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Item 7. Management’s Discussion and Analysis

2022-08-23 compared with 2021-08-26 · 211 added, 249 removed, 175 unchanged (72% of the section changed)

2 unchanged sentences

BUSINESS DESCRIPTION

Regis Corporation (RGS) franchises, owns and operates beauty salons.

Regis Corporation (the Company) franchises, owns and operates beauty salons.

As of June 30, 2022, the Company franchised, owned or held ownership interests in 5,576 locations worldwide.

Our locations consisted of 5,500 system-wide North American and International salons, and in 76 locations where we maintain a non-controlling ownership interest.

Each of the Company's salon concepts generally offer similar salon products and services.

Each of the Company's salon concepts generally offer similar salon products and services and serve the mass market.

As of June 30, 2022, we had approximately 630 corporate employees worldwide.

See discussion within Part I, Item 1.

In October 2017, the Company sold substantially all of its mall-based salon business in North America, representing 858 company-owned salons, and substantially all of its International segment, representing approximately 250 company-owned salons, to TBG.

In the second quarter of fiscal year 2020, TBG transferred 207 of its North American salons to the Company.

See Note 3 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K, as the results of operations for the mall-based business and International segment are accounted for as discontinued operations for all periods presented.

The overall goal of the TBG transaction was to reduce the Company's exposure to the mall-based lease obligations.

As of June 30, 2021, we have 43 TBG salons and remaining lease liability of $9 million.

See discussion within Part I, Item 1 of this Form 10-K.

On June 30, 2022, the Company sold its Opensalon Pro (OSP) software-as-a-service solution to Soham Inc.

for a purchase price of $20.0 million in cash plus up to an additional $19.0 million in cash contingent upon the number of salons that migrate to Soham's Zenoti product as their salon technology platform.

The Company received $13.0 million in proceeds in June 2022.

The remaining $7.0 million of the purchase price is subject to holdbacks including $4.0 million of the proceeds retained in escrow to be paid upon completion of the Company’s refinancing, $1.0 million once the Company ends its arrangement with its former third-party salon technology provider in December 2022 and $2.0 million of proceeds held back until general indemnity provisions are satisfied within 18 months from closing.

As a result of the sale, the Company classified the OSP business as discontinued operations in the financial statements as discussed in Note 3 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

As part of the Company's strategic transition to a fully-franchised model, the Company is selling salons to franchisees.

The impact of these transactions are as follows:

Fiscal Years Increase (Decrease)

2021 2020 2019 2021 2020

(Dollars in thousands)

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Cash proceeds received $ — $ 8,437

(Loss) gain on venditions, excluding goodwill derecognition $ (16,696) $ 49,660 $ 69,973 $ (66,356) $ (20,313)

Non-cash goodwill derecognition — (76,966) (67,055) 76,966 (9,911)

(Loss) gain from sale of salon assets to franchisees, net $ (16,696) $ (27,306) $ 2,918 $ 10,610 $ (30,224)

The Company is also exiting its wholesale distribution business as part of its asset-light transformation.

The Company will exit its distribution centers and cease selling products to franchisees in fiscal year 2022.

Instead, franchisees will source product from third party distribution partners and the Company will receive a royalty payment based on franchisee purchases.

Going forward, this change will significantly decrease both the Company's Franchise product revenue and general and administrative costs, including the Franchise distribution costs discussed in Note 1 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

In fiscal year 2021, the Company experienced the following one-time charges related to the plan to exit the distribution centers:

Financial Statement Caption Segment (in thousands)

Inventory reserve (Note 1) Cost of product Company-owned $ 12,068

Gain from disposal of distribution center assets (Note 8) Interest income and other, net Corporate (14,997)

Loss from sale of salon assets to franchisees, net $ (2,334) $ (16,696)

The Company shifted its product business from a wholesale model to a third-party distribution model as part of its asset-light transformation.

In fiscal year 2022, the Company exited its distribution centers and ceased selling products to franchisees.

Going forward, franchisees will source product from a third-party distribution partner and the Company receives a royalty payment based on franchisee purchases.

This change has significantly decreased both the Company's franchise product revenue and general and administrative expense, including the Franchise distribution costs discussed in Note 1 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

In fiscal years 2022 and 2021, the Company experienced the following charges related to the plan to exit the distribution centers:

Financial Statement Caption (Dollars in thousands)

Inventory reserve (1) Inventory reserve $ 7,655 $ —

Inventory valuation adjustment (2) Company-owned salon expense 2,823 12,068

Gain from disposal of distribution center assets Interest income and other, net — (14,997)

____________________________________________________________________________

(1) Includes charges in the third and fourth quarter of fiscal year 2022 associated with the liquidation of distribution center inventory, which primarily related to reserving for personal protective equipment acquired as a result of the COVID-19 pandemic.

(2) Due to the reduction in company-owned salons, the Company cannot redistribute inventory from closed salons causing an increase to the reserve.

Also included in fiscal year 2021 was the write-off of marketing and promotional items.

RESULTS OF OPERATIONS

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Franchise salons and Company-owned salons.

In fiscal year 2019, the mall-based business and International segment were accounted for as discontinued operations.

COVID-19 Impact:

During fiscal year 2021 and the second half of fiscal year 2020, the global coronavirus pandemic (COVID-19) had an adverse impact on our operations.

Nearly all salons were closed for some time during April 2020 with franchise salons gradually starting to open near the end of April.

Company-owned salons began opening in June 2020 and our salons did not experience significant mandated closures during the remainder of the year, with the exception of California and Canada.

California and Canada had significant mandated closures throughout fiscal year 2021, predominantly in the second half of the year.

To offset the loss of revenue, in April 2020, a furlough program was implemented for a majority of the workforce across the corporate headquarters, field support, and distribution centers;

and reductions in the pay for executives and other working employees.

The furlough program was in effect for the majority of the fourth quarter of fiscal year 2020 and was gradually lifted in the first quarter of fiscal year 2021.

Despite actions taken to resume business operations, COVID-19 and the volatile regional and global economic conditions stemming from the pandemic could potentially prolong and intensify the impact on our business.

During fiscal years 2022 and 2021, the global coronavirus pandemic (COVID-19) had an adverse impact on operations.

The COVID-19 pandemic continues to impact salon guest visits and franchisee staffing, resulting in a significant reduction in revenue and profitability.

In response to COVID-19, the Company received Canadian rent relief, Canadian wage relief and U.S.

employee retention payroll tax credits.

In fiscal years 2022 and 2021, the Company received the following amounts in rent and wage assistance:

Financial Statement Caption (Dollars in thousands)

Canadian rent relief Rent $ 1,235 $ —

Canadian wage relief Company-owned salon expense 1,966 1,629

employee retention payroll tax credit Company-owned salon expense — 1,547

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

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

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

System-wide results

As an asset-light franchise platform, our results are impacted by our system-wide sales, which include sales by all points of distribution, whether owned by the Company or our franchisees.

Our results are impacted by our system-wide sales, which include sales by all points of distribution, whether owned by our franchisees or the Company.

While we do not record sales by franchisees as revenue, and such sales are not included in our Consolidated Financial Statements, we believe that this operating measure is important in obtaining an understanding of our financial performance.

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System-wide same-store sales (1) by concept are detailed in the table below:

2021 2020 2019

SmartStyle 5.7 % (26.7) %

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____________________________________________________________________________

(1) Fiscal year 2021 system-wide same-store sales are calculated as the total change in sales for system-wide franchise and company-owned locations that were open on a specific day of the week during the current period and the corresponding prior period.

Fiscal years 2020 and 2019 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.

Adjusting the definition to include salons that were open under the current ownership for less than one year negatively impacted the 2021 comparables by approximately 1%.

(1) Fiscal years 2022 and 2021 system-wide same-store sales are calculated as the total change in sales for system-wide franchise and company-owned locations that were open on a specific day of the week during the current period and the corresponding prior period.

Year-to-date system-wide same-store sales are the sum of the system-wide same-store sales computed on a daily basis.

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The following table sets forth, for the periods indicated, certain information derived from our Consolidated Statement of Operations.

The percentages are computed as a percent of total revenues, except as otherwise indicated.

The percentages are computed as a percent of total revenues, and the increase (decrease) is measured in basis points.

2022 2021 2022 2021 2022

(Dollars in millions) % of Total Revenues (1) Basis Point (Decrease) Increase

Service revenues $ 108.1 $ 331.5 $ 749.7 26.0 % 49.5 % 70.1 % (2,350) (2,060)

Product revenues 91.5 137.6 225.6 22.1 20.5 21.1 160 (60)

Franchise royalties and fees 88.1 73.4 93.8 21.2 11.0 8.8 1,020 220

Franchise rental income 127.4 127.2 — 30.7 19.0 — 1,170 N/A

Cost of service (2) 79.1 222.3 452.8 73.2 67.1 60.4 610 670

Cost of product (2) 79.2 84.7 128.8 86.6 61.6 57.1 2,500 450

Site operating expenses 51.5 71.5 141.0 12.4 10.7 13.2 170 (250)

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

Royalties $ 65.8 $ 52.4 23.8 % 12.7 % 1,110

Fees 11.6 10.2 4.2 2.6 160

Product sales to franchisees 15.1 56.7 5.5 13.8 (830)

Advertising fund contributions 32.6 22.0 11.8 5.3 650

Franchise rental income 130.8 127.4 47.4 30.9 1,650

Company-owned salon revenue 20.2 143.0 7.3 34.7 (2,740)

Cost of product sales to franchisees (2) 17.4 43.8 115.2 77.2 3,800

Inventory reserve 7.7 — 2.8 — N/A

General and administrative 65.3 96.4 23.7 23.4 30

Rent 9.4 40.8 3.4 9.9 (650)

Franchise rent expense 127.4 127.2 — 30.7 19.0 — 1,170 N/A

Advertising fund expense 32.6 22.0 11.8 5.3 650

Franchise rent expense 130.8 127.4 47.4 30.9 1,650

Company-owned salon expense 22.0 141.2 8.0 34.3 (2,630)

Depreciation and amortization 6.2 21.7 2.2 5.3 (310)

Long-lived asset impairment 13.0 22.6 — 3.1 3.4 — (30) N/A

TBG restructuring — 2.3 21.8 — 0.3 2.0 (30) (170)

Long-lived asset impairment 0.5 13.0 0.2 3.2 (300)

Goodwill impairment 13.1 — 4.7 — N/A

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Interest expense (12.9) (13.2) (4.7) (3.2) (150)

(Loss) gain from sale of salon assets to franchisees, net (16.7) (27.3) 2.9 (4.0) (4.1) 0.3 10 (440)

Loss from sale of salon assets to franchisees, net (2.3) (16.7) (0.8) (4.1) 330

Interest income and other, net (0.3) 15.9 (0.1) 3.9 (400)

Income tax benefit (3) 5.4 4.6 2.1 4.6 2.6 9.6 N/A N/A

Income from discontinued operations, net of taxes — 0.8 5.9 — 0.1 0.6 (10) (50)

Income tax (expense) benefit (4) (2.0) 5.4 (4.5) 5.0 N/A

Loss from discontinued operations, net of taxes (39.4) (10.1) (14.3) (2.5) (1,180)

Net loss (3) (85.9) (113.3) (31.1) (27.5) (360)

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(1) Cost of service is computed as a percent of service revenues.

Cost of product is computed as a percent of product revenues.

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

(2) Excludes depreciation and amortization expense.

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The income taxes basis point change is noted as not applicable (N/A) as the discussion below is related to the effective income tax rate.

Fluctuations in major revenue categories, operating expenses and other income and expense were as follows:

Consolidated Revenues

Consolidated revenues primarily include product and equipment sales to franchisees, franchise royalties and fees, franchise rental income and revenues of company-owned salons.

The following tables summarize revenues and same-store sales by concept, as well as the reasons for the percentage change.

2021 2020 2019

(Dollars in thousands)

Franchise salons:

Product excluding TBG $ 56,699 $ 50,411 $ 42,915

TBG product — 2,010 16,990

Total franchise product 56,699 52,421 59,905

Royalties and fees 88,057 73,402 93,761

Franchise rental income 127,392 127,203 —

Total, Franchise salons 272,148 253,026 153,666

Franchise same-store sales (decrease) increase (1) (24.5) % (4.4) % 0.3 %

Company-owned salons:

SmartStyle $ 48,657 $ 203,361 $ 208,531

Supercuts 23,055 54,121 383,380

Portfolio Brands 71,253 159,221 323,462

Total, Company-owned salons 142,965 416,703 915,373

Company-owned salon same-store sales decrease (2) (33.4) % (4.4) % (0.4) %

Consolidated revenues $ 415,113 $ 669,729 $ 1,069,039

Percent change from prior year (38.0) % (37.4) % (13.5) %

_______________________________________________________________________________

(1) Franchise same-store sales in fiscal year 2021 are calculated as the total change in sales for franchise locations that were open on a specific day of the week during the current period and the corresponding prior period.

Fiscal years 2020 and 2019 franchise same-store sales are calculated as the total change in sales for franchise 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.

Adjusting the definition to include salons that were open under the current ownership for less than one year negatively impacted the 2021 comparables by approximately 1%.

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.

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

(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.

Fiscal year company-owned same-store sales are the sum of 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.

Fiscal Year Ended June 30, 2022 Compared with Fiscal Year Ended June 30, 2021

Consolidated Revenues

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

Consolidated revenue decreased $254.6 million, or 38.0%, during fiscal year 2021.

Service revenue and product revenue decreased $223.4 million and $46.0 million, respectively.

The decline in service and product revenue is primarily due to the Company's sale of salons to franchisees.

Consolidated revenues are primarily comprised of royalties, fees, advertising fund contributions, product sales to franchisees, franchise rental income and company-owned salon revenue.

Consolidated revenues decreased $135.7 million, or 33.0%, during fiscal year 2022.

Royalty revenue increased $13.4 million during fiscal year 2022 due to higher franchise system-wide sales and a higher average franchise salon count during the year.

The overall decrease in revenue is due to the sale of company-owned salons to franchisees, the closure of company-owned salons which contributed $105.4 million to the decline and the reduction in product sales to franchisees of $41.6 million.

During fiscal year 2022, 110 salons were sold to franchisees, net of buy backs, and 360 and 21 system-wide salons were closed and constructed, respectively (2022 Net Salon Count Changes).

The impact to consolidated revenue due to the sale of salons to franchisees and closure of salons was $223.3 million.

System-wide sales also declined, primarily due to fewer guest visits and government-mandated closures related to the COVID-19 pandemic, which also contributed to the decline in service, product and royalties and fees revenue.

In fiscal year 2020, the Company refunded $14.9 million of previously collected cooperative advertising fees, which reduced royalties and fees in the prior period.

Service Revenues

The decrease of $223.4 million, or 67.4%, in service revenues during fiscal year 2021 was primarily due to 2021 Net Salon Count Changes.

The impact to service revenue due to the sale of salons to franchisees and closure of salons was $179.5 million.

The remaining decrease in service revenue relates primarily to fewer guest visits as a result of the COVID-19 pandemic.

Product Revenues

The decrease of $46.0 million, or 33.5%, in product revenues during fiscal year 2021 was primarily due to 2021 Net Salon Count Changes.

The impact to product revenue due to the sale of salons to franchisees and closure of salons was $43.8 million.

Additionally, franchise same-store product sales declined 25.3% contributing to the decline.

Royalties and Fees

Royalties and fees increased $14.7 million, or 20.0%, during fiscal year 2021.

This increase was primarily due to an increase in cooperative advertising funds charged to franchisees of $8.7 million.

In fiscal year 2020, the Company refunded $14.9 million of previously collected cooperative advertising fund fees, which reduced royalties and fees in the prior period.

Cooperative advertising funds were temporarily reduced as part of our COVID-19 pandemic relief effort and also declined due to lower same-store sales.

The declines in cooperative advertising are offset in site expense and have no impact on operating income.

Royalties and fees were also impacted by the decreases in franchise same-store sales of 24.5%, partially offset by an increase in franchise salons.

Total franchised locations open at June 30, 2021 were 5,563 as compared to 5,209 at June 30, 2020.

Additionally, our sales continue to be challenged by labor issues with active stylists and stylist hours worked below pre-COVID levels.

During fiscal year 2022, royalties increased $13.4 million, or 25.6%, primarily due to a higher average franchise salon count and higher franchise system-wide sales.

During fiscal year 2022, fees increased $1.4 million, primarily due to the rebate from the Company's third-party distributor included in fees, which was a new source of revenue in fiscal year 2022.

Training revenues also increased year over year.

See Note 2 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

Product Sales to Franchisees

Product sales to franchisees decreased $41.6 million, or 73.4%, during fiscal year 2022, primarily due to the Company's shift in its product business to a third-party distribution model.

The Company expected revenue from product sales to decrease significantly during fiscal year 2022 and expects it to continue to decrease in fiscal year 2023.

Advertising Fund Contributions

Advertising fund contributions increased $10.6 million, or 48.2%, during fiscal year 2022, primarily due to a higher average franchise salon count in fiscal year 2022 and system-wide sales and an increase in the contribution rate that had been reduced in the first half of fiscal year 2021 in response to COVID-19.

Franchise Rental Income

The increase of $0.2 million, or 0.1%, in franchise rental income during fiscal year 2021 is due to the increase in franchise salons.

Cost of Service

The 610 basis point increase in cost of service as a percent of service revenues during fiscal year 2021 was primarily due to inefficient and non-productive stylist hours as a result of reduced guest visits and higher minimum wages.

Cost of Product

The 2,500 basis point increase in cost of product as a percent of product revenue during fiscal year 2021 was primarily due to an $12.1 million reserve for excess and obsolete inventory related to the change in the Company's merchandising strategy.

The shift from retail sales to franchise product sales also contributed to the basis point increase.

Excluding the excess and obsolescence reserve, margins on retail product sales were 40.7% and 47.6% for fiscal years 2021 and 2020, respectively.

Margins on franchise product sales were 18.1% and 23.6% for fiscal years 2021 and 2020, respectively.

The decrease in product margin is primarily due to lower prices in connection with the closing of company-owned salons and the Company exiting the wholesale distribution product business.

Site Operating Expenses

The decrease of $20.1 million, or 28.1%, in site operating expenses during fiscal year 2021 was primarily due to a net reduction in company-owned salon counts and decreases in marketing spend, partially offset by a $8.7 million increase in cooperative advertising expense, as noted above in Royalties and Fees.

During fiscal year 2022, franchise rental income increased $3.4 million, or 2.7%, primarily due to a higher average franchise salon count.

Company-owned Salon Revenue

During fiscal year 2022, company-owned salon revenue decreased $122.8 million, or 85.9%, due to the decrease in company-owned salons as a result of the sale of salons to franchisees and salon closures, a decline in product sales, and exiting our third-party logistic revenue associated with the closure of our warehouses in fiscal year 2022.

Cost of Product Sales to Franchisees

The 3,800 basis point increase in cost of product as a percent of product revenue during fiscal year 2022 was primarily due to the Company reducing prices to liquidate distribution center inventory.

Inventory Reserve

During fiscal year 2022, the Company recorded an inventory reserve charge of $7.7 million related to distribution center inventory, primarily consisting of personal protective equipment the Company no longer believes is marketable.

During fiscal year 2021, the Company recorded an inventory reserve charge of $12.1 million, which was included in company-owned salon expense in connection with our distribution center exit strategy.

General and Administrative

The decrease of $25.5 million, or 19.5%, in general and administrative during fiscal year 2021 was primarily due to lower administrative and field management salaries due to reductions in headcount as we aligned our cost structure with our transition to an asset-light franchise model.

A benefit from the forfeiture of equity awards related to the departure of the Company's former CEO contributed $2.4 million to the decrease in fiscal year 2021.

Additionally, $1.3 million of the decline is due to the Company not holding its annual franchise convention in fiscal year 2021 due to the COVID-19 pandemic.

The decrease of $35.5 million, or 46.4%, in rent expense during fiscal year 2021 was primarily due to the net reduction in the number of company-owned salons associated with the Company's transformation to a fully-franchised portfolio.

The decrease of $31.1 million, or 32.3%, in general and administrative expense during fiscal year 2022 was primarily due to lower administrative and field management compensation resulting from headcount reductions and a decrease in expenses associated with the distribution centers closed in fiscal year 2022.

The decrease of $31.4 million, or 77.0%, in rent expense during fiscal year 2022 was primarily due to the net reduction in the number of company-owned salons.

Additionally in fiscal year 2022, the Company accrued less rent deemed uncollectible from franchisees.

Partially offsetting the decrease was a $0.9 million broker fee incurred in fiscal year 2022 related to exiting the Company's distribution centers.

Advertising Fund Expense

Advertising fund expense increased $10.6 million, or 48.2%, during fiscal year 2022, primarily due to a higher average franchise salon count in fiscal year 2022 and system-wide sales and an increase in the contribution rate that had been reduced in the first half of fiscal year 2021 in response to COVID-19.

Franchise Rent Expense

The increase of $0.2 million, or 0.1%, in franchise rent expense is due to the increase in franchise salons.

During fiscal year 2022, franchise rent expense increased $3.4 million, or 2.7%, primarily due to a higher average franchise salon count.

Company-owned Salon Expense

Company-owned salon expense decreased $119.2 million, or 84.4%, during fiscal year 2022, primarily due to the reduction in company-owned salons, a reduction in the inventory reserve charge and a decline in product sales.

Depreciation and Amortization

The decrease of $14.2 million, or 38.5%, in depreciation and amortization during fiscal year 2021 was primarily due to the net reduction in company-owned salon counts.

Additionally, salon asset impairment of $3.9 million was recorded to depreciation expense in fiscal year 2020.

Salon asset impairment in fiscal year 2021 was recorded to long-lived asset impairment.

The decrease of $15.5 million, or 71.4%, in depreciation and amortization during fiscal year 2022 was primarily due to the net reduction in company-owned salon count and no depreciation expense in fiscal year 2022 related to the distribution center assets that were derecognized in fiscal year 2021.

Long-Lived Asset Impairment

In fiscal year 2021, the Company recorded a long-lived asset impairment charge of $13.0 million, which included a right of use asset impairment of $9.5 million and a salon asset impairment of $3.5 million.

In fiscal year 2020, the Company recorded a long-lived asset impairment charge of $22.6 million, which included a right of use asset impairment of $17.4 million.

TBG Mall Restructuring

In fiscal year 2020, the Company recorded $2.3 million of TBG restructuring charges, which related to professional fees and the Company assisting TBG with operating expenses to mitigate the risk of default associated with TBG's lease obligations.

See Note 3 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

In fiscal year 2022, the Company recorded a long-lived asset impairment charge of $0.5 million, which represents a right of use (ROU) asset impairment charge of $0.5 million.

In fiscal year 2021, the Company recorded a long-lived asset impairment charge of $13.0 million, which included a ROU asset impairment of $9.5 million.

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

Goodwill Impairment

In fiscal year 2020, the Company recorded $40.2 million of goodwill impairment related to the Company-owned reporting unit.

The Company's forecasted cash flows for company-owned salons decreased significantly due to the impact of the COVID-19 pandemic.

As a result, the carrying value of the Company-owned reporting unit exceeded its fair value resulting in a full impairment of goodwill.

During fiscal year 2022, the Company recorded a goodwill impairment charge of $13.1 million.

See Note 1 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

Interest Expense

The increase of $6.3 million in interest expense for fiscal year 2021 was primarily due to greater levels of debt at higher interest rates.

The $0.3 million decrease in interest expense during fiscal year 2022 was primarily due to interest incurred in fiscal year 2021 related to the financing liabilities associated with our sale leasebacks.

Interest expense is expected to increase in fiscal year 2023 as fees related to the credit amendment signed in the first quarter of 2023 are amortized as interest expense over the new term of the credit agreement.

Additionally, under the terms of the amended credit agreement, we expect interest expense to increase in the fourth quarter of fiscal year 2023.

Loss from Sale of Salon Assets to Franchisees, net

In fiscal year 2021, the loss from sale of salon assets to franchisees was $16.7 million.

In fiscal year 2020, the loss from sale of salon assets to franchisees was $27.3 million, including non-cash goodwill derecognition of $77.0 million.

There was no goodwill derecognition in fiscal year 2021 due to the company-owned goodwill impairment reported in fiscal year 2020.

The $14.4 million decrease in the loss from the sale of salon assets to franchises, net during fiscal year 2022 was primarily due to fewer salons sold in fiscal year 2022.

Interest Income and Other, net

The increase of $12.5 million in interest income and other, net during fiscal year 2021 was primarily due to the gain associated with the leases for the Company's distribution centers (see Note 8 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K), partially offset by the sale of the Company's headquarters recorded in fiscal year 2020.

During fiscal year 2021, the Company recognized a tax benefit of $5.4 million, with a corresponding effective tax rate of 4.6%, compared to recognizing a tax benefit of $4.6 million, with a corresponding effective tax rate of 2.6% during fiscal year 2020.

The decrease of $16.2 million in interest income and other, net during fiscal year 2022 was primarily due to the $15.0 million gain associated with the leases for the Company's distribution centers that was recognized in fiscal year 2021.

Income Tax (Expense) Benefit

During fiscal year 2022, the Company recognized tax expense of $(2.0) million, with a corresponding effective tax rate of (4.5)%, compared to recognizing a tax benefit of $5.4 million, with a corresponding effective tax rate of 5.0% during fiscal year 2021.

See Note 10 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

Income from Discontinued Operations

Income from discontinued operations was $0.8 million during fiscal year 2020 due to actuarial reserve adjustments.

Loss from Discontinued Operations, net of Income Taxes

In fiscal year 2022, the loss from discontinued operations includes the loss from the sale of OSP, including goodwill derecognition of $38.4 million, partially offset by proceeds from the sale.

In fiscal year 2021, loss from discontinued operations includes the income generated from OSP software subscriptions.

See Note 3 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

In fiscal year 2023, we expect to record gains relate to discontinued operations as we receive cash related to the release of holdbacks of the purchase price in connection with the sale of OSP.

Results of Operations by Segment

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Franchise salons and Company-owned salons.

See Note 15 to the Consolidated Financial Statements in in Part II, Item 8, of this Form 10-K.

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

See Note 15 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

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

Franchise Salons

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(Dollars in millions) Increase (Decrease) (1)

Product $ 56.7 $ 50.4 $ 42.9 $ 6.3 $ 7.5

Product sold to TBG — 2.0 17.0 (2.0) (15.0)

Total Product $ 56.7 $ 52.4 $ 59.9 $ 4.3 $ (7.5)

Royalties and fees (1) 88.1 73.4 93.8 14.7 (20.4)

Royalties $ 65.8 $ 52.4 $ 13.4

Fees 11.6 10.2 1.4

Product sales to franchisees 15.1 56.7 (41.6)

Advertising fund contributions 32.6 22.0 10.6

Franchise rental income 130.8 127.4 3.4

Total franchise salons revenue (2) $ 272.1 $ 253.0 $ 153.7 $ 19.1 $ 99.4

Total franchise revenue (1) $ 255.8 $ 268.7 $ (12.9)

Franchise same-store sales (2) 15.0 % (24.5) %

Operating income $ 40.7 $ 35.2 $ 36.4 $ 5.5 $ (1.2)

Operating loss from TBG — (2.3) (20.2) 2.3 17.9

Total operating income (2) $ 40.7 $ 32.9 $ 16.1 $ 7.8 $ 16.7

Operating loss $ (11.8) $ (24.6) $ 12.8

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(1) Includes $1.6 million of royalties related to TBG during fiscal year 2019.

(1) Total is a recalculation;

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

(3) Franchise same-store sales in fiscal year 2021 are calculated as the total change in sales for franchise locations that were open on a specific day of the week during the current period and the corresponding prior period.

Adjusting the definition to include salons that were open under the current ownership for less than one year negatively impacted the 2021 comparables by approximately 1%.

(2) Franchise same-store sales in fiscal year 2022 and 2021 are calculated as the total change in sales for franchise locations that were open on a specific day of the week during the current period and the corresponding prior period.

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.

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

TBG same-store sales are excluded from fiscal year 2019 to be consistent with fiscal years 2020 and 2021.

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

Fiscal Year Ended June 30, 2022 Compared with Fiscal Year Ended June 30, 2021

Franchise Salon Revenues

Franchise salon revenues increased $19.1 million during fiscal year 2021.

The increase in franchise salon revenue was primarily due to increased cooperative fund contributions due to the refunding of $14.9 million of previously collected contributions to the cooperative advertising funds.

Product revenue increased primarily due to the increase in franchise salons.

During fiscal year 2021, Franchisees purchased (net of Company buybacks) 747 salons from the Company and constructed (net of relocations) and closed 32 and 425 franchise-owned salons, respectively.

Franchise Salon Operating Income

During fiscal year 2021, Franchise salon operations generated operating income of $40.7 million, an increase of $7.8 million compared to the prior comparable period.

The increase was primarily due to the increase in royalties per salon due to the net 747 salons purchased from the Company.

Cash Generated from Salons Sold to Franchisees

During fiscal years 2021 and 2020, the Company generated $8.4 million and $91.6 million of cash, respectively, from the sale of company-owned salons to franchisees.

The decrease is due to lower proceeds per salon sold due to diminished salon performance due to COVID-19 pandemic as well as the mix of salons sold.

Franchise Revenues

Franchise revenues decreased $12.9 million during fiscal year 2022.

The decrease in franchise revenue was primarily due to the decrease in product sales to franchisees due to the Company's shift to third-party distributors, partially offset by higher royalties and advertising fund contributions due to a higher average salon count and increase in system-wide sales.

During fiscal year 2022, franchisees purchased 110 salons from the Company and constructed (net of relocations) and closed 21 and 299 franchise salons, respectively.

Franchise Operating Loss

During fiscal year 2022, franchise salon operations generated operating losses of $11.8 million, and generated an operating loss of $24.6 million during fiscal year 2021.

The operating loss improved during fiscal year 2022 compared to the prior comparable period due to the increase in royalties and decrease in general and administrative expense and rent, partially offset by the $13.1 million goodwill impairment charge.

Company-owned Salons

2022 2021 2022

(Dollars in millions) Increase (Decrease)

(Dollars in millions) (Decrease) Increase (1)

Total revenue $ 20.2 $ 143.0 $ (122.8)

Operating (loss) income $ (70.0) $ (96.1) $ 58.3 $ 26.1 $ (154.4)

Operating loss $ (9.5) $ (70.0) $ 60.5

Total company-owned salons 105 276

_______________________________________________________________________________

(1) Total is a recalculation;

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

Fiscal Year Ended June 30, 2022 Compared with Fiscal Year Ended June 30, 2021

Company-owned Salon Revenues

Company-owned salon revenues decreased $273.7 million in fiscal year 2021, primarily due to the closure of a net 613 salons and the sale of 747 company-owned salons (net of buybacks) to franchisees during the year and a decline in sales as a result of lower traffic.

Company-owned salon revenues decreased $122.8 million in fiscal year 2022, primarily due to the 2022 Net Salon Count Changes.

Company-owned Salon Operating Loss

During fiscal year 2021, company-owned salon operating loss decreased $26.1 million to a loss of $70.0 million.

The decrease in the loss was primarily due to the goodwill impairment of $40.2 million recorded in the third quarter of fiscal year 2020, partially offset by an $12.1 million inventory reserve charge recorded in fiscal year 2021.

Fiscal Year Ended June 30, 2021 Compared with Fiscal Year Ended June 30, 2020

Corporate Operating Loss (1)

Corporate operating loss of $74.8 million decreased $7.3 million during fiscal year 2021, primarily driven by lower general and administrative salaries due to lower headcount and the cancellation of the traditional in-person franchise convention in fiscal year 2021.

_______________________________________________________________________________

(1) The Corporate operating loss consists primarily of unallocated general and administrative expenses, including expenses associated with salon support, depreciation and amortization related to our corporate headquarters and unallocated insurance, benefit and compensation programs, including stock-based compensation.

During fiscal year 2022, company-owned salon operating loss improved $60.5 million, compared to the prior comparable period.

The improvement in the loss during fiscal year 2022 was primarily due to reduced general and administrative expense primarily related to salaries, a decrease in long-lived asset impairment and the exiting of loss-generating company-owned salons.

We expect losses associated with the company-owned segment to decrease as we reduce the number of remaining salons through closures or lease buyouts .

Recent Accounting Pronouncements

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LIQUIDITY AND CAPITAL RESOURCES

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

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

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

See additional discussion under Financing Arrangements and Note 8 and Note 16 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

Sources of Liquidity

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

Additionally, on February 3, 2021, the Company filed a $150 million shelf registration and $50 million prospectus supplement with the Securities and Exchange Commission under which it may offer and sell, from time to time, up to $50 million worth of its of its Class A common stock in “at-the-market offerings.” Net proceeds from sales of shares under the “at-the-market” program, if any, may be used to, among other things, fund working capital requirements, repay debt and support of our brands and franhisees.

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

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

As of June 30, 2022, cash and cash equivalents were $17.0 million, with $14.9 and $2.1 million within the United States and Canada, respectively.

As of June 30, 2022, the Company's borrowing arrangements include a $277.5 million five-year revolving credit facility that expires in March 2023, of which $81.9 million was available as of June 30, 2022.

The Company's liquidity per the agreement includes the unused available balance under the credit facility, unrestricted cash and cash equivalents and the shortfall in the gap in expected proceeds from the sale of salon assets of $20.9 million as of June 30, 2022.

Total liquidity per the agreement was $119.8 million compared to a minimum liquidity covenant of $75.0 million as of June 30, 2022.

See additional discussion under Financing Arrangements and Notes 8 and 16 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

Net proceeds from sales of shares under the "at-the-market" program, if any, may be used to, among other things, fund working capital requirements, repay debt and support of our brands and franchisees.

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

To date we have not issued any shares under the agreement.

As of June 30, 2021, cash and cash equivalents were $19.2 million, with $16.8, $2.0 and $0.4 million within the United States, Canada and Europe, respectively.

The Company has a credit agreement which as of June 30, 2021 provided for a $294.4 million five-year unsecured revolving credit facility that expires in March 2023, of which $88.8 million was available as of June 30, 2021.

The credit facility includes a minimum liquidity covenant of not less than $75.0 million.

See additional discussion under Financing Arrangements and Note 8 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

During fiscal year 2022, the Company issued 9.3 million shares and received net proceeds of $37.2 million.

The Company closely manages its liquidity and capital resources.

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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 in 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 response to the COVID-19 pandemic, as well as its strategic plan as discussed within Part I, Item 1.

To the best of our knowledge and based on our current liquidity position and forecast, we believe we have adequate liquidity to run our business and support our growth initiatives.

Cash Flows Used In Operating Activities

During fiscal year 2021, cash used in operating activities was $99.9 million.

Cash used in operations increased year-over-year by $13.5 million due to lower revenues, margins and same-store sales, CEO transition expense of $0.7 million, CEO sign-on bonus of $2.5 million and an increase in lease termination payments of $8.3 million.

The increase in cash use was partially offset by lower salaries due to lower headcount and a decline in general and administrative expense.

The Company has a disciplined approach to capital allocation, which focuses on investing in key priorities to support the Company's strategic plan as discussed within Part I, Item 1.

Cash Requirements

The Company's most significant contractual cash requirements as of June 30, 2022 were lease commitments.

See Note 6 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K for further detail.

Additionally, the Company is committed to purchasing $1.8 million of Designline inventory in the first quarter of fiscal year 2023.

This inventory will be sold to our third-party supplier and customers.

Cash Flows from Operating Activities

During fiscal year 2022, cash used in operating activities was $38.6 million.

Cash from operations declined due to lower revenues and margins and the refunding of the cooperative advertising funds to franchisees as a direct result of the COVID-19 pandemic, as well as lower same-store sales, partially offset by the elimination of certain general and administrative costs.

During fiscal year 2019, cash used in operating activities was $17.5 million, primarily as a result of a decline in Company-owned operating margin, strategic investment in new retail product lines and planned strategic general and administrative investments to enhance the Company's franchisor capabilities and support the increase in volume and cadence of transactions and conversions into the Franchise portfolio, partially offset by the elimination of certain general and administrative costs.

Cash used in operations improved due to higher royalties, lower general and administrative expense, lower rent and the exiting of loss-generating company-owned salons.

These improvements were partially offset by $2.5 million of social security contributions that had been deferred under the CARES Act and $3.6 million of costs related to our debt refinancing.

Quarter-over-quarter cash use improved throughout fiscal year 2022.

Cash used in operating activities was $12.3, $12.1, $10.0 and $4.3 million in the first, second, third and fourth quarters, respectively.

We expect cash use in first quarter of fiscal year 2023 to increase due to approximately $5.0 million of costs paid in connection with the credit amendment and approximately $2.8 million of bonus payments.

Cash Flows from Investing Activities

During fiscal year 2021, cash used in investing activities of $2.1 million was primarily related to capital investments, partially offset by cash proceeds from the sale of salon assets of $8.4 million.

During fiscal year 2020, cash provided by investing activities of $61.0 million was primarily from cash proceeds from sale of salon assets of $91.6 million and the sale of the Company's headquarters of $9.0 million, partially offset by capital expenditures of $37.5 million.

During fiscal year 2019, cash provided by investing activities of $87.8 million was primarily from cash proceeds from sale of salon assets of $94.8 million and proceeds from company-owned life insurance policies of $24.6 million, partially offset by capital expenditures of $31.6 million.

During fiscal year 2022, cash provided by investing activities of $7.7 million was primarily related to cash received of $13.0 million from the sale of OSP, partially offset by capital expenditures primarily related to developing the OSP software.

In the first quarter of fiscal year 2023, we expect to receive approximately $4 million related to the release of purchase price holdbacks in connection with the sale of OSP.

Additionally, due to the sale of OSP, we expect capital expenditures to decrease in fiscal year 2023.

Cash Flows from Financing Activities

During fiscal year 2021, cash provided by financing activities of $7.8 million was primarily due to a net $9.4 million draw on the Company's line of credit.

During fiscal year 2020, cash provided by financing activities of $56.2 million was primarily due to the net $87.5 million draw on the Company's line of credit and for the repurchase of common stock of $28.2 million

During fiscal year 2019, cash used in financing activities of $126.7 million was primarily for repurchase of common stock of $152.7 million and employee taxes paid for shares withheld of $2.5 million, partially offset by proceeds from the sale and leaseback of the Company's distribution centers of $28.8 million.

During fiscal year 2022, cash provided by financing activities of $29.4 million was primarily a result of net proceeds of $37.2 million related to the issuance of common stock and a net $6.9 million paydown on the Company's revolving credit facility.

The additional purchase price of approximately $4 million expected to be received in the first quarter of fiscal year 2023 will be used to repay the term loan as required by the credit agreement.

Financing Arrangements

Financing activities are discussed in Note 8 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

Financing activities are discussed in Note 8 and Note 16 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

Derivative activities are discussed in Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk."

The Company's financing arrangements consists of the following:

The Company's financing arrangements consist of the following:

Maturity Dates 2022 2021 2022 2021

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Revolving credit facility 2023 5.50% 5.00% $ 179,994 $ 186,911

Long-term financing lease liability 2034 N/A 3.30% — 16,773

Long-term financing lease liability 2034 N/A 3.70% — 11,208

$ 186,911 $ 205,481

As of June 30, 2022 and 2021, the Company had $180.0 and $186.9 million, respectively, of outstanding borrowings under its revolving credit facility.

The five-year revolving credit facility expires in March 2023 and includes a minimum liquidity covenant of not less than $75.0 million, provides the Company's lenders security in substantially all of the Company's assets, adds additional guarantors, and grants a first priority lien and security interest to the lenders in substantially all of the Company's and the guarantors' existing and future property.

The five-year revolving credit facility expires in March 2023 and includes a minimum liquidity covenant of $75.0 million, provides the Company's lenders security in substantially all of the Company's assets, adds additional guarantors, and grants a first priority lien and security interest to the lenders in substantially all of the Company's and the guarantors' existing and future property.

Total liquidity per the agreement was $119.8 million as of June 30, 2022.

See Note 8 to the Consolidated Financial Statements.

See Note 8 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

The revolving credit facility includes a $30.0 million sub-facility for the issuance of letters of credit and a $30.0 million sublimit for swingline loans.

The Company may request an increase in revolving credit commitments under the facility of up to $115.0 million under certain circumstances.

The applicable margin for loans bearing interest at LIBOR ranges from 3.75%-4.25%, the applicable margin for loans bearing interest at the base rate ranges from 2.75%-3.25%, and the facility fee ranges from 0.5%-0.75%, each depending on average utilization of the revolving line of credit.

In fiscal year 2021, the Company determined it would no longer lease the distribution centers for the majority of the assets' useful lives, which resulted in the transactions being considered sale and leaseback transactions.

As a result, the Company derecognized the financing lease liability and the carrying value of the related assets.

See Note 8 to the Consolidated Financial Statements.

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 year-end, was as follows:

The applicable margin for loans bearing interest at the Secured Overnight Financing Rate (SOFR) ranges from 3.75%-4.25%, the applicable margin for loans bearing interest at the base rate ranges from 2.75%-3.25%, and the facility fee ranges from 0.5%-0.75%, each depending on average utilization of the revolving line of credit.

In August 2022, the Company amended its credit agreement.

Under the amendment, the revolving credit facility was converted to a $180.0 million term loan and $55.0 million revolving credit facility.

The amendment also extends the maturity date to August 31, 2025 and includes, among other things, financial covenants, including minimum EBITDA, leverage and fixed charge coverage ratios and a minimum liquidity covenant which was reduced from $75.0 million to $10.0 million.

The amendment also eliminates the $115.0 million incremental loan facility.

See additional discussion in Note 16 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

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

As of June 30, Debt to

Capitalization (1)

The increase in the debt to capitalization ratio as of June 30, 2021 compared to June 30, 2020 was primarily due to the loss incurred in fiscal year 2021 and the increase in debt.

The increase in the debt to capitalization ratio as of June 30, 2020 compared to June 30, 2019 was primarily due to the increase in the Company's borrowings.

_______________________________________________________________________________

(1) Excludes the long-term lease liability as that liability is offset by the ROU asset.

The increase in the debt to capitalization ratio as of June 30, 2022 compared to June 30, 2021 was primarily due to the decrease in shareholders' (deficit) equity as a result of the loss from operations.

Contractual Obligations and Commercial Commitments

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Our debt obligations are primarily composed of our revolving credit facility at June 30, 2022.

Non-current deferred benefits of $10.0 million includes $5.0 million related to a Non-qualified Deferred Salary Plan and a salary deferral program of $2.5 million related to established contractual payment obligations under retirement and severance agreements for a small number of employees.

Non-current deferred benefits of $6.3 million includes $1.8 million related to a non-qualified deferred salary plan, a salary deferral program of $2.3 million and a bonus deferral plan of $2.2 million related to established contractual payment obligations under retirement and severance agreements for a small number of employees.

See Note 4 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

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Regarding franchisee subleases, we generally retain the right to the related salon assets, net of any outstanding obligations, in the event of a default by a franchise owner.

The loss of revenue related to the COVID-19 pandemic has increased the risk of default by franchisees, which may be material.

Recent trends in system-wide revenue over the past few years has increased the risk of default by franchisees, which may be material.

The Company has unfunded deferred compensation contracts covering certain management and executive personnel.

Because we cannot predict the timing or amount of future payments related to these contracts, such amounts were not included in the table above.

We cannot predict the timing or amount of future payments related to these contracts.

See Note 11 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

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Interest payments on long-term debt are calculated based on the revolving credit facility's rates.

The applicable margin for loans bearing interest at LIBOR ranges from 3.75%-4.25%, the applicable margin for loans bearing interest at the base rate ranges from 2.75%-3.25% and the facility fee ranges from 0.5%-0.75%, each depending on average utilization of the revolving line of credit.

As of June 30, 2022, the applicable margin for loans bearing interest at SOFR ranges from 3.75%-4.25%, the applicable margin for loans bearing interest at the base rate ranges from 2.75%-3.25% and the facility fee ranges from 0.5%-0.75%, each depending on average utilization of the revolving line of credit.

Under the amended credit facility entered into in August 2022, the applicable margins for the loans bearing interest are subject to annual increases.

The margin applicable to loans bearing interest at SOFR will initially be 3.875%.

Effective March 27, 2023, the margin will increase to 6.25%, of which 4.25% will be paid currently in cash and 2.00% will be paid in kind (PIK) interest (added to the principal balance and thereafter accruing interest).

Effective March 27, 2024, the margin will increase to 7.25%, of which 4.25% will be paid currently in cash and 3.00% will be PIK interest.

The margin applicable to base rate loans will be 100 basis points (1.00%) less than the margin applicable to SOFR loans.

See Note 16 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

We are a party to a variety of contractual agreements that we may be obligated to indemnify the other party for certain matters, which indemnities may be secured by operation of law or otherwise, in the ordinary course of business.

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While our aggregate indemnification obligation could result in a material liability, we are not aware of any current matter that we expect will result in a material liability.

We do not have other unconditional purchase obligations or significant other commercial commitments such as standby repurchase obligations or other commercial commitments.

We do not have any unconditional purchase obligations or significant other commercial commitments such as standby repurchase obligations or other commercial commitments.

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet financial arrangements or other contractually narrow or limited purposes at June 30, 2022.

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In December 2013, the Board elected to discontinue declaring regular quarterly dividends.

Share Issuance Program

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

As of June 30, 2022, the Company has issued 9.3 million shares for net proceeds of $37.2 million.

Share Repurchase Program

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During fiscal year 2022, the Company did not repurchase any shares.

As of June 30, 2021, 30.0 million shares have been cumulatively repurchased for $595.4 million, and $54.6 million remained outstanding under the approved stock repurchase program.

As of June 30, 2022, 30.0 million shares have been cumulatively repurchased for $595.4 million, and $54.6 million remained authorized for repurchase.

The Company does not anticipate repurchasing shares of common stock for the foreseeable future.

CRITICAL ACCOUNTING POLICIES

The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America.

The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States.

In preparing the 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 Consolidated Financial Statements.

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As of June 30, 2022 and 2021, the Franchise reporting unit had $174.4 and $229.6 million of goodwill, respectively, and the Company-owned segment had no goodwill at either period.

See Note 5 to the Consolidated Financial Statements.

See Note 5 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

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.

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Allocations are generally based on the number of salons in each reporting unit as a percent of total salons or expenses of the reporting unit as a percentage of total company expenses.

The Company calculates estimated fair values of the reporting units based on discounted cash flows utilizing estimates in annual revenue, fixed expense rates, allocated corporate overhead, franchise salon counts, and long-term growth rates for determining terminal value.

The Company calculates estimated fair values of the reporting units based on discounted cash flows utilizing estimates in annual revenue, fixed expense rates, franchise salon counts, long-term growth rates and discount rates for determining terminal value.

During fiscal year 2022, our estimates of annual revenue and salon counts were decreased to reflect recent trends in the business and, in fourth quarter, the removal of OSP revenues and expenses from our forecast.

In addition, discount rates have increased during this period to reflect changes in the market interest rates.

Where available and as appropriate, comparative market multiples are used in conjunction with the results of the discounted cash flows.

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Long-Lived Assets, Excluding Goodwill

A lessee's Right of Use (ROU) asset is subject to the same asset impairment guidance in ASC 360, Property, Plant, and Equipment, applied to other elements of property, plant, and equipment.

The Company follows the guidance in ASC 360, Property, Plant, and Equipment and applies the guidance to property, plant, and equipment as well as right of use (ROU) assets.

The Company has identified its asset groups at the individual salon level as this represents the lowest level that identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities.

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Estimating cash flows for purposes of the recoverability test is subjective and requires significant judgment.

Estimated future cash flows used for the purposes of the recoverability test were based upon historical cash flows for the salons, adjusted for expected changes in future market conditions related to the COVID-19 pandemic, and other factors.

Estimated future cash flows used for the purposes of the recoverability test were based upon historical cash flows for the salons.

The period of time used to determine the estimates of the future cash flows for the recoverability test was based on the remaining useful life of the primary asset of the group, which was the ROU asset in all cases.

Step two of the long-lived asset impairment test requires the fair value of the asset group be estimated when determining the amount of any impairment loss.

The second step of the long-lived asset impairment test requires that the fair value of the asset group be estimated when determining the amount of any impairment loss.

For the salon asset groups that failed the recoverability test, an impairment loss was measured as the amount by which the carrying amount of the asset group exceeds its fair value.

The Company applied the fair value guidance within ASC 820-10 to determine the fair value of the asset group from the perspective of a market-participant considering, among other things, appropriate discount rates, multiple valuation techniques, the most advantageous market, and assumptions about the highest and best use of the asset group.

To determine the fair value of the salon asset groups, the Company utilized market-participant assumptions rather than the Company's own assumptions about how it intends to use the asset group.

The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include;

the market rent of comparable properties, the asset group's projected sales for properties with no recently negotiated leases, and a discount rate.

The fair value of the salon long-lived asset group is estimated using market participant methods based on the best information available.

The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include:

the market rent of comparable properties, the asset group's projected sales, and a discount rate.

In fiscal year 2020, the Company engaged a third-party valuation specialist to assist with the research related to inputs used in their determination of the fair value of the ROU asset, which included providing information related to significant inputs and assumptions utilized in the measurement of the impairment loss.

For fiscal year 2021, the Company recognized a long-lived impairment charge of $13.0 million, which included $9.5 million related to ROU assets on the Consolidated Statement of Operations.

To determine the fair value of the salon asset groups, the Company utilized market-participant assumptions based on the best information available, rather than the Company's own assumptions about how it intends to use the asset group.

The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include the market rent of comparable properties and a discount rate.

For fiscal years 2022 and 2021, the Company recognized long-lived asset impairment charges of $0.5 and $13.0 million, respectively, which included $0.5 and $9.5 million, respectively, related to ROU assets on the Consolidated Statement of Operations in Part II, Item 8, of this Form 10-K.

The impairment loss for each salon asset group that was recognized was allocated among the long-lived assets of the group on a pro-rata basis using their relative carrying amounts.

Additionally, the impairment losses did not reduce the carrying amount of an individual asset below its fair value, including for the ROU assets included in the salon asset groups.

Assessing the long-lived assets for impairment requires management to make assumptions and to apply judgment that 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 for its long-lived assets, including its ROU assets.

However, the ultimate severity and longevity of the COVID-19 pandemic is unknown, therefore, if actual results are inconsistent with the estimates and assumptions used in the calculations, the Company may be exposed to future impairment losses that could be material.

Assessing the long-lived assets for impairment requires management to make assumptions and to apply judgment which can be affected by economic conditions and other factors that can be difficult to predict.

However, actual results may not be consistent with the estimates and assumptions used in the calculations, the Company may be exposed to future impairment losses that could be material.

Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the Consolidated Financial Statements or income tax returns.

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Significant components of the valuation allowance which occurred during fiscal year 2022 are as follows:

• The Company recognized a tax loss on its investment in Luxembourg and established a corresponding valuation allowance of $34.4 million.

Significant components of the valuation allowance which occurred during fiscal year 2020 are as follows:

• In connection with the Coronavirus Aid, Relief and Economic Security Act (CARES Act), Net Operating Losses (NOLs) resulting from accounting periods which straddled December 31, 2017 are now considered definite-lived NOLs.

Therefore, the Company established a valuation allowance against the U.S.

NOLs generated during its fiscal year 2018 and recorded a net tax expense of $14.7 million.

• The Company determined that it no longer had sufficient U.S.

indefinite-lived taxable temporary differences to support realization of its U.S.

indefinite-lived NOLs and its existing U.S.

deferred tax assets that upon reversal are expected to generate indefinite-lived NOLs.

As a result, the Company recorded an additional $17.0 million valuation allowance on its U.S.

federal indefinite-lived deferred tax assets.

• The Company recognized a capital loss and established a corresponding valuation allowance of $14.9 million on investment outside basis previously impaired for financial accounting purposes.

state indefinite-lived taxable temporary differences to support realization of its U.S.

state indefinite-lived NOLs and its existing U.S.

deferred tax assets that upon reversal are expected to generate state indefinite-lived NOLs.

As a result, the Company recorded a $4.1 million valuation allowance on its U.S.

state indefinite-lived deferred tax assets.

Significant components of the valuation allowance which occurred during fiscal year 2021 are as follows:

• The Company recognized a tax loss on its investment in Luxembourg and established a corresponding valuation allowance of $34.4 million.

The Company reserves for unrecognized tax benefits, interest and penalties related to anticipated tax audit positions in the U.S.

6 unchanged sentences

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What changed 10-K

Item 7. Management’s Discussion and Analysis