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Item 8. Financial Statements and Supplementary Data

2024-08-28 compared with 2023-08-23 · 267 added, 240 removed, 965 unchanged (34% of the section changed)

1 unchanged sentence

Index to Consolidated Financial Statements:

Report of Independent Registered Public Accounting Firms (PCAOB ID:

Report of Independent Registered Public Accounting Firm (PCAOB ID:

Consolidated Balance Sheets as of June 30, 2024, and 2023

Consolidated Statements of Operations for each of the three years in the period ended June 30, 2024

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

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

Consolidated Statements of Comprehensive Income (Loss) for each of the three years in the period ended June 30, 2024

Consolidated Statements of Shareholders' Equity (Deficit) for each of the three years in the period ended June 30, 2024

Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 2024

Notes to Consolidated Financial Statements

Table of Conte n t s

Report of Independent Registered Public Accounting Firm

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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").

We have audited the accompanying consolidated balance sheets of Regis Corporation (a Minnesota corporation) and subsidiaries (the “Company”) as of June 30, 2024 and 2023, the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity (deficit), and cash flows for each of the three years in the period ended June 30, 2024, 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, 2024 and 2023 and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2024, in conformity with accounting principles generally accepted in the United States of America.

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August 28, 2024

Table of Conte n t s

REGIS CORPORATION

4 unchanged sentences

Receivables, net 9,434 10,885

Inventories 1,681 3,109

Other current assets 22,550 16,845

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Total assets $ 530,496 $ 607,377

LIABILITIES AND SHAREHOLDERS' DEFICIT

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities:

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Commitments and contingencies (Note 9)

Shareholders' deficit:

Shareholders' equity (deficit):

Common stock, $ 0.05 par value;

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Accumulated deficit ( 21,571 ) ( 112,631 )

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

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

Total shareholders' equity (deficit) 56,787 ( 36,730 )

Total liabilities and shareholders' equity (deficit) $ 530,496 $ 607,377

______________________________________________________________________________

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

Table of Conte n t s

REGIS CORPORATION

21 unchanged sentences

Long-lived asset impairment (Note 1)

101 542 13,023

Goodwill impairment (Note 5)

4 unchanged sentences

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

Gain on extinguishment of long-term debt, net 94,611 — —

Other, net ( 172 ) 1,364 ( 296 )

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 operations before income taxes 89,936 ( 11,998 ) ( 44,442 )

Income tax (expense) benefit ( 869 ) 655 ( 2,017 )

Income (loss) from continuing operations 89,067 ( 11,343 ) ( 46,459 )

Income (loss) from discontinued operations (Note 3) 1,993 3,958 ( 39,398 )

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 )

Net income (loss) $ 91,060 $ ( 7,385 ) $ ( 85,857 )

Net income (loss) per share:

Income (loss) from continuing operations $ 38.08 $ ( 4.88 ) $ ( 21.32 )

Income (loss) from discontinued operations 0.85 1.70 ( 18.08 )

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

Net income (loss) per share, basic (2) $ 38.93 $ ( 3.18 ) $ ( 39.40 )

Income (loss) from continuing operations $ 37.50 $ ( 4.88 ) $ ( 21.32 )

Income (loss) from discontinued operations 0.84 1.70 ( 18.08 )

Net income (loss) per share, diluted (2) $ 38.34 $ ( 3.18 ) $ ( 39.40 )

Weighted average common and common equivalent shares outstanding:

Basic and diluted 46,235 43,582 35,956

Basic 2,339 2,323 2,179

Diluted 2,375 2,323 2,179

_____________________________________________________________________________

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

Table of Conte n t s

REGIS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands)

2024 2023 2022

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

Other comprehensive (loss) income, net of tax:

Net income (loss) $ 91,060 $ ( 7,385 ) $ ( 85,857 )

Other comprehensive loss, net of tax:

Net current period foreign currency translation adjustments ( 321 ) ( 448 ) ( 547 )

Recognition of deferred compensation ( 118 ) 16 459

Other comprehensive (loss) income ( 432 ) ( 88 ) 2,094

Comprehensive loss $ ( 7,817 ) $ ( 85,945 ) $ ( 111,237 )

Other comprehensive loss ( 439 ) ( 432 ) ( 88 )

Comprehensive income (loss) $ 90,621 $ ( 7,817 ) $ ( 85,945 )

_______________________________________________________________________________

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

Table of Conte n t s

REGIS CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

(Dollars in thousands, except share data)

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Comprehensive

Income Retained Earnings (Accumulated Deficit) Total

Income Accumulated Deficit Total

Shares Amount

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

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

Issuance of common stock, net of offering costs 464,781 23 37,182 — — 37,205

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

2 unchanged sentences

Net restricted stock activity 20,939 1 ( 545 ) — — ( 544 )

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

Balance, June 30, 2022 2,275,029 $ 114 $ 64,724 $ 9,455 $ ( 105,246 ) $ ( 30,953 )

1 unchanged sentence

Foreign currency translation (Note 1) — — — ( 448 ) — ( 448 )

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

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

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Balance, June 30, 2023 2,277,828 $ 114 $ 66,764 $ 9,023 $ ( 112,631 ) $ ( 36,730 )

Net loss — — — — ( 7,385 ) ( 7,385 )

Net income — — — — 91,060 91,060

Foreign currency translation (Note 1)

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Net restricted stock activity 2,120 — ( 18 ) — — ( 18 )

Stock warrants issued in connection with debt (1) — — 1,292 — — 1,292

Balance, June 30, 2024 2,279,948 $ 114 $ 69,660 $ 8,584 $ ( 21,571 ) $ 56,787

_______________________________________________________________________________

(1) This activity represents the stock warrants issued in connection with the new credit facility agreement signed June 24, 2024.

Stock warrant value shown net of allocated financing costs.

See Note 8 and Note 14 for additional details.

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

Table of Conte n t s

REGIS CORPORATION

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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:

Net income (loss) $ 91,060 $ ( 7,385 ) $ ( 85,857 )

Adjustments to reconcile net income (loss) to net cash used in operating activities:

(Gain) loss from sale of OSP (Note 3) ( 2,000 ) ( 4,562 ) 36,143

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Non-cash interest 3,418 3,790 —

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

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

Gain on extinguishment of long-term debt, net ( 94,611 ) — —

Goodwill impairment — — 16,000

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Receivables 848 943 11,896

Inventories ( 182 ) 7,886 17,879

Income tax receivable 1,230 ( 577 ) 1,118

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Net proceeds from sale of OSP 2,000 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:

Net cash provided by investing activities:

1,624 4,019 7,684

Cash flows from financing activities:

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

Proceeds from issuance of long-term debt 105,000 — —

Borrowings on revolving credit facility

14,238 13,357 10,000

Repayments of long-term debt ( 96,499 ) ( 11,083 ) ( 16,916 )

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Taxes paid for shares withheld ( 16 ) ( 36 ) ( 845 )

Minority interest buyout — — ( 562 )

Distribution center lease payments — — ( 724 )

Net cash (used in) provided by financing activities:

Net cash provided by (used in) financing activities:

8,363 ( 2,145 ) 29,424

Effect of exchange rate changes on cash and cash equivalents ( 31 ) ( 53 ) ( 158 )

Decrease in cash, cash equivalents and restricted cash ( 6,068 ) ( 1,688 ) ( 93,728 )

Increase (decrease) in cash, cash equivalents and restricted cash 7,916 ( 6,068 ) ( 1,688 )

Cash, cash equivalents and restricted cash:

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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.

As a result, the Company received Canadian rent relief, Canadian wage relief and a grant from the state of North Carolina.

In fiscal years 2024, 2023, and 2022, the Company received the following assistance:

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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 —

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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.

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.

As of June 30, 2024, the Company has no VIE's where the Company is the primary beneficiary.

The Company previously held an investment in Empire Education Group, Inc.

On May 2, 2024, the Company sold its interest in EEG to the other shareholder.

The sale did not have a significant impact on the Company's operations or financial position.

When the Company held a majority ownership interest in EEG it was a co-signatory to the Title IV program participation agreements of the EEG schools with the Department of Education.

As a co-signatory to the Title IV program participation agreements, the Department of Education could hold the Company responsible for EEG's Title IV program liabilities.

In connection with the sale, Regis is no longer a co-signatory to the Title IV program participation agreements of the EEG schools with the Department of Education.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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Total cash, cash equivalents and restricted cash $ 29,312 $ 21,396

_______________________________________________________________________________

(1) The increase in restricted cash in fiscal year 2024 is related to temporarily cash collateralizing the letters of credit as the Company transitioned to the new lender.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Receivables and Allowance for Doubtful Accounts:

Receivables and Allowance for Credit Losses:

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 balance is presented net of an allowance for credit 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.

The allowance for credit losses is the Company's best estimate of the amount of probable credit losses related to existing accounts and notes receivables.

As of June 30, 2024, and 2023, the allowance for credit losses was $ 6.2 million and $ 7.3 million, respectively.

The allowance for credit losses decreased in fiscal year 2024 due to the write-off of past due receivables previously reserved for related to underperforming franchise salons.

See Note 2 to the Consolidated Financial Statements.

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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.

As a result, the Company exited its two distribution centers in fiscal year 2022 and previously stored inventory at a third-party facility through the second of quarter fiscal year 2024.

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.

Additionally, the reduction in company-owned salons decreased 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, 2024, and 2023 was $ 0.3 million and $ 1.5 million, respectively.

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

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.

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

Inventory of $ 0.8 million and $ 1.7 million as of June 30, 2024 and June 30, 2023, respectively, is included in Current Assets, see Note 4 to the Consolidated Financial Statements.

Property and Equipment:

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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.

Depreciation expense was $ 3.7 million, $ 7.4 million, and $ 5.8 million in fiscal years 2024, 2023, and 2022, respectively.

Depreciation expense for fiscal years 2024, 2023, and 2022 includes $ 0.5 million, $ 0.5 million, and $ 1.0 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.

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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.

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.

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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, 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.

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.

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.

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

5 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

As of June 30, 2024, and 2023, the franchise reporting unit had $ 173.1 million and $ 173.8 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.

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

The Company determined a triggering event occurred related to a decrease in the Company's stock price, resulting in a quantitative impairment test performed over goodwill.

Accordingly, the Company engaged a third-party valuation specialist to perform an impairment analysis on the franchise reporting unit of the business as of November 30, 2023.

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 discount rates, revenue growth rates, economic and market trends, cost structure, and other expectations about the anticipated short-term and long-term operating results.

These assumptions are inherently uncertain.

An increase in the discount rate or a decrease in revenue growth rate or market trends would have a negative impact on the fair value of the reporting unit which could be material.

As a result of the impairment testing, the franchise reporting unit was determined to have a fair value in excess of its carrying value, resulting in no goodwill impairment charge.

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

During fiscal year 2023, the Company did not experience any triggering events that required an interim goodwill analysis.

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See Notes 3 and 5 to the Consolidated Financial Statements.

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.

Reverse Stock Split:

On November 29, 2023, the Company effected a one-for-20 reverse stock split of its outstanding common stock, par value $ 0.05 per share.

As a result of the reverse stock split, every 20 shares of common stock issued and outstanding was converted into one share of common stock.

The reverse stock split affected all shareholders uniformly and did not alter any shareholder’s percentage interest in the Company’s equity.

No fractional shares were issued in connection with the reverse stock split.

Shareholders who would otherwise be entitled to a fractional share of common stock were instead entitled to receive a proportional cash payment.

All common share and per share amounts presented in the consolidated financial statements and accompanying notes have been retroactively adjusted to reflect the reverse stock split.

The reverse stock split affected all issued and outstanding shares of the Company’s common stock, as well as the number of shares of common stock available for issuance under the Company’s outstanding stock options and stock unit awards.

The reverse stock split reduced the number of shares of common stock issuable upon the exercise of stock options outstanding and the vesting of stock unit awards outstanding immediately prior to the reverse stock split and correspondingly increased the respective exercise prices or other price dependent terms.

Tax Benefits Preservation Plan:

On January 28, 2024, the Board authorized and declared a dividend of one preferred stock purchase right (a Right) for each outstanding share of common stock.

The dividend was payable on February 9, 2024 (the Record Date) to the holders of record of shares of common stock as of the close of business on the Record Date.

The description and terms of the Rights are set forth in a Tax Benefits Preservation Plan (the Plan), dated as of January 29, 2024, as the same may be amended from time to time between the Company and Equiniti Trust Company, LLC, as Rights Agent.

Self-Insurance Accruals:

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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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

For fiscal years 2024, 2023, and 2022, the Company recorded decreases in expense for changes in estimates related to prior year open policy periods of $ 0.9 million, $ 1.4 million, and $ 0.5 million, respectively.

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

1 unchanged sentence

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of June 30, 2024, the Company had $ 1.7 million and $ 4.7 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, 2023, the Company had $ 3.6 million 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.

Revenue Recognition and Deferred Revenue:

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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.

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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.

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

There were no such charges during fiscal years 2024 or 2023.

Advertising and Advertising Funds:

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

(2) Corporate funded advertising costs for fiscal year 2024 relates to a credit received.

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.

As of June 30, 2024, and 2023, approximately $ 8.8 million and $ 11.1 million, respectively, representing the advertising funds' assets and liabilities, were recorded within total assets and total liabilities in the Company's Consolidated Balance Sheets.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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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.

During fiscal years 2023 and 2024, the Company’s credit agreement had variable interest rates over the term of the debt.

Accordingly, interest expense was recorded using a weighted average effective interest rate by estimating total future cash flows related to the debt to determine interest expense.

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.

The significant assumptions used in the estimate were future SOFR rates and expected debt balance, as well as the length of time the debt would be outstanding.

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

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

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

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

Due to the interest rate increases over the debt term, the Company recorded more interest expense than interest paid in cash in fiscal years 2023 and 2024.

On June 24, 2024, Regis entered into a new credit agreement with a variable interest rate based on SOFR plus margin.

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.

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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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.

The Company has a valuation allowance on its deferred tax assets of $ 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 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.

6 unchanged sentences

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.

Net Income (Loss) Per Share:

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

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.

Comprehensive Income (Loss):

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

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

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

During fiscal years 2024, 2023, and 2022, the Company recorded foreign currency losses of $ 0.5 million, $ 0.3 million, and $ 0.6 million in income (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.

On July 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13 Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“ASC 326”).

This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology.

CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, such as accounts receivable.

The adoption of ASU 2016-13 did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Standards Not Yet Adopted:

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

In November 2023, the FASB issued ASU No.

2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures, which requires disclosure of significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and a description of other segment items (the difference between segment revenue less the segment expenses disclosed under the significant expense principle and each reported measure of segment profit or loss) by reportable segment, as well as disclosure of the title and position of the entity’s CODM and an explanation of how the CODM uses the reported measures of segment profit or loss in assessing segment performance and deciding how to allocate resources.

The pronouncement is effective for annual reporting periods in fiscal years beginning after December 15, 2023, and for interim periods in fiscal years beginning after December 15, 2024.

We do not expect the adoption of this pronouncement to impact our consolidated financial statements beyond the expansion of our reportable segment disclosures.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14 unchanged sentences

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.

Gift card breakage, the amount of gift cards which will not be redeemed, is recognized based on gift card balances with no activity over a 36-month basis.

In the fourth quarter of fiscal year 2024, the Company revised its estimate related to the gift card breakage and recognized $ 1.3 million of non-cash gift card revenue.

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

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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:

The following table is a rollforward of the allowance for credit losses for the periods indicated:

(Dollars in thousands)

Balance at beginning of period $ 7,297 $ 6,559

Provision for doubtful accounts (1) 608 967

Provision for franchisee rent (2) 1,538 1,358

Reclass of accrued rent (3) — 325

Recoveries 47 —

Other ( 75 ) 106

Write-offs ( 3,118 ) ( 1,659 )

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

(1) The provision for credit losses 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.

(3) The amounts billed in fiscal year 2023 and the related accrual were reclassified to allowance for credit losses.

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

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

Additions — 25

Amortization ( 2,749 ) ( 3,100 )

3 unchanged sentences

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.

Franchise fee revenue for fiscal years 2024, 2023, and 2022 was $ 6.5 million, $ 6.7 million, and $ 6.5 million, respectively.

Estimated revenue expected to be recognized in the future related to deferred franchise fees for open salons as of June 30, 2024, is as follows (in thousands):

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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 to receive additional proceeds related to salon migration 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.

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(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.

There was no tax impact in fiscal years 2024 or 2023 due to a valuation allowance.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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The related liability is included in accrued expenses as of June 30, 2024, 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:

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

2024 2023 2022

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(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.

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 gain (loss) on the sale of OSP.

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

9 unchanged sentences

Restricted cash 19,246 11,888

Inventory 818 1,681

Other 1,802 1,766

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

Total amortization expense related to intangible assets during fiscal years 2023, 2022 and 2021 was approximately $ 0.3 , $ 0.4 and $ 0.8 million, respectively.

Total amortization expense related to intangible assets during fiscal years 2024, 2023, and 2022 was approximately $ 0.3 million, $ 0.3 million, and $ 0.4 million, respectively.

As of June 30, 2024, future estimated amortization expense related to intangible assets is estimated as follows (in thousands):

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Balance at beginning of period $ 173,791 $ 174,360

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 ( 645 ) ( 569 )

Balance at end of period $ 173,146 $ 173,791

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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(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.

(1) During fiscal years 2024 and 2023, the Company incurred costs of $ 0.1 million and $ 1.6 million, respectively, 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

1 unchanged sentence

In fiscal years 2023, 2022 and 2021, franchise rental income and franchise rent expense were $ 111.4 , $ 130.8 and $ 127.4 million, respectively.

In fiscal years 2024, 2023, and 2022, franchise rental income and franchise rent expense were $ 95.3 million, $ 111.4 million, and $ 130.8 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.

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

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

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The weighted average remaining lease term was 5.05 years and 5.52 years, and the weighted average discount rate was 5.13 % and 4.55 % for all salon operating leases as of June 30, 2024, and 2023, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A lessee's ROU asset is subject to the same asset impairment guidance in ASC 360, Property, Plant, and Equipment, applied to other elements of property, plant, and equipment.

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 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of June 30, 2024, future operating lease commitments, including one renewal option for leases expected to be renewed, to be paid and received by the Company were as follows (in thousands):

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_______________________________________________________________________________

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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FINANCING ARRANGEMENTS

The Company's financing arrangements consists of the following:

Maturity Date 2023 2022 2023 2022

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

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

The Company's financing arrangements consist of the following:

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.

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.

$ 99,545 $ 176,830

_______________________________________________________________________________

(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 (the “2024 Credit Agreement”).

The 2024 Credit Agreement includes a $ 105.0 million term loan and a $ 25.0 million revolving credit facility, with a $ 10.0 million minimum liquidity covenant and is set to expire June 2029.

The Company incurred $ 14.2 million of refinancing fees (including $ 3.9 million of Original Issue Discount fee) that will be amortized on a straight-line basis over the term of the agreement.

The 2024 Credit Agreement is considered a troubled debt restructuring, which resulted in a $ 94.6 million ($ 39.83 per weighted average diluted share) gain on the extinguishment of the prior agreement.

Any unamortized financing fees that existed at the date of the new agreement were written off upon the signing date of the 2024 Credit Agreement.

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

In connection with the transition of the letters of credit, the available liquidity is reduced by $ 5.0 million dollars at June 30, 2024.

As of June 30, 2024, the Company had cash and cash equivalents of $ 10.1 million.

The $ 10.2 million drawn on the credit facility at June 30, 2024 related to restricted cash temporarily collateralizing letters of credit as the Company transitioned to the new lender.

See Note 16 for subsequent event related to letters of credit, cash collateralization, and revolver availability.

The interest rate on the 2024 Credit Agreement is based on secured overnight financing rate (SOFR) plus margin.

The margin applicable to 2024 Credit Agreement is subject to change based on the Company's total leverage ratio, remeasured annually on a predetermined date set by the lender.

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 SOFR base rate applicable to the debt has a floor of 2.5 % per annum.

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

The previous credit agreement utilized an interest rate margin that was subject to annual increases.

The margin applicable to term SOFR loans was 3.875 % through March 27, 2023.

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

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

The margin previously 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.

Due to the interest rate increasing over the debt term, the Company recorded more interest expense than interest paid in cash in fiscal years 2024 and 2023.

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

In connection with the 2024 Credit Agreement, the Company issued detachable stock warrants to the debt lenders.

See Note 14 for additional details.

The Company was in compliance with its covenants and other requirements of the financing arrangements as of June 30, 2024.

The Company's assets serve as collateral to the new credit facility.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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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.

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

Litigation and Settlements:

3 unchanged sentences

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.

During fiscal year 2024, the Company recorded $ 0.2 million of expense related to litigation and paid $ 0.2 million in fees related to settlements of claims.

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.

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

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.

5 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

2024 2023 2022

(Dollars in thousands)

Loss before income taxes

Income (loss) before income taxes

$ 91,279 $ ( 10,204 ) $ ( 41,231 )

1 unchanged sentence

$ 89,936 $ ( 11,998 ) $ ( 44,442 )

The (benefit) provision for income taxes consists of:

The provision (benefit) for income taxes consists of:

2024 2023 2022

5 unchanged sentences

$ 869 $ ( 655 ) $ 2,017

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:

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

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

2024 2023 2022

6 unchanged sentences

Stock-based compensation 0.2 ( 2.7 ) ( 2.8 )

Loss on investment in Luxembourg — — 29.3

Deferred tax rate remeasurement — ( 3.6 ) —

2 unchanged sentences

_______________________________________________________________________________

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

(1) The change in valuation allowance for fiscal year 2024 primarily relates to the utilization of federal and state net operating losses used to offset taxable income generated from the extinguishment of long-term debt.

(2) The ( 0.3 )% of other, net in fiscal year 2024 does not include the rate impact of any items in excess of 5% of computed tax.

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8 unchanged sentences

Operating lease liabilities 74,409 92,666

Interest expense carryforward 8,200 10,193

Other (2) 6,346 8,633

9 unchanged sentences

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(1) The decline in fiscal year 2024 is a result of US net operating loss utilization, primarily due to taxable income generated from the extinguishment of long-term debt.

(2) The $ 6.3 million of Other in fiscal year 2024 includes $ 3.0 million of deferred tax assets with a corresponding valuation allowance of the same amount related to discontinued operations.

2 unchanged sentences

At June 30, 2024, 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.

net operating loss carryforwards of approximately $ 102.9 million, $ 27.1 million, $ 8.5 million and $ 0.2 million, respectively.

The Company's federal loss carryforward consists of $ 12.3 million that will expire in fiscal year 2038 and $ 90.6 million that has no expiration.

The state loss carryforwards consist of $ 23.5 million that will expire from fiscal years 2025 to 2044 and $ 3.6 million that has no expiration.

The federal and state loss carryforwards reported in the financial statements are reduced for uncertain tax positions by $ 17.6 million and $ 2.6 million, respectively.

The Canada loss carryforward will expire from fiscal years 2036 to 2044.

13 unchanged sentences

Additions based on tax positions related to the current year 3 10

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

Additions (reductions) based on tax positions of prior years 12 ( 663 )

Reductions on tax positions related to the expiration of the statute of limitations ( 176 ) ( 127 )

2 unchanged sentences

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.

The Company recorded interest and penalties of approximately $ 0.1 million, $ 0.1 million, and $ 0.2 million, as reductions to the accrual, net of the respective reversal of previously accrued interest and penalties during fiscal years 2024, 2023, and 2022, respectively.

As of June 30, 2024, the Company had accrued interest and penalties related to unrecognized tax benefits of $ 0.6 million.

2 unchanged sentences

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

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

30 unchanged sentences

Total $ 2,110 $ 2,327

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.

The accumulated other comprehensive income (loss) for the deferred compensation contracts, consisting of primarily unrecognized actuarial income, was $ 0.6 million and $ 0.7 million at June 30, 2024 and 2023, 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.

Costs associated with this benefit included in general and administrative expense on the Consolidated Statements of Operations totaled $ 0.6 million, $ 0.6 million, and $ 0.5 million for fiscal years 2024, 2023, and 2022, respectively.

The fair value of the related obligations totaled $ 2.3 million and $ 2.3 million at June 30, 2024, and 2023, respectively, with $ 0.6 million and $ 0.6 million within accrued expenses at June 30, 2024, and 2023, respectively, and the remainder included in other non-current liabilities on the Consolidated Balance Sheets.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

EARNINGS PER SHARE

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

The Company's basic earnings per share is calculated as net income (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 (loss) divided by weighted average common shares and common share equivalents outstanding, which includes shares issued under the Company's stock-based compensation plans and warrants issued in connection with the June 2024 refinancing.

Stock-based awards and warrants 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.

For fiscal years 2023 and 2022, 24,636 and 30,425 common stock equivalents of dilutive common stock, respectively, were excluded from the diluted earnings per share calculation due to net loss from continuing operations.

22 unchanged sentences

RSUs 21.20 — 53.80

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

The fair value of market-based RSUs granted are estimated on the date of grant using the closing stock price on the date of grant.

The significant assumptions used in determining the estimated fair value of the market-based awards granted during fiscal years 2024, 2023, and 2022 were as follows:

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Expected dividend yield — % — % — %

Expected term of share options 6.0 - 7.9 years

Expected term of stock-based awards 5.8 - 6.7 years

6.0 - 7.9 years

6.1 - 7.7 years

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

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

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

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

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(Dollars in thousands)

SARs & SOs (1) $ 1,352 $ ( 241 ) $ 456

RSUs & PSUs 964 1,575 2,798

SARs (1) $ ( 63 ) $ 238 $ 49

SOs (2) 1,070 1,114 ( 290 )

RSUs 551 964 1,575

Total stock-based compensation expense (recorded in general and administrative) 1,558 2,316 1,334

2 unchanged sentences

_______________________________________________________________________________

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

(1) The credit balance in fiscal year 2024 is due to adjustments made for quarterly revaluations resulting from a decrease in stock price during the year.

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

(3) Federal statutory income tax rate utilized of 0 % due to a valuation allowance in fiscal years 2024, 2023, and 2022.

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Outstanding balance at June 30, 2023 105 $ 129.00

Granted 600 1.52

Forfeited/Expired — —

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Unvested awards, net of estimated forfeitures 32 $ 41.32 7.79 $ ( 587 )

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.

As of June 30, 2024, there was $ 0.1 million of unrecognized expense related to SARs that is to be recognized over a weighted average period of one year .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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Outstanding balance at June 30, 2023 150 $ 32.27

Granted 1,644 1.43

Forfeited/Expired ( 1 ) 30.40

Exercised — —

Outstanding balance at June 30, 2024 149 $ 32.29 7.95 $ ( 1,385 )

1 unchanged sentence

Unvested awards, net of estimated forfeitures 65 $ 34.33 7.86 $ ( 737 )

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.

As of June 30, 2024, there was $ 0.6 million of unrecognized expense related to SOs that is to be recognized over a weighted average period of one year .

Restricted Stock Units:

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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:

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Outstanding balance at June 30, 2023 39 $ 126.83

Granted 13 21.20

Forfeited ( 1 ) 22.65

4 unchanged sentences

As of June 30, 2024, there was $ 0.3 million of unrecognized expense related to RSUs that is expected to be recognized over a weighted average period of 1.7 years.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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:

(in thousands) Weighted

Fair Value Aggregate Intrinsic

(in thousands)

Outstanding balance at June 30, 2022 74 $ 9.82

Forfeited ( 74 ) 9.82

Outstanding balance at June 30, 2023 — $ — $ —

Vested at June 30, 2023 — $ — $ —

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

The fair value of the shares vested was $ 0.3 million, $ 0.5 million and $ 5.8 million in fiscal years 2024, 2023, and 2022, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SHAREHOLDERS' DEFICIT

SHAREHOLDERS' EQUITY (DEFICIT)

Authorized Shares and Designation of Preferred Class:

The Company has 5.0 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.

Stock Warrants Issues in Connection with Long-Term Debt:

In connection with the new credit agreement, the Company issued detachable warrants to affiliates of TCW Asset Management Company, LLC, and Asilia Investments.

Pursuant to the warrants, the holders can purchase up to an aggregate 407,542 shares of the Company’s common stock, par value $ 0.05 per share, at an exercise price equal to $ 7.00 per share.

The warrants are exercisable for a seven-year period beginning June 24, 2024.

The warrants may also be exercised on a cashless basis under certain circumstances under the agreement.

In addition, in connection with the issuance of the warrants, the Company has granted an exemption in favor of each holder pursuant to Section 36 of the Tax Benefits Preservation Plan, dated January 29, 2024, among the Company and Equiniti Trust Company, LLC (the “Plan”), such that neither Holder was deemed to be an “Acquiring Person” (as defined in the Plan) solely in connection with (i) the issuance of the warrants nor (ii) the acquisition of beneficial ownership of securities of the Company pursuant to the exercise of the warrants.

The warrants and the shares of common stock issuable upon the exercise of such warrants have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), and may not be sold absent registration or an applicable exemption from the registration requirements of the Securities Act.

Based in part upon the representations of each holder in each warrant, the offering and sale of each warrant is exempt from registration under Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation D promulgated under the Securities Act.

The warrants were valued at $ 1.5 million using a relative fair value method, and were accounted for through additional paid-in capital.

Further, the related financing fees incurred as a result of warrant issuance is recorded through a contra-equity account, and amounts to $ 0.2 million.

Prior to the second anniversary of the issue date, the Company may call for cancellation up to an aggregate 203,771 shares of Common Stock underlying the warrants for consideration equal to $ 15.00 per share;

provided, that the volume weighted average price on the trading day immediately preceding the date the Company delivers a written call notice to a holder exceeds $ 20.00 .

As of June 30, 2024 the Company has no intentions on exercising this call provision.

The Company will reassess this intention on a quarterly basis.

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 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 no t issue any shares under this prospectus.

The share issuance program expired on February 10, 2024.

In May 2000, the Company's Board approved a stock repurchase program with no stated expiration date.

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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.

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, goodwill and long-lived asset impairment charges, and the benefit from the Company's debt refinancing.

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

16 unchanged sentences

Total 25,934 21,010 ( 1,799 )

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

Unallocated benefits (expenses) 94,138 ( 3,050 ) ( 9,843 )

Depreciation and amortization ( 3,945 ) ( 7,716 ) ( 6,224 )

2 unchanged sentences

Interest expense ( 25,393 ) ( 22,141 ) ( 12,914 )

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

Income tax (expense) benefit ( 869 ) 655 ( 2,017 )

Income (loss) from discontinued operations 1,993 3,958 ( 39,398 )

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

Total net income (loss) $ 91,060 $ ( 7,385 ) $ ( 85,857 )

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

11 unchanged sentences

Total $ 202,982 $ 3,664 $ 233,326 $ 6,422 $ 275,967 $ 12,835

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SUBSEQUENT EVENTS:

Workforce Reduction:

In August 2024, the Company executed a workforce reduction.

As a result of the workforce reduction, the Company expects to incur lower salary and wage related expenses, partially offset by severance expense and investments back into the business.

We are unable to estimate the net impact of workforce reduction, severance expense and related investments into the business.

Revolving Credit Facility/Restricted Cash:

As the Company transitioned to its new lender in June 2024, the Company temporarily drew $ 10.2 million on the revolving credit facility to cash collateralize its outstanding letters of credit issued by the Company’s former lenders.

This cash is included in restricted cash as of June 30, 2024.

Subsequent to June 30, 2024, under the 2024 Credit Agreement, the Company issued letters of credit in the amount of $ 9.25 million and paid down the revolving credit facility by $ 5.8 million and restricted cash was reduced accordingly.

As of August 23, 2024, the Company's current revolver availability is $ 15.6 million.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data