September 30, 2023 and June 30, ~~2022~~	2

		~~Condensed Consolidated Statement of Operations for the Three and Six Months Ended December 31, 2022 and 2021~~2023	3

		Condensed Consolidated ~~Statement~~Statements of ~~Comprehensive Loss~~Operations for the Three ~~and Six~~ Months Ended ~~December 31,~~September 30, 2023 and 2022 ~~and 2021~~	4

		Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended September 30, 2023 and 2022	5

		Condensed Consolidated ~~Statement~~Statements of Shareholders' Deficit for the Three ~~and Six~~ Months Ended ~~December 31,~~September 30, 2023 and 2022 ~~and 2021~~	56

		Condensed Consolidated ~~Statement~~Statements of Cash Flows for the ~~Six~~Three Months Ended ~~December 31,~~September 30, 2023 and 2022 ~~and 2021~~	67

		Notes to Condensed Consolidated Financial Statements	78

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2122

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3332

	Item 4.	Controls and Procedures	3332

Part II.	Other Information		3433

	Item 1.	Legal Proceedings	3433

	Item 1A.	Risk Factors	3433

	Item 2.	Unregistered Sales of Equity Securities, ~~and~~ Use of Proceeds, and Issuer Purchases of Equity Securities	35

	Item 5.	Other Information	35



	Item 6.	Exhibits	36

	Signatures		37

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

REGIS CORPORATION

CONDENSED CONSOLIDATED BALANCE ~~SHEET~~SHEETS (Unaudited)

As of September 30, 2023 and June 30, 2023

(Dollars in thousands, except per share data)


		December 31, 2022		June 30, 2022			September 30, 2023		June 30, 2023

ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents (Note 7)	Cash and cash equivalents (Note 7)	$	9,406	$	17,041	Cash and cash equivalents (Note 7)	$	9,298	$	9,508
Receivables, net	Receivables, net	13,962		14,531		Receivables, net	9,697		10,885
Inventories, net	Inventories, net	2,623		3,109		Inventories, net	1,011		1,681
Other current assets	Other current assets	18,138		13,984		Other current assets	14,628		15,164
Total current assets	Total current assets	44,129		48,665		Total current assets	34,634		37,238

Property and equipment, net	Property and equipment, net	8,692		12,835		Property and equipment, net	6,336		6,422
Goodwill (Note 1)	Goodwill (Note 1)	173,337		174,360		Goodwill (Note 1)	173,291		173,791
Other intangibles, net	Other intangibles, net	2,917		3,226		Other intangibles, net	2,691		2,783
Right of use asset (Note 8)	Right of use asset (Note 8)	430,979		493,749		Right of use asset (Note 8)	337,481		360,836
Other assets	Other assets	27,622		36,465		Other assets	25,737		26,307

Total assets	Total assets	$	687,676	$	769,300	Total assets	$	580,170	$	607,377

LIABILITIES AND SHAREHOLDERS' DEFICIT	LIABILITIES AND SHAREHOLDERS' DEFICIT					LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	17,277	$	15,860	Accounts payable	$	13,069	$	14,309
Accrued expenses	Accrued expenses	27,690		33,784		Accrued expenses	26,142		30,109

Short-term lease liability (Note 8)	Short-term lease liability (Note 8)	93,940		103,196		Short-term lease liability (Note 8)	78,006		81,917
Total current liabilities	Total current liabilities	138,907		152,840		Total current liabilities	117,217		126,335

Long-term debt, net (Note 9)	Long-term debt, net (Note 9)	174,846		179,994		Long-term debt, net (Note 9)	179,732		176,830
Long-term lease liability (Note 8)	Long-term lease liability (Note 8)	352,212		408,445		Long-term lease liability (Note 8)	271,942		291,901

Other non-current liabilities	Other non-current liabilities	53,346		58,974		Other non-current liabilities	46,543		49,041
Total liabilities	Total liabilities	719,311		800,253		Total liabilities	615,434		644,107
Commitments and contingencies (Note 6)	Commitments and contingencies (Note 6)					Commitments and contingencies (Note 6)
Shareholders' deficit:	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		2,278		2,276
Common stock, $0.05 par value; issued and outstanding, 45,579,248 and 45,566,228 common shares at September 30, 2023 and June 30, 2023, respectively						Common stock, $0.05 par value; issued and outstanding, 45,579,248 and 45,566,228 common shares at September 30, 2023 and June 30, 2023, respectively	2,279		2,278
Additional paid-in capital	Additional paid-in capital	63,543		62,562		Additional paid-in capital	65,160		64,600
Accumulated other comprehensive income	Accumulated other comprehensive income	8,729		9,455		Accumulated other comprehensive income	8,734		9,023
Accumulated deficit	Accumulated deficit	(106,185)		(105,246)		Accumulated deficit	(111,437)		(112,631)
Total shareholders' deficit	Total shareholders' deficit	(31,635)		(30,953)		Total shareholders' deficit	(35,264)		(36,730)
Total liabilities and shareholders' deficit	Total liabilities and shareholders' deficit	$	687,676	$	769,300	Total liabilities and shareholders' deficit	$	580,170	$	607,377

_______________________________________________________________________________

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

REGIS CORPORATION

CONDENSED CONSOLIDATED ~~STATEMENT~~STATEMENTS OF OPERATIONS (Unaudited)

For the Three ~~and Six~~ Months Ended ~~December 31,~~September 30, 2023 and 2022 ~~and 2021~~

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


		Three Months Ended December 31,				Six Months Ended December 31,					Three Months Ended September 30,
		2022		2021		2022		2021				2023		2022

Revenues:	Revenues:									Revenues:
Royalties	Royalties	$	16,158	$	16,125	$	33,338	$	32,726	Royalties		$	16,528	$	17,180
Fees	Fees	3,238		3,881		5,791		6,208		Fees		2,631		2,553
Product sales to franchisees	Product sales to franchisees	1,107		2,428		1,550		10,436		Product sales to franchisees		384		443
Advertising fund contributions	Advertising fund contributions	7,965		8,021		16,216		16,136		Advertising fund contributions		7,226		8,251
Franchise rental income (Note 8)	Franchise rental income (Note 8)	28,886		33,772		59,216		67,534		Franchise rental income (Note 8)		24,667		30,330
Company-owned salon revenue	Company-owned salon revenue	2,613		5,043		5,727		13,048		Company-owned salon revenue		1,936		3,114
Total revenue	Total revenue	59,967		69,270		121,838		146,088		Total revenue		53,372		61,871
Operating expenses:	Operating expenses:									Operating expenses:
Cost of product sales to franchisees	Cost of product sales to franchisees	1,310		3,117		1,780		10,766		Cost of product sales to franchisees		359		470
Inventory reserve		1,228		—		1,228		—

General and administrative	General and administrative	11,747		15,082		26,108		35,866		General and administrative		10,729		14,361
Rent (Note 8)	Rent (Note 8)	2,090		3,042		3,843		4,789		Rent (Note 8)		1,097		1,753
Advertising fund expense	Advertising fund expense	7,965		8,021		16,216		16,136		Advertising fund expense		7,226		8,251
Franchise rent expense	Franchise rent expense	28,886		33,772		59,216		67,534		Franchise rent expense		24,667		30,330
Company-owned salon expense (1)	Company-owned salon expense (1)	2,218		5,067		5,203		13,011		Company-owned salon expense (1)		1,490		2,985
Depreciation and amortization	Depreciation and amortization	3,793		1,605		5,044		3,144		Depreciation and amortization		370		1,251
Long-lived asset impairment		—		52		—		215

Total operating expenses	Total operating expenses	59,237		69,758		118,638		151,461		Total operating expenses		45,938		59,401

Operating income (loss)		730		(488)		3,200		(5,373)
Operating income										Operating income		7,434		2,470

Other expense:	Other expense:									Other expense:
Interest expense	Interest expense	(4,519)		(3,270)		(8,336)		(6,397)		Interest expense		(6,188)		(3,817)
Loss from sale of salon assets to franchisees, net		—		(615)		—		(1,695)

Other, net	Other, net	1,248		99		785		(140)		Other, net		(200)		(463)

Loss from operations before income taxes		(2,541)		(4,274)		(4,351)		(13,605)
Income (loss) from operations before income taxes										Income (loss) from operations before income taxes		1,046		(1,810)

Income tax benefit (expense)	Income tax benefit (expense)	—		164		(28)		213		Income tax benefit (expense)		148		(28)

Loss from continuing operations		(2,541)		(4,110)		(4,379)		(13,392)
Income (loss) from continuing operations										Income (loss) from continuing operations		1,194		(1,838)

Income (loss) from discontinued operations (Note 3)		134		(818)		3,440		(1,914)
Income from discontinued operations (Note 3)										Income from discontinued operations (Note 3)		—		3,306

Net loss		$	(2,407)	$	(4,928)	$	(939)	$	(15,306)
Net income										Net income		$	1,194	$	1,468

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)
Net income per share:										Net income per share:
Basic:										Basic:
Income (loss) from continuing operations										Income (loss) from continuing operations		0.03		(0.04)
Income from discontinued operations										Income from discontinued operations		0.00		0.07
Net income per share, basic (2)										Net income per share, basic (2)		$	0.03	$	0.03
Diluted:										Diluted:
Income (loss) from continuing operations										Income (loss) from continuing operations		0.03		(0.04)
Income from discontinued operations										Income from discontinued operations		0.00		0.07
Net income per share, diluted (2)										Net income per share, diluted (2)		$	0.03	$	0.03

Weighted average common and common equivalent shares outstanding:	Weighted average common and common equivalent shares outstanding:									Weighted average common and common equivalent shares outstanding:
Basic and diluted		46,148		45,721		46,091		41,274
Basic										Basic		46,640		46,054
Diluted										Diluted		47,243		46,054

(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 Three and Six Months Ended December 31, 2022 and 2021~~

~~(Dollars in thousands)~~

Three Months Ended December 31, Six Months Ended December 31,
2022 2021 2022 2021
Net loss $ (2,407) $ (4,928) $ (939) $ (15,306)
Foreign currency translation adjustments 132 36 (726) (438)
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~~STATEMENTS OF ~~SHAREHOLDERS' DEFICIT~~COMPREHENSIVE INCOME (Unaudited)

For the Three ~~and Six~~ Months Ended ~~December 31,~~September 30, 2023 and 2022 ~~and 2021~~

(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 45,536,525 $ 2,277 $ 63,044 $ 8,597 $ (103,778) $ (29,860)
Net loss — — — — (2,407) (2,407)
Foreign currency translation — — — 132 — 132
Stock-based compensation — — 524 — — 524
Net restricted stock activity 26,030 1 (25) — — (24)
Balance, December 31, 2022 45,562,555 $ 2,278 $ 63,543 $ 8,729 $ (106,185) $ (31,635)
Three Months Ended December 31, 2021
Common Stock Additional
Paid-In
Capital Accumulated
Other
Comprehensive
Income Accumulated Deficit Total
Shares Amount
Balance, September 30, 2021 43,964,489 $ 2,198 $ 58,310 $ 9,069 $ (29,767) $ 39,810
Net loss — — — — (4,928) (4,928)
Foreign currency translation — — — 36 — 36
Issuance of common stock, net of offering costs 1,223,314 61 4,931 — — 4,992
Stock-based compensation — — (1,374) — — (1,374)
Net restricted stock activity 302,271 18 (266) — — (248)
Balance, December 31, 2021 45,490,074 $ 2,277 $ 61,601 $ 9,105 $ (34,695) $ 38,288

Six Months Ended December 31, 2022
Common Stock Additional
Paid-In
Capital Accumulated
Other
Comprehensive
Income Accumulated Deficit Total
Shares Amount
Balance, June 30, 2022 45,510,245 $ 2,276 $ 62,562 $ 9,455 $ (105,246) $ (30,953)
Net loss — — — — (939) (939)
Foreign currency translation — — — (726) — (726)
Stock-based compensation — — 1,020 — — 1,020
Net restricted stock activity 52,310 2 (39) — — (37)
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 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


	Three Months Ended September 30,
		2023		2022

Net income		$	1,194	$	1,468
Foreign currency translation adjustments		(289)		(858)
Comprehensive income		$	905	$	610

_______________________________________________________________________________

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

REGIS CORPORATION

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

For the Three Months Ended September 30, 2023 and 2022

(Dollars in thousands)






























	Three Months Ended September 30, 2023
	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total
	Shares	Amount

Balance, June 30, 2023	45,566,228	$	2,278	$	64,600	$	9,023	$	(112,631)	$	(36,730)
Net income	—	—		—		—		1,194		1,194
Foreign currency translation	—	—		—		(289)		—		(289)


Stock-based compensation	—	—		567		—		—		567
Net restricted stock activity	13,020	1		(7)		—		—		(6)

Balance, September 30, 2023	45,579,248	$	2,279	$	65,160	$	8,734	$	(111,437)	$	(35,264)

	Three Months Ended September 30, 2022
	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income		Accumulated Deficit		Total
	Shares	Amount

Balance, June 30, 2022	45,510,245	$	2,276	$	62,562	$	9,455	$	(105,246)	$	(30,953)
Net income	—	—		—		—		1,468		1,468
Foreign currency translation	—	—		—		(858)		—		(858)


Stock-based compensation	—	—		496		—		—		496
Net restricted stock activity	26,280	1		(14)		—		—		(13)

Balance, September 30, 2022	45,536,525	$	2,277	$	63,044	$	8,597	$	(103,778)	$	(29,860)

_______________________________________________________________________________

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

REGIS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

For the ~~Six~~Three Months Ended ~~December 31,~~September 30, ~~2022~~2023 and ~~2021~~2022

(Dollars in thousands)


		Six Months Ended December 31,					Three Months Ended September 30,
		2022		2021			2023		2022

Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net loss		$	(939)	$	(15,306)
Adjustments to reconcile net loss to cash used in operating activities:
Net income						Net income	$	1,194	$	1,468
Adjustments to reconcile net income to cash used in operating activities:						Adjustments to reconcile net income to cash used in operating activities:
Gain from sale of OSP (Note 3)	Gain from sale of OSP (Note 3)	(4,034)		—		Gain from sale of OSP (Note 3)	—		(3,927)
Depreciation and amortization	Depreciation and amortization	4,647		3,284		Depreciation and amortization	375		1,035

Long-lived asset impairment		—		215

Deferred income taxes	Deferred income taxes	28		(529)		Deferred income taxes	(59)		28
Inventory reserve		1,228		—

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

Non-cash interest						Non-cash interest	640		—

Stock-based compensation	Stock-based compensation	1,111		305		Stock-based compensation	630		531
Amortization of debt discount and financing costs	Amortization of debt discount and financing costs	1,391		920		Amortization of debt discount and financing costs	747		648
Other non-cash items affecting earnings	Other non-cash items affecting earnings	376		551		Other non-cash items affecting earnings	238		481
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)	(10,722)		(15,463)		Changes in operating assets and liabilities, excluding the effects of asset sales (1)	(6,589)		(5,321)
Net cash used in operating activities	Net cash used in operating activities	(6,914)		(24,328)		Net cash used in operating activities	(2,824)		(5,057)

Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Capital expenditures	Capital expenditures	(361)		(2,947)		Capital expenditures	(163)		(184)

Proceeds from sale of OSP, net of fees	Proceeds from sale of OSP, net of fees	4,000		—		Proceeds from sale of OSP, net of fees	—		3,500
Net cash provided by (used in) investing activities		3,639		(2,947)
Net cash (used in) provided by investing activities						Net cash (used in) provided by investing activities	(163)		3,316

Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Borrowings on credit facility	Borrowings on credit facility	11,357		10,000		Borrowings on credit facility	2,000		6,357
Repayments of long-term debt	Repayments of long-term debt	(8,535)		(2,734)		Repayments of long-term debt	(162)		(5,801)
Debt refinancing fees	Debt refinancing fees	(4,383)		—		Debt refinancing fees	(152)		(4,341)
Proceeds from issuance of common stock, net of offering costs		—		37,185

Taxes paid for shares withheld	Taxes paid for shares withheld	(35)		(823)		Taxes paid for shares withheld	(6)		(13)

Net cash (used in) provided by financing activities		(1,596)		43,628
Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	1,680		(3,798)

Effect of exchange rate changes on cash and cash equivalents	Effect of exchange rate changes on cash and cash equivalents	(135)		(134)		Effect of exchange rate changes on cash and cash equivalents	(42)		(166)

(Decrease) increase in cash, cash equivalents, and restricted cash		(5,006)		16,219
Decrease in cash, cash equivalents, and restricted cash						Decrease in cash, cash equivalents, and restricted cash	(1,349)		(5,705)

Cash, cash equivalents and restricted cash:	Cash, cash equivalents and restricted cash:					Cash, cash equivalents and restricted cash:
Beginning of period	Beginning of period	27,464		29,152		Beginning of period	21,396		27,464
End of period	End of period	$	22,458	$	45,371	End of period	$	20,047	$	21,759

_______________________________________________________________________________

(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, 2022~~September 30, 2023 and for the three ~~and six~~ months ended ~~December 31,~~September 30, 2023 and 2022, ~~and 2021,~~ reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of ~~December 31, 2022~~September 30, 2023 and its consolidated results of operations, comprehensive ~~loss,~~income, shareholders' 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 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, ~~2022~~2023 and other documents filed or furnished with the SEC during the current fiscal year.

~~Inventories:~~

The Company has inventory valuation reserves for excess and obsolete inventories or other factors that may render inventories unmarketable at their historical costs. The Company exited its distribution centers in fiscal year 2022 and now stores inventory at a third-party facility. To facilitate the exit of the distribution centers, the Company sold inventory at discounts. The inventory valuation reserve as of December 31, 2022 and June 30, 2022 was $1.9 and $1.9 million, respectively. In the three and six months ended December 31, 2022, an inventory reserve charge of $1.2 million was recorded in 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, respectively, was recorded in Company-owned salon expense 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 of $1.3 and $1.1 million, respectively. The increase in the reserve during fiscal year 2023 reduced the gain from discontinued operations. See Note 3 to the unaudited Condensed Consolidated Financial Statements.

Goodwill:

As of ~~December 31, 2022~~September 30, 2023 and June 30, ~~2022,~~2023, the Franchise reporting unit had $173.3 and ~~$174.4~~$173.8 million, respectively, of goodwill. The change in goodwill for the ~~six~~three months ended ~~December 31, 2022~~September 30, 2023 is due to foreign currency translation. The Company assesses goodwill impairment on an annual basis, during the Company's fourth fiscal quarter, and between annual assessments if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. An interim impairment analysis was not required in the three ~~and six~~ months ended ~~December 31, 2022.~~September 30, 2023.

Depreciation:

Depreciation expense in the three months ended ~~December 31,~~September 30, 2023 and 2022 includes $0.0 and ~~2021 includes~~ $0.2 ~~and $0.3 million, respectively, and for the six months ended December 31, 2022 and 2021 includes $0.4 and $0.6~~ 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 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~~Statements 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 opens and is then recognized over the term of the franchise agreement, which is typically 10 years. 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.~~landlord and has no impact on net income.

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, 2022		June 30, 2022		Balance Sheet Classification		September 30, 2023		June 30, 2023		Balance Sheet Classification

		(Dollars in thousands)						(Dollars in thousands)

Receivables from contracts with customers, net	Receivables from contracts with customers, net	$	9,419	$	10,263	Receivables, net	Receivables from contracts with customers, net	$	6,426	$	5,683	Receivables, net
Broker fees	Broker fees	14,006		15,592		Other assets	Broker fees	11,623		12,471		Other assets

Deferred revenue:	Deferred revenue:						Deferred revenue:
Current	Current						Current
Gift card liability	Gift card liability	$	1,950	$	2,037	Accrued expenses	Gift card liability	$	1,764	$	1,823	Accrued expenses

Deferred franchise fees open salons	Deferred franchise fees open salons	5,533		5,770		Accrued expenses	Deferred franchise fees open salons	5,175		5,325		Accrued expenses
Total current deferred revenue	Total current deferred revenue	$	7,483	$	7,807		Total current deferred revenue	$	6,939	$	7,148
Non-current	Non-current						Non-current
Deferred franchise fees unopened salons	Deferred franchise fees unopened salons	$	2,664	$	3,211	Other non-current liabilities	Deferred franchise fees unopened salons	$	2,217	$	2,312	Other non-current liabilities
Deferred franchise fees open salons	Deferred franchise fees open salons	23,963		26,827		Other non-current liabilities	Deferred franchise fees open salons	19,323		20,839		Other non-current liabilities
Total non-current deferred revenue	Total non-current deferred revenue	$	26,627	$	30,038		Total non-current deferred revenue	$	21,540	$	23,151

Receivables relate primarily to payments due for royalties, advertising fees ~~rent, product sales~~ and ~~sales of salon services and product paid by credit card.~~rent. The receivables balance is presented net of an allowance for expected losses (i.e., doubtful accounts)~~, primarily related~~. Provisions for credit losses are recorded based on management’s judgment regarding our ability to ~~receivables from franchisees.~~collect as well as the age of the receivables. Receivable are written off when they are deemed uncollectible. The following table is a rollforward of the allowance for doubtful accounts for the ~~period:~~periods indicated:


		Six Months Ended December 31,					Three Months Ended September 30,
		2022		2021			2023		2022

		(Dollars in thousands)					(Dollars in thousands)

Balance at beginning of period	Balance at beginning of period	$	6,559	$	7,774	Balance at beginning of period	$	7,297	$	6,559
Provision for doubtful accounts	Provision for doubtful accounts	369		(41)		Provision for doubtful accounts	211		461
Provision for franchisee rent ~~(1)~~	Provision for franchisee rent ~~(1)~~	(208)		811		Provision for franchisee rent ~~(1)~~	167		19
Reclass of accrued rent (2)		73		396
Recoveries						Recoveries	(237)		—
Write-offs	Write-offs	(1,129)		(589)		Write-offs	(991)		(725)
Reclass of accrued rent (1)						Reclass of accrued rent (1)	—		60
Other (2)						Other (2)	(56)		—
Balance at end of period	Balance at end of period	$	5,664	$	8,351	Balance at end of period	$	6,391	$	6,374

_______________________________________________________________________________

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

~~(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 billed in fiscal years 2023 and~~ 2022, and subsequently billed, so the related ~~accrual~~accruals were reclassified to allowance for doubtful accounts.

(2)Includes currency fluctuation.

The Company offers financing to Smartstyle franchisees when they remodel their salons. Included in Other assets is a receivable of $0.9 million, partially offset by a credit loss reserve of $0.2 million, related to this financing program.

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:


		Six Months Ended December 31,					Three Months Ended September 30,
		2022		2021			2023		2022

		(Dollars in thousands)					(Dollars in thousands)

Balance at beginning of period	Balance at beginning of period	$	15,592	$	19,254	Balance at beginning of period	$	12,471	$	15,592
Additions	Additions	—		25		Additions	—		—
Amortization	Amortization	(1,586)		(1,625)		Amortization	(739)		(827)
Write-offs	Write-offs	—		(366)		Write-offs	(109)		—
Balance at end of period	Balance at end of period	$	14,006	$	17,288	Balance at end of period	$	11,623	$	14,765

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,~~September 30, 2023 and 2022 ~~and 2021~~ was $1.7 and ~~$1.6 million, respectively, and for the six months ended December 31, 2022 and 2021 was $3.2 and $3.2~~$1.5 million, respectively. Estimated revenue expected to be recognized in the future related to deferred franchise fees for open salons as of ~~December 31, 2022~~September 30, 2023 is as follows ~~(in~~(dollars in thousands):


Remainder of 2023		$	2,766
2024		5,378
Remainder of 2024				Remainder of 2024	$	3,881
2025	2025	4,986		2025	4,889
2026	2026	4,521		2026	4,420
2027	2027	4,058		2027	3,959
2028				2028	3,276
Thereafter	Thereafter	7,787		Thereafter	4,073
Total	Total	$	29,496	Total	$	24,498

910

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~~$5.0 million in ~~proceeds, net of~~fiscal year 2023, offset by 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,					Three Months Ended September 30,
		2022		2021		2022		2021				2023		2022

		(Dollars in thousands)										(Dollars in thousands)

Discontinued operations:	Discontinued operations:									Discontinued operations:
OSP fees	OSP fees	$	—	$	986	$	(226)	$	1,924	OSP fees		$	—	$	(226)
Cost of product sales to franchisees		—		(302)		—		(766)

General and administrative	General and administrative	—		(902)		(27)		(1,907)		General and administrative		—		(27)
Rent	Rent	26		(46)		(341)		(102)		Rent		—		(368)
Depreciation and amortization		—		(375)		—		(705)

Interest expense		—		(179)		—		(358)

Gain from sale of OSP	Gain from sale of OSP	108		—		4,034		—		Gain from sale of OSP		—		3,927

Gain (loss) from OSP discontinued operations, net		$	134	$	(818)	$	3,440	$	(1,914)
Income from OSP discontinued operations, net										Income from OSP discontinued operations, net		$	—	$	3,306

1011

4. SHAREHOLDERS' ~~EQUITY:~~DEFICIT:

Stock-Based Employee Compensation:

During the three ~~and six~~ months ended ~~December 31, 2022,~~September 30, 2023, the Company granted ~~various equity awards including~~restricted stock ~~options and stock appreciation rights~~units as follows:

Three Months Ended December 31, 2022 Six Months Ended December 31, 2022
Stock options (SOs) 615,000 1,600,000
Stock appreciation rights (SARs) — 600,000

Three Months Ended September 30, 2023

Restricted stock units (RSUs)

259,403

The ~~SOs and SARs~~RSUs granted during the three ~~and six~~ months ended ~~December 31, 2022~~September 30, 2023, vest in equal amounts over a ~~one~~ or three-year period subsequent to the grant date.

Total compensation cost for stock-based payment arrangements totaling $0.6 and ~~$(1.4)~~$0.5 million for the three months ended ~~December 31,~~September 30, 2023 and 2022, ~~and 2021,~~ respectively, ~~and $1.1 and $0.3 million for the six months ended December 31, 2022 and 2021, respectively, were~~was recorded within general and administrative ~~expense~~ on the unaudited Condensed Consolidated ~~Statement~~Statements of Operations. ~~In the three and six months ended December 31, 2021, stock compensation includes a benefit related to executive forfeitures of $2.0 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 ~~six~~three months ended ~~December 31,~~September 30, 2023 and 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 net proceeds of $37.2 million.~~ As of ~~December 31, 2022,~~September 30, 2023, $11.6 million remains under the prospectus supplement, which equates to ~~9.5~~16.5 million shares based on the share price as of ~~December 31, 2022.~~September 30, 2023.

1112

5. INCOME TAXES:

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


		Three Months Ended December 31,						Six Months Ended December 31,							Three Months Ended September 30,
		2022			2021			2022			2021					2023			2022

		(Dollars in thousands)														(Dollars in thousands)

Income tax benefit (expense)	Income tax benefit (expense)	$	—		$	164		$	(28)		$	213		Income tax benefit (expense)		$	148		$	(28)
Effective tax rate	Effective tax rate	—		%	3.8		%	(0.6)		%	1.6		%	Effective tax rate		(14.1)		%	(1.5)		%

The recorded tax provision and effective tax ~~rates~~rate for the three ~~and six~~ months ended ~~December 31,~~September 30, 2023 and 2022 ~~and 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 has evaluated the IRA and does not expect it to have a material impact on the Company's consolidated financial statements.

With limited exceptions, due to net operating loss carryforwards, our federal, state and foreign tax returns are open to examination for all years since 2014, 2012 and 2016, respectively.

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 faced allegations of franchise regulation and agreement violations. Additionally, because the Company may be the tenant under a master lease for a location subleased to a franchisee, the Company has faced allegations of nonpayment of rent and associated charges. Further, similar to other large retail employers, the Company has faced, and may continue to face, allegations of purported class-wide consumer and wage and hour violations.

During the three and six months ended December 31, 2022, the Company recorded $0.4 and $0.9 million, respectively, of 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 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.

The Company owns a majority stake in Empire Education Group Inc. (EEG). To be eligible to participate in Title IV programs, the schools operated by EEG must comply with specific standards and procedures set forth in the Higher Education Act and the regulations issued thereunder by the Department of Education. On October 10, 2023, the Department of Education issued a final rule applicable to “gainful employment” programs, which under the Higher Education Act, include all programs offered by the Empire Education Group schools and other proprietary institutions. Under this final rule, which becomes effective July 1, 2024, the continued Title IV eligibility of such programs will be based on meeting both a debt-to-earnings metric and an earnings premium metric. A program that fails either metric in a single year will be required to provide warnings to current and prospective students that it could be at risk of losing Title IV program eligibility. A program that fails to meet the same metric twice in a three-year period will lose Title IV program eligibility. The first measurement will be assessed in fiscal year 2025. Upon a loss of institutional or programmatic eligibility, EEG’s students would lose access to Title IV program funds and that could be detrimental to EEG's business model. Additionally, EEG students who are unable to complete their educational program with EEG, or who do not accept a teach-out opportunity with another institution, may be eligible for discharges of their federal student loan debt. Those discharged loan amounts and other Title IV funds disbursed to EEG students that do not complete their program, as well as other Title IV program funds, may constitute liabilities to the Department of Education. Because the Company holds a majority ownership interest in EEG and is a co-signatory to the Title IV program participation agreements of the EEG schools with the Department of Education, the Department of Education could hold the Company responsible for EEG's Title IV program liabilities. As of September 30, 2023, EEG had $8.7 million of Title IV liabilities. If EEG is unable to meet the required metrics for gainful employment programs and subsequently unable to allow students to complete their programs, then it is possible the Company could be liable for all or some of the Title IV liabilities. The Company does not believe that it is probable that it would be liable for a material portion of these liabilities because there is time for EEG to reduce its exposure to these liabilities and therefore has not recorded any accrual for this potential liability.

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~~Sheets to the amount of cash, cash equivalents and restricted cash reported on the unaudited Condensed Consolidated ~~Statement~~Statements of Cash Flows:


		December 31, 2022		June 30, 2022			September 30, 2023		June 30, 2023

		(Dollars in thousands)					(Dollars in thousands)

Cash and cash equivalents	Cash and cash equivalents	$	9,406	$	17,041	Cash and cash equivalents	$	9,298	$	9,508
Restricted cash, included in other current assets (1)	Restricted cash, included in other current assets (1)	13,052		10,423		Restricted cash, included in other current assets (1)	10,749		11,888
Total cash, cash equivalents and restricted cash	Total cash, cash equivalents and restricted cash	$	22,458	$	27,464	Total cash, cash equivalents and restricted cash	$	20,047	$	21,396

_______________________________________________________________________________

(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.

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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 one to 20 years with many leases renewable for an additional five 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 September 30,
		2022		2021		2022		2021				2023		2022

		(Dollars in thousands)										(Dollars in thousands)

Office and warehouse rent		$	834	$	1,202	$	1,706	$	2,815
Lease termination expense (1)		848		238		1,306		1,578
Office rent										Office rent		$	825	$	872
Lease termination (benefit) expense										Lease termination (benefit) expense		(13)		458
Lease liability benefit ~~(2)~~(1)	Lease liability benefit ~~(2)~~(1)	(615)		(496)		(1,217)		(2,927)		Lease liability benefit ~~(2)~~(1)		(128)		(602)
Franchise salon rent ~~(3)~~(2)	Franchise salon rent ~~(3)~~(2)	9		246		(44)		575		Franchise salon rent ~~(3)~~(2)		(337)		(53)
Company-owned salon rent	Company-owned salon rent	1,014		1,852		2,092		2,748		Company-owned salon rent		750		1,078
Total	Total	$	2,090	$	3,042	$	3,843	$	4,789	Total		$	1,097	$	1,753

_______________________________________________________________________________

(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 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 dates in order to relieve the Company of future lease obligations.

~~(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)~~(2)~~Franchise~~The credit in franchise salon rent ~~in fiscal year 2023 includes the benefit of incurring~~is related to settlements with landlords for less ~~cost to terminate a lease~~ than ~~estimated.~~previously accrued.

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~~Statements of Operations. For the three months ended ~~December 31,~~September 30, 2023 and 2022, ~~and 2021,~~ franchise rental income and franchise rent expense were ~~$28.9~~$24.7 and ~~$33.8~~$30.3 million, ~~respectively, and $59.2 and $67.5 million, respectively, for the six months ended December 31, 2022 and 2021.~~respectively. These leases generally have lease terms of approximately five years. The Company expects to renew the SmartStyle® master lease and some leases for locations subleased to our franchisees upon expiration of those leases. Other leases are expected to be renewed by the franchisee upon expiration.

1415

All the Company's leases are operating leases. The lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date, including one lease term option when the lease is expected to be renewed. The ROU asset is initially and subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, less ~~any~~ accrued lease payments and unamortized lease incentives received, if any. 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 ~~5.77~~5.65 years and ~~6.02~~5.52 years and the weighted average discount rate was ~~4.34%~~4.60% and ~~4.25%~~4.55% for all salon operating leases as of ~~December 31, 2022~~September 30, 2023 and June 30, ~~2022,~~2023, 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 in fiscal years 2023 and 2022 resulted in ASC 360-10-35-21 triggering 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 the market rent of comparable properties and a discount rate.

In the three and six months ended December 31, 2022, the Company did not recognize long-lived asset impairment charges related to ROU assets in the unaudited Condensed Consolidated Statement of Operations. In the three and six months ended December 31, 2021, the Company recognized long-lived asset impairment charges of $0.1 and $0.2 million, respectively, primarily related to ROU assets in the unaudited Condensed Consolidated Statement of Operations. The impairment loss for each salon asset group that was recognized was allocated among the long-lived assets of the group on 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 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 asset, including its ROU assets. If actual results are not consistent with the estimates and assumptions used in the calculations, the Company may be exposed to future impairment losses that could be material.

1516

As of ~~December 31, 2022,~~September 30, 2023, 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~~(dollars 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 2023		$	54,914	$	1,292	$	1,061	$	57,267	$	(54,914)	$	2,353
2024		99,860		1,617		1,301		102,778		(99,860)		2,918
Remainder of 2024														Remainder of 2024	$	68,629	$	1,044	$	978	$	70,651	$	(68,629)	$	2,022
2025	2025	83,570		536		1,334		85,440		(83,570)		1,870		2025	77,882		674		1,334		79,890		(77,882)		2,008
2026	2026	69,825		290		1,367		71,482		(69,825)		1,657		2026	64,605		454		1,367		66,426		(64,605)		1,821
2027	2027	59,363		63		1,401		60,827		(59,363)		1,464		2027	54,830		229		1,401		56,460		(54,830)		1,630
2028														2028	46,254		218		1,436		47,908		(46,254)		1,654
Thereafter	Thereafter	122,479		36		4,417		126,932		(122,479)		4,453		Thereafter	70,459		56		2,981		73,496		(70,459)		3,037
Total future obligations	Total future obligations	$	490,011	$	3,834	$	10,881	$	504,726	$	(490,011)	$	14,715	Total future obligations	$	382,659	$	2,675	$	9,497	$	394,831	$	(382,659)	$	12,172
Less amounts representing interest	Less amounts representing interest	56,953		121		1,500		58,574						Less amounts representing interest	43,445		208		1,230		44,883
Present value of lease liability	Present value of lease liability	$	433,058	$	3,713	$	9,381	$	446,152					Present value of lease liability	$	339,214	$	2,467	$	8,267	$	349,948
Less short-term lease liability	Less short-term lease liability	90,342		2,246		1,352		93,940						Less short-term lease liability	75,885		1,132		989		78,006
Long-term lease liability	Long-term lease liability	$	342,716	$	1,467	$	8,029	$	352,212					Long-term lease liability	$	263,329	$	1,335	$	7,278	$	271,942

1617

9. FINANCING ARRANGEMENTS:

The Company's debt consists of the following:


		Maturity Date	December 31, 2022	December 31, 2022		June 30, 2022			Maturity Date	September 30, 2023	September 30, 2023		June 30, 2023

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

Term loan	Term loan	2026	8.21%	$	173,816	$	—	Term loan	2026	9.69%	$	172,106	$	172,268
Deferred financing fees	Deferred financing fees			(7,970)		—		Deferred financing fees			(6,406)		(6,471)
Term loan, net	Term loan, net			$	165,846	$	—	Term loan, net			$	165,700	$	165,797
Revolving credit facility	Revolving credit facility	2026	8.21%	9,000		179,994		Revolving credit facility	2026	9.69%	12,000		10,000
Paid-in-kind interest								Paid-in-kind interest			2,032		1,033
Total long-term debt, net	Total long-term debt, net			$	174,846	$	179,994	Total long-term debt, net			$	179,732	$	176,830

~~In August of 2022, the Company amended its credit agreement.~~ The ~~amendment, among other things, converted $180.0 million of the previous $295.0 million revolving~~Company's credit facility matures in August 2025. In addition to a ~~new term loan, reduced commitments under~~$10.0 million minimum liquidity covenant, the ~~revolving~~amended credit ~~facility to $55.0 million,~~agreement includes typical provisions and ~~extended~~financial covenants, including minimum EBITDA, leverage and fixed-charge coverage ratio covenants, the ~~term~~latter two of the credit facility from March 26, 2023 to August 31, 2025, with no scheduled amortization prior to 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 incurredwhich are ~~amortized through the extended term of the credit facility. At~~not tested until December 31, 2022, the Company had outstanding standby letters of credit under the revolving credit facility of $11.8 million, primarily related to the Company's self-insurance program. As of December 31, 2022, total liquidity and available credit under the revolving credit facility, as defined by the agreement, were $43.7 and $34.3 million, respectively. As of December 31, 2022, the Company had cash and cash equivalents of $9.4 million and current liabilities of $138.9 million.2023. 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~~was 3.875%. through March 27, 2023. Effective March 27, 2023, the margin ~~will increase~~increased to 6.25%, of which 4.25% ~~will be~~is paid currently in cash and 2.00% ~~will be~~is 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. Interest expense is recorded based on a weighted average effective interest rate method. The significant assumptions used in the weighted average estimate are the future SOFR rates and debt balance, as well as the length of time the debt will be outstanding. Cash interest paid in the three months ended September 30, 2023 and 2022 was $4.8 and $3.2 million, respectively.

At September 30, 2023, the Company had outstanding standby letters of credit under the revolving credit facility of $9.8 million, primarily related to the Company's self-insurance program. As of September 30, 2023, total liquidity and available credit under the revolving credit facility, as defined by the agreement, ~~contains typical provisions~~were $42.4 and ~~financial covenants regarding minimum EBITDA, maximum leverage~~$33.1 million, respectively. As of September 30, 2023, the Company had cash and ~~minimum fixed-charge coverage~~cash equivalents of $9.3 million and ~~a minimum liquidity threshold~~current liabilities of ~~$10.0~~$117.2 million.

The Company was in compliance with its covenants and other requirements of the financing arrangements as of ~~December 31, 2022.~~September 30, 2023.

1718

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, 2022~~September 30, 2023 and June 30, ~~2022,~~2023, the estimated fair value of the Company's cash, cash equivalents, restricted cash, receivables, inventory, deferred compensation assets, accounts payable and debt approximated their carrying values.

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 Company's basic earnings per share is calculated as net ~~loss~~income 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~~income 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~~4,176,371 and ~~2,960,122~~3,211,485 of stock-based awards during the three months ended ~~December 31,~~September 30, 2023 and 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 not dilutive under the treasury stock method.

1819

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


		December 31, 2022		June 30, 2022			September 30, 2023		June 30, 2023

FRANCHISE SALONS:	FRANCHISE SALONS:					FRANCHISE SALONS:
Supercuts	Supercuts	2,160		2,264		Supercuts	2,060		2,082
SmartStyle/Cost Cutters in Walmart Stores	SmartStyle/Cost Cutters in Walmart Stores	1,605		1,646		SmartStyle/Cost Cutters in Walmart Stores	1,373		1,388
Portfolio Brands	Portfolio Brands	1,293		1,344		Portfolio Brands	1,210		1,223
Total North American salons	Total North American salons	5,058		5,254		Total North American salons	4,643		4,693
Total International salons (1)	Total International salons (1)	138		141		Total International salons (1)	102		102
Total Franchise salons	Total Franchise salons	5,196		5,395		Total Franchise salons	4,745		4,795
as a percent of total Franchise and Company-owned salons	as a percent of total Franchise and Company-owned salons	98.6	%	98.1	%	as a percent of total Franchise and Company-owned salons	98.6	%	98.6	%

COMPANY-OWNED SALONS:	COMPANY-OWNED SALONS:					COMPANY-OWNED SALONS:
Supercuts	Supercuts	10		18		Supercuts	7		7
SmartStyle/Cost Cutters in Walmart Stores	SmartStyle/Cost Cutters in Walmart Stores	48		49		SmartStyle/Cost Cutters in Walmart Stores	48		48
Portfolio Brands	Portfolio Brands	17		38		Portfolio Brands	11		13
Total Company-owned salons	Total Company-owned salons	75		105		Total Company-owned salons	66		68
as a percent of total Franchise and Company-owned salons	as a percent of total Franchise and Company-owned salons	1.4	%	1.9	%	as a percent of total Franchise and Company-owned salons	1.4	%	1.4	%

OWNERSHIP INTEREST LOCATIONS:
Equity ownership interest locations		76		76

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

Total Franchise and Company-owned salons						Total Franchise and Company-owned salons	4,811		4,863

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

~~As of December 31, 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 Supercuts~~®~~, SmartStyle~~®~~, and other regional trade names.~~

1920

Financial information concerning the Company's reportable operating segments is shown in the ~~tables~~table 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. Asset information by segment is not provided to the CODM. Segment adjusted EBITDA is defined as income from continuing operations before interest, income taxes, depreciation, amortization and ~~amortization.~~impairment. Consistent 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 and asset retirement obligation ~~costs and long-lived asset impairment charges. Figures for prior reporting periods have been restated to conform to the current period.~~costs.


		Three Months Ended December 31,				Six Months Ended December 31,					Three Months Ended September 30,
		2022		2021		2022		2021				2023		2022

		(Dollars in thousands)										(Dollars in thousands)

Revenues:	Revenues:									Revenues:
Franchise	Franchise	$	57,354	$	64,227	$	116,111	$	133,040	Franchise		$	51,436	$	58,757
Company-owned	Company-owned	2,613		5,043		5,727		13,048		Company-owned		1,936		3,114
Total revenue	Total revenue	59,967		69,270		121,838		146,088		Total revenue		53,372		61,871

Segment adjusted EBITDA:	Segment adjusted EBITDA:									Segment adjusted EBITDA:
Franchise	Franchise	7,532		5,721		12,523		2,256		Franchise		7,960		4,993
Company-owned	Company-owned	303		(3,133)		(863)		(4,688)		Company-owned		(497)		(1,169)
Total	Total	7,835		2,588		11,660		(2,432)		Total		7,463		3,824
Unallocated expenses	Unallocated expenses	(2,064)		(1,935)		(2,631)		(1,417)		Unallocated expenses		141		(566)
Depreciation and amortization	Depreciation and amortization	(3,793)		(1,605)		(5,044)		(3,144)		Depreciation and amortization		(370)		(1,251)
Long-lived asset impairment		—		(52)		—		(215)

Interest expense	Interest expense	(4,519)		(3,270)		(8,336)		(6,397)		Interest expense		(6,188)		(3,817)
Income tax benefit (expense)	Income tax benefit (expense)	—		164		(28)		213		Income tax benefit (expense)		148		(28)
Income (loss) from discontinued operations		134		(818)		3,440		(1,914)
Total net loss		$	(2,407)	$	(4,928)	$	(939)	$	(15,306)
Income from discontinued operations										Income from discontinued operations		—		3,306
Total net income										Total net income		$	1,194	$	1,468

2021

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, ~~2022~~2023 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 (NYSE:RGS) is a leader in the beauty salon industry. As of ~~December 31, 2022,~~September 30, 2023, the Company franchised or owned ~~or held ownership interests~~4,811 locations, primarily in ~~5,347 worldwide locations.~~North America. Our locations consisted of ~~5,271 system-wide North American and international~~4,745 franchised salons and ~~76 locations in which we maintained a non-controlling ownership interest less than 100 percent.~~66 company-owned salons. 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, Inc. in the United States. As of ~~December 31, 2022,~~September 30, 2023, the Company had ~~545~~425 employees worldwide.

Merchandising Strategy

As part of the Company's transformation to focus on managing and nurturing its brands, and in line with its capital-light business, the Company shifted its product business from a wholesale model to a third-party distribution 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 receives a ~~rebate~~fee from the third-party distributor, which is included in fees on the interim unaudited Condensed Consolidated ~~Statement~~Statements of Operations. As a result of the change, product sales to franchisees and cost of products sales to franchisees will continue to decrease and are expected to ~~provide less revenue and costs in~~be immaterial for the remainder of fiscal year 2024.

Corporate Strategy Update

On November 1, 2023, the Company announced that the Board has initiated a strategic review to proactively assess the Company’s capital structure. The Board has established a Special Committee to evaluate the various strategic alternatives and initiatives. There is no set timetable for this process, and there can be no assurances as ~~compared~~ to ~~prior year.~~the results of the review. The Company does not intend to comment further on developments or status of this process until it deems further disclosure is appropriate or required by law. The Company is being advised by Jefferies, LLC as its financial advisor and Weil, Gotshal & Manges LLP as its legal advisor.

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, 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 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, 20222023 Annual Report on Form 10-K. ~~Our~~There have been no changes to our critical accounting policies ~~related to revenue recognition guidance can be found in Note 2 to~~from those disclosed on our Form 10-K for the ~~unaudited Condensed Consolidated Financial Statements.~~year ended June 30, 2023.

2122

RESULTS OF OPERATIONS

System-wide results

~~As an asset-light franchise platform, our~~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. In the three months ended September 30, 2023, a net 50 franchise salons have closed, which will reduce future royalty income.

~~System-wide~~The following table summarizes system-wide revenue and system-wide same-store sales by concept ~~are detailed in the table below:~~(1):


		Three Months Ended December 31,				Six Months Ended December 31,					Three Months Ended September 30,
		2022		2021		2022		2021				2023			2022

												(Dollars in Millions)

System-wide revenue										System-wide revenue		$	306.6		$	316.0

Supercuts	Supercuts	7.2	%	30.8	%	8.0	%	30.6	%	Supercuts		2.2		%	8.9		%
SmartStyle	SmartStyle	(2.9)		13.2		(3.1)		15.1		SmartStyle		(2.0)			(3.2)
Portfolio Brands	Portfolio Brands	6.0		16.6		4.8		17.6		Portfolio Brands		3.7			3.6
Consolidated system-wide same-store sales (1)		4.5	%	22.1	%	4.5	%	22.6	%
Total system-wide same-store sales (1)										Total system-wide same-store sales (1)		1.8		%	4.5		%

_______________________________________________________________________________

(1)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. 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.

Condensed Consolidated Results of Operations (Unaudited)

The following table sets forth, for the periods indicated, certain information derived from our unaudited Condensed Consolidated ~~Statement~~Statements 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 September 30,
		2022		2021		2022		2021		2022	2022		2021		2022		2021		2022				2023		2022		2023		2022		2023

		($ 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	$	16.2	$	16.1	27.0	%	23.2	%	380	$	33.3	$	32.7	27.3	%	22.5	%	480	Royalties			$	16.5	$	17.2	30.9	%	27.9	%	300
Fees	Fees	3.2		3.9		5.4		5.6		(20)	5.8		6.2		4.8		4.2		60	Fees			2.6		2.6		4.9		4.2		70
Product sales to franchisees	Product sales to franchisees	1.1		2.4		1.8		3.5		(170)	1.6		10.4		1.3		7.1		(580)	Product sales to franchisees			0.4		0.4		0.8		0.6		20
Advertising fund contributions	Advertising fund contributions	8.0		8.0		13.3		11.7		160	16.2		16.1		13.3		11.0		230	Advertising fund contributions			7.2		8.3		13.5		13.4		10
Franchise rental income	Franchise rental income	28.9		33.8		48.2		48.8		(60)	59.2		67.5		48.6		46.3		230	Franchise rental income			24.7		30.3		46.3		48.9		(260)
Company-owned salon revenue	Company-owned salon revenue	2.6		5.0		4.3		7.2		(290)	5.7		13.0		4.7		8.9		(420)	Company-owned salon revenue			1.9		3.1		3.6		5.0		(140)

Cost of product sales to franchisees	Cost of product sales to franchisees	1.3		3.1		118.2		129.2		(1,100)	1.8		10.8		112.5		103.8		870	Cost of product sales to franchisees			0.4		0.5		100.0		125.0		(2,500)
Inventory reserve		1.2		—		2.0		—		N/A	1.2		—		1.0		—		N/A

General and administrative	General and administrative	11.7		15.1		19.6		21.8		(220)	26.1		35.9		21.4		24.6		(320)	General and administrative			10.7		14.4		20.1		23.3		(320)
Rent	Rent	2.1		3.0		3.5		4.3		(80)	3.8		4.8		3.1		3.3		(20)	Rent			1.1		1.8		2.1		2.9		(80)
Advertising fund expense	Advertising fund expense	8.0		8.0		13.3		11.7		160	16.2		16.1		13.3		11.0		230	Advertising fund expense			7.2		8.3		13.5		13.4		10
Franchise rent expense	Franchise rent expense	28.9		33.8		48.2		48.8		(60)	59.2		67.5		48.6		46.3		230	Franchise rent expense			24.7		30.3		46.3		48.9		(260)
Company-owned salon expense(2)	Company-owned salon expense(2)	2.2		5.1		3.7		7.4		(370)	5.2		13.0		4.3		8.9		(460)	Company-owned salon expense(2)			1.5		3.0		2.8		4.8		(200)
Depreciation and amortization	Depreciation and amortization	3.8		1.6		6.3		2.3		400	5.0		3.1		4.1		2.1		200	Depreciation and amortization			0.4		1.3		0.8		2.1		(130)
Long-lived asset impairment		—		0.1		—		0.1		(10)	—		0.2		—		0.1		(10)

Operating income (loss) (2)		0.7		(0.5)		1.2		(0.7)		190	3.2		(5.4)		2.6		(3.7)		630

Operating income (3)																				Operating income (3)			7.4		2.5		13.9		4.0		990

Interest expense	Interest expense	(4.5)		(3.3)		(7.5)		(4.8)		(270)	(8.3)		(6.4)		(6.8)		(4.4)		(240)	Interest expense			(6.2)		(3.8)		(11.6)		(6.1)		(550)
Loss from sale of salon assets to franchisees, net		—		(0.6)		—		(0.9)		90	—		(1.7)		—		(1.2)		120

Other, net	Other, net	1.2		0.1		2.0		0.1		190	0.8		(0.1)		0.7		(0.1)		80	Other, net			(0.2)		(0.5)		(0.4)		(0.8)		40

Income tax benefit (expense) ~~(3)~~(4)	Income tax benefit (expense) ~~(3)~~(4)	—		0.2		—		3.8		N/A	—		0.2		(0.6)		1.6		N/A	Income tax benefit (expense) ~~(3)~~(4)			0.1		—		(14.1)		(1.5)		N/A

Income (loss) from discontinued operations		0.1		(0.8)		0.2		(1.2)		140	3.4		(1.9)		2.8		(1.3)		410
Income (loss) from continuing operations																				Income (loss) from continuing operations			1.2		(1.8)		2.3		(2.9)		520

Net loss (2)		(2.4)		(4.9)		(4.0)		(7.1)		310	(0.9)		(15.3)		(0.7)		(10.5)		980
Income from discontinued operations																				Income from discontinued operations			—		3.3		—		5.3		(530)

Net income (3)																				Net income (3)			1.2		1.5		2.3		2.4		(10)

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

(2)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.

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

~~(3)~~(4)Computed as a percent of ~~loss~~income (loss) from continuing operations before income taxes. The income tax basis point change is noted as not applicable (N/A) as the discussion within the MD&A is related to the effective income tax rate.

2324

Three ~~and Six~~ Months Ended ~~December 31, 2022~~September 30, 2023 Compared with Three ~~and Six~~ Months Ended ~~December 31, 2021~~

~~Consolidated Revenues~~

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

~~Consolidated revenue decreased $9.3 and $24.3 million, or 13.4% and 16.6%, for the three and six months ended December 31,~~September 30, 2022 respectively. Royalty revenue increased $0.1 and $0.6 million in the three and six months ended December 31, 2022, respectively, due to improved system-wide same-store sales and average royalty rates. The overall decrease in revenue for the three and six months ended December 31, 2022 is due to the decrease in company-owned salon revenue of $2.4 and $7.3 million, respectively, due primarily to salon closures, the decline in product sales to franchisees of $1.3 and $8.8 million, respectively, and the decline in franchise rental income of $4.9 and $8.3 million, respectively. During the twelve months ended December 31, 2022, 17 salons were sold to franchisees and 452 and 20 system-wide salons were closed and constructed, respectively (2023 Net Salon Count Changes).

Royalties

During the three ~~and six~~ months ended ~~December 31, 2022,~~September 30, 2023, royalties ~~increased $0.1 and $0.6~~decreased $0.7 million, or ~~0.6% and 1.8%~~4.1%, ~~respectively,~~ primarily due to ~~higher average royalty rates and improved system-wide same-store sales partially offset by~~ a decrease in franchise salon count.

Fees

During the three ~~and six~~ months ended ~~December 31, 2022,~~September 30, 2023, fees ~~decreased $0.7 and $0.4 million, or 17.9% and 6.5%, respectively, primarily due to a decrease~~were consistent with prior period. An increase in terminated ~~development agreements in fiscal year 2023 partially~~franchise agreement fees was offset by ~~an increase~~a decline in ~~the rebate received from the Company's shift in its~~ product ~~business to a third-party distribution model.~~fees.

Product Sales to Franchisees

Product sales to franchisees ~~decreased $1.3 and $8.8 million, or 54.2% and 84.6%, respectively, during~~in the three ~~and six~~ months ended ~~December 31,~~September 30, 2023 were less than the three months ended September 30, 2022, primarily due to the Company's shift in its product business from a wholesale model to a third-party distribution model. Product sales to franchisees are not expected to be material in fiscal year 2024.

Advertising Fund Contributions

Advertising fund contributions ~~did not change significantly year-over-year, declining slightly~~decreased $1.1 million, or 13.3%, during the three months ended September 30, 2023, primarily due to ~~a reduction~~the decrease in franchise salon ~~count partially offset by an increase in system-wide same-store sales.~~count.

Franchise Rental Income

During the three ~~and six~~ months ended ~~December 31, 2022,~~September 30, 2023, franchise rental income decreased ~~$4.9 and $8.3~~$5.6 million, or ~~14.5% and 12.3%~~18.5%, ~~respectively,~~ primarily due to ~~a lower~~the decrease in franchise salon count.

~~Company-owned~~Company-Owned Salon Revenue

During the three ~~and six~~ months ended ~~December 31, 2022,~~September 30, 2023, company-owned salon revenue decreased ~~$2.4 and $7.3~~$1.2 million, or ~~48.0% and 56.2%~~38.7%, ~~respectively,~~ due to the decrease in company-owned salon ~~count and a decline in product sales.~~count.

Cost of Product Sales to Franchisees

The ~~1,100 basis point~~ decrease in cost of product as a percent of product revenues during the three months ended ~~December 31, 2022~~September 30, 2023 was primarily due to ~~higher marketing and~~lower freight ~~expense~~charges. Cost of product sales to franchisees is not expected to be material 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, 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 reserve charge of $1.2 million related to 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 included in company-owned salon expense related to distribution center inventory.

2024.

General and Administrative

General and administrative expense decreased ~~$3.4 and $9.8~~$3.7 million, or ~~22.5% and 27.3%~~25.7%, during the three ~~and six~~ months ended ~~December 31, 2022, respectively. Lower administrative~~September 30, 2023, primarily due to lower headcount resulting in lower compensation expense and ~~field management compensation resulting from headcount reductions, a decrease in expenses associated with the distribution center closures in fiscal year 2022~~lower legal, insurance and ~~a favorable actuarial adjustment of $0.6 million contributed to the decrease.~~professional fees.

Rent

Rent expense decreased ~~$0.9 and $1.0~~$0.7 million, or ~~30.0% and 20.8%~~38.9%, during the three ~~and six~~ months ended ~~December 31, 2022, respectively. There was~~September 30, 2023, primarily due to a ~~benefit of $0.1~~reduction in franchise rent due to lower lease termination fees, settling with landlords for less than previously accrued and ~~$1.2 million in the three and six months ended December 31, 2021 related to Canadian COVID-19 rent relief, which was offset by~~ the net reduction in the number of company-owned salons, partially offset by a reduction in ~~fiscal year 2023.~~the lease liability benefit. See Note 8 to the unaudited Condensed Consolidated Financial Statements.

Advertising Fund Expense

Advertising fund expense ~~did not change significantly year-over-year, declining slightly~~decreased $1.1 million, or 13.3%, during the three months ended September 30, 2023, primarily due to ~~a reduction~~the decrease in franchise salon ~~count partially offset by an increase in system-wide same-store sales.~~count.

Franchise Rent Expense

During the three ~~and six~~ months ended ~~December 31, 2022,~~September 30, 2023, franchise rent expense decreased ~~$4.9 and $8.3~~$5.6 million, or ~~14.5% and 12.3%~~18.5%, ~~respectively,~~ primarily due to ~~a lower~~the decrease in franchise salon count.

~~Company-owned~~Company-Owned Salon Expense

Company-owned salon expense for the three ~~and six~~ months ended ~~December 31, 2022~~September 30, 2023 decreased ~~$2.9 and $7.8~~$1.5 million, or ~~56.9% and 60.0%~~50.0%, ~~respectively,~~ primarily due to the reduction in company-owned salon ~~count and a decline in product sales, partially offset by $0.8 and $1.4 million of Canadian wage relief received in the three and six months ended December 31, 2021, respectively.~~count.

Depreciation and Amortization

~~The increases of $2.2~~Depreciation and ~~$1.9~~amortization decreased $0.9 million, or ~~137.5% and 61.3%~~69.2%, ~~in depreciation and amortization~~ during the three ~~and six~~ months ended ~~December 31, 2022, respectively, were~~September 30, 2023. The decrease in the three months ended September 30, 2023 was primarily due to a ~~$2.6 million accelerated depreciation charge related to the consolidation of~~reduction in corporate office ~~space within the Company's corporate headquarters, partially offset by lower~~and IT assets and a reduction in asset retirement ~~obligations ("white~~"white boxing" ~~salons at lease end) and the net reduction in company-owned salon count.~~

~~Long-Lived Asset Impairment~~

In the three and six months ended December 31, 2022, the Company did not record a long-lived asset impairment charge, and in the three and six months ended December 31, 2021, the Company recorded long-lived asset impairment charges of $0.1 and $0.2 million, respectively. The decreases in long-lived asset impairment was primarily due to salons being impaired in prior periods.expense.

Interest Expense

The ~~$1.2 and $1.9~~$2.4 million ~~increases~~increase in interest expense for the three ~~and six~~ months ended ~~December 31, 2022, respectively, were~~September 30, 2023 was 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 higher weighted average interest rate on outstanding ~~borrowings.~~

~~Loss from Sale~~borrowings, including non-cash interest and amortization of ~~Salon Assets to Franchisees, Net~~

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

$1.4 million.

Other, Net

Other, net ~~increased $1.1 and $0.9~~decreased $0.3 million ~~during~~for the three ~~and six~~ months ended ~~December 31, 2022, respectively,~~September 30, 2023 primarily due to a ~~$1.1 million grant received from the state of North Carolina related to COVID-19 relief.~~lower foreign currency loss.

Income Tax Benefit (Expense)

During the three months ended ~~December 31, 2022,~~September 30, 2023, the Company recognized ~~no tax benefit or expense, as compared to recognizing~~ a tax benefit of ~~$0.2~~$0.1 million, with a corresponding effective tax rate of ~~3.8% during the three months ended December 31, 2021. During the six months ended December 31, 2022, the Company recognized~~(14.1)%, as compared to recognizing a tax expense of ~~$0.03~~$0.0 million, with a corresponding effective tax rate of ~~(0.6)~~(1.5)%~~, as compared to recognizing a tax benefit of $0.2 million, with a corresponding effective tax rate of 1.6%~~ during the ~~six~~three months ended ~~December 31, 2021.~~September 30, 2022. See Note 5 to the unaudited Condensed Consolidated Financial Statements.

Income ~~(Loss)~~ from Discontinued Operations

In the three ~~and six~~ months ended ~~December 31,~~September 30, 2022, the Company recorded ~~a gain~~income from discontinued operations of ~~$0.1 and $3.4~~$3.3 million ~~respectively, and in the three and six months ended December 31, 2021, the Company recorded a loss of $0.8 and $1.9 million, respectively. The gain in fiscal year 2023 is~~due primarily ~~due~~ to receipt of ~~$4.5~~$4.0 million in sales ~~proceeds, of which $0.5 million were received in the second quarter, which were previously held back.~~proceeds. See Note 3 to the unaudited Condensed Consolidated Financial Statements.

Results of Operations by Segment

Based on our internal management structure, we report two segments: Franchise and Company-owned salons. See Note 12 to the unaudited Condensed Consolidated Financial Statements. Significant results of continuing operations are discussed below with respect to each of these segments.

Franchise Salons


		Three Months Ended December 31,										Six Months Ended December 31,																	Three Months Ended September 30,
		2022			2021			Increase (Decrease) (1)				2022					2021					Increase (Decrease) (1)									2023					2022					(Decrease) Increase (1)
																																		(Decrease) Increase (1)
		(Dollars in millions)								(Dollars in millions)																		(Dollars in millions)		(Decrease) Increase (1)

Royalties	Royalties	$	16.2		$	16.1				$	0.1				$	33.3				$	32.7				$	0.6	Royalties								$	16.5		$	17.2				$	(0.7)
Fees	Fees	3.2			3.9					(0.7)					5.8					6.2					(0.4)		Fees								2.6					2.6					—
Product sales to franchisees	Product sales to franchisees	1.1			2.4			(1.3)				1.6					10.4					(8.8)		Product sales to franchisees								0.4					0.4					—
Advertising fund contributions	Advertising fund contributions	8.0			8.0			—				16.2					16.1					0.1		Advertising fund contributions								7.2					8.3					(1.1)
Franchise rental income	Franchise rental income	28.9			33.8			(4.9)				59.2					67.5					(8.3)		Franchise rental income							24.7					30.3					(5.6)
Total franchise revenue (1)	Total franchise revenue (1)	$	57.4		$	64.2		$	(6.8)			$	116.1				$	133.0				$	(16.9)	Total franchise revenue (1)							$	51.4				$	58.8				$	(7.4)

Franchise same-store sales (2)	Franchise same-store sales (2)	4.5		%	22.4		%					4.6		%			23.0		%					Franchise same-store sales (2)							1.7		%			4.6		%

Franchise adjusted EBITDA	Franchise adjusted EBITDA	$	7.5		$	5.7		$	1.8			$	12.5				$	2.3				$	10.2	Franchise adjusted EBITDA							$	8.0				$	5.0				$	3.0
Total franchise salons	Total franchise salons	5,196			5,553			(357)																Total franchise salons							4,745					4,795					(50)

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

(2)Franchise same-store sales are calculated as the total change in sales for franchise locations 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.

Three Months Ended September 30, 2023 Compared with Three Months Ended September 30, 2022

Franchise Revenue

Franchise ~~revenues~~revenue decreased ~~$6.8 and $16.9~~$7.4 million during the three ~~and six~~ months ended ~~December 31, 2022, respectively.~~September 30, 2023. The ~~decreases~~decrease in franchise ~~salon~~ revenue during the three ~~and six~~ months ended ~~December 31, 2022 were~~September 30, 2023 was primarily due to the decrease in ~~product sales to franchisees due to the Company's shift to a third-party distributor and~~ franchise ~~rental income.~~salon count. During the twelve months ended ~~December 31, 2022,~~September 30, 2023, franchisees purchased 17zero salons from the Company and constructed (net of relocations) and closed 1911 and ~~393~~589 franchise salons, respectively.

Franchise Adjusted EBITDA

During the three ~~and six~~ months ended ~~December 31, 2022,~~September 30, 2023, franchise adjusted EBITDA totaled ~~$7.5 and $12.5~~$8.0 million, ~~respectively,~~ an improvement of ~~$1.8 and $10.2~~$3.0 million compared to the three ~~and six~~ months ended ~~December 31, 2021, respectively.~~September 30, 2022. The ~~improvements are~~improvement was primarily due to ~~an increase in average royalty revenues and~~ a decrease in general and administrative ~~expense.~~expense due primarily to lower headcount, resulting in lower compensation expense, lower professional fees and a benefit in rent expense related to settling with landlords for less than previously accrued.

~~Company-owned~~Company-Owned Salons
Three Months Ended December 31, Six Months Ended December 31,
2022 2021 (Decrease) Increase (1) 2022 2021 (Decrease) Increase (1)
(Dollars in millions) (Dollars in millions)
Total revenue $ 2.6 $ 5.0 $ (2.4) $ 5.7 $ 13.0 $ (7.3)
Company-owned salon adjusted EBITDA $ 0.3 $ (3.1) $ 3.4 $ (0.9) $ (4.7) $ 3.8
Total company-owned salons 75 150 (75)


	Three Months Ended September 30,
			2023		2022		(Decrease) Increase (1)

		(Dollars in millions)

Total revenue			$	1.9	$	3.1	$	(1.2)

Company-owned salon adjusted EBITDA			$	(0.5)	$	(1.2)	$	0.7
Total Company-owned salons			66		95		(29)

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

~~Company-owned~~Three Months Ended September 30, 2023 Compared with Three Months Ended September 30, 2022

Company-Owned Salon Revenue

Company-owned salon ~~revenues~~revenue decreased ~~$2.4 and $7.3~~$1.2 million during the three ~~and six~~ months ended ~~December 31, 2022, respectively,~~September 30, 2023, primarily due to the ~~2023 Net Salon Count Changes and a decline~~decrease in ~~product sales in salons.~~company-owned salon count.

~~Company-owned~~Company-Owned Salon Adjusted EBITDA

During the three ~~and six~~ months ended ~~December 31, 2022,~~September 30, 2023, company-owned salon adjusted EBITDA improved ~~$3.4 and $3.8~~$0.7 million, ~~respectively,~~ primarily due to the closure of ~~unprofitable salons and a $1.1 million grant received from the state of North Carolina related to COVID-19 relief in the three months ended December 31, 2022.~~loss-generating company-owned salons.

LIQUIDITY AND CAPITAL RESOURCES

InFollowing the amendment of the Company's credit agreement in August 2022, the ~~Company reached an agreement to amend its credit agreement and extend the maturity to~~facility matures in August ~~2025 from March 2023. Under the amendment, the $295.0 million revolving credit facility was converted~~2025. In addition to a ~~$180.0~~$10.0 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~~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.~~until maturity of the credit agreement in August 2025. In conducting the Company’s current operations, all cash in excess of the amounts needed to support existing operating activities is used to pay the interest on the amounts outstanding under the credit agreement, and we are periodically borrowing additional amounts to cover these costs.

As of ~~December 31, 2022,~~September 30, 2023, cash and cash equivalents were ~~$9.4~~$9.3 million, with ~~$8.4~~$8.6 and ~~$1.0~~$0.7 million within the United States and Canada, respectively.

As of ~~December 31, 2022,~~September 30, 2023, the Company's borrowing arrangements include a ~~$173.8~~$172.1 million term loan, $2.0 million of paid-in-kind interest and a $55.0 million revolving credit facility that expires in August 2025. As of ~~December 31, 2022,~~September 30, 2023, the unused available credit under the revolving credit facility was ~~$34.3~~$33.1 million, the credit agreement has a minimum liquidity covenant of $10.0 million, and total liquidity per the agreement was ~~$43.7~~$42.4 million. See Note 9 to the unaudited Condensed Consolidated Financial Statements.

Additionally, in February 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 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,~~September 30, 2023 and 2022, the Company 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,~~September 30, 2023, $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 performance of the business, the level of investment needed to support its business strategies, ~~the performance of the business,~~ credit facilities and borrowing arrangements, and working capital management. The Company has a disciplined approach to capital allocation, which focuses on ensuring we can meet our interest obligations and investing in key priorities to support the Company's strategic plan as discussed within Part I, Item 1 of our Annual Report on Form 10-K for the fiscal year ended June 30, ~~2022.~~2023.

Cash Requirements

The Company's most significant contractual cash requirements as of ~~December 31, 2022~~September 30, 2023 were lease commitments and interest payments. See ~~Note~~Notes 8 and 9 to the unaudited Condensed Consolidated Financial Statements ~~for further lease commitment detail.~~included in this Quarterly Report on Form 10-Q.

Cash Flows

Cash Flows from Operating Activities

During the ~~six~~three months ended ~~December 31, 2022,~~September 30, 2023, cash used in operating activities was ~~$6.9~~$2.8 million compared to ~~$24.3~~$5.1 million in the prior year. Cash used in ~~operations~~operating activities improved due primarily to our lower general and administrative expense, a $1.1 million cash grant received from the state of North Carolina related to COVID-19 relief and less cash used for working capital. Cash use in fiscal year 2023 included a $2.5 million payment of previously deferred social security contributions.cost structure.

Cash Flows from Investing Activities

During the ~~six~~three months ended ~~December 31,~~September 30, 2023, cash used in investing activities of $0.2 million primarily related to a salon capital improvements. During the three months ended September 30, 2022, cash provided by investing activities of ~~$3.6~~$3.3 million was primarily ~~related~~due to cash received of ~~$4.5~~$4.0 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~~three months ended ~~December 31,~~September 30, 2023, cash provided by financing activities was $1.7 million, primarily as a result of a net $1.8 million borrowing under the Company's revolving credit facility. During the three months ended September 30, 2022, cash used in financing activities was ~~$1.6~~$3.8 million, primarily as a result of debt refinancing fees of ~~$4.4~~$4.3 million, partially offset by a net ~~$2.8~~$0.6 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 related to the issuance of common stock and a net draw on the Company's revolving credit facility.

Financing Arrangements

See Note 9 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, 2022~~September 30, 2023 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, ~~2022,~~2023 for additional information regarding our financing arrangements.

Debt to Capitalization Ratio

Our debt to capitalization ratio, calculated as the principal amount of debt, including paid-in-kind interest accrued, as a percentage of the principal amount of debt and shareholders' deficit at fiscal quarter end, was as follows:


	Debt to Capitalization (1)

~~December 31, 2022~~September 30, 2023	~~120.9~~123.4	%
June 30, ~~2022~~2023	~~120.8~~125.1	%

_______________________________________________________________________________

(1)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, 2022 did not change significantly compared~~September 30, 2023 was primarily due to ~~June 30, 2022.~~

the increase in outstanding debt.

Share Issuance Program

In February 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 ~~six~~three months ended ~~December 31, 2022,~~September 30, 2023, the Company did not issue shares under the prospectus supplement. As of ~~December 31, 2022,~~September 30, 2023, 9.3 million shares have been cumulatively issued for $38.4 million, and $11.6 million 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, 2022,~~September 30, 2023, 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 ~~six~~three months ended ~~December 31, 2022,~~September 30, 2023, the Company did not repurchase any shares. As of ~~December 31, 2022,~~September 30, 2023, 30.0 million shares have been cumulatively repurchased for $595.4 million, and $54.6 million remains outstanding under the approved stock repurchase program. The Company does not anticipate repurchasing shares of common stock for the foreseeable future.

3130

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 COVID-19 pandemic, including any adverse impact from variants;~~changes in 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; our potential responsibility for Empire Education Group, Inc.'s liabilities; changes in general economic ~~conditions;~~environment; changes in consumer tastes, hair product innovation, fashion trends and consumer spending patterns; compliance with New York Stock Exchange listing requirements; reliance on franchise royalties and overall success of our franchisees’ salons; ~~the return of sales at franchise locations to pre-pandemic levels; new merchandising strategy that utilizes~~our salons' dependence on a third-party ~~preferred~~ supplier ~~arrangements;~~agreement for merchandise; our franchisees' ability to attract, train and retain talented stylists and salon leaders; the success of our franchisees, which operate independently; data security and privacy compliance and 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;~~ the effectiveness of our enterprise risk management program; ability to generate sufficient cash flow to satisfy our debt service obligations;compliance with covenants in our financing arrangement, access to the existing revolving credit facility, and ~~we may face an accelerated~~acceleration of our obligation to repay our indebtedness; the completion and/or results of the strategic alternatives review; limited resources to invest in our business; ~~our capital investments in technology may not achieve appropriate returns;~~ premature termination of agreements with our franchisees; financial performance of Empire Education Group, Inc.; our ability to close the sale of our ownership stake in Empire Education 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~~control 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;~~proceedings; 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.

3231

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, ~~2022~~2023 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 by the Company in ~~its~~the reports filed or submitted under the 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~~SEC'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~~, at 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, 2022.~~September 30, 2023.

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.

3332

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 ~~unfair or deceptive trade practices. These claims have increased following the Company's franchising of its company-owned locations.~~agreement violations. Additionally, because the Company ~~currently faces, and in the past has faced, allegations of non-payment of rent and associated charges pursuant to leases in which the Company is~~may be the tenant under a master lease for a location subleased to a ~~franchisee. These claims have increased since~~franchisee, the ~~advent~~Company faces allegations of ~~COVID-19~~non-payment of rent and ~~can be attributed in part to 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.~~associated charges. Litigation is inherently unpredictable, and the outcome of these matters cannot presently be determined. Although the actions are being vigorously defended, the Company could, in the future, ~~the Company could~~ incur judgments or ~~settle~~enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period.

Item 1A. Risk Factors

There have been no material changes in our risk factors, except as noted below, from those disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, ~~2022.~~2023.

Empire Education Group, Inc. (EEG) may be unsuccessful and we may be unable to close the sale of our ownership stake in it, which could adversely affect our financial results.

EEG has experienced, and continues to experience, poor financial performance. In 2020, we entered into an agreement to sell to the other owner our 55.1% ownership stake in EEG. The transaction is subject to approval by each of the states in which EEG’s schools operate, as well as EEG’s institutional accrediting agency, National Accrediting Commission of Career Arts and Sciences (NACCAS), and the Department of Education. Some state approvals and the NACCAS approval must be obtained prior to the closing of the transaction. Additionally, three state agencies have indicated that the pertinent EEG schools must post surety bonds as a condition of transaction approval and ongoing authorization to operate. The other owner of EEG has not obtained the required surety bonds to facilitate a closing of the transaction. The Department of Education similarly may require a letter of credit as a condition of EEG’s participation in the Title IV programs following the transaction. As a result of these conditions, there is no guarantee that we will be able to close the sale. If the transaction does not close, our financial results may be adversely affected.

We may be responsible for Empire Education Group, Inc.'s liabilities.

The Company owns a majority stake in Empire Education Group Inc. (EEG). To be eligible to participate in Title IV programs,

the schools operated by EEG must comply with specific standards and procedures set forth in the Higher Education Act and the

regulations issued thereunder by the Department of Education. On October 10, 2023, the Department of Education issued a

final rule applicable to “gainful employment” programs, which under the Higher Education Act, include all programs offered

by the Empire Education Group schools and other proprietary institutions. Under this final rule, which becomes effective July

1, 2024, the continued Title IV eligibility of such programs will be based on meeting both a debt-to-earnings metric and an

earnings premium metric. A program that fails either metric in a single year will be required to provide warnings to current and

prospective students that it could be at risk of losing Title IV program eligibility. A program that fails to meet the same metric

twice in a three-year period will lose Title IV program eligibility. The first measurement will be assessed in fiscal year 2025. To the extent that EEG is unable to meet the required metrics for gainful employment programs, or it fails to comply with other existing or revised Title IV program regulations, its schools and programs may become ineligible for continued Title IV program participation. Upon a loss of institutional or programmatic eligibility, EEG’s students would lose access to Title IV program funds and that could be detrimental to EEG's business model. Additionally, EEG students who are unable to complete their educational program with EEG, or who do not accept a teach-out opportunity with another institution, may be eligible for discharges of their federal student loan debt. Those discharged loan amounts and other Title IV funds disbursed to EEG students that do not complete their program, as well as other Title IV program funds, may constitute liabilities to the Department of Education. Because the Company holds a majority ownership interest in EEG and is a co-signatory to the Title IV program participation agreements of the EEG schools with the Department of Education, the Department of Education could hold the Company responsible for EEG's Title IV program liabilities.

There are uncertainties introduced by our announcement of our exploration and evaluation of strategic alternatives to enhance value.

On November 1, 2023, the Company announced that the Board has initiated a strategic review to proactively assess the Company's capital structure. The Board of Directors has established a Special Committee to evaluate various strategic alternatives and initiatives to enhance value. There is no set timetable for this process, and there can be no assurances as to the results of the review. The Company does not intend to comment further on developments or status of this process until it deems further disclosure is appropriate or required by law. We may also incur substantial costs in connection with the pursuit of strategic alternatives which are not ultimately consummated.

We currently are not in compliance with New York Stock Exchange listing requirements.

In June 2022, we received written notice from the New York Stock Exchange (NYSE) that we did not meet certain NYSE continued listing standards. Under the NYSE continued listing standards, the Company is required to maintain (a) a minimum average closing price of $1.00 per share over a period of 30 consecutive trading days, and (b) an average market capitalization of at least $50.0 million over a period of 30 consecutive trading days, and at the same time, total stockholders' equity equal to or greater than $50.0 million. On September 1, 2022, we were notified we cured the minimum average closing price of $1.00 per share, but our average market capitalization was still non-compliant. On October 4, 2023, we received a second written notice from the NYSE that the Company no longer satisfies the continued listing compliance standards, because the average closing price of the Company's common stock was less than $1.00 per share over a period of 30 consecutive days. The Company also remains noncompliant with the market capitalization requirement of Section 802.01B of the NYSE Listed Company Manual as previously disclosed. If our average market capitalization is not greater than $50.0 million on December 13, 2023, we will be subject to the NYSE’s suspension and delisting procedures. We are closely monitoring the closing share price of our common stock and are considering all available options. A delisting of our common stock could negatively impact us by, among other things, reducing the liquidity and market price of our common stock; reducing the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to raise equity financing; limiting our ability to issue additional securities or obtain additional financing in the future; decreasing the amount of news and analyst coverage of us; and causing us reputational harm with investors, our employees, and parties conducting business with us.

Item 2. Unregistered Sales of Equity Securities, ~~and~~ Use of Proceeds, and Issuer Purchases of Equity Securities

Share Issuance Program

In February 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 ~~six~~three months ended ~~December 31, 2022,~~September 30, 2023, the Company did not issue shares under the prospectus supplement. On ~~December 31, 2022,~~September 30, 2023, $11.6 million remains under the prospectus supplement, which equates to ~~9.5~~16.5 million shares based on the share price as of ~~December 31, 2022.~~September 30, 2023.

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, 2022,~~September 30, 2023, 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, 2022,~~September 30, 2023, a total accumulated 30.0 million shares have been repurchased for $595.4 million. At ~~December 31, 2022,~~September 30, 2023, $54.6 million remains outstanding under the approved stock repurchase program. The Company does not expect to repurchase shares in fiscal year ~~2023.~~2024.

Item 5. Other Information

During the three months ended September 30, 2023, no director or officer of the Company adopted, modified or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as each term is defined in Item 408(a) of Regulation S-K.

Item 6. Exhibits


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~~period ended ~~December 31, 2022,~~September 30, 2023, 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;~~Income; (iv) the Condensed Consolidated Statements of Shareholders' 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, 2022,~~September 30, 2023, formatted in iXBRL (included as Exhibit 101).

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~~November 1, 2023	By:	/s/ ~~Kersten~~KERSTEN D. ~~Zupfer~~ZUPFER
		Kersten D. Zupfer,
		Executive Vice President and Chief Financial Officer
		(Principal Accounting Officer)


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


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

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

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

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

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

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


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

Balance, June 30, 2022	45,510,245	$	2,276	$	62,562	$	9,455	$	(105,246)	$	(30,953)
Net loss	—	—		—		—		(939)		(939)
Foreign currency translation	—	—		—		(726)		—		(726)


Stock-based compensation	—	—		1,020		—		—		1,020
Net restricted stock activity	52,310	2		(39)		—		—		(37)

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	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


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



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