What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-08-28 compared with 2023-08-23 · 85 added, 106 removed, 277 unchanged (41% of the section changed)

7 unchanged sentences

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

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

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

The impact of these transactions is as follows:

6 unchanged sentences

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.

In fiscal year 2024, the Company received an additional $2.0 million of proceeds that had been previously held back for general indemnity provisions.

In fiscal year 2025, the Company expects additional proceeds related to salons migrating to Zenoti.

The Zenoti migration was successfully completed in early first quarter, fiscal year 2025.

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

8 unchanged sentences

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

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

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1 unchanged sentence

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

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

Table of Conte n t s

RESULTS OF OPERATIONS

10 unchanged sentences

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

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.

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

System-wide results

16 unchanged sentences

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

Table of Conte n t s

Consolidated Results of Operations

11 unchanged sentences

Cost of product sales to franchisees 0.4 3.5 17.4 80.0 125.0 115.2 (4,500) 980

Inventory reserve 1.2 7.7 — 0.5 2.8 — (230) N/A

Inventory reserve — 1.2 7.7 — 0.5 2.8 (50) (230)

General and administrative 45.4 50.8 65.3 22.4 21.8 23.7 60 (190)

5 unchanged sentences

Long-lived asset impairment 0.8 0.1 0.5 0.4 — 0.2 40 (20)

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

Goodwill impairment — — 13.1 — — 4.7 — (470)

Operating income (loss) (2) 20.9 8.8 (28.9) 10.3 3.8 (10.5) 650 1,430

1 unchanged sentence

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

Gain on extinguishment of long-term debt, net 94.6 — — 46.6 — — N/A N/A

Other, net (0.2) 1.4 (0.3) (0.1) 0.6 (0.1) (70) 70

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

Income tax (expense) benefit (3) (0.9) 0.7 (2.0) 1.0 5.5 (4.5) N/A N/A

Income (loss) from discontinued operations 2.0 4.0 (39.4) 1.0 1.7 (14.3) (70) 1,600

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

Net income (loss) (2) 91.1 (7.4) (85.9) 44.9 (3.2) (31.1) 4,810 2,790

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2 unchanged sentences

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

(3) Computed as a percent of loss from continuing operations before income taxes.

(3) Computed as a percent of income (loss) from continuing operations before income taxes.

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

Table of Conte n t s

Fiscal Year Ended June 30, 2024, Compared with Fiscal Year Ended June 30, 2023

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

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

During fiscal year 2024, royalties decreased $1.9 million, or 2.9%, primarily due to a decrease in franchise salon count and unfavorable same store sales traffic.

This was partially offset by increased prices within our same store sales.

During fiscal year 2024, fees decreased $1.1 million, or 9.7%, primarily due to a decrease in terminated development agreements year over year.

Product Sales to Franchisees

1 unchanged sentence

Advertising Fund Contributions

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

Advertising fund contributions decreased $6.0 million, or 18.9%, during fiscal year 2024, primarily due to the decrease in franchise salon count and decrease in advertising fund contribution rates.

Franchise Rental Income

1 unchanged sentence

Company-Owned Salon Revenue

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

During fiscal year 2024, company-owned salon revenue decreased $2.8 million, or 27.7%, due to the decrease in company-owned salon count, partially offset by the recognition of non-cash revenue related to a change in estimate for gift card breakage.

Cost of Product Sales to Franchisees

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

Inventory Reserve

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

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

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

Cost of product sales to franchisees decreased $3.1 million, or 88.6%, primarily due to the Company's shift in its product business to a third-party distribution model.

General and Administrative

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

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

The decrease of $5.4 million, or 10.6%, in general and administrative expense during fiscal year 2024 was primarily due to lower compensation resulting from headcount reductions, lower legal and professional fees and less technical education spend.

The decrease of $3.7 million, or 40.2%, in rent expense during fiscal year 2024 was primarily due to the net reduction in the number of company-owned salons.

Advertising Fund Expense

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

Table of Conte n t s

Advertising fund expense decreased $6.0 million, or 18.9%, during fiscal year 2024, primarily due to the decrease in franchise salon count and a decrease in advertising fund contribution rates.

Franchise Rent Expense

1 unchanged sentence

Company-Owned Salon Expense

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

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

Company-owned salon expense decreased $3.7 million, or 42.0%, during fiscal year 2024, primarily due to the reduction in company-owned salon count and a decline in product sales.

Depreciation and Amortization

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

The decrease of $3.8 million, or 49.4%, in depreciation and amortization during fiscal year 2024 was primarily due to a $2.6 million accelerated depreciation charge in the second quarter of fiscal year 2023 related to the consolidation of office space within the Company's corporate headquarters, partially offset by accelerated depreciation charges in the fourth quarter of fiscal year 2024 related to further consolidation of office space within the corporate headquarters and the net reduction in company-owned salon count.

Long-Lived Asset Impairment

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

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

Goodwill Impairment

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

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

The Company recorded long-lived asset impairment charges of $0.8 million and $0.1 million in fiscal years 2024 and 2023, respectively.

The increase in long-lived asset impairment was primarily due to more right-of-use assets being impaired in fiscal year 2024 resulting from subleasing excess corporate office space to unrelated third parties.

Interest Expense

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

Loss from Sale of Salon Assets to Franchisees, net

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

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

Income Tax Benefit (Expense)

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

The $3.3 million increase in interest expense during fiscal year 2024 was primarily due to a higher weighted average interest rate on outstanding borrowings.

Gain on Extinguishment of Long-Term Debt, Net

In June 2024, the Company recorded a gain of $94.6 million related to the extinguishment of long-term debt.

Additionally, the net gain includes the write off of paid-in-kind interest accruals and the write off of unamortized debt financing fees.

Other, net declined $1.6 million in fiscal year 2024, primarily due to a $1.1 million grant received from the state of North Carolina related to COVID-19 relief and a class action settlement in fiscal year 2023.

Income Tax (Expense) Benefit

During fiscal year 2024, the Company recognized an income tax expense of $0.9 million, with a corresponding effective tax rate of 1.0%, compared to recognizing an income tax benefit of $0.7 million, with a corresponding effective tax rate of 5.5% during fiscal year 2023.

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

Income (Loss) from Discontinued Operations

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

The Company recorded income from discontinued operations of $2.0 million and $4.0 million in fiscal years 2024 and 2023, respectively.

Income in fiscal year 2024 is primarily due to the receipt of $2.0 million sales proceeds related to the sale of OSP that had previously been held back for general indemnity provisions.

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

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

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

Table of Conte n t s

Results of Operations by Segment

25 unchanged sentences

Franchise revenue decreased $27.5 million during fiscal year 2024.

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

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

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

During fiscal year 2024, franchisees purchased 10 salons from the Company and constructed (net of relocations) and closed 15 and 429 franchise salons, respectively.

Franchise Adjusted EBITDA

1 unchanged sentence

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

Table of Conte n t s

Company-Owned Salons

9 unchanged sentences

Company-Owned Salon Revenue

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

Company-owned salon revenue declined $2.8 million in fiscal year 2024, primarily due to the closure of loss-generating company-owned salons, partially offset by the recognition of non-cash revenue of $1.3 million due to a change in estimate related to gift card breakage.

Company-Owned Salon Adjusted EBITDA

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

During fiscal year 2024, company-owned salon adjusted EBITDA improved $1.5 million, primarily due to a change in estimate related to gift card breakage in addition to the closure of unprofitable salons.

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

1 unchanged sentence

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

Table of Conte n t s

LIQUIDITY AND CAPITAL RESOURCES

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

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

In June 2024, the Company entered into a new credit agreement with TCW Asset Management Company, LLC, and MidCap Financial Trust, which matures in June 2029.

In addition to a $10.0 million minimum liquidity covenant, the agreement includes typical provisions and financial covenants, including leverage and fixed-charge coverage ratio covenants, of which the latter two are not tested until September 30, 2024.

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

1 unchanged sentence

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

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

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

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

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

The Company believes it has sufficient liquidity, cash on hand, and borrowing capacity to meet its obligations in the next twelve months and until maturity of the credit agreement in June 2029.

As of June 30, 2024, cash and cash equivalents were $10.1 million, with $9.4 million and $0.7 million within the United States and Canada, respectively.

As of June 30, 2024, the Company's borrowing arrangements include a $105.0 million term loan and a $25.0 million revolving credit facility with a $10.0 million minimum liquidity covenant that expires in June 2029.

As of June 30, 2024, the unused available credit under the revolving credit facility was $9.8 million and total liquidity per the agreement was $19.9 million.

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

Additionally, on February 3, 2021, the Company filed a $150.0 million shelf registration and $50.0 million prospectus supplement with the Securities and Exchange Commission under which it may offer and sell, from time to time, up to $50.0 million worth of its common stock in "at-the-market" offerings.

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

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

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

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

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

In fiscal year 2022, 464,781 shares were issued for $38.4 million under the prospectus.

During fiscal years 2023 and 2024, the Company did not issue any shares under this prospectus.

The share issuance program expired on February 10, 2024.

The Company closely manages its liquidity and capital resources.

5 unchanged sentences

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

Table of Conte n t s

Cash Flows from Operating Activities

During fiscal year 2024, cash used in operating activities was $2.0 million.

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

Cash used in operations improved due to lower general and administrative expense and less cash used for working capital.

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

Cash Flows from Investing Activities

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

During fiscal year 2024, cash provided by investing activities of $1.6 million was primarily related to $2.0 million received related to the sale of OSP.

Cash Flows from Financing Activities

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

Table of Conte n t s

During fiscal year 2024, cash provided by financing activities of $8.4 million was primarily a result of cash proceeds from the June 2024 credit agreement, offset by repayment of long-term debt and debt refinancing fees.

Financing Arrangements

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The Company's financing arrangements consist of the following:

Maturity Dates 2023 2022 2023 2022

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

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

Twelve months ended

2024 2023 2024 2023

(Cash interest rate %) (Dollars in thousands)

Term loan (1)

9.68% 9.54% $ 105,000 $ 172,268

Deferred financing fees

(14,244) (6,471)

Term loan, net

90,756 165,797

Revolving credit facility (1)

9.68% 9.54% 10,237 10,000

Paid-in-kind interest

Fair value of warrants issued to lenders (Note 14)

Total long-term debt, net

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

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

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

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

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

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

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

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

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

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

$ 99,545 $ 176,830

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(1) June 30, 2023 term loan and revolving credit facility had a maturity date of August 31, 2025.

(2) June 30, 2024 term loan and revolving credit facility matures on June 24, 2029.

In June 2024, the Company entered into a new credit agreement between TCW Asset Management Company, LLC, and MidCap Financial Trust Company for a $25.0 million revolving credit facility, in addition to a term loan of $105.0 million with a $10.0 million minimum liquidity covenant that expires in June 2029.

The agreement includes typical provisions and financial covenants, including leverage and fixed-charge coverage ratio covenants, of which the latter two are not tested until September 30, 2024.

As of June 30, 2024, the unused available credit under the revolving credit facility was $9.8 million and total liquidity per the agreement was $19.9 million.

The interest rate on the new agreement is based on secured overnight financing rate (SOFR) plus margin.

The agreement utilizes an interest rate margin that is subject to change year-over-year.

The margin applicable to the new term loan and revolving credit facility is subject to change based on the Company's total leverage ratio, remeasured at a specific point during the year.

When the Company's total leverage ratio is greater than or equal to 3.75 to 1.00, the margin applicable to the new term loan and revolving credit facility is 9.00%.

If the Company's leverage ratio is less than 3.75 to 1.00, the margin rate is 8.50%.

In either scenario, 4.5% of the margin is paid-in-kind (PIK) interest (added to the principal balance and thereafter accruing interest), and the remainder is paid currently in cash.

The margin applicable to any letter of credit is 5.25% and paid currently in cash.

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

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

As of June 30, Debt to

1 unchanged sentence

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

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

Table of Conte n t s

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

The decrease in the debt to capitalization ratio as of June 30, 2024, compared to June 30, 2023, was primarily due to extinguishment of long term debt during fiscal year 2024.

Contractual Obligations and Commercial Commitments

14 unchanged sentences

Off-Balance Sheet Arrangements

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

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

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

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

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

Under the credit agreement entered into in June 2024, the margin applicable to any letter of credit is 5.25% and is paid currently in cash.

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

5 unchanged sentences

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

Table of Conte n t s

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

Share Issuance Program

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

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

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

In fiscal year 2022, 464,781 shares were issued for $38.4 million under the prospectus.

During fiscal years 2023 and 2024, the Company did not issue any shares under this prospectus.

The share issuance program expired on February 10, 2024.

Share Repurchase Program

6 unchanged sentences

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

Table of Conte n t s

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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We believe the following accounting policies are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations.

As of June 30, 2023 and 2022, the Franchise reporting unit had $173.8 and $174.4 million of goodwill, respectively, and the Company-owned segment had no goodwill at either period.

As of June 30, 2024, and 2023, the franchise reporting unit had $173.1 million and $173.8 million of goodwill, respectively, and the company-owned segment had no goodwill at either period.

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

13 unchanged sentences

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

Table of Conte n t s

Long-Lived Assets, Excluding Goodwill

14 unchanged sentences

The fair value of the right of use asset is estimated by determining what a market participant would pay over the life of the primary asset in the group, discounted back to June 30, 2024.

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

During fiscal year 2021, the Company recognized a long-lived asset impairment charge of $13.0 million, which included $9.5 million related to ROU assets on the Consolidated Statements of Operations in Part II, Item 8 of this Form 10-K.

During fiscal years 2024, 2023, and 2022, the Company recognized long-lived asset impairment charges of $0.8 million, $0.1 million, and $0.5 million, respectively, related to ROU assets on the Consolidated Statements of Operations in Part II, Item 8 of this Form 10-K.

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.

3 unchanged sentences

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.

Table of Conte n t s

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.

3 unchanged sentences

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

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

The Company has a valuation allowance on its deferred tax assets amounting to $181.8 million and $202.2 million at June 30, 2024 and 2023, respectively.

The decline in fiscal year 2024 is primarily due to utilization of its U.S.

net operating loss and a reduction to the corresponding valuation allowance.

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

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.

5 unchanged sentences

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

Table of Conte n t s

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

What changed 10-K

Item 7. Management’s Discussion and Analysis