What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-08-23 compared with 2021-08-26 · 455 added, 532 removed, 807 unchanged (55% of the section changed)

1 unchanged sentence

Index to Consolidated Financial Statements:

Reports of Independent Registered Public Accounting Firms

Report of Independent Registered Public Accounting Firms (PCAOB ID:

Consolidated Balance Sheet as of June 30, 2022 and 2021

Consolidated Statement of Operations for each of the three years in the period ended June 30, 2021

Consolidated Statement of Comprehensive Loss for each of the three years in the period ended June 30, 2021

Consolidated Statement of Shareholders' Equity for each of the three years in the period ended June 30, 2021

Consolidated Statement of Cash Flows for each of the three years in the period ended June 30, 2021

Consolidated Statement of Operations for each of the two years in the period ended June 30, 2022

Consolidated Statement of Comprehensive Loss for each of the two years in the period ended June 30, 2022

Consolidated Statement of Shareholders' (Deficit) Equity for each of the two years in the period ended June 30, 2022

Consolidated Statement of Cash Flows for each of the two years in the period ended June 30, 2022

Notes to Consolidated Financial Statements

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Opinion on the financial statements

We have audited the accompanying consolidated balance sheet of Regis Corporation (a Minnesota Corporation) and subsidiaries (the "Company") as of June 30, 2021, the related consolidated statements of operations, comprehensive loss, shareholders' equity, and cash flows for the year then ended, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2021, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company’s internal control over financial reporting as of June 30, 2021 based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"), and our report dated August 26, 2021 expressed an unqualified opinion.

We have audited the accompanying consolidated balance sheets of Regis Corporation (a Minnesota corporation) and subsidiaries (the "Company") as of June 30, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, shareholders' (deficit) equity, and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of June 30, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated August 22, 2022 expressed as an unqualified opinion.

Basis for opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company's financial statements based on our audit.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Critical audit matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Right of Use Asset Impairment Assessment for the Company-Owned Salon Asset Groups

As described in Notes 1 and 15 to the consolidated financial statements, the Company operates in two reportable segments, Company-owned salons and Franchise salons.

Note 6 describes the Company’s Right of Use Assets ("ROU asset"), a portion of which relates to Company-owned salons.

Management determined that triggering events had occurred related to Company-owned salons and was required to perform quantitative impairment assessments during fiscal year 2021.

The Company first assessed its Company-owned salon asset groups at the individual salon level, which included the ROU assets, to determine if the carrying value was recoverable.

Recoverability is determined by comparing the net carrying value of the salon asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset group.

For the Company-owned salon asset groups that failed the recoverability test, an impairment loss was measured as the amount by which the ROU asset within the asset group exceeded its fair value, which was determined using a discounted cash flow methodology.

As described by management, the results of this assessment indicated that the estimated fair value of certain Company-owned salon asset groups did not exceed the carrying value and an impairment expense was recorded to the ROU asset balance.

We identified the evaluation of the impairment of ROU asset balances at the Company-owned salon asset group level as a critical audit matter.

Subjective auditor judgment was required to evaluate, for each Company-owned salon asset group:

(i) the assumptions used by management to calculate the undiscounted future cash flow, (ii) management's method to determine the fair value and, (iii) significant judgments and assumptions related to the fair value determination, including the discount rate, the market rent of comparable properties based on recently negotiated leases, as applicable, the projected sales for fiscal years 2022 through 2023 and market capitalization rate for properties with no recently negotiated leases.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

We performed the following procedures:

evaluated the design and tested the operating effectiveness of relevant controls relating to management’s impairment assessment of the ROU asset balances related to Company-owned salons, including controls over the valuation of the Company-owned salon asset groups

tested the Company-owned salon impairment analyses as follows:

evaluated the completeness of the population of Company-owned salon locations determined to be impaired ,

evaluated and tested management's models and processes for developing the undiscounted and discounted cash flows,

select ed a sample of Company-owned salons to test the appropriateness of management's methodology and significant assumptions noted above, and the accuracy of the computations and data used for both the undiscounted and discounted cash flow analyses

assessed the reasonableness of management’s ability to forecast future sales by comparing past projections to actual financial statement results

performed sensitivity analyses of the significant assumptions to evaluate the impact on the fair value of each of the Company-owned salons resulting from changes in the underlying assumptions.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical audit matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Goodwill impairment analysis

As described further in Note 1 to the financial statements, the Company’s consolidated goodwill balance was $174.4 million as of June 30, 2022 and is assigned to the Franchise reporting unit.

Goodwill is tested annually for impairment on April 30th or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired.

At March 31, 2022, a triggering event was identified and a quantitative goodwill impairment test was performed which resulted in impairment expense of $16.0 million.

We identified the Company’s March 31, 2022 goodwill impairment analysis as a critical audit matter.

The principal considerations for our determination that the goodwill impairment analysis is a critical audit matter are that the significant estimates and assumptions made by management involve subjectivity and judgment in determining the fair value of the reporting unit using the discounted future cash flows valuation technique.

The reporting unit discounted future cash flows include certain management assumptions that are complex and have a higher degree of estimation uncertainty and changes in these assumptions could have a significant impact on the results of the impairment analysis.

These assumptions include forward-looking projections related to salon counts, revenue, EBITDA margin and determination of discount rates.

Performing audit procedures to evaluate management's assumptions required a high degree of auditor judgement and an increased extent of effort, including the need to involve valuation specialists.

Our audit procedures related to the annual goodwill impairment analysis included the following, among others.

• We tested the design and operating effectiveness of controls relating to management's goodwill impairment test, including the controls over the determination of key inputs such as the forecasting of future cash flows and determination of the discount rate;

• We tested the reasonableness of management's forecasts of future revenues and EBITDA margin by comparing to third-party industry projections and historical operating results;

• We performed sensitivity analysis on the Company's future revenue and salon counts to evaluate the reasonableness of management's forecasts;

• We utilized a valuation specialist to assist in recalculating the Company's discounted future cash flows model and in evaluating the reasonableness of significant assumptions including the discount rate;

• We evaluated the competency and objectivity of management's specialists who assisted with preparing the discounted cash flow analysis.

Accounting for Discontinued Operations

As discussed in Note 3 of the consolidated financial statements, on June 29, 2022, the Company completed the sale of its OSP software-as-a-service business ("OSP") to Soham Inc.

("Buyer") for $20.0 million in cash plus up to an additional $19.0 million in proceeds contingent upon the number of salons that transition to the Buyer's salon technology platform.

In connection with the sale, the Company recognized a pre-tax loss of $36.6 million in discontinued operations.

As a result of the discontinued operations classification, the comparative period consolidated financial statements for fiscal year 2021 have been recast to reclassify balance sheet, operations and cash flow amounts related to OSP discontinued operations.

We identified the Company’s accounting for the OSP discontinued operations as a critical audit matter.

The principal considerations for our determination that the discontinued operations is a critical audit matter are that auditing the Company's discontinued operations was complex due to judgments made by management in applying the relevant accounting principles including management's determination that OSP is a business, that the sale is a strategic shift, and the fair value determinations used in allocating goodwill attributable to the OSP component of the Franchise reporting unit.

Our audit procedures related to the discontinued operations included the following, among others.

• We tested the design and operating effectiveness of financial reporting controls over the Company's accounting for the discontinued operations.

• We evaluated the appropriateness of the Company's application of the criteria for reporting of discontinued operations by inspecting management's supporting documentation, reading board of directors meeting minutes and other entity information, and evaluating whether there was contrary evidence, based on our understanding of the business.

• We consulted with our national office as to the appropriateness of the conclusion reached regarding discontinued operations treatment.

• To test the allocation of goodwill to the OSP component for purposes of computing the loss, we evaluated the determination of the fair value of OSP based on the terms of the sale and the fair value of the overall Franchise reporting unit based on the most recent fair value determinations used in conjunction with goodwill impairment testing.

• We evaluated the presentation of the discontinued operations in the consolidated financial statements, including testing significant balances for appropriate allocation to discontinued operations in 2022 and 2021 and assessing the reasonableness of key judgments applied by management in allocating expenses to the discontinued operations.

/s/ GRANT THORNTON LLP

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August 22, 2022

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Regis Corporation

Opinion on the Financial Statements

We have audited the consolidated balance sheet of Regis Corporation and its subsidiaries (the "Company") as of June 30, 2020, and the related consolidated statements of operations, of comprehensive loss, of shareholders' equity and of cash flows for each of the two years in the period ended June 30, 2020, including the related notes (collectively referred to as the "consolidated financial statements").

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2020, and the results of its operations and its cash flows for each of the two years in the period ended June 30, 2020 in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases as of July 1, 2019.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Minneapolis, Minnesota

August 31, 2020

We served as the Company's auditor from at least 1990 to 2020.

We have not been able to determine the specific year we began serving as auditor of the Company.

REGIS CORPORATION

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Other current assets 13,984 17,017

Current assets related to discontinued operations (Note 3)

Total current assets 48,665 86,659

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Goodwill (Note 5)

174,360 188,257

Other intangibles, net 3,226 3,761

Right of use asset (Note 6)

493,749 610,599

Other assets 36,465 41,388

Non-current assets related to discontinued operations (Note 3)

Total assets $ 769,300 $ 996,383

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY

Current liabilities:

2 unchanged sentences

Short-term lease liability (Note 6)

103,196 116,348

Current liabilities related to discontinued operations (Note 3)

Total current liabilities 152,840 198,485

Long-term debt, net (Note 8)

179,994 186,911

Long-term lease liability (Note 6)

Long-term financing liabilities (Note 8) — 27,981

408,445 517,626

Other non-current liabilities 58,974 75,075

Non-current liabilities related to discontinued operations (Note 3)

Total liabilities 800,253 979,337

Commitments and contingencies (Note 9)

Shareholders' equity:

Shareholders' (deficit) equity:

Common stock, $ 0.05 par value;

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Accumulated other comprehensive income 9,455 9,543

Retained (deficit) earnings ( 19,389 ) 94,462

Total shareholders' equity 17,046 125,703

Total liabilities and shareholders' equity $ 996,383 $ 1,342,794

Accumulated deficit ( 105,246 ) ( 19,389 )

Total shareholders' (deficit) equity ( 30,953 ) 17,046

Total liabilities and shareholders' (deficit) equity $ 769,300 $ 996,383

______________________________________________________________________________

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(Dollars and shares in thousands, except per share data)

2021 2020 2019

Service $ 108,120 $ 331,538 $ 749,660

Product 91,544 137,586 225,618

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

Royalties $ 65,753 $ 52,357

Fees 11,587 10,215

Product sales to franchisees 15,072 56,699

Advertising fund contributions 32,573 22,023

Franchise rental income (Note 6)

130,777 127,392

Company-owned salon revenue 20,205 142,965

Total revenue 275,967 411,651

Operating expenses:

Cost of service 79,144 222,279 452,827

Cost of product 79,167 84,698 128,816

Site operating expenses 51,463 71,543 141,031

Cost of product sales to franchisees 17,391 43,756

Inventory reserve (1) 7,655 —

General and administrative 65,274 96,427

Rent (Note 6)

Franchise rent expense (Note 6) 127,392 127,203 —

Advertising fund expense 32,573 22,023

Franchise rent expense 130,777 127,392

Company-owned salon expense (2) 21,952 141,204

Depreciation and amortization 6,224 21,749

Long-lived asset impairment (Note 1)

TBG mall location restructuring (Note 3) — 2,333 21,816

Goodwill impairment (Note 5)

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Interest expense ( 12,914 ) ( 13,163 )

(Loss) gain from sale of salon assets to franchisees, net ( 16,696 ) ( 27,306 ) 2,918

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

Interest income and other, net ( 296 ) 15,902

Loss from continuing operations before income taxes ( 118,759 ) ( 176,813 ) ( 22,267 )

Income tax benefit 5,428 4,619 2,145

Loss from operations before income taxes ( 44,442 ) ( 108,634 )

Income tax (expense) benefit ( 2,017 ) 5,428

Loss from continuing operations ( 46,459 ) ( 103,206 )

Income from discontinued operations, net of income taxes (Note 3) — 832 5,896

Loss from discontinued operations, net of income taxes (Note 3) ( 39,398 ) ( 10,125 )

Net loss $ ( 85,857 ) $ ( 113,331 )

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Loss from continuing operations $ ( 1.07 ) $ ( 2.87 )

Income from discontinued operations — 0.02 0.14

Loss from discontinued operations ( 0.90 ) ( 0.28 )

Net loss per share, basic and diluted (3) $ ( 1.97 ) $ ( 3.15 )

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_____________________________________________________________________________

(1) Includes charges in the third and fourth quarter associated with liquidation of distribution center inventory.

Excludes reserves for inventory at salons.

(2) Includes cost of service and product sold to guests in our Company-owned salons.

Excludes general and administrative expense, rent and depreciation and amortization related to Company-owned salons.

(3) Total is a recalculation;

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(Dollars in thousands)

2021 2020 2019

Net loss $ ( 85,857 ) $ ( 113,331 )

Other comprehensive income (loss), net of tax:

Other comprehensive (loss) income, net of tax:

Net current period foreign currency translation adjustments ( 547 ) 1,888

Recognition of deferred compensation 459 206

Other comprehensive income (loss) 2,094 ( 1,893 ) ( 314 )

Other comprehensive (loss) income ( 88 ) 2,094

Comprehensive loss $ ( 85,945 ) $ ( 111,237 )

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REGIS CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY

(Dollars in thousands, except share data)

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Comprehensive

Income Retained

Earnings (Deficit) Total

Income Retained Earnings (Deficit) Total

Shares Amount

1 unchanged sentence

Net loss — — — — ( 113,331 ) ( 113,331 )

Foreign currency translation

— — — 185 — 185

Stock repurchase program

( 8,605,430 ) ( 431 ) ( 154,114 ) — — ( 154,545 )

Foreign currency translation (Note 1) — — — 1,888 — 1,888

Exercise of SARs 3,775 — ( 24 ) — — ( 24 )

1 unchanged sentence

Recognition of deferred compensation (Note 11)

Net restricted stock activity 193,845 10 ( 1,951 ) — — ( 1,941 )

Minority interest (Note 1) — — — — 51 51

Balance, June 30, 2019 36,869,249 1,843 47,152 9,342 265,908 324,245

Net loss — — — — ( 171,362 ) ( 171,362 )

Foreign currency translation

— — — 206 — 206

Stock repurchase program

( 1,504,000 ) ( 75 ) ( 26,281 ) — — ( 26,356 )

Exercise of SARs 1,776 — 28 — — 28

Stock-based compensation — — 3,275 — — 3,275

Recognition of deferred compensation (Note 11) — — — ( 431 ) — ( 431 )

Net restricted stock activity 166,353 9 ( 139 ) — — ( 130 )

Minority interest (Note 1)

— — — — ( 84 ) ( 84 )

Minority interest — — — — ( 520 ) ( 520 )

Balance, June 30, 2021 35,795,844 1,790 25,102 9,543 ( 19,389 ) 17,046

2 unchanged sentences

— — — ( 547 ) — ( 547 )

Exercise of SARs 3,775 — ( 24 ) — — ( 24 )

Issuance of common stock, net of offering costs 9,295,618 465 36,720 — — 37,185

Stock-based compensation — — 1,285 — — 1,285

Recognition of deferred compensation (Note 11)

— — — 459 — 459

Net restricted stock activity 418,783 21 ( 545 ) — — ( 524 )

Minority interest (Note 1) — — — — ( 520 ) ( 520 )

Balance, June 30, 2022 45,510,245 $ 2,276 $ 62,562 $ 9,455 $ ( 105,246 ) $ ( 30,953 )

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(Dollars in thousands)

2021 2020 2019

Cash flows from operating activities:

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Adjustments to reconcile net loss to net cash used in operating activities:

Non-cash adjustments related to discontinued operations — ( 1,098 ) 306

Loss from sale of OSP (Note 3) 36,143 —

Depreciation and amortization (Note 1) 6,504 17,871

Salon asset impairment — 3,851 4,587

Long-lived asset impairment 542 13,023

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Gain from disposal of distribution center assets — ( 14,997 )

Gain from sale of company headquarters, net — ( 2,513 ) —

Loss (gain) from sale of salon assets to franchisees, net 16,696 27,306 ( 2,918 )

Non-cash TBG mall location restructuring charge (Note 3) — — 21,008

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

Goodwill impairment 16,000 —

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Capital expenditures ( 5,316 ) ( 11,475 )

Proceeds from sale of company headquarters — 8,996 —

Proceeds from sale of OSP 13,000 —

Proceeds from sale of assets to franchisees — 8,437

1 unchanged sentence

Proceeds from company-owned life insurance policies — 1,200

Net cash (used in) provided by investing activities:

Net cash provided by (used in) investing activities:

7,684 ( 2,099 )

2 unchanged sentences

Repayments of revolving credit facility ( 16,916 ) ( 589 )

Repurchase of common stock — ( 28,246 ) ( 152,661 )

Proceeds from sale and leaseback transactions — — 28,821

Proceeds from issuance of common stock, net of offering costs 37,185 —

Taxes paid for shares withheld ( 845 ) ( 348 )

Minority interest buyout — ( 562 )

Distribution center lease payments — ( 724 )

Taxes paid for shares withheld ( 348 ) ( 2,320 ) ( 2,477 )

Net cash provided by (used in) financing activities:

7,777 56,165 ( 126,695 )

Net cash provided by financing activities:

Effect of exchange rate changes on cash and cash equivalents ( 158 ) 477

(Decrease) increase in cash, cash equivalents and restricted cash ( 93,728 ) 30,501 ( 56,396 )

Decrease in cash, cash equivalents and restricted cash ( 1,688 ) ( 93,728 )

Cash, cash equivalents and restricted cash:

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Business Description:

Regis Corporation (the Company) franchises technology-enabled hairstyling and hair care salons throughout the United States (U.S.), Canada, Puerto Rico and the United Kingdom (U.K.).

Regis Corporation (the Company) franchises hairstyling and hair care salons throughout the United States (U.S.), Canada, Puerto Rico and the United Kingdom (U.K.).

The business is evaluated in two segments, Franchise salons and Company-owned salons.

Franchise salons in operation decreased from 5,563 to 5,395 at June 30, 2021 compared to June 30, 2022, primarily due to the closure of 299 salons, which was partially offset by the conversion of 110 salons from company-owned.

Company-owned salons in operation decreased from 276 to 105 at June 30, 2021 compared to June 30, 2022, primarily due to the conversion of 110 salons to franchise.

See Note 15 to the Consolidated Financial Statements.

Salons are located in leased space in strip shopping centers, malls or Walmart.

Salons are located in leased space in strip center locations, malls or Walmart.

COVID-19 Impact:

During fiscal years 2021 and 2020, the global coronavirus pandemic (COVID-19) had an adverse impact on operations, including government-mandated salon closures in the fourth quarter of fiscal year 2020 and other prolonged closures, particularly in California and Ontario, in fiscal year 2021.

The COVID-19 pandemic continues to impact salon guest visits resulting in a significant reduction in revenue and traffic.

As a result, COVID-19 has and may continue to negatively affect revenue and profitability.

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 2022 2021

(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.

Overall, COVID-19 has, and may continue to have, a negative effect on revenue and profitability.

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.

Consolidation:

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The Company evaluates whether or not it is the primary beneficiary for each VIE using a qualitative assessment that considers the VIE's purpose and design, the involvement of each of the interest holders and the risk and benefits of the VIE.

As of June 30, 2021, the Company has no VIE's where the Company is the primary beneficiary.

As of June 30, 2022, the Company has no VIEs where the Company is the primary beneficiary.

The Company has an investment in Empire Education Group, Inc.

During fiscal year 2020, the Company signed an agreement to sell its interest in EEG to the other shareholder.

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

Until the transaction closes, the Company continues to account for EEG as an equity investment under the voting interest model.

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As of June 30, 2022 and 2021, the allowance for doubtful accounts was $ 6.6 and $ 7.8 million, respectively.

The allowance for doubtful accounts increased in fiscal year 2021 due to lower franchisees sales increasing the risk of default.

The allowance for doubtful accounts decreased in fiscal year 2022 due to higher write-offs.

See Note 2 to the Consolidated Financial Statements.

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Inventories are stated at the lower of cost or market, with cost determined on a weighted average cost basis.

Physical inventory counts are performed primarily in the fourth quarter of the fiscal year for salons and throughout the year at the distribution centers.

Physical inventory is held at salons and a third-party distribution center as of June 30, 2022.

A physical inventory count is conducted annually at the third-party distribution center.

Product and service inventories are adjusted based on the physical inventory counts.

1 unchanged sentence

The cost of product used in salon services is determined by applying an estimated percentage of total cost of service to service revenues.

These estimates are updated quarterly based on cycle count results for the distribution centers, service sales mix, discounting, special promotions and other factors.

The Company has inventory valuation reserves for excess and obsolete inventories, or other factors that may render inventories unmarketable at their historical costs.

In fiscal year 2021, the Company announced it would transition away from its wholesale product distribution model in favor of a third-party distribution model.

As a result, the Company plans to exit its two distribution centers in fiscal year 2022.

To facilitate the exit, the Company is selling inventory at discounts and disposing of hard to sell products.

Additionally, the reduction in company-owned salons decreases the Company's ability to re-distribute inventory from closed locations to other salons to be sold or used.

These two factors resulted in a significant increase in inventory write-offs and an overall increase in the inventory valuation reserve during fiscal year 2021.

The fiscal year 2021 non-cash inventory write-off charge of $ 12.1 million was recorded to Cost of product in the Consolidated Statement of Operations.

The inventory valuation reserve as of June 30, 2021 and 2020 was $ 11.8 million and $ 1.2 million, respectively.

As a result, the Company exited its two distribution centers in fiscal year 2022 and now stores inventory at a third-party facility.

To facilitate the exit of the distribution centers, the Company sold and continues to sell inventory at discounts and dispose of hard-to-sell products.

Additionally, the reduction in company-owned salons decreases the Company's ability to redistribute inventory from closed locations to other salons to be sold or used.

The inventory valuation reserve as of June 30, 2022 and 2021 was $ 1.9 and $ 11.8 million, respectively.

During fiscal year 2022, the Company recorded total inventory reserve charges of $ 10.5 million, of which $ 7.7 and $ 2.8 million were recorded in Inventory reserve and Company-owned salon expense, respectively, in the Consolidated Statement of Operations.

Included in Company-owned salon expense in the Consolidated Statement of Operations is an inventory reserve charge of $ 12.1 million during fiscal year 2021.

Property and Equipment:

Property and equipment are carried at cost, less accumulated depreciation and amortization.

Depreciation of property and equipment is computed using the straight-line method over their estimated useful asset lives (i.e., 30 to 39 years for buildings, 10 years or lease life for improvements and three to ten years or lease life for equipment, furniture and software).

Depreciation of property and equipment is computed using the straight-line method over their estimated useful asset lives (i.e., 30 to 39 years for buildings, 10 years or lease life for improvements and three to 10 years or lease life for equipment, furniture and software).

Depreciation expense was $ 5.8 and $ 20.9 million in fiscal years 2022 and 2021, respectively.

Depreciation expense for fiscal year 2021 includes $ 4.7 million of asset retirement obligations, which is a cash expense.

Fiscal years 2020 and 2019 had no asset retirement obligations.

Depreciation expense for fiscal years 2022 and 2021 include $ 1.0 and $ 4.7 million of asset retirement obligations, which are cash expenses.

The Company capitalizes both internal and external costs of developing or obtaining computer software for internal use.

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The Company leases salon premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees.

All lease costs are passed through to franchisees.

All lease-related costs are passed through to franchisees.

The Company records the rental payments due from franchisees as Franchise rental income and the corresponding amounts owed to landlords as Franchise rent expense on the Consolidated Statement of Operations.

For salon operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date, including one lease term option when the lease is expected to be renewed.

The right of use asset is initially and subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, less any accrued lease payments and unamortized lease incentives received, if any.

The Company's consolidated ROU asset balance was $ 611.9 and $ 786.2 million as of June 30, 2021 and 2020, respectively.

The right of use (ROU) asset is initially and subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, less any accrued lease payments and unamortized lease incentives received, if any.

For leases classified as operating leases, expense for lease payments is recognized on a straight-line basis over the lease term, including the lease renewal option when the lease is expected to be renewed.

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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.

Poor salon performance in fiscal year 2020 and 2021, primarily due to the COVID-19 pandemic, resulted in ASC 360-10-35-21 triggering events.

Poor salon performance in fiscal years 2022 and 2021, primarily due to the COVID-19 pandemic, resulted in ASC 360-10-35-21 triggering events.

As a result, management assessed underperforming salon asset groups, which included the related ROU assets, for impairment in accordance with ASC 360.

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The fair value of the right of use asset is estimated by determining what a market participant would pay over the life of the primary asset in the group, discounted back to June 30, 2022.

See Note 6 for further discussion related to right of use asset impairment.

See Note 6 to the Consolidated Financial Statements for further discussion related to right of use asset impairment.

The first step in the impairment test under ASC 360 is to determine whether the long-lived assets are recoverable, which is determined by comparing the net carrying value of the salon asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset group.

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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 that 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.

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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 and a discount rate.

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.

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 for fiscal years 2021 through 2023, and a discount rate.

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 asset impairment charge of $ 13.0 million, which included $ 9.5 million related to ROU assets on the Consolidated Statement of Operations.

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

A long-lived asset impairment charge was no t recognized in fiscal year 2019.

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.

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.

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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 asset, including its ROU assets.

However, the ultimate severity and longevity of the COVID-19 pandemic is unknown;

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

Our projections of future operating performance do not anticipate future salon closures due to the COVID-19 pandemic.

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

See Note 6 to the Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of June 30, 2021 and 2020, the Franchise reporting unit had $ 229.6 and $ 227.5 million of goodwill and the Company-owned reporting unit had no goodwill for both periods.

See Note 5 to the Consolidated Financial Statements.

As of June 30, 2022 and 2021, the Franchise reporting unit had $ 174.4 and $ 229.6 million, respectively, of goodwill and the Company-owned reporting unit had no goodwill for both periods.

See Note 5 to the Consolidated Financial Statements for changes to the goodwill balance.

The Company assesses goodwill impairment on an annual basis as of April 30, 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.

Goodwill impairment assessments are performed at the reporting unit level, which is the same as the Company's operating segments.

In fiscal year 2020, the Company adopted ASU 2017-04, which simplified the test for goodwill impairment.

Under this accounting standard, the Company performed its interim impairment test and annual impairment tests by comparing the fair value of a reporting unit to its carrying amount.

The Company performed its interim impairment tests and annual impairment tests by comparing the fair value of a reporting unit to its carrying amount.

The Company then records an impairment charge for the amount that the carrying amount exceeds the fair value.

This eliminates Step 2 from the goodwill impairment test to simplify the subsequent measure of goodwill.

Prior to the adoption, the goodwill assessment involved a one-step comparison of the reporting unit's fair value to its carrying value, including goodwill (Step 1).

If the reporting unit's fair value exceeded its carrying value, no further procedures were required.

However, if the reporting unit's fair value was less than the carrying value, an impairment charge was recorded for the difference between the fair value and carrying value of the reporting unit.

In applying the goodwill impairment assessment, the Company could assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting units was less than its carrying value (Step 0).

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Following is a description of the goodwill impairment assessments for each of the fiscal years:

During fiscal year 2021, the Company did not experience any triggering events that required an interim goodwill analysis.

During fiscal year 2022, the Company performed a quantitative impairment test over goodwill during the second quarter due to a triggering event experienced in the quarter.

This determination was made considering the sustained decrease in share price and a change in the Company's chief operating decision maker.

In the second quarter, the Franchise reporting unit was determined to have a fair value in excess of its carrying value and no impairment was recorded.

A quantitative goodwill impairment was performed in the third quarter due to a triggering event experienced during the quarter.

This determination was made considering a decrease in forecasted revenue due to slower than expected recovery from COVID-19.

In the third quarter, the Franchise reporting unit was determined to have a carrying value in excess of its fair value, resulting in a goodwill impairment charge of $ 16.0 million.

The Company performed its annual impairment assessment as of April 30.

For the fiscal year 2021 annual impairment assessment, the Company performed a Step 1 impairment test for the Franchise reporting unit.

The Company compared the carrying value of the Franchise reporting unit, including goodwill, to the estimated fair value.

The results of this assessments indicated that the estimated fair value of the Company's Franchise reporting unit significantly exceeded the carrying value.

For the goodwill impairment analysis, management utilized a combination of both a discounted cash flows approach and market approach to evaluate the Franchise reporting unit.

The discounted cash flows model reflects management's assumptions regarding revenue growth rates, economic and market trends, cost structure, and other expectations about the anticipated short-term and long-term operating results.

Management's assumptions related to revenue growth rates were reduced and management increased expected salon closures compared to valuations in prior years.

These changes, along with a decline in value from the market approach, reduced the fair value of the reporting unit.

The discount rate of 20.0 % was also a key assumption utilized in the discounted cash flows, which was an increase of 0.5 % from the third quarter valuation due to an increase in market interest rates.

As a result of the impairment testing, the Franchise reporting unit was determined to have a fair value in excess of its carrying value.

The Company derecognized $ 38.4 million of goodwill in fiscal year 2022 in connection to the sale of OSP.

The $ 38.4 million represents the portion of goodwill related to the OSP business based on relative fair value.

See Notes 3 and 5 to the Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

During the third quarter of fiscal year 2020, the Company determined a triggering event occurred, resulting in quantitative impairment tests performed over the goodwill.

This determination was made considering the reduced sales and profitability projections for the reporting units, driven by the COVID-19 pandemic and related economic disruption.

The triggering event experienced in the third quarter impacted both reporting units of the business, Franchise and Company-owned.

The Company engaged a third-party valuation specialist to perform an impairment analysis on the Franchise reporting unit of the business.

The Company-owned reporting unit is comprised of a portfolio of salons that the Company intends to sell to franchisees or close in the short-term as part of the transition to a fully-franchised model.

As a result, the Company-owned reporting unit has a limited life which allows the Company to perform its own impairment analysis on the Company-owned reporting unit.

For the goodwill impairment analysis, management utilized a combination of both a discounted cash flows approach and market approach to evaluate the Franchise reporting unit, and the discounted cash flows approach to evaluate the Company-owned reporting unit.

The discounted cash flow models reflect management's assumptions regarding revenue growth rates, economic and market trends including deterioration from the current COVID-19 pandemic, cost structure, and other expectations about the anticipated short-term and long-term operating results of the reporting units.

For the Franchise reporting unit, the number of salons to be sold to franchisees and the discount rate of 13 percent were significant assumptions utilized in the discounted cash flow.

For the Company-owned reporting unit, proceeds from the sale of salons to franchisees and number of salon venditions were the significant assumptions utilized in its discounted cash flow.

As a result of the impairment testing, the Franchise reporting unit was determined to have a fair value that exceeded carrying value by approximately 50 percent.

The Company-owned reporting unit was determined to have a carrying value in excess of its fair value, resulting in a goodwill impairment charge of $ 40.2 million.

Prior to the COVID-19 pandemic, the Company had been derecognizing Company-owned goodwill as part of the calculation of gain or loss on the sale of salons to franchisees.

The Company-owned reporting unit has no remaining goodwill, so there will be no further derecognition of Company-owned goodwill.

The Company performed its annual impairment assessment as of April 30, 2020 and noted no significant changes to the carrying value or the fair value of the Franchise reporting unit, which would indicate that the headroom dropped below the 50 percent determined as of March 31, 2020.

If a future triggering event analysis or the Company's annual impairment assessment indicates the fair value of the Franchise reporting unit has potentially fallen below more than the 50 percent headroom, we may be required to perform an updated impairment assessment that may result in a non-cash impairment charge to reduce the carrying value of goodwill.

Assessing goodwill for impairment requires management to make assumptions and to apply judgment, including forecasting future sales, future salon sales to franchisees and selecting appropriate discount rates, which can be affected by economic conditions and other factors that can be difficult to predict.

The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions it uses to calculate impairment losses of goodwill.

However, if actual results are not consistent with the estimates and assumptions used in the calculations, or if management is unable to expand its franchise base, the Company may be exposed to future impairment losses that could be material.

During fiscal year 2021, the Company did not experience any triggering events that required an interim goodwill analysis.

The Company performed its annual impairment assessment as of April 30.

For the fiscal year 2019 annual impairment assessment, due to the transformational efforts completed during the year, the Company elected to forgo the optional Step 0 assessment and performed the quantitative impairment analysis on the Franchise and Company-owned reporting units.

The Company compared the carrying value of the reporting units, including goodwill, to their estimated fair value.

The results of these assessments indicated that the estimated fair value of the Company's reporting units exceeded their carrying value.

The Franchise reporting unit had substantial headroom and the Company-owned reporting unit had headroom of approximately 20 percent.

Investments In Affiliates:

The Company has equity investments in securities of certain privately held entities.

The Company accounts for these investments under the equity or cost method of accounting.

The Company's investments have no value as of June 30, 2021 and 2020.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the fiscal year 2021 annual impairment assessment, the Company performed a Step 1 impairment test for the Franchise reporting unit.

The Company compared the carrying value of the Franchise reporting unit, including goodwill, to the estimated fair value.

The results of this assessment indicated that the estimated fair value of the Company's Franchise reporting unit significantly exceeded the carrying value.

Self-Insurance Accruals:

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Although the Company does not expect the amounts ultimately paid to differ significantly from the estimates, self-insurance accruals could be affected if future claims experience differs significantly from historical trends and actuarial assumptions.

For fiscal years 2021, 2020 and 2019, the Company recorded decreases (increases) in expense for changes in estimates related to prior year open policy periods of $ 3.6 , $ 3.1 and $( 1.3 ) million, respectively.

The Company updates loss projections quarterly and adjusts its liability to reflect updated projections.

For fiscal years 2022 and 2021, the Company recorded decreases in expense for changes in estimates related to prior year open policy periods of $ 0.5 and $ 3.6 million, respectively.

The Company updates loss projections bi-annually and adjusts its liability to reflect updated projections.

The updated loss projections consider new claims and developments associated with existing claims for each open policy period.

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Revenue Recognition and Deferred Revenue:

Franchise revenues primarily include royalties, advertising fund fees and initial franchise fees.

Franchise revenues primarily include royalties, fees, product sales to franchisees and advertising fund fees.

Royalties and advertising fund revenues represent sales-based royalties that are recognized as revenue in the period in which the sales occur.

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See Note 2 to the Consolidated Financial Statements.

Product sales by the Company to its franchisees are included within product revenues on the Consolidated Statement of Operations and recorded at the time product is delivered to franchise locations.

Company-owned salon revenues are recognized at the time when the services are provided.

Product revenues are recognized when the guest receives and pays for the merchandise.

Classification of Expenses:

The following discussion provides the primary costs classified in each major expense category:

Cost of service— labor costs related to salon employees and the cost of product used in providing service.

Cost of product— cost of product sold to guests, labor costs related to selling retail product, the cost of product sold to franchisees and reserve for excess and obsolete inventory.

Site operating— direct costs incurred by the Company's salons, such as advertising, workers' compensation, insurance, utilities and janitorial costs.

General and administrative— costs incurred to support franchise operations, costs associated with field supervision, costs associated with salon training, distribution centers and corporate offices (such as salaries and professional fees).

Product sales by the Company to its franchisees are recorded at the time product is delivered to franchise locations.

Company-owned salon revenues are recognized at the time when the services are provided or the guest receives and pays for merchandise.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Classification of Revenue and Expenses:

Beginning in the first quarter of fiscal year 2022, the Company adjusted its Statement of Operations for all periods presented to align the presentation of results to its franchise-focused business.

Below is a summary of the changes to the financial statement captions.

The change does not have a financial impact on the Company's reported revenue, operating loss, reported net loss or cash flows from operations.

Royalties - sales-based royalty received from franchisees.

In prior years, these fees were included in Royalties and Fees and disclosed in the footnotes.

Fees - fees received from franchisees and third parties, including franchise fees, software and hardware fees related to Opensalon Pro and fees received from the third-party distributors.

Product sales to franchisees - wholesale product sales to franchisees.

This caption equates to Product sales in the Franchise segment in prior years.

The Company changed its franchise product sales business in fiscal year 2022 from a wholesale distribution model to a third-party distribution model.

This revenue was expected to decrease significantly during fiscal year 2022 and into fiscal year 2023.

Advertising fund contributions - sales-based advertising fund contributions received from franchisees.

In prior years, these fees were included in Royalties and Fees and disclosed in the footnotes.

Company-owned salon revenue - service revenue and revenue derived from sales of product in Company-owned salons.

This caption equates to revenue reported in the Company-owned segment in prior periods.

Cost of product sales to franchisees - direct cost of inventory and freight and other costs of sales.

In prior years, these sales were included in the Franchise segment cost of product and site operating expenses.

Company-owned salon expense - cost of service and product sold to guests in our Company-owned salons and other salon-related costs.

In prior years, these costs were classified as Company-owned segment cost of service, cost of product and site operating expenses.

Excluded from this caption are general and administrative expense, rent and depreciation and amortization related to company-owned salons.

Consideration Received from Vendors:

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Distribution costs are incurred to store, move and ship product from the Company's distribution centers to salons and includes distribution center overhead.

Such distribution costs related to product shipped to company-owned locations are included in site operating expenses in the Consolidated Statement of Operations.

Distribution costs, including distribution center overhead, related to shipping product to franchise locations totaled $ 12.1 , $ 8.6 and $ 7.7 million during fiscal years 2021, 2020 and 2019, respectively, and are included within general and administrative expenses on the Consolidated Statement of Operations.

Such distribution costs related to product shipped to company-owned locations are included in Company-owned salon expenses in the Consolidated Statement of Operations.

Distribution costs, including distribution center overhead, related to shipping product to franchise locations totaled $ 2.3 and $ 12.1 million during fiscal years 2022 and 2021, respectively, and are included within general and administrative on the Consolidated Statement of Operations.

In fiscal year 2022, the Company exited its two distribution centers and changed the wholesale product distribution model in favor of a third-party distribution model, reducing the cost in fiscal year 2022.

The Company now stores inventory at a third-party facility.

Advertising and Advertising Funds:

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Corporate funded advertising costs are expensed as incurred.

The Company has various franchising programs supporting certain of its franchise salon concepts.

The Company has various franchising programs supporting specific franchise salon concepts.

Most maintain advertising funds that provide comprehensive advertising and sales promotion support.

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Advertising fund contributions are expensed when the contribution is made.

The Company's advertising costs are included in site operating expenses in the Consolidated Statement of Operations and consist of the following:

2021 2020 2019

The Company's advertising costs included in the Consolidated Statement of Operations consist of the following:

(Dollars in thousands)

Corporate funded advertising costs $ 7,015 $ 13,210 $ 21,581

Advertising fund contributions from company-owned salons 897 3,715 12,929

Advertising fund contributions from franchisees $ 32,573 $ 22,023

Advertising fund contributions from company-owned salons (1) 154 897

Corporate funded advertising costs (1) 671 7,015

Total advertising costs $ 33,398 $ 29,935

_____________________________________________________________________________

(1) Fiscal year 2020 includes the refunding of $ 14.9 million of previously collected cooperative fees to franchisees as a direct result of the COVID-19 pandemic.

(1) Included in General and administrative expense in the Consolidated Statement of Operations.

The Company records all advertising funds as assets and liabilities within the Company's Consolidated Balance Sheet.

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Interest Income and Other, Net:

In December 2019, the Company sold the land and buildings associated with the Company's former headquarters for proceeds of $ 9.0 million, resulting in a net gain on sale of $ 2.5 million, which was recorded in Interest income and other, net on the Consolidated Statement of Operations.

In March 2021, the Company recorded a gain of $ 15.0 million related to the Company's distribution centers.

The gain on distribution centers was recorded to Interest income and other, net in the Consolidated Statement of Operations in fiscal year 2021.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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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), 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.

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Stock-based awards with exercise prices greater than the average market value of the Company's common stock are excluded from the computation of diluted earnings per share.

Due to the Company's net loss, basic and dilutive earnings per share are equal.

Due to the Company's net loss in all periods presented, basic and dilutive earnings per share are equal.

Comprehensive Loss:

Components of comprehensive loss include net loss, foreign currency translation adjustments and recognition of deferred compensation, net of tax within shareholders' equity.

Components of comprehensive loss include net loss, foreign currency translation adjustments and recognition of deferred compensation, net of tax within shareholders' (deficit) equity.

Foreign Currency Translation:

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Assets and liabilities of these subsidiaries are translated at the exchange rates in effect at each Balance Sheet date.

Translation adjustments arising from the use of differing exchange rates from period to period are included in accumulated other comprehensive income within shareholders' equity.

Translation adjustments arising from the use of differing exchange rates from period to period are included in accumulated other comprehensive income within shareholders' (deficit) equity.

Statement of Operations accounts are translated at the average rates of exchange prevailing during the year.

During fiscal years 2021, 2020 and 2019, the foreign currency gain (loss) included in loss from continuing operations was $ 0.3 , $( 0.1 ) and $ 0.1 million, respectively.

During fiscal years 2022 and 2021, a $ 0.6 million foreign currency loss and $ 0.3 million foreign currency gain is included in loss from continuing operations, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Accounting Standards Recently Adopted by the Company:

Simplifying the Test for Goodwill Impairment

In fiscal year 2020, the Company adopted ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350)" for the interim impairment test performed due to the triggering event noted above, for the quarter ended March 31, 2020.

Under this accounting standard, the Company performed its interim impairment test and annual impairment tests by comparing the fair value of a reporting unit to its carrying amount.

The Company then records an impairment charge for the amount that the carrying amount exceeds the fair value.

This eliminates Step 2 from the goodwill impairment test to simplify the subsequent measure of goodwill.

In fiscal year 2020, the Company adopted ASU 2016-02, "Leases (Topic 842)" and all subsequent ASUs that modified Topic 842 using the modified retrospective method and elected the option to not restate comparative periods in the year of adoption.

The Company also elected the package of practical expedients that do not require reassessment of whether existing contracts are or contain leases, lease classification or initial direct costs.

The Company has also made an accounting policy election to keep leases with an initial term of 12 months or less off of the Consolidated Balance Sheet.

Under adoption of Topic 842, the Company recorded a right of use asset and lease liability of $ 980.8 and $ 993.7 million, respectively.

The difference between the assets and liabilities are attributable to the reclassification of certain existing lease-related assets and liabilities as an adjustment to the right of use assets.

The decrease in the right of use asset and lease liability from July 1, 2019 to June 30, 2021 was due to lease modifications, impairment and salon closures.

The lease liability reflects a present value of the Company's current minimum lease payments for existing operating leases primarily relating to real estate leases, over a lease term which may include one option, if the options are reasonably assured of being exercised, discounted using a collateralized incremental borrowing rate.

The Company uses the portfolio approach in applying the discount rate.

The accounting guidance for lessors remained largely unchanged from previous guidance with the exception of the presentation of rent payments that the Company passes through to franchisees (lessees).

These costs are generally paid by the Company and reimbursed by the franchisee.

Historically, the costs had been recorded on a net basis within rent expense in the Consolidated Statements of Operations, but are now presented on a gross basis upon adoption of the guidance.

See Note 6 for further information about our transition to Topic 842 and the newly required disclosures.

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740)," which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740.

The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.

This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

Depending on the amendment, adoption may have been applied on the retrospective, modified retrospective or prospective basis.

The adoption of this new guidance during fiscal year 2022 using the prospective method did not have a material impact on our Consolidated Financial Statements.

Recently Issued Accounting Standards Not Yet Adopted:

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and it does not believe any of these pronouncements will have a material impact to the Company's financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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Revenue recognized at point of sale

Company-owned salon revenues are recognized at the time when the services are provided.

Product revenues for company-owned salons are recognized when the guest receives and pays for the merchandise.

Product sales to franchisees are recorded at the time product is delivered to the franchisee.

Payment for franchisee product revenue is generally collected 30 to 90 days of delivery.

Company-owned salon revenues are recognized at the time when the services are provided or the guest receives and pays for the merchandise.

Revenues from purchases made with gift cards are also recorded when the guest takes possession of the merchandise or services are provided.

Gift cards issued by the Company are recorded as a liability (deferred revenue) upon sale and recognized as revenue upon redemption by the customer.

Gift cards issued by the Company are recorded as a liability (deferred revenue) upon sale and recognized as revenue upon redemption by the guest.

Gift card breakage, the amount of gift cards which will not be redeemed, is recognized proportional to redemptions using estimates based on historical redemption patterns.

Product sales to franchisees are included within product revenues in the Consolidated Statement of Operations and recorded at the time product is delivered to the franchisee.

Payment for franchisee product revenue is generally collected within 30 to 90 days of delivery.

Revenue recognized over time

Franchise revenues primarily include royalties, advertising fund cooperatives fees, franchise fees and other fees.

Royalty and advertising fund revenues represent sales-based royalties that are recognized in the period in which the sales occur.

Generally, royalty and advertising fund revenue is billed and collected monthly in arrears.

Generally, royalty and advertising fund revenues are billed and collected monthly in arrears.

Advertising fund revenues and expenditures, which must be spent on marketing and related activities per the franchise agreements, are recorded on a gross basis within the Consolidated Statement of Operations.

This treatment increases both the gross amount of reported franchise revenue and site operating expense and generally has no impact on operating income and net income.

The treatment increases both the gross amount of reported revenue and expense and generally has no impact on operating income and net income.

Franchise fees are billed and received upon the signing of the franchise agreement.

Recognition of these fees is deferred until the salon opening and is then recognized over the term of the franchise agreement, typically ten years .

Franchise rental income is a result of the Company signing leases on behalf of franchisees and entering into a sublease arrangement with the franchise.

Recognition of these fees is deferred until the salon opening and is then recognized over the term of the franchise agreement, which is typically 10 years .

Franchise rental income is a result of the Company signing leases on behalf of franchisees and entering into sublease arrangements with the franchisees.

The Company recognizes franchise rental income and expense when it is due to the landlord.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table disaggregates revenue by timing of revenue recognition and is reconciled to reportable segment revenues as follows:

Year Ended June 30, 2021 Year Ended June 30, 2020 Year Ended June 30, 2019

Franchise Company-owned Franchise Company-owned Franchise Company-owned

(Dollars in thousands)

Revenue recognized at a point in time:

Service $ — $ 108,120 $ — $ 331,538 $ — $ 749,660

Product 56,699 34,845 52,421 85,165 59,905 165,713

Total revenue recognized at a point in time $ 56,699 $ 142,965 $ 52,421 $ 416,703 $ 59,905 $ 915,373

Revenue recognized over time:

Royalty and other franchise fees $ 66,034 $ — $ 60,061 $ — $ 59,688 $ —

Advertising fund fees 22,023 — 13,341 — 34,073 —

Franchise rental income 127,392 — 127,203 — — —

Total revenue recognized over time 215,449 — 200,605 — 93,761 —

Total revenue $ 272,148 $ 142,965 $ 253,026 $ 416,703 $ 153,666 $ 915,373

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

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(Dollars in thousands)

Receivables from contracts with customers, net $ 19,112 $ 22,991 Accounts receivable, net

Receivables from contracts with customers, net $ 10,263 $ 18,011 Receivable, net

Broker fees 15,592 19,254 Other assets

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Receivables relate primarily to payments due for royalties, franchise fees, advertising fees, franchise product sales and sales of salon services and product paid by credit card.

Receivables relate primarily to payments due for royalties, franchise fees, advertising fees, rent, franchise product sales and sales of salon services and product paid by credit card.

The receivables balance is presented net of an allowance for expected losses (i.e., doubtful accounts), related to receivables from franchisees.

The following table is a rollforward of the allowance for doubtful accounts for the periods indicated (in thousands):

Balance as of June 30, 2020 $ 6,899

The following table is a rollforward of the allowance for doubtful accounts for the periods indicated:

(Dollars in thousands)

Balance at beginning of period $ 7,774 $ 6,899

Provision for doubtful accounts (1) 967 509

Provision for franchisee rent (2) 1,421 1,920

Reclass of accrued rent (3) 149 —

Write-offs ( 3,752 ) ( 1,554 )

Balance as of June 30, 2021 $ 7,774

Balance at end of period $ 6,559 $ 7,774

_____________________________________________________________________________

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(2) The provision for franchisee rent is recognized as rent in the Consolidated Statement of Operations.

(3) The reclass of accrued rent represents franchisee rent obligations guaranteed by the Company that were unbilled and deemed unrecoverable as of June 30, 2021.

The amounts billed in fiscal year 2022 and the related accrual was reclassified to allowance for doubtful accounts.

Broker fees are the costs associated with using external brokers to identify new franchisees.

These fees are paid upon the signing of the franchise agreement and recognized as General and administrative expense over the term of the agreement.

The following table is a rollforward of the broker fee balance for the periods indicated (in thousands):

Balance as of June 30, 2020 $ 20,516

These fees are paid upon the signing of the franchise agreement and recognized as general and administrative expense over the term of the franchise agreement in the Consolidated Statement of Operations.

The following table is a rollforward of the broker fee balance for the periods indicated:

(Dollars in thousands)

Balance at beginning of period $ 19,254 $ 20,516

Additions 25 2,112

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Write-offs ( 498 ) ( 194 )

Balance as of June 30, 2021 $ 19,254

Balance at end of period $ 15,592 $ 19,254

The decrease in non-current deferred franchise fees for unopened salons in fiscal year 2022 is primarily due to $ 2.4 million of deferred fees related to terminated development agreements being recognized as fees in the Consolidated Statement of Operations in the year ended June 30, 2022.

Deferred revenue includes the gift card liability and deferred franchise fees for unopened salons and open salons.

Gift card revenue for the years ended June 30, 2021, 2020 and 2019 was $ 0.9 , $ 2.4 and $ 5.3 million, respectively.

Deferred franchise fees related to open salons are generally recognized on a straight-line basis over the term of the franchise agreement.

Franchise fee revenue for the years ended June 30, 2021, 2020 and 2019 was $ 6.6 , $ 5.2 and $ 3.6 million, respectively.

Franchise fee revenue for fiscal years 2022 and 2021 was $ 6.5 and $ 6.6 million, respectively.

Estimated revenue expected to be recognized in the future related to deferred franchise fees for open salons as of June 30, 2022 is as follows (in thousands):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

TBG DISCONTINUED OPERATIONS AND RESTRUCTURING

The Beautiful Group (TBG) :

In October 2017, the Company sold substantially all of its mall-based salon business in North America, representing 858 salons, to The Beautiful Group (TBG), an affiliate of Regent, a private equity firm based in Los Angeles, California.

In addition, the Company entered into a share purchase agreement for substantially all of its International segment, representing approximately 250 salons in the UK, with TBG operating these locations as franchise locations until they were transferred to another franchisee in fiscal year 2020.

The Company classified the results of its mall-based business and its International segment as discontinued operations for the periods TBG owned the salons in the Consolidated Statement of Operations.

In fiscal year 2019, TBG salons were operating at a loss and TBG struggled to pay the Company for the receivables related to the original purchase agreements as well as royalty and product receivables.

The Company reserved $ 20.7 million of receivables in fiscal year 2019.

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

The 207 North American mall-based salons transferred were the salons that the Company was the guarantor of the lease obligation.

The transfer of the 207 mall-based salons occurred on December 31, 2019, so the operational results of these mall-based salons are included in the Consolidated Statement of Operations beginning in the third quarter of fiscal year 2020.

The assets acquired and liabilities assumed were not material to the Consolidated Balance Sheet.

As of June 30, 2021, prior to any mitigation efforts which may be available, the Company remains liable for up to approximately $ 9 million related to its mall-based salon lease commitments on the 43 salons that remain open, a $ 14 million reduction from June 30, 2020.

The commitments are included in our lease liabilities.

The following summarizes the results of TBG related charges and TBG discontinued operations for the periods presented:

DISCONTINUED OPERATIONS

Opensalon Pro (OSP):

On June 30, 2022, the Company sold its 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 ProPoint 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 for all years presented.

Discontinued operations is included in the Franchise segment in the Consolidated Statement of Operations for all periods presented.

The following summarizes the components of the loss from sale of OSP for fiscal year 2022 included in discontinued operations (in thousands):

Cash proceeds $ 13,000

Goodwill derecognition ( 38,358 )

Software write-off (1) ( 8,408 )

Hardware write-down (2) ( 1,825 )

Other, net, including professional fees ( 552 )

Loss from sale of OSP $ ( 36,143 )

_______________________________________________________________________________

(1) Internally developed capitalized software is included in non-current assets related to discontinued operations as of June 30, 2021 and written off in June 2022 upon completion of the sale.

(2) Prior to the sale, hardware used to run OSP was sold to franchisees.

As a result of the sale, the Company wrote-down the value of the hardware to its net realizable value and the charge is included in the loss on the sale of OSP.

The hardware is included in inventory as of June 30, 2022 and current assets related to discontinued operations as of June 30, 2021 in the Consolidated Balance Sheet.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(Dollars in thousands)

TBG mall restructuring:

Accounts and notes receivable reserves $ — $ — $ 20,711

Other charges (1) — 2,333 1,105

Total TBG mall restructuring $ — $ 2,333 $ 21,816

TBG discontinued operations:

(Income) loss from TBG discontinued operations, before taxes (2) $ — $ ( 1,063 ) $ 1,221

Income tax expense (benefit) from TBG discontinued operations (3) — 231 ( 7,117 )

Income from TBG discontinued operations, net of tax $ — $ ( 832 ) $ ( 5,896 )

Discontinued operations:

Fees $ 3,811 $ 3,461

Cost of product sales to franchisees ( 1,037 ) ( 2,790 )

General and administrative ( 3,517 ) ( 9,006 )

Rent ( 194 ) ( 176 )

Depreciation and amortization ( 1,322 ) ( 964 )

Goodwill impairment (1) ( 2,880 ) —

Interest expense ( 715 ) ( 650 )

Loss from sale of OSP ( 36,143 ) —

Loss from discontinued operations, before taxes ( 41,997 ) ( 10,125 )

Income tax benefit from discontinued operations (2) 2,599 —

Loss from discontinued operations, net of tax $ ( 39,398 ) $ ( 10,125 )

_______________________________________________________________________________

(1) In fiscal year 2020, the Company recorded professional fees associated with the transfer of the mall salons back to the Company as TBG mall restructuring charges.

(2) In fiscal years 2020 and 2019, the Company recorded professional fees related to the transaction, as well as insurance adjustments associated with the discontinued operations.

(1) Goodwill impairment included in discontinued operations represents the portion of impairment allocated to the OSP business based on relative fair value.

(2) Income taxes have been allocated to continuing and discontinued operations based on the methodology required by accounting for income taxes guidance.

The Company leases office space in Fremont, California.

The lease related liabilities are included in long-term lease liability as of June 30, 2022, and the lease related assets and liabilities are included in non-current assets, current liabilities and non-current liabilities related to discontinued operations as of June 30, 2021 in the Consolidated Balance Sheet.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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Rent and related real estate costs 4,585 11,197

Deferred revenue 7,823 8,164

Other 8,597 8,181

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

Total amortization expense related to intangible assets during fiscal year 2021 was approximately $ 0.8 million and in fiscal years 2020 and 2019 was approximately $ 1.3 million in both years.

Total amortization expense related to intangible assets during fiscal years 2022 and 2021 was approximately $ 0.4 and $ 0.8 million, respectively.

As of June 30, 2022, future estimated amortization expense related to intangible assets is estimated as follows (in thousands):

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The following provides supplemental disclosures of cash flow activity:

2021 2020 2019

(Dollars in thousands)

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_______________________________________________________________________________

(1) The change in the gross carrying value of goodwill relates foreign currency translation adjustments.

(2) In fiscal year 2011, the Company realized a $ 74.1 million goodwill impairment loss associated with the Company-owned reporting unit (the previous North American Value reporting unit).

In fiscal year 2020, the Company realized a $ 40.2 million goodwill impairment associated with the Company-owned reporting unit.

Prior to the COVID-19 pandemic, the Company had been derecognizing Company-owned goodwill as part of the calculation of gain or loss on the sale of salons to franchisees.

Following the goodwill impairment in fiscal year 2020, the Company-owned reporting unit has no remaining goodwill, so there will be no further derecognition of Company-owned goodwill.

The table below contains details related to the Company's goodwill (in thousands):

Franchise Reporting Unit

Goodwill, net at June 30, 2020 $ 227,457

(1) The change in the gross carrying value of goodwill relates to foreign currency translation adjustments.

The table below contains details related to the Company's goodwill related to the Franchise reporting unit:

(Dollars in thousands)

Balance at beginning of period (1) $ 229,582 $ 227,457

Derecognition of OSP goodwill ( 38,358 ) —

Goodwill impairment related to continuing operations ( 13,120 ) —

Goodwill impairment related to discontinued operations ( 2,880 ) —

Translation rate adjustments ( 864 ) 2,125

Goodwill, net at June 30, 2021 $ 229,582

Balance at end of period (1) $ 174,360 $ 229,582

_______________________________________________________________________________

(1) The goodwill balance as of June 30, 2021 includes $ 41.3 million related to discontinued operations.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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The Company leases its company-owned salons and some of its corporate facilities under operating leases.

The original terms of the salon leases range from 1 to 20 years with many leases renewable for an additional 5 to 10 year term at the option of the Company.

The original terms of the salon leases range from one to 20 years with many leases renewable for an additional five to 10-year term at the option of the Company.

In addition to the obligation to make fixed rental payments for the use of the salons, the Company also has variable lease payments that are based on sales levels.

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Total rent includes the following:

2021 2020 2019

(Dollars in thousands)

Minimum rent $ 33,596 $ 57,819 $ 108,892

Percentage rent based on sales 8 2,043 4,754

Real estate taxes and other expenses 8,644 12,868 16,445

Office and warehouse rent $ 4,575 $ 5,234

Lease termination expense (1) 1,835 13,544

Lease liability benefit (2) ( 3,620 ) ( 20,022 )

Corporate segment rent 2,703 2,589 862

Franchise segment non-reimbursable rent 2,395 872 740

Franchise salon rent 1,695 3,376

Company-owned salon rent 4,872 38,622

Total $ 9,357 $ 40,754

_______________________________________________________________________________

(1) During fiscal year 2021, the Company terminated the leases for 402 company-owned salons before the lease end dates.

For the fiscal year ended June 30, 2021, lease termination fees include $ 8.3 million of early termination payments to close salons before the lease end date to relieve the Company of future lease obligations.

For the fiscal year ended June 30, 2021, lease termination fees also include $ 5.3 million of adjustments to accrue future lease payments for salons that are no longer operating.

The early termination payments made during the fiscal year ended June 30, 2021 decreased the future minimum rent liability by $ 15.7 million plus saved the Company from the associated real estate taxes, other lease expenses and loss incurred operating the salons.

(2) For the fiscal year ended June 30, 2021, upon termination of previously impaired leases, the Company derecognized ROU assets of $ 18.3 million and lease liabilities of $ 31.1 million that resulted in a net gain of $ 12.8 million.

In addition, the Company recognized a benefit of $ 7.1 million from lease liabilities decreasing in excess of previously impaired ROU assets for the fiscal year ended June 30, 2021.

(1) During fiscal year 2022, lease termination expense includes $ 0.9 million to exit the Company's distribution centers before the lease end dates and $ 0.9 million to exit salons before the lease end dates in order to relieve the Company of future lease obligations.

During fiscal year 2021, lease termination fees include $ 8.3 million of early termination payments to close salons before the lease end date to relieve the Company of future lease obligations and $ 5.3 million to accrue future lease payments for salons that are no longer operating.

(2) Upon termination of previously impaired leases, the Company derecognizes the corresponding ROU assets and lease liabilities which results in a net gain.

In addition, the Company recognizes a benefit from lease liabilities decreasing in excess of previously impaired ROU assets for ongoing leases that were previously impaired.

The Company leases salon premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees.

All lease costs are passed through to franchisees.

All lease-related costs are passed through to the franchisees.

The Company records the rental payments due from franchisees as franchise rental income and the corresponding amounts owed to landlords as franchise rent expense on the Consolidated Statement of Operations.

In fiscal year 2021, franchise rental income and franchise rent expense were $ 127.4 million.

In fiscal years 2022 and 2021, Franchise rental income and Franchise rent expense were $ 130.8 and $ 127.4 million, respectively.

These leases generally have lease terms of approximately five years .

The Company expects to renew SmartStyle and some franchise leases upon expiration.

Other leases are expected to be renewed by the franchisee upon expiration.

This represents a Board-approved change in estimate that occurred in the second quarter of fiscal year 2021 and was intended to reduce lease exposure.

The change in estimate resulted in a decrease to lease liabilities and right of use assets of $ 72.9 million, with no impact to net income.

All lease related costs are passed through to the franchisees.

In April 2020, the FASB issued a question and answer document focused on the application of lease accounting guidance to lease concessions provided as a result of COVID-19 (the Lease Modification Q&A).

The Lease Modification Q&A provides entities with the option to elect to account for lease concessions as though the enforceable rights and obligations existed in the original lease when the total cash flows resulting from the modified lease are substantially similar to the cash flows in the original lease.

The Company elected this FASB relief for COVID-19-related rent concessions for the Walmart rent abatement received in April and May 2020 and has elected not to remeasure the related lease liability and right of use asset for Walmart leases.

The Walmart rent abatement was recognized as a reduction of variable rent expense of $ 2.7 million in the fourth fiscal quarter of 2020.

Additionally, included in accounts payable as of June 30, 2020 is approximately $ 20 million of rental payments that were due, but the Company had not paid.

The Company treated these deferrals as if no change to the underlying lease had been made as of June 30, 2020.

If the rent was subsequently forgiven or modified, the Company accounted for the change as a lease modification upon execution of the amended terms.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Some other leases are expected to be renewed by the franchisee upon expiration.

The ROU asset is initially and subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, less any accrued lease payments and unamortized lease incentives received, if any.

The Company's consolidated ROU asset balance was $ 611.9 and $ 786.2 million as of June 30, 2021 and 2020, respectively.

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The weighted average remaining lease term was 6.02 and 6.44 years and the weighted average discount rate was 4.25 % and 4.11 % for all salon operating leases as of June 30, 2022 and 2021, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A lessee's 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.

Poor salon performance in fiscal years 2020 and 2021, primarily due to the COVID-19 pandemic, resulted in ASC 360-10-35-21 triggering events.

Poor salon performance in fiscal years 2022 and 2021 resulted in ASC 360-10-35-21 triggering events.

As a result, management assessed underperforming salon asset groups, which included the related ROU assets, for impairment in accordance with ASC 360.

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Step two 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.

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.

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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 based on recently negotiated leases as applicable, the asset group's projected sales for properties with no recently negotiated leases, and a discount rate.

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.

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 based on recently negotiated leases as applicable, the asset group's projected sales for fiscal years 2021 through 2023 for properties with no recently negotiated leases, and a discount rate.

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

Impairment related to ROU assets for fiscal year 2020 was $ 17.4 million.

For fiscal years 2022 and 2021, the Company recognized long-lived 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.

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.

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However, the ultimate severity and longevity of the COVID-19 pandemic is unknown, therefore, if actual results are not consistent with the estimates and assumptions used in the calculations, the Company may be exposed to future impairment losses that could be material.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of June 30, 2022, future operating lease commitments, including one renewal option for leases expected to be renewed, to be paid and received by the Company were as follows (in thousands):

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Long-term lease liabilities $ 396,568 $ 3,373 $ 8,504 $ 408,445

Supplemental operating cash flow information and non-cash activity related to our operating leases are as follows (in thousands):

(Dollars in thousands)

Cash paid for amounts included in the measurement of lease liabilities (1) $ 74,507 $ 130,039

Right of use assets obtained in exchange for new lease liabilities 2,011 4,242

_______________________________________________________________________________

(1) Cash paid for amounts included in the measurement of lease liabilities includes rent, termination fees, settlements and legal fees, and commission payments.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of June 30, 2021 and 2020, the estimated fair value of the Company's cash, cash equivalents, restricted cash, receivables, inventory, deferred compensation assets and accounts payable approximated their carrying values.

As of June 30, 2021, the estimated fair value of the Company's debt was $ 186.9 million, which approximated its carrying value.

The estimated fair value of the Company's debt is based on Level 2 inputs.

As of June 30, 2022 and 2021, the estimated fair value of the Company's cash, cash equivalents, restricted cash, receivables, inventory, deferred compensation assets, debt and accounts payable approximated their carrying values.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

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The following impairment charges were based on fair values using Level 3 inputs (1):

2021 2020 2019

(Dollars in thousands)

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Long-lived asset impairment 542 13,023

Salon asset impairment (1) 3,529 3,851 4,587

_______________________________________________________________________________

(1) See Note 1 to the Consolidated Financial Statements.

(1) See Notes 1 and 5 to the Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FINANCING ARRANGEMENTS

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

The Company's debt consists of the following:

Revolving Credit Facility

2 unchanged sentences

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

_______________________________________________________________________________

(1) As of June 30, 2022 the Company's borrowings matured in March 2023.

On August 12, 2022, the Company amended its credit agreement.

In connection with the amendment, the maturity of the credit agreement was extended to August 31, 2025.

Accordingly, the debt is classified as non-current on the Consolidated Balance Sheet.

See Note 16 to the Consolidated Financial Statements.

At June 30, 2022, cash and cash equivalents totaled $ 17.0 million.

As of June 30, 2021, the Company had $ 186.9 million of outstanding borrowings under a $ 294.4 million revolving credit facility.

The credit facility decreased $ 0.6 million from $ 295.0 million as of June 30, 2020, in accordance with the bulk sale provisions in the agreement, due to the sale of secured inventory related to our transition to third party vendors.

As of June 30, 2022, the Company had $ 180.0 million of outstanding borrowings under the original $ 295.0 million revolving credit facility, of which $ 277.5 million was available as of June 30, 2022.

The credit facility decreased $ 16.9 million from $ 294.4 million as of June 30, 2021, in accordance with the bulk sale provisions in the revolving credit facility agreement, due to the sale of OSP and secured inventory related to our transition to a third-party distribution partner.

At June 30, 2022, the Company had outstanding standby letters of credit under the revolving credit facility of $ 15.7 million, primarily related to the Company's self-insurance program.

The unused available credit under the facility was $ 81.9 million at 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, 2021.

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

In May of 2020, the Company amended its revolving credit facility that expires in March 2023.

Under the new terms of the amendment, the Company is required to maintain a minimum liquidity of $ 75.0 million and provides the Company's lenders security in 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 amendment also increases the applicable interest rate margins and facility fees applicable to the loans and inserts a 1.25 % LIBOR floor.

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.

The Company was in compliance with all covenants and other requirements of the financing arrangements as of June 30, 2021 and believes it will continue to be in compliance for at least one year from the filing date.

Sale and Leaseback Transactions

The Company's long-term financing liabilities consists of the following:

Maturity Date Interest Rate June 30,

2021 June 30,

(Fiscal year) (Dollars in thousands)

Financial liability - Salt Lake City Distribution Center 2034 N/A $ — $ 16,773

Financial liability - Chattanooga Distribution Center 2034 N/A — 11,208

Long-term financing liabilities $ — $ 27,981

In fiscal year 2019, the Company sold its Salt Lake City and Chattanooga Distribution Centers to an unrelated party.

At the time of the sale, the transactions were considered failed sale and leaseback transactions, as the Company had planned to lease the property for more than 75% of its economic life.

The sale proceeds received from the buyer-lessor were recognized as a financial liability, which was reduced based on the rental payments made under the lease that were allocated between principal and interest.

In the third quarter of fiscal year 2021, as a result of the decision to exit the Company's wholesale product sales business, the Company informed the landlord of its intention to exit the leased spaces.

Because the Company no longer plans to lease the distribution centers for the majority of the assets' useful lives, these transactions are subsequently considered sale and leaseback transactions.

As a result, the Company derecognized the financial liability of $ 28.5 million and the carrying value of the related assets of $ 13.5 million and recognized a gain of $ 15.0 million for the difference between the liability and asset.

The gain on distribution centers was recorded to Interest income and other, net in the Consolidated Statement of Operations.

As the leases for the two distribution centers meet the sale and leaseback criteria, the Company recognized a right of use asset and lease liability on the Consolidated Balance Sheet (See Note 6 to the Consolidated Financial Statements).

As of June 30, 2022, the Company had cash, cash equivalents and restricted cash of $ 27.5 million and current liabilities of $ 152.8 million.

Under the terms of the revolving credit facility as of June 30, 2022, the Company is required to maintain a minimum liquidity of $ 75.0 million and the Company's lenders are secured in the Company's assets.

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 0.50 %- 0.75 %, each depending on average utilization of the revolving line of credit.

The Company was in compliance with all covenants and other requirements of the financing arrangements as of June 30, 2022.

On August 12, 2022, the Company amended and extended its credit facility which, among other things, converted the revolving credit facility 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.

See Note 16 to the Consolidated Financial Statements .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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Litigation and Settlements:

The Company is a defendant in various lawsuits and claims arising out of the normal course of business.

Like certain other large retail employers, the Company has been faced with allegations of purported class-wide consumer and wage and hour violations.

The Company is a plaintiff or defendant in various lawsuits and claims arising out of the normal course of business.

Like certain other franchisors, the Company has faced allegations of franchise regulation and agreement violations.

Additionally, because the Company may be the tenant under a master lease for a location subleased to a franchisee, the Company has faced allegations of nonpayment of rent and associated charges.

Further, similar to other large retail employers, the Company has been faced with allegations of purported class-wide consumer and wage and hour violations.

During fiscal year 2022, the Company recorded $ 2.2 million of expense related to litigation, of which $ 1.7 million was paid during the year.

The Company's accrual related to potential settlement liability was $ 0.5 million as of June 30, 2022.

Included in the expense is litigation brought in the 11th Judicial Circuit, St.

Charles County, Missouri, in which the Company challenged a landlord regarding a lease the Company secured but the landlord leased to another tenant.

The landlord in the case prevailed and the court ordered the Company to pay the landlord $ 0.5 million in attorney's fees.

The Company requested leave to appeal and plans to vigorously pursue overturning this judgment.

The Company's previous point-of-sale system supplier had challenged the development of certain parts of the Company's technology systems in litigation brought in the Northern District of California.

The Company and the supplier entered into an agreement, effective June 25, 2021, that provided for the dismissal of the lawsuit and set forth a Transition Services Agreement pursuant to which the supplier will assist in the transfer of franchise salons from its point-of-sale system to the Company's salon management system, OSP.

The Company and the supplier entered into an amendment to the Settlement Agreement, effective June 15, 2022, in which the Company agreed to pay $ 2.0 million to the supplier in installments commencing on June 15, 2022, and ending on December 10, 2022, in consideration of a release of claims arising out of or related to the Transition Services Agreement and for the supplier to continue to provide the services set forth in that agreement.

Litigation is inherently unpredictable, and the outcome of these matters cannot presently be determined.

Although the actions are being vigorously defended, the Company could in the future, incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period.

In addition, our existing point-of-sale system supplier had challenged the development of certain parts of our technology systems in litigation brought in the Northern District of California, case No.

20-cv-02181-MMC.

The Company and the supplier entered into an agreement, effective June 25, 2021, that provided for the dismissal of the lawsuit and set forth a commercial services agreement pursuant to which the supplier will assist in the transfer of franchise salons from its point-of-sale system to the Company's salon management system, Opensalon ® Pro.

Under the agreement, the Company expects to pay the supplier between $ 3.0 and $ 5.0 million over two years .

The Company recorded $ 3.0 million in general and administrative expense on the Consolidated Statement of Operations and an accrual of $ 3.0 million on the Consolidated Balance Sheet, which represent the low end of the estimated cost range.

Although the actions are being vigorously defended, the Company could incur judgments in the future or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The components of loss from continuing operations before income taxes are as follows:

2021 2020 2019

(Dollars in thousands)

3 unchanged sentences

$ ( 44,442 ) $ ( 108,634 )

The benefit for income taxes consists of:

2021 2020 2019

The provision (benefit) for income taxes consists of:

(Dollars in thousands)

4 unchanged sentences

$ 2,017 $ ( 5,428 )

The benefit for income taxes differs from the amount of income tax determined by applying the applicable U.S.

The provision (benefit) for income taxes differs from the amount of income tax determined by applying the applicable U.S.

statutory rate to loss from continuing operations before income taxes, as a result of the following:

2021 2020 2019

statutory rate 21.0 % 21.0 %

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rates 3.0 9.4

Work opportunity tax credits 0.2 0.4 7.2

Uncertain tax positions ( 17.9 ) 0.2

Stock-based compensation ( 2.8 ) ( 0.7 )

Capital loss — 15.0 —

Loss on investment in Luxembourg — 29.3

3 unchanged sentences

(1) See Note 1 to the Consolidated Financial Statements.

(2) The ( 2.6 )% of Other, net in fiscal year 2022 includes the rate impact of the federal provision to return true-up and miscellaneous items of ( 2.0 )% and ( 0.6 )%, respectively.

The ( 0.6 )% of Other, net in fiscal year 2021 does not include the rate impact of any items in excess of 5 % of computed tax.

The ( 1.7 )% of Other, net in fiscal year 2020 includes the rate impact of goodwill derecognition and impairment and miscellaneous items of ( 1.2 )% and ( 0.5 )%, respectively.

The ( 8.7 )% of Other, net in fiscal year 2019 includes the rate impact of goodwill derecognition and miscellaneous items of ( 5.9 )% and ( 2.8 )%, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8 unchanged sentences

Operating lease liabilities 124,905 154,255

Financing lease liabilities — 7,157

Other (1) 17,542 12,608

8 unchanged sentences

Net deferred tax liability $ ( 10,979 ) $ ( 10,650 )

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.

_______________________________________________________________________________

(1) The $ 17.5 million of Other in fiscal year 2022 includes $ 5.3 million of deferred tax assets with a corresponding valuation allowance of the same amount related to discontinued operations.

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

• On March 27, 2020, the U.S.

government enacted the Coronavirus Aid, Relief and Economic Security Act (CARES Act) in response to the COVID-19 pandemic.

The CARES Act included several significant business tax provisions that, among other items, eliminated the taxable income limit and granted business a five-year carryback for certain net operating losses (NOLs), accelerated refunds of previously generated corporate alternative minimum tax (AMT) credits, temporarily loosened the business interest limitation under section 163(j) and corrected certain provisions under the Tax Cuts and Jobs Act (TCJA).

• In connection with the CARES Act, NOLs resulting from accounting periods which straddled December 31, 2017 are now considered definite-lived NOLs.

Therefore, the Company established a U.S.

valuation allowance against the NOLs generated during its fiscal year 2018 and recorded a net tax expense of $ 14.7 million in continuing operations.

• 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 further 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5 unchanged sentences

loss carryforward has no expiration.

The Company's tax credit carryforward of $ 37.4 million primarily consist of Work Opportunity Tax Credits that will expire from fiscal years 2031 to 2041.

The Company's tax credit carryforward of $ 37.7 million primarily consists of Work Opportunity Tax Credits that will expire from fiscal years 2031 to 2042.

The Company's capital loss carryforward of $ 5.3 million will expire in fiscal year 2025.

9 unchanged sentences

A rollforward of the unrecognized tax benefits is as follows:

2021 2020 2019

(Dollars in thousands)

1 unchanged sentence

Additions based on tax positions related to the current year, primarily salon vendition activity and tax positions related to a capital loss 8,636 292

Additions/(reductions) based on tax positions of prior years 50 ( 223 ) ( 154 )

Additions based on tax positions of prior years 81 50

Reductions on tax positions related to the expiration of the statute of limitations ( 402 ) ( 529 )

2 unchanged sentences

Interest and penalties associated with unrecognized tax benefits are recorded within income tax expense.

During each of the fiscal years 2021, 2020 and 2019, the Company recorded interest and penalties of approximately $ 0.1 million as additions to the accrual, net of the respective reversal of previously accrued interest and penalties.

During each of the fiscal years 2022 and 2021, the Company recorded interest and penalties of approximately $ 0.2 million as reductions to the accrual, net of the respective reversal of previously accrued interest and penalties.

As of June 30, 2022, the Company had accrued interest and penalties related to unrecognized tax benefits of $ 0.7 million.

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Under the terms of the ESPP, eligible employees may purchase the Company's common stock through payroll deductions.

The Company contributes an amount equal to 15.0 % of the purchase price of the stock to be purchased on the open market and pays all expenses of the ESPP and its administration, not to exceed an aggregate contribution of $ 11.8 million.

As of June 30, 2022, the Company's cumulative contributions to the ESPP totaled $ 11.2 million.

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Effective June 30, 2012, these contracts were amended and the benefits were frozen.

Expense associated with the deferred compensation contracts included in general and administrative expenses on the Consolidated Statement of Operations totaled zero for fiscal years 2021, 2020, and 2019.

The table below presents the projected benefit obligation of these deferred compensation contracts in the Consolidated Balance Sheet:

(Dollars in thousands)

Current portion (included in accrued liabilities) $ 1,660 $ 302

Current portion (included in accrued expenses) $ 303 $ 1,660

Long-term portion (included in other non-current liabilities) 2,320 3,115

1 unchanged sentence

The accumulated other comprehensive loss for the deferred compensation contracts, consisting of primarily unrecognized actuarial income, was $ 0.7 and $ 0.3 million at June 30, 2022 and 2021, respectively.

The Company had previously agreed to pay the former Vice Chairman and his spouse an annual benefit for life.

Costs associated with this benefit included in general and administrative expenses on the Consolidated Statement of Operations totaled $ 0.4 million for fiscal years 2021, 2020 and 2019.

Related obligations totaled $ 2.3 and $ 2.4 million at June 30, 2021 and 2020, respectively, with $ 0.5 million within accrued expenses at June 30, 2021 and 2020, and the remainder included in other non-current liabilities in the Consolidated Balance Sheet.

Additionally, the Company had previously agreed to pay the former Vice Chairman and his spouse an annual benefit for life.

Costs associated with this benefit included in general and administrative expense on the Consolidated Statement of Operations totaled $ 0.5 and $ 0.4 million for fiscal years 2022 and 2021, respectively.

The fair value of the related obligations totaled $ 2.3 and $ 2.3 million at June 30, 2022 and 2021, respectively, with $ 0.5 million within accrued expenses at June 30, 2022 and 2021, and the remainder included in other non-current liabilities in the Consolidated Balance Sheet.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

EARNINGS PER SHARE

The Company's basic earnings per share is calculated as net loss divided by weighted average common shares outstanding, excluding unvested outstanding stock options (SOs), restricted stock units (RSUs) and stock-settled performance units (PSUs).

The Company's basic earnings per share is calculated as net loss divided by weighted average common shares outstanding, excluding unvested outstanding stock options (SOs), outstanding stock appreciation rights (SARs), restricted stock units (RSUs) and stock-settled performance units (PSUs).

The Company's diluted earnings per share is calculated as net income divided by weighted average common shares and common share equivalents outstanding, which includes shares issued under the Company's stock-based compensation plans.

Stock-based awards with exercise prices greater than the average market price of the Company's common stock are excluded from the computation of diluted earnings per share.

As the Company is in a net loss basic earnings per share is equivalent to dilutive earnings per share.

As the Company is in a net loss position, basic earnings per share is equivalent to dilutive earnings per share.

For fiscal years 2022 and 2021, 608,503 and 636,310 of common stock equivalents of dilutive common stock, respectively, were excluded from the diluted earnings per share calculation due to net loss from continuing operations.

The computation of weighted average shares outstanding, assuming dilution, excluded the following stock-based awards as they were not dilutive under the treasury stock method:

2021 2020 2019

Equity-based compensation awards 2,269,335 2,322,006

2 unchanged sentences

The Company grants long-term equity-based awards under the 2018 Long Term Incentive Plan (the 2018 Plan).

The 2018 Plan, which was approved by the Company's shareholders at its 2018 Annual Meeting, provides for the granting of nonqualified stock options (SOs), equity-based stock appreciation rights (SARs), restricted stock units (RSUs) and stock-settled performance units (PSUs), as well as cash-based performance grants, to employees and non-employee directors of the Company.

The 2018 Plan, which was approved by the Company's shareholders at its 2018 Annual Meeting, provides for the granting of nonqualified stock options (SOs), equity-based stock appreciation rights and cash-settled stock appreciation rights (SARs), restricted stock units (RSUs) and stock-settled performance units (PSUs), to employees and non-employee directors of the Company.

Under the 2018 Plan, a maximum of 3,818,895 shares are approved for issuance.

1 unchanged sentence

As of June 30, 2022, a maximum of 2,793,494 shares were available for grant under the 2018 Plan.

All unvested awards are subject to forfeiture in event of termination of employment, unless accelerated.

SAR and RSU awards granted under the 2018 Plan generally include various acceleration terms, including upon retirement for participants aged sixty-two years or older or who are aged fifty-five or older and have 15 years of continuous service.

All unvested awards are subject to forfeiture in the event of termination of employment, unless accelerated.

SAR and RSU awards granted under the 2018 Plan generally include various acceleration terms, including upon retirement for participants aged 62 years or older or who are aged 55 years or older and have 15 years of continuous service.

The Company also has outstanding awards under the 2016 Long Term Incentive Plan (the 2016 Plan), although the 2016 Plan terminated in October 2018 and no additional awards have since been or will be made under the 2016 Plan.

The 2016 Plan provided for the granting of SARs, RSAs, RSUs and PSUs, as well as cash-based performance grants, to employees and non-employee directors of the Company.

The 2016 Plan provided for the granting of SARs, restricted stock awards (RSAs), RSUs and PSUs, as well as cash-based performance grants, to employees and non-employee directors of the Company.

The Company also has outstanding awards under the Amended and Restated 2004 Long Term Incentive Plan (the 2004 Plan), although the 2004 Plan terminated in October 2016 and no additional awards have since been or will be made under the 2004 Plan.

The 2004 Plan provided for the granting of nonqualified stock options, SARs, RSAs, RSUs and PSUs, as well as cash-based performance grants, to employees and non-employee directors of the Company.

The 2004 Plan provided for the granting of nonqualified SOs, SARs, RSAs, RSUs and PSUs, as well as cash-based performance grants, to employees and non-employee directors of the Company.

Under the 2018 Plan, 2016 Plan and the 2004 Plan, stock-based awards are granted at an exercise price or initial value equal to the fair market value on the date of grant.

There were no SARs granted in fiscal year 2021.

The fair value of cash-settled SARs granted in fiscal year 2022 are re-valued on a quarterly basis.

Using the fair value of each grant on the date of grant, the weighted average fair values per stock-based compensation award granted during fiscal years 2022 and 2021 were as follows (1):

2021 2020 2019

SARs $ 2.56 $ —

SOs 1.82 2.89

RSUs 2.69 7.15

PSUs (1) 5.83 12.09 14.05

_______________________________________________________________________________

(1) The fair value of cash-settled SARs granted are estimated on the date of grant using a Black-Scholes valuation model, with the fair value recalculated on a quarterly basis.

The fair value of market-based SOs granted are estimated on the date of grant using either a Monte Carlo valuation model or a Black-Scholes valuation model.

1 unchanged sentence

The significant assumptions used in determining the estimated fair value of the market-based awards granted during fiscal years 2022 and 2021 were as follows:

2021 2020 2019

Risk-free interest rate 1.25 - 3.04 %

3 unchanged sentences

Expected dividend yield — % — %

Expected term of share options 7.0 years N/A N/A

Expected term of share options 6.1 - 7.7 years

The risk-free interest rate is determined based on the U.S.

Treasury rates approximating the expected life of the market-based SOs, RSUs and PSUs granted.

Treasury rates approximating the expected life of the market-based SARs, SOs, RSUs and PSUs granted.

Expected volatility is established based on historical volatility of the Company's stock price.

The Company uses historical data to estimate pre-vesting forfeiture rates.

The expected term is the mid-point between shares vesting and expiration.

The expected term is based on a review of historical exercise experience.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock-based compensation expense was as follows:

2021 2020 2019

(Dollars in thousands)

1 unchanged sentence

RSUs & PSUs 1,575 2,798

Total stock-based compensation expense (recorded in G&A) 3,254 3,275 9,003

Total stock-based compensation expense (recorded in general and administrative) 1,334 3,254

Income tax benefit (2) — —

1 unchanged sentence

_______________________________________________________________________________

(1) Federal statutory income tax rate utilized of 0% due to a valuation allowance in fiscal year 2021 and of 21% utilized in fiscal years 2020 and 2019.

Stock Appreciation Rights & Stock Options:

SARs and SOs granted under the 2018 Plan, 2016 Plan and the 2004 Plan generally vest ratably over a three to five year period on each of the annual grant date anniversaries and expire ten years from the grant date.

SARs granted subsequent to fiscal year 2012 vest ratably over a three year period with the exception of the April 2017 grant to the former Chief Executive Officer, which vested in full after two years .

The SOs granted during fiscal year 2021 were granted in connection with the appointment of the Company's CEO and consist of options to purchase shares of the Company's common stock.

The SOs are subject to both a four-year service-based condition and a performance-based vesting condition.

Additionally, 0.4 million SOs are matching options that vest on the fourth anniversary of employment up to the number of RSUs the CEO still holds of the "sign-on" RSUs.

Activity for all the Company's outstanding SARs and SOs is as follows:

(1) A benefit was recognized in fiscal year 2022 due to forfeiture of SARs and SOs.

(2) Federal statutory income tax rate utilized of 0 % due to a valuation allowance in fiscal years 2022 and 2021.

Stock Appreciation Rights:

SARs granted under the 2018 Plan, 2016 Plan and the 2004 Plan generally vest 20 %, 20 %, and 60 % over a three-year period subsequent to the grant date or vest ratably over a three to five year period on each of the annual grant date anniversaries and expire 10 years from the grant date.

SARs granted in fiscal year 2022 were awarded to the Company's executives and are liability-classified awards that vest 20 %, 20 %, and 60 % over a three-year period and are revalued on a quarterly basis.

SARs granted before fiscal year 2022 vest ratably over a three year period with the exception of the April 2017 grant to the former Chief Executive Officer, which vested in full after two years .

Activity for all the Company's outstanding SARs is as follows:

(in thousands) Weighted

10 unchanged sentences

Unvested awards, net of estimated forfeitures 466 $ 2.56 9.40 $ ( 690 )

As of June 30, 2021, there was $ 2.5 million of unrecognized expense related to SOs that is to be recognized over a weighted average period of 4.09 years.

As of June 30, 2022, there was $ 0.2 million of unrecognized expense related to SARs that is to be recognized over a weighted average period of 2.5 years.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock Options:

SOs granted under the 2018 Plan, 2016 Plan and the 2004 Plan generally vest 20 %, 20 %, and 60 % over a three-year period subsequent to the grant date or vest ratably over a three to five year period on each of the annual grant date anniversaries and expire 10 years from the grant date.

The SOs granted during fiscal year 2022 were awarded to the Company's executives and vest 20 %, 20 %, and 60 % over a three-year period.

Activity for all the Company's outstanding SOs is as follows:

(in thousands) Weighted

Exercise Price Weighted

Contractual Life Aggregate

Intrinsic Value

(in thousands)

Outstanding balance at June 30, 2021 1,459 $ 6.53

Granted 1,505 1.82

Forfeited/Expired ( 1,469 ) 6.50

Exercised — —

Outstanding balance at June 30, 2022 1,495 $ 1.81 9.66 $ ( 1,091 )

Exercisable at June 30, 2022 — $ — — $ —

Unvested awards, net of estimated forfeitures 1,079 $ 1.84 9.66 $ ( 820 )

As of June 30, 2022, there was $ 1.0 million of unrecognized expense related to SOs that is to be recognized over a weighted average period of 2.7 years.

Restricted Stock Units:

RSUs granted to employees under the 2018 Plan, 2016 Plan and 2004 Plan generally vest ratably over a three to five year period on each of the annual grant date anniversaries or vest entirely after a one , three or five year period subsequent to the grant date.

The CEO, who was appointed in October 2020, was granted 0.4 million "sign-on" RSUs that vest pro-rata over one year .

RSUs granted to employees under the 2018 Plan, 2016 Plan and 2004 Plan generally vest 20 %, 20 %, and 60 % over a three-year period subsequent to the grant date, vest ratably over a three to five year period on each of the annual grant date anniversaries or vest entirely after a one , three or five year period subsequent to the grant date.

RSUs granted to non-employee directors under the 2018 Plan, 2016 Plan and 2004 Plan generally vest in equal monthly amounts over a one year period from the Company's previous annual shareholder meeting date and distributions are deferred until the director's board service ends.

RSUs granted in fiscal year 2022 were issued under the Company's matching program, as well as to the Company's Board members.

Activity for all the Company's RSUs is as follows:

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Performance Share Units:

PSUs are grants of restricted stock units which are earned based on the achievement of performance goals established by the Compensation Committee over a performance period.

Activity for all of the Company's PSUs is as follows:

PSUs are grants of restricted stock units which are earned based on the achievement of performance goals established by the Compensation Committee over a performance period, typically three years .

There were no PSUs granted in fiscal year 2022.

Activity for all the Company's PSUs is as follows:

(in thousands) Weighted

2 unchanged sentences

Outstanding balance at June 30, 2021 164 $ 12.56

Granted 62 5.83

Forfeited ( 90 ) 13.68

Vested ( 6 ) 25.11

Outstanding balance at June 30, 2022 74 $ 9.82 $ 80

1 unchanged sentence

Unvested awards, net of estimated forfeitures 62 $ 9.20 $ 67

PSUs granted in fiscal year 2021 have a performance period of three years , after which they will vest to the extent earned.

There was $ 0.3 million of total unrecognized compensation expense related to the unvested awards to be recognized over 1.8 years.

PSUs granted in fiscal year 2020 have a performance period of three years , after which they will vest to the extent earned.

There was $ 0.2 million of total unrecognized compensation expense related to the unvested awards to be recognized over 1.2 years.

PSUs granted in fiscal year 2019 have a performance period of three years , ending June 30, 2021.

As of June 30, 2021, these awards have not been earned and will not vest.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SHAREHOLDERS' EQUITY

SHAREHOLDERS' (DEFICIT) EQUITY

Authorized Shares and Designation of Preferred Class:

The Company has 100.0 million shares of capital stock authorized, par value $ 0.05 , of which all outstanding shares, and shares available under the Stock Option Plans, have been designated as common.

Share Issuance Program:

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

During fiscal year 2022, the Company received gross proceeds of $ 38.4 million related to the "at-the-market" offering and paid fees to sales agents and other fees of $ 1.2 million.

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 growth strategies.

Share Repurchase Program:

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All repurchased shares become authorized but unissued shares of the Company.

The timing and amounts of any repurchases depends on many factors, including the market price of the common stock and overall market conditions.

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.

Accumulated Other Comprehensive Income:

The components of accumulated other comprehensive income are as follows:

2021 2020 2019

(Dollars in thousands)

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SEGMENT INFORMATION

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

Segment information is prepared on the same basis the chief operating decision maker (CODM) reviews financial information for operational decision-making purposes.

The Franchise reportable operating segment is comprised of 5,395 franchised salons located mainly in strip center locations and Walmart.

Franchise salons offer high quality, convenient and value priced hair care and beauty services and retail products.

This segment operates primarily in the United States and Canada and primarily includes the Supercuts, SmartStyle, Cost Cutters, First Choice Haircutters, Roosters and Magicuts concepts.

This segment operates primarily in the U.S., Puerto Rico and Canada and primarily includes the Supercuts, SmartStyle, Cost Cutters, First Choice Haircutters, Roosters and Magicuts concepts.

The Company-owned salons reportable operating segment is comprised of 105 company-owned salons located mainly in strip center locations and Walmart.

Company-owned salons offer high quality, convenient and value priced hair care and beauty services and retail products.

SmartStyle, Supercuts, Cost Cutters and other regional trade names operating in the United States, Canada and Puerto Rico are generally within the Company-owned salons segment.

SmartStyle, Supercuts, Cost Cutters and other regional trade names operating in the United States and Canada are generally within the Company-owned salons segment.

Financial information concerning the Company's reportable operating segments is shown in the following table:

For the Year Ended June 30, 2022

Franchise Company - owned Corporate (1)

Franchise Company - owned Consolidated (1)

(Dollars in thousands)

Service $ — $ 108,120 $ — $ 108,120

Product 56,699 34,845 — 91,544

Royalties and fees 88,057 — — 88,057

Royalties $ 65,753 $ — $ 65,753

Fees 11,587 — 11,587

Product sales to franchisees 15,072 — 15,072

Advertising fund contributions 32,573 — 32,573

Franchise rental income 130,777 — 130,777

272,148 142,965 — 415,113

Company-owned salon revenue — 20,205 20,205

Total revenue 255,762 20,205 275,967

Operating expenses:

Cost of service — 79,144 — 79,144

Cost of product 46,449 32,718 — 79,167

Site operating expenses 22,121 29,342 — 51,463

Cost of product sales to franchisees 17,391 — 17,391

Inventory reserve (1) — — 7,655

General and administrative 62,816 2,458 65,274

Rent 5,498 3,859 9,357

Advertising fund expense 32,573 — 32,573

Franchise rent expense 130,777 — 130,777

Company-owned salon expense — 21,952 21,952

Depreciation and amortization 4,913 1,311 6,224

Long-lived asset impairment 450 92 542

Goodwill impairment 13,120 — 13,120

Total operating expenses 267,538 29,672 304,865

Operating income (loss) 40,652 ( 70,032 ) ( 74,772 ) ( 104,152 )

Other (expense) income:

Interest expense — — ( 13,813 ) ( 13,813 )

Loss from sale of salon assets to franchisees, net — — ( 16,696 ) ( 16,696 )

Interest income and other, net — — 15,902 15,902

Income (loss) from continuing operations before income taxes $ 40,652 $ ( 70,032 ) $ ( 89,379 ) $ ( 118,759 )

Operating loss $ ( 11,776 ) $ ( 9,467 ) $ ( 28,898 )

_______________________________________________________________________________

(1) This charge, primarily related to reserving for personal protective equipment acquired as a result of the COVID-19 pandemic, relates to the wind down of our distribution centers and is reviewed separately from the segment results by the CODM.

Consolidated results will not cross foot as the inventory reserve is not part of the Company's segments.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Year Ended June 30, 2021

Franchise Company-owned Corporate (1)

Franchise Company - owned Consolidated

(Dollars in thousands)

Service $ — $ 331,538 $ — $ 331,538

Product 52,421 85,165 — 137,586

Royalties and fees 73,402 — — 73,402

Royalties $ 52,357 $ — $ 52,357

Fees 10,215 — 10,215

Product sales to franchisees 56,699 — 56,699

Advertising fund contributions 22,023 — 22,023

Franchise rental income 127,392 — 127,392

253,026 416,703 — 669,729

Company-owned salon revenue — 142,965 142,965

Total revenue 268,686 142,965 411,651

Operating expenses:

Cost of service — 222,279 — 222,279

Cost of product 40,032 44,666 — 84,698

Site operating expenses 13,341 58,202 — 71,543

Cost of product sales to franchisees 43,756 — 43,756

General and administrative 87,493 8,934 96,427

Rent 4,922 35,832 40,754

Advertising fund expense 22,023 — 22,023

Franchise rent expense 127,392 — 127,392

Company-owned salon expense — 141,204 141,204

Depreciation and amortization 7,019 14,730 21,749

Long-lived asset impairment 726 12,297 13,023

TBG restructuring 2,333 — — 2,333

Goodwill impairment — 40,164 — 40,164

Total operating expenses 293,331 212,997 506,328

Operating income (loss) 32,886 ( 96,128 ) ( 82,096 ) ( 145,338 )

Other (expense) income:

Interest expense — — ( 7,522 ) ( 7,522 )

Loss from sale of salon assets to franchisees, net — — ( 27,306 ) ( 27,306 )

Interest income and other, net — — 3,353 3,353

Income (loss) from continuing operations before income taxes $ 32,886 $ ( 96,128 ) $ ( 113,571 ) $ ( 176,813 )

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Year Ended June 30, 2019

Franchise Company - owned Corporate (1)

(Dollars in thousands)

Service $ — $ 749,660 $ — $ 749,660

Product 59,905 165,713 — 225,618

Royalties and fees 93,761 — — 93,761

153,666 915,373 — 1,069,039

Operating expenses:

Cost of service — 452,827 — 452,827

Cost of product 47,219 81,597 — 128,816

Site operating expenses 34,099 106,932 — 141,031

General and administrative 32,888 57,219 86,897 177,004

Rent 740 130,214 862 131,816

Depreciation and amortization 762 28,263 8,823 37,848

TBG restructuring 21,816 — — 21,816

Total operating expenses 137,524 857,052 96,582 1,091,158

Operating income (loss) 16,142 58,321 ( 96,582 ) ( 22,119 )

Other (expense) income:

Interest expense — — ( 4,795 ) ( 4,795 )

Gain from sale of salon assets to franchisees, net — — 2,918 2,918

Interest income and other, net — — 1,729 1,729

Income (loss) from continuing operations before income taxes $ 16,142 $ 58,321 $ ( 96,730 ) $ ( 22,267 )

_______________________________________________________________________________

(1) Corporate 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.

The Company's chief operating decision maker does not evaluate reportable segments using assets and capital expenditure information.

Operating loss $ ( 24,645 ) $ ( 70,032 ) $ ( 94,677 )

The Company's CODM does not evaluate reportable segments using assets and capital expenditure information.

Total revenues and property and equipment, net associated with business operations in the U.S.

and all other countries in aggregate were as follows:

2021 2020 2019

Revenues Property and

1 unchanged sentence

Revenues Property and

Equipment, Net Total

Revenues Property and

Equipment, Net

3 unchanged sentences

Total $ 275,967 $ 12,835 $ 411,651 $ 16,906

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SUBSEQUENT EVENT:

On August 12, 2022, the Company amended its credit agreement.

The amendment, among other things, converts $ 180.0 million of the existing $ 295.0 million revolving credit facility to a new term loan, reduces commitments under the revolving credit facility to $ 55.0 million, and extends the term of the credit facility from March 26, 2023 to August 31, 2025, with no scheduled amortization prior to maturity.

The Company's obligations will continue to be guaranteed by certain of its subsidiaries and secured by substantially all real and personal property of the Company and such subsidiaries.

The amendment replaces the current utilization-based interest rate margins applicable to borrowings with a margin that is subject to annual increases.

The margin applicable to term SOFR loans 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 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 term SOFR loans.

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

requires the Company to prepay the credit facilities each quarter in an amount equal to 75 % to 100 % of its excess cash flow (as defined in the agreement, if any);

reduces the threshold for prepayment due to excess cash on hand from $ 100.0 million to $ 15.0 million;

reduces the existing minimum liquidity covenant from $ 75.0 million to $ 10.0 million;

and includes new financial covenants regarding minimum EBITDA, maximum leverage and minimum fixed charge coverage.

Upon closing the agreement, the Company paid $ 4.9 million of fees and other costs.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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 8. Financial Statements and Supplementary Data