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(Exact name of registrant as specified in its charter)

Minnesota

41-0749934

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

3701 Wayzata Boulevard,

Minneapolis

Minnesota

55416

(Address of principal executive offices)

(Zip Code)

(952) 947-7777

(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to be submit such files). Yes ☒ No ☐

 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act): Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of April 26, 2024: 2,279,948

 INDEX

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

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

_______________________________________________________________________________ 

_______________________________________________________________________________ 

For the Nine Months Ended March 31, 2024 and 2023

_______________________________________________________________________________        

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

1.    BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The unaudited interim Condensed Consolidated Financial Statements of Regis Corporation (the Company) as of March 31, 2024 and for the three and nine months ended March 31, 2024 and 2023, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of March 31, 2024 and its consolidated results of operations, comprehensive loss, shareholders' deficit and cash flows for the interim periods. Adjustments consist only of normal recurring items, except for any discussed in the notes below. The results of operations and cash flows for any interim period are not necessarily indicative of results of operations and cash flows for the full year.

The accompanying unaudited interim Condensed Consolidated Financial Statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP). The unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended June 30, 2023 and other documents filed or furnished to the SEC during the current fiscal year.

The Company assesses goodwill impairment on an annual basis, during the Company's fourth fiscal quarter, and between annual assessments if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. An interim impairment analysis was not required in the three months ended March 31, 2024. As of March 31, 2024 and June 30, 2023, the Franchise reporting unit had goodwill of $173.3 million and $173.8 million, respectively.

On November 29, 2023, the Company effected a one-for-20 reverse stock split of its outstanding common stock, par value $0.05 per share. As a result of the reverse stock split, every 20 shares of common stock issued and outstanding was converted into one share of common stock. The reverse stock split affected all shareholders uniformly and did not alter any shareholder’s percentage interest in the Company’s equity. No fractional shares were issued in connection with the reverse stock split. Shareholders who would otherwise be entitled to a fractional share of common stock were instead entitled to receive a proportional cash payment. All common share and per share amounts presented in the unaudited condensed consolidated financial statements and accompanying notes have been retroactively adjusted to reflect the reverse stock split.

The reverse stock split affected all issued and outstanding shares of the Company’s common stock, as well as the number of shares of common stock available for issuance under the Company’s outstanding stock options and stock unit awards. The reverse stock split reduced the number of shares of common stock issuable upon the exercise of stock options outstanding and the vesting of stock unit awards outstanding immediately prior to the reverse stock split and correspondingly increased the respective exercise prices or other price dependent terms.

On January 28, 2024, the Board authorized and declared a dividend of one preferred stock purchase right (a Right) for each outstanding share of common stock. The dividend was payable on February 9, 2024 (the Record Date) to the holders of record of shares of common stock as of the close of business on the Record Date. The description and terms of the Rights are set forth in a Tax Benefits Preservation Plan (the Plan), dated as of January 29, 2024, as the same may be amended from time to time between the Company and Equiniti Trust Company, LLC, as Rights Agent.

By adopting the Plan, the Board is seeking to protect the Company’s ability to use its net operating loss carryforwards (“NOLs”) and other tax attributes to offset potential future income tax liabilities. The Company’s ability to use such NOLs and other tax attributes would be substantially limited if the Company experiences an “ownership change,” as defined in Section 382 of the Internal Revenue Code (the “Code”). Generally, an “ownership change” occurs if the percentage of the Company’s stock owned by one or more “five percent stockholders” increases by more than fifty percentage points over the lowest percentage of stock owned by such stockholders at any time during the prior three-year period or, if sooner, since the last “ownership change” experienced by the Company. The Plan is intended to make it more difficult for the Company to undergo an ownership change by deterring any person from acquiring 4.95% or more of the outstanding shares without the approval of the Board. The Board believes it is in the best interest of the Company and its stockholders to reduce the likelihood of an ownership change, which could harm the Company’s future operating results by effectively increasing the Company future tax liabilities.

Depreciation expense in the three months ended March 31, 2024 and 2023 includes $0.4 million and $0.2 million, respectively, and for the nine months ended March 31, 2024 and 2023 includes $0.5 million and $0.6 million, respectively, of asset retirement obligations, which are cash expenses.

2.    REVENUE RECOGNITION:

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

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

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

Receivables relate primarily to payments due for royalties, advertising fees and rent. The receivables balance is presented net of an allowance for expected credit losses (i.e., doubtful accounts). Provisions for credit losses are recorded based on management’s judgment regarding our ability to collect as well as the age of the receivables. Receivable are written off when they are deemed uncollectible. As of March 31, 2024 and June 30, 2023, the allowance for doubtful accounts was $6.9 million and $7.3 million, respectively. The Company offers financing to SmartStyle® franchisees when they remodel their salons. Included in Other assets is a receivable of $1.0 million, partially offset by a credit loss reserve of $0.2 million, related to this financing program.

Broker fees are the costs associated with using external brokers to identify new franchisees. These fees are paid upon the signing of the franchise agreement and recognized as general and administrative expense over the term of the franchise agreement. The following table is a rollforward of the broker fee balance for the periods indicated:

Deferred franchise fees related to open salons are generally recognized on a straight-line basis over the term of the franchise agreement. Franchise fee revenue for the three months ended March 31, 2024 and 2023 was $1.7 million and $1.6 million, respectively, and for the nine months ended March 31, 2024 and 2023 was $5.0 million and $4.8 million, respectively. Estimated revenue expected to be recognized in the future related to deferred franchise fees for open salons as of March 31, 2024 is as follows (dollars in thousands):

On June 30, 2022, the Company sold its Opensalon® Pro (OSP) solution to Soham Inc. As a result of the sale, the Company classified the OSP business as discontinued operations in the financial statements for all periods presented. The Company received $13.0 million in proceeds in June 2022 and received $5.0 million in fiscal year 2023, offset by a $0.5 million transaction fee. In the quarter ended December 31, 2023, the Company earned $2.0 million of proceeds that had been previously held back, which were paid to the Company in January 2024. No income taxes have been allocated to discontinued operations based on the methodology required by accounting for income taxes guidance. Cash used in operations includes $0.1 million of cash from discontinued operations.

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

4.    SHAREHOLDERS' DEFICIT:

During the three and nine months ended March 31, 2024, the Company granted restricted stock units as follows:

The RSUs granted during the nine months ended March 31, 2024, vest in equal amounts over a three-year period subsequent to the grant date.

Total compensation cost for stock-based payment arrangements totaling $0.3 million and $0.6 million for the three months ended March 31, 2024 and 2023, respectively, and $1.2 and $1.7 million for the nine months ended March 31, 2024 and 2023, respectively, was recorded within general and administrative on the unaudited Condensed Consolidated Statements of Operations.

In fiscal year 2021, the Company filed a $150.0 million shelf registration statement and $50.0 million prospectus supplement (collectively, the Share Issuance Program) with the Securities and Exchange Commission (SEC) under which it may offer and sell, from time to time, up to $50.0 million worth of its Class A common stock in "at-the-market" offerings. During the three and nine months ended March 31, 2024 and 2023, the Company did not issue any shares under this prospectus. The Share Issuance Program expired on February 10, 2024.

5.     INCOME TAXES:

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

The recorded tax provision and effective tax rate for the three and nine months ended March 31, 2024 and 2023 were different than what would normally be expected, primarily due to the impact of the deferred tax valuation allowance. In addition, the Company recognized a one-time tax benefit of $0.2 million in fiscal year 2024 as a result of an income tax audit of foreign subsidiaries.

With limited exceptions, due to net operating loss carryforwards, our federal, state, and foreign tax returns are open to examination for all years since 2014, 2013 and 2016, respectively.

6.     COMMITMENTS AND CONTINGENCIES:

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

Litigation is inherently unpredictable, and the outcome of these matters cannot presently be determined. Although the actions are being vigorously defended, the Company could incur judgments in the future or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period.

The Company owns a majority stake in Empire Education Group, Inc. (EEG). To be eligible to participate in Title IV programs, the schools operated by EEG must comply with specific standards and procedures set forth in the Higher Education Act and the regulations issued thereunder by the Department of Education. On October 10, 2023, the Department of Education issued a final rule applicable to “gainful employment” programs, which under the Higher Education Act, include all programs offered by the EEG schools and other proprietary institutions. Under this final rule, which becomes effective July 1, 2024, the continued Title IV eligibility of such programs will be based on meeting both a debt-to-earnings metric and an earnings premium metric. A program that fails either metric in a single year will be required to provide warnings to current and prospective students that it could be at risk of losing Title IV program eligibility. A program that fails to meet the same metric twice in a three-year period will lose Title IV program eligibility. The first measurement will be assessed in fiscal year 2025. Upon a loss of institutional or programmatic eligibility, EEG’s students would lose access to Title IV program funds and that could be detrimental to EEG's business model. Additionally, EEG students who are unable to complete their educational program with EEG, or who do not accept a teach-out opportunity with another institution, may be eligible for discharges of their federal student loan debt. Those discharged loan amounts and other Title IV funds disbursed to EEG students that do not complete their program, as well as other Title IV program funds, may constitute liabilities to the Department of Education. Because the Company holds a majority ownership interest in EEG and is a co-signatory to the Title IV program participation agreements of the EEG schools with the Department of Education, the Department of Education could hold the Company responsible for EEG's Title IV program liabilities. As of March 31, 2024, EEG had $10.8 million of Title IV liabilities. If EEG is unable to meet the required metrics for gainful employment programs and subsequently unable to allow students to complete their programs, then it is possible the Company could be liable for all or some of the Title IV liabilities. The Company does not believe that it is probable that it would be liable for a material portion of these liabilities because there is time for EEG to reduce its exposure to these liabilities and therefore has not recorded any accrual for this potential liability.

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

						March 31, 2024						June 30, 2023
						(Dollars in thousands)
Cash and cash equivalents						$	5,886					$	9,508
Restricted cash, included in other current assets (1)						8,930						11,888
Total cash, cash equivalents and restricted cash						$	14,816					$	21,396

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

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

						Three Months Ended March 31,												Nine Months Ended March 31,
						2024						2023						2024						2023
						(Dollars in thousands)
Office rent						$	756					$	875					$	2,330					$	2,581
Lease termination (benefit) expense						(39)						266						122						1,571
Lease liability benefit (1)						(59)						(297)						(281)						(1,515)
Franchise salon rent (2)						627						415						193						372
Company-owned salon rent						481						818						1,893						2,911
Total						$	1,766					$	2,077					$	4,257					$	5,920

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

(2)Franchise salon rent is lower in the nine months ended March 31, 2024 due to settlements with landlords for less than previously accrued.

The Company leases salon premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees. All lease-related costs are passed through to the franchisees. The Company records the rental payments due from franchisees as franchise rental income and the corresponding amounts owed to landlords as franchise rent expense on the unaudited Condensed Consolidated Statements of Operations. For the three and nine months ended March 31, 2024 and 2023, franchise rental income and franchise rent expense were $23.8 million and $26.6 million, and $72.5 million and $85.8 million, respectively. These leases generally have lease terms of approximately five years. The Company expects to renew the SmartStyle master lease and some leases for locations subleased to our franchisees upon expiration of those leases. Other leases are expected to be renewed by the franchisee upon expiration.

All the Company's leases are operating leases. The lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date, including one lease term option when the lease is expected to be renewed. The ROU asset is initially and subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, less accrued lease payments and unamortized lease incentives received, if any. Expense for lease payments is recognized on a straight-line basis over the lease term, including the lease renewal option when the lease is expected to be renewed. Generally, the non-lease components, such as real estate taxes and other occupancy expenses, are separate from rent expense within the lease and are not included in the measurement of the lease liability because these charges are variable.

The discount rate used to determine the present value of the lease payments is the Company's estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as the interest rate implicit in the lease cannot generally be determined. The Company uses the portfolio approach in applying the discount rate based on the original lease term. The weighted average remaining lease term was 5.15 and 5.52 years, and the weighted average discount rate was 4.99% and 4.55% for all salon operating leases as of March 31, 2024 and June 30, 2023, respectively.

As of March 31, 2024, future operating lease commitments, including one renewal option for leases expected to be renewed, to be paid and received by the Company were as follows (dollars in thousands):

9.    FINANCING ARRANGEMENTS:

The Company's debt consists of the following:

The Company's credit facility matures in August 2025. In addition to a $10.0 million minimum liquidity covenant, the amended credit agreement includes typical provisions and financial covenants, including leverage and fixed-charge coverage ratio covenants. The agreement utilizes an interest rate margin that is subject to annual increases. The margin applicable to term secured overnight financing rate (SOFR) loans was 3.875% through March 27, 2023. Effective March 27, 2023, the margin increased to 6.25%, of which 4.25% is paid currently in cash and 2.00% is PIK interest (added to the principal balance and thereafter accruing interest). Effective March 27, 2024, the margin increased to 7.25%, of which 4.25% will be paid currently in cash and 3.00% will be PIK interest. The margin applicable to base rate loans will be 100 basis points (1.00%) less than the margin applicable to term SOFR loans. Interest expense is recorded based on a weighted average effective interest rate method. The significant assumptions used in the weighted average estimate are the future SOFR rates and debt balance, as well as the length of time the debt will be outstanding. Cash interest paid in the three and nine months ended March 31, 2024 and 2023 was $4.7 million and $14.2 million, and $4.0 million and $10.9 million, respectively.

At March 31, 2024, the Company had outstanding standby letters of credit under the revolving credit facility of $9.8 million, primarily related to the Company's self-insurance program. As of March 31, 2024, total liquidity and available credit under the $55.0 million revolving credit facility, as defined by the amended agreement, were $36.7 million and $30.9 million, respectively. As of March 31, 2024, the Company had cash and cash equivalents of $5.9 million and current liabilities of $109.1 million.

The Company was in compliance with its covenants and other requirements of the financing arrangements as of March 31, 2024.

10.    FAIR VALUE MEASUREMENTS:

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

As of March 31, 2024 and June 30, 2023, the estimated fair value of the Company's cash, cash equivalents, restricted cash, receivables, inventory, deferred compensation assets, accounts payable and debt approximated their carrying values.

We measure certain assets, including the Company's equity method investments, tangible fixed and other assets and goodwill, at fair value on a nonrecurring basis when they are deemed to be other than temporarily impaired. The fair values of these assets are determined, when applicable, based on valuation techniques using the best information available, and may include quoted market prices, market comparables and discounted cash flow projections.

11.    EARNINGS PER SHARE:

The Company's basic earnings per share is calculated as net loss divided by weighted average common shares outstanding, excluding unvested outstanding stock options (SOs), stock appreciation rights (SARs), restricted stock units (RSUs) and stock-settled performance units (PSUs). The Company's diluted earnings per share is calculated as net loss divided by weighted average common shares and common share equivalents outstanding, which includes shares issued under the Company's stock-based compensation plans. Stock-based awards with exercise prices greater than the average market price of the Company's common stock are excluded from the computation of diluted earnings per share. The computation of weighted average shares outstanding, assuming dilution, excluded 218,904 and 214,684 of stock-based awards during the three months ended March 31, 2024 and 2023, respectively, and excluded 216,727 and 194,093 of stock-based awards during the nine months ended March 31, 2024 and 2023, respectively, as they were not dilutive under the treasury stock method.

12.    SEGMENT INFORMATION:

Segment information is prepared on the same basis that the chief operating decision maker (CODM) reviews financial information for operational decision-making purposes. The Company's reportable operating segments consisted of the following salons:

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

Financial information concerning the Company's reportable operating segments is shown in the table below. Segment information is presented in the same way that the Company internally organizes the business for assessing performance and making decisions regarding allocation of resources. In the second quarter of fiscal year 2023, the Company revised its internal reporting such that the CODM’s primary measures of segment performance are revenue and segment adjusted EBITDA. Revenue and segment adjusted EBITDA are regularly reviewed by the CODM to make decisions about resources to be allocated to the segments, assess current performance, and forecast future performance. Asset information by segment is not provided to the CODM. Segment adjusted EBITDA is defined as income from continuing operations before interest, income taxes, depreciation, amortization, and impairment. Consistent with our internal management reporting, unallocated expenses include certain items impacting comparability. These unallocated items are not defined terms within U.S. GAAP. They are based on how management views the business, makes financial, operating and planning decisions and evaluates the Company's ongoing performance and are not attributable to either segment. Unallocated fees include one-time professional fees and settlements, severance expense, the benefit from lease liability decreases in excess of previously impaired ROUA, lease termination fees and asset retirement obligation costs.

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, 2023 Annual Report on Form 10-K and other documents filed or furnished with the SEC during the current fiscal year.

Regis Corporation (NasdaqGM:RGS) is a leader in the beauty salon industry. As of March 31, 2024, the Company franchised or owned 4,557 locations, primarily in North America. Our locations consisted of 4,537 franchised salons and 20 company-owned salons. Regis’ franchised and corporate locations operate under concepts such as Supercuts®, SmartStyle®, Cost Cutters®, Roosters® and First Choice Haircutters®. As of March 31, 2024, the Company had 296 employees.

As part of the Company's transformation to focus on managing and nurturing its brands, and in line with its capital-light business, the Company shifted its product business from a wholesale model to a third-party distribution model in fiscal year 2022. Management expects the change will positively impact franchisees by providing them access to industry-leading pricing, loyalty programs, promotional benefits, educational assets, and ongoing support. The Company receives a fee from the third-party distributor, which is included in fees on the interim unaudited Condensed Consolidated Statements of Operations. As a result of the change, product sales to franchisees and cost of product sales to franchisees will continue to decrease and are expected to be immaterial for the remainder of fiscal year 2024.

On November 1, 2023, the Company announced that the Board has initiated a strategic review to proactively assess the Company’s capital structure with the support of legal and financial advisors. The Board has established a Special Committee to evaluate the various strategic alternatives and initiatives. The Company is continuing with such strategic review and there is no set timetable for this process, and there can be no assurances as to the results of the review. The Company does not intend to comment further on developments or status of this process until it deems further disclosure is appropriate or required by law.

On January 28, 2024, the Board adopted a Tax Benefits Preservation Plan (the “Plan”). By adopting the Plan, the Board is seeking to protect the Company’s ability to use its net operating loss carryforwards and other tax attributes to offset potential future income tax liabilities. See Note 1 of the unaudited Condensed Consolidated Financial Statements.

The interim unaudited Condensed Consolidated Financial Statements are prepared in conformity with U.S. GAAP. In preparing the interim unaudited Condensed Consolidated Financial Statements, we are required to make various judgments, estimates and assumptions that could have a significant impact on the results reported in the interim unaudited Condensed Consolidated Financial Statements. We base these estimates on historical experience and other assumptions believed to be reasonable under the circumstances. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Changes in these estimates could have a material effect on our interim unaudited Condensed Consolidated Financial Statements.

The Company assesses goodwill impairment on an annual basis, during the Company's fourth fiscal quarter, and between annual assessments if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. An interim impairment analysis was not required in the three months ended March 31, 2024. As of March 31, 2024 and June 30, 2023, the Franchise reporting unit had goodwill of $173.3 million and $173.8 million, respectively

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, 2023 Annual Report on Form 10-K. There have been no changes to our critical accounting policies from those disclosed on our Form 10-K for the year ended June 30, 2023.

Our results are impacted by our system-wide sales, which include sales by all points of distribution, whether owned by our franchisees or the Company. While we do not record sales by franchisees as revenue, and such sales are not included in our unaudited Condensed Consolidated Financial Statements, we believe that this operating measure is important in obtaining an understanding of our financial performance. We believe system-wide sales information aids in understanding how we derive royalty revenue and in evaluating performance. In the nine months ended March 31, 2024, a net 258 franchise salons have closed, which will reduce future royalty income.

The following table summarizes system-wide revenue and system-wide same-store sales by concept:

						Three Months Ended March 31,												Nine Months Ended March 31,
						2024						2023						2024						2023
						(Dollars in Millions)
System-wide revenue						$	286.8					$	299.3					$	885.4					$	918.7
Supercuts						1.6		%				7.6		%				2.2		%				7.9		%
SmartStyle						(4.2)						(0.5)						(2.9)						(2.2)
Portfolio Brands						1.9						8.8						3.0						6.1
Total system-wide same-store sales (1)						0.5		%				6.0		%				1.4		%				5.0		%

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

The following table sets forth, for the periods indicated, certain information derived from our unaudited Condensed Consolidated Statements of Operations. The percentages are computed as a percent of total consolidated revenues, except as otherwise indicated, and the increase (decrease) is measured in basis points. Variances calculated on amounts shown in millions may result in rounding differences.

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(1)Cost of product sales to franchisees is computed as a percent of product sales to franchisees. The basis point change is not meaningful.

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

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

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

During the three and nine months ended March 31, 2024, royalties decreased $0.3 million and $1.4 million, or 2.2% and 2.7%, respectively, primarily due to a decrease in franchise salon count.

During the three months ended March 31, 2024, fees increased $0.1 million due to an increase in terminated development agreements in the current year quarter. During the nine months ended March 31, 2024, fees decreased $0.6 million, primarily due to a decrease in terminated development agreements and lower fees from franchise product vendors.

Product sales to franchisees in the three and nine months ended March 31, 2024 decreased $0.6 million and $1.7 million, or 100.0% and 79.4%, respectively, compared to the three and nine months ended March 31, 2023. The decreases are primarily due to the Company's shift in its product business from a wholesale model to a third-party distribution model. Product sales to franchisees are not expected to be material for the remainder of fiscal year 2024.

Advertising fund contributions decreased $2.0 million and $4.2 million, or 25.9% and 17.5%, during the three and nine months ended March 31, 2024, respectively, primarily due to the decrease in franchise salon count and lower contribution rates.

During the three and nine months ended March 31, 2024, franchise rental income decreased $2.8 million and $13.3 million, or 10.7% and 15.5%, respectively, primarily due to the decrease in franchise salon count and franchisees signing their own leases.

During the three and nine months ended March 31, 2024, company-owned salon revenue decreased $0.9 million and $2.9 million, or 38.9% and 36.2%, respectively, due to the decrease in company-owned salon count.

The decrease in cost of product as a percent of product revenues during the three and nine months ended March 31, 2024 was primarily due to the Company's shift in its product business from a wholesale model to a third-party distribution model. Cost of product sales to franchisees is not expected to be material for the remainder of fiscal year 2024.

There were no inventory reserve charges in the three months ended March 31, 2024 or 2023. In the nine months ended March 31, 2023, the Company recorded an inventory reserve charge of $1.2 million related to slow moving products. There were no similar charges during the nine months ended March 31, 2024.

General and administrative expense for the three and nine months ended March 31, 2024 decreased $1.9 million and $5.5 million, or 14.1% or 13.9%, respectively, primarily due to lower headcount resulting in lower compensation expense and lower legal, insurance and professional fees.

Rent expense decreased $0.3 million and $1.6 million, or 15.0% and 28.1%, during the three and nine months ended March 31, 2024, respectively, primarily due to a reduction in company-owned salon count.

Advertising fund expense decreased $2.0 million and $4.2 million, or 25.6% and 17.5%, during the three and nine months ended March 31, 2024, respectively, primarily due to the decrease in franchise salon count and and lower contribution rates.

During the three and nine months ended March 31, 2024, franchise rent expense decreased $2.8 million and $13.3 million, or 10.7% and 15.5%, respectively, primarily due to the decrease in franchise salon count and franchisees signing their own leases.

Company-owned salon expense, for the three and nine months ended March 31, 2024, decreased $0.6 million and $3.0 million, or 28.0% and 41.0%, respectively, primarily due to the reduction in company-owned salon count.

Depreciation and amortization was $1.0 million in the three months ended March 31, 2024 and 2023. Depreciation and amortization decreased $4.0 million, or 66.0%, during the nine months ended March 31, 2024. The decrease was primarily due to a $2.6 million accelerated depreciation charge related to the consolidation of office space within the Company's corporate headquarters in the second quarter of fiscal year 2023 and the decrease in company-owned salon count.

In the three months ended March 31, 2024 and 2023, there were no significant long-lived asset impairment charges. In the nine months ended March 31, 2024, the Company recorded a long-lived asset impairment charge of $0.2 million related to the right-of-use asset associated with the corporate office lease. There were no similar charges recorded in the nine months ended March 31, 2023.

The $1.4 million and $5.4 million increase in interest expense for the three and nine months ended March 31, 2024, respectively, was primarily due to a higher weighted average interest rate on outstanding borrowings. Cash interest increased $0.7 million and $3.3 million in the three and nine months ended March 31, 2024, respectively.

Other, net decreased $0.7 million for the three months ended March 31, 2024, primarily due to fluctuations in the Canadian dollar. Other, net decreased $1.4 million in the nine months ended March 31, 2024, primarily due to a $1.1 million grant received in fiscal year 2023 from the state of North Carolina related to COVID-19 relief.

During the three months ended March 31, 2024, the Company recognized a tax expense of $0.1 million, with a corresponding effective tax rate of (2.3)%, as compared to recognizing a tax benefit of $0.2 million during the three months ended March 31, 2023, for an effective tax rate of 10.0%. During the nine months ended March 31, 2024, the Company recognized a tax benefit of $0.2 million, with a corresponding effective tax rate of 8.3%, as compared to recognizing a tax benefit of $0.2 million, with a corresponding effective tax rate of 3.2% during the nine months ended March 31, 2023. See Note 5 to the unaudited Condensed Consolidated Financial Statements.

Income from discontinued operations decreased $0.4 million in the three months ended March 31, 2024 due to sales proceeds in the prior year of $0.5 million. Income from discontinued operations decreased $1.9 million in the nine months ended March 31, 2024, due primarily to the recognition of $5.0 million of sales proceeds in fiscal year 2023 compared to $2.0 million in fiscal year 2024. See Note 3 to the unaudited Condensed Consolidated Financial Statements.

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