What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-08-23 compared with 2022-08-23 · 155 added, 158 removed, 228 unchanged (58% of the section changed)

3 unchanged sentences

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

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

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

As of June 30, 2023, the Company franchised or owned 4,863 salons in North America and the United Kingdom.

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

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

As of June 30, 2023, we had 435 corporate employees worldwide.

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

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

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

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

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

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

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

The impact of these transactions are as follows:

The impact of these transactions is as follows:

2023 2022 2021

(Dollars in thousands)

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

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

The Company received $13.0 million in proceeds in June 2022 and received an additional $5.0 million in proceeds in fiscal year 2023, offset by a $0.5 million transaction fee.

The Company expects to receive an additional $2.0 million of proceeds held back for general indemnity provisions in December 2024 and additional proceeds as salons migrate to the Zenoti platform.

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

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

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

Franchisees source product from a third-party distribution partner and the Company receives a royalty payment based on franchisee purchases.

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

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

In fiscal years 2023, 2022 and 2021, the Company experienced the following charges related to the exit of the distribution centers:

2023 2022 2021

Financial Statement Caption (Dollars in thousands)

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

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

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

____________________________________________________________________________

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

Table of Conte n t s

RESULTS OF OPERATIONS

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COVID-19 Impact:

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:

The global coronavirus pandemic (COVID-19) had an adverse impact on operations.

As a result, the Company received Canadian rent relief, Canadian wage relief, U.S.

employee retention payroll tax credits and a grant from the state of North Carolina.

In fiscal years 2023, 2022 and 2021, the Company received the following financial assistance:

2023 2022 2021

Financial Statement Caption (Dollars in thousands)

2 unchanged sentences

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

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

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

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

North Carolina COVID-19 grant Other, net 1,106 — —

Additionally, in both December 2022 and December 2021, the Company paid $2.5 million of social security contributions that had been deferred under the CARES Act.

System-wide results

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We believe system-wide sales information aids in understanding how we derive royalty revenue and in evaluating performance.

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

SmartStyle 5.7 % (26.7) %

In fiscal year 2023, a net 600 franchise salons have closed, which reduces future royalty income.

The following table summarizes system-wide revenue and system-wide same-store sales (1) by concept:

2023 2022 2021

(Dollars in millions)

System-wide revenue $ 1,230.5 $ 1,228.5 $ 1,086.0

Supercuts 6.9 % 22.1 % (25.8) %

SmartStyle (2.5) 5.7 (26.7)

Portfolio Brands 5.5 11.2 (24.8)

Total 14.8 % (25.8) %

Total system-wide same-store sales 4.4 % 14.8 % (25.8) %

____________________________________________________________________________

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

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

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

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

Franchise salons that do not report daily sales are excluded from same-store sales.

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

Table of Conte n t s

Consolidated Results of Operations

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

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

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

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

Variances calculated on amounts shown in millions may result in rounding differences.

2023 2022 2021 2023 2022 2021 2023 2022

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Goodwill impairment — 13.1 — — 4.7 — (470) N/A

Operating loss (3) (28.9) (94.7) (10.5) (23.0) 1,250

Operating income (loss) (2) 8.8 (28.9) (94.7) 3.8 (10.5) (23.0) 1,430 1,250

Interest expense (22.1) (12.9) (13.2) (9.5) (4.7) (3.2) (480) (150)

Loss from sale of salon assets to franchisees, net — (2.3) (16.7) — (0.8) (4.1) 80 330

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

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

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

Other, net 1.4 (0.3) 15.9 0.6 (0.1) 3.9 70 (400)

Income tax benefit (expense) (3) 0.7 (2.0) 5.4 5.5 (4.5) 5.0 N/A N/A

Income (loss) from discontinued operations 4.0 (39.4) (10.1) 1.7 (14.3) (2.5) 1,600 (1,180)

Net loss (2) (7.4) (85.9) (113.3) (3.2) (31.1) (27.5) 2,790 (360)

1 unchanged sentence

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

(2) Excludes depreciation and amortization expense.

(2) Total is a recalculation;

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

Table of Conte n t s

Fiscal Year Ended June 30, 2023 Compared with Fiscal Year Ended June 30, 2022

Consolidated Revenues

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

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

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

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

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

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

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

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

Training revenues also increased year over year.

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

During fiscal year 2023, royalties increased $0.2 million, or 0.3%, primarily due to higher average royalty rates and improved system-wide same-store sales, mostly offset by a decrease in franchise salon count.

During fiscal year 2023, fees decreased $0.3 million, or 2.6%, primarily due to a decrease in terminated development agreements year over year, partially offset by an increase in the fee received from the Company's third-party distribution partner.

Product Sales to Franchisees

Product sales to franchisees decreased $12.3 million, or 81.5%, during fiscal year 2023, primarily due to the Company's shift in its product business to a third-party distribution model.

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

Advertising Fund Contributions

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

Advertising fund contributions decreased $0.9 million, or 2.8%, during fiscal year 2023, primarily due to the decrease in franchise salon count, partially offset by improved system-wide same-store sales.

Franchise Rental Income

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

During fiscal year 2023, franchise rental income decreased $19.4 million, or 14.8%, primarily due to the decrease in franchise salon count.

Company-owned Salon Revenue

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

During fiscal year 2023, company-owned salon revenue decreased $10.1 million, or 50.0%, due to the decrease in company-owned salon count and a decline in product sales.

Cost of Product Sales to Franchisees

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

The 980 basis point increase in cost of product sales to franchisees as a percent of product revenue during fiscal year 2023 was primarily due to the Company reducing prices to liquidate distribution center inventory.

Inventory Reserve

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

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

During fiscal year 2023, the Company recorded an inventory reserve charge of $1.2 million related to slow moving products.

During fiscal year 2022, the Company recorded a total inventory reserve charge of $10.5 million, of which $7.7 million was recorded in inventory reserve and $2.8 million was recorded in company-owned salon expense on the Consolidated Statements of Operations.

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

General and Administrative

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

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

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

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

The decrease of $14.5 million, or 22.2%, in general and administrative expense during fiscal year 2023 was primarily due to lower administrative and field management compensation resulting from headcount reductions, lower legal and professional fees and a decrease in expenses associated with the distribution centers closures in fiscal year 2022.

The decrease of $0.2 million, or 2.1%, in rent expense during fiscal year 2023 was primarily due to the net reduction in the number of company-owned salons, partially offset by a $1.2 million benefit in fiscal year 2022 related to Canadian COVID-19 rent relief.

Advertising Fund Expense

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

Advertising fund expense decreased $0.9 million, or 2.8%, during fiscal year 2023, primarily due to the decrease in franchise salon count, partially offset by improved system-wide same-store sales.

Table of Conte n t s

Franchise Rent Expense

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

During fiscal year 2023, franchise rent expense decreased $19.4 million, or 14.8%, primarily due to the decrease in franchise salon count.

Company-owned Salon Expense

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

Company-owned salon expense decreased $13.2 million, or 60.0%, during fiscal year 2023, primarily due to the reduction in company-owned salon count, a decline in product sales and an inventory reserve charge of $2.8 million in fiscal year 2022 included in company-owned salon expense.

These decreases were partially offset by $2.0 million of Canadian COVID-19 wage relief received in fiscal year 2022.

Depreciation and Amortization

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

The increase of $1.5 million, or 24.2%, in depreciation and amortization during fiscal year 2023 was primarily due to a $2.6 million accelerated depreciation charge in the second quarter of fiscal year 2023 related to the consolidation of office space within the Company's corporate headquarters, partially offset by lower asset retirement obligations ("white boxing" salons at lease end) and the net reduction in company-owned salon count.

Long-Lived Asset Impairment

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

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

In fiscal year 2023, the Company recorded a long-lived asset impairment charge of $0.1 million, and in fiscal year 2022, the Company recorded a long-lived asset impairment charge of $0.5 million.

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

Goodwill Impairment

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

During fiscal year 2023, the Company did not record a goodwill impairment charge, and during fiscal year 2022, the Company recorded a goodwill impairment charge of $13.1 million.

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

Interest Expense

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

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

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

The $9.2 million increase in interest expense during fiscal year 2023 was primarily due to the increase of $1.1 million in amortization of fees related to the credit amendment that was signed in the first quarter of fiscal year 2023 and a higher weighted average interest rate on outstanding borrowings, including non-cash paid-in-kind interest of $1.0 million.

Loss from Sale of Salon Assets to Franchisees, net

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

Interest Income and Other, net

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

Income Tax (Expense) Benefit

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

There was one salon sold in fiscal year 2023 compared to 110 in fiscal year 2022, which resulted in a $2.3 million improvement in the loss from sale of salon assets to franchises, net.

Other, net improved $1.7 million in fiscal year 2023, primarily due to a $1.1 million grant received from the state of North Carolina related to COVID-19 relief and a class action settlement.

Income Tax Benefit (Expense)

During fiscal year 2023, the Company recognized an income tax benefit of $0.7 million, with a corresponding effective tax rate of 5.5%, compared to recognizing income tax expense of $2.0 million, with a corresponding effective tax rate of (4.5)% during fiscal year 2022.

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

Loss from Discontinued Operations, net of Income Taxes

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

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

Income (Loss) from Discontinued Operations

In fiscal year 2023, the Company recorded income from discontinued operations of $4.0 million and in fiscal year 2022, the Company recorded a loss from discontinued operations of $39.4 million.

Income in fiscal year 2023 is primarily due to the receipt of $5.0 million sales proceeds offset by a $0.5 million transaction fee and other expenses from the sale of OSP.

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

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

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

Table of Conte n t s

Results of Operations by Segment

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Franchise same-store sales (2) 4.4 % 15.0 % (24.5) %

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

Franchise adjusted EBITDA $ 22.8 $ 7.7 $ (29.4) $ 15.1 $ 37.1

Total franchise salons 4,795 5,395 5,563 (600) (168)

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

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

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

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

2 unchanged sentences

Fiscal Year Ended June 30, 2023 Compared with Fiscal Year Ended June 30, 2022

Franchise Revenues

Franchise revenues decreased $12.9 million during fiscal year 2022.

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

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

Franchise Operating Loss

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

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

Franchise Revenue

Franchise revenue decreased $32.6 million during fiscal year 2023.

The decrease in franchise revenue was primarily due to the decrease in franchise rental income as a result of lower salon count and the decrease in product sales to franchisees due to the Company's shift to a third-party distributor model.

During fiscal year 2023, franchisees purchased one salon from the Company and constructed (net of relocations) and closed 15 and 616 franchise salons, respectively.

Franchise Adjusted EBITDA

During fiscal year 2023, franchise adjusted EBITDA totaled $22.8 million, an improvement of $15.1 million compared to fiscal year 2022.

The improvement is primarily due to a decrease in general and administrative expense.

Table of Conte n t s

Company-Owned Salons

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Total revenue $ 10.1 $ 20.2 $ 143.0 $ (10.1) $ (122.8)

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

Company-owned salon adjusted EBITDA $ (1.8) $ (9.5) $ (47.5) $ 7.7 $ 38.0

Total Company-owned salons 68 105 276 (37) (171)

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Fiscal Year Ended June 30, 2023 Compared with Fiscal Year Ended June 30, 2022

Company-owned Salon Revenues

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

Company-owned Salon Operating Loss

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

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

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

Company-owned Salon Revenue

Company-owned salon revenue decreased $10.1 million in fiscal year 2023, primarily due to decrease in company-owned salon count and a decline in product sales in salons.

Company-owned Salon Adjusted EBITDA

During fiscal year 2023, Company-owned salon adjusted EBITDA improved $7.7 million, primarily due to the closure of unprofitable salons.

Fiscal year 2023 also benefited from a $1.1 million grant received from the state of North Carolina related to COVID-19 relief.

Recent Accounting Pronouncements

Recent accounting pronouncements are discussed in Note 1 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

Table of Conte n t s

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

Following the amendment of the Company's credit agreement in August 2022, the facility matures in August 2025.

In addition to a $10.0 million minimum liquidity covenant, the amended credit agreement includes typical provisions and financial covenants, including minimum EBITDA, leverage and fixed-charge coverage ratio covenants, the latter two of which are not tested until December 31, 2023.

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

Sources of Liquidity

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

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

The Company believes it has sufficient liquidity, cash on hand and borrowing capacity, to meet its obligations in the next twelve months and until maturity of the credit agreement in August 2025.

In conducting the Company’s current operations, all cash in excess of the amounts needed to support existing operating activities is used to pay the interest on the amounts outstanding under the credit agreement, and we are periodically borrowing additional amounts to cover these operating and interest expense costs.

As of June 30, 2023, cash and cash equivalents were $9.5 million, with $8.7 and $0.8 million within the United States and Canada, respectively.

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

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

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

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

As of June 30, 2023, the Company's borrowing arrangements include a $172.3 million term loan and a $55.0 million revolving credit facility with a $10.0 million minimum liquidity covenant that expires in August 2025.

As of June 30, 2023, the unused available credit under the revolving credit facility was $33.3 million and total liquidity per the agreement was $42.8 million.

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

Additionally, on February 3, 2021, the Company filed a $150.0 million shelf registration and $50.0 million prospectus supplement with the Securities and Exchange Commission 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.

1 unchanged sentence

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

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

During fiscal year 2023, the Company did not issue shares under the prospectus supplement.

As of June 30, 2023, 9.3 million shares have been cumulatively issued for $38.4 million, and $11.6 million remains outstanding under the share issuance program.

The Company closely manages its liquidity and capital resources.

The Company's liquidity requirements depend on key variables, including the performance of the business, the level of investment needed to support its business strategies, capital expenditures, credit facilities and borrowing arrangements and working capital management.

Capital expenditures are a component of the Company's cash flow and capital management strategy, which can be adjusted in response to economic and other changes in the Company's business environment.

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

The Company's liquidity requirements depend on key variables, including the performance of the business, the level of investment needed to support its business strategies, credit facilities and borrowing arrangements, and working capital management.

The Company has a disciplined approach to capital allocation, which focuses on ensuring we can meet our interest obligations and investing in key priorities to support the Company's strategic plan as discussed within Part I, Item 1.

Additional information about the Company's current use of cash is described under "Sources of Liquidity."

Cash Requirements

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

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

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

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

The Company's most significant contractual cash requirements as of June 30, 2023 were lease commitments and interest payments.

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

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Cash Flows from Operating Activities

During fiscal year 2023, cash used in operating activities was $7.9 million.

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

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

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

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

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

Cash used in operations improved due to lower general and administrative expense resulting from a reduced headcount, a $1.1 million cash grant received from the state of North Carolina related to COVID-19 relief, $0.6 million received related to COVID-19 employee retention credits and less cash used for working capital.

Cash used in fiscal year 2023 included a $2.5 million payment of previously deferred social security contributions.

Cash Flows from Investing Activities

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

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

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

During fiscal year 2023, cash provided by investing activities of $4.0 million was primarily related to cash received of $5.0 million from the sale of OSP, partially offset by a $0.5 million transaction fee.

Cash Flows from Financing Activities

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

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

During fiscal year 2023, cash used in financing activities of $2.1 million was primarily as a result of debt refinancing fees of $4.4 million, partially offset by a net $2.3 million borrowing under the Company's revolving credit facility.

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Financing Arrangements

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(Fiscal year) (Interest rate %) (Dollars in thousands)

Term loan 2026 9.54% N/A $ 172,268 $ —

Deferred financing fees (6,471) —

Term loan, net 165,797 —

Revolving credit facility 2026 9.54% 5.50% 10,000 179,994

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

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

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

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

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

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

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

In August 2022, the Company amended its credit agreement.

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

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

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

Paid-in-kind interest 1,033 —

Total long-term debt, net $ 176,830 $ 179,994

In August 2022, the Company amended its credit agreement and extended the maturity to August 2025.

Under the amendment, the $295.0 million revolving credit facility was converted to a $180.0 million term loan and reduced commitments under the revolving credit facility to $55.0 million, with the minimum liquidity covenant reduced to $10.0 million from $75.0 million.

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

Total liquidity and available credit under the revolving credit facility, as defined by the agreement, were $42.8 and $33.3 million, respectively, as of June 30, 2023.

As of June 30, 2023 and 2022, the Company had $176.8 and $180.0 million, respectively, of net outstanding borrowings.

The agreement utilizes an interest rate margin that is subject to annual increases.

The margin applicable to term secured overnight financing rate (SOFR) loans was 3.875% through March 27, 2023.

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

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

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

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

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

Our debt to capitalization ratio, calculated as the principal amount of debt, including paid-in-kind interest accrued, as a percentage of the principal amount of debt and shareholders' deficit at fiscal year-end, was as follows:

As of June 30, Debt to

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

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

The increase in the debt to capitalization ratio as of June 30, 2023 compared to June 30, 2022 was primarily due to the increase in shareholders' deficit as a result of the net loss.

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Contractual Obligations and Commercial Commitments

On-Balance Sheet Obligations

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

Our debt obligations are primarily composed of our credit agreement at June 30, 2023.

Non-current deferred benefits of $6.0 million includes $1.8 million related to a non-qualified deferred salary plan, a salary deferral program of $2.0 million and a bonus deferral plan of $2.2 million related to established contractual payment obligations under retirement and severance agreements for a small number of employees.

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

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

Declines in system-wide revenue in certain brands over the past few years have increased the risk of default by franchisees, which may be material.

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

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Off-Balance Sheet Arrangements

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

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

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

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

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

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

The margin applicable to loans bearing interest at SOFR was 3.875% through March 27, 2023.

Effective March 27, 2023, the margin increased to 6.25%, of which 4.25% is paid currently in cash and 2.00% is 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.

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

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

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

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet financial arrangements or other contractually narrow or limited purposes at June 30, 2023.

As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

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

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The Company has not declared a quarterly dividend payment since December 2013.

Share Issuance Program

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

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

During fiscal year 2023, the Company did not issue shares under the prospectus supplement.

As of June 30, 2023, 9.3 million shares have been cumulatively issued for $38.4 million, and $11.6 million remains outstanding under the share issuance program.

Share Repurchase Program

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

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

During fiscal year 2023, the Company did not repurchase shares.

As of June 30, 2023, 30.0 million shares have been cumulatively repurchased for $595.4 million, and $54.6 million remained authorized for repurchase.

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

CRITICAL ACCOUNTING POLICIES

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

The Company assesses goodwill impairment on an annual basis during the Company's fourth fiscal quarter, and between annual assessments if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

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.

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If after assessing these qualitative factors, the Company determines it is more likely than not that the carrying value is less than the fair value, then performing Step 1 of the goodwill impairment assessment is unnecessary.

The carrying value of the reporting unit is based on the assets and liabilities associated with the operations of the reporting unit, including allocation of shared or corporate balances among reporting units.

The carrying value of each reporting unit is based on the assets and liabilities associated with the operations of the reporting unit, including allocation of shared or corporate balances among reporting units.

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

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

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

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

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

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

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

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Long-Lived Assets, Excluding Goodwill

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

Poor salon performance in fiscal years 2023, 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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Estimating cash flows for purposes of the recoverability test is subjective and requires significant judgment.

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

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

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.

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

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

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

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

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

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

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, 2023.

During fiscal years 2023 and 2022, the Company recognized long-lived asset impairment charges of $0.1 and $0.5 million, respectively, related to ROU assets on the Consolidated Statements of Operations in Part II, Item 8 of this Form 10-K.

During 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 Statements of Operations in Part II, Item 8 of this Form 10-K.

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

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

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

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

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

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.

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

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The Company evaluates all evidence, including recent financial performance, the existence of cumulative year losses and our forecast of future taxable income, to assess the need for a valuation allowance against our deferred tax assets.

While the determination of whether or not to record a valuation allowance is not fully governed by a specific objective test, accounting guidance places significant weight on recent financial performance.

While the determination of whether to record a valuation allowance is not fully governed by a specific objective test, accounting guidance places significant weight on recent financial performance.

The Company has a valuation allowance on its deferred tax assets amounting to $202.2 and $201.7 million at June 30, 2023 and 2022, respectively.

If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make necessary adjustments to the deferred tax asset valuation, which would reduce the provision for income taxes.

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

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

In fiscal year 2022, the Company determined that it no longer had sufficient U.S.

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

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis