REGIS CORP 10-K

Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements: Report of Independent Registered Public Accounting Firms (PCAOB ID: 248 ) 44 Consolidated Balance Sheets as of June 30, 2023 and 2022 45 Consolidated Statements of Operations for each of the three years in the period ended June 30, 2023 46 Consolidated Statements of Comprehensive Loss for each of the three years in the period ended June 30, 2023 47 Consolidated Statements of Shareholders' Deficit for each of the three years in the period ended June 30, 2023 48 Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 2023 49 Notes to Consolidated Financial Statements 50 43 Table of Conte n t s Report of Independent Registered Public Accounting Firm Board of Directors and Shareholders Regis Corporation 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, 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 These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. 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. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matters 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 We have served as the Company’s auditor since 2020. Minneapolis, Minnesota August 23, 2023 44 Table of Conte n t s REGIS CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data) June 30, 2023 2022 ASSETS Current assets: Cash and cash equivalents $ 9,508 $ 17,041 Receivables, net 10,885 14,531 Inventories 1,681 3,109 Other current assets 15,164 13,984 Total current assets 37,238 48,665 Property and equipment, net 6,422 12,835 Goodwill (Note 5) 173,791 174,360 Other intangibles, net 2,783 3,226 Right of use asset (Note 6) 360,836 493,749 Other assets 26,307 36,465 Total assets $ 607,377 $ 769,300 LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Accounts payable $ 14,309 $ 15,860 Accrued expenses 30,109 33,784 Short-term lease liability (Note 6) 81,917 103,196 Total current liabilities 126,335 152,840 Long-term debt, net (Note 8) 176,830 179,994 Long-term lease liability (Note 6) 291,901 408,445 Other non-current liabilities 49,041 58,974 Total liabilities 644,107 800,253 Commitments and contingencies (Note 9) Shareholders' deficit: Common stock, $ 0.05 par value; issued and outstanding, 45,566,228 and 45,510,245 common shares as of June 30, 2023 and 2022, respectively 2,278 2,276 Additional paid-in capital 64,600 62,562 Accumulated other comprehensive income 9,023 9,455 Accumulated deficit ( 112,631 ) ( 105,246 ) 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. 45 Table of Conte n t s REGIS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars and shares in thousands, except per share data) Fiscal Years 2023 2022 2021 Revenues: Royalties $ 65,981 $ 65,753 $ 52,357 Fees 11,266 11,587 10,215 Product sales to franchisees 2,802 15,072 56,699 Advertising fund contributions 31,747 32,573 22,023 Franchise rental income (Note 6) 111,441 130,777 127,392 Company-owned salon revenue 10,089 20,205 142,965 Total revenue 233,326 275,967 411,651 Operating expenses: Cost of product sales to franchisees 3,540 17,391 43,756 Inventory reserve 1,228 7,655 — General and administrative 50,751 65,274 96,427 Rent (Note 6) 9,196 9,357 40,754 Advertising fund expense 31,747 32,573 22,023 Franchise rent expense (Note 6) 111,441 130,777 127,392 Company-owned salon expense (1) 8,827 21,952 141,204 Depreciation and amortization 7,716 6,224 21,749 Long-lived asset impairment (Note 1) 101 542 13,023 Goodwill impairment (Note 5) — 13,120 — Total operating expenses 224,547 304,865 506,328 Operating income (loss) 8,779 ( 28,898 ) ( 94,677 ) Other (expense) income: Interest expense ( 22,141 ) ( 12,914 ) ( 13,163 ) Loss from sale of salon assets to franchisees, net — ( 2,334 ) ( 16,696 ) Other, net 1,364 ( 296 ) 15,902 Loss from operations before income taxes ( 11,998 ) ( 44,442 ) ( 108,634 ) Income tax benefit (expense) 655 ( 2,017 ) 5,428 Loss from continuing operations ( 11,343 ) ( 46,459 ) ( 103,206 ) Income (loss) from discontinued operations (Note 3) 3,958 ( 39,398 ) ( 10,125 ) Net loss $ ( 7,385 ) $ ( 85,857 ) $ ( 113,331 ) Net loss per share: Basic and diluted: Loss from continuing operations $ ( 0.25 ) $ ( 1.07 ) $ ( 2.87 ) 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 ) Weighted average common and common equivalent shares outstanding: Basic and diluted 46,235 43,582 35,956 _____________________________________________________________________________ (1) Includes cost of service and product sold to guests in our company-owned salons. Excludes general and administrative expense, rent and depreciation and amortization related to company-owned salons. (2) Total is a recalculation; line items calculated individually may not sum to total due to rounding. The accompanying notes are an integral part of the Consolidated Financial Statements. 46 Table of Conte n t s REGIS CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Dollars in thousands) Fiscal Years 2023 2022 2021 Net loss $ ( 7,385 ) $ ( 85,857 ) $ ( 113,331 ) Other comprehensive (loss) income, net of tax: Net current period foreign currency translation adjustments ( 448 ) ( 547 ) 1,888 Recognition of deferred compensation 16 459 206 Other comprehensive (loss) income ( 432 ) ( 88 ) 2,094 Comprehensive loss $ ( 7,817 ) $ ( 85,945 ) $ ( 111,237 ) _______________________________________________________________________________ The accompanying notes are an integral part of the Consolidated Financial Statements. 47 Table of Conte n t s REGIS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT (Dollars in thousands, except share data) Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income Retained Earnings (Accumulated Deficit) Total Shares Amount Balance, June 30, 2020 35,625,716 $ 1,781 $ 22,011 $ 7,449 $ 94,462 $ 125,703 Net loss — — — — ( 113,331 ) ( 113,331 ) Foreign currency translation (Note 1) — — — 1,888 — 1,888 Exercise of SARs 3,775 — ( 24 ) — — ( 24 ) Stock-based compensation — — 3,254 — — 3,254 Recognition of deferred compensation (Note 11) — — — 206 — 206 Net restricted stock activity 166,353 9 ( 139 ) — — ( 130 ) Minority interest — — — — ( 520 ) ( 520 ) Balance, June 30, 2021 35,795,844 $ 1,790 $ 25,102 $ 9,543 $ ( 19,389 ) $ 17,046 Net loss — — — — ( 85,857 ) ( 85,857 ) Foreign currency translation (Note 1) — — — ( 547 ) — ( 547 ) Issuance of common stock, net of offering costs 9,295,618 465 36,720 — — 37,185 Stock-based compensation — — 1,285 — — 1,285 Recognition of deferred compensation (Note 11) — — — 459 — 459 Net restricted stock activity 418,783 21 ( 545 ) — — ( 524 ) 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. 48 Table of Conte n t s REGIS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Fiscal Years 2023 2022 2021 Cash flows from operating activities: Net loss $ ( 7,385 ) $ ( 85,857 ) $ ( 113,331 ) Adjustments to reconcile net loss to net cash used in operating activities: (Gain) loss from sale of OSP (Note 3) ( 4,562 ) 36,143 — Depreciation and amortization (Note 1) 7,189 6,504 17,871 Long-lived asset impairment 101 542 13,023 Deferred income taxes ( 8 ) 391 ( 3,388 ) Inventory reserve 1,228 10,478 12,068 Non-cash interest 3,790 — — Gain from disposal of distribution center assets — — ( 14,997 ) Loss from sale of salon assets to franchisees, net — 2,334 16,696 Goodwill impairment — 16,000 — Stock-based compensation 2,316 1,334 3,254 Amortization of debt discount and financing costs 2,891 1,839 1,839 Other non-cash items affecting earnings 155 709 ( 351 ) Changes in operating assets and liabilities (1): Receivables 943 11,896 ( 279 ) Inventories ( 182 ) 7,886 17,879 Income tax receivable ( 577 ) 1,118 1,295 Other current assets 850 2,118 1,658 Other assets 6,818 2,703 ( 2,896 ) Accounts payable ( 497 ) ( 10,966 ) ( 21,669 ) Accrued expenses ( 6,151 ) ( 21,983 ) 5,296 Net lease liabilities ( 4,991 ) ( 5,960 ) ( 19,248 ) Other non-current liabilities ( 9,817 ) ( 15,867 ) ( 14,603 ) Net cash used in operating activities: ( 7,889 ) ( 38,638 ) ( 99,883 ) Cash flows from investing activities: Capital expenditures ( 481 ) ( 5,316 ) ( 11,475 ) Net proceeds from sale of OSP 4,500 13,000 — Proceeds from sale of assets to franchisees — — 8,437 Costs associated with sale of assets to franchisees — — ( 261 ) Proceeds from company-owned life insurance policies — — 1,200 Net cash provided by (used in) investing activities: 4,019 7,684 ( 2,099 ) Cash flows from financing activities: 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 ) Minority interest buyout — — ( 562 ) Distribution center lease payments — — ( 724 ) 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 Decrease in cash, cash equivalents and restricted cash ( 6,068 ) ( 1,688 ) ( 93,728 ) Cash, cash equivalents and restricted cash: Beginning of year 27,464 29,152 122,880 End of year $ 21,396 $ 27,464 $ 29,152 _______________________________________________________________________________ (1) Changes in operating assets and liabilities exclude assets and liabilities sold or acquired. The accompanying notes are an integral part of the Consolidated Financial Statements. 49 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Description: 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 5,395 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. Salons are located in leased space in strip center locations, malls or Walmart. COVID-19 Impact: 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: Fiscal Years 2023 2022 2021 Financial Statement Caption (Dollars in thousands) Canadian rent relief Rent $ — $ 1,235 $ — Canadian wage relief Company-owned salon expense — 1,966 1,629 U.S. employee retention payroll tax credit Company-owned salon expense — — 1,547 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: The Consolidated Financial Statements include the accounts of the Company and its subsidiaries after the elimination of intercompany accounts and transactions. All material subsidiaries are wholly owned. The Company consolidates variable interest entities where it has determined it is the primary beneficiary of those entities' operations. Variable Interest Entities : The Company has interests in certain privately-held entities through arrangements that do not involve voting interests. 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. The Company has an investment in Empire Education Group, Inc. (EEG). During fiscal year 2020, the Company signed an agreement to sell its interest in EEG to the other shareholder. Until the transaction closes, the Company continues to account for EEG as an equity investment under the voting interest model. The Company has granted the other shareholder of EEG an irrevocable proxy to vote a certain number of the Company's shares such that the other shareholder of EEG has voting control of EEG's common stock, as well as the right to appoint four of the five members of EEG's Board of Directors. The Company wrote off its investment balance in EEG in fiscal year 2016. 50 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Use of Estimates: 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. Cash, Cash Equivalents and Restricted Cash: Cash equivalents consist of investments in short-term, highly liquid securities having original maturities of three months or less, which are made as a part of the Company's cash management activity. The carrying values of these assets approximate their fair market values. The Company primarily utilizes a cash management system with a series of separate accounts consisting of lockbox accounts for receiving cash, concentration accounts that funds are moved to, and several "zero balance" disbursement accounts for funding of payroll and accounts payable. As a result of the Company's cash management system, checks issued, but not presented to the banks for payment, may create negative book cash balances. There were no checks outstanding in excess of related book cash balances at June 30, 2023 and 2022. Restricted cash within other current assets primarily relates to consolidated advertising cooperatives funds, which can only be used to settle obligations of the respective cooperatives and contractual obligations to collateralize the Company's self-insurance programs. 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 Sheets to the amount of cash, cash equivalents and restricted cash reported on the Consolidated Statements of Cash Flows: June 30, 2023 2022 (Dollars in thousands) Cash and cash equivalents $ 9,508 $ 17,041 Restricted cash, included in other current assets 11,888 10,423 Total cash, cash equivalents and restricted cash $ 21,396 $ 27,464 51 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Receivables and Allowance for Doubtful Accounts: 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. The Company monitors the financial condition of its franchisees and records provisions for estimated losses on receivables when it believes franchisees are unable to make their required payments based on factors such as delinquencies and aging trends. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses related to existing accounts and notes receivables. 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 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. Inventories: Inventories of finished goods consist principally of hair care products for retail product sales. 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 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. In fiscal year 2021, the Company announced it would transition away from its wholesale product distribution model in favor of a third-party distribution model. As a result, the Company 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 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. 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., 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 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. Costs incurred to develop internal-use software during the application development stage are capitalized, while data conversion, training and maintenance costs associated with internal-use software are expensed as incurred. Estimated useful lives range from three to seven years . Expenditures for maintenance and repairs and minor renewals and betterments, which do not improve or extend the life of the respective assets, are expensed. 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 (loss). Fully depreciated or amortized assets remain in the accounts until retired from service. 52 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Right of Use Asset, Lease Liabilities and Rent Expense: At contract inception, the Company determines whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides the Company the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, the Company considers it to be, or contain, a lease. 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 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. For most leases, the Company is required to pay real estate taxes and other occupancy expenses. The Company leases salon premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees. All lease-related costs are passed through to franchisees. The Company records the rental payments due from franchisees as franchise rental income and the corresponding amounts owed to landlords as franchise rent expense on the Consolidated 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. 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. The discount rate used to determine the present value of the lease payments is the Company's estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as the interest rate implicit in the lease cannot generally be determined. The Company uses the portfolio approach in applying the discount rate based on the original lease term. 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 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. 53 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Salon Long-Lived Asset and Right of Use Asset Impairment Assessments: A lessee's ROU asset is subject to the same asset impairment guidance in ASC 360, Property, Plant, and Equipment, applied to other elements of property, plant, and equipment. 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 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 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 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 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. The second step of the long-lived asset impairment test requires that the fair value of the asset group be estimated when determining the amount of any impairment loss. For the salon asset groups that failed the recoverability test, an impairment loss was measured as the amount by which the carrying amount of the asset group exceeds its fair value. The Company applied the fair value guidance within ASC 820-10 to determine the fair value of the asset group from the perspective of a market-participant considering, among other things, appropriate discount rates, multiple valuation techniques, the most advantageous market, and assumptions about the highest and best use of the asset group. To determine the fair value of the salon asset groups, the Company utilized market-participant assumptions rather than the Company's own assumptions about how it intends to use the asset group. The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include the market rent of comparable properties and a discount rate. The fair value of the salon long-lived asset group is estimated using market participant methods based on the best information available. The 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 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 assets, 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. See Note 6 to the Consolidated Financial Statements. 54 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Goodwill: As of June 30, 2023 and 2022, the Franchise reporting unit had $ 173.8 and $ 174.4 million, respectively, of goodwill and the Company-owned reporting unit had no goodwill for both periods. See Note 5 to the Consolidated Financial Statements for changes to the goodwill balance. The Company assesses goodwill impairment on an annual basis as of April 30, and between annual assessments if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Goodwill impairment assessments are performed at the reporting unit level, which is the same as the Company's operating segments. 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 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. The following is a description of the goodwill impairment assessments for each of the fiscal years: Fiscal 2023 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. 55 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Fiscal 2022 During fiscal year 2022, the Company performed a quantitative impairment test over goodwill during the second quarter due to a triggering event experienced in the quarter. This determination was made considering the sustained decrease in share price and a change in the Company's chief operating decision maker. In the second quarter, the Franchise reporting unit was determined to have a fair value in excess of its carrying value and no impairment was recorded. A quantitative goodwill impairment was performed in the third quarter due to a triggering event experienced during the quarter. This determination was made considering a decrease in forecasted revenue due to slower than expected recovery from COVID-19. In the third quarter, the Franchise reporting unit was determined to have a carrying value in excess of its fair value, resulting in a goodwill impairment charge of $ 16.0 million. The Company performed its annual impairment assessment as of April 30. For the goodwill impairment analysis, management utilized a combination of both a discounted cash flows approach and market approach to evaluate the Franchise reporting unit. The discounted cash flows model reflects management's assumptions regarding revenue growth rates, economic and market trends, cost structure, and other expectations about the anticipated short-term and long-term operating results. Management's assumptions related to revenue growth rates were reduced and management increased expected salon closures compared to valuations in prior years. These changes, along with a decline in value from the market approach, reduced the fair value of the reporting unit. The discount rate of 20.0 % was also a key assumption utilized in the discounted cash flows. As a result of the impairment testing, the Franchise reporting unit was determined to have a fair value in excess of its carrying value. The Company derecognized $ 38.4 million of goodwill in fiscal year 2022 in connection to the sale of OSP. The $ 38.4 million represents the portion of goodwill related to the OSP business based on relative fair value. See Notes 3 and 5 to the Consolidated Financial Statements. Fiscal 2021 During fiscal year 2021, the Company did not experience any triggering events that required an interim goodwill analysis. The Company performed its annual impairment assessment as of April 30. For the fiscal year 2021 annual impairment assessment, the Company performed a Step 1 impairment test for the Franchise reporting unit. The Company compared the carrying value of the Franchise reporting unit, including goodwill, to the estimated fair value. The results of this assessment indicated that the estimated fair value of the Company's Franchise reporting unit 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 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. Although the Company does not expect the amounts ultimately paid to differ significantly from the estimates, self-insurance accruals could be affected if future claims experience differs significantly from historical trends and actuarial assumptions. For fiscal years 2023, 2022 and 2021, the Company recorded decreases in expense for changes in estimates related to prior year open policy periods of $ 1.4 , $ 0.5 and $ 3.6 million, respectively. The Company updates loss projections bi-annually and adjusts its liability to reflect updated projections. The updated loss projections consider new claims and developments associated with existing claims for each open policy period. As certain claims can take years to settle, the Company has multiple policy periods open at any point in time. As of June 30, 2023, the Company had $ 3.6 and $ 7.3 million recorded in current liabilities and non-current liabilities, respectively, related to the Company's workers' compensation and general liability self-insurance accruals. 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. 56 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Revenue Recognition and Deferred Revenue: Franchise revenues primarily include royalties, fees, product sales to franchisees and advertising fund fees. Royalties and advertising fund revenues represent sales-based royalties that are recognized as revenue in the period in which the sales occur. The Company defers franchise fees until the salon is open and then recognizes the revenue over the term of the franchise agreement. See Note 2 to the Consolidated Financial Statements. Product sales by the Company to its franchisees are recorded at the time product is delivered to franchise locations. Company-owned salon revenues are recognized at the time when the services are provided, or the guest receives and pays for merchandise. Classification of Revenue and Expenses: Below is a summary of the primary financial statement captions. Royalties - Sales-based royalty received from franchisees. 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. The Company changed its franchise product sales business in fiscal year 2022 from a wholesale distribution model to a third-party distribution model. This revenue was expected to decrease significantly during fiscal year 2022 and into fiscal year 2023. Advertising fund contributions - Sales-based advertising fund contributions received from franchisees. Company-owned salon revenue - Service revenue and revenue derived from sales of product in Company-owned salons. Cost of product sales to franchisees - Direct cost of inventory and freight and other costs of sales. Company-owned salon expense - Cost of service and product sold to guests in our Company-owned salons and other salon-related costs. Excluded from this caption are general and administrative expense, rent and depreciation and amortization related to company-owned salons. Consideration Received from Vendors: The Company receives consideration for a variety of vendor-sponsored programs. These programs primarily include volume rebates and promotion and advertising reimbursements. With respect to volume rebates, the Company estimates the amount of rebate it will receive and accrues it as a reduction to the cost of inventory over the period in which the rebate is earned based upon historical purchasing patterns and the terms of the volume rebate program. A quarterly analysis is performed in order to ensure the estimated rebate accrued is reasonable and any necessary adjustments are recorded. 57 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Distribution Costs: 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 years 2022 and 2023. 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: Advertising costs consist of the Company's corporate funded advertising costs, the Company's advertising fund contributions and franchisee's advertising fund contributions. Corporate funded advertising costs are expensed as incurred. The Company has various franchising programs supporting specific franchise salon concepts. Most maintain advertising funds that provide comprehensive advertising and sales promotion support. All salons are required to participate in the advertising funds for the same salon concept. The Company administers the advertising funds in accordance with franchise operating and other agreements. Advertising fund contributions are expensed when the contribution is made. The Company's advertising costs included in the Consolidated Statements of Operations consist of the following: Fiscal Years 2023 2022 2021 (Dollars in thousands) Advertising fund contributions from franchisees $ 31,747 $ 32,573 $ 22,023 Advertising fund contributions from company-owned salons (1) 105 154 897 Corporate funded advertising costs (1) 264 671 7,015 Total advertising costs $ 32,116 $ 33,398 $ 29,935 _____________________________________________________________________________ (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. 58 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Stock-Based Employee Compensation Plans: The Company recognizes stock-based compensation expense based on the fair value of the awards at the grant date. Compensation expense is recognized on a straight-line basis over the requisite service period of the award (or to the date a participant becomes eligible for retirement, if earlier). The Company uses fair value methods that require the input of subjective assumptions, including the expected term, expected volatility, dividend yield and risk-free interest rate. The Company estimates the likelihood and the rate of achievement for performance sensitive stock-based awards at the end of each reporting period. 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 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. Other, Net: 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 other, net in the Consolidated Statements of Operations in fiscal year 2021. 59 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Sales Taxes: 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: Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the Consolidated Financial Statements or income tax returns. Deferred income tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using currently enacted tax rates in effect for the years in which the differences are expected to reverse. We recognize deferred tax assets to the extent we believe these assets are more likely than not to be realized. 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 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. 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. 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. The Company reserves for unrecognized tax benefits, interest and penalties related to anticipated tax audit positions in the U.S. and other tax jurisdictions based on an estimate of whether additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of these liabilities would result in tax benefits being recognized in the period in which it is determined that the liabilities are no longer necessary. If the estimate of unrecognized tax benefits, interest and penalties proves to be less than the ultimate assessment, additional expenses would result. Inherent in the measurement of deferred balances are certain judgments and interpretations of tax laws and published guidance with respect to the Company's operations. Income tax expense is primarily the current tax payable for the period and the change during the period in certain deferred tax assets and liabilities. See Note 10 to the Consolidated Financial Statements. 60 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 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. Stock-based awards with exercise prices greater than the average market value of the Company's common stock are excluded from the computation of diluted earnings per share. Due to the Company's net loss in all periods presented, basic and dilutive earnings per share are equal. Comprehensive Loss: Components of comprehensive loss include net loss, foreign currency translation adjustments and recognition of deferred compensation, net of tax within shareholders' deficit. Foreign Currency Translation: 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: The Company did not adopt any material accounting pronouncements during fiscal year 2023. Recently Issued Accounting Standards Not Yet Adopted: The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and it does not believe any of these pronouncements will have a material impact to the Company's financial statements. 61 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. REVENUE RECOGNITION: Revenue Recognition and Deferred Revenue: Revenue recognized over time Royalty and advertising fund revenues represent sales-based royalties that are recognized in the period in which the sales occur. Generally, royalty and advertising fund 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 Statements 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 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: June 30, 2023 June 30, 2022 Balance Sheet Classification (Dollars in thousands) Receivables from contracts with customers, net $ 5,683 $ 10,263 Receivable, net Broker fees 12,471 15,592 Other assets Deferred revenue: Current Gift card liability $ 1,823 $ 2,037 Accrued expenses Deferred franchise fees open salons 5,325 5,770 Accrued expenses Total current deferred revenue $ 7,148 $ 7,807 Non-current Deferred franchise fees unopened salons $ 2,312 $ 3,211 Other non-current liabilities Deferred franchise fees open salons 20,839 26,827 Other non-current liabilities Total non-current deferred revenue $ 23,151 $ 30,038 62 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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: Fiscal Years 2023 2022 (Dollars in thousands) Balance at beginning of period $ 6,559 $ 7,774 Provision for doubtful accounts (1) 608 967 Provision for franchisee rent (2) 1,358 1,421 Reclass of accrued rent (3) 325 149 Other 106 — Write-offs ( 1,659 ) ( 3,752 ) Balance at end of period $ 7,297 $ 6,559 _____________________________________________________________________________ (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 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 Statements of Operations. The following table is a rollforward of the broker fee balance for the periods indicated: Fiscal Years 2023 2022 (Dollars in thousands) Balance at beginning of period $ 15,592 $ 19,254 Additions — 25 Amortization ( 3,100 ) ( 3,189 ) Write-offs ( 21 ) ( 498 ) Balance at end of period $ 12,471 $ 15,592 Deferred revenue includes the gift card liability and deferred franchise fees for unopened salons and open salons. Deferred franchise fees related to open salons are generally recognized on a straight-line basis over the term of the franchise agreement. Franchise fee revenue for fiscal years 2023, 2022 and 2021 was $ 6.7 , $ 6.5 and $ 6.6 million, respectively. Estimated revenue expected to be recognized in the future related to deferred franchise fees for open salons as of June 30, 2023 is as follows (in thousands): 2024 $ 5,325 2025 4,954 2026 4,481 2027 4,021 2028 3,357 Thereafter 4,026 Total $ 26,164 63 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. DISCONTINUED OPERATIONS On June 30, 2022, the Company sold its OSP software-as-a-service solution to Soham Inc. The Company received $ 13.0 million in proceeds in June 2022 and received an additional $ 5.0 million in proceeds in fiscal year 2023, offset by a $ 0.5 million transaction fee. The Company expects to receive an additional $ 2.0 million of proceeds held back for general indemnity provisions in December 2024 and additional proceeds as salons migrate to the Zenoti platform. 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: Fiscal Years 2023 2022 2021 (Dollars in thousands) Discontinued operations: Fees $ ( 226 ) $ 3,811 $ 3,461 Cost of product sales to franchisees — ( 1,037 ) ( 2,790 ) General and administrative ( 27 ) ( 3,517 ) ( 9,006 ) Rent ( 351 ) ( 194 ) ( 176 ) Depreciation and amortization — ( 1,322 ) ( 964 ) Goodwill impairment (1) — ( 2,880 ) — Interest expense — ( 715 ) ( 650 ) 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 — Income (loss) from discontinued operations, net of tax $ 3,958 $ ( 39,398 ) $ ( 10,125 ) _______________________________________________________________________________ (1) Goodwill impairment included in discontinued operations represents the portion of impairment allocated to the OSP business based on relative fair value. (2) Income taxes have been allocated to continuing and discontinued operations based on the methodology required by accounting for income taxes guidance. There was no tax impact in fiscal years 2023 and 2021 due to a valuation allowance. 64 Table of Contents 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: Fiscal Years 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: Fiscal Years 2023 2022 2021 (Dollars in thousands) Capital expenditures $ — $ 1,067 $ 3,591 65 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. OTHER FINANCIAL STATEMENT DATA The following provides additional information concerning selected balance sheet accounts: June 30, 2023 2022 (Dollars in thousands) Other current assets: Prepaid assets $ 1,510 $ 1,816 Restricted cash 11,888 10,423 Other 1,766 1,745 Total other current assets $ 15,164 $ 13,984 Property and equipment: Buildings and improvements $ 4,594 $ 8,228 Equipment, furniture and leasehold improvements 10,126 14,260 Internal use software 20,722 34,824 Total property and equipment 35,442 57,312 Less accumulated depreciation and amortization ( 29,020 ) ( 44,477 ) Total property and equipment, net $ 6,422 $ 12,835 Accrued expenses: Payroll and payroll related costs $ 4,179 $ 7,767 Insurance 3,777 5,012 Interest expense 4,124 77 Rent and related real estate costs 5,968 4,585 Deferred revenue 7,148 7,807 Other 4,913 8,536 Total accrued expenses $ 30,109 $ 33,784 Other non-current liabilities: Deferred income taxes $ 10,936 $ 10,979 Insurance 7,291 9,744 Deferred benefits 5,975 6,308 Deferred franchise fees 23,151 30,038 Other 1,688 1,905 Total other non-current liabilities $ 49,041 $ 58,974 66 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following provides additional information concerning other intangibles, net: June 30, 2023 2022 Weighted Average Amortization Periods (1) Cost (2) Accumulated Amortization (2) Net Weighted Average Amortization Periods (1) Cost (2) Accumulated Amortization (2) Net (In years) (Dollars in thousands) (In years) (Dollars in thousands) Brand assets and trade names 36 $ 5,290 $ ( 3,312 ) $ 1,978 36 $ 5,421 $ ( 3,234 ) $ 2,187 Franchise agreements 20 7,565 ( 6,809 ) 756 20 7,719 ( 6,756 ) 963 Other 20 289 ( 240 ) 49 20 354 ( 278 ) 76 Total 26 $ 13,144 $ ( 10,361 ) $ 2,783 26 $ 13,494 $ ( 10,268 ) $ 3,226 _______________________________________________________________________________ (1) All intangible assets have been assigned an estimated finite useful life and are amortized on a straight-line basis over the number of years that approximate their expected period of benefit (ranging from three to 40 years). (2) The change in the gross carrying value and accumulated amortization of other intangible assets is impacted by foreign currency. Total amortization expense related to intangible assets during fiscal years 2023, 2022 and 2021 was approximately $ 0.3 , $ 0.4 and $ 0.8 million, respectively. As of June 30, 2023, future estimated amortization expense related to intangible assets is estimated as follows (in thousands): 2024 $ 292 2025 292 2026 292 2027 292 2028 165 Thereafter 1,450 Total $ 2,783 The following provides supplemental disclosures of cash flow activity: Fiscal Years 2023 2022 2021 (Dollars in thousands) Cash paid (received) for: Interest $ 15,457 $ 11,786 $ 11,940 Taxes and penalties, net (1) 265 ( 1,400 ) ( 2,636 ) Non-cash investing activities: 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. 67 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. GOODWILL The table below contains details related to the Company's goodwill: June 30, 2023 2022 Gross Carrying Value (1) Accumulated Impairment Net Gross Carrying Value (1) Accumulated Impairment Net (Dollars in thousands) Goodwill $ 304,055 $ ( 130,264 ) $ 173,791 $ 304,624 $ ( 130,264 ) $ 174,360 _______________________________________________________________________________ (1) The change in the gross carrying value of goodwill relates to foreign currency translation adjustments. The table below contains details related to the Company's goodwill related to the Franchise reporting unit: Fiscal Years 2023 2022 (Dollars in thousands) Balance at beginning of period (1) $ 174,360 $ 229,582 Derecognition of OSP goodwill — ( 38,358 ) Goodwill impairment related to continuing operations — ( 13,120 ) Goodwill impairment related to discontinued operations — ( 2,880 ) Translation rate adjustments ( 569 ) ( 864 ) Balance at end of period $ 173,791 $ 174,360 _______________________________________________________________________________ (1) The goodwill balance at the beginning of fiscal year 2022 included $ 41.3 million related to discontinued operations. 68 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. LEASES At contract inception, the Company determines whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides the Company the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, the Company considers it to be, or contain, a lease. 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 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. For most leases, the Company is required to pay real estate taxes and other occupancy expenses. Total rent from continuing operations includes the following: Fiscal Years 2023 2022 2021 (Dollars in thousands) Office and warehouse rent $ 3,594 $ 4,575 $ 5,234 Lease termination expense (1) 1,627 1,835 13,544 Lease liability benefit (2) ( 1,773 ) ( 3,620 ) ( 20,022 ) Franchise salon rent 2,109 1,695 3,376 Company-owned salon rent 3,639 4,872 38,622 Total $ 9,196 $ 9,357 $ 40,754 _______________________________________________________________________________ (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. During fiscal year 2021, lease termination fees include $ 8.3 million of early termination payments to close salons before the lease end date to relieve the Company of future lease obligations and $ 5.3 million to accrue future lease payments for salons that are no longer operating. (2) Upon termination of previously impaired leases, the Company derecognizes the corresponding ROU assets and lease liabilities which results in a net gain. In addition, the Company recognizes a benefit from lease liabilities decreasing in excess of previously impaired ROU assets for ongoing leases that were previously impaired. The Company leases salon premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees. All lease-related costs are passed through to the franchisees. The Company records the rental payments due from franchisees as franchise rental income and the corresponding amounts owed to landlords as franchise rent expense on the Consolidated Statements of Operations. 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 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 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 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. 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. The discount rate used to determine the present value of the lease payments is the Company's estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as the interest rate implicit in the lease cannot generally be determined. The Company uses the portfolio approach in applying the discount rate based on the original lease term. 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. 69 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) A lessee's ROU asset is subject to the same asset impairment guidance in ASC 360, Property, Plant, and Equipment, applied to other elements of property, plant, and equipment. 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 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 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. The second step of the long-lived asset impairment test requires that the fair value of the asset group be estimated when determining the amount of any impairment loss. For the salon asset groups that failed the recoverability test, an impairment loss was measured as the amount by which the carrying amount of the asset group exceeds its fair value. The Company applied the fair value guidance within ASC 820-10 to determine the fair value of the asset group from the perspective of a market-participant considering, among other things, appropriate discount rates, multiple valuation techniques, the most advantageous market, and assumptions about the highest and best use of the asset group. To determine the fair value of the salon asset groups, the Company utilized market-participant assumptions rather than the Company's own assumptions about how it intends to use the asset group. The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include the market rent of comparable properties and a discount rate. The fair value of the salon long-lived asset group is estimated using market participant methods based on the best information available. The 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. 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. 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. 70 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 Commitments Sublease Income to be Received From Franchisees Net Rent Commitments 2024 $ 93,838 $ 1,629 $ 1,301 $ 96,768 $ ( 93,838 ) $ 2,930 2025 78,344 677 1,334 80,355 ( 78,344 ) 2,011 2026 64,992 458 1,367 66,817 ( 64,992 ) 1,825 2027 55,273 229 1,401 56,903 ( 55,273 ) 1,630 2028 46,758 218 1,436 48,412 ( 46,758 ) 1,654 Thereafter 70,053 56 2,981 73,090 ( 70,053 ) 3,037 Total future obligations $ 409,258 $ 3,267 $ 9,820 $ 422,345 $ ( 409,258 ) $ 13,087 Less amounts representing interest 46,970 240 1,317 48,527 Present value of lease liabilities $ 362,288 $ 3,027 $ 8,503 $ 373,818 Less current lease liabilities 79,420 1,526 971 81,917 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: Fiscal Years 2023 2022 2021 (Dollars in thousands) Cash paid for amounts included in the measurement of lease liabilities (1) $ 57,598 $ 74,507 $ 130,039 Right of use assets obtained in exchange for new lease liabilities 458 2,011 4,242 _______________________________________________________________________________ (1) Cash paid for amounts included in the measurement of lease liabilities includes rent, termination fees, settlements and legal fees, and commission payments. Other than Walmart, franchisees pay landlords directly. 71 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. FAIR VALUE MEASUREMENTS Fair value measurements are categorized into one of three levels based on the lowest level of significant input used: Level 1 (unadjusted quoted prices in active markets); Level 2 (observable market inputs available at the measurement date, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data). Assets and Liabilities Measured at Fair Value on a Recurring Basis As of June 30, 2023 and 2022, the estimated fair value of the Company's cash, cash equivalents, restricted cash, receivables, inventory, deferred compensation assets, debt and accounts payable approximated their carrying values. Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis We measure certain assets, including the Company's equity method investments, tangible fixed and other assets, and goodwill, at fair value on a nonrecurring basis when they are deemed to be other than temporarily impaired. The fair values of these assets are determined, when applicable, based on valuation techniques using the best information available, and may include quoted market prices, market comparables and discounted cash flow projections. The following impairment charges were based on fair values using Level 3 inputs (1): Fiscal Years 2023 2022 2021 (Dollars in thousands) Goodwill impairment $ — $ 16,000 $ — Long-lived asset impairment 101 542 13,023 _______________________________________________________________________________ (1) See Notes 1 and 5 to the Consolidated Financial Statements. 72 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. FINANCING ARRANGEMENTS The Company's financing arrangements consists of the following: June 30, 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 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. 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. 73 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 9. COMMITMENTS AND CONTINGENCIES Contingencies: 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. The Company is insured for losses in excess of these limitations. The Company is also self-insured for health care claims for eligible participating employees subject to certain deductibles and limitations. 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: The Company is a plaintiff or defendant in various lawsuits and claims arising out of the normal course of business. Like certain other franchisors, the Company has faced allegations of franchise regulation and agreement violations. Additionally, because the Company may be the tenant under a master lease for a location subleased to a franchisee, the Company has faced allegations of nonpayment of rent and associated charges. Further, similar to other large retail employers, the Company has 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 previous point-of-sale system supplier had challenged the development of certain parts of the Company's technology systems in litigation brought in the Northern District of California. The Company and the supplier entered into an agreement, effective June 25, 2021, that provided for the dismissal of the lawsuit and set forth a Transition Services Agreement pursuant to which the supplier will assist in the transfer of franchise salons from its point-of-sale system to the Company's salon management system, OSP. The Company and the supplier entered into an amendment to the Settlement Agreement, effective June 15, 2022, in which the Company agreed to pay $ 2.0 million to the supplier in installments commencing on June 15, 2022, and ending on December 10, 2022, in consideration of a release of claims arising out of or related to the Transition Services Agreement and for the supplier to continue to provide the services set forth in that agreement. 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. Although the actions are being vigorously defended, the Company could incur judgments in the future or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period. 74 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. INCOME TAXES The components of loss from continuing operations before income taxes are as follows: Fiscal Years 2023 2022 2021 (Dollars in thousands) Loss before income taxes U.S. $ ( 10,204 ) $ ( 41,231 ) $ ( 143,104 ) International ( 1,794 ) ( 3,211 ) 34,470 $ ( 11,998 ) $ ( 44,442 ) $ ( 108,634 ) The (benefit) provision for income taxes consists of: Fiscal Years 2023 2022 2021 (Dollars in thousands) Current: U.S. $ ( 219 ) $ ( 535 ) $ ( 620 ) International ( 428 ) ( 425 ) ( 1,421 ) Deferred: U.S. ( 270 ) 3,130 ( 3,701 ) International 262 ( 153 ) 314 $ ( 655 ) $ 2,017 $ ( 5,428 ) 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: Fiscal Years 2023 2022 2021 U.S. statutory rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal income tax benefit ( 2.7 ) 1.4 7.9 Valuation allowance (1) ( 12.9 ) ( 6.6 ) ( 61.5 ) Foreign income taxes at other than U.S. rates ( 0.2 ) 3.0 9.4 Uncertain tax positions 6.7 ( 17.9 ) 0.2 Stock-based compensation ( 2.7 ) ( 2.8 ) ( 0.7 ) Loss on investment in Luxembourg — — 29.3 Deferred tax rate remeasurement ( 3.6 ) — — Other, net (2) ( 0.1 ) ( 2.6 ) ( 0.6 ) Effective tax rate 5.5 % ( 4.5 ) % 5.0 % _______________________________________________________________________________ (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. The ( 0.6 )% of other, net in fiscal year 2021 does not include the rate impact of any items in excess of 5 % of computed tax. 75 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The components of the net deferred tax assets and liabilities are as follows: June 30, 2023 2022 (Dollars in thousands) Deferred tax assets: Payroll and payroll related costs $ 5,041 $ 5,267 Net operating loss carryforwards 154,514 153,190 Tax credit carryforwards 37,515 37,664 Capital loss carryforwards 5,845 5,338 Deferred franchise fees 7,018 8,694 Operating lease liabilities 92,666 124,905 Other (1) 18,826 17,542 Subtotal 321,425 352,600 Valuation allowance ( 202,185 ) ( 201,731 ) Total deferred tax assets $ 119,240 $ 150,869 Deferred tax liabilities: Goodwill and intangibles $ ( 35,001 ) $ ( 33,466 ) Operating lease assets ( 91,921 ) ( 123,333 ) Other ( 3,254 ) ( 5,049 ) Total deferred tax liabilities ( 130,176 ) ( 161,848 ) Net deferred tax liability $ ( 10,936 ) $ ( 10,979 ) _______________________________________________________________________________ (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. 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. 76 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) At June 30, 2023, the Company has tax-effected federal, state, Canada, and U.K. net operating loss carryforwards of approximately $ 118.1 , $ 27.9 , $ 8.3 and $ 0.2 million, respectively. The Company's federal loss carryforward consists of $ 27.3 million that will expire from fiscal years 2034 to 2038 and $ 90.8 million that has no expiration. The state loss carryforwards consist of $ 24.4 million that will expire from fiscal years 2024 to 2043 and $ 3.5 million that has no expiration. The Canada loss carryforward will expire from fiscal years 2036 to 2043. The U.K. loss carryforward has no expiration. The Company's tax credit carryforward of $ 37.5 million primarily consists of Work Opportunity Tax Credits that will expire from fiscal years 2031 to 2043. The Company's capital loss carryforward of $ 5.8 million will expire in fiscal year 2025. We consider the earnings of certain non-U.S. subsidiaries to be indefinitely invested outside the U.S. Accordingly, we have not recorded deferred taxes related to the U.S. federal and state income taxes and foreign withholding taxes on approximately $ 6.6 million of undistributed earnings of foreign subsidiaries, which have been reinvested outside the U.S. 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, 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: Fiscal Years 2023 2022 (Dollars in thousands) Balance at beginning of period $ 22,173 $ 13,858 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 ) Balance at end of period $ 21,393 $ 22,173 If the Company were to prevail on all unrecognized tax benefits recorded, a net benefit of approximately $ 0.9 million would be recorded in the effective tax rate. Interest and penalties associated with unrecognized tax benefits are recorded within income tax expense. 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. This amount is not included in the gross unrecognized tax benefits noted above. It is reasonably possible the amount of the unrecognized tax benefit with respect to certain of our unrecognized tax positions will increase or decrease during the next fiscal year. 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. 77 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. BENEFIT PLANS Regis Retirement Savings Plan: The Company maintains a defined contribution 401(k) plan, the Regis Retirement Savings Plan (RRSP). The RRSP is a defined contribution profit-sharing plan with a 401(k) feature that is intended to qualify under Section 401(a) of the Internal Revenue Code (the Code) and is subject to the Employee Retirement Income Security Act of 1974 (ERISA). The 401(k) portion of the RRSP is a cash or deferred arrangement intended to qualify under section 401(k) of the Code and under which eligible employees may elect to contribute a percentage of their eligible compensation. 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, 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. Nonqualified Deferred Salary Plan: The Company maintains a Nonqualified Deferred Salary Plan (Executive Plan), which covers Company officers and all other employees who are highly compensated as defined by the Code. The discretionary employer contribution portion of the Executive Plan is a profit-sharing component in which a participant's interest becomes 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. Certain participants within the Executive Plan also receive a matching contribution from the Company. Regis Individual Secured Retirement Plan (RiSRP): The Company maintains a Regis Individual Secured Retirement Plan (RiSRP), pursuant to which eligible employees may use post-tax dollars to purchase life insurance benefits. Salon Support employees at the director level and above qualify. The Company may make discretionary contributions on behalf of participants within the RiSRP, which may be calculated as a matching contribution. The participant is the owner of the life insurance policy under the RiSRP. Stock Purchase Plan: The Company has an employee stock purchase plan (ESPP) available to qualifying employees. Under the terms of the ESPP, eligible employees may purchase the Company's common stock through payroll deductions. The Company contributes an amount equal to 15.0 % of the purchase price of the stock to be purchased on the open market and pays all expenses of the ESPP and its administration, not to exceed an aggregate contribution of $ 14.0 million or when 4.6 million shares registered under the SEC for issuance under the plan have been purchased. As of June 30, 2023, the Company's cumulative contributions to the ESPP totaled $ 11.2 million. 78 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Deferred Compensation Contracts: The Company has unfunded deferred compensation contracts covering certain current and former key executives. 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 Sheets: June 30, 2023 2022 (Dollars in thousands) Current portion (included in accrued expenses) $ 314 $ 303 Long-term portion (included in other non-current liabilities) 2,013 2,320 Total $ 2,327 $ 2,623 The accumulated other comprehensive loss for the deferred compensation contracts, consisting of primarily unrecognized actuarial income, was $ 0.7 and $ 0.7 million at June 30, 2023 and 2022, respectively. 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 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. 79 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. EARNINGS PER SHARE The Company's basic earnings per share is calculated as net loss divided by weighted average common shares outstanding, excluding unvested outstanding stock options (SOs), outstanding stock appreciation rights (SARs), restricted stock units (RSUs) and stock-settled performance units (PSUs). The Company's diluted earnings per share is calculated as net income divided by weighted average common shares and common share equivalents outstanding, which includes shares issued under the Company's stock-based compensation plans. Stock-based awards with exercise prices greater than the average market price of the Company's common stock are excluded from the computation of diluted earnings per share. As the Company is in a net loss position, basic earnings per share is equivalent to dilutive earnings per share. 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: Fiscal Years 2023 2022 2021 Equity-based compensation awards 3,955,941 2,269,335 2,322,006 80 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. STOCK-BASED COMPENSATION 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 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. The 2018 Plan incorporates a fungible share design, under which full value awards (such as RSUs and PSUs) count against the shares reserved for issuance at a rate 2.0 times higher than appreciation awards (such as SARs and SOs). As of June 30, 2023, a maximum of 1,481,215 shares were available for grant under the 2018 Plan. All unvested awards are subject to forfeiture in the event of termination of employment, unless accelerated. SAR and RSU awards granted under the 2018 Plan generally include various acceleration terms, including upon retirement for participants aged 62 years or older or who are aged 55 years or older and have 15 years of continuous service. The Company also has outstanding awards under the 2016 Long Term Incentive Plan (the 2016 Plan), although the 2016 Plan terminated in October 2018 and no additional awards have since been or will be made under the 2016 Plan. The 2016 Plan provided for the granting of SARs, restricted stock awards (RSAs), RSUs and PSUs, as well as cash-based performance grants, to employees and non-employee directors of the Company. The Company also has outstanding awards under the Amended and Restated 2004 Long Term Incentive Plan (the 2004 Plan), although the 2004 Plan terminated in October 2016 and no additional awards have since been or will be made under the 2004 Plan. The 2004 Plan provided for the granting of nonqualified SOs, SARs, RSAs, RSUs and PSUs, as well as cash-based performance grants, to employees and non-employee directors of the Company. Under the 2018 Plan, 2016 Plan and the 2004 Plan, stock-based awards are granted at an exercise price or initial value equal to the fair market value on the date of grant. The fair value of cash-settled SARs granted in fiscal year 2022 are re-valued on a quarterly basis. Using the fair value of each grant on the date of grant, the weighted average fair values per stock-based compensation award granted during fiscal years 2023, 2022 and 2021 were as follows (1): Fiscal Years 2023 2022 2021 SARs $ 1.52 $ 2.56 $ — SOs 1.43 1.82 2.89 RSUs — 2.69 7.15 PSUs — — 5.83 _______________________________________________________________________________ (1) The fair value of cash-settled SARs granted are estimated on the date of grant using a Black-Scholes valuation model, with the fair value recalculated on a quarterly basis. The fair value of market-based SOs granted are estimated on the date of grant using either a Monte Carlo valuation model or a Black-Scholes valuation model. The fair value of market-based RSUs and PSUs granted are estimated on the date of grant using a Monte Carlo valuation model. 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: Fiscal Years 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 7.0 years The risk-free interest rate is determined based on the U.S. Treasury rates approximating the expected life of the market-based SARs, SOs, RSUs and PSUs granted. Expected volatility is established based on historical volatility of the Company's stock price. The Company uses historical data to estimate pre-vesting forfeiture rates. The expected term is based on a review of historical exercise experience. 81 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Stock-based compensation expense was as follows: Fiscal Years 2023 2022 2021 (Dollars in thousands) SARs & SOs (1) $ 1,352 $ ( 241 ) $ 456 RSUs & PSUs 964 1,575 2,798 Total stock-based compensation expense (recorded in general and administrative) 2,316 1,334 3,254 Less: Income tax benefit (2) — — — Total stock-based compensation expense, net of tax $ 2,316 $ 1,334 $ 3,254 _______________________________________________________________________________ (1) A benefit was recognized in fiscal year 2022 due to forfeiture of SARs and SOs. (2) Federal statutory income tax rate utilized of 0 % due to a valuation allowance in fiscal years 2023, 2022 and 2021. Stock Appreciation Rights: SARs granted under the 2018 Plan, 2016 Plan and the 2004 Plan generally vest 20 %, 20 %, and 60 % over a three-year period subsequent to the grant date or vest ratably over a three to five-year period on each of the annual grant date anniversaries and expire 10 years from the grant date. SARs granted in fiscal year 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: Shares/Units (in thousands) Weighted Average Exercise Price Weighted Average Remaining Contractual Life Aggregate Intrinsic Value (in thousands) SARs Outstanding balance at June 30, 2022 1,611 $ 7.95 Granted 600 1.52 Forfeited/Expired ( 113 ) 1.61 Exercised — — Outstanding balance at June 30, 2023 2,098 $ 6.45 6.37 $ ( 11,203 ) Exercisable at June 30, 2023 1,119 $ 10.33 4.22 $ ( 10,317 ) Unvested awards, net of estimated forfeitures 825 $ 2.02 8.82 $ ( 751 ) As of June 30, 2023, there was $ 0.4 million of unrecognized expense related to SARs that is to be recognized over a weighted average period of 1.9 years. 82 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Stock Options: SOs granted under the 2018 Plan, 2016 Plan and the 2004 Plan generally vest 20 %, 20 %, and 60 % over a three-year period subsequent to the grant date or vest ratably over a three to five-year period on each of the annual grant date anniversaries and expire 10 years from the grant date. The SOs granted during fiscal year 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: Shares/Units (in thousands) Weighted Average Exercise Price Weighted Average Remaining Contractual Life Aggregate Intrinsic Value (in thousands) SOs Outstanding balance at June 30, 2022 1,495 $ 1.81 Granted 1,644 1.43 Forfeited/Expired ( 148 ) 1.59 Exercised — — Outstanding balance at June 30, 2023 2,991 $ 1.61 8.98 $ ( 1,496 ) Exercisable at June 30, 2023 645 $ 1.54 9.05 $ ( 277 ) Unvested awards, net of estimated forfeitures 1,958 $ 1.63 8.97 $ ( 1,018 ) As of June 30, 2023, there was $ 1.4 million of unrecognized expense related to SOs that is to be recognized over a weighted average period of 1.7 years. 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 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. The Company did not grant RSUs in fiscal year 2023. Activity for all the Company's RSUs is as follows: Shares/Units (in thousands) Weighted Average Grant Date Fair Value Aggregate Intrinsic Value (in thousands) RSUs Outstanding balance at June 30, 2022 907 $ 6.27 Granted — — Forfeited ( 34 ) 4.79 Vested ( 88 ) 6.13 Outstanding balance at June 30, 2023 785 $ 6.35 $ 871 Vested at June 30, 2023 543 $ 7.24 $ 603 Unvested awards, net of estimated forfeitures 162 $ 5.58 $ 180 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. 83 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Performance Share Units: PSUs are grants of restricted stock units which are earned based on the achievement of performance goals established by the Compensation Committee over a performance period, typically three years . There were no PSUs granted in fiscal year 2023. Activity for all the Company's PSUs is as follows: Shares/Units (in thousands) Weighted Average Grant Date Fair Value Aggregate Intrinsic Value (in thousands) PSUs Outstanding balance at June 30, 2022 74 $ 9.82 Granted — — Forfeited ( 74 ) 9.82 Vested — — Outstanding balance at June 30, 2023 — $ — $ — Vested at June 30, 2023 — $ — $ — Unvested awards, net of estimated forfeitures — $ — $ — 84 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. 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 stock. 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. 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: In May 2000, the Company's Board approved a stock repurchase program with no stated expiration date. Originally, the program authorized up to $ 50.0 million to be expended for the repurchase of the Company's stock. The Board elected to increase this maximum to $ 100.0 million in August 2003, to $ 200.0 million in May 2005, to $ 300.0 million in April 2007, to $ 350.0 million in April 2015, to $ 400.0 million in September 2015, to $ 450.0 million in January 2016, and to $ 650.0 million in August 2018. All repurchased shares become authorized but unissued shares of the Company. As of June 30, 2023, 30.0 million shares have been cumulatively repurchased for $ 595.4 million, and $ 54.6 million remained authorized for repurchase. The Company does not anticipate repurchasing shares of common stock for the foreseeable future. Accumulated Other Comprehensive Income: The components of accumulated other comprehensive income are as follows: June 30, 2023 2022 (Dollars in thousands) Foreign currency translation $ 8,284 $ 8,732 Unrealized gain on deferred compensation contracts 739 723 Accumulated other comprehensive income $ 9,023 $ 9,455 85 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 15. SEGMENT INFORMATION 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. GAAP. 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. This segment operates primarily in the U.S., Puerto Rico and Canada and primarily includes the Supercuts, SmartStyle, Cost Cutters, First Choice Haircutters, Roosters and Magicuts concepts. The Company-owned salons reportable operating segment is comprised of 68 company-owned salons located mainly in strip center locations and Walmart. Company-owned salons offer high quality, convenient and value priced hair care and beauty services and retail products. SmartStyle, Supercuts, Cost Cutters and other regional trade names operating in the U.S. and Canada are generally within the Company-owned salons segment. 86 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Fiscal Years 2023 2022 2021 (Dollars in thousands) Revenues: Franchise $ 223,237 $ 255,762 $ 268,686 Company-owned 10,089 20,205 142,965 Total revenue 233,326 275,967 411,651 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 ) 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: June 30, 2023 2022 2021 Total Revenues Property and Equipment, Net Total Revenues Property and Equipment, Net Total Revenues Property and Equipment, Net (Dollars in thousands) U.S. $ 211,429 $ 6,410 $ 249,285 $ 12,808 $ 380,506 $ 16,807 Other countries 21,897 12 26,682 27 31,145 99 Total $ 233,326 $ 6,422 $ 275,967 $ 12,835 $ 411,651 $ 16,906 87 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.