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REGIS CORP - Quarter Report: 2019 December (Form 10-Q)



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 2019
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from             to            
Commission file number 1-12725
Regis Corporation
(Exact name of registrant as specified in its charter)
Minnesota
 
41-0749934
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
7201 Metro Boulevard
Edina
Minnesota
 
55439
(Address of principal executive offices)
 
(Zip Code)
 (952) 947-7777
(Registrant’s telephone number, including area code) 
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to be submit and post such files). Yes ☒ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
☒
Accelerated filer 
☐

Non-accelerated filer (Do not check if a smaller reporting company)
☐

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 January 29, 2020:
Common Stock, $.05 par value
 
35,566,201
Class
 
Number of Shares
 




REGIS CORPORATION
 
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
REGIS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
(Dollars in thousands, except share data)
 
 
 
December 31,
2019
 
June 30,
2019
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
49,783

 
$
70,141

Receivables, net
 
27,756

 
30,143

Inventories
 
68,413

 
77,322

Other current assets
 
32,458

 
33,216

Total current assets
 
178,410

 
210,822

 
 
 
 
 
Property and equipment, net
 
68,917

 
78,090

Goodwill (Note 9)
 
293,019

 
345,718

Other intangibles, net (Note 9)
 
8,159

 
8,761

Right of use asset (Note 10)
 
911,948

 
—

Other assets
 
38,144

 
34,170

Non-current assets held for sale (Note 1)
 
—

 
5,276

Total assets
 
$
1,498,597

 
$
682,837

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
55,587

 
$
47,532

Accrued expenses
 
59,707

 
80,751

Short-term lease liability (Note 10)
 
156,154

 
—

Total current liabilities
 
271,448

 
128,283

 
 
 
 
 
Long-term debt, net
 
60,000

 
90,000

Long-term lease liability (Note 10)
 
767,624

 
—

Long-term financing liabilities
 
28,485

 
28,910

Other noncurrent liabilities
 
95,979

 
111,399

Total liabilities
 
1,223,536

 
358,592

Commitments and contingencies (Note 7)
 


 


Shareholders’ equity:
 
 

 
 

Common stock, $0.05 par value; issued and outstanding 35,563,611 and 36,869,249 common shares at December 31, 2019 and June 30, 2019 respectively
 
1,778

 
1,843

Additional paid-in capital
 
21,230

 
47,152

Accumulated other comprehensive income
 
9,480

 
9,342

Retained earnings
 
242,573

 
265,908

Total shareholders’ equity
 
275,061

 
324,245

Total liabilities and shareholders’ equity
 
$
1,498,597

 
$
682,837

_______________________________________________________________________________ 

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

3


REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
For The Three and Six Months Ended December 31, 2019 and 2018
(Dollars and shares in thousands, except per share data amounts)
 
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
 
Service
 
$
101,805

 
$
190,419

 
$
243,746

 
$
398,267

Product
 
43,983

 
61,649

 
89,639

 
119,240

Royalties and fees
 
29,347

 
22,603

 
57,364

 
44,999

Franchise rental income (Note 10)
 
33,630

 
—

 
65,054

 
—

Total revenue
 
208,765

 
274,671

 
455,803

 
562,506

Operating expenses:
 
 
 
 
 
 
 
 
Cost of service
 
67,358

 
114,931

 
157,840

 
236,428

Cost of product
 
27,258

 
36,350

 
53,585

 
68,531

Site operating expenses
 
26,330

 
35,563

 
59,272

 
72,384

General and administrative
 
32,691

 
45,836

 
73,316

 
93,563

Rent
 
20,495

 
34,642

 
44,759

 
70,620

Franchise rent expense
 
33,630

 
—

 
65,054

 
—

Depreciation and amortization
 
7,747

 
8,900

 
17,127

 
19,102

TBG mall location restructuring (Note 3)
 
722

 
—

 
2,222

 
—

Total operating expenses
 
216,231

 
276,222

 
473,175

 
560,628

 
 
 
 
 
 
 
 


Operating (loss) income
 
(7,466
)
 
(1,551
)
 
(17,372
)
 
1,878

 
 
 
 
 
 
 
 
 
Other (expense) income:
 
 
 
 
 
 
 
 
Interest expense
 
(1,464
)
 
(1,072
)
 
(2,903
)
 
(2,078
)
(Loss) gain from sale of salon assets to franchisees, net
 
(5,692
)
 
2,865

 
(11,552
)
 
(1,095
)
Interest income and other, net
 
4,346

 
629

 
4,517

 
989

 
 
 
 
 
 
 
 
 
(Loss) income from continuing operations before income taxes
 
(10,276
)
 
871

 
(27,310
)
 
(306
)
 
 
 
 
 
 
 
 
 
Income tax benefit (expense)
 
795

 
(454
)
 
3,651

 
260

 
 
 
 
 
 
 
 
 
(Loss) income from continuing operations
 
(9,481
)

417

 
(23,659
)
 
(46
)
 
 
 
 
 
 
 
 
 
Income from discontinued operations, net of taxes (Note 3)
 
79

 
6,113

 
452

 
5,849

 
 
 
 
 
 
 
 
 
Net (loss) income
 
$
(9,402
)
 
$
6,530

 
$
(23,207
)
 
$
5,803

 
 
 
 
 
 
 
 
 
Net (loss) income per share:
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
(Loss) income from continuing operations
 
$
(0.26
)
 
$
0.01

 
$
(0.66
)
 
$
0.00

Income from discontinued operations
 
0.00

 
0.14

 
0.01

 
0.13

Net (loss) income per share, basic (1)
 
$
(0.26
)
 
$
0.15

 
$
(0.64
)
 
$
0.13

Diluted:
 
 
 
 
 
 
 
 
(Loss) income from continuing operations
 
$
(0.26
)
 
$
0.01

 
$
(0.66
)
 
$
0.00

Income from discontinued operations
 
0.00

 
0.14

 
0.01

 
0.13

Net (loss) income per share, diluted (1)
 
$
(0.26
)
 
$
0.15

 
$
(0.64
)
 
$
0.13

 
 
 
 
 
 
 
 
 
Weighted average common and common equivalent shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
35,798

 
43,619

 
36,028

 
44,175

Diluted
 
35,798

 
44,479

 
36,028

 
44,175

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

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

4


REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME (Unaudited)
For The Three and Six Months Ended December 31, 2019 and 2018
(Dollars in thousands)
 
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
 
2019
 
2018
 
2019
 
2018
Net (loss) income
 
$
(9,402
)
 
$
6,530

 
$
(23,207
)
 
$
5,803

Foreign currency translation adjustments
 
541

 
(2,592
)
 
138

 
(1,511
)
Comprehensive (loss) income
 
$
(8,861
)
 
$
3,938

 
$
(23,069
)
 
$
4,292

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

5


REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited)
For the Three and Six Months Ended December 31, 2019 and 2018
(Dollars in thousands)
 
 
Three Months Ended December 31, 2019
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
Total
 
 
Shares
 
Amount
 
 
 
 
Balance, September 30, 2019
 
35,548,036

 
$
1,777

 
$
20,880

 
$
8,939

 
$
252,143

 
$
283,739

Net loss
 
—

 
—

 
—

 
—

 
(9,402
)
 
(9,402
)
Foreign currency translation
 
—

 
—

 
—

 
541

 
—

 
541

Exercise of SARs
 
1,500

 
—

 
28

 
—

 
—

 
28

Stock-based compensation
 
—

 
—

 
332

 
—

 
—

 
332

Net restricted stock activity
 
14,075

 
1

 
(10
)
 
—

 
—

 
(9
)
Minority interest
 
—

 
—

 
—

 
—

 
(168
)
 
(168
)
Balance, December 31, 2019
 
35,563,611

 
$
1,778

 
$
21,230

 
$
9,480

 
$
242,573

 
$
275,061

 
 
Three Months Ended December 31, 2018
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
Total
 
 
Shares
 
Amount
 
 
 
 
Balance, September 30, 2018
 
44,328,127

 
$
2,217

 
$
175,983

 
$
10,737

 
$
279,420

 
$
468,357

Net income
 
—

 
—

 
—

 
—

 
6,530

 
6,530

Foreign currency translation
 
—

 
—

 
—

 
(2,592
)
 
—

 
(2,592
)
Stock repurchase program
 
(2,879,414
)
 
(144
)
 
(48,849
)
 
—

 
—

 
(48,993
)
Exercise of SARs
 
4,531

 
—

 
(63
)
 
—

 
—

 
(63
)
Stock-based compensation
 
—

 
—

 
2,219

 
—

 
—

 
2,219

Net restricted stock activity
 
19,224

 
1

 
(326
)
 
—

 
—

 
(325
)
Minority interest
 
—

 
—

 
—

 
—

 
(123
)
 
(123
)
Balance, December 31, 2018
 
41,472,468

 
$
2,074

 
$
128,964

 
$
8,145

 
$
285,827

 
$
425,010































6


REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited)
For the Three and Six Months Ended December 31, 2019 and 2018 (Continued)
(Dollars in thousands)


 
 
Six Months Ended December 31, 2019
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
Total
 
 
Shares
 
Amount
 
 
 
 
Balance, June 30, 2019
 
36,869,249

 
$
1,843

 
$
47,152

 
$
9,342

 
$
265,908

 
$
324,245

Net loss
 
—

 
—

 
—

 
—

 
(23,207
)
 
(23,207
)
Foreign currency translation
 
—

 
—

 
—

 
138

 
—

 
138

Stock repurchase program
 
(1,504,000
)
 
(75
)
 
(26,281
)
 
—

 
—

 
(26,356
)
Exercise of SARs
 
1,776

 
—

 
28

 
—

 
—

 
28

Stock-based compensation
 
—

 
—

 
2,139

 
—

 
—

 
2,139

Net restricted stock activity
 
196,586

 
10

 
(1,808
)
 
—

 
—

 
(1,798
)
Minority interest
 
—

 
—

 
—

 
—

 
(128
)
 
(128
)
Balance, December 31, 2019
 
35,563,611

 
$
1,778

 
$
21,230

 
$
9,480

 
$
242,573

 
$
275,061


 
 
Six Months Ended December 31, 2018
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
Total
 
 
Shares
 
Amount
 
 
 
 
Balance, June 30, 2018
 
45,258,571

 
$
2,263

 
$
194,436

 
$
9,656

 
$
280,083

 
$
486,438

Net income
 
—

 
—

 
—

 
—

 
5,803

 
5,803

Foreign currency translation
 
—

 
—

 
—

 
(1,511
)
 
—

 
(1,511
)
Stock repurchase program
 
(3,973,093
)
 
(199
)
 
(68,132
)
 
—

 
—

 
(68,331
)
Exercise of SARs
 
8,332

 
—

 
(105
)
 
—

 
—

 
(105
)
Stock-based compensation
 
—

 
—

 
4,552

 
—

 
—

 
4,552

Net restricted stock activity
 
178,658

 
10

 
(1,787
)
 
—

 
—

 
(1,777
)
Minority interest
 
—

 
—

 
—

 
—

 
(59
)
 
(59
)
Balance, December 31, 2018
 
41,472,468

 
$
2,074

 
$
128,964

 
$
8,145

 
$
285,827

 
$
425,010

_______________________________________________________________________________ 

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

7


REGIS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
For The Six Months Ended December 31, 2019 and 2018
(Dollars in thousands)
 
 
Six Months Ended December 31,
 
 
2019
 
2018
Cash flows from operating activities:
 
 

 
 

Net (loss) income
 
$
(23,207
)
 
$
5,803

Adjustments to reconcile net (loss) income to net cash used in operating activities:
 
 
 
 

Non-cash adjustments related to discontinued operations
 
(586
)
 
176

Depreciation and amortization
 
14,484

 
16,799

Deferred income taxes
 
(5,227
)
 
(7,915
)
Gain from sale of company headquarters, net
 
(3,990
)
 
—

Loss from sale of salon assets to franchisees, net
 
11,552

 
1,095

Salon asset impairments
 
2,643

 
2,303

Stock-based compensation
 
2,139

 
4,552

Amortization of debt discount and financing costs
 
138

 
138

Other non-cash items affecting earnings
 
(243
)
 
(352
)
Changes in operating assets and liabilities, excluding the effects of asset sales (1)
 
(17,032
)
 
(33,223
)
Net cash used in operating activities
 
(19,329
)
 
(10,624
)
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 

Capital expenditures
 
(17,576
)
 
(16,804
)
Proceeds from sale of assets to franchisees
 
69,414

 
24,050

Costs associated with sale of salon assets to franchisees
 
(1,550
)
 
—

Proceeds from company-owned life insurance policies
 
—

 
24,617

Proceeds from sale of company headquarters
 
8,996

 
—

Net cash provided by investing activities
 
59,284

 
31,863

 
 
 
 
 
Cash flows from financing activities:
 
 
 
 

Repayment of long-term debt
 
(30,000
)
 
—

Repurchase of common stock
 
(28,246
)
 
(65,136
)
Taxes paid for shares withheld
 
(1,809
)
 
(2,305
)
Net proceeds from sale and leaseback transaction
 
—

 
18,068

Sale and leaseback payments
 
(480
)
 
—

Net cash used in financing activities
 
(60,535
)
 
(49,373
)
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
122

 
(174
)
 
 
 
 
 
Decrease in cash, cash equivalents, and restricted cash
 
(20,458
)
 
(28,308
)
 
 
 
 
 
Cash, cash equivalents and restricted cash:
 
 
 
 

Beginning of period
 
92,379

 
148,774

End of period
 
$
71,921

 
$
120,466

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

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

8


REGIS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.
BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
The unaudited interim Condensed Consolidated Financial Statements of Regis Corporation (the "Company") as of December 31, 2019 and for the three and six months ended December 31, 2019 and 2018, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of December 31, 2019 and its consolidated results of operations, comprehensive (loss) income, changes in equity and cash flows for the interim periods. Adjustments consist only of normal recurring items, except for any discussed in the notes below. The results of operations and cash flows for any interim period are not necessarily indicative of results of operations and cash flows for the full year.
 
The accompanying interim unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP). The unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2019 and other documents filed or furnished with the SEC during the current fiscal year.

Goodwill:

As of December 31, 2019 and June 30, 2019, the Franchise reporting unit had $228.1 and $227.9 million of goodwill and the Company-owned reporting unit had $65.0 and $117.8 million of goodwill, respectively. See Note 9 to the unaudited interim 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 amount. An interim impairment analysis was not required in the six months ended December 31, 2019.
The Company performs its annual impairment assessment as of April 30. For the fiscal year 2019 annual impairment assessment, due to the transformational efforts completed during the year, the Company elected to forgo the optional Step 0 assessment and performed the quantitative impairment analysis on the Franchise and Company-owned reporting units. The Company compared the carrying value of the reporting units, including goodwill, to their estimated fair value. The results of these assessments indicated that the estimated fair value of the Company's reporting units exceeded their carrying value. The Franchise reporting unit had substantial headroom and the Company-owned reporting unit had headroom of approximately 20%. The fair value of the Company-owned reporting unit was determined based on a discounted cash flow analysis. The key assumptions used in determining fair value were the number and pace of salons sold to franchisees and proceeds from salon sales. Assumptions were based on historical financial performance and trends, historical salon sale proceeds and estimated future salon sale activities. The preparation of the fair value estimate includes uncertain factors and requires significant judgments and estimates which are subject to change.
There are a number of uncertain factors or events that exist which may result in a future triggering event and require an interim impairment analysis with respect to the carrying value of goodwill for the Company-owned reporting unit prior to the annual assessment. These internal and external factors include but are not limited to the following:
•
Changes in the company-owned salon strategy,
•
Salon closures or other restructuring,
•
Franchise expansion and sales opportunities,
•
Future market earnings multiples deterioration,
•
Financial performance falls short of projections due to internal operating factors,
•
Economic recession,
•
Reduced salon traffic,
•
Deterioration of industry trends,
•
Increased competition,
•
Inability to reduce general and administrative expenses as company-owned salon count potentially decreases, and
•
Other factors causing cash flow to deteriorate.


9


If the triggering event analysis indicates the fair value of the Company-owned reporting unit has potentially fallen below more than the 20% headroom, the Company may be required to perform an updated impairment assessment which may result in a non-cash impairment charge to reduce the carrying value of goodwill.
Assessing goodwill for impairment requires management to make assumptions and to apply judgment, including forecasting future sales and expenses, and selecting appropriate discount rates, which can be affected by economic conditions and other factors that can be difficult to predict. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions it uses to calculate impairment losses of goodwill. However, if actual results are not consistent with the estimates and assumptions used in the calculations, or if there are significant changes to the Company's planned strategy for company-owned salons, the Company may be exposed to future impairment losses that could be material.
Non-Current Assets Held for Sale:

In March 2019, the Company announced that it had entered into a ten-year lease for a new corporate headquarters and would be selling the land and buildings currently used for its headquarters. The non-current assets held for sale represent the net book value of the land of $1.7 million and buildings of $3.6 million, as of June 30, 2019. The sale was completed in December 2019 for proceeds of $9.0 million, resulting in a net gain on sale of $4.0 million, which was recorded in Interest income and other, net on the Condensed Consolidated Statement of Operations.

Accounting Standards Recently Adopted by the Company:

Leases

The Company adopted ASU 2016-02, "Leases (Topic 842)” and all subsequent ASUs that modified Topic 842 as of July 1, 2019 using the modified retrospective method and elected the option to not restate comparative periods in the year of adoption. The Company also elected the package of practical expedients that do not require reassessment of whether existing contracts are or contain leases, lease classifications or initial direct costs. The Company has also made an accounting policy election to keep leases with an initial term of 12 months or less off the Balance Sheet.

Under adoption of Topic 842, the Company recorded a Right of Use Asset and Lease Liability of $980.8 and $993.7 million, respectively. The difference between the assets and liabilities are attributable to the reclassification of certain existing lease-related assets and liabilities as an adjustment to the right of use assets. The Lease Liability reflects the present value of the Company's estimated future minimum lease payments over the lease term, which includes one option period, as options are reasonably assured of being exercised, are discounted using a collateralized incremental borrowing rate. The decrease in the Right of Use Asset and Lease Liability from July 1, 2019 to December 31, 2019 was due to lease modifications and salon closures.

The accounting guidance for lessors remained largely unchanged from previous guidance, with the exception of the presentation of rent payments that the Company passes through to franchisees (lessees). Historically, these costs have been recorded on a net basis in the unaudited Condensed Consolidated Statements of Operations, but are now presented on a gross basis upon adoption of the new guidance. The adoption of the new guidance resulted in the recognition of franchise rental income and rent expense of $33.6 and $65.1 million during the three and six months ended December 31, 2019, respectively. See Note 10 for further information about our transition to Topic 842 and the newly required disclosures.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI), which provides the option to reclassify to retained earnings the tax effects resulting from the Tax Act related to items in AOCI. The Company adopted this guidance on July 1, 2019 and did not elect to reclassify the income tax effects from the Tax Act from AOCI to retained earnings as the impact was not material.





10


2.    REVENUE RECOGNITION:
    
Revenue Recognition and Deferred Revenue:

Revenue recognized at point of sale
Company-owned salon revenues are recognized at the time when the services are provided. Product revenues for company-owned salons are recognized when 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 customer. 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 by the Company to franchisees are included within product revenues in the unaudited Condensed Consolidated Statement of Operations and recorded at the time product is delivered to the franchisee. Payment for franchisee product revenue is generally collected within 30 to 90 days of delivery.

Revenue recognized over time
Franchise revenues primarily include royalties, advertising fund cooperatives fees, franchise fees and other fees. 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 revenue is billed and collected monthly in arrears. Advertising fund revenues and expenditures, which must be spent on marketing and related activities per the franchise agreements, are recorded on a gross basis within the unaudited Condensed Consolidated Statement of Operations. This increases both the gross amount of reported franchise revenue and site operating 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 opening and is then recognized over the term of the franchise agreement, typically ten years. Franchise rental income is a result of the Company signing leases on behalf of franchisees and entering into a sublease arrangement with the franchisee. The Company recognizes franchise rental income and expense when it is due to the landlord.

The following table disaggregates revenue by timing of revenue recognition and is reconciled to reportable segment revenues as follows:
 
 
Three Months Ended December 31, 2019
 
Three Months Ended December 31, 2018
 
 
Franchise
 
Company-owned
 
Franchise
 
Company-owned
 
 
(Dollars in thousands)
Revenue recognized at a point in time:
 
 
 
 
 
 
 
 
Service
 
$
—

 
$
101,805

 
$
—

 
$
190,419

Product
 
16,864

 
27,119

 
17,818

 
43,831

Total revenue recognized at a point in time
 
$
16,864

 
$
128,924

 
$
17,818

 
$
234,250

 
 
 
 
 
 
 
 
 
Revenue recognized over time:
 
 
 
 
 
 
 
 
Royalty and other franchise fees
 
$
18,644

 
$
—

 
$
14,736

 
$
—

Advertising fund fees
 
10,703

 
—

 
7,867

 
—

Franchise rental income
 
33,630

 
—

 
—

 
—

Total revenue recognized over time
 
62,977

 
—

 
22,603

 
—

Total revenue
 
$
79,841

 
$
128,924

 
$
40,421

 
$
234,250


11


 
 
Six Months Ended December 31, 2019
 
Six Months Ended December 31, 2018
 
 
Franchise
 
Company-owned
 
Franchise
 
Company-owned
 
 
(Dollars in thousands)
Revenue recognized at a point in time:
 
 
 
 
 
 
 
 
Service
 
$
—

 
$
243,746

 
$
—

 
$
398,267

Product
 
29,969

 
59,670

 
33,447

 
85,793

Total revenue recognized at a point in time
 
$
29,969

 
$
303,416

 
$
33,447

 
$
484,060

 
 
 
 
 
 
 
 
 
Revenue recognized over time:
 
 
 
 
 
 
 
 
Royalty and other franchise fees
 
$
36,235

 
$
—

 
$
29,156

 
$
—

Advertising fund fees
 
21,129

 
—

 
15,843

 
—

Franchise rental income
 
65,054

 
—

 
—

 
—

Total revenue recognized over time
 
122,418

 
—

 
44,999

 
—

Total revenue
 
$
152,387

 
$
303,416

 
$
78,446

 
$
484,060


Information about receivables, broker fees and deferred revenue subject to the amended revenue recognition guidance is as follows:
 
 
December 31,
2019
 
June 30,
2019
 
Balance Sheet Classification
 
 
(Dollars in thousands)
 
 
Receivables from contracts with customers, net
 
$
22,512

 
$
23,210

 
Accounts receivable, net
Broker fees
 
$
20,384

 
$
17,819

 
Other assets
 
 
 
 
 
 
 
Deferred revenue:
 
 
 
 
 
 
     Current
 
 
 
 
 
 
Gift card liability
 
$
3,461

 
$
3,050

 
Accrued expenses
Deferred franchise fees unopened salons
 
217

 
193

 
Accrued expenses
Deferred franchise fees open salons
 
5,042

 
4,164

 
Accrued expenses
Total current deferred revenue
 
$
8,720

 
$
7,407

 
 
     Non-current
 
 
 
 
 
 
Deferred franchise fees unopened salons
 
$
12,860

 
$
15,173

 
Other non-current liabilities
Deferred franchise fees open salons
 
31,555

 
24,194

 
Other non-current liabilities
Total non-current deferred revenue
 
$
44,415

 
$
39,367

 
 

Receivables relate primarily to payments due for royalties, franchise fees, advertising fees, franchise product sales and sales of salon services and product paid by credit card. The receivables balance is presented net of an allowance for expected losses (i.e., doubtful accounts), primarily related to receivables from franchisees. As of December 31, 2019 and June 30, 2019, the balance in the allowance for doubtful accounts was $1.9 and $2.0 million, respectively. 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 agreement.

The following table is a rollforward of the broker fee balance for the periods indicated (in thousands):
Balance as of June, 30, 2019
 
$
17,819

Additions
 
3,938

Amortization
 
(1,341
)
Write-offs
 
(32
)
Balance as of December, 31, 2019
 
$
20,384




12


Deferred revenue includes the gift card liability and deferred franchise fees for unopened salons and open salons. Gift card revenue for the three months ended December 31, 2019 and 2018 was $0.7 and $1.1 million, respectively, and for the six months ended December 31, 2019 and 2018 was $1.5 and $2.2 million, respectively. Deferred franchise fees related to open salons are generally recognized on a straight-line basis over the term of the franchise agreement. Franchise fee revenue for the three months ended December 31, 2019 and 2018 was $1.3 and $0.8 million, respectively, and for the six months ended December 31, 2019 and 2018 was $2.4 and $1.7 million, respectively. Estimated revenue expected to be recognized in the future related to deferred franchise fees for open salons as of December 31, 2019 is as follows (in thousands):

Remainder of 2020
 
$
2,364

2021
 
4,930

2022
 
4,810

2023
 
4,633

2024
 
4,398

Thereafter
 
15,462

Total
 
$
36,597





13


3.
TBG RESTRUCTURING AND DISCONTINUED OPERATIONS:

In October 2017, the Company sold substantially all of its mall-based salon business in North America, representing 858 salons, to The Beautiful Group (TBG), who operated these locations as franchise locations until June 2019. In June 2019, the Company entered into a settlement agreement with TBG regarding the North America salons, which, among other things, substituted the master franchise agreement for a license agreement. The Company classified the results of its mall-based business as discontinued operations in the Condensed Consolidated Statement of Operations. Included in discontinued operations in the fiscal years presented are adjustments to actuarial assumptions related to the discontinued operations and income tax benefits associated with the wind-down and transfer of legal entities in fiscal year 2019. Other than the items presented in the Consolidated Statement of Cash Flows, there were no other significant non-cash operating activities or non-cash investing activities related to discontinued operations for the six months ended December 31, 2019 and 2018. 

In the second quarter of fiscal year 2020, TBG transferred 207 of its North American mall-based salons to the Company. The 207 North American mall-based salons transferred were the salons that the Company was the guarantor of the lease obligation. The transfer of the 207 mall-based salons occurred on December 31, 2019 so the operational results of these mall-based salons are not included on the Condensed Consolidated Statement of Operations. Also, the assets acquired and liabilities assumed were not material to the Condensed Consolidated Balance Sheet. Professional fees and other restructuring related charges of $0.7 and $2.2 million in the three and six months ended December 31, 2019, respectively,were recorded in the TBG restructuring line on the Condensed Consolidated Statement of Operations. As of December 31, 2019, prior to any mitigation efforts which may be available, the Company remains liable for up to approximately $30.0 million related to its mall-based salon lease commitments, an $11 million reduction from June 30, 2019.



4.
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 restricted stock awards (RSAs), 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.

For the three and six months ended December 31, 2019, there were 1,322,308 and 1,338,634, respectively, and for the six months ended December 31, 2018 there were 903,107 common stock equivalents of dilutive common stock excluded in the diluted earnings per share calculations due to the net loss from continuing operations. For the three months ended December 31, 2018, there were 859,598 common stock equivalents of dilutive common stock included in the diluted earnings per share calculations due to the net income from continuing operations.

The computation of weighted average shares outstanding, assuming dilution, excluded 66,151 and 734,526 of stock-based awards during the three months ended December 31, 2019 and 2018, respectively, and 77,514 and 520,348 of stock-based awards during the six months ended December 31, 2019 and 2018, respectively, as they were not dilutive under the treasury stock method.


14


5.
SHAREHOLDERS’ EQUITY:
 
Stock-Based Employee Compensation:

During the three and six months ended December 31, 2019, the Company granted various equity awards including restricted stock units (RSUs) and performance-based restricted stock units (PSUs).

A summary of equity awards granted is as follows:
 
 
For the Three Months Ended December 31, 2019
 
For the Six Months Ended December 31, 2019
Restricted stock units
 
7,564

 
193,640

Performance-based restricted stock units
 
22,694

 
73,712



The RSUs granted to employees during the three and six months ended December 31, 2019 vest in equal amounts over a three-year period subsequent to the grant date, cliff vest after a three-year period or cliff vest after a five-year period subsequent to the grant date.

The PSUs granted to employees have a three-year performance period ending June 30, 2022 linked to the Company's stock price reaching a specified volume weighted average closing price for a 50 day period that ends on June 30, 2022. The PSUs granted have a maximum vesting percentage of 200% based on the level of performance achieved for the respective award.

Total compensation cost for stock-based payment arrangements totaling $0.3 and $2.2 million for the three months ended December 31, 2019 and 2018, respectively, and $2.1 and $4.6 million for the six months ended December 31, 2019 and 2018, respectively, was recorded within general and administrative expense on the Condensed Consolidated Statement of Operations.

Share Repurchases:
 
During the six months ended December 31, 2019, the Company repurchased 1.5 million shares for $26.4 million under a previously approved stock repurchase program. At December 31, 2019, $54.6 million remains outstanding under the approved stock repurchase program.

6. 
INCOME TAXES:
 
A summary of income tax benefit (expense) and corresponding effective tax rates is as follows:
 
 
For the Three Months Ended December 31,
 
For the Six Months Ended December 31,
 
 
2019
 
2018
 
2019
 
2018
 
 
(Dollars in thousands)
Income tax benefit (expense)
 
$
795

 
$
(454
)
 
$
3,651

 
$
260

Effective tax rate
 
7.7
%
 
52.1
%
 
13.4
%
 
85.0
%


The recorded tax provisions and effective tax rates for the three and six months ended December 31, 2019 were different than normally expected primarily due to the impact of the deferred tax valuation allowance and global intangible low-taxed income ("GILTI"). The recorded tax provision and effective tax rate for the three and six months ended December 31, 2018 were different than normally expected primarily due to the impact of the deferred tax valuation allowance.

The Company is no longer subject to IRS examinations for years before 2013. Furthermore, with limited exceptions, the Company is no longer subject to state and international income tax examinations by tax authorities for years before 2012.

7. 
COMMITMENTS AND CONTINGENCIES:
 
The Company is a defendant in various lawsuits and claims arising out of the normal course of business. Like certain other large retail employers, the Company has been faced with 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 in the future, incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period.


15


8.    CASH, CASH EQUIVALENTS AND RESTRICTED CASH:

The table below reconciles the cash and cash equivalents balances and restricted cash balances, recorded in other current assets from the unaudited Condensed Consolidated Balance Sheet to the amount of cash, cash equivalents and restricted cash reported on the unaudited Condensed Consolidated Statement of Cash flows:
 
December 31,
2019
 
June 30,
2019
 
(Dollars in thousands)
Cash and cash equivalents
$
49,783

 
$
70,141

Restricted cash, included in Other current assets (1)
22,138

 
22,238

Total cash, cash equivalents and restricted cash
$
71,921

 
$
92,379

_______________________________________________________________________________
(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.

9.    GOODWILL AND OTHER INTANGIBLES:

The table below contains details related to the Company's goodwill:
 
 
Franchise
 
Company-owned
 
Consolidated
 
 
(Dollars in thousands)
Goodwill, net at June 30, 2019
 
$
227,928

 
$
117,790

 
$
345,718

Translation rate adjustments
 
139

 
(73
)
 
66

Derecognition related to sale of salon assets to franchisees (1)
 
—

 
(52,765
)
 
(52,765
)
Goodwill, net at December 31, 2019
 
$
228,067

 
$
64,952

 
$
293,019

_______________________________________________________________________________
(1)
Goodwill is derecognized for salons sold to franchisees with positive cash flows. The amount of goodwill derecognized is determined by a fraction (the numerator of which is the trailing-twelve months EBITDA of the salon being sold and the denominator of which is the estimated annualized EBITDA of the Company-owned reporting unit) that is applied to the total goodwill balance of the Company-owned reporting unit.

The table below presents other intangible assets:
 
 
December 31, 2019
 
June 30, 2019
 
 
Cost (1)
 
Accumulated
Amortization (1)
 
Net
 
Cost (1)
 
Accumulated
Amortization (1)
 
Net
 
 
(Dollars in thousands)
Amortized intangible assets:
 
 

 
 

 
 

 
 

 
 

 
 

Brand assets and trade names
 
$
6,938

 
$
(3,786
)
 
$
3,152

 
$
6,909

 
$
(3,659
)
 
$
3,250

Franchise agreements
 
9,817

 
(8,250
)
 
1,567

 
9,783

 
(8,057
)
 
1,726

Lease intangibles
 
13,495

 
(10,406
)
 
3,089

 
13,490

 
(10,065
)
 
3,425

Other
 
884

 
(533
)
 
351

 
883

 
(523
)
 
360

 
 
$
31,134

 
$
(22,975
)
 
$
8,159

 
$
31,065

 
$
(22,304
)
 
$
8,761


_______________________________________________________________________________
(1) 
The change in the gross carrying value and accumulated amortization of other intangible assets is impacted by foreign currency.


16


10.    RIGHT OF USE ASSET AND LEASE LIABILITIES

At contract inception, the Company determines whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides the Company the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, the Company considers it to be, or contain, a lease. The Company leases its company-owned salons and some of its corporate facilities under operating leases. The original terms of the salon leases range from 1 to 20 years with many leases renewable for additional 5 to 10 year terms at the option of the Company. 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 expense includes the following:

 
For the Three Months Ended December 31,
 
For the Six Months Ended December 31,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in thousands)
Minimum rent
$
16,937

 
$
28,859

 
$
36,498

 
58,774

Percentage rent based on sales
550

 
1,052

 
1,847

 
2,103

Real estate taxes and other expenses
3,008

 
4,731

 
6,414

 
9,743

 
$
20,495

 
$
34,642

 
$
44,759

 
$
70,620



The Company also leases the premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees. These leases, generally with terms of approximately 5 years, are expected to be renewed on expiration. All additional lease costs are passed through to the franchisees. Upon adopting Topic 842, the Company now records the rental payments due from franchisees as franchise rental income and the corresponding amounts owed to landlords as franchise rent expense on the Condensed Consolidated Statement of Operations. For the three and six months ended December 31, 2019, franchise rental income was $33.6 and $65.1 million, respectively, and franchise rent expense was $33.6 and $65.1 million, respectively.

For company-owned and franchise salon operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date. The Right of Use (ROU) asset is initially and subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, less any accrued lease payments and unamortized lease incentives received, if any. Lease expense for lease payments is recognized on a straight-line basis over the lease term. 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 allocated to the lease liability.

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 original lease term. The weighted average remaining lease term was 6.82 years and the weighted-average discount rate was 3.95 percent for all salon operating leases as of December 31, 2019.

17


As of December 31, 2019, future operating lease commitments to be paid and received by the Company were as follows:
Fiscal Year
Leases for Franchise Salons
 
Leases for Company-owned Salons
 
Corporate Leases
 
Total Operating Lease Payments
 
Sublease Income To Be Received From Franchisees
 
Net Rent Commitments
Remainder of 2020
$
59,771

 
$
36,809

 
$
335

 
$
96,915

 
$
(59,771
)
 
$
37,144

2021
113,224

 
64,907

 
1,781

 
179,912

 
(113,224
)
 
66,688

2022
103,599
 
55,214

 
1,410

 
160,223

 
(103,599
)
 
56,624

2023
93,725

 
48,589

 
1,447

 
143,761

 
(93,725
)
 
50,036

2024
84,384

 
43,417

 
1,484

 
129,285

 
(84,384
)
 
44,901

Thereafter
224,482

 
111,327

 
9,339

 
345,148

 
(224,482
)
 
120,666

Total future obligations
$
679,185

 
$
360,263

 
$
15,796

 
$
1,055,244

 
$
(679,185
)
 
$
376,059

Less amounts representing interest
84,680

 
43,723

 
3,063

 
131,466

 
 
 
 
Present value of lease liabilities
$
594,505

 
316,540

 
12,733

 
923,778

 
 
 
 
Less current lease liabilities
96,249

 
59,218

 
687

 
156,154

 
 
 
 
Long-term lease liabilities
$
498,256

 
$
257,322

 
$
12,046

 
$
767,624

 
 
 
 



11.
FINANCING ARRANGEMENTS:

The Company’s long-term debt consists of the following:

Revolving Credit Facility
 
 
Maturity Date
 
Interest Rate
 
December 31,
2019
 
June 30,
2019
 
 
(Fiscal Year)
 
 
 
(Dollars in thousands)
Revolving credit facility
 
2023
 
3.65%
 
$
60,000

 
$
90,000



As of December 31, 2019 and June 30, 2019, the Company has $60.0 and $90.0 million, respectively, of outstanding borrowings under a $295.0 million revolving credit facility. At December 31, 2019 and June 30, 2019, the Company has outstanding standby letters of credit under the revolving credit facility of $21.5 million, primarily related to the Company's self-insurance program. The unused available credit under the facility was $213.5 and $183.5 million, as of December 31, 2019 and June 30, 2019, respectively. Amounts outstanding under the revolving credit facility are due at maturity in March 2023.
















18


Sale and Leaseback Transaction

The Company’s long-term financing liabilities consists of the following:
 
 
Maturity Date
 
Interest Rate
 
December 31,
2019
 
June 30,
2019
 
 
(Fiscal Year)
 
 
 
(Dollars in thousands)
Financial liability - Salt Lake City Distribution Center
 
2034
 
3.30%
 
$
17,055

 
$
17,354

Financial liability - Chattanooga Distribution Center
 
2034
 
3.70%
 
11,430

 
11,556

Long- term financing liability
 

 

 
$
28,485

 
$
28,910



In fiscal year 2019, the Company sold its Salt Lake City and Chattanooga Distribution Centers to an unrelated party. The Company is leasing the properties back for 15 years with the option to renew. As the Company plans to lease the property for more than 75% of its economic life, the sales proceeds received from the buyer-lessor are recognized as a financial liability. This financial liability is reduced based on the rental payments made under the lease that are allocated between principal and interest. As of December 31, 2019, the current portion of the Company’s lease liability was $0.9 million which was recorded in accrued expenses on the unaudited Condensed Consolidated Balance Sheet. The weighted average remaining lease term was 14.1 years and the weighted-average discount rate was 3.46% for financing leases as of December 31, 2019.

As of December 31, 2019, future lease payments due are as follows:

Fiscal year
 
Salt Lake City Distribution Center
 
Chattanooga Distribution Center
 
 
(Dollars in thousands)
Remainder of 2020
 
$
574

 
$
403

2021
 
1,157

 
817

2022
 
1,171

 
829

2023
 
1,186

 
842

2024
 
1,200

 
854

Thereafter
 
11,899

 
9,282

Total
 
$
17,187

 
$
13,027



The financing liability does not include interest. Future lease payments above are due per the lease agreement and include embedded interest. Therefore, the total payments do not equal the financing liability. Total interest expense for the financing lease was $0.3 and $0.5 million for the three and six months ended December 31, 2019.
The Company was in compliance with all covenants and requirements of its financing arrangements as of and during the three and six months ended December 31, 2019.

19



12.    FAIR VALUE MEASUREMENTS:
 
Fair value measurements are categorized into one of three levels based on the lowest level of significant input used: Level 1 (unadjusted quoted prices in active markets); Level 2 (observable market inputs available at the measurement date, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data).
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
As of December 31, 2019 and June 30, 2019, the estimated fair value of the Company’s cash, cash equivalents, restricted cash, receivables, accounts payable, debt and long-term financial liabilities approximated their carrying values. The estimated fair values of the Company's debt and long-term financial liability are based on Level 2 inputs.
 
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
 
We measure certain assets, including the Company’s equity method investments, tangible fixed and other assets and goodwill, at fair value on a nonrecurring basis when they are deemed to be other than temporarily impaired. The fair values of these assets are determined, when applicable, based on valuation techniques using the best information available, and may include quoted market prices, market comparables and discounted cash flow projections.

The following impairments were based on fair values using Level 3 inputs:
 
 
For the Three Months Ended December 31,
 
For the Six Months Ended December 31,
 
 
2019
 
2018
 
2019
 
2018
 
 
(Dollars in thousands)
Long-lived assets
 
$
1,126

 
$
472

 
$
2,643

 
$
2,303




20


13.    SEGMENT INFORMATION:
 
Segment information is prepared on the same basis that the chief operating decision maker reviews financial information for operational decision-making purposes.

The Company’s reportable operating segments consisted of the following salons:
 
 
December 31,
2019
 
June 30,
2019
FRANCHISE SALONS:
 
 
 
 
SmartStyle/Cost Cutters in Walmart Stores
 
969

 
615

Supercuts
 
2,493

 
2,340

Signature Style
 
1,156

 
766

Total North American salons
 
4,618

 
3,721

Total International salons (1)
 
172

 
230

Total Franchise salons
 
4,790

 
3,951

as a percent of total Company-owned and Franchise salons
 
67.8
%
 
56.0
%
 
 
 
 
 
COMPANY-OWNED SALONS:
 
 
 
 
SmartStyle/Cost Cutters in Walmart Stores
 
1,159

 
1,550

Supercuts
 
262

 
403

Signature Style
 
649

 
1,155

Mall-based (2)
 
207

 
—

Total Company-owned salons
 
2,277

 
3,108

as a percent of total Company-owned and Franchise salons
 
32.2
%
 
44.0
%
 
 
 
 
 
OWNERSHIP INTEREST LOCATIONS:
 
 
 
 
 
 
 
 
 
Equity ownership interest locations
 
85

 
86

 
 
 
 
 
Grand Total, System-wide
 
7,152

 
7,145

____________________________________
(1)
Canadian and Puerto Rican salons are included in the North American salon totals.
(2)
The mall-based salons were acquired from TBG on December 31, 2019 resulting in no impact to the Statement of Operations for the three and six months ended December 31, 2019.

As of December 31, 2019, the Company-owned operating segment is comprised primarily of SmartStyle®, Supercuts®, Cost Cutters®, and other regional trade names and the Franchise operating segment is comprised primarily of Supercuts®, SmartStyle®, Cost Cutters®, First Choice Haircutters®, Roosters® and Magicuts® concepts.

21


Financial information concerning the Company's reportable operating segments is shown in the following table:
 
 
For the Three Months Ended December 31, 2019
 
 
Franchise
 
Company-owned
 
Corporate
 
Consolidated
 
 
(Dollars in thousands)
Revenues:
 
 
 
 
 
 
 
 
Service
 
$
—

 
$
101,805

 
$
—

 
$
101,805

Product
 
16,864

 
27,119

 
—

 
43,983

Royalties and fees
 
29,347

 
—

 
—

 
29,347

Franchise rental income
 
33,630

 
—

 
—

 
33,630

Total revenue
 
79,841

 
128,924

 
—

 
208,765

 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
Cost of service
 
—

 
67,358

 
—

 
67,358

Cost of product
 
13,072

 
14,186

 
—

 
27,258

Site operating expenses
 
10,704

 
15,626

 
—

 
26,330

General and administrative
 
8,976

 
7,547

 
16,168

 
32,691

Rent
 
401

 
19,374

 
720

 
20,495

Franchise rent expense
 
33,630

 
—

 
—

 
33,630

Depreciation and amortization
 
210

 
5,938

 
1,599

 
7,747

TBG restructuring
 
722

 
—

 
—

 
722

Total operating expenses
 
67,715

 
130,029

 
18,487

 
216,231

Operating income (loss)
 
12,126

 
(1,105
)
 
(18,487
)
 
(7,466
)
Other (expense) income:
 
 
 
 
 
 
 
 
Interest expense
 
—

 
—

 
(1,464
)
 
(1,464
)
Loss from sale of salon assets to franchisees, net
 
—

 
—

 
(5,692
)
 
(5,692
)
Interest income and other, net
 
—

 
—

 
4,346

 
4,346

Income (loss) from continuing operations before income taxes
 
$
12,126

 
$
(1,105
)
 
$
(21,297
)
 
$
(10,276
)

 
 
For the Three Months Ended December 31, 2018
 
 
Franchise
 
Company-owned
 
Corporate
 
Consolidated
 
 
(Dollars in thousands)
Revenues:
 
 
 
 
 
 
 
 
Service
 
$
—

 
$
190,419

 
$
—

 
$
190,419

Product
 
17,818

 
43,831

 
—

 
61,649

Royalties and fees
 
22,603

 
—

 
—

 
22,603

Total revenue
 
40,421

 
234,250

 
—

 
274,671

 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
Cost of service
 
—

 
114,931

 
—

 
114,931

Cost of product
 
14,449

 
21,901

 
—

 
36,350

Site operating expenses
 
7,867

 
27,696

 
—

 
35,563

General and administrative
 
9,466

 
14,198

 
22,172

 
45,836

Rent
 
184

 
34,258

 
200

 
34,642

Depreciation and amortization
 
215

 
6,728

 
1,957

 
8,900

Total operating expenses
 
32,181

 
219,712

 
24,329

 
276,222

Operating income (loss)
 
8,240

 
14,538

 
(24,329
)
 
(1,551
)
Other (expense) income:
 
 
 
 
 
 
 
 
Interest expense
 
—

 
—

 
(1,072
)
 
(1,072
)
Gain from sale of salon assets to franchisees, net
 
—

 
—

 
2,865

 
2,865

Interest income and other, net
 
—

 
—

 
629

 
629

Income (loss) from continuing operations before income taxes
 
$
8,240

 
$
14,538

 
$
(21,907
)
 
$
871



22


 
 
For the Six Months Ended December 31, 2019
 
 
Franchise
 
Company-owned
 
Corporate
 
Consolidated
 
 
(Dollars in thousands)
Revenues:
 
 
 
 
 
 
 
 
Service
 
$
—

 
$
243,746

 
$
—

 
$
243,746

Product
 
29,969

 
59,670

 
—

 
89,639

Royalties and fees
 
57,364

 
—

 
—

 
57,364

Franchise rental income
 
65,054

 
—

 
—

 
65,054

Total revenue
 
152,387

 
303,416

 
—

 
455,803

 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
Cost of service
 
—

 
157,840

 
—

 
157,840

Cost of product
 
23,352

 
30,233

 
—

 
53,585

Site operating expenses
 
21,130

 
38,142

 
—

 
59,272

General and administrative
 
17,333

 
17,697

 
38,286

 
73,316

Rent
 
591

 
43,163

 
1,005

 
44,759

Franchise rent expense
 
65,054

 
—

 
—

 
65,054

Depreciation and amortization
 
370

 
12,045

 
4,712

 
17,127

TBG restructuring
 
2,222

 
—

 
—

 
2,222

Total operating expenses
 
130,052

 
299,120

 
44,003

 
473,175

Operating income (loss)
 
22,335

 
4,296

 
(44,003
)
 
(17,372
)
Other (expense) income:
 
 
 
 
 
 
 
 
Interest expense
 
—

 
—

 
(2,903
)
 
(2,903
)
Loss from sale of salon assets to franchisees, net
 
—

 
—

 
(11,552
)
 
(11,552
)
Interest income and other, net
 
—

 
—

 
4,517

 
4,517

Income (loss) from continuing operations before income taxes
 
$
22,335

 
$
4,296

 
$
(53,941
)
 
$
(27,310
)

 
 
For the Six Months Ended December 31, 2018
 
 
Franchise
 
Company-owned
 
Corporate
 
Consolidated
 
 
(Dollars in thousands)
Revenues:
 
 
 
 
 
 
 
 
Service
 
$
—

 
$
398,267

 
$
—

 
$
398,267

Product
 
33,447

 
85,793

 
—

 
119,240

Royalties and fees
 
44,999

 
—

 
—

 
44,999

Total revenue
 
78,446

 
484,060

 
—

 
562,506

 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
Cost of service
 
—

 
236,428

 
—

 
236,428

Cost of product
 
26,862

 
41,669

 
—

 
68,531

Site operating expenses
 
15,843

 
56,541

 
—

 
72,384

General and administrative
 
17,130

 
30,579

 
45,854

 
93,563

Rent
 
278

 
69,944

 
398

 
70,620

Depreciation and amortization
 
373

 
14,785

 
3,944

 
19,102

Total operating expenses
 
60,486

 
449,946

 
50,196

 
560,628

Operating income (loss)
 
17,960

 
34,114

 
(50,196
)
 
1,878

Other (expense) income:
 
 
 
 
 
 
 
 
Interest expense
 
—

 
—

 
(2,078
)
 
(2,078
)
Loss from sale of salon assets to franchisees, net
 
—

 
—

 
(1,095
)
 
(1,095
)
Interest income and other, net
 
—

 
—

 
989

 
989

Income (loss) from continuing operations before income taxes
 
$
17,960

 
34,114

 
$
(52,380
)
 
$
(306
)



23


14.    SUBSEQUENT EVENT:
 
In January 2020, the Company borrowed $30.0 million under its revolving credit facility. Additionally, the Company signed an agreement to sell its investment in Empire Education Group in January 2020. Upon the closure of the transaction, the Company expects to record an immaterial non-operating gain and an income tax benefit.


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our consolidated financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. This MD&A should be read in conjunction with the MD&A included in our June 30, 2019 Annual Report on Form 10-K and other documents filed or furnished with the Securities and Exchange Commission (SEC) during the current fiscal year.
 
MANAGEMENT’S OVERVIEW
 
Regis Corporation (RGS) franchises, owns, and operates beauty salons. As of December 31, 2019, the Company franchised, owned or held ownership interests in 7,152 worldwide locations. Our locations consisted of 7,067 system-wide North American and International salons, and in 85 locations we maintained a non-controlling ownership interest less than 100 percent. Each of the Company’s salon concepts generally offer similar salon products and services and serve the mass market. As of December 31, 2019, we had approximately 14,000 corporate employees worldwide.
 
CRITICAL ACCOUNTING POLICIES
 
The interim unaudited Condensed Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the interim unaudited Condensed Consolidated Financial Statements, we are required to make various judgments, estimates and assumptions that could have a significant impact on the results reported in the interim unaudited Condensed Consolidated Financial Statements. We base these estimates on historical experience and other assumptions believed to be reasonable under the circumstances. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made, and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Changes in these estimates could have a material effect on our interim unaudited Condensed Consolidated Financial Statements.
 
Our significant accounting policies can be found in Note 1 to the Consolidated Financial Statements contained in Part II, Item 8 of the June 30, 2019 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. Discussion of each of these policies is contained under “Critical Accounting Policies” in Part II, Item 7 of our June 30, 2019 Annual Report on Form 10-K. Our updated policies on the amended revenue recognition guidance, ASC Topic 606, can be found in Note 2 to the unaudited Condensed Consolidated Financial Statements.

Recent Accounting Pronouncements
 
The Company adopted the amended leasing guidance, Topic 842, on July 1, 2019 using the modified retrospective method which required the adjustment of only the current reporting period presented. Recent accounting pronouncements are discussed in detail in Notes 1 and 10 to the unaudited Condensed Consolidated Financial Statements.
 

24


RESULTS OF OPERATIONS

Impact of salons sold to franchisees on operations.

In the three and six months ended December 31, 2019, the Company sold 443 and 988, respectively, company-owned salons to franchisees. The impact of these transactions are as follows:

 
 
Three Months Ended December 31,
 
Increase (Decrease)
 
Six Months Ended December 31,
 
Increase (Decrease)
 
 
2019
 
2018
 
 
2019
 
2018
 
 
 
(Dollars in thousands)
Salons sold to franchisees
 
443

 
133

 
310

 
988

 
257

 
731

Cash proceeds received
 
31,468

 
11,628

 
$
19,840

 
$
69,414

 
$
24,050

 
$
45,364

 
 
 
 
 
 
 
 
 
 
 
 
 
Gain on sale of venditions, excluding goodwill derecognition
 
$
14,993

 
$
9,369

 
$
5,624

 
$
41,213

 
$
16,501

 
$
24,712

Non-cash goodwill derecognition
 
(20,685
)
 
(6,504
)
 
14,181

 
(52,765
)
 
(17,596
)
 
35,169

(Loss) gain from sale of salon assets to franchisees, net
 
$
(5,692
)
 
$
2,865

 
$
(8,557
)
 
$
(11,552
)
 
$
(1,095
)
 
$
(10,457
)

System-wide results

As we transition to an asset-light franchise platform, our results will be more impacted by our system-wide sales, which include sales by all points of distribution, whether owned by the Company or our franchisees. While we do not record sales by franchisees as revenue, and such sales are not included in our consolidated financial statements, we believe that this operating measure is important in obtaining an understanding of our financial performance. We believe system-wide sales information aids in understanding how we derive royalty revenue and in evaluating performance.

System-wide same-store sales by concept are detailed in the table below:
 
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
 
2019
 
2018
 
2019
 
2018
SmartStyle
 
(4.3
)%
 
2.1
%
 
(3.1
)%
 
1.6
%
Supercuts
 
(1.1
)
 
0.6

 
(0.4
)
 
0.7

Signature Style
 
(2.3
)
 
0.3

 
(2.0
)
 
0.5

Consolidated system-wide same store sales
 
(2.3
)%
 
0.9
%
 
(1.7
)%
 
0.8
%
_____________________________
(1)
System-wide same-store sales are calculated as the total change in sales for system-wide franchise and company-owned locations for more than one year that were open on a specific day of the week during the current period and the corresponding prior period. Quarterly and year-to-date system-wide same-store sales are the sum of the system-wide same-store sales computed on a daily basis. Franchise salons that do not report daily sales are excluded from same-store sales. Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period. System-wide same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation. TBG salons were not a franchise location in fiscal year 2020 so by definition they are not included in system-wide same-store sales. TBG same-store sales are excluded from fiscal year 2019 same-store sales to be comparative to fiscal year 2020.


25


Condensed Consolidated Results of Operations (Unaudited)
 
The following table sets forth, for the periods indicated, certain information derived from our unaudited Condensed Consolidated Statement of Operations. The percentages are computed as a percent of total consolidated revenues, except as otherwise indicated.
 
For the Three Months Ended December 31,
 
For the Six Months Ended December 31,
 
2019

 
2018

 
2019

 
2018

 
2019
 
2019

 
2018

 
2019

 
2018

 
2019
 
($ in millions)
 
% of Total
Revenues (1)
 
(Decrease)
Increase
 
($ in millions)
 
% of Total
Revenues (1)
 
(Decrease)
Increase
Service revenues
$
101.8

 
$
190.4

 
48.8
 %
 
69.3
 %
 
(2,050
)
 
$
243.7

 
$
398.3

 
53.5
 %
 
70.9
 %
 
(1,740
)
Product revenues
44.0

 
61.6

 
21.1

 
22.4

 
(130
)
 
89.6

 
119.2

 
19.7

 
21.2

 
(150
)
Royalties and fees
29.3

 
22.6

 
14.1

 
8.2

 
590

 
57.4

 
45.0

 
12.6

 
8.0

 
460

Franchise rental income
33.6

 
—

 
16.1

 
—

 
N/A

 
65.1

 
—

 
14.3

 
—

 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of service (2)
67.4

 
114.9

 
66.2

 
60.4

 
580

 
157.8

 
236.4

 
64.8

 
59.4

 
540

Cost of product (2)
27.3

 
36.4

 
62.0

 
59.0

 
300

 
53.6

 
68.5

 
59.8

 
57.5

 
230

Site operating expenses
26.3

 
35.6

 
12.6

 
12.9

 
(30
)
 
59.3

 
72.4

 
13.0

 
12.9

 
10

General and administrative
32.7

 
45.8

 
15.7

 
16.7

 
(100
)
 
73.3

 
93.6

 
16.1

 
16.6

 
(50
)
Rent
20.5

 
34.6

 
9.8

 
12.6

 
(280
)
 
44.8

 
70.6

 
9.8

 
12.6

 
(280
)
Franchise rent expense
33.6

 
—

 
16.1

 
—

 
N/A

 
65.1

 
—

 
14.3

 
—

 
N/A

Depreciation and amortization
7.7

 
8.9

 
3.7

 
3.2

 
50

 
17.1

 
19.1

 
3.8

 
3.4

 
40

TBG restructuring
0.7

 
—

 
0.3

 
—

 
N/A

 
2.2

 
—

 
0.5

 
—

 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating (loss) income
(7.5
)
 
(1.6
)
 
(3.6
)
 
(0.6
)
 
(300
)
 
(17.4
)
 
1.9

 
(3.8
)
 
0.3

 
(410
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
(1.5
)
 
(1.1
)
 
(0.7
)
 
(0.4
)
 
(30
)
 
(2.9
)
 
(2.1
)
 
(0.6
)
 
(0.4
)
 
(20
)
Gain (Loss) from sale of salon assets to franchisees, net
(5.7
)
 
2.9

 
(2.7
)
 
1.0

 
(370
)
 
(11.6
)
 
(1.1
)
 
(2.5
)
 
(0.2
)
 
(230
)
Interest income and other, net
4.3

 
0.6

 
2.1

 
0.2

 
190

 
4.5

 
1.0

 
1.0

 
0.2

 
80

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax benefit (expense) (3)
0.8

 
(0.5
)
 
7.7

 
52.1

 
N/A

 
3.7

 
0.3

 
13.4

 
85.0

 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from discontinued operations, net of income taxes
0.1

 
6.1

 
—

 
2.2

 
(220
)
 
0.5

 
5.8

 
0.1

 
1.0

 
(90
)
_____________________________
(1)
Cost of service is computed as a percent of service revenues. Cost of product is computed as a percent of product revenues.
(2)    
Excludes depreciation and amortization expense.
(3)       
Computed as a percent of loss from continuing operations before income taxes. The income taxes basis point change is noted as not applicable (N/A) as the discussion within MD&A is related to the effective income tax rate.


26


Consolidated Revenues

Consolidated revenues primarily include revenues of company-owned salons, product and equipment sales to franchisees, franchise royalties and fees and franchise rental income. The following tables summarize revenues and same-store sales by concept as well as the reasons for the percentage change:
 
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
 
2019
 
2018
 
2019
 
2018
 
 
(Dollars in thousands)
Franchise salons:
 
 
 
 
 
 
 
 
Product
 
$
16,864

 
$
17,818

 
$
29,969

 
$
33,447

Royalties and fees
 
29,347

 
22,603

 
57,364

 
44,999

Franchise rental income
 
33,630

 
—

 
65,054

 
—

Total Franchise salons
 
$
79,841

 
$
40,421

 
$
152,387

 
$
78,446

Franchise salon same-store sales increase (decrease) (1)
 
(1.4
)%
 
1.4
 %
 
(0.8
)%
 
1.3
 %
 
 
 
 
 
 
 
 
 
Company-owned salons:
 
 

 
 

 
 
 
 
SmartStyle
 
$
66,103

 
$
94,363

 
$
151,634

 
$
190,326

Supercuts
 
16,967

 
58,856

 
41,321

 
126,135

Signature Style
 
45,854

 
81,031

 
110,461

 
167,599

Total Company-owned salons
 
$
128,924

 
$
234,250

 
$
303,416

 
$
484,060

Company-owned salon same-store sales (decrease) increase (2)
 
(3.6
)%
 
0.5
 %
 
(2.7
)%
 
0.5
 %
 
 
 
 
 
 
 
 
 
Consolidated revenues
 
$
208,765

 
$
274,671

 
$
455,803

 
$
562,506

Percent change from prior year
 
(24.0
)%
 
(11.0
)%
 
(19.0
)%
 
(9.0
)%
_____________________________
(1)
Franchise same-store sales are calculated as the total change in sales for salons that have been a franchise location for more than one year that were open on a specific day of the week during the current period and the corresponding prior period. Quarterly and year-to-date franchise same-store sales are the sum of the franchise same-store sales computed on a daily basis. Franchise salons that do not report daily sales are excluded from same-store sales. Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period. Franchise same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation. TBG salons were not a franchise location in fiscal year 2020 so by definition they are not included in franchise same-store sales. TBG same-store sales are excluded from fiscal year 2019 same-store sales to be comparative to fiscal year 2020.
(2)
Company-owned same-store sales are calculated as the total change in sales for company-owned locations that were open on a specific day of the week during the current period and the corresponding prior period. Quarterly and year-to-date company-owned same-store sales are the sum of the company-owned same-store sales computed on a daily basis. Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period. Company-owned same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation.














27



Three and Six Months Ended December 31, 2019 Compared with Three and Six Months Ended December 31, 2018

Consolidated Revenues

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

Consolidated revenue decreased $65.9 and $106.7 million for the three and six months ended December 31, 2019, respectively. Service revenue and product revenue decreased $88.6 and $17.7 million, respectively, in the three months ended December 31, 2019 and decreased $154.5 and $29.6 million, respectively, in the six months ended December 31, 2019. The decline in service and product revenue is primarily the result of the Company's sale of salons to franchisees. During the twelve months ended December 31, 2019, 1,447 salons were sold to franchisees, net of buy backs and 587 and 82 system-wide salons were closed and constructed, respectively (2020 Net Salon Count Changes). The decline in service and product revenue was partially offset by an increase in royalty and fee revenue of $6.7 and $12.4 million in the three and six months ended December 31, 2019, respectively. The increase is primarily a result of an increased number of franchised locations during the twelve months ended December 31, 2019. Additionally, as a result of the Company's adoption of Topic 842, the Company now records revenue related to franchise leases and this adoption resulted in $33.6 and $65.1 million increase in franchise rental income for the three and six months ended December 31, 2019.

Service Revenues
 
The decreases of $88.6 and $154.5 million in service revenues during the three and six months ended December 31, 2019, respectively, were primarily due to 2020 Net Salon Count Changes and company-owned same-store service sales decreases. Company-owned same-store service sales decreases of 2.1% and 1.6% during the three and six months ended December 31, 2019, respectively, were primarily due to a decrease of 6.2% and 5.2% in same-store guest transactions, partly offset by increases of 4.1% and 3.6% in average ticket price, respectively.

Product Revenues
 
The decreases of $17.7 and $29.6 million in product revenues during the three and six months ended December 31, 2019 were primarily due to 2020 Net Salon Count Changes, and company-owned same-store product sales decreases of 9.3% and 7.2%, respectively, were partly offset by product sold to franchisees. For the three and six months ended December 31, 2019, the decreases in company-owned same-store product sales were primarily the result of decreases in company-owned same-store transactions of 12.8% and 10.9%, respectively, partially offset by increases in average ticket price of 3.5% and 3.7%, respectively.

Royalties and Fees
 
The increases of $6.7 and $12.4 million in royalties and fees for the three and six months ended December 31, 2019, respectively, were primarily due to an increase in franchise locations. Total franchised locations open at December 31, 2019 were 4,790 as compared to 4,266 at December 31, 2018.

Franchise Rental Income

The increase of $33.6 million in franchise rental income is due to the adoption of Topic 842 in fiscal year 2020. Prior to the adoption, the Company recorded franchise rental income and expense on a net basis.

Cost of Service
 
The 580 and 540 basis point increases in cost of service as a percent of service revenues during the three and six months ended December 31, 2019, respectively, were due to higher minimum wage and commissions.


28


Cost of Product

The 300 and 230 basis point increases in cost of product as a percent of product revenues during the three and six months ended December 31, 2019, respectively, were primarily due to the shift into lower margin wholesale product sales. Margins on retail product sales were 47.7% and 50.0% in the three months ended December 31, 2019 and 2018, respectively. Margins on wholesale product sales were 22.5% and 18.9% in the three months ended December 31, 2019 and 2018, respectively. Margins on retail product sales were 49.3% and 51.4% in the six months ended December 31, 2019 and 2018, respectively. Margins on wholesale product sales were 22.1% and 19.7% in the six months ended December 31, 2019 and 2018, respectively. Increases on wholesale product margins were primarily driven by lower sales to TBG.

Site Operating Expenses
 
The decreases of $9.2 and $13.1 million in site operating expenses during the three and six months ended December 31, 2019, respectively, were due to a net reduction in salon counts.

General and Administrative
 
The decreases of $13.1 and $20.2 million in general and administrative (G&A) during the three and six months ended December 31, 2019 were primarily due to lower administrative and field management salaries, bonuses and stock compensation benefits associated with a change in performance awards assumptions and the departure of two executives during the quarter. In January 2020, the Company reduced its headcount as a result of the decrease in company-owned salons.

Rent
 
The decreases of $14.1 and $25.9 million in rent expense during the three and six months ended December 31, 2019, respectively, were primarily due to the net reduction in salon counts, partly offset by rent inflation.

Franchise Rent Expense

The increase in franchise rent expense is due to the adoption of Topic 842 in fiscal year 2020. Prior to the adoption, the Company recorded franchise rental income and expense on a net basis.

Depreciation and Amortization
 
The decreases of $1.2 and $2.0 million in depreciation and amortization during the three and six months ended December 31, 2019, respectively, were primarily due to the reduced salon base.

TBG Restructuring

In the three and six months ended December 31, 2019, the Company incurred professional fees associated with acquiring salons from TBG. In the six months ended December 31, 2019, the Company assisted TBG with operating expenses to mitigate the risk of default associated with TBG's lease obligations where Regis had potential contingent liability. These costs were not incurred in fiscal year 2019.

Interest Expense

The increases of $0.4 and $0.8 million in interest expense for the three and six months ended December 31, 2019, respectively, were primarily due to interest charges associated with our long-term financing liabilities.


29


(Loss)/Gain from sale of salon assets to franchisees, net

In the three months ended December 31, 2019, the loss from sale of salon assets to franchisees was $5.7 million, including non-cash goodwill derecognition of $20.7 million. In the six months ended December 31, 2019, the loss from the sale of salons assets to franchisees was $11.6 million, including $52.8 million of non-cash goodwill derecognition.

Interest Income and Other, net
 
The increases of $3.7 and $3.5 million in interest income and other, net during the three and six months ended December 31, 2019, respectively, were primarily due to a gain on the sale of the Company's headquarters of $4.0 million, partially offset by a decline in interest income.

Income Taxes
 
During the three and six months ended December 31, 2019 the Company recognized tax benefits of $0.8 and $3.7 million, respectively, with corresponding effective tax rates of 7.7% and 13.4% as compared to recognizing tax expense of $0.5 and tax benefits of $0.3 million, with corresponding effective tax rates of 52.1% and 85.0% during the three and six months ended December 31, 2018.

See Note 6 to the unaudited Condensed Consolidated Financial Statements.

Income from Discontinued Operations

Income from discontinued operations decreased $6.0 and $5.4 million during the three and six months ended December 31, 2019. The decreases were due to lapping income tax benefits associated with the wind-down and transfer of legal entities related to discontinued operations recognized in the second quarter of fiscal year 2019, partially offset by beneficial actuarial adjustments recognized in fiscal year 2020.

Results of Operations by Segment

Based on our internal management structure, we report two segments: Franchise salons and Company-owned salons. See Note 13 to the Consolidated Financial Statements. Significant results of operations are discussed below with respect to each of these segments.


30


Franchise Salons
 
For the Three Months Ended December 31,
 
For the Six Months Ended December 31,
 
2019
 
2018
 
2019
 
2019
 
2018
 
2019
 
(Dollars in millions)
 
Increase (Decrease)
 
(Dollars in millions)
 
Increase (Decrease)
Revenue
 
 
 
 
 
 
 
 
 
 
 
Product
$
16.2

 
$
10.6

 
$
5.6

 
$
28.0

 
$
20.7

 
$
7.3

Product sold to TBG
0.7

 
7.2

 
(6.5
)
 
2.0

 
12.7

 
(10.7
)
Total product
16.9

 
17.8

 
(0.9
)
 
30.0

 
33.4

 
(3.4
)
Royalties and fees (1)
29.3

 
22.6

 
6.7

 
57.4

 
45.0

 
12.4

Franchise rental income
33.6

 
—

 
33.6

 
65.1

 
—

 
65.1

Total franchise salons revenue (2)
$
79.8

 
$
40.4

 
$
39.4

 
$
152.5

 
$
78.4

 
$
74.1

 
 
 
 
 
 
 
 
 
 
 


Franchise same-store sales (3)
(1.4
)%
 
1.4
%
 


 
(0.8
)%
 
1.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income
$
12.1

 
$
7.0

 
$
5.1

 
$
22.3

 
$
16.2

 
$
6.1

Operating income from TBG
—

 
1.2

 
(1.2
)
 
—

 
1.8

 
(1.8
)
Total operating income (2)
$
12.1

 
$
8.2

 
$
3.9

 
$
22.3

 
$
18.0

 
$
4.3

_______________________________________________________________________________
(1)
Total includes $1.1 and $1.7 million of royalties related to TBG during the three and six months ended December 31, 2018.
(2)
Total is a recalculation; line items calculated individually may not sum to total due to rounding.
(3)
Franchise same-store sales are calculated as the total change in sales for salons that have been a franchise location for more than one year that were open on a specific day of the week during the current period and the corresponding prior period. Quarterly and year-to-date franchise same-store sales are the sum of the franchise same-store sales computed on a daily basis. Franchise salons that do not report daily sales are excluded from same-store sales. Locations relocated within a one-mile radius are included in same-store sales as they are considered to have been open in the prior period. Franchise same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation. TBG salons were not a franchise location in fiscal year 2020 so by definition they are not included in franchise same-store sales. TBG same-store sales are excluded from fiscal year 2019 same-store sales to be comparative to fiscal year 2020.

Franchise same-store sales by concept are detailed in the table below:
 
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
 
2019
 
2018
 
2019
 
2018
SmartStyle
 
(7.6
)%
 
(5.6
)%
 
(7.6
)%
 
(4.3
)%
Supercuts
 
(0.5
)
 
1.8

 
0.3

 
1.5

Signature Style
 
(1.4
)
 
1.3

 
(1.0
)
 
1.3

Total
 
(1.4
)%
 
1.4
 %
 
(0.8
)%
 
1.3
 %

Franchise Salon Revenues
Franchise salon revenues increased $39.4 and $74.1 million during the three and six months ended December 31, 2019. Excluding franchise rental income recorded in fiscal year 2020 as a result of the adoption of Topic 842, franchise salon revenues increased $5.8 and $8.9 million during the three and six months ended December 31, 2019, respectively. The increases during the three months ended December 31, 2019, were primarily due to increases in royalties, ad fund revenue and fees due to higher franchise salon counts, partially offset by decreases in franchise product sales. During the twelve months ended December 31, 2019, franchisees constructed (net of relocations) and closed 61 and 415 Franchise-owned salons, respectively, and purchased (net of Company buybacks) 1,447 salons from the Company during the same period.

31


Franchise Salon Operating Income
During the three months ended December 31, 2019, Franchise salon operations generated operating income of $12.1 million, an increase of $3.9 million compared to the prior comparable period. The increase during the three months ended December 31, 2019 was primarily due to higher royalties, fees and product sales associated with the increase in salon count. During the six months ended December 31, 2019, Franchise salon operations generated operating income of $22.3 million, an increase of $4.3 million compared to the prior comparable period. The increase during the six months ended December 31, 2019 was primarily due to higher royalties, fees and product sales associated with the increase in salon count.

Company-owned Salons
 
For the Three Months Ended December 31,
 
For the Six Months Ended December 31,
 
2019
 
2018
 
2019
 
2019
 
2018
 
2019
 
(Dollars in millions)
 
Increase (Decrease)
 
(Dollars in millions)
 
Increase (Decrease)
Total revenue
$
128.9

 
$
234.3

 
$
(105.3
)
 
$
303.4

 
$
484.1

 
$
(180.6
)
Company-owned same-store sales
(3.6
)%
 
0.5
%
 
 
 
(2.7
)%
 
0.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating (loss) income
$
(1.1
)
 
$
14.5

 
$
(15.6
)
 
$
4.3

 
$
34.1

 
$
(29.8
)

Company-owned Salon Revenues

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

 
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
 
2019
 
2018
 
2019
 
2018
SmartStyle
 
(3.5
)%
 
2.6
 %
 
(2.2
)%
 
1.8
 %
Supercuts
 
(5.1
)
 
(1.5
)
 
(4.4
)
 
(0.6
)
Signature Style
 
(3.3
)
 
(0.3
)
 
(2.8
)
 
—

Total
 
(3.6
)%
 
0.5
 %
 
(2.7
)%
 
0.5
 %

Company-owned salon revenues decreased $105.3 and $180.6 million during the three and six months ended December 31, 2019, respectively, primarily due to the closure of a net 151 salons and the sale of 1,447 company-owned salons (net of buybacks) to franchisees during the twelve months ended December 31, 2019. The decreases were also due to company-owned same-store sale decreases of 3.6% and 2.7% during the three and six months ended December 31, 2019, respectively. The company-owned same-store sales decreases were due to decreases of 6.6% and 5.7% in same-store guest transactions, partly offset by increases of 3.0% and 3.0% in average ticket prices during the three and six months ended December 31, 2019, respectively.
Company-owned Salon Operating (Loss) Income
During the three and six months ended December 31, 2019, company-owned salon operations operating income decreased $15.6 and $29.8 million, respectively, compared to the prior comparable period. The decrease during the three and six months ended December 31, 2019 were primarily due to the net reduction in company-owned salons and same-store sales decline.
Corporate
Corporate Operating Loss
Corporate operating loss decreased $5.8 million during the three months ended December 31, 2019 primarily driven by lower general and administrative salaries, bonuses and stock compensation benefits associated with a change in performance awards assumptions and the departure of two executives during the quarter. Corporate operating loss decreased $6.2 million during the six months ended December 31, 2019 primarily driven by lower general and administrative salaries, bonuses and stock compensation benefits associated with a change in performance awards assumptions and the departure of two executives during the quarter, partially offset by the prior year's franchise convention cost, which was recorded as Corporate expenses in fiscal year 2020 compared to Franchise expense in fiscal year 2019.


32


LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity

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

As of December 31, 2019, cash and cash equivalents were $49.8 million, with $42.3 and $7.5 million within the United States and Canada, respectively.

The Company's borrowing arrangements include a $295.0 million five-year unsecured revolving credit facility that expires in March 2023, of which $213.5 million was available as of December 31, 2019. See Note 11 to the unaudited Condensed Consolidated Financial Statements.
 
Uses of Cash

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 has a disciplined approach to capital allocation, which focuses on investing in key priorities to support the Company's multi-year strategic plan as discussed within Part I, Item 1 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2019.

Cash Flows
 
Cash Flows from Operating Activities
 
During the six months ended December 31, 2019, cash used in operating activities was $19.3 million, an increase of $8.7 million compared to the prior comparable period. Cash from operations declined due to lower revenues and margins in the Company-owned segment as well as planned strategic general and administrative investments to enhance the Company's franchisor capabilities and support the increased volume and cadence of transactions and conversions into the Franchise portfolio, partially offset by the elimination of certain general and administrative costs.
 
Cash Flows from Investing Activities
 
During the six months ended December 31, 2019, cash provided by investing activities of $59.3 million, an increase of $27.4 million compared to the prior comparable period, was primarily from proceeds from the sale of salon assets of $69.4 million and the sale of the company's headquarters of $9.0 million, partly offset by capital expenditures of $17.6 million.
 
Cash Flows from Financing Activities
 
During the six months ended December 31, 2019, cash used in financing activities of $60.5 million, an increase of $11.2 million compared to the prior comparable period was primarily from the repayment of debt of $30.0 million, repurchase of common stock of $28.2 million, and employee taxes paid for shares withheld of $1.8 million.

Financing Arrangements

See Note 11 of the Notes to the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended December 31, 2019 and Note 7 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019, for additional information regarding our financing arrangements.

33


Debt to Capitalization Ratio
 
Our debt to capitalization ratio, calculated as the principal amount of debt as a percentage of the principal amount of debt and shareholders’ equity at fiscal quarter end, was as follows:
 
As of
 
Debt to
Capitalization (1)
 
Basis Point Increase (Decrease) (2)
12/31/2019
 
24.3
%
 
(250
)
6/30/2019
 
26.8
%
 
1,120

_______________________________________________________________________________

(1)    Debt includes long-term debt and financing liabilities. It excludes long-term lease liability as that liability is offset by         the right of use asset and does not impact the Company's debt covenants.
(2)    Represents the basis point change in debt to capitalization as compared to the prior fiscal year end (June 30, 2019 and
June 30, 2018, respectively).
 
The 250 basis point decrease in the debt to capitalization ratio as of December 31, 2019 as compared to June 30, 2019, was primarily due to the repayment of $30.0 million of long-term debt in December 2019, partially offset by decreases in shareholders' equity resulting from the repurchase of 1.5 million of the Company's shares for $26.4 million.
 
Share Repurchase Program

In May 2000, the Company’s Board of Directors (Board) approved a stock repurchase program with no stated expiration date. Since that time and through December 31, 2019, 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 months ended December 31, 2019, the Company did not repurchase any shares. During the six months ended December 31, 2019, the Company repurchased 1.5 million shares for $26.4 million. As of December 31, 2019, 30.0 million shares have been cumulatively repurchased for $595.4 million, and $54.6 million remains outstanding under the approved stock repurchase program.


34


SAFE HARBOR PROVISIONS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
 
This Quarterly Report on Form 10-Q, as well as information included in, or incorporated by reference from, future filings by the Company with the Securities and Exchange Commission and information contained in written material, press releases and oral statements issued by or on behalf of the Company contains or may contain “forward-looking statements” within the meaning of the federal securities laws, including statements concerning anticipated future events and expectations that are not historical facts. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this document reflect management’s best judgment at the time they are made, but all such statements are subject to numerous risks and uncertainties, which could cause actual results to differ materially from those expressed in or implied by the statements herein. Such forward-looking statements are often identified herein by use of words including, but not limited to, “may,” “believe,” “project,” “forecast,” “expect,” “estimate,” “anticipate,” and “plan.” In addition, the following factors could affect the Company's actual results and cause such results to differ materially from those expressed in forward-looking statements. These factors include the continued ability of the Company to implement its strategy, priorities and initiatives including the re-engineering of our corporate and field infrastructure; our franchisee's ability to attract, train and retain talented stylists; financial performance of our franchisees; acceleration of sale of salons to franchisees; if our capital investments in technology do not achieve appropriate returns; our ability to manage cyber threats and protect the security of potentially sensitive information about our guests, employees, vendors or Company information; the ability to operate or sell the salons transferred back from TBG; the outcome of the review by the administrator in TBG's insolvency proceedings in the United Kingdom; the ability of the Company to maintain a satisfactory relationship with Walmart; marketing efforts to drive traffic; changes in regulatory and statutory laws including increases in minimum wages; our ability to maintain and enhance the value of our brands; premature termination of agreements with our franchisees; reliance on information technology systems; reliance on external vendors; consumer shopping trends and changes in manufacturer distribution channels; competition within the personal hair care industry; changes in tax exposure; changes in healthcare; changes in interest rates and foreign currency exchange rates; failure to standardize operating processes across brands; financial performance of Empire Education Group; the continued ability of the Company to implement cost reduction initiatives; compliance with debt covenants and access to existing revolving credit facility; changes in economic conditions; changes in consumer tastes and fashion trends; exposure to uninsured or unidentified risks; reliance on our management team and other key personnel or other factors not listed above. Additional information concerning potential factors that could affect future financial results is set forth under Item 1A on Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. However, your attention is directed to any further disclosures made in our subsequent annual and periodic reports filed or furnished with the SEC on Forms 10-K, 10-Q and 8-K and Proxy Statements on Schedule 14A.

35


Item 3.  Quantitative and Qualitative Disclosures about Market Risk
 
There has been no material change to the factors discussed within Part II, Item 7A in the Company’s June 30, 2019 Annual Report on Form 10-K.
 
Item 4.  Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Securities Exchange Act of 1934, as amended (the "Exchange Act”) reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure.

Management, with the participation of the CEO and CFO, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of the end of the period. Based on their evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of December 31, 2019.

Changes in Internal Controls over Financial Reporting

During the six months ended December 31, 2019, we adopted new guidance for lease accounting. We implemented internal controls to ensure we adequately evaluated leasing arrangements and properly assessed the impact of the new guidance to facilitate the adoption. Additionally, we implemented new business processes, internal controls, and modified information technology systems to assist in the ongoing application of the new guidance. There were no other changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION
 
Item 1.  Legal Proceedings
 
The Company is a defendant in various lawsuits and claims arising out of the normal course of business. Like certain other large retail employers, the Company has been faced with 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 in the future, incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period.
 
Item 1A.  Risk Factors
 
There have been no material changes in our risk factors from those disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2019, except the first risk factor is replaced by the first risk factor below, the seventh risk factor is replaced by the second and third risk factors listed below and the twenty-third risk factor is replaced by the fourth risk factor listed below.

To date we have been successful in selling our company-owned salons to franchise owners and we are re-engineering our corporate and field infrastructure to support a fully-franchised portfolio, which involves risks to our financial condition and results of operations in both our company-owned and franchise portfolios.

Our transition to a fully-franchised model has been occurring at a rapid pace and, as a result, our inability to re-engineer the infrastructure and reduce our costs on timing and in amounts necessary to effectively support a fully-franchised salon portfolio may reduce the anticipated economic benefit of the transformation in the near term. Furthermore, our efforts to re-engineer and reduce the corporate and field infrastructure devoted to supporting company-owned stores may impair our ability to support the remaining company-owned salons and diminish the value of those salons while we own them, which may challenge our ability to sell such salons to franchisees, including the timing of venditions or net cash proceeds we may generate from the sale process.
 


36


We are now significantly dependent on franchise royalties and product sales and the overall success of our franchisees’ salons. It customarily takes new franchisees time to develop their salons and increase their sales. Further, a number of our historically successful and more experienced franchisees are onboarding new salon operations. This will likely adversely impact our revenue and profitability during this next stage of our transformation. Additionally, we expect that our franchisees will purchase products and services from us for their businesses, but there is no assurance that they will do so in quantities or at wholesale pricing levels consistent with our expectations. Further, in order to support and enhance our franchisees’ businesses, we may need to invest in certain unanticipated new capabilities and/or services, and we will need to determine the appropriate amount of investment to optimize the success of our franchisees, while ensuring that the level of investment supports our expected return on those investments. Investments made in company-owned technology including without exception the Company’s new, internally developed back office salon management system may not yield the profitable results that we anticipate. If we are not able to identify the right level of support and effectively deliver those resources to our franchisees, our results of operations and business may be adversely affected. Furthermore, our transition to a fully-franchised model may expose us to additional legal, compliance and operational risks specific to this different business model including the business failure of unproven new salon owners.

We may face challenges operating the salons that TBG transferred back to us, and our inability to operate them successfully or transfer these salons to new ownerships could adversely affect our business, financial condition, results of operations and cash flows.

On December 31, 2019, we acquired certain assets that were used in the operation of the mall-based salon business in the United States and Canada at which we have residual real estate lease liability from our original sale of the salons to TBG. The transfer was consummated in connection with an assignment for the benefit of creditors by TBG. The assets acquired in connection with the salon reacquisition are, in the aggregate, unprofitable, and the total lease liability related to the salons is approximately $30 million. In addition to the salons, we assumed limited liabilities for certain employee benefit related payments. In connection with the reacquisition of the salons, we also terminated certain other agreements we had with TBG, although we had already recorded a full reserve against the promissory notes evidencing TBG’s obligations to us. As a result of our reacquisition of these salons in connection with TBG assignment for the benefit of creditors, there is a risk that a creditor of TBG could seek to void or otherwise challenge the transfer as a preference transaction. If a TBG creditor was successful in making such a claim, we could remain liable on the leases without the ability to operate the salons to generate revenue to fund the lease obligations.

While we believe the salons transferred back to us have been able to continue operations without any significant disruptions so far, these salons have experienced significant changes in recent years and, as a result, there is a risk of increased levels of employee attrition, customer losses, and supplier interruption. A loss of key personnel or material erosion of the employee base, particularly our stylists, as well as fruition of other risks could adversely affect our results of operations and could diminish the value of the salons in any future transfer of the ownership of these salons to new ownership as part of our continued commitment to converting to a fully-franchised model. If we are not able to successfully operate these salons, we may not be able to generate sufficient revenue to cover the lease liabilities for these salons. In the meantime, we expect that our operation of these salons may adversely impact our results of operations. Our inability to successfully operate the salons or transfer them to new stable ownership, could adversely affect our business, financial condition, results of operations and cash flows.

TBG’s transfer of salons in the United Kingdom to the Bushell Investment Group, which became our franchisee, is subject to review by the administrator in TBG’s insolvency proceeding in the United Kingdom.

As previously announced, we entered into a franchise agreement with the Bushell Investment Group (“Bushell”), which acquired over 100 salons in the United Kingdom from TBG in December 2019. The transaction occurred in connection with TBG’s insolvency proceeding in the United Kingdom. While we do not have any financial obligations in connection with the salons transferred to Bushell, the administrator in TBG’s insolvency proceeding has a legal obligation to review our original and subsequent transactions with TBG in the United Kingdom. If the administrator were to challenge our original transaction with TBG, the administrator could seek remedies to effectively unwind the economics of the original transaction or impair the ability of Bushell to continue operating these salons as our franchisee. While we do not expect the administrator to identify any concerns with our original or any subsequent transaction, any allegations against the validity of these transactions could disrupt the operation of the salons by Bushell and we could face significant adverse financial impacts or management distraction.


37


If we fail to comply with any of the covenants in our existing financing arrangement, we may not be able to access our existing revolving credit facility, and we may face an accelerated obligation to repay our indebtedness.

We have a financing arrangement that contains certain financial and other covenants. If we fail to comply with any of the covenants, it may cause a default under our financing arrangement, which could limit our ability to obtain new replacement financing or additional financing under our existing credit facility, require us to pay higher levels of interest or accelerate our obligation to repay our indebtedness should we be unable to negotiate modifications to our existing debt agreements in these circumstances. As a result of our rapid transition to a fully-franchised model, we expect we will not be able to comply in future quarters with certain of the financial covenants in our current credit facility. We have engaged an investment banker and are actively engaged in identifying alternative sources of replacement debt financing on terms that would better support our evolving business model. However, there can be no assurance that conditions in the debt market will remain favorable or that we will be able to find new sources of debt financing on terms that will be satisfactory to us, or that we will be able to find any such source of new debt financing prior to the fourth quarter.




38


Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Share Repurchase Program
 
In May 2000, the Company’s Board of Directors (Board) approved a stock repurchase program with no stated expiration date. Since that time and through December 31, 2019, the Board has authorized $650.0 million to be expended for the repurchase of the Company's stock under this program. All repurchased shares become authorized but unissued shares of the Company. The timing and amounts of any repurchases depend on many factors, including the market price of the common stock and overall market conditions. During the three and six months ended December 31, 2019, the Company repurchased 1.5 million shares for $26.4 million. As of December 31, 2019, a total accumulated 30.0 million shares have been repurchased for $595.4 million. At December 31, 2019, $54.6 million remains outstanding under the approved stock repurchase program.

The following table shows the stock repurchase activity by the Company or any “affiliated purchaser” of the Company, as defined in Rule 10b-18(a)(3) under the Exchange Act, by month for the three months ended December 31, 2019:

Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased As Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs (in thousands)
 
 
 

 
 
 
 

 
 
10/1/19 - 10/31/19
 
—

 
$
—

 
29,974,657

 
$
54,573

11/1/19 - 11/30/19
 
—

 
—

 
29,974,657

 
54,573

12/1/19 - 12/31/19
 
—

 
—

 
29,974,657

 
54,573

Total
 
—

 
$
—

 
29,974,657

 
$
54,573


Item 6.  Exhibits
 
 
President and Chief Executive Officer of Regis Corporation: Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
Executive Vice President and Chief Financial Officer of Regis Corporation: Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
Chief Executive Officer and Chief Financial Officer of Regis Corporation: Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
Exhibit 101
 
The following financial information from Regis Corporation's Quarterly Report on Form 10-Q for the quarterly and year-to-date periods ended December 31, 2019, formatted in Inline Xtensible Business Reporting Language (iXBRL) and filed electronically herewith: (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Earnings; (iii) the Condensed Consolidated Statements of Comprehensive Income; (iv) the Condensed Consolidated Statements of Cash Flows; and (v) the Notes to the Consolidated Financial Statements.
 
 
 
Exhibit 104
 
The cover page from Regis Corporation's Quarterly Report on Form 10-Q for the quarterly and year-to-date periods ended December 31, 2019, formatted in iXBRL (included as Exhibit 101).
 

39


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 

 
 
Date: February 4, 2020
By:
/s/ Kersten D. Zupfer
 
 
Kersten D. Zupfer
 
 
Executive Vice President and Chief Financial Officer
 
 
(Principal Accounting Officer)
 
 
 


40