What changed in this filing

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Item 1A. Risk Factors

2022-08-23 compared with 2021-08-26 · 94 added, 100 removed, 203 unchanged (49% of the section changed)

Business and Industry Risks

The impact of the COVID-19 pandemic, including the Delta variant, and the measures implemented to contain the spread of the virus have had, and may continue to have, a material adverse impact on our business and results of operations.

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.

The impact of the COVID-19 pandemic, including variants, and the measures implemented to contain the spread of the virus have had, and may continue to have, a material adverse impact on our business and results of operations.

Our operations expose us to risks associated with public health crises and epidemics/pandemics, such as COVID-19, that has spread globally.

COVID-19 has had, and may continue to have, an adverse impact on our operations.

The pandemic may affect the health and welfare of our stylist community, customers, franchise partners or headquarters personnel.

The pandemic may affect the health and welfare of our stylist community, customers, franchise partners or Salon Support personnel.

As of the date of this filing, our salons across essentially all geographies are allowed to be open;

however, states may again decide to require the closure of salons as the level of COVID-19 positive cases continues to fluctuate, as we have already seen in Canada.

Each time we are required to close and re-open salons, we will continue to experience the risks and business impacts described here, and further requirements to again close salons or limit and/or modify services or operations may exacerbate these impacts.

The continuing uncertainty surrounding COVID-19, including the 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 to develop strategies to resume and/or continue operations, to generate growth, or to achieve our initial objectives for fiscal year 2022.

In addition, some of our franchisees, many of whom were in the early stages of developing their businesses prior to the onset of the pandemic, have chosen, or may choose, not to resume operation of their salons and/or are facing challenges rehiring employees, reestablishing operations with their landlords and other vendors, and attracting customers back to their salons.

however, states may again decide to require the closure of salons as the level of COVID-19 cases continue to fluctuate.

Some of our franchisees, many of whom were in the early stages of developing their businesses prior to the onset of the pandemic, have chosen, or may choose, not to resume operation of their salons and/or are facing challenges rehiring employees, reestablishing operations with their landlords and other vendors, and attracting customers back to their salons.

As a result, many of our franchisees requested reductions or other modifications to their royalty payments or other amounts due to us, which may be critical to their ability to reestablish operations, and they may simply be unable or unwilling to make lease, royalty or other payments to us and may be unable to continue to operate or may need to close their salons.

The removal or reduction of these payments, including the added expense associated with closed locations where we may have residual lease liability, has continued, and is expected to continue, to adversely impact our revenues and cash flows.

Customers and employees have been cautious about returning to personal service providers, and we and our franchisees are incurring substantial additional costs to ensure the safety of our employees and customers.

The removal or reduction of these payments, including the added expense associated with closed locations where we may have residual lease liability, has and is expected to continue to have, an adverse impact on our revenues and cash flows.

Customers and employees have been cautious about returning to personal service providers.

Furthermore, as a result of the pandemic, many of our customers have themselves experienced adverse financial impacts, including loss of disposable income, which may limit their spending on personal care, including purchasing of beauty products, or have identified other means for hair care.

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In addition, COVID-19 may cause additional workers' compensation claims and customer claims associated with the pandemic.

Regarding support for our franchisees, the pandemic could impact workers at our headquarters and/or compromise the performance of our technology center in Fremont, California.

As a result, COVID-19 has negatively affected, and may continue to negatively affect, our revenue, increase the cost of salon operations, increase our investment in safety equipment and potentially expose us to additional liability, the combination of which will reduce our profitability, including the profitability of our franchisees.

In addition, we retain a residual real estate lease liability of $603.4 million for company-owned and nearly all franchise salons.

As a result, COVID-19 has negatively affected, and may continue to negatively affect, our revenue, increased the cost of salon operations and potentially exposed us to additional liability, the combination of which has reduced and may continue to reduce our profitability, including the profitability of our franchisees.

In addition, we retain a residual real estate lease liability of $501.3 million for company-owned and franchise salons that either sublease the premises of their location from us or that require us to guarantee the franchisee's lease.

The combination of the revenue reduction, obligations we ultimately 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.

We cannot reasonably estimate the length or severity of the COVID-19 pandemic, but we currently anticipate a material adverse impact on our financial position and results of operations.

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.

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, can be difficult to predict.

COVID-19, and the volatile local, 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 identified in this Form 10-K, which in turn could materially adversely affect our business, financial condition, liquidity, results of operations (including revenues and profitability) and/or stock price.

Further, COVID-19 may also affect our operating and financial results, certain litigation or regulatory risks 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.

COVID-19 may impact the operations of our key suppliers, including our merchandise, personal protective equipment (PPE) and technology suppliers.

We depend upon the support of a small number of critical suppliers, including our merchandise, PPE, and technology providers, such as our third-party point-of-sale system supplier.

We have experienced limited disruption in operations from these suppliers.

The continuing impacts of the global COVID-19 pandemic and the transition to two new merchandising distributors may pose additional disruptions in our supply chain or in the availability of products and services, or could increase the prices we pay to our suppliers, which could result in a material impact to our own operations.

The COVID-19 pandemic caused disruption to the global economy and to our business, which may lead to triggering events that prevent our recovery of the carrying value of certain assets, including accounts receivables, long-lived assets, intangibles, and goodwill.

Assessing goodwill for impairment can be difficult to predict because, among other things, it requires management to make assumptions and to apply judgment, including forecasting future sales and expenses, and selecting appropriate discount rates, all of which can be affected by economic conditions and other factors.

Consumer shopping trends and changes in manufacturer choice of distribution channels may negatively affect both service and product revenues.

Our salons are partly dependent on the volume of traffic around their locations in order to generate both service and product revenues.

Customer traffic may be adversely affected by changing consumer shopping trends that favor alternative shopping locations, such as the internet.

In recent years, we have experienced substantial declines in traffic in some shopping malls and traffic patterns at those salons affect our potential product sales revenues and impact the health of our brands.

In addition, we are experiencing a proliferation of alternative channels of distribution, such as blow dry bars, booth rental facilities, discount brick-and-mortar and online professional products retailers, as well as manufacturers selling direct to consumers online, which may negatively affect our product and service revenue.

Our salons are partly dependent on the volume of customer foot traffic around their locations to generate both service and product revenues.

Customer foot traffic may be adversely affected by changing consumer shopping trends that favor internet-based shopping or alternative shopping methods or locations.

In recent years, we have experienced substantial declines in foot traffic in some shopping malls that changed traffic patterns at those salons that may affect our revenues and impact the health of our brands.

In addition, we are experiencing a proliferation of alternative channels of distribution, such as blow dry bars, booth rental facilities, discount brick-and-mortar and online professional product retailers, as well as manufacturers selling directly to consumers online, all of which may negatively affect our product and service revenue.

Also, product manufacturers may decide to utilize these other distribution channels to a larger extent than in the past and they generally have the right to terminate relationships with us with little advance notice.

These trends could reduce the volume of traffic around our salons, and in turn, our revenues may be adversely affected.

These trends could reduce the volume of foot traffic around our salons, and in turn, our revenues may be adversely affected.

Changes in regulatory and statutory laws, such as increases in the minimum wage and changes that make collective bargaining easier, and the costs of compliance and non-compliance with such laws, may result in increased costs to our business.

With 5,576 locations and approximately 630 employees worldwide, our financial results can be adversely impacted by regulatory or statutory changes in laws.

Due to the number of people we or our franchisees employ, laws that increase minimum wage rates, employment taxes, overtime requirements or costs to provide employee benefits or administration may result in additional costs to our Company.

We are subject to laws and regulations that could require us to modify our current business practices and incur increased costs, which could have an adverse effect on our business, financial condition and revenues.

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In addition, a growing number of states, provinces and municipalities have passed, or are considering passing, requirements for paid sick leave, family leave, predictive scheduling (which imposes penalties for changing an employee's shift as it nears), and other requirements that increase the administrative complexity of managing our workforce.

Finally, changes in labor laws, such as recent legislation in Ontario and Alberta that was designed to facilitate union organizing, could increase the likelihood of some of our employees being subjected to greater organized labor influence.

Finally, changes in labor laws designed to facilitate union organizing, could increase the likelihood of some of our employees being subjected to greater organized labor influence.

If a significant portion of our employees were to become unionized, it would have an adverse effect on our business and financial results.

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Various state and federal laws govern our relationships with our franchisees and our potential sale of a franchise.

If we fail to comply with these laws, we could be liable for damages to franchisees and fines or other penalties.

If we fail to comply with these laws, we may subject the Company and our personnel to claims lodged by our franchisees, as well as federal and state government agencies, and those claims may include, among others, fraud, misrepresentation, unfair business practices and wrongful terminations.

As a result of those claims, we could be liable for fines, damages, stop orders or other penalties.

A franchisee or government agency may bring legal action against us based on the franchisee/franchisor relationship.

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In addition, other regulatory or legal developments may result in changes to laws or to the franchisee/franchisor relationship that could negatively impact the franchise business model and, accordingly, our profits.

We are also subject to federal statutes and regulations, including the rules promulgated by the U.S.

Federal Trade Commission, as well as certain state laws governing the offer and sale of franchises.

Many state franchise laws impose substantive requirements on franchise agreements, including limitations on non-competition provisions and on provisions concerning the termination or non-renewal of a franchise.

Some states require that certain materials be filed for a franchisor to be registered and approved before franchises can be offered or sold in that state.

The failure to obtain or retain licenses or approvals to sell franchises could have a material adverse effect on our business, financial condition, results of operations and prospects.

In addition to employment and franchise laws, we are also subject to a wide range of federal, state, provincial and local laws and regulations in the jurisdictions in which we operate, including those affecting public companies, product manufacturing and sale and those governing the franchisee/franchisor relationship.

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Changes in the general economic environment may impact our business and results of operations.

Changes to the U.S., Canadian and U.K.'s economies have an impact on our business.

General economic factors that are beyond our control, such as recession, inflation, deflation, tax rates and policy, energy costs, unemployment trends, extreme weather patterns, viruses, pandemics, stay-at-home orders and other casualty events that influence consumer confidence and spending, may impact our business.

Changes to the U.S., Canada and U.K.'s economies have an impact on our business.

In particular, visitation patterns to our salons can be adversely impacted by increases in unemployment rates and decreases in discretionary income levels.

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If we do not timely identify and properly respond to evolving trends and changing consumer demands for hair care or services, our sales may decline.

As a result of the global COVID-19 pandemic, there has been an increase in remote work and schooling, which reduces traffic in downtowns, city centers, and other business districts where our salons are located and reduces our revenue.

Furthermore, we may accumulate additional inventory and be required to mark down unsold inventory to prices that are lower than normal prices, which could adversely impact our margins and could further adversely impact our business, financial condition and results of operations.

The recent trend to work remotely reduces foot traffic in downtowns, city centers, and other business districts where our salons are located, causing a reduction in our revenue.

As of June 30, 2022, we were not in compliance with New York Stock Exchange listing requirements.

In June 2022, we received written notice from the New York Stock Exchange ("NYSE") that we did not meet certain NYSE continued listing standards.

Under the NYSE continued listing standards, the Company is required to maintain (a) a minimum average closing price of $1.00 per share over a period of 30 consecutive trading days, and (b) an average market capitalization of at least $50.0 million over a period of 30 consecutive trading days, and at the same time, total stockholders' equity equal to or greater than $50.0 million.

If we are unable to improve our stock price to over $1.00 by December 13, 2022 and our market capitalization to greater than $50.0 million by December 13, 2023, we will be subject to the NYSE’s suspension and delisting procedures.

We are closely monitoring the closing share price of our common stock and are considering all available options.

We intend to regain compliance with the NYSE listing standards by pursuing measures that are in the best interest of the Company and our shareholders.

A delisting of our common stock could negatively impact us by, among other things, reducing the liquidity and market price of our common stock;

reducing the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to raise equity financing;

limiting our ability to issue additional securities or obtain additional financing in the future;

decreasing the amount of news and analyst coverage of us;

and causing us reputational harm with investors, our employees, and parties conducting business with us.

Operating Risks

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.

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 in time 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.

We are now substantially dependent on franchise royalties 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 or recovering from the impacts of COVID-19.

Further, a number of our historically successful and more experienced franchisees are onboarding new salon operations.

This could adversely impact our revenue and profitability during this next stage of our transformation.

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.

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.

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 are moving away from our wholesale distribution model to third-party preferred supplier arrangements.

We are exiting the wholesale distribution model and have entered into preferred supplier agreements with two suppliers.

This change will reduce our future revenue and we may incur significant costs related to the transition.

In addition, if our new suppliers are unable to source the products at the prices expected by our franchisees, our franchisees' profitability and our profitability may be adversely impacted.

Further, economic instability and other impactful events and circumstances in the regions in which our suppliers and their manufacturers are located (such as in the ongoing COVID-19 pandemic), the financial instability of our suppliers, our suppliers' failure to meet our terms and conditions or our supplier standards, product safety and quality issues, disruption or delay in the transportation of products from our suppliers and their manufacturers to our salons, transport availability and cost, transport security, inflation and other factors relating to the suppliers and the areas in which they are located are beyond our control.

Sales at franchise locations may not return to pre-pandemic levels.

Sales at most of our franchise locations have not returned to their pre-pandemic levels causing our franchisees to earn less profits or incur losses.

Franchisees may be unable to pay their royalties or rents as they come due, which could decrease cash collections and increase our cash outflows if the franchisee subleases from us or we guarantee the lease.

Franchisees may decide to close their salons and there may not be another franchisee willing to take over the business, which would decrease the size of our fleet and our revenues.

We have exited our wholesale distribution business and entered into a preferred supplier agreement with a third party.

We exited our wholesale distribution business and entered into a preferred supplier agreement with a supplier.

This change has and will continue to reduce our future revenue.

If our new supplier is unable to source the products at the prices expected by our franchisees, our franchisees' profitability and our profitability may be adversely impacted.

Further, economic instability and other impactful events and circumstances in the regions in which our supplier and their manufacturers are located, the financial instability of our supplier, our supplier's failure to meet our terms and conditions or our supplier standards, product safety and quality issues, disruption or delay in the transportation of products from our supplier and their manufacturers to our salons, transport availability and cost, transport security, inflation and other factors relating to the suppliers and the areas in which they are located are beyond our control.

It is important for us and our franchisees to attract, train and retain talented stylists and salon leaders.

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Because the salon industry is highly fragmented and comprised of many independent operators, the market for stylists is typically highly competitive.

In addition, labor shortages, increases in minimum wage requirements may impact the number of stylists considering careers outside the beauty industry.

In addition, labor shortages and increases in minimum wage requirements may impact the number of stylists considering careers outside the beauty industry.

In most markets, we and our franchisees have experienced a shortage of qualified stylists or a reduction in the hours stylist will work.

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If the cosmetology school industry sustains further declines in enrollment or some schools close entirely, or if stylists leave the beauty industry, we expect that we and our franchisees would have increased difficulty staffing our salons in some markets.

In addition, we have observed that some stylists are not comfortable coming back to the salon environment during the COVID-19 pandemic and the enhanced unemployment amounts provided by the federal government during the COVID-19 pandemic, in some cases, decreases stylists' incentive to come back to work or return to their full workload.

If our salons are not successful in attracting, training and retaining stylists or in staffing salons, our same-store sales or the performance of our franchise business could experience periods of volatility or sales could decline and our results of operations could be adversely affected.

We are making significant investments in programs to attract and retain stylists.

If our strategies are not successful in attracting, training and retaining stylists or in staffing salons, our same-store sales or the performance of our franchise business could experience periods of volatility or sales could decline and our results of operations could be adversely affected.

Our continued success depends, in part, on the success of our franchisees, which operate independently.

As of June 30, 2021, approximately 95.3% of our salons were franchised locations.

As of June 30, 2022, 98.1% of our salons were franchised locations.

We derive revenues associated with our franchised locations primarily from royalties and fees.

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If franchisees do not successfully operate their salons in compliance with our standards, our brand reputation and image could be harmed, and our financial results could be affected.

Additionally, if franchisees do not price their goods and services competitively, the franchisee may fail to maximize the financial performance of their salon.

We could experience greater risks as the scale of our franchised salons increases.

Further, some franchise owners may not successfully execute the rebranding and/or turnaround of under-performing salons that we have transferred to them, particularly in the post-COVID environment.

Further, some franchise owners may not successfully execute the rebranding and/or turnaround of under-performing salons that we have transferred to them.

In addition, our franchisees are subject to the same general economic risks as our Company, and their results are influenced by competition for both guests and stylists, market trends, price competition and disruptions in their markets and business operations due to public health issues, including pandemics, severe weather and other external events.

Like us, they rely on external vendors for some critical functions and to protect their company data.

They may also be limited in their ability to open new locations by an inability to secure adequate financing, especially because many of them are small businesses with much more limited access to financing than our Company, by the limited supply of favorable real estate for new salon locations, or by government-mandated restrictions on salon operations due to COVID-19 or other pandemics.

They may also experience financial distress as a result of over-leveraging, which could negatively affect our operating results due to delayed or non-payments to us.

The bankruptcy, default, abandonment, or other default or breach by or of a franchisee could also expose us to liability under leases, which are generally sub-leased by us to our franchisees.

They may also be limited in their ability to open new locations by an inability to secure adequate financing, especially because many of them are small businesses with much more limited access to financing than our Company or by the limited supply of favorable real estate for new salon locations.

They may also experience financial distress because of over-leveraging, which could negatively affect our operating results due to delayed or non-payments to us.

The bankruptcy, default, abandonment, or breach by or of a franchisee could also expose us to lease liability due to our lease guarantees or subleases as explained previously.

A deterioration in the financial results of our franchisees, a failure of our franchisees to renew their franchise agreements or closure of locations could adversely affect our operating results through decreased royalty payments and fees.

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However, franchisees may not have access to capital, labor, etc., to support their growth.

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

On December 31, 2019, we re-acquired certain assets that were used in the operation of the mall-based salon business in the United States and Canada for which we had 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 $9 million as of June 30, 2021.

We are attempting to renegotiate these lease obligations and re-franchise certain salons;

however, the outcome of those negotiations is currently uncertain.

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 with TBG for which we had already recorded a full reserve against the promissory notes evidencing TBG's obligations to us.

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.

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.

As a result, we may be compelled to close certain salons or sell the assets at depressed values.

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.

Data security and data privacy compliance requirements could increase our costs, and cybersecurity incidents could result in the compromise of potentially sensitive information about our guests, franchisees, employees, vendors or Company and expose us to business disruption, negative publicity, costly government enforcement actions or private litigation and our reputation could suffer.

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The costs to remediate security incidents or breaches that may occur could be material.

Also, as cyber criminals become more frequent, intense, and sophisticated, the costs of proactive defensive measures may increase.

Also, as cyber-attacks become more frequent, intense, and sophisticated, the costs of proactive defensive measures may increase.

Furthermore, while our franchisees are independently responsible for data security at their franchised salon locations, a security incident or breach at a franchised salon location could negatively affect public perception of our brands.

More broadly, our incident response preparedness and disaster recovery planning efforts may be inadequate or ill-suited for a security incident and we could suffer disruption of operations or adverse effects to our operating results.

Our ability to franchise our company-owned SmartStyle salons and successfully operate this business is dependent on our relationship with Walmart.

Our SmartStyle salon operations are dependent on our relationship with Walmart.

As of June 30, 2022, we had 1,695 SmartStyle or Cost Cutters salons within Walmart locations.

Walmart is our largest landlord, and we believe we are Walmart's largest tenant.

Walmart is our largest landlord.

Our business within each of those 1,695 salons relies primarily on the traffic of visitors to the Walmart location, so our success is tied to Walmart's success in bringing shoppers into their stores.

We have limited control over the locations and markets in which we open new SmartStyle locations, as we only have potential opportunities in locations offered to us by Walmart.

Furthermore, Walmart has the right to close up to 100 of our salons per year for any reason, upon payment of certain penalties, to terminate lease agreements for breach, such as if we failed to conform with required operating hours, subject to a notice and cure period, and to terminate the lease if the Walmart store is closed.

In fiscal year 2017, we began franchising SmartStyle salons.

Future franchising activity will require, and be limited, by the approval of Walmart on a location-by-location basis.

Walmart may not give its approval to franchise some or all of our company-owned salons.

Furthermore, Walmart has the right to (a) close up to 100 of our salons per year for any reason, upon payment of certain buyout fees;

(b) terminate lease agreements for breach, such as if we failed to conform with required operating hours, subject to a notice and cure period;

and (d) to terminate the lease if the Walmart store is closed.

Future franchising activity is dependent upon a continued relationship between us and Walmart, as well as Walmart's approval of our proposed franchisee on a location-by-location basis.

Further, Walmart may attempt to impose changes to the terms and conditions of our agreements, which may be contrary to our economic interests.

Operating SmartStyle salons adds complexity in overseeing franchise compliance and coordination with Walmart.

Additionally, there are various remodel requirements of our franchisees, whether it be upon lease expiration or the remodeling of a Walmart location.

To the extent Walmart accelerates the pace of their own store remodels, our stores in remodeled Walmart locations would be held to the same standard.

The cost of these remodels may be prohibitive to our franchisees and could lead to the Company bearing a portion of the cost, or closures if the remodel requirement is not satisfied.

Our future growth and profitability may depend, in part, on our ability to build awareness and drive traffic with advertising and marketing efforts and on delivering a quality guest experience to drive repeat visits to our salons.

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In addition, delivering a quality guest experience is crucial to drive repeat visits to our salons.

We are developing our marketing and advertising strategies, including national and local campaigns, to build awareness, drive interest, consideration and traffic to our salons.

We are developing our marketing and advertising strategies, which might include national and local campaigns, to build awareness, drive interest, consideration and traffic to our salons.

We are also focusing on improving guest experiences to provide brand differentiation and preference as well as ensure our guests' needs are met.

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Our future growth and profitability may depend on the effectiveness, efficiency and spending levels of our marketing and advertising efforts to drive awareness and traffic to our salons.

In addition, delivering a quality guest experience is crucial to drive repeat visits to our salons.

We are developing our marketing and advertising strategies, including national and local campaigns, to build awareness and drive interest, consideration and traffic to our salons.

We are also focusing on improving guest experiences to provide brand differentiation and preference, and to ensure our guests' needs are met.

If our marketing, advertising, and improved guest experience efforts do not generate sufficient customer traffic and repeat visits to our salons, our business, financial condition, and results of operations may be adversely affected.

Additionally, we plan to increase our digital marketing efforts, and the success of those efforts are dependent upon our franchisee's migration to the Zenoti salon technology platform and customers opting-in to receive marketing messages from us.

Our success depends substantially on the migration of our Franchisees to the Zenoti salon technology platform.

The success of our digital marketing efforts discussed previously, as well as providing franchisees with back-office and salon management, including walk-in or advanced appointments, is dependent upon our franchisees' adoption of the Zenoti point-of-sale software.

We previously developed a mobile application, platform and salon management system called Opensalon Pro, which we sold to Soham, Inc.

("Zenoti"), in fiscal year 2022.

That agreement requires us to receive certain payments based upon the migration of our salons to the Zenoti software.

Additionally, some of our technology capabilities will require development by Zenoti, and thus if not developed, may adversely affect our digital marketing efforts as well as providing our franchisees with critical functionality and information.

Our success depends substantially on the value of our brands.

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Such systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, hacker attempts, security breaches and natural disasters.

In addition, some of our management information systems are currently developed and maintained by external vendors, and some are outdated or limited functionality exists that are not owned by us or not exclusively provided by us.

Certain capabilities or entire systems may be outdated or have limited functionality.

These management information systems may require upgrades or replacements periodically, which involve implementation and other operational risks.

In addition, our management information systems are developed and maintained by external vendors and we are transitioning our franchisees onto the Zenoti salon technology platform beginning in fiscal year 2023.

The failure of our management information systems to perform as we anticipate, to meet the continuously evolving needs of our business, or to provide an affordable long-term solution, could disrupt our business operations and result in other negative consequences, including remediation costs, loss of revenue and reputational damage.

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If our product offerings do not meet our guests' expectations regarding safety and quality, we could experience lost sales, increased costs, and exposure to legal and reputational risk.

All our vendors must comply with applicable product safety laws, and we are dependent on them to ensure that the products and packages we buy, for either use on a guest during a service or resale to the public, comply with all safety and quality standards.

All of our vendors must comply with applicable product safety laws, and we are dependent on them to ensure that the products and packages we buy, for either use on a guest during a service or resale to the public, comply with all safety and quality standards.

Events that give rise to actual, potential or perceived product safety concerns or mislabeling could expose us to government enforcement action and/or private litigation and result in costly product recalls and other liabilities.

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Financial and Economic Risks

We have made significant investments in company-owned technology, including point-of-sale and salon management system that may not yield results on the timing or amounts we expect.

Investments made in company-owned technology, including our internally developed point-of-sale and salon management system, Opensalon ® Pro, may not yield the profitable results in the timeframe or in amounts that we anticipate.

This new system also increases our susceptibility to data breaches, which could erode franchisee trust and materially impact the business.

We expect to make the technology a required brand standard in all of our franchise-owned salons, which may result in litigation from our franchisees.

Additionally, we entered into a transition services arrangement with our former point-of-sale and salon management system supplier to facilitate the transition of our remaining salons to Opensalon Pro.

If the supplier is unable to perform or the transition is delayed, our results may be adversely impacted.

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.

If we fail to comply with our existing financing arrangements, such a failure 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.

COVID-19 or other significant business disruptions could ultimately impair our ability to comply with the liquidity covenant, which could preclude our ability to access our credit facility or accelerate our debt repayment obligation, which is secured by a lien on substantially all of the Company's assets.

Our existing credit facility expires in March 2023 and we may not be able to re-finance or re-finance at a similar rate.

In March 2023, our existing debt is due and management expects to re-finance the debt prior to the expiration date.

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

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

Additionally, the Company may need to look to other sources of financing, including using the Company's At-The-Market (ATM) offering.

Use of the ATM or other equity offerings may be dilutive to shareholders.

If our capital investments in developing new technology-enabled capabilities and improving current technology infrastructure do not achieve appropriate returns, our financial condition and results of operations may be adversely affected.

We are currently making, and expect to continue to make, strategic investments in technology to improve guest experiences and improve our back-office systems, including without limitation, our Opensalon mobile application and platform that we launched in 2019 and our Opensalon Pro salon management system that we launched in August 2020.

These investments might not provide the anticipated benefits or desired return and could expose us to additional legal and compliance risks.

The impacts of significant business disruptions could ultimately impair our ability to comply with our covenants, which could preclude our ability to access our credit facility or accelerate our debt repayment obligation, which is secured by a lien on substantially all of the Company's assets.

If our capital investments in developing new and improving current technology infrastructure do not achieve appropriate returns, our financial condition and results of operations may be adversely affected.

We are currently making, and expect to continue to make, strategic investments in technology to increase traffic to salons and improve guest experiences, including without limitation, our mobile applications.

These investments may not provide the anticipated benefits or desired return and could expose us to additional legal and compliance risks.

Furthermore, some of our technology capabilities and developments involve third-party partnerships that we are dependent on.

If these partnerships are unsuccessful, the technology-enabled capabilities may not fully achieve their anticipated returns.

In addition, if we are unable to successfully protect any intellectual property rights resulting from our investments, the value received from those investments may be eroded, which could adversely affect our financial condition.

Among other things, targeting the wrong investment opportunities, failing to successfully meet our strategic objectives when making the correct investments, being unable to make new concepts scalable or achieving appropriate market or franchisee adoption, and/or making an investment commitment significantly above or below our needs could adversely affect our financial condition and results of operations.

Premature termination of franchise agreements can cause losses.

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A significant loss of franchisee agreements due to premature terminations could hurt our financial performance or our ability to grow our business.

Empire Education Group may be unsuccessful, which could adversely affect our financial results.

In 2020, we entered into an agreement to sell to the other owner our 55% ownership stake in Empire Education Group (EEG), an operator of accredited cosmetology schools.

Empire Education Group, Inc.

may be unsuccessful, which could adversely affect our financial results.

In 2020, we entered into an agreement to sell to the other owner our 55.1% ownership stake in Empire Education Group, Inc.

(EEG), an operator of accredited cosmetology schools.

The transaction is subject to regulatory approval before it can close, and there is no guarantee that the regulatory approval will occur, which has been delayed, in part, due to COVID-19.

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If the transaction does not close as anticipated and EEG is unsuccessful in executing its business plan, or if economic, regulatory and other factors, including declines in enrollment, revenue and profitability continue for the for-profit secondary education market, our financial results may be affected by certain potential liabilities related to this investment.

The transaction is expected to close in fiscal year 2022, at which time we expect to record an immaterial non-operating gain.

Failure to control costs may adversely affect our operating results.

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Also, in the future, our effective income tax rate could be adversely affected by a number of factors, including changes in the mix of earnings in countries with different statutory tax rates, changes in tax laws or the outcome of income examinations.

Our ability to use our U.S.

net operating loss carryforwards to offset future taxable income may be subject to certain limitations.

Utilization of the net operating loss carryforwards may be subject to an annual limitation if an ownership change under Section 382 of the Internal Revenue Code of 1986 occurs.

An ownership change could be triggered by subsequent sales of securities by us or our stockholders and such a change of ownership may limit our utilization of net operating losses.

Litigation and other legal or regulatory proceedings or claims and the outcome of such litigation, proceedings or claims, including possible fines and penalties, could have an adverse effect on our business and any loss contingency accruals may be inadequate to cover actual losses.

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

What changed 10-K

Item 1A. Risk Factors