What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-04 compared with 2021-05-06 · 159 added, 237 removed, 129 unchanged (75% of the section changed)

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Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our consolidated financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results.

This MD&A should be read in conjunction with the MD&A included in our June 30, 2020 Annual Report on Form 10-K and other documents filed or furnished with the Securities and Exchange Commission (SEC) during the current fiscal year.

This MD&A should be read in conjunction with the MD&A included in our June 30, 2021 Annual Report on Form 10-K and other documents filed or furnished with the SEC during the current fiscal year.

MANAGEMENT'S OVERVIEW

Regis Corporation (RGS) franchises, owns, and operates beauty salons.

As of March 31, 2021, the Company franchised, owned or held ownership interests in 6,221 worldwide locations.

Regis Corporation (RGS) franchises technology-enabled hairstyling and hair care salons throughout the United States, Puerto Rico and the United Kingdom.

As of September 30, 2021, the Company franchised, owned or held ownership interests in 5,843 worldwide locations.

Our locations consisted of 5,766 system-wide North American and international salons, and in 77 locations we maintained a non-controlling ownership interest less than 100 percent.

Each of the Company's salon concepts generally offer similar salon products and services and serve the mass market.

As of March 31, 2021, we had approximately 4,000 corporate employees worldwide.

As of September 30, 2021, the Company had 1,172 employees worldwide.

Impact of COVID-19 on Business Operations

During the period ended March 31, 2021, the global coronavirus pandemic (COVID-19) had an adverse impact on operations, including prolonged government-mandated salon closures in California and Ontario, in addition to other U.S.

states and Canadian provinces during the three and nine months ended March 31, 2021.

The COVID-19 pandemic continues to impact salon guest visits resulting in a significant reduction in revenue and traffic.

Due to the economic disruption caused by the COVID-19 pandemic, the Company faces a greater degree of uncertainty than normal in making judgments and estimates needed to apply the Company's significant accounting policies.

Actual results and outcomes may differ from management's estimates and assumptions.

During the period ended September 30, 2021, the COVID-19 pandemic had an adverse impact on operations.

The COVID-19 pandemic continues to impact salon guest visits and franchisee staffing, resulting in a significant reduction in revenue.

As a result, COVID-19 has, and may continue to have, a negative affect on revenue and profitability.

The ultimate impact of the COVID-19 pandemic in both the short and long term is not currently estimable due to the uncertainty surrounding the duration of the pandemic, the availability and acceptance of preventative vaccines, the emergence and impact of new COVID-19 variants, and changing government restrictions.

Additional impacts to the business may arise that we are not aware of currently.

Merchandising Strategy

As part of the Company's transformation to focus on managing and nurturing brands, and in line with its capital-light business, a new merchandise strategy to outsource product distribution was adopted in the third quarter.

The Company plans to shifts its product business from a whole-sale model to a third-party distribution model.

The Company is shifting its product business from a wholesale model to a third-party distribution model.

Management expects the change will positively impact franchisees by providing them access to industry-leading pricing, loyalty programs, promotional benefits, educational assets, and ongoing support.

The change will results in a decrease in revenue, cost of product and general and administrative expense going forward.

The Company will receive a fee from the third-party distributors which is included in Fees on the interim unaudited Condensed Consolidated Statement of Operations.

The change is expected to result in product sales to franchisees providing significantly less revenue by the end of fiscal year 2022.

Cost of product sales to franchisees and general and administrative expense are expected to decrease once the transition is complete which is expected to be by the end of fiscal year 2022.

CRITICAL ACCOUNTING POLICIES

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Discussion of each of these policies is contained under "Critical Accounting Policies" in Part II, Item 7 of our June 30, 2021 Annual Report on Form 10-K.

Our policies related to revenue recognition guidance, ASC Topic 606, can be found in Note 2 to the unaudited Condensed Consolidated Financial Statements.

Our policies related to revenue recognition guidance can be found in Note 2 to the unaudited Condensed Consolidated Financial Statements.

RESULTS OF OPERATIONS

Impact of salons sold to franchisees on operations.

In the three and nine months ended March 31, 2021, the Company sold 126 and 408, respectively, company-owned salons to franchisees.

The impact of these transactions are as follows:

Three Months Ended March 31, Increase (Decrease) Nine Months Ended March 31, Increase (Decrease)

2021 2020 2021 2020

(Dollars in thousands)

Salons sold to franchisees 126 375 (249) 408 1,363 (955)

Cash proceeds received $ 595 $ 18,502 $ (17,907) $ 7,743 $ 87,916 $ (80,173)

(Loss) gain on venditions, excluding goodwill derecognition $ (4,575) $ 9,628 $ (14,203) $ (8,463) $ 50,841 $ (59,304)

Non-cash goodwill derecognition — (17,486) 17,486 — (76,966) 76,966

Loss from sale of salon assets to franchisees, net $ (4,575) $ (7,858) $ 3,283 $ (8,463) $ (26,125) $ 17,662

System-wide results

As we continue to transition to an asset-light franchise platform, our results will be more impacted by our system-wide sales, which include sales by all points of distribution, whether owned by the Company or our franchisees.

While we do not record sales by franchisees as revenue, and such sales are not included in our consolidated financial statements, we believe that this operating measure is important in obtaining an understanding of our financial performance.

As an asset-light franchise platform, our results are impacted by our system-wide sales, which include sales by all points of distribution, whether owned by our franchisees or the Company.

While we do not record sales by franchisees as revenue, and such sales are not included in our unaudited Condensed Consolidated Financial Statements, we believe that this operating measure is important in obtaining an understanding of our financial performance.

We believe system-wide sales information aids in understanding how we derive royalty revenue and in evaluating performance.

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

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

2021 2020 2021 2020

Three Months Ended September 30,

SmartStyle 17.0 % (33.9) %

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(1) System-wide same-store sales are calculated as the total change in sales for system-wide franchise and company-owned locations for more than one year that were open on a specific day of the week during the current period and the corresponding prior period.

(1) Fiscal year 2022 system-wide same-store sales are calculated as the total change in sales for system-wide franchise and company-owned locations that were open on a specific day of the week during the current period and the corresponding prior period.

Fiscal year 2021 system-wide same-store sales are calculated as the total change in sales for system-wide franchise and company-owned locations for more than one year that were open on a specific day of the week during the current period and the corresponding prior period.

Quarterly and year-to-date system-wide same-store sales are the sum of the system-wide same-store sales computed on a daily basis.

Franchise salons that do not report daily sales are excluded from same-store sales.

Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period.

System-wide same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.

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The following table sets forth, for the periods indicated, certain information derived from our unaudited Condensed Consolidated Statement of Operations.

The percentages are computed as a percent of total consolidated revenues, except as otherwise indicated, and the (decrease) increase is measured in basis points.

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

The percentages are computed as a percent of total consolidated revenues, except as otherwise indicated, and the increase (decrease) is measured in basis points.

Three Months Ended September 30,

2021 2020 2021 2020 2021

($ in millions) % of Total

Revenues (1) (Decrease)

Increase ($ in millions) % of Total

Revenues (1) (Decrease)

Service revenues $ 24.6 $ 78.4 24.5 % 51.0 % (2,650) $ 90.0 $ 322.1 28.6 % 52.8 % (2,420)

Product revenues 20.8 34.9 20.8 22.7 (190) 68.7 124.5 21.7 20.4 130

Royalties and fees 23.5 8.7 23.5 5.7 1,780 61.4 66.1 19.4 10.8 860

Revenues (1) Increase (Decrease)

Royalties $ 16.6 $ 11.4 21.4 % 10.3 % 1,110

Fees 3.3 2.0 4.2 1.8 240

Product sales to franchisees 8.0 13.7 10.3 12.3 (200)

Advertising fund contributions 8.1 4.5 10.4 4.0 640

Franchise rental income 33.8 32.3 43.4 29.0 1,440

Cost of service (2) 15.8 54.8 64.2 69.9 (570) 66.4 212.7 73.8 66.0 780

Cost of product (2) 21.3 21.7 102.4 62.2 4,020 54.8 75.3 79.8 60.5 1,930

Site operating expenses 13.4 3.7 13.4 2.4 1,100 37.0 62.9 11.7 10.3 140

Company-owned salon revenue 8.0 47.4 10.3 42.6 (3,230)

Cost of product sales to franchisees (2) 8.1 10.7 101.3 78.1 2,320

General and administrative 21.8 26.1 28.0 23.4 460

Rent 1.8 13.2 2.3 11.8 (950)

Advertising fund expense 8.1 4.5 10.4 4.0 640

Franchise rent expense 33.8 32.3 43.4 29.0 1,440

Company-owned salon expense 7.9 42.9 10.2 38.5 (2,830)

Depreciation and amortization 1.9 7.4 2.4 6.6 (420)

Long-lived asset impairment 0.8 — 0.8 — N/A 9.8 — 3.1 — N/A

TBG restructuring — 0.1 — 0.1 (10) — 2.4 — 0.4 (40)

Goodwill impairment — 40.2 — 26.1 (2,610) — 40.2 — 6.6 (660)

Long-lived asset impairment 0.2 5.8 0.3 5.2 (490)

Operating loss (3) (5.8) (31.6) (7.5) (28.4) 2,090

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Interest income and other, net (0.2) 0.1 (0.3) 0.1 (40)

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

Income from discontinued operations, net of income taxes — 0.3 — 0.2 (20) — 0.8 — 0.1 (10)

Income tax benefit (4) — 0.6 0.5 1.8 N/A

Net loss (3) (10.4) (35.3) (13.4) (31.7) 1,830

_______________________________________________________________________________

(1) Cost of service is computed as a percent of service revenues.

Cost of product is computed as a percent of product revenues.

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

(2) Excludes depreciation and amortization expense.

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Consolidated Revenues

Consolidated revenues primarily include revenues of company-owned salons, product and equipment sales to franchisees, franchise royalties and fees and franchise rental income.

Consolidated revenues primarily include franchise royalties, fees, product sales to franchisees, advertising contributions, rental income, and service and product sales in company-owned salons.

The following tables summarize revenues and same-store sales by concept, as well as the reasons for the percentage change:

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

2021 2020 2021 2020

Three Months Ended September 30,

(Dollars in thousands)

Franchise salons:

Product $ 13,079 $ 15,318 $ 41,057 $ 45,287

Royalties and fees 23,535 8,698 61,393 66,062

Royalties $ 16,602 $ 11,405

Fees 3,265 2,042

Product sales to franchisees 8,008 13,742

Advertising fund contributions 8,114 4,509

Franchise rental income 33,762 32,283

Total, Franchise salons $ 67,931 $ 55,837 $ 198,335 $ 208,224

Franchise salon same-store sales decrease (1) (19.3) % (4.1) % (27.6) % (1.8) %

Company-owned salons:

SmartStyle $ 11,056 $ 46,277 $ 43,802 $ 197,912

Supercuts 5,743 11,743 17,562 53,063

Portfolio Brands 15,537 39,926 56,284 150,387

Total, Franchise $ 69,751 $ 63,981

Franchise same-store sales (1) 23.7 % (31.9) %

Total, Company-owned salons $ 8,005 $ 47,415

Company-owned salon same-store sales decrease (2) (28.8) % (7.9) % (33.8) % (3.9) %

Consolidated revenues $ 77,756 $ 111,396

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(1) Franchise same-store sales are calculated as the total change in sales for salons that have been a franchise location for more than one year that were open on a specific day of the week during the current period and the corresponding prior period.

(1) Franchise same-store sales in fiscal year 2022 are calculated as the total change in sales for franchise locations that were open on a specific day of the week during the current period and the corresponding prior period.

Franchise same-store sales in fiscal year 2021 are calculated as the total change in sales for franchise locations for more than one year that were open on a specific day of the week during the current period and the corresponding prior period.

Quarterly and year-to-date franchise same-store sales are the sum of the franchise same-store sales computed on a daily basis.

Franchise salons that do not report daily sales are excluded from same-store sales.

Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period.

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

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

Quarterly and year-to-date company-owned same-store sales are the sum of the company-owned same-store sales computed on a daily basis.

Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period.

Company-owned same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.

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

(2) Decrease due to the Company's strategic shift from a company-owned salon business to an asset-light franchise model.

Three Months Ended September 30, 2021 Compared with Three Months Ended September 30, 2020

Consolidated Revenues

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

Consolidated revenue decreased $53.5 and $293.6 million, or 34.8% and 48.2%, for the three and nine months ended March 31, 2021, respectively.

Service revenue and product revenue decreased $53.8 and $14.1 million, respectively, in the three months ended March 31, 2021 and decreased $232.1 and $55.8 million, respectively, in the nine months ended March 31, 2021.

The decline in service and product revenue is primarily due to the Company's sale of salons to franchisees.

During the twelve months ended March 31, 2021, 519 salons were sold to franchisees, net of buy backs and 833 and 35 system-wide salons were closed and constructed, respectively (2021 Net Salon Count Changes).

For the three and nine months ended March 31, 2021, the impact to consolidated revenue due to the sale of salons to franchisees and closure of salons was $44.9 and $214.0 million, respectively.

System-wide sales also declined, primarily due to fewer guest visits and government-mandated closures related to the COVID-19 pandemic, in the three and nine months ended March 31, 2021, which also contributed to the decline in service, product and royalties and fees revenue.

In the three months ended March 31, 2020, the Company refunded $14.9 million of previously collected cooperative advertising fees, which reduced royalties and fees in the prior period.

Service Revenues

The decreases of $53.8 and $232.1 million, or 68.6% and 72.0%, in service revenues during the three and nine months ended March 31, 2021, respectively, were primarily due to the 2021 Net Salon Count Changes.

For the three and nine months ended March 31, 2021, the impact to service revenue due to the sale of salons to franchisees and closure of salons was $35.0 and $172.5 million, respectively.

The remaining decrease in service revenue relates primarily to fewer guest visits as a result of the COVID-19 pandemic.

Product Revenues

The decreases of $14.1 and $55.8 million, or 40.4% and 44.9%, in product revenues during the three and nine months ended March 31, 2021, respectively, were primarily due to the 2021 Net Salon Count Changes.

For the three and nine months ended March 31, 2021, the impact to product revenue due to the sale of salons to franchisees and closure of salons was $9.9 and $41.5 million, respectively.

Additionally, franchise same-store product sales declined 20.0% and 24.2% for the three and nine months ended March 31, 2021, respectively, contributing to the decline.

Royalties and Fees

During the three months ended March 31, 2021, royalties and fees increased $14.8 million, or 170.6%, primarily due to the Company refunding cooperative advertising fund contributions in the third quarter of fiscal year 2020.

During the nine months ended March 31, 2021, royalties and fees decreased $4.7 million, or 7.1%, primarily due to a $1.5 million decline in cooperative advertising funds charged to franchisees during the nine months ended March 31, 2021.

For the three and nine months ended March 31, 2021, cooperative advertising funds were temporarily reduced as part of our COVID-19 pandemic relief effort and also declined due to lower same-store sales.

The declines in cooperative advertising are offset in site expense and have no impact on operating income.

Royalties and fees were also impacted by the decreases in franchise same-store sales of 19.3% and 27.6% for the three and nine months ended March 31, 2021, respectively, partially offset by an increase in franchise salons.

Total franchised locations open at March 31, 2021 were 5,317 as compared to 5,126 at March 31, 2020.

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

Consolidated revenue decreased $33.6 million, or 30.2%, for the three months ended September 30, 2021.

Royalty revenue increased $5.2 million in the three months ended September 30, 2021 due to higher franchise system-wide sales and higher franchise salon counts.

During the twelve months ended September 30, 2021, 692 salons were sold to franchisees and 799 and 31 system-wide salons were closed and constructed, respectively (2022 Net Salon Count Changes).

During the three months ended September 30, 2021, company-owned salon revenue decreased $39.4 million due primarily to the sale of salons to franchisees and salon closures.

For the three months ended September 30, 2021, the impact to consolidated revenue due to the sale of salons to franchisees and closure of salons was $35.3 million.

During the three months ended September 30, 2021, royalties increased $5.2 million, or 45.6%, primarily due to the increase in franchise salons and higher franchise system-wide sales.

Total franchised locations open at September 30, 2021 were 5,587 as compared to 5,226 at September 30, 2020.

During the three months ended September 30, 2021, fees increased $1.3 million, primarily due to the increase in franchise salons and an increase in salons running Opensalon ® Pro.

Product Sales to Franchisees

Product sales to franchisees decreased $5.7 million, or 41.6%, during the three months ended September 30, 2021, primarily due to the Company's shift to third-party distribution partners.

The Company expects revenue from product sales to decrease significantly during fiscal year 2022.

Advertising Fund Contributions

Advertising fund contributions increased $3.6 million, or 80.0%, during the three months ended September 30, 2021, primarily due to the increase in franchise salon count and system-wide sales.

Franchise Rental Income

During the three and nine months ended March 31, 2021, franchise rental income decreased $0.5 and $1.0 million, or 1.6% and 1.0%, respectively.

The decrease in the three months ended March 31, 2021 is primarily due to an increase in rent considered uncollectible and to the change in the lease renewal assumption.

The decrease in the nine months ended March 31, 2021 is due to the rental income from TBG salons included in fiscal year 2020 and an increase in rent considered uncollectible.

Cost of Service

During the three months ended March 31, 2021, cost of service as a percent of service revenues decreased 570 basis points, primarily due to payroll related COVID-19 relief tax credits.

During the nine months ended March 31, 2021, cost of service as a percent of service revenues increased 780 basis points, primarily due to inefficient and non-productive stylist hours as a result of reduced guest visits related to the COVID-19 pandemic and higher minimum wages.

Cost of Product

The 4,020 and 1,930 basis point increases in cost of product as a percent of product revenues during the three and nine months ended March 31, 2021, respectively, were primarily due to a $5.3 million reserve for excess and obsolete inventory related to the change in the Company's merchandising strategy and the shift from retail sales to franchise product sales.

Excluding the excess and obsolescence reserve, margins on retail product sales were 37.4% and 47.7% in the three months ended March 31, 2021 and 2020, respectively.

Margins on franchise product sales were 14.8% and 25.2% in the three months ended March 31, 2021 and 2020, respectively.

Excluding the excess and obsolescence reserve, margins on retail product sales were 46.2% and 48.9% in the nine months ended March 31, 2021 and 2020, respectively.

Margins on franchise product sales were 19.3% and 23.1% in the nine months ended March 31, 2021 and 2020, respectively.

Decreases in franchise product margins were primarily driven by a shift to lower-margin customers and products.

Site Operating Expenses

Site operating expenses increased $9.7 million, or 265.2%, during the three months ended March 31, 2021 and decreased $25.9 million, or 41.3%, during the nine months ended March 31, 2021.

Site operating expenses during the three months ended March 31, 2020 were reduced by the refunding of $14.9 million of previously collected advertising fees in the prior period, as noted above in Royalties and fees.

Excluding the refund, site operating expenses decreased due to a net reduction in salon counts and decreases in marketing spend.

The decrease in site operating expenses during the nine months ended March 31, 2021 was primarily due to a net reduction in salon counts and decreases in marketing spend, partially offset by a $1.5 million increase in cooperative advertising expense, as noted above in Royalties and fees.

During the three months ended September 30, 2021, franchise rental income increased $1.5 million, or 4.6%, primarily due to the increase in franchise salon count.

Company-owned Salon Revenue

Company-owned salon revenue decreased $39.4 million due to the decrease in Company-owned salons as a result of the sale of salons to franchisees and salon closures, a decline in product sales, and exiting our third-party logistic revenue.

Cost of Product Sales to Franchisees

The 2,320 basis point increase in cost of product as a percent of product revenues during the three months ended September 30, 2021 was primarily due to the Company reducing prices to liquidate inventory at its distribution centers to facilitate exiting the distribution centers.

General and Administrative

The decreases of $7.3 and $27.8 million, or 22.9% and 26.4%, in general and administrative (G&A) during the three and nine months ended March 31, 2021, respectively, were primarily due to lower administrative and field management salaries due to reductions in headcount as we align our cost structure with our transition to an asset-light franchise model.

A benefit from the forfeiture of equity awards related to the departure of the Company's former CEO contributed $2.4 million to the decrease in the nine months ended March 31, 2021.

Additionally, $1.3 million of the decline in the nine months ended March 31, 2021 is due to the Company not holding its annual franchise convention in fiscal year 2021 due to the COVID-19 pandemic.

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

The decrease of $4.3 million, or 16.5%, in general and administrative expense during the three months ended September 30, 2021 was primarily due to lower administrative and field management salaries due to reductions in headcount as we align our cost structure with our transition to an asset-light franchise model.

Additionally, bad debt expense decreased $2.1 million year-over-year.

These decreases were offset by an increase in stock compensation expense of $2.9 million, due primarily to a $2.4 million benefit from the forfeiture of awards related to the departure of the Company's former CEO in fiscal year 2021.

The decrease of $11.4 million, or 86.4%, in rent expense during the three months ended September 30, 2021 was primarily due to the net reduction in the number of company-owned salons.

Partially offsetting the decrease is a $1.3 million broker fee incurred this fiscal year related to exiting the Company's distribution centers.

Advertising Fund Expense

Advertising fund expense increased $3.6 million, or 80.0%, during the three months ended September 30, 2021, primarily due to the increase in franchise salon count and system-wide sales.

Franchise Rent Expense

During the three and nine months ended March 31, 2021, franchise rent expense decreased $0.5 and $1.0 million, or 1.6% and 1.0%, respectively.

The decrease in the three months ended March 31, 2021 is primarily due to an increase in rent considered uncollectible and the change in the lease renewal assumption.

The decrease in the nine months ended March 31, 2021 is due to the rental income from TBG salons included in fiscal year 2020 and an increase in rent considered uncollectible.

During the three months ended September 30, 2021, franchise rent expense increased $1.5 million, or 4.6%, primarily due to the increase in franchise salon count.

Company-owned Salon Expense

Company-owned salon expense for the three months ended September 30, 2021 decreased $35.0 million, or 81.6%, primarily due to the reduction in company-owned salons.

Depreciation and Amortization

The decreases of $6.8 and $10.1 million, or 65.1% and 36.8%, in depreciation and amortization during the three and nine months ended March 31, 2021, respectively, were primarily due to the net reduction in company-owned salon counts.

Additionally, salon asset impairment of $1.2 and $3.9 million were recorded to depreciation expense in the three and nine months ended March 31, 2020, respectively.

Salon asset impairment in fiscal year 2021 was recorded to long-lived asset impairment.

The decrease of $5.5 million, or 74.3%, in depreciation and amortization during the three months ended September 30, 2021 was primarily due to the net reduction in company-owned salon counts and no depreciation expense in the current year related to the distribution center assets that were derecognized in the third quarter of fiscal year 2021.

Long-Lived Asset Impairment

In the three and nine months ended March 31, 2021, the Company recorded a long-lived asset impairment charge of $0.8 and $9.8 million, respectively, which included a right of use asset impairment charge of $0.3 and $6.3 million, respectively, and salon asset impairment of $0.5 and $3.5 million, respectively.

Prior to the COVID-19 pandemic that began in fiscal year 2020, the Company had not recorded a right of use asset impairment charge.

TBG Mall Location Restructuring

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

See Note 3 to the unaudited Condensed Consolidated Financial Statements.

Goodwill Impairment

The Company recorded $40.2 million of goodwill impairment for the three and nine months ended March 31, 2020.

Management concluded that the COVID-19 pandemic in March 2020 was a triggering event requiring an assessment of the Company’s goodwill.

The Company concluded the carrying value of the Company-owned reporting unit exceeded its fair value resulting in a full impairment.

In the three months ended September 30, 2021 and 2020, the Company recorded a long-lived asset impairment charge of $0.2 and $5.8 million, respectively, which included a ROU asset impairment charge of $0.1 and $4.6 million, respectively, and salon asset impairment of $0.1 and $1.2 million, respectively.

The decrease in long-lived asset impairment is primarily due to more salons being impaired in prior periods.

Interest Expense

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

The $0.5 million decrease in interest expense for the three months ended September 30, 2021 was primarily due to a lower interest rate in fiscal year 2022.

Loss from Sale of Salon Assets to Franchisees, net

In the three and nine months ended March 31, 2021, the loss from sale of salon assets to franchisees was $4.6 and $8.5 million, respectively.

In the three and nine months ended March 31, 2020, the loss from the sale of salon assets to franchisees was $7.9 and $26.1 million, respectively, including non-cash goodwill derecognition of $17.5 and $77.0 million, respectively.

There was no goodwill derecognition in fiscal year 2021 due to the company-owned goodwill impairment in the third quarter of fiscal year 2020.

The $0.4 million increase in the loss from the sale of salon assets to franchisees, net in the three months ended September 30, 2021 was primarily due to no proceeds being received for the salons sold in fiscal year 2022 compared to $3.7 million of proceeds in fiscal year 2021.

Interest Income and Other, net

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

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

The decrease of $0.3 million in interest income and other, net during the three months ended September 30, 2021 was primarily due to the foreign exchange loss of $0.3 million in fiscal year 2022 compared to no loss in fiscal year 2021.

Income Tax Benefit

During the three months ended September 30, 2021, the Company recognized a tax benefit of $0.05 million, with a corresponding effective tax rate of 0.5% as compared to recognizing a tax benefit of $0.6 million, with a corresponding effective tax rate of 1.8% during the three months ended September 30, 2020.

See Note 4 to the unaudited Condensed Consolidated Financial Statements.

Income from Discontinued Operations

Income from discontinued operations was $0.3 and $0.8 million during the three and nine months ended March 31, 2020, respectively, due to actuarial insurance reserve adjustments.

Similar adjustments did not occur in the three and nine months ended March 31, 2021.

Results of Operations by Segment

Based on our internal management structure, we report two segments:

Franchise salons and Company-owned salons.

Franchise and Company-owned salons.

See Note 10 to the unaudited Condensed Consolidated Financial Statements.

Significant results of operations are discussed below with respect to each of these segments.

Franchise Salons

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

2021 2020 Increase (Decrease) 2021 2020 Increase (Decrease)

(Dollars in millions) (Dollars in millions)

Product 13.1 15.3 (2.2) 41.1 45.3 (4.2)

Royalties and fees 23.5 8.7 14.8 61.4 66.1 (4.7)

Three Months Ended September 30,

2021 2020 Increase (Decrease) (1)

(Dollars in millions)

Royalties $ 16.6 $ 11.4 $ 5.2

Fees 3.3 2.0 1.3

Product sales to franchisees 8.0 13.7 (5.7)

Advertising fund contributions 8.1 4.5 3.6

Franchise rental income 33.8 32.3 1.5

Total franchise salons revenue (1) $ 67.9 $ 55.8 $ 12.1 $ 198.3 $ 208.2 $ (9.9)

Total franchise revenue (1) $ 69.8 $ 64.0 $ 5.8

Franchise same-store sales (2) 23.7 % (31.9) %

Operating income $ 12.0 $ 11.2 $ 0.8 $ 28.7 $ 35.8 $ (7.1)

Operating loss from TBG restructuring — (0.1) 0.1 — (2.4) 2.4

Total operating income (1) $ 12.0 $ 11.1 $ 0.9 $ 28.7 $ 33.4 $ (4.7)

Operating loss $ (4.8) $ (10.8) $ 6.0

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line items calculated individually may not sum to total due to rounding.

(2) Franchise same-store sales are calculated as the total change in sales for salons that have been a franchise location for more than one year that were open on a specific day of the week during the current period and the corresponding prior period.

(2) Franchise same-store sales in fiscal year 2022 are calculated as the total change in sales for franchise locations that were open on a specific day of the week during the current period and the corresponding prior period.

Quarterly and year-to-date franchise same-store sales are the sum of the franchise same-store sales computed on a daily basis.

Franchise salons that do not report daily sales are excluded from same-store sales.

Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period.

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

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

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

2021 2020 2021 2020

SmartStyle (18.1) % (10.9) % (25.8) % (8.6) %

Supercuts (21.5) (3.3) (29.4) (0.9)

Portfolio Brands (15.1) (3.5) (24.6) (1.7)

Total (19.3) % (4.1) % (27.6) % (1.8) %

Franchise Salon Revenues

Franchise salon revenues increased $12.1 million during the three months ended March 31, 2021 and decreased $9.9 million during the nine months ended March 31, 2021.

The increase in franchise salon revenue during the three months ended March 31, 2021 was primarily due to the refund of previously collected contributions to the cooperative advertising funds in the third quarter of fiscal year 2020.

The decrease in franchise salon revenue during the nine months ended March 31, 2021 was primarily due to decreases in royalties and cooperative fund contributions due to the COVID-19 pandemic.

During the twelve months ended March 31, 2021, franchisees constructed (net of relocations) and closed 31 and 359 Franchise-owned salons, respectively, and purchased (net of Company buybacks) 519 salons from the Company during the same period.

Franchise Salon Operating Income

During the three months ended March 31, 2021, franchise salon operations generated operating income of $12.0 million, an increase of $0.9 million compared to the prior comparable period.

During the nine months ended March 31, 2021, franchise salon operations generated operating income of $28.7 million, a decrease of $4.7 million compared to the prior comparable period.

The increase in the three months ended March 31, 2021 was primarily due to an increase in franchise fees due to the increase in salon count.

The decrease in the nine months ended March 31, 2021 was primarily due to the decrease in royalties due to the COVID-19 pandemic.

Franchise Revenues

Franchise salon revenues increased $5.8 million during the three months ended September 30, 2021.

The increase in franchise salon revenue during the three months ended September 30, 2021 was primarily due to higher royalties and advertising contributions due to an increase in salon count and system-wide sales.

During the twelve months ended September 30, 2021, franchisees constructed (net of relocations) and closed 27 and 358 Franchise-owned salons, respectively, and purchased 692 salons from the Company during the same period.

The increase in royalties and advertising contributions was partially offset by a decline in franchise product sales, which the Company expects revenue to significantly decrease throughout fiscal year 2022 due to the Company exiting its whole-sale product business.

Franchise Operating Loss

During the three months ended September 30, 2021, franchise salon operations generated an operating loss of $4.8 million, a $6.0 million improvement from the prior comparable period.

The improvement in the three months ended September 30, 2021 was primarily due to an increase in royalties and reduced general and administrative expense related primarily to salaries and bad debt expense.

Company-owned Salons

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

2021 2020 Increase (Decrease) (1) 2021 2020 Increase (Decrease) (1)

(Dollars in millions) (Dollars in millions)

Three Months Ended September 30,

2021 2020 (Decrease) Increase (1)

(Dollars in millions)

Total revenue $ 8.0 $ 47.4 $ (39.4)

Company-owned same-store sales (28.8) % (7.9) % (33.8) % (3.9) %

Operating loss (1.0) (20.7) 19.7

Total company-owned salons 179 1,308 (1,129)

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line items calculated individually may not sum to total due to rounding.

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

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

2021 2020 2021 2020

SmartStyle (24.4) % (9.0) % (33.3) % (3.8) %

Supercuts (34.1) (6.7) (38.0) (4.9)

Portfolio Brands (28.4) (6.5) (32.4) (3.5)

Total (28.8) % (7.9) % (33.8) % (3.9) %

Company-owned Salon Revenues

Company-owned salon revenues decreased $65.6 and $283.7 million during the three and nine months ended March 31, 2021, respectively, primarily due to the 2021 Net Salon Count Changes and a decline in sales as a result of the COVID-19 pandemic.

Company-owned same-store sales decreased 28.8% and 33.8% during the three and nine months ended March 31, 2021, respectively, due primarily to decreases in same-store guest transactions.

Company-owned salon revenues decreased $39.4 million during the three months ended September 30, 2021, primarily due to the 2022 Net Salon Count Changes.

Company-owned Salon Operating Loss

During the three months ended March 31, 2021, company-owned salon operating loss decreased $38.0 million to a loss of $12.6 million, and during the nine months ended March 31, 2021, company-owned salon operating loss increased $4.4 million to a loss of $50.7 million compared to the prior comparable period.

The decrease in the loss during the three months ended March 31, 2021 was primarily due to the goodwill impairment of $40.2 million recorded in the third quarter of fiscal year 2020.

The increase in the loss during the nine months ended March 31, 2021 was primarily due to the overall decline in margin related primarily to COVID-19 and a $5.3 million inventory reserve charge recorded in the third quarter of fiscal year 2021, partially offset by the goodwill impairment recorded in the third quarter of fiscal year 2020.

Corporate Operating Loss

Corporate operating loss decreased $1.9 million during the three months ended March 31, 2021, primarily driven by lapping stock compensation benefits associated with a change in performance awards assumptions and executive departures in fiscal year 2020, as well as higher severance costs in fiscal year 2021.

Corporate operating loss decreased $8.9 million during the nine months ended March 31, 2021, primarily driven by lower general and administrative salaries due to lower headcount and the cancellation of the traditional in-person franchise convention in fiscal year 2021.

During the three months ended September 30, 2021, company-owned salon operating loss improved $19.7 million compared to the prior comparable period.

The improvement in the loss during the three months ended September 30, 2021 was primarily due to reduced general and administrative expense primarily related to salaries and a decrease in marketing expense.

LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity

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

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

The Company's borrowing arrangements include a $295.0 million five-year revolving credit facility that expires in March 2023, of which $98.8 million was available as of March 31, 2021.

The Company's liquidity, which includes the unused available balance under the credit facility and unrestricted cash and cash equivalents, totaled $133.3 million as of March 31, 2021.

As of March 31, 2021, the revolving credit facility has a minimum liquidity covenant of $75.0 million (see Note 11 to the unaudited Condensed Consolidated Financial Statements).

In accordance with the credit agreement, beginning with periods ending June 30, 2021, the Company’s minimum liquidity calculation will be adjusted related to certain net cash proceeds generated from historical venditions.

The Company expects that as of June 30, 2021, after using the vendition proceeds adjustment, the minimum liquidity covenant will change such that the unused available balance under the credit facility and unrestricted cash and cash equivalents be in the range of $53-$55 million.

On February 3, 2021, the Company filed a $150 million shelf registration and $50 million prospectus supplement with the Securities and Exchange Commission under which it may offer and sell, from time to time, up to $50 million worth of its 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 of our growth strategies.

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

As of September 30, 2021, cash and cash equivalents were $45.5 million, with $42.3 and $3.2 million within the United States and Canada, respectively.

The Company's borrowing arrangements include a $293.3 million five-year revolving credit facility that expires in March 2023, of which $81.8 million was available as of September 30, 2021.

The revolving credit facility has a minimum liquidity covenant of $75.0 million (see Note 8 to the unaudited Condensed Consolidated Financial Statements).

Additionally, on February 3, 2021, the Company filed a $150.0 million shelf registration statement and $50.0 million prospectus supplement with the SEC under which it may offer and sell, from time to time, up to $50.0 million worth of its of its Class A common stock in "at-the-market offerings." Net proceeds from sales of shares under the "at-the-market" program, if any, may be used to, among other things, fund working capital requirements, repay debt and support growth strategies.

Such strategies may include positioning the Company for potential expansion through targeted industry acquisitions and alternatives to fund additional capital investment requirements related to potential partnership opportunities to facilitate continued growth of our proprietary technology, Opensalon ® Pro.

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.

No shares have been issued under the shelf registration.

During the three months ended September 30, 2021, the Company issued 8.1 million shares and received net proceeds of $32.2 million.

On September 29, 2021, the Company sold 1.2 million shares for net proceeds of $5.0 million, which settled on October 1, 2021.

The Company closely manages its liquidity and capital resources.

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Capital expenditures are a component of the Company's cash flow and capital management strategy, which can be adjusted in response to economic and other changes to the Company's business environment.

The Company has a disciplined approach to capital allocation, which focuses on investing in key priorities to support the Company's response to the COVID-19 pandemic, as well as its multi-year strategic plan as discussed within Part I, Item 1 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2020.

The Company has a disciplined approach to capital allocation, which focuses on investing in key priorities as discussed within Part I, Item 1 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2021.

Cash Flows from Operating Activities

During the nine months ended March 31, 2021, cash used in operating activities was $80.0 million.

Cash used in operations increased due to lower revenues and margins, payments of $14.0 million to catch up on payables related to fiscal year 2020, and the CEO sign-on bonus of $2.5 million, partially offset by the elimination of certain general and administrative costs and a $0.8 million COVID-19 payroll relief payment from the Canadian government received in the third quarter of fiscal year 2021.

During the three months ended September 30, 2021, cash used in operating activities was $12.3 million.

Cash used in operations decreased due to higher royalties and lower general and administrative expense.

These cash inflows were partially offset by the Company's bonus payment of $2.1 million to non-executives paid during the first quarter.

In the prior year, bonuses were paid in the second quarter.

Cash Flows from Investing Activities

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

During the three months ended September 30, 2021, cash used in investing activities of $1.5 million was due to capital expenditures primarily related to internally-developed capitalized software.

Cash Flows from Financing Activities

During the nine months ended March 31, 2021, cash used in financing activities was $1.6 million compared to cash provided by financing activities of $152.1 million in the prior comparable period.

In the nine months ended March 31, 2020, the Company borrowed a net $183.0 million and used $28.2 million to purchase common stock.

During the three months ended September 30, 2021, cash provided by financing activities was $40.8 million, primarily as a result of net proceeds of $32.2 million related to the issuance of common stock and a net $8.9 million draw on the Company's revolving credit facility.

Financing Arrangements

See Note 11 of the Notes to the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 and Note 8 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020, for additional information regarding our financing arrangements.

See Note 8 of the Notes to the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 and Note 8 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021, for additional information regarding our financing arrangements.

Debt to Capitalization Ratio

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

As of Debt to

Capitalization (1) Basis Point Increase (Decrease) (2)

March 31, 2021 78.2 % 1,620

Capitalization (1)

September 30, 2021 83.1 %

June 30, 2021 91.6 %

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(1) Debt includes long-term debt and financing liabilities.

It excludes long-term lease liability as that liability is offset by the right of use asset.

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

The 1,620 basis point increase in the debt to capitalization ratio as of March 31, 2021 as compared to June 30, 2020, was primarily due to the decreases in shareholders' equity as a result of the loss from operations, partially offset by the decrease in debt as a result of the derecognition of the Company's financing lease liability (see Note 11 to the unaudited Condensed Consolidated Financial Statements).

(1) Debt includes long-term debt.

It 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 September 30, 2021 as compared to June 30, 2021, was primarily due to the increase in shareholders' equity as a result of the common stock issued in the quarter

Share Issuance Program

On February 3, 2021, the Company filed a $150.0 million shelf registration statement and $50.0 million prospectus supplement with the SEC under which it may offer and sell, from time to time, up to $50.0 million worth of its Class A common stock in "at-the-market" offerings.

During the three months ended September 30, 2021, the Company issued 8.1 million shares for net proceeds of $32.2 million.

Share Repurchase Program

In May 2000, the Company’s Board of Directors (Board) approved a stock repurchase program with no stated expiration date.

Since that time and through March 31, 2021, the Board has authorized $650.0 million to be expended for the repurchase of the Company's stock under this program.

In May 2000, the Board approved a stock repurchase program with no stated expiration date.

Since that time and through September 30, 2021, the Board has authorized $650.0 million to be expended for the repurchase of the Company's stock under this program.

All repurchased shares become authorized, but unissued shares of the Company.

The timing and amounts of any repurchases depend on many factors, including the market price of the common stock and overall market conditions.

During the three and nine months ended March 31, 2021, the Company did not repurchase any shares.

As of March 31, 2021, 30.0 million shares have been cumulatively repurchased for $595.4 million, and $54.6 million remains outstanding under the approved stock repurchase program.

During the three months ended September 30, 2021, the Company did not repurchase any shares.

As of September 30, 2021, 30.0 million shares have been cumulatively repurchased for $595.4 million, and $54.6 million remains outstanding under the approved stock repurchase program.

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

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The forward-looking statements in this document reflect management's best judgment at the time they are made, but all such statements are subject to numerous risks and uncertainties, which could cause actual results to differ materially from those expressed in or implied by the statements herein.

Such forward-looking statements are often identified herein by use of words including, but not limited to, “may,” “believe,” “project,” “forecast,” “expect,” “estimate,” “anticipate,” and “plan.” These uncertainties include a potential material adverse impact on our business and results of operations as a result of the uncertain duration and severity of the COVID-19 pandemic, as well as the health and risk appetite of our stylists, customers and employees to return to the salon environment;

the continued ability of the Company to implement its strategy, priorities and initiatives including the re-engineering of our corporate and field infrastructure;

Opensalon® Pro may not yield the intended results on timing and amounts due to the COVID-19 pandemic, efforts by our current third-party back office management system vendor to make it difficult for our franchisees to convert to our new company-owned system and the pending litigation with that third-party vendor;

Such forward-looking statements are often identified herein by use of words including, but not limited to, "may," "believe," "project," "forecast," "expect," "estimate," "anticipate," and "plan." These uncertainties include a potential material adverse impact on our business and results of operations as a result of the uncertain duration and severity of the COVID-19 pandemic, including any adverse impact from the Delta variant;

the impact of the COVID-19 pandemic on our key suppliers;

the ability to address rent obligations incurred during the government-mandated hibernation of our salons related to the COVID-19 pandemic and the ability to obtain long-term rent concessions;

the ability to operate or sell the salons transferred back from TBG;

the outcome of the review by the administrator in TBG's insolvency proceedings in the United Kingdom;

compliance with credit facility covenants and access to the existing revolving credit facility;

our and our franchisees' ability to attract, train and retain talented stylists;

consumer shopping trends and changes in manufacturer distribution channels;

changes in regulatory and statutory laws including increases in minimum wages;

laws and regulations could require us to modify current business practices and incur increased costs;

changes in economic conditions;

changes in consumer tastes and fashion trends;

the continued ability of the Company to implement its strategy, priorities and initiatives including the re-engineering of our corporate and field infrastructure;

new merchandising strategy;

our franchisees' ability to attract, train and retain talented stylists;

financial performance of our franchisees;

success of the sale of salons to franchisees;

if our capital investments in technology do not achieve appropriate returns;

the ability to operate or sell the salons transferred back from TBG;

our ability to manage cyber threats and protect the security of potentially sensitive information about our guests, employees, vendors or Company information;

the ability of the Company to maintain a satisfactory relationship with Walmart;

the impact of recent actions by Walmart;

marketing efforts to drive traffic to our franchisees' salons;

changes in regulatory and statutory laws including increases in minimum wages;

our ability to maintain and enhance the value of our brands;

premature termination of agreements with our franchisees;

reliance on information technology systems;

reliance on external vendors;

consumer shopping trends and changes in manufacturer distribution channels;

competition within the personal hair care industry;

continued ability to compete in our business markets;

the continued ability to maintain an effective system of internal controls over financial reporting;

changes in tax exposure;

the use of social media;

failure to standardize operating processes across brands;

exposure to uninsured or unidentified risks;

Opensalon ® Pro may not yield the intended results;

compliance with credit facility covenants and access to the existing revolving credit facility;

ability to re-finance our existing credit facility or the ability to re-finance at a similar rate;

our capital investments in technology may not achieve appropriate returns;

premature termination of agreements with our franchisees;

financial performance of Empire Education Group;

the continued ability of the Company to implement cost reduction initiatives;

changes in economic conditions;

changes in consumer tastes and fashion trends;

failure at our distribution centers;

exposure to uninsured or unidentified risks;

continued ability to compete in our business markets;

reliance on our management team and other key personnel;

new merchandising strategy or other factors not listed above.

the continued ability to maintain an effective system of internal controls over financial reporting;

changes in tax exposure;

potential litigation and other legal or regulatory proceedings could have an adverse effect on our business or other factors not listed above.

Additional information concerning potential factors that could affect future financial results is set forth under Item 1A on Form 10-K.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis