What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-10 compared with 2022-02-03 · 100 added, 79 removed, 201 unchanged (47% of the section changed)

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MANAGEMENT'S OVERVIEW

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

As of December 31, 2021, the Company franchised, owned or held ownership interests in 5,779 worldwide locations.

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

As of March 31, 2022, the Company franchised, owned or held ownership interests in 5,697 worldwide locations.

Our locations consisted of 5,621 system-wide North American and international salons, and in 76 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 December 31, 2021, the Company had 853 employees worldwide.

As of March 31, 2022, the Company had 735 employees worldwide.

COVID-19 Impact

During the period ended December 31, 2021, the COVID-19 pandemic had an adverse impact on operations.

During the periods ended March 31, 2022 and 2021, the COVID-19 pandemic had an adverse impact on operations.

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

In response to COVID-19, the U.S.

employee retention payroll tax credit, Canada Emergency Wage Subsidy (CEWS) and Canada Emergency Rent Subsidy (CERS) were introduced for eligible employers.

In response to COVID-19, the Canada Emergency Wage Subsidy (CEWS), Canada Emergency Rent Subsidy (CERS) and the U.S.

employee retention payroll tax credit were introduced for eligible employers.

In fiscal years 2022 and 2021, the Company received $1.9 and $1.6 million, respectively, in CEWS and $1.2 and $0.0 million, respectively, in CERS that partially cover expenses incurred in Canada during those years.

In fiscal year 2021, the Company recorded a $1.5 million benefit related to the U.S.

employee retention payroll tax credit.

In fiscal years 2022 and 2021, the Company received $1.4 and $1.6 million, respectively, in CEWS and $1.2 and $0.0 million, respectively, in CERS that partially cover expenses incurred in Canada during those years.

Additionally, in December 2021 the Company paid $2.5 million of social security contributions that had been deferred under the CARES Act.

Overall, COVID-19 has, and may continue to have, a negative effect on revenue and profitability.

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As part of the Company's transformation to focus on managing and nurturing brands, and in line with its capital-light business, a new merchandise strategy to outsource product distribution was adopted in the third quarter of fiscal year 2021.

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

The Company has shifted 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.

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

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

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

2022 2021 2022 2021

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(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.

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

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

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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 December 31, Six Months Ended December 31,

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

2022 2021 2022 2021 2022 2022 2021 2022 2021 2022

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Cost of product sales to franchisees (2) 2.6 11.2 200.0 85.5 11,450 14.1 33.2 120.5 80.8 3,970

Inventory reserve 6.4 — 9.9 — N/A 6.4 — 3.0 — N/A

General and administrative 15.6 24.6 24.1 24.6 (50) 53.3 77.4 25.0 24.5 50

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Long-lived asset impairment 0.3 0.8 0.5 0.8 (30) 0.5 9.8 0.2 3.1 (290)

Goodwill impairment 16.0 — 24.7 — N/A 16.0 — 7.5 — N/A

Operating loss (3) (25.4) (18.5) (39.2) (18.5) (2,070) (32.4) (76.9) (15.2) (24.3) 910

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(2) Excludes depreciation and amortization expense.

The Company exited its warehouses in fiscal year 2022 and is selling inventory below cost to facilitate the wind down of the whole-sale distribution business.

(3) Total is a recalculation;

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(4) Computed as a percent of loss from continuing operations before income taxes.

The income taxes basis point change is noted as not applicable (N/A) as the discussion within MD&A is related to the effective income tax rate.

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

The income tax basis point change is noted as not applicable (N/A) as the discussion within MD&A is related to the effective income tax rate.

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

Consolidated Revenues

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

Consolidated revenue decreased $34.0 and $67.7 million, or 32.6% and 31.4%, for the three and six months ended December 31, 2021, respectively.

Royalty revenue increased $3.4 and $8.5 million, respectively, in the three and six months ended December 31, 2021 due to higher franchise system-wide sales and higher franchise salon counts.

During the twelve months ended December 31, 2021, 560 salons were sold to franchisees and 628 and 25 system-wide salons were closed and constructed, respectively (2022 Net Salon Count Changes).

During the three and six months ended December 31, 2021, company-owned salon revenue decreased $32.9 and $72.3 million, respectively, due primarily to the sale of salons to franchisees and salon closures.

For the three and six months ended December 31, 2021, the impact to consolidated revenue due to the sale of salons to franchisees and closure of salons was $28.8 and $64.0 million, respectively.

During the three and six months ended December 31, 2021, royalties increased $3.4 and $8.5 million, or 26.8% and 35.1%, respectively, primarily due to the increase in franchise salons and higher franchise system-wide sales.

Total franchised locations open at December 31, 2021 were 5,553 as compared to 5,269 at December 31, 2020.

During the three and six months ended December 31, 2021, fees increased $2.5 and $3.6 million, respectively, primarily due to the increase in franchise salons, an increase in salons running Opensalon ® Pro and an increase in terminated development agreements (see Note 3 to the unaudited Condensed Consolidated Financial Statements).

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

Consolidated revenue decreased $35.6 and $103.2 million, or 35.5% and 32.7%, for the three and nine months ended March 31, 2022, respectively.

Royalty revenue increased $3.0 and $11.5 million, respectively, in the three and nine months ended March 31, 2022 due to higher franchise system-wide sales and higher franchise salon counts.

The overall decrease in revenue is due to the decrease in company-owned salons.

During the twelve months ended March 31, 2022, 448 salons were sold to franchisees and 544 and 22 system-wide salons were closed and constructed, respectively (2022 Net Salon Count Changes).

During the three and nine months ended March 31, 2022, company-owned salon revenue decreased $28.8 and $101.0 million, respectively, due primarily to the sale of salons to franchisees and salon closures.

For the three and nine months ended March 31, 2022, the impact to consolidated revenue due to the sale of salons to franchisees and closure of salons was $24.8 and $88.8 million, respectively.

During the three and nine months ended March 31, 2022, royalties increased $3.0 and $11.5 million, or 23.4% and 31.1%, respectively, primarily due to the increase in franchise salons and higher franchise system-wide sales.

Total franchised locations open at March 31, 2022 were 5,504 as compared to 5,317 at March 31, 2021.

During the three months ended March 31, 2022, fees decreased $1.7 million, or 33.3%, primarily due an increase in terminated development agreements in the three months ended March 31, 2021, partially offset by the increase in franchise salons and an increase in salons running Opensalon ® Pro in the three months ended March 31, 2022.

In fiscal year 2022, the Company recorded $1.5 million of terminated development agreement fees in the second quarter.

During the nine months ended March 31, 2022, fees increased $1.9 million, or 19.8%, primarily due to the increase in franchise salons and an increase in salons running Opensalon ® Pro.

Product Sales to Franchisees

Product sales to franchisees decreased $11.8 and $17.6 million, or 83.1% and 62.9%, respectively, during the three and six months ended December 31, 2021, primarily due to the Company's shift to third-party distribution partners.

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

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

Advertising Fund Contributions

Advertising fund contributions increased $3.3 and $6.9 million, or 70.2% and 75.0%, respectively, during the three and six months ended December 31, 2021, primarily due to the increase in franchise salon count and system-wide sales.

Advertising fund contributions increased $2.5 and $9.4 million, or 44.6% and 63.5%, respectively, during the three and nine months ended March 31, 2022, primarily due to the increase in franchise salon count and system-wide sales.

Additionally, the increase in the nine months ended March 31, 2022 is also due to an increase in the contribution rate that had been reduced in the first half of fiscal year 2021 in response to COVID-19.

Franchise Rental Income

During the three and six months ended December 31, 2021, franchise rental income increased $1.5 and $2.9 million, or 4.6% and 4.5%, respectively, primarily due to the increase in franchise salon count.

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

Company-owned Salon Revenue

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

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

Cost of Product Sales to Franchisees

The 6,210 and 3,200 basis point increases in cost of product as a percent of product revenues during the three and six months ended December 31, 2021, respectively, were primarily due to the Company reducing prices to liquidate inventory at its distribution centers to facilitate exiting the distribution centers.

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

Inventory Reserve

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

General and Administrative

The decreases of $10.7 and $15.0 million, or 40.1% and 28.4%, in general and administrative expense during the three and six months ended December 31, 2021, respectively, were primarily due to lower administrative and field management compensation due to reductions in headcount as we align our cost structure with our asset-light franchise model, partially offset by $1.0 million of legal expenses (see Note 5 to the unaudited Condensed Consolidated Financial Statements).

Additionally, the provision for doubtful accounts expense also contributed to the decline in the six months ended December 31, 2021.

The decreases of $9.8 and $21.2 million, or 76.0% and 81.2%, in rent expense during the three and six months ended December 31, 2021, respectively, were primarily due to the net reduction in the number of company-owned salons.

Partially offsetting the decrease in the six month period was a $0.9 million broker fee incurred in the six months ended December 31, 2021 related to exiting the Company's distribution centers.

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

Additionally, the provision for doubtful accounts expense also contributed to the decline in the nine months ended March 31, 2022.

The decreases of $6.8 and $28.0 million, or 85.0% and 82.1%, in rent expense during the three and nine months ended March 31, 2022, respectively, were primarily due to the net reduction in the number of company-owned salons.

Additionally, in the three months ended March 31, 2022 the Company accrued less rent deemed uncollectible from franchisees.

Partially offsetting the decrease in the nine month period was a $0.9 million broker fee incurred in the nine months ended March 31, 2022 related to exiting the Company's distribution centers.

Advertising Fund Expense

Advertising fund expense increased $3.3 and $6.9 million, or 70.2% and 75.0%, during the three and six months ended December 31, 2021, respectively, primarily due to the increase in franchise salon count and system-wide sales.

Advertising fund expense increased $2.5 and $9.4 million, or 44.6% and 63.5%, during the three and nine months ended March 31, 2022, respectively, primarily due to the increase in franchise salon count and system-wide sales.

Franchise Rent Expense

During the three and six months ended December 31, 2021, franchise rent expense increased $1.5 and $2.9 million, or 4.6% and 4.5%, respectively, primarily due to the increase in franchise salon count.

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

Company-owned Salon Expense

Company-owned salon expense for the three and six months ended December 31, 2021 decreased $28.5 and $63.6 million, or 84.8% and 83.0%, respectively, primarily due to the reduction in company-owned salons, a decline in product sales, and exiting third-party logistics.

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

Depreciation and Amortization

The decreases of $4.4 and $10.0 million, or 68.8% and 72.5%, in depreciation and amortization during the three and six months ended December 31, 2021, respectively, were primarily due to the net reduction in company-owned salon counts and no depreciation expense in the current year related to the distribution center assets that were derecognized in the third quarter of fiscal year 2021.

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

Long-Lived Asset Impairment

In the three months ended December 31, 2021 and 2020, the Company recorded a long-lived asset impairment charge of $0.1 and $3.2 million, respectively, which included an ROU asset impairment charge of $0.0 and $1.5 million, respectively.

In the six months ended December 31, 2021 and 2020, the Company recorded a long-lived asset impairment charge of $0.2 and $9.0 million, respectively, which included an ROU asset impairment charge of $0.2 and $6.0 million, respectively.

In the three months ended March 31, 2022 and 2021, the Company recorded a long-lived asset impairment charge of $0.3 and $0.8 million, respectively, which included an ROU asset impairment charge of $0.3 and $0.3 million, respectively.

In the nine months ended March 31, 2022 and 2021, the Company recorded a long-lived asset impairment charge of $0.5 and $9.8 million, respectively, which included an ROU asset impairment charge of $0.5 and $6.3 million, respectively.

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

Goodwill Impairment

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

Interest Expense

The $0.3 and $0.7 million decreases in interest expense for the three and six months ended December 31, 2021, respectively, were primarily due to a lower average interest rate in fiscal year 2022.

The $0.2 million increase in interest expense for the three months ended March 31, 2022 was primarily due to increased borrowings.

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

Loss from Sale of Salon Assets to Franchisees, net

The $2.6 and $2.2 million decreases in the loss from the sale of salon assets to franchisees, net in the three and six months ended December 31, 2021, respectively, were primarily due to fewer salons sold in fiscal year 2022.

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

Interest Income and Other, net

The decrease of $0.3 million in interest income and other, net during the three months ended December 31, 2021 was primarily due to the foreign exchange gains of $0.3 million in the three months ended December 31, 2020 compared to no gain in the three months ended December 31, 2021.

The decrease of $0.6 million in interest income and other, net during the six months ended December 31, 2021 was primarily due to the foreign exchange losses of $0.3 million in the six months ended December 31, 2021 compared to foreign exchange gains of $0.3 million in the six months ended December 31, 2020.

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

Income Tax Benefit

During the three and six months ended December 31, 2021, the Company recognized tax benefits of $0.2 and $0.2 million, respectively, with corresponding effective tax rates of 3.2% and 1.4% as compared to recognizing tax benefits of $0.4 and $1.0 million, respectively, with corresponding effective tax rates of 1.2% and 1.5% during the three and six months ended December 31, 2020.

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

See Note 4 to the unaudited Condensed Consolidated Financial Statements.

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

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

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

2022 2021 Increase (Decrease) (1) 2022 2021 Increase (Decrease) (1)

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

Operating income (loss) $ 2.1 $ (9.4) $ 11.5 $ (2.7) $ (20.2) $ 17.5

Operating loss $ (15.3) $ (5.9) $ (9.4) $ (18.0) $ (26.1) $ 8.1

Total franchise salons 5,504 5,317 187

_______________________________________________________________________________

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

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

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

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

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Franchise Revenues

Franchise revenues decreased $1.2 million during the three months ended December 31, 2021 and increased $4.6 million during the six months ended December 31, 2021.

The decrease in franchise salon revenue during the three months ended December 31, 2021 was primarily due to the decrease in product sales to franchisees due to the Company's shift to third-party distributors, partially offset by higher royalties and advertising fund contributions.

The increase in franchise revenue during the six months ended December 31, 2021 was primarily due to higher royalties and advertising contributions due to an increase in salon count and system-wide sales.

During the twelve months ended December 31, 2021, franchisees constructed (net of relocations) and closed 23 and 299 franchise salons, respectively, and purchased 560 salons from the Company during the same period.

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

Franchise Operating Income (Loss)

During the three and six months ended December 31, 2021, franchise salon operations generated operating income of $2.1 million and operating loss of $2.7 million, an $11.5 and $17.5 million improvement from the prior comparable period.

The improvement in the three and six months ended December 31, 2021 was primarily due to increases in royalties and reduced general and administrative expense related primarily to cost saving initiatives.

Franchise revenues decreased $6.7 and $2.1 million during the three and nine months ended March 31, 2022.

The decrease in franchise salon revenue during the three months and nine months ended March 31, 2022 was primarily due to the decrease in product sales to franchisees due to the Company's shift to third-party distributors, partially offset by higher royalties and advertising fund contributions due to an increase in salon count and system-wide sales.

During the twelve months ended March 31, 2022, franchisees constructed (net of relocations) and closed 22 and 283 franchise salons, respectively, and purchased 448 salons from the Company during the same period.

The Company expects product revenue to continue to decrease throughout fiscal year 2022 due to the Company exiting its wholesale product business.

Franchise Operating Loss

During the three and nine months ended March 31, 2022, franchise salon operations generated operating losses of $15.3 million and $18.0 million, respectively.

The loss in the three months ended March 31, 2022 was $9.4 million higher than the prior year due to a goodwill impairment charge of $16.0 million in the period.

Excluding the goodwill impairment, operating income increased primarily due to higher royalty revenue and decreased general and administrative expense and rent.

The operating loss improved $8.1 million in the nine months ended March 31, 2022 from the prior comparable period due to the increase in royalties and decrease in general and administrative expense and rent, partially offset by the goodwill impairment charge.

Company-owned Salons

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

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

2022 2021 (Decrease) Increase (1) 2022 2021 (Decrease) Increase (1)

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Company-owned Salon Revenues

Company-owned salon revenues decreased $32.9 and $72.3 million during the three and six months ended December 31, 2021, respectively, primarily due to the 2022 Net Salon Count Changes.

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

Company-owned Salon Operating Loss

During the three and six months ended December 31, 2021, company-owned salon operating loss improved $14.2 and $33.9 million, respectively, compared to the prior comparable period.

The improvement in the loss during the three and six months ended December 31, 2021 was primarily due to reduced general and administrative expense primarily related to salaries, a decrease in depreciation and long-lived asset impairment and the exiting of loss making company-owned salons.

During the three and nine months ended March 31, 2022, company-owned salon operating loss improved $8.9 and $42.8 million, respectively, compared to the prior comparable period.

The improvement in the loss during the three and nine months ended March 31, 2022 was primarily due to reduced general and administrative expense primarily related to salaries, a decrease in depreciation and long-lived asset impairment and the exiting of loss making company-owned salons.

LIQUIDITY AND CAPITAL RESOURCES

The Company's debt of $193.8 million is due in March 2023 and management's current projected cash flows do not support the ability to repay this obligation in full at maturity.

As a result of the maturity date, our debt is reflected as a current liability at March 31, 2022.

Management is working with advisors to determine alternative financing arrangements and believes the ability to refinance alleviates substantial doubt related to the Company's ability to continue as a going concern.

If the Company is not able to refinance our debt at terms acceptable to us by the maturity date, the lender would be able to call the debt and pursue other remedies that could be harmful to our business.

Sources of Liquidity

Funds generated by operating activities, available cash and cash equivalents and our borrowing agreements are our most significant sources of liquidity.

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

The Company's borrowing arrangements include a $291.7 million five-year revolving credit facility that expires in March 2023, of which $81.8 million was available as of December 31, 2021.

The Company's liquidity per the agreement includes the unused available balance under the credit facility, unrestricted cash and cash equivalents and the shortfall in the gap in expected proceeds from the sale of salon assets of $20.9 million as of December 31, 2021.

Total liquidity per the agreement was $138.1 million as of December 31, 2021.

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

The Company's borrowing arrangements include a $291.3 million five-year revolving credit facility that expires in March 2023, of which $81.8 million was available as of March 31, 2022.

Total liquidity per the agreement was $128.3 million as of March 31, 2022.

The revolving credit facility has a minimum liquidity covenant of $75.0 million (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 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.

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 Class A common stock in "at-the-market offerings." Net proceeds from sales of shares under the "at-the-market" program 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.

During the six months ended December 31, 2021, the Company issued 9.3 million shares and received net proceeds of $37.2 million.

During the nine months ended March 31, 2022, the Company issued 9.3 million shares and received net proceeds of $37.2 million.

The Company closely manages its liquidity and capital resources.

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Cash Flows from Operating Activities

During the six months ended December 31, 2021, cash used in operating activities was $24.3 million.

Cash used in operations improved due to higher royalties, lower general and administrative expense and the exiting of loss making company-owned salons.

During the nine months ended March 31, 2022, cash used in operating activities was $34.4 million compared to $80.0 million in the prior year.

Cash used in operations improved due to higher royalties, lower general and administrative expense, lower rent and the exiting of loss making company-owned salons.

These improvements were partially offset by $2.5 million of social security contributions remitted in the second quarter that had been deferred under the CARES Act.

Cash Flows from Investing Activities

During the six months ended December 31, 2021, cash used in investing activities of $2.9 million was due to capital expenditures primarily related to internally-developed capitalized software.

During the six months ended December 31, 2020, cash provided by investing activities of $0.6 million was primarily due to proceeds from the sale of salon assets, partially offset by capital expenditures.

During the nine months ended March 31, 2022, cash used in investing activities of $4.3 million was due to capital expenditures primarily related to internally-developed capitalized software.

During the nine months ended March 31, 2021, cash used in investing activities of $0.9 million was primarily due to capital expenditures, partially offset by proceeds from the sale of salon assets.

Cash Flows from Financing Activities

During the six months ended December 31, 2021, cash provided by financing activities was $43.6 million, primarily as a result of net proceeds of $37.2 million related to the issuance of common stock and a net $7.3 million draw on the Company's revolving credit facility.

During the six months ended December 31, 2020, cash used in financing activities was $1.3 million, primarily due to the Company's purchase of its non-controlling interest from the minority shareholders.

During the nine months ended March 31, 2022, cash provided by financing activities was $43.2 million, primarily as a result of net proceeds of $37.2 million related to the issuance of common stock and a net $6.9 million draw on the Company's revolving credit facility.

During the nine months ended March 31, 2021, cash used in financing activities was $1.6 million.

Financing Arrangements

The Company's existing revolving credit facility is due in March 2023 and management expects to refinance the debt prior to the expiration date.

The Company's existing revolving credit facility is due in March 2023 and management is working with advisors to determine alternate financing.

Uncertainty in the business, including the impact of COVID-19, may reduce our borrowing options and increase the interest rate.

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Additionally, the Company may need to look to other sources of financing, including additional use of the Company's At-The-Market (ATM) offering or other equity offerings that may be dilutive to shareholders.

See Note 8 of the Notes to the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended December 31, 2021 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.

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 March 31, 2022 and Note 8 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021, for additional information regarding our financing arrangements.

Debt to Capitalization Ratio

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Capitalization (1)

December 31, 2021 83.5 %

March 31, 2022 94.6 %

June 30, 2021 91.6 %

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(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 December 31, 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 first quarter.

(1) Excludes the long-term lease liability as that liability is offset by the ROU asset.

The increase in the debt to capitalization ratio as of March 31, 2022 as compared to June 30, 2021, was primarily due to the decrease in shareholders' equity as a result of the loss from operations.

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 and six months ended December 31, 2021, the Company issued 1.2 and 9.3 million shares for net proceeds of $5.0 and $37.2 million, respectively.

During the nine months ended March 31, 2022, the Company issued 9.3 million shares for net proceeds of $37.2 million.

Share Repurchase Program

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

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

Since that time and through March 31, 2022, the Board has authorized $650.0 million to be expended for the repurchase of the Company's stock under this program.

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

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

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

As of December 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 and nine months ended March 31, 2022, the Company did not repurchase any shares.

As of March 31, 2022, 30.0 million shares have been cumulatively repurchased for $595.4 million, and $54.6 million remains outstanding under the approved stock repurchase program.

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

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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 or other factors not listed above.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis