−Removed: 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 second risk factor below, the seventh risk factor is replaced by the third and fourth risk factors listed below and the twenty-third risk factor is replaced by the fifth risk factor listed below and we have added, as the first, a risk factor related to the COVID-19 pandemic below.
−Removed: The impact of the COVID-19 pandemic and the measures implemented to contain the spread of the virus have had, and are expected to continue to have, a material adverse impact on our business and results of operations.
−Removed: Our operations expose us to risks associated with public health crises and epidemics/pandemics, such as the novel strain of coronavirus (COVID-19) that has spread globally.
−Removed: COVID-19 is having, and will continue to have, an adverse impact on our operations, including the temporary closure of all of our company-owned salons and almost all of our franchise locations;
−Removed: implementation of a furlough program for a substantial majority of our workforce across our corporate office, field support and distribution centers;
−Removed: and reductions in the pay for executives and other working employees at different levels for approximately two months.
−Removed: The pandemic may affect the health and welfare of our stylist community, customers, franchise partners or headquarters personnel.
−Removed: As of the date of this filing, a majority of our company-owned and franchise stores have re-opened after having been temporarily closed for several weeks.
−Removed: Most of our company-owned and franchise stores are located in markets that have been impacted by COVID-19 and where the recovery may be particularly slow to occur.
−Removed: The unprecedented uncertainty surrounding COVID-19, including the rapidly changing governmental directives, public health challenges and progress, macroeconomic consequences and market reactions thereto, makes it more challenging for our management to estimate the future performance of our business and develop strategies to resume and/or continue operations or generate growth or achieve our initial or any revised objectives for 2020.
−Removed: In particular, the uncertainty around COVID-19 will likely delay and/or impair or our ability to convert to a fully franchised model by the end of calendar year 2020 as we had previously thought, and we may need to explore other transactions, such as closing or selling off certain salons.
−Removed: In addition, as our stores are able to resume operations, our franchisees, many of whom were in the early stages of developing their businesses prior to the onset of the pandemic, may choose not to, or may not be able to, due to a variety of factors, resume operation of their salons or they may face challenges rehiring employees, reestablishing operations with their landlords and other vendors, and attracting customers back to their salons.
−Removed: As a result, our franchisees may request reductions to their royalty payments or other amounts due to us which may be critical to their ability to reestablishing operations, or they may simply be unable to make these payments and continue to operate or close the salon.
−Removed: The removal or reduction of these payments, including the added expense associated with closed locations where the Company may have residual lease liability, has and is expected to continue to adversely impact our revenues and cash flows.
−Removed: Customers may be cautious about returning to personal service providers, and we and our franchisees may incur substantial additional costs to ensure the safety of our employees and customers.
−Removed: While we may experience an initial increased demand for our services and products when businesses’ resume operation, there is no assurance that such immediate increase will be sustained.
−Removed: Furthermore, many of our customers have themselves experienced adverse financial impacts from the pandemic, including loss of disposable income, which may limit their spending on personal care, including sales of beauty products, or may have identified other means for hair care during the pandemic.
−Removed: In addition, efforts to lift restrictions on individuals’ daily activities and businesses’ normal operations may result in a resurgence of COVID-19 and potentially prolong and intensify the impact of the crisis, including additional workers compensation claims and customer claims associated with the pandemic.
−Removed: Further, the pandemic could impact workers at our headquarters or compromise the performance of our Fremont, CA technology center.
−Removed: As a result, COVID-19 has and will continue to negatively affect our revenue, the cost of salon operations, increase investment in safety equipment and potentially reduce our profitability, including the profitability of our franchisees.
−Removed: In addition, we retain residual real estate lease liability for company-owned and nearly all franchise stores.
−Removed: The combination of the revenue reduction, obligations we owe to landlords, and other costs both related and unrelated to COVID-19 could significantly reduce or exhaust our available liquidity over time and limit our ability to access liquidity sources.
−Removed: While the economic impact of COVID-19 to our franchisees may be reduced by financial assistance under the Coronavirus Aid, Relief, and Economic Security (CARES) Act or other similar COVID-19 related federal and state programs, such programs may not have a positive impact on our corporate financial results.
−Removed: Among other things, while we have begun to call employees back to work, the temporary furlough of most of our employees has impacted various operational and risk management functions, including our audit and financial reporting function.
−Removed: These reductions could temporarily impair our ability to timely and accurately reporting information to regulators and our shareholders and impair our business risk management protocols.
−Removed: We cannot reasonably estimate the length or severity of COVID-19 but we currently anticipate a material adverse impact on our financial position and results of operations.
−Removed: The disruption to the global economy and to our business, along with a sustained decline in our stock price, may lead to triggering events that may indicate that the carrying value of certain assets, including accounts receivables, long-lived assets, intangibles, and goodwill, may not be recoverable.
−Removed: 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.
−Removed: Prior to the COVID-19 pandemic, the Company had been derecognizing Company-owned goodwill as part of the calculation of gain or loss on the sale of salons to franchisees.
−Removed: Based on the results of items referenced above, the Company recognized a non-cash impairment charge to reduce the carrying value of goodwill related to our Company-owned reporting unit.
−Removed: COVID-19, and the volatile regional and global economic conditions stemming from the pandemic, as well as reactions to future pandemics or resurgences of COVID-19, including government mandates, could also precipitate or aggravate the other risk factors that we identify in our 2019 Form 10-K and this Form 10-Q, which in turn could materially adversely affect our business, financial condition, liquidity, results of operations (including revenues and profitability) and/or stock price.
−Removed: Further, COVID-19 may also affect our operating and financial results or the value of our salon brands in a manner that is not presently known to us or that we currently do not consider to present significant risks to our operations.
−Removed: 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.
−Removed: We have been successful in selling our company-owned salons to franchise owners 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.
−Removed: Furthermore, our efforts to re-engineer and reduce the corporate and field infrastructure devoted to supporting company-owned stores may impair our ability to effectively 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.
−Removed: In addition, as a result of the impacts of COVID-19 all corporate owned-stores were temporarily closed for several weeks, which may cause, among other things, a loss of stylists and customers, which could diminish the value and timing 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.
−Removed: We are now significantly dependent on franchise royalties and product sales and the overall success of our franchisees’ salons.
−Removed: It customarily takes new franchisees time to develop their salons and increase their sales.
−Removed: Further, a number of our historically successful and more experienced franchisees are onboarding new salon operations.
−Removed: This could adversely impact our revenue and profitability during this next stage of our transformation.
−Removed: 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.
−Removed: 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.
−Removed: 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.
−Removed: Further, the COVID-19 pandemic may impact our ability to successfully launch this new system on the timing and levels of profitability we had originally anticipated.
−Removed: In addition, a third party has challenged the development of certain parts of our technology systems.
−Removed: We have denied the allegations made by the third party and have asserted certain counterclaims against the third party.
−Removed: However, the dispute regarding our ownership and involvement of certain key personnel may be costly and distracting and the outcome is uncertain.
−Removed: 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.
−Removed: 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.
−Removed: We have made significant investments in company-owned technology, including a new back office salon management system that may not yield results on the timing or amounts we expect due to COVID-19 and pending litigation that has been filed by our existing POS supplier.
−Removed: Investments made in company-owned technology, including the Company's new, internally developed back office salon management system, may not yield the profitable results that we anticipate.
−Removed: Further, the COVID-19 pandemic may impact our ability to successfully launch this new system on the timing and levels of profitability we had originally anticipated.
−Removed: In addition, our existing POS supplier has challenged the development of certain parts of our technology systems.
−Removed: We have denied the allegations made by this third-party supplier and have asserted certain counterclaims against the third party.
−Removed: However, the dispute regarding our ownership and involvement of certain key personnel may be costly and distracting, and the outcome is currently uncertain.
−Removed: 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.
−Removed: 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.
−Removed: COVID-19 may impact the operations of the Company's key suppliers, including its merchandise, PPE and technology suppliers.
−Removed: The Company depends upon the support of a small number of critical suppliers, including its merchandise, PPE and technology providers, including its third-party POS supplier.
−Removed: We cannot be certain that the operations of these suppliers will not be impaired by COVID-19, which could result in a material impact to our own operations.
−Removed: 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 ownership could adversely affect our business, financial condition, results of operations and cash flows.
−Removed: 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.
−Removed: The transfer was consummated in connection with an assignment for the benefit of creditors by TBG.
−Removed: 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 $26 million as of March 31, 2020.
−Removed: We are attempting to renegotiate these lease obligations;
−Removed: however, the outcome of those negotiations is currently uncertain.
−Removed: In addition to the salons, we assumed limited liabilities for certain employee benefit related payments.
−Removed: 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.
−Removed: 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.
−Removed: 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.
−Removed: While we believe the salons transferred back to us have been able to continue operations without any significant disruptions so far except for the impacts arising out of COVID-19, 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.
−Removed: 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.
−Removed: 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.
−Removed: As a result, we may be compelled to close certain salons or sell the assets at depressed values.
−Removed: In the meantime, we expect that our operation of these salons may adversely impact our results of operations.
−Removed: 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.
−Removed: 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.
−Removed: 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.
−Removed: The transaction occurred in connection with TBG’s insolvency proceeding in the United Kingdom.
−Removed: 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.
−Removed: 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.
−Removed: 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.
−Removed: 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.
−Removed: If we fail to comply with our existing financing arrangements, 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.
−Removed: We believe that the amendment of our financing arrangement in May 2020 will allow us to remain in compliance with the revised covenants notwithstanding the impacts to our business of converting to a fully franchised model and other impacts arising out of COVID-19;
−Removed: however, significant and continued business disruptions could ultimately impair our ability to comply with the new liquidity covenant, which could preclude our ability to access our credit facility or our debt repayment obligation may be accelerated, which is now secured by a lien on substantially all of our assets.
+Added: 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, 2020, except for revision to the thirty-third risk factor listed below.
+Added: We rely on our management team and other key personnel.
+Added: We depend on the skills, working relationships, and continued services of key personnel, including our management team and others throughout our organization.
+Added: We are also dependent on our ability to attract and retain qualified personnel, for whom we compete with other companies both inside and outside our industry.
+Added: Our business, financial condition or results of operations may be adversely impacted by the unexpected loss of any of our management team or other key personnel, or more generally if we fail to identify, recruit, train and/or retain talented personnel.
+Added: Effective October 5, 2020, our new Chief Executive Officer commenced his employment as part of a leadership transition.
+Added: Any transition in senior executive leadership can impact relationships with our suppliers, franchisees, and employees and can lead to shifts in our operations.
Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.