What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2023-08-23 compared with 2022-08-23 · 316 added, 373 removed, 889 unchanged (44% of the section changed)

2 unchanged sentences

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 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

Consolidated Balance Sheets as of June 30, 2023 and 2022

Consolidated Statements of Operations for each of the three years in the period ended June 30, 2023

Consolidated Statements of Comprehensive Loss for each of the three years in the period ended June 30, 2023

Consolidated Statements of Shareholders' Deficit for each of the three years in the period ended June 30, 2023

Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 2023

Notes to Consolidated Financial Statements

Table of Conte n t s

Report of Independent Registered Public Accounting Firm

2 unchanged sentences

Opinion on the financial statements

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.

We have audited the accompanying consolidated balance sheets of Regis Corporation (a Minnesota corporation) and subsidiaries (the "Company") as of June 30, 2023, and 2022, the related consolidated statements of operations, comprehensive loss, shareholders' deficit, and cash flows for each of the three years in the period ended June 30, 2023, 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, 2023, and 2022, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2023, in conformity with accounting principles generally accepted in the United States of America.

Basis for opinion

1 unchanged sentence

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.

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.

1 unchanged sentence

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.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

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.

3 unchanged sentences

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.

Critical audit matters 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 judgements.

We determined that there are no critical audit matters.

/s/ GRANT THORNTON LLP

2 unchanged sentences

August 23, 2023

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Regis Corporation

Opinion on internal control over financial reporting

We have audited the internal control over financial reporting of Regis Corporation (a Minnesota Corporation) and subsidiaries (the "Company") 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”).

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated financial statements of the Company as of and for the year ended June 30, 2022, and our report dated August 22, 2022, expressed an unqualified opinion on those financial statements.

Basis for opinion

The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting ("Management’s Report").

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

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.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.

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

Definition and limitations of internal control over financial reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ GRANT THORNTON LLP

Minneapolis, Minnesota

August 22, 2022

Table of Conte n t s

REGIS CORPORATION

CONSOLIDATED BALANCE SHEET

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

4 unchanged sentences

Other current assets 15,164 13,984

Current assets related to discontinued operations (Note 3)

Total current assets 37,238 48,665

6 unchanged sentences

Other assets 26,307 36,465

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

Total assets $ 607,377 $ 769,300

LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY

LIABILITIES AND SHAREHOLDERS' DEFICIT

Current liabilities:

3 unchanged sentences

81,917 103,196

Current liabilities related to discontinued operations (Note 3)

Total current liabilities 126,335 152,840

4 unchanged sentences

Other non-current liabilities 49,041 58,974

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

Total liabilities 644,107 800,253

Commitments and contingencies (Note 9)

Shareholders' (deficit) equity:

Shareholders' deficit:

Common stock, $ 0.05 par value;

issued and outstanding, 45,510,245 and 35,795,844 common shares at June 30, 2022 and 2021, respectively

issued and outstanding, 45,566,228 and 45,510,245 common shares as of June 30, 2023 and 2022, respectively

Additional paid-in capital 64,600 62,562

1 unchanged sentence

Accumulated deficit ( 112,631 ) ( 105,246 )

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

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

Total shareholders' deficit ( 36,730 ) ( 30,953 )

Total liabilities and shareholders' deficit $ 607,377 $ 769,300

______________________________________________________________________________

The accompanying notes are an integral part of the Consolidated Financial Statements.

Table of Conte n t s

REGIS CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS

CONSOLIDATED STATEMENTS OF OPERATIONS

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

2023 2022 2021

Royalties $ 65,981 $ 65,753 $ 52,357

11 unchanged sentences

Rent (Note 6)

9,196 9,357 40,754

Advertising fund expense 31,747 32,573 22,023

Franchise rent expense 130,777 127,392

Franchise rent expense (Note 6) 111,441 130,777 127,392

Company-owned salon expense (1) 8,827 21,952 141,204

1 unchanged sentence

Long-lived asset impairment (Note 1)

101 542 13,023

Goodwill impairment (Note 5)

Total operating expenses 224,547 304,865 506,328

Operating loss ( 28,898 ) ( 94,677 )

Operating income (loss) 8,779 ( 28,898 ) ( 94,677 )

Other (expense) income:

1 unchanged sentence

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

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

Other, net 1,364 ( 296 ) 15,902

Loss from operations before income taxes ( 11,998 ) ( 44,442 ) ( 108,634 )

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

Income tax benefit (expense) 655 ( 2,017 ) 5,428

Loss from continuing operations ( 11,343 ) ( 46,459 ) ( 103,206 )

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

Income (loss) from discontinued operations (Note 3) 3,958 ( 39,398 ) ( 10,125 )

Net loss $ ( 7,385 ) $ ( 85,857 ) $ ( 113,331 )

2 unchanged sentences

Loss from continuing operations $ ( 0.25 ) $ ( 1.07 ) $ ( 2.87 )

Loss from discontinued operations ( 0.90 ) ( 0.28 )

Income (loss) from discontinued operations 0.09 ( 0.90 ) ( 0.28 )

Net loss per share, basic and diluted (2) $ ( 0.16 ) $ ( 1.97 ) $ ( 3.15 )

2 unchanged sentences

_____________________________________________________________________________

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

Excludes reserves for inventory at salons.

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

3 unchanged sentences

The accompanying notes are an integral part of the Consolidated Financial Statements.

Table of Conte n t s

REGIS CORPORATION

CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Dollars in thousands)

2023 2022 2021

Net loss $ ( 7,385 ) $ ( 85,857 ) $ ( 113,331 )

6 unchanged sentences

The accompanying notes are an integral part of the Consolidated Financial Statements.

Table of Conte n t s

REGIS CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT

(Dollars in thousands, except share data)

2 unchanged sentences

Comprehensive

Income Retained Earnings (Deficit) Total

Income Retained Earnings (Accumulated Deficit) Total

Shares Amount

11 unchanged sentences

Foreign currency translation (Note 1) — — — ( 547 ) — ( 547 )

— — — ( 547 ) — ( 547 )

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

4 unchanged sentences

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

Net loss — — — — ( 7,385 ) ( 7,385 )

Foreign currency translation (Note 1)

— — — ( 448 ) — ( 448 )

Stock-based compensation — — 2,077 — — 2,077

Recognition of deferred compensation (Note 11)

— — — 16 — 16

Net restricted stock activity 55,983 2 ( 39 ) — — ( 37 )

Balance, June 30, 2023 45,566,228 $ 2,278 $ 64,600 $ 9,023 $ ( 112,631 ) $ ( 36,730 )

_______________________________________________________________________________

The accompanying notes are an integral part of the Consolidated Financial Statements.

Table of Conte n t s

REGIS CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

2023 2022 2021

Cash flows from operating activities:

1 unchanged sentence

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

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

(Gain) loss from sale of OSP (Note 3) ( 4,562 ) 36,143 —

Depreciation and amortization (Note 1) 7,189 6,504 17,871

2 unchanged sentences

Inventory reserve 1,228 10,478 12,068

Non-cash interest 3,790 — —

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

18 unchanged sentences

Capital expenditures ( 481 ) ( 5,316 ) ( 11,475 )

Proceeds from sale of OSP 13,000 —

Net proceeds from sale of OSP 4,500 13,000 —

Proceeds from sale of assets to franchisees — — 8,437

4 unchanged sentences

Cash flows from financing activities:

Borrowings on revolving credit facility 10,000 10,000

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

Borrowings on credit facility 13,357 10,000 10,000

Repayments of long-term debt ( 11,083 ) ( 16,916 ) ( 589 )

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

Debt refinancing fees ( 4,383 ) — —

Taxes paid for shares withheld ( 36 ) ( 845 ) ( 348 )

1 unchanged sentence

Distribution center lease payments — — ( 724 )

Net cash provided by financing activities:

Net cash (used in) provided by financing activities:

( 2,145 ) 29,424 7,777

Effect of exchange rate changes on cash and cash equivalents ( 53 ) ( 158 ) 477

9 unchanged sentences

Business Description:

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.).

Regis Corporation franchises and owns hair care salons, primarily in North America.

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.

Franchise salons in operation decreased from 5,395 at June 30, 2022 to 4,795 at June 30, 2023, primarily due to the closure of 616 salons.

Company-owned salons in operation decreased from 105 at June 30, 2022 to 68 at June 30, 2023, primarily due to the closure of 37 salons.

See Note 15 to the Consolidated Financial Statements.

1 unchanged sentence

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:

Financial Statement Caption 2022 2021

(Dollars in thousands)

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 assistance:

2023 2022 2021

Financial Statement Caption (Dollars in thousands)

Canadian rent relief Rent $ — $ 1,235 $ —

1 unchanged sentence

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.

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.

Consolidation:

4 unchanged sentences

The Company has interests in certain privately-held entities through arrangements that do not involve voting interests.

Such entities, known as a variable interest entities (VIE), are required to be consolidated by its primary beneficiary.

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.

Such entities, known as variable interest entities (VIE), are required to be consolidated by its primary beneficiary.

The Company evaluates whether 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, 2023, the Company has no VIEs where the Company is the primary beneficiary.

6 unchanged sentences

Use of Estimates:

The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Due to the economic disruption caused by the COVID-19 pandemic, the Company faces a greater degree of uncertainty than normal in making judgments and estimates needed to apply the Company's significant accounting policies.

The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Actual results and outcomes may differ from management's estimates and assumptions.

7 unchanged sentences

The self-insurance restricted cash arrangement can be canceled by the Company at any time if substituted with letters of credit.

The table below reconciles the cash and cash equivalents balances and restricted cash balances, recorded within other current assets on the Consolidated Balance Sheet to the amount of cash, cash equivalents and restricted cash reported on the Consolidated Statement of Cash Flows:

The table below reconciles the cash and cash equivalents balances and restricted cash balances, recorded within other current assets on the Consolidated Balance Sheets to the amount of cash, cash equivalents and restricted cash reported on the Consolidated Statements of Cash Flows:

(Dollars in thousands)

4 unchanged sentences

Receivables and Allowance for Doubtful Accounts:

The receivable balance on the Company's Consolidated Balance Sheet primarily includes accounts and notes receivable from franchisees, credit card receivables and receivables related to salons sold to franchisees.

The receivable balance on the Company's Consolidated Balance Sheets primarily includes accounts and notes receivable from franchisees, credit card receivables and receivables related to salons sold to franchisees.

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

2 unchanged sentences

As of June 30, 2023 and 2022, the allowance for doubtful accounts was $ 7.3 and $ 6.6 million, respectively.

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

The allowance for doubtful accounts increased in fiscal year 2023 due to an increase in past due receivables related to underperforming franchise salons.

See Note 2 to the Consolidated Financial Statements.

1 unchanged sentence

A portion of inventories are also used for salon services consisting of hair color, hair care products including shampoo and conditioner and hair care treatments including permanents, neutralizers and relaxers.

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

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.

During the fiscal year, cost of retail product sold to salon guests is determined based on the weighted average cost of product sold, adjusted for an estimated shrinkage factor.

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

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

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

1 unchanged sentence

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.

To facilitate the exit of the distribution centers, the Company sold inventory at discounts.

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, 2023 and 2022 was $ 1.5 and $ 1.9 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.

As of June 30, 2023 and 2022, the Company had inventory related to discontinued operations of $ 1.2 and $ 1.8 million, respectively, offset by a reserve of $ 1.2 and $ 1.1 million, respectively.

See Note 3 to the Consolidated Financial Statements.

During fiscal year 2023, the Company recorded a total inventory reserve charge of $ 1.2 million, which was recorded in inventory reserve in the Consolidated Statements of Operations.

During fiscal year 2022, the Company recorded a total inventory reserve charge 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 Statements of Operations.

During fiscal year 2021, the Company recorded a total inventory reserve charge of $ 12.1 million, which was recorded in company-owned salon expense in the Consolidated Statements of Operations.

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 10 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., 10 years or lease life for improvements and three to 10 years or lease life for equipment, furniture and software).

Depreciation expense was $ 7.4 , $ 5.8 and $ 20.9 million in fiscal years 2023, 2022 and 2021, respectively.

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

Depreciation expense for fiscal years 2023, 2022 and 2021 includes $ 0.5 , $ 1.0 and $ 4.7 million of asset retirement obligations, respectively, which are cash expenses.

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

3 unchanged sentences

All other expenditures for renewals and betterments are capitalized.

The assets and related depreciation and amortization accounts are adjusted for property retirements and disposals with the resulting gain or loss included in operating income.

The assets and related depreciation and amortization accounts are adjusted for property retirements and disposals with the resulting gain or loss included in operating income (loss).

Fully depreciated or amortized assets remain in the accounts until retired from service.

4 unchanged sentences

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 11 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.

2 unchanged sentences

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 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 Statements of Operations.

All of the Company's leases are 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 (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.

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.

Generally, the non-lease components, such as real estate taxes and other occupancy expenses, are separate from rent expense within the lease and are not included in the measurement of the lease liability because these charges are variable.

2 unchanged sentences

Certain leases provide for contingent rents that are determined as a percentage of revenues in excess of specified levels.

The Company records a contingent rent liability in accrued expenses on the Consolidated Balance Sheet, along with the corresponding rent expense in the Consolidated Statement of Operations, when specified levels have been achieved or when management determines that achieving the specified levels during the fiscal year is probable.

The Company records a contingent rent liability in accrued expenses on the Consolidated Balance Sheets, along with the corresponding rent expense in the Consolidated Statements of Operations, when specified levels have been achieved or when management determines that achieving the specified levels during the fiscal year is probable.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2 unchanged sentences

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.

The Company assesses impairment of long-lived salon assets and right of use assets at the individual salon level, as this is the lowest level for which identifiable cash flows are largely independent of other groups of assets and liabilities, when events or changes in circumstances indicate the carrying value of the assets or the asset grouping may not be recoverable.

The Company assesses impairment of long-lived salon assets and ROU assets at the individual salon level, as this is the lowest level for which identifiable cash flows are largely independent of other groups of assets and liabilities, when events or changes in circumstances indicate the carrying value of the assets or the asset grouping may not be recoverable.

Factors considered in deciding when to perform an impairment review include significant under-performance of an individual salon in relation to expectations, significant economic or geographic trends, and significant changes or planned changes in our use of the assets.

The first step is to assess recoverability, and in doing that, the undiscounted cash flows are compared to the carrying value.

If the undiscounted estimated cash flows are less than the carrying value of the assets, the Company calculates an impairment charge based on the difference between the carrying value of the asset group and its fair value.

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, 2022.

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.

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

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

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.

5 unchanged sentences

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

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 fair value of the ROU 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.

During fiscal year 2021, the Company recognized long-lived asset impairment charges of $ 13.0 million, which included $ 9.5 million related to ROU assets on the Consolidated Statements 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.

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.

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.

5 unchanged sentences

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

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.

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).

Qualitative factors could include, but were not limited to, economic, market and industry conditions, cost factors and overall financial performance of the reporting unit.

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

The goodwill assessment involves 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 exceeds its carrying value, no further procedures are required.

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

In applying the goodwill impairment assessment, the Company may 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).

Qualitative factors could include, but are not limited to, economic, market and industry conditions, cost factors and overall financial performance of the reporting unit.

If after assessing these qualitative factors, the Company determined 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 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 company-owned salons or expenses of the reporting unit as a percent of total company expenses.

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

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 percent of total company expenses.

The Company calculates estimated fair values of the reporting units based on discounted cash flows utilizing estimates in annual revenue, fixed expense rates, allocated corporate overhead, franchise 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.

The Company engages third-party valuation consultants to assist in evaluating the Company's estimated fair value calculations.

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

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

During fiscal year 2023, 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 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.

The discount rate of 17.0 % was also a key assumption utilized in the discounted cash flows.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

9 unchanged sentences

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.

The discount rate of 20.0 % was also a key assumption utilized in the discounted cash flows.

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

2 unchanged sentences

See Notes 3 and 5 to the Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

2 unchanged sentences

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.

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

Self-Insurance Accruals:

The Company uses a combination of third-party insurance and self-insurance for a number of risks including workers' compensation, health insurance, employment practice liability and general liability claims.

The liability represents the Company's estimate of the undiscounted ultimate cost of uninsured claims incurred as of the Consolidated Balance Sheet date.

The liability represents the Company's estimate of the undiscounted ultimate cost of uninsured claims incurred as of the Consolidated Balance Sheets date.

The Company estimates self-insurance liabilities using a number of factors, primarily based on independent third-party actuarially-determined amounts, historical claims experience, estimates of incurred but not reported claims, demographic factors and severity factors.

6 unchanged sentences

As of June 30, 2022, the Company had $ 4.7 and $ 9.7 million recorded in current liabilities and non-current liabilities, respectively, related to the Company's workers' compensation and general liability self-insurance accruals.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Revenue Recognition and Deferred Revenue:

5 unchanged sentences

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.

Below is a summary of the primary financial statement captions.

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.

Fees - Fees received from franchisees and third parties, including franchise fees and fees received from the third-party distributor.

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.

1 unchanged sentence

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.

6 unchanged sentences

Distribution Costs:

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 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.

Beginning in the second half of fiscal year 2022, the Company began storing inventory at a third-party facility.

Prior to closing the distribution centers in fiscal year 2022, the Company incurred costs to store, move and ship product from the Company's distribution centers to salons.

Distribution costs related to product shipped to company-owned locations are included in company-owned salon expenses in the Consolidated Statements of Operations.

Distribution costs, including distribution center overhead, related to shipping product to franchise locations totaled $ 0.0 , $ 2.3 and $ 12.1 million during fiscal years 2023, 2022 and 2021, respectively, and are included in general and administrative in the Consolidated Statements of Operations.

Advertising and Advertising Funds:

6 unchanged sentences

Advertising fund contributions are expensed when the contribution is made.

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

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

2023 2022 2021

(Dollars in thousands)

4 unchanged sentences

_____________________________________________________________________________

(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.

As of June 30, 2022 and 2021, approximately $ 10.5 and $ 9.9 million, respectively, representing the advertising funds' assets and liabilities were recorded within total assets and total liabilities in the Company's Consolidated Balance Sheet.

(1) Included in general and administrative in the Consolidated Statements of Operations.

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

As of June 30, 2023 and 2022, approximately $ 11.1 and $ 10.5 million, respectively, representing the advertising funds' assets and liabilities, were recorded within total assets and total liabilities in the Company's Consolidated Balance Sheets.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock-Based Employee Compensation Plans:

4 unchanged sentences

Changes in the estimated rate of achievement can have a significant effect on the recorded stock-based compensation expense as the effect of a change in the estimated achievement level is recognized in the period the change occurs.

Interest Income and Other, Net:

Interest Expense:

In the first quarter of fiscal year 2023, management amended its credit agreement.

The amended agreement contains variable interest rates over the term of the debt.

Therefore, management developed a weighted average effective interest rate by estimating total future cash flows related to the debt to determine interest expense in fiscal year 2023.

The estimated cash flows included the margin rate, PIK interest, SOFR interest, and tenor fee applied to the forecasted outstanding debt balance in each future period.

The significant assumptions used in the estimate are the future SOFR and debt balance, as well as the length of time the debt will be outstanding.

Management applied the weighted average rate to the debt balance to record interest expense for the period.

Due to the interest rate increases over the debt term, the Company recorded more interest expense than interest paid in cash in fiscal year 2023.

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.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Sales taxes are recorded on a net basis (rather than as both revenue and an expense) within the Company's Consolidated Statement of Operations.

Sales taxes are recorded on a net basis (rather than as both revenue and an expense) within the Company's Consolidated Statements of Operations.

Income Taxes:

3 unchanged sentences

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 of $ 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 allowance, 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.

3 unchanged sentences

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.

7 unchanged sentences

Net Loss Per Share:

The Company's basic earnings per share is calculated as net loss divided by weighted average common shares outstanding, excluding unvested outstanding restricted stock awards and restricted stock units.

The Company's basic earnings per share is calculated as net loss divided by weighted average common shares outstanding, excluding unvested outstanding stock awards.

The Company's dilutive earnings per share is calculated as net income divided by weighted average common shares and common share equivalents outstanding, which includes shares issuable under the Company's stock option plan and long-term incentive plan and dilutive securities.

2 unchanged sentences

Comprehensive Loss:

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

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

Foreign Currency Translation:

The Consolidated Balance Sheet, Consolidated Statement of Operations and Consolidated Statement of Cash Flows of the Company's international operations are measured using local currency as the functional currency.

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' (deficit) equity.

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

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)

The Consolidated Balance Sheets, Consolidated Statements of Operations and Consolidated Statements of Cash Flows of the Company's international operations are measured using local currency as the functional currency.

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

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

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

During fiscal years 2023, 2022 and 2021, the Company recorded a $ 0.3 million foreign currency loss, a $ 0.6 million foreign currency loss and a $ 0.3 million foreign currency gain in loss from continuing operations, respectively, in the Consolidated Financial Statements.

Accounting Standards Recently Adopted by the Company:

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.

The Company did not adopt any material accounting pronouncements during fiscal year 2023.

Recently Issued Accounting Standards Not Yet Adopted:

3 unchanged sentences

Revenue Recognition and Deferred Revenue:

Revenue recognized at point of sale

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 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.

Revenue recognized over time

1 unchanged sentence

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.

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, which is typically 10 years .

Recognition of these fees is deferred until the salon opens 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.

Revenue recognized at point of sale

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 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 recorded at the time product is delivered to the franchisee.

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

6 unchanged sentences

Gift card liability $ 1,823 $ 2,037 Accrued expenses

Deferred franchise fees unopened salons 16 40 Accrued expenses

Deferred franchise fees open salons 5,325 5,770 Accrued expenses

4 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

Receivables relate primarily to payments due for royalties, 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.

Management estimates the allowance based on the age of the receivable and creditworthiness of the franchisee.

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

7 unchanged sentences

_____________________________________________________________________________

(1) The provision for doubtful accounts is recognized as general and administrative expense in the Consolidated Statement of Operations.

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

(1) The provision for doubtful accounts is recognized as general and administrative expense in the Consolidated Statements of Operations.

(2) The provision for franchisee rent is recognized as rent in the Consolidated Statements 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.

The amounts billed in fiscal years 2023 and 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 franchise agreement in the Consolidated Statement of Operations.

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

5 unchanged sentences

Balance at end of period $ 12,471 $ 15,592

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.

6 unchanged sentences

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 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.

As a result of the sale, the Company classified the OSP business, which had been included in the Company's franchise segment, as discontinued operations in the financial statements for all years presented.

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

2023 2022 2021

(Dollars in thousands)

7 unchanged sentences

Interest expense — ( 715 ) ( 650 )

Loss from sale of OSP ( 36,143 ) —

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

Gain (loss) from sale of OSP 4,562 ( 36,143 ) —

Income (loss) from discontinued operations, before taxes 3,958 ( 41,997 ) ( 10,125 )

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

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

Income (loss) from discontinued operations, net of tax $ 3,958 $ ( 39,398 ) $ ( 10,125 )

_______________________________________________________________________________

1 unchanged sentence

(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.

There was no tax impact in fiscal years 2023 and 2021 due to a valuation allowance.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company exited its office space in Fremont, California, but remains liable for lease payments through September 2024.

The related liability is included in accrued expenses as of June 30, 2023 in the Consolidated Balance Sheets.

The Company is actively trying to sublet the space.

The following summarizes the gain (loss) from sale of OSP for the periods presented:

2023 2022 2021

(Dollars in thousands)

Cash proceeds $ 5,000 $ 13,000 $ —

Goodwill derecognition — ( 38,358 ) —

Software write-off (1) ( 64 ) ( 8,408 ) —

Hardware write-down (2) ( 367 ) ( 1,825 ) —

Other, net, including professional fees ( 7 ) ( 552 ) —

Gain (loss) from sale of OSP $ 4,562 $ ( 36,143 ) $ —

_______________________________________________________________________________

(1) Write-off of internally developed capitalized software.

(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 following summarizes capital expenditures related to discontinued operations for the periods presented:

2023 2022 2021

(Dollars in thousands)

Capital expenditures $ — $ 1,067 $ 3,591

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

OTHER FINANCIAL STATEMENT DATA

16 unchanged sentences

Insurance 3,777 5,012

Interest expense 4,124 77

Rent and related real estate costs 5,968 4,585

27 unchanged sentences

The following provides supplemental disclosures of cash flow activity:

2023 2022 2021

(Dollars in thousands)

4 unchanged sentences

Unpaid capital expenditures 25 35 312

_______________________________________________________________________________

(1) The Company also received a $ 1.1 million COVID-19 relief grant from the State of North Carolina in fiscal year 2023.

The grant is included in other, net on the Consolidated Statements of Operations.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

17 unchanged sentences

_______________________________________________________________________________

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

(1) The goodwill balance at the beginning of fiscal year 2022 included $ 41.3 million related to discontinued operations.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5 unchanged sentences

For most leases, the Company is required to pay real estate taxes and other occupancy expenses.

Total rent includes the following:

Total rent from continuing operations includes the following:

2023 2022 2021

(Dollars in thousands)

6 unchanged sentences

_______________________________________________________________________________

(1) During fiscal year 2023, the Company incurred costs of $ 1.6 million to exit salons before the lease end date in order to relieve the company of future lease obligations.

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.

4 unchanged sentences

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

In fiscal years 2023, 2022 and 2021, franchise rental income and franchise rent expense were $ 111.4 , $ 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.

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

The Company expects to renew the SmartStyle master lease and some leases for locations subleased to our franchisees upon expiration of those leases.

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

All the Company's leases are operating leases.

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.

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.

1 unchanged sentence

The Company uses the portfolio approach in applying the discount rate based on the original lease term.

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.

The weighted average remaining lease term was 5.52 years and 6.02 years and the weighted average discount rate was 4.55 % and 4.25 % for all salon operating leases as of June 30, 2023 and 2022, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14 unchanged sentences

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 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.

During fiscal year 2021, the Company recognized long-lived asset impairment charges of $ 13.0 million, which included $ 9.5 million related to ROU assets on the Consolidated Statements 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.

5 unchanged sentences

As of June 30, 2023, 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):

Fiscal Year Leases For Franchise Salons Leases For Company-Owned Salons Corporate Leases Total Operating Lease Payments Sublease Income To Be Received From Franchisees Net Rent Commitments

Fiscal Year Leases For Franchise Salons Leases For Company-Owned Salons Corporate Leases Total Operating Lease Commitments Sublease Income to be Received From Franchisees Net Rent Commitments

2024 $ 93,838 $ 1,629 $ 1,301 $ 96,768 $ ( 93,838 ) $ 2,930

9 unchanged sentences

Long-term lease liabilities $ 282,868 $ 1,501 $ 7,532 $ 291,901

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

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

2023 2022 2021

(Dollars in thousands)

3 unchanged sentences

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

Other than Walmart, franchisees pay landlords directly.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10 unchanged sentences

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

2023 2022 2021

(Dollars in thousands)

5 unchanged sentences

FINANCING ARRANGEMENTS

The Company's debt consists of the following:

Revolving Credit Facility

The Company's financing arrangements consists of the following:

Maturity Date 2023 2022 2023 2022

(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

_______________________________________________________________________________

(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, 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.

Paid-in-kind interest 1,033 —

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

In August 2022, the Company amended its credit agreement.

The amendment, among other things, converted $ 180.0 million of the previous $ 295.0 million revolving credit facility to a new term loan, reduced commitments under the revolving credit facility to $ 55.0 million, and extended the term of the credit facility from March 26, 2023 to August 31, 2025, with no scheduled amortization prior to maturity.

The amendment is accounted for as a modification of debt and any unamortized financing fees that existed at the date of the amendment and new financing fees incurred are amortized through the extended term of the credit facility.

At June 30, 2023, the Company had outstanding standby letters of credit under the revolving credit facility of $ 11.8 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.

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

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 .

As of June 30, 2023, the 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, the Company had cash and cash equivalents of $ 9.5 million and current liabilities of $ 126.3 million.

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 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.

Interest expense is recorded based on a weighted average effective interest rate method.

The significant assumptions used in the weighted average estimate are the future SOFR rates and debt balance, as well as the length of time the debt will be outstanding.

Due to the interest rate increasing over the debt term, the Company recorded more interest expense than interest paid in cash in fiscal year 2023.

The related accrued interest of $ 3.8 million as of June 30, 2023 is included in accrued expenses on the Consolidated Balance Sheets.

The agreement contains typical provisions and financial covenants regarding minimum EBITDA, maximum leverage and minimum fixed-charge coverage and a minimum liquidity threshold of $ 10.0 million.

The Company was in compliance with its covenants and other requirements of the financing arrangements as of June 30, 2023.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1 unchanged sentence

Contingencies:

The Company is self-insured for most workers' compensation, employment practice liability and general liability.

As of June 30, 2023, the Company was self-insured for most workers' compensation, employment practice liability and general liability.

Workers' compensation and general liability losses are subject to per occurrence and aggregate annual liability limitations.

2 unchanged sentences

The Company determines its liability for claims incurred but not reported on an actuarial basis.

Beginning in fiscal year 2024, the Company transitioned to a third-party insurance plan for new workers' compensation and general liability claims.

Litigation and Settlements:

2 unchanged sentences

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.

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

During fiscal year 2023, the Company recorded $ 1.0 million of expense related to litigation and paid $ 1.5 million settlements of claims during the year.

Legal costs are expensed as incurred.

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.

1 unchanged sentence

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.

As of June 30, 2023, the Company has made all payments under the agreement.

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

2 unchanged sentences

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

2023 2022 2021

(Dollars in thousands)

3 unchanged sentences

$ ( 11,998 ) $ ( 44,442 ) $ ( 108,634 )

The provision (benefit) for income taxes consists of:

The (benefit) provision for income taxes consists of:

2023 2022 2021

(Dollars in thousands)

4 unchanged sentences

$ ( 655 ) $ 2,017 $ ( 5,428 )

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

The (benefit) provision 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:

2023 2022 2021

statutory rate 21.0 % 21.0 % 21.0 %

6 unchanged sentences

Loss on investment in Luxembourg — — 29.3

Deferred tax rate remeasurement ( 3.6 ) — —

Other, net (2) ( 0.1 ) ( 2.6 ) ( 0.6 )

2 unchanged sentences

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

(2) The ( 0.1 )% of other, net in fiscal year 2023 includes the rate impact of the federal provision to return true-up, tax attribute expirations and miscellaneous items of 1.3 %, ( 1.1 )% and ( 0.3 )%, respectively.

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.

22 unchanged sentences

(1) The $ 18.8 million of Other in fiscal year 2023 includes $ 3.4 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:

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

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 $ 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12 unchanged sentences

As a result of the Tax Cuts and Jobs Act of 2017, taxes payable on the remittance of such earnings is expected to be minimal.

The Company files tax returns and pays tax primarily in the U.S., Canada, the U.K.

and Luxembourg, as well as states, cities, and provinces within these jurisdictions.

The Company is no longer subject to Internal Revenue Service examinations for years before 2014.

With limited exceptions, the Company is no longer subject to state and international income tax examination by tax authorities for years before 2012.

The Company files tax returns and pays tax primarily in the U.S., Canada, and the U.K., as well as states, cities, and provinces within these jurisdictions.

With limited exceptions, due to net operating loss carryforwards, the Company's federal, state and foreign tax returns are open to examination for all years since 2014, 2012 and 2016, respectively.

A rollforward of the unrecognized tax benefits is as follows:

1 unchanged sentence

Balance at beginning of period $ 22,173 $ 13,858

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 based on tax positions of prior years 81 50

Additions based on tax positions related to the current year 10 8,636

(Reductions) additions based on tax positions of prior years ( 663 ) 81

Reductions on tax positions related to the expiration of the statute of limitations ( 127 ) ( 402 )

2 unchanged sentences

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

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.

The Company recorded interest and penalties of approximately $ 0.1 , $ 0.2 and $ 0.2 million as reductions to the accrual, net of the respective reversal of previously accrued interest and penalties during fiscal years 2023, 2022 and 2021, respectively.

As of June 30, 2023, the Company had accrued interest and penalties related to unrecognized tax benefits of $ 0.6 million.

2 unchanged sentences

However, an estimate of the amount or range of the change cannot be made at this time.

On August 16, 2022, the Inflation Reduction Act (the IRA) was signed into law.

The IRA contains a number of tax related provisions, including a 15% minimum corporate income tax on certain large corporations, as well as an excise tax on stock repurchases.

The Company has evaluated the IRA and does not expect it to have a material impact on the Company's Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5 unchanged sentences

Employees who are 18 years of age or older and who were not highly compensated employees as defined by the Code during the preceding RRSP year are eligible to participate in the RRSP commencing with the first day of the month following their completion of one month of service.

The discretionary employer contribution profit sharing portion of the RRSP is a noncontributory defined contribution component covering full-time and part-time employees of the Company who have at least one year of eligible service, defined as 1,000 hours of service during the RRSP year, are employed by the Company on the last day of the RRSP year and are Salon Support employees, distribution center employees, field leaders, artistic directors or consultants, and that are not highly compensated employees as defined by the Code.

The discretionary employer contribution profit-sharing portion of the RRSP is a noncontributory defined contribution component covering full-time and part-time employees of the Company who have at least one year of eligible service, defined as 1,000 hours of service during the RRSP year, are employed by the Company on the last day of the RRSP year and are Salon Support employees, field leaders, artistic directors or consultants, and that are not highly compensated employees as defined by the Code.

Participants' interest in the noncontributory defined contribution component become 20.0 % vested after completing two years of service with vesting increasing 20.0 % for each additional year of service with participants becoming fully vested after six full years of service.

17 unchanged sentences

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

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

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

(Dollars in thousands)

4 unchanged sentences

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.

Costs associated with this benefit included in general and administrative expense on the Consolidated Statements of Operations totaled $ 0.6 , $ 0.5 and $ 0.4 million for fiscal years 2023, 2022 and 2021, respectively.

The fair value of the related obligations totaled $ 2.3 and $ 2.3 million at June 30, 2023 and 2022, respectively, with $ 0.6 and $ 0.5 million within accrued expenses at June 30, 2023 and 2022, respectively, and the remainder included in other non-current liabilities on the Consolidated Balance Sheets.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4 unchanged sentences

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.

For fiscal years 2023, 2022 and 2021, 492,715 , 608,503 and 636,310 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:

2023 2022 2021

Equity-based compensation awards 3,955,941 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 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.

The 2018 Plan, which was approved by the Company's shareholders at its 2018 Annual Meeting of Shareholders, provides for the granting of nonqualified SOs, equity-based SARs and cash-settled SARs, RSUs and 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.

10 unchanged sentences

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 2023, 2022 and 2021 were as follows (1):

2023 2022 2021

SARs $ 1.52 $ 2.56 $ —

1 unchanged sentence

RSUs — 2.69 7.15

PSUs — — 5.83

_______________________________________________________________________________

3 unchanged sentences

The significant assumptions used in determining the estimated fair value of the market-based awards granted during fiscal years 2023, 2022 and 2021 were as follows:

2023 2022 2021

Risk-free interest rate 3.08 - 4.30 %

1.25 - 3.04 %

0.16 - 0.78 %

Expected volatility 69.5 - 82.6 %

58.3 - 64.5 %

44.9 - 66.8 %

Expected dividend yield — % — % — %

Expected term of share options 6.0 - 7.9 years

6.1 - 7.7 years

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

5 unchanged sentences

Stock-based compensation expense was as follows:

2023 2022 2021

(Dollars in thousands)

9 unchanged sentences

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 .

SARs granted in fiscal year 2023 were awarded to the Company's executives and are liability-classified awards that vest ratably over a three-year period and are revalued each reporting period.

SARs granted prior to fiscal year 2023 vest 20 %, 20 %, and 60 % over a three-year period or 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:

15 unchanged sentences

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.

The SOs granted during fiscal year 2023 were awarded to the Company's executives and vest ratably over a three-year period and SOs granted to non-employee directors vest in equal amounts over a one-year period from the Company's previous annual shareholder meeting date and exercises are deferred until the director's board service ends.

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

13 unchanged sentences

Restricted Stock Units:

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 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 one 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.

The Company did not grant RSUs in fiscal year 2023.

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

3 unchanged sentences

Outstanding balance at June 30, 2022 907 $ 6.27

Granted 828 2.69

Forfeited ( 34 ) 4.79

4 unchanged sentences

As of June 30, 2023, there was $ 0.3 million of unrecognized expense related to RSUs that is expected to be recognized over a weighted average period of 1.6 years.

The fair value of the shares vested was $ 0.5 , $ 5.8 and $ 3.2 million in fiscal years 2023, 2022 and 2021, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11 unchanged sentences

Unvested awards, net of estimated forfeitures — $ — $ —

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SHAREHOLDERS' (DEFICIT) EQUITY

SHAREHOLDERS' DEFICIT

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.

During fiscal year 2023, the Company did no t 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:

13 unchanged sentences

SEGMENT INFORMATION

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.

Financial information concerning the Company's reportable operating segments is shown in the table below.

Segment information is presented on the same basis that the Company internally organizes the business for assessing performance and making decisions regarding allocation of resources.

In the second quarter of fiscal year 2023, the Company revised its internal reporting such that the Chief Operating Decision Maker's (CODM) primary measures of segment performance are revenue and segment adjusted EBITDA.

Revenue and segment adjusted EBITDA are regularly reviewed by the CODM to make decisions about resources to be allocated to the segments, assess current performance and forecast future performance.

The Company's CODM does not evaluate reportable segments using assets and capital expenditure information.

Segment adjusted EBITDA is defined as income (loss) from continuing operations before interest, income taxes, depreciation, amortization and impairment.

Consistent with our internal management reporting, unallocated expenses include certain items impacting comparability.

These unallocated items are not defined terms within U.S.

They are based on how management views the business, makes financial, operating and planning decisions and evaluates the Company's ongoing performance and are not attributable to either segment.

Unallocated fees include distribution center wind down fees, inventory reserve, one-time professional fees and settlements, severance expense, the benefit from lease liability decreases in excess of previously impaired ROU assets, lease termination fees, asset retirement obligation costs and goodwill and long-lived asset impairment charges.

Figures for prior reporting periods have been restated to conform to the current period.

The Franchise reportable operating segment is comprised of 4,795 franchise 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.

2 unchanged sentences

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 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 Consolidated (1)

(Dollars in thousands)

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

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

Total revenue 255,762 20,205 275,967

Operating expenses:

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 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.

SmartStyle, Supercuts, Cost Cutters and other regional trade names operating in the U.S.

and Canada are generally within the Company-owned salons segment.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Year Ended June 30, 2021

Franchise Company - owned Consolidated

2023 2022 2021

(Dollars in thousands)

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

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

Franchise $ 223,237 $ 255,762 $ 268,686

Company-owned 10,089 20,205 142,965

Total revenue 233,326 275,967 411,651

Operating expenses:

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

Segment adjusted EBITDA:

Franchise 22,799 7,730 ( 29,417 )

Company-owned ( 1,789 ) ( 9,529 ) ( 47,497 )

Total 21,010 ( 1,799 ) ( 76,914 )

Unallocated (expenses) benefits ( 3,050 ) ( 9,843 ) 16,215

Depreciation and amortization ( 7,716 ) ( 6,224 ) ( 21,749 )

Long-lived asset impairment ( 101 ) ( 542 ) ( 13,023 )

Total operating expenses 293,331 212,997 506,328

Operating loss $ ( 24,645 ) $ ( 70,032 ) $ ( 94,677 )

The Company's CODM does not evaluate reportable segments using assets and capital expenditure information.

Goodwill impairment — ( 13,120 ) —

Interest expense ( 22,141 ) ( 12,914 ) ( 13,163 )

Income tax benefit (expense) 655 ( 2,017 ) 5,428

Income (loss) from discontinued operations 3,958 ( 39,398 ) ( 10,125 )

Total net loss $ ( 7,385 ) $ ( 85,857 ) $ ( 113,331 )

Total revenues and property and equipment, net associated with business operations in the U.S.

and all other countries in aggregate were as follows:

2023 2022 2021

Revenues Property and

1 unchanged sentence

Revenues Property and

Equipment, Net Total

Revenues Property and

Equipment, Net

3 unchanged sentences

Total $ 233,326 $ 6,422 $ 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