What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-11-01 compared with 2022-05-10 · 124 added, 154 removed, 147 unchanged (65% of the section changed)

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MANAGEMENT'S OVERVIEW

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

COVID-19 Impact

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 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.

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

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

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

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

Regis Corporation (NYSE:RGS) is a leader in the beauty salon industry.

As of September 30, 2022, the Company franchised, owned or held ownership interests in 5,494 worldwide locations.

Our locations consisted of 5,418 system-wide North American and international salons, and 76 locations in which we maintained a non-controlling ownership interest less than 100 percent.

Regis’ franchised and corporate locations operate under concepts such as Supercuts ® , SmartStyle ® , Cost Cutters ® , Roosters ® and First Choice Haircutters ® .

Regis maintains an ownership interest in Empire Education Group in the U.S.

As of September 30, 2022, the Company had 608 employees worldwide.

Merchandising Strategy

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

The Company has shifted its product business from a wholesale model to a third-party distribution model.

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

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

As a result of the change, product sales to franchisees will continue to decrease and are expected to provide less revenue and costs in fiscal year 2023 as compared to prior year.

CRITICAL ACCOUNTING POLICIES

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Our significant accounting policies can be found in Note 1 to the Consolidated Financial Statements contained in Part II, Item 8 of the June 30, 2022 Annual Report on Form 10-K, as well as Notes 1 and 2 to the unaudited Condensed Consolidated Financial Statements contained within this Quarterly Report on Form 10-Q.

We believe the accounting policies related to the valuation of goodwill, the valuation and estimated useful lives of long-lived assets, estimates used in relation to tax liabilities and deferred taxes are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations.

We believe the accounting policies related to the valuation of goodwill and the valuation and estimated useful lives of long-lived assets are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations.

Discussion of each of these policies is contained under "Critical Accounting Policies" in Part II, Item 7 of our June 30, 2022 Annual Report on Form 10-K.

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

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

2022 2021 2022 2021

SmartStyle (2.5) % (19.6) % 8.8 % (28.7) %

Three Months Ended September 30,

Supercuts 8.9 % 30.5 %

SmartStyle (3.2) 17.0

Portfolio Brands 3.6 18.5

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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 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.

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

Quarterly 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.

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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 March 31, Nine Months Ended March 31,

Three Months Ended September 30,

2022 2021 2022 2021 2022

($ in millions) % of Total

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

Revenues (1) (2) Increase (Decrease) (1)

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Cost of product sales to franchisees 0.5 7.6 125.0 95.0 3,000

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

General and administrative 14.4 20.8 23.3 27.1 (380)

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Long-lived asset impairment — 0.2 — 0.3 (30)

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

Operating income (loss) (3) 2.5 (4.9) 4.0 (6.4) 1,040

Interest expense (3.8) (3.1) (6.1) (4.0) (210)

Loss from sale of salon assets to franchisees, net — (1.1) — (1.4) 140

Interest income and other, net 0.2 15.1 0.3 15.1 (1,480) — 15.6 — 4.9 (490)

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

Net loss (3) (27.9) (10.8) (43.1) (10.8) (3,230) (43.2) (79.0) (20.3) (25.0) 470

Other, net (0.5) (0.2) (0.8) (0.3) (50)

Income tax (expense) benefit (4) — — (1.5) 0.5 N/A

Income (loss) from discontinued operations 3.3 (1.1) 5.3 (1.4) 670

Net income (loss) (3) 1.5 (10.4) 2.4 (13.5) 1,590

_______________________________________________________________________________

(1) Variances calculated on amounts shown in millions may result in rounding differences.

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

(2) Excludes depreciation and amortization expense.

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

(3) Total is a recalculation;

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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

Three Months Ended September 30, 2022 Compared with Three Months Ended September 30, 2021

Consolidated Revenues

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.

Consolidated revenue decreased $14.9 million, or 19.4%, for the three months ended September 30, 2022.

Royalty revenue increased $0.6 million in the three months ended September 30, 2022 due to higher average royalty rates.

The overall decrease in revenue is due to the decrease in company-owned salon revenue of $4.9 million due primarily to salon closures and to the decline in product sales to franchisees of $7.6 million.

During the twelve months ended September 30, 2022, 30 salons were sold to franchisees and 370 and 22 system-wide salons were closed and constructed, respectively (2023 Net Salon Count Changes).

During the three months ended September 30, 2022, royalties increased $0.6 million, or 3.6%, primarily due to higher average royalty rates partially offset by a decrease in franchise salon count.

During the three months ended September 30, 2022, fees increased $0.3 million, or 13.0%, primarily due to the rebate from the Company's third-party distributor, which is a new source of revenue.

See Note 2 to the unaudited Condensed Consolidated Financial Statements.

Product Sales to Franchisees

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

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

Product sales to franchisees decreased $7.6 million, or 95.0%, during the three months ended September 30, 2022, primarily due to the Company's shift in its product business to a third-party distribution model.

Advertising Fund Contributions

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

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

Advertising fund contributions increased $0.2 million, or 2.5%, during the three months ended September 30, 2022, primarily due to the increase in Supercuts system-wide sales.

Franchise Rental Income

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.

During the three months ended September 30, 2022, franchise rental income decreased $3.5 million, or 10.4%, primarily due to lower franchise salon count.

Company-owned Salon Revenue

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

During the three months ended September 30, 2022, company-owned salon revenue decreased $4.9 million, or 61.3%, due to the decrease in company-owned salons as a result of a decrease in salon count and a decline in product sales.

Cost of Product Sales to Franchisees

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.

The 3,000 basis point increase in cost of product as a percent of product revenues during the three months ended September 30, 2022 was primarily due to the Company reducing prices to liquidate distribution center inventory.

General and Administrative

The decreases of $9.0 and $24.1 million, or 36.6% and 31.1%, in general and administrative expense during the three and nine months ended March 31, 2022, respectively, were primarily due to lower administrative and field management compensation due to reductions in headcount as we align our cost structure with our asset-light franchise model, partially offset by $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.

The decrease of $6.4 million, or 30.8%, in general and administrative expense during the three months ended September 30, 2022 was primarily due to lower administrative and field management compensation resulting from headcount reductions and a decrease in expenses associated with the distribution center closures in fiscal year 2022.

Rent expense did not change significantly year over year.

There was a benefit of $1.1 million in fiscal year 2022 related to Canadian COVID-19 rent relief, which was offset by the net reduction in the number of company-owned salons in fiscal year 2023.

Advertising Fund Expense

Advertising fund expense 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.

Advertising fund expense increased $0.2 million, or 2.5%, during the three months ended September 30, 2022, primarily due to the increase in Supercuts system-wide sales.

Franchise Rent Expense

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

During the three months ended September 30, 2022, franchise rent expense decreased $3.5 million, or 10.4%, primarily due to lower franchise salon count.

Company-owned Salon Expense

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.

Company-owned salon expense for the three months ended September 30, 2022 decreased $4.9 million, or 62.0%, primarily due to the reduction in company-owned salons and a decline in product sales, partially offset by $0.6 million of Canadian wage relief received in fiscal year 2022.

Depreciation and Amortization

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

The decrease of $0.2 million, or 13.3%, in depreciation and amortization during the three months ended September 30, 2022 was primarily due to lower asset retirement obligations ("white boxing" salons at lease end) and the net reduction in company-owned salon count.

Long-Lived Asset Impairment

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

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

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

Goodwill Impairment

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

In the three months ended September 30, 2022, the Company did not record a long-lived asset impairment charge and in the three months ended September 30, 2021, the Company recorded a long-lived asset impairment charge of $0.2 million.

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

Interest Expense

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

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

The $0.7 million increase in interest expense for the three months ended September 30, 2022 was primarily due to the amortization of fees related to the credit amendment that was signed in the first quarter of fiscal year 2023 and a higher interest rate on outstanding borrowings.

Loss from Sale of Salon Assets to Franchisees, Net

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

Interest Income and Other, net

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

Income Tax Benefit

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

There was one salon sold in the three months ended September 30, 2022 compared to 81 in the three months ended September 30, 2021, which resulted in a $1.1 million decrease in the loss from sale of salon assets to franchisees, net.

The decrease of $0.3 million in other, net during the three months ended September 30, 2022 was primarily due to a higher foreign exchange loss in the three months ended September 30, 2022.

Income Tax (Expense) Benefit

During the three months ended September 30, 2022, the Company recognized tax expense of $0.03 million, with a corresponding effective tax rate of (1.5%), as compared to recognizing a tax benefit of $0.05 million, with a corresponding effective tax rate of 0.5% during the three months ended September 30, 2021.

See Note 5 to the unaudited Condensed Consolidated Financial Statements.

Income (Loss) from Discontinued Operations

In the three months ended September 30, 2022 and 2021, the Company recognized a gain from discontinued operations, net of income taxes of $3.3 million and a loss of $1.1 million, respectively.

The gain in fiscal year 2023 is primarily due to receipt of $4.0 million in sales proceeds, which were previously held back.

See Note 3 to the unaudited Condensed Consolidated Financial Statements.

Results of Operations by Segment

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See Note 12 to the unaudited Condensed Consolidated Financial Statements.

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

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

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

(Dollars in millions) (Dollars in millions)

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

Three Months Ended September 30,

2022 2021 Increase (Decrease) (1)

(Dollars in millions)

Royalties $ 17.2 $ 16.6 $ 0.6

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Franchise same-store sales (2) 4.6 % 23.7 %

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

Operating income (loss) $ 4.1 $ (3.9) $ 8.0

Total franchise salons 5,323 5,587 (264)

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

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

Franchise same-store sales in fiscal year 2021 are calculated as the total change in sales for franchise locations 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.

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

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

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

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

Franchise Revenues

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.

Franchise Revenue

Franchise revenues decreased $10.0 million during the three months ended September 30, 2022.

The decrease in franchise salon revenue during the three months ended September 30, 2022 was primarily due to the decrease in product sales to franchisees due to the Company's shift to third-party distributors and franchise rental income.

During the twelve months ended September 30, 2022, franchisees purchased 30 salons from the Company and constructed (net of relocations) and closed 21 and 315 franchise salons, respectively.

Franchise Operating Income (Loss)

During the three months ended September 30, 2022, franchise salon operations generated operating income of $4.1 million and generated operating losses of $3.9 million during the three months ended September 30, 2021.

Operating income improved primarily due to higher royalty revenue and decreased general and administrative expense and rent.

Company-owned Salons

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

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

(Dollars in millions) (Dollars in millions)

Three Months Ended September 30,

2022 2021 Decrease (1)

(Dollars in millions)

Total revenue $ 3.1 $ 8.0 $ (4.9)

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

Company-owned Salon Revenues

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 Revenue

Company-owned salon revenues decreased $4.9 million during the three months ended September 30, 2022, primarily due to the 2023 Net Salon Count Changes and a decline in product sales in salons.

Company-owned Salon Operating Loss

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.

During the three months ended September 30, 2022, company-owned salon operating loss increased $0.6 million, compared to the prior comparable period.

The increase in the loss during the three months ended September 30, 2022 was primarily due to the Company receiving Canadian COVID-19 rent and wage relief benefits of $1.7 million in fiscal year 2022, partially offset by the closure of loss-generating 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.

In August 2022, the Company reached an agreement to amend its credit agreement and extend the maturity to August 2025 from March 2023.

Under the amendment, the $295.0 million revolving credit facility was converted to a $180.0 million term loan and $55.0 million revolving credit facility with the minimum liquidity covenant reduced to $10.0 million from $75.0 million.

The amended credit agreement includes typical provisions and financial covenants, including minimum EBITDA, leverage and fixed-charge coverage ratio covenants, the latter two of which are not tested until December 31, 2023.

See Note 9 to the unaudited Condensed Consolidated Financial Statements.

Sources of Liquidity

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

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.

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

The Company believes it has sufficient liquidity, cash on hand and borrowing capacity, to meet its obligations in the next twelve months and beyond.

As of September 30, 2022, cash and cash equivalents were $9.5 million, with $8.3 million and $1.2 million within the United States and Canada, respectively.

As of September 30, 2022, the Company's borrowing arrangements include a $180.0 million term loan and a $55.0 million revolving credit facility that expires in August 2025.

As of September 30, 2022, the unused available credit under the revolving credit facility was $38.3 million, the credit agreement has a minimum liquidity covenant of $10.0 million, and total liquidity per the agreement was $47.8 million.

See Note 9 to the unaudited Condensed Consolidated Financial Statements.

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

The timing and amount of sales of shares, if any, will depend on a variety of factors, including prevailing market conditions, the trading price of shares, and other factors as determined by the Company.

During the three months ended September 30, 2022, the Company did not issue shares under the prospectus supplement.

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.

As of September 30, 2022, $11.6 million remains outstanding under the share issuance program.

The Company closely manages its liquidity and capital resources.

The Company's liquidity requirements depend on key variables, including the level of investment needed to support its business strategies, the performance of the business, capital expenditures, credit facilities and borrowing arrangements, and working capital management.

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

The Company's liquidity requirements depend on key variables, including the level of investment needed to support its business strategies, the performance of the business, credit facilities and borrowing arrangements, and working capital management.

The Company has a disciplined approach to capital allocation, which focuses on 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, 2022.

Cash Requirements

The Company's most significant contractual cash requirements as of September 30, 2022 were lease commitments and interest payments.

See Note 8 to the unaudited Condensed Consolidated Financial Statements for further lease commitment detail.

Additionally, the Company is expecting to pay $2.5 million in deferred social security contributions in the second quarter of fiscal year 2023.

Cash Flows from Operating Activities

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.

During the three months ended September 30, 2022, cash used in operating activities was $5.1 million compared to $12.3 million in the prior year.

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

Cash Flows from Investing Activities

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

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

During the three months ended September 30, 2022, cash provided by investing activities of $3.3 million, primarily related to cash received of $4.0 million from the sale of OSP, net of a $0.5 million transaction fee.

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

Cash Flows from Financing Activities

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

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

During the three months ended September 30, 2022, cash used in financing activities was $3.8 million, primarily as a result of debt refinancing fees of $4.3 million, partially offset by a net $0.6 million borrowing under the Company's revolving credit facility.

During the three months ended September 30, 2021, cash provided by financing activities was $40.8 million, primarily as a result of net proceeds related to the issuance of common stock.

Financing Arrangements

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

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

An increase to the rate or a decrease to the facility may impact our ability to achieve our strategic objectives and may materially impact our operations.

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

See Note 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.

See Note 9 of the Notes to the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended September 30, 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, 2022, for additional information regarding our financing arrangements.

Debt to Capitalization Ratio

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

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

Capitalization (1)

March 31, 2022 94.6 %

September 30, 2022 119.8 %

June 30, 2022 120.8 %

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(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.

The decrease in the debt to capitalization ratio as of September 30, 2022 as compared to June 30, 2022, was primarily due to the improvement in shareholders' deficit as a result of net income 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 nine months ended March 31, 2022, the Company issued 9.3 million shares for net proceeds of $37.2 million.

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

During the three months ended September 30, 2022, the Company did not issue shares under the prospectus supplement.

As of September 30, 2022, 9.3 million shares have been cumulatively issued for $38.4 million, and $11.6 million remains outstanding under the share issuance program.

Share Repurchase Program

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

Since that time and through March 31, 2022, 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 September 30, 2022, the Board has authorized $650.0 million to be expended for the repurchase of the Company's stock under this program.

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

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

During the three and nine months ended March 31, 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.

During the three months ended September 30, 2022, the Company did not repurchase any shares.

As of September 30, 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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The forward-looking statements in this document reflect management's best judgment at the time they are made, but all such statements are subject to numerous risks and uncertainties, which could cause actual results to differ materially from those expressed in or implied by the statements herein.

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

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

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

consumer shopping trends and changes in manufacturer distribution channels;

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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;

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;

changes in consumer tastes, fashion trends and consumer spending patterns;

compliance with New York Stock Exchange listing requirements;

reliance on franchise royalties and overall success of our franchisees’ salons;

the return of sales at franchise locations to pre-pandemic levels;

new merchandising strategy that utilizes third-party preferred supplier arrangements;

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

the success of our franchisees, which operate independently;

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

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

marketing efforts to drive traffic to our franchisees' salons;

the successful migration of our franchisees to the Zenoti salon technology platform;

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

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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, including our ability to re-finance at a similar rate, and our ability to raise additional debt or equity capital;

the effectiveness of our enterprise risk management program;

compliance with covenants in our financing arrangement, access to the existing revolving credit facility, and we may face an accelerated obligation to repay our indebtedness;

our capital investments in technology may not achieve appropriate returns;

premature termination of agreements with our franchisees;

financial performance of Empire Education Group;

financial performance of Empire Education Group, Inc.;

the continued ability of the Company to implement cost reduction initiatives and achieve expected cost savings;

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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.

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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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