REGIS CORP 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. BUSINESS DESCRIPTION Regis Corporation (the Company) franchises, owns, and operates beauty salons. As of June 30, 2025, the Company franchised or owned 3,941 salons in North America and the United Kingdom. Each of the Company's salon concepts generally offer similar salon products and services and serve the mass market. As of June 30, 2025, we had 1,777 corporate employees worldwide. See discussion within Part I, Item 1 of this Form 10-K. In December 2024, the Company acquired the Alline Salon Group (the Alline Acquisition), its largest franchisee, consisting of 314 salons. The transaction provides Regis with a turn-key operating infrastructure and gets the Company closer to salon operations alongside franchisees, and the salon portfolio provides a testing ground for brand and operational initiatives. On June 30, 2022, the Company sold its Opensalon ® Pro (OSP) software-as-a-service solution to Soham Inc. (Zenoti). 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. 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 received $8.5 million in additional proceeds related to salons migrating to Zenoti. The Zenoti migration was successfully completed in 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. The Company shifted its product business from a wholesale model to a third-party distribution model as part of its asset-light transformation. In fiscal year 2022, the Company exited its distribution centers and ceased selling products to franchisees. Franchisees source product from a third-party distribution partner and the Company receives a royalty payment based on franchisee purchases. This change has significantly decreased both the Company's franchise product revenue and general and administrative expense, including the franchise distribution costs discussed in Note 1 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. In fiscal year 2023, the Company experienced an inventory reserve charge of $1.2 million related to the exit of the distribution centers. 29 Table of Contents RESULTS OF OPERATIONS The Company reports its operations in two operating segments: franchise salons and company-owned salons. COVID-19 Impact: The global coronavirus pandemic (COVID-19) had an adverse impact on operations. As a result, in fiscal year 2023, the Company received a $1.1 million grant from the state of North Carolina included in Other, net on the Consolidated Statements of Operations in Part II, Item 8, of this Form 10-K. System-wide results Our results are impacted by our system-wide sales, which include sales by all points of distribution, whether owned by our franchisees or the Company. While we do not record sales by franchisees as revenue, and such sales are not included in our Consolidated Financial Statements, we believe that this operating measure is important in obtaining an understanding of our financial performance. We believe system-wide sales information aids in understanding how we derive royalty revenue and in evaluating performance. In fiscal year 2025, a net 430 franchise salons, excluding any impact from the Alline Acquisition, have closed. An additional 314 salons were acquired as part of the Alline Acquisition, which will reduce future royalty income. The Alline Acquisition will increase future company-owned salon revenue and expenses. The following table summarizes system-wide revenue and system-wide same-store sales by concept: Fiscal Years 2025 2024 2023 (Dollars in millions) System-wide revenue $ 1,104.9 $ 1,179.5 $ 1,230.5 Supercuts 1.3 % 1.6 % 6.9 % SmartStyle (6.1) (3.5) (2.5) Portfolio Brands (0.6) 2.0 5.5 Total system-wide same-store sales (1) (0.6) % 0.7 % 4.4 % ____________________________________________________________________________ (1) System-wide same-store sales are calculated as the total change in sales for system-wide franchise and company-owned locations that were open on a specific day of the week during the current period and the corresponding prior period. System-wide same-store sales are the sum of the system-wide same-store sales computed on a daily basis. Franchise salons that do not report daily sales are excluded from same-store sales. System-wide same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation. 30 Table of Contents Consolidated Results of Operations The following table sets forth, for the periods indicated, certain information derived from our Consolidated Statements of Operations. The percentages are computed as a percent of total consolidated revenues, except as otherwise indicated, and the increase (decrease) is measured in basis points. Variances calculated on amounts shown in millions may result in rounding differences. Fiscal Years 2025 2024 2023 2025 2024 2023 2025 2024 (Dollars in millions) % of Total Revenues (1) (Decrease) Increase Royalties $ 58.2 $ 64.1 $ 66.0 27.7 % 31.6 % 28.4 % (390) 320 Fees 9.7 10.2 11.3 4.6 5.0 4.8 (40) 20 Product sales to franchisees — 0.5 2.8 — 0.2 1.2 (20) (100) Advertising fund contributions 21.9 25.7 31.7 10.4 12.7 13.6 (230) (90) Franchise rental income 76.6 95.3 111.4 36.5 46.9 47.7 (1,040) (80) Company-owned salon revenue 43.7 7.3 10.1 20.8 3.6 4.3 1,720 (70) Cost of product sales to franchisees — 0.4 3.5 N/A 80.0 125.0 N/A (4,500) Inventory reserve — — 1.2 — — 0.5 — (50) General and administrative 46.8 45.4 50.8 22.3 22.4 21.8 (10) 60 Rent 10.5 5.5 9.2 5.0 2.7 3.9 230 (120) Advertising fund expense 21.9 25.7 31.7 10.4 12.7 13.6 (230) (90) Franchise rent expense 76.6 95.3 111.4 36.5 46.9 47.7 (1,040) (80) Company-owned salon expense 31.1 5.1 8.8 14.8 2.5 3.8 1,230 (130) Depreciation and amortization 3.0 3.9 7.7 1.4 1.9 3.3 (50) (140) Long-lived asset impairment 0.4 0.8 0.1 0.2 0.4 — (20) 40 Operating income (2) 19.9 20.9 8.8 9.5 10.3 3.8 (80) 650 Interest expense (20.3) (25.4) (22.1) (9.7) (12.5) (9.5) 280 (300) Gain on extinguishment of long-term debt, net — 94.6 — — 46.6 — N/A N/A Other, net 1.8 (0.2) 1.4 0.9 (0.1) 0.6 100 (70) Income tax benefit (expense) (3) 115.5 (0.9) 0.7 55.0 1.0 5.5 N/A N/A Income from discontinued operations 6.5 2.0 4.0 3.1 1.0 1.7 210 (70) Net income (loss) (2) 123.5 91.1 (7.4) 58.8 44.9 (3.2) 1,390 4,810 ____________________________________________________________________________ (1) Cost of product sales to franchisees is computed as a percent of product sales to franchisees. (2) Total is a recalculation; line items calculated individually may not sum to total due to rounding. (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. 31 Table of Contents Fiscal Year Ended June 30, 2025, Compared with Fiscal Year Ended June 30, 2024 Royalties During fiscal year 2025, royalties decreased $5.9 million, or 9.2%, mainly due to a decrease in franchise salon count primarily caused by franchise salon closures and the Alline Acquisition. Fees During fiscal year 2025, fees decreased $0.5 million, or 4.9%, primarily due to salon closures and lower rebate fees from franchise product vendors, offset partially by terminated franchise fees related to the acquisition of the Alline salons. Product Sales to Franchisees Product sales to franchisees decreased $0.5 million, or 100.0%, during fiscal year 2025, due to the Company's shift in its product business to a third-party distribution model. Advertising Fund Contributions Advertising fund contributions decreased $3.8 million, or 14.8%, during fiscal year 2025, primarily due to the decrease in franchise salon count and a decrease in advertising fund contribution rates. Franchise Rental Income During fiscal year 2025, franchise rental income decreased $18.7 million, or 19.6%, primarily due to the decrease in franchise salon count and franchisees signing their own leases. Company-Owned Salon Revenue During fiscal year 2025, company-owned salon revenue increased $36.4 million, or 498.6%, due primarily to the Alline Acquisition. Cost of Product Sales to Franchisees Cost of product sales to franchisees decreased $0.4 million, or 100.0%, as a result of the Company's shift in its product business to a third-party distribution model. General and Administrative The increase of $1.4 million, or 3.1%, in general and administrative expense during fiscal year 2025 was primarily due to acquisition related costs of $1.4 million, as well as operating expenses related to Alline, offset partially by company-wide cost saving measures. Rent The increase of $5.0 million, or 90.9%, in rent expense during fiscal year 2025 was primarily due to Alline Acquisition salon rent expense. Advertising Fund Expense Advertising fund expense decreased $3.8 million, or 14.8%, during fiscal year 2025, primarily due to the decrease in franchise salon count and a decrease in advertising fund contribution rates. 32 Table of Contents Franchise Rent Expense During fiscal year 2025, franchise rent expense decreased $18.7 million, or 19.6%, primarily due to the decrease in franchise salon count and franchisees signing their own leases. Company-Owned Salon Expense Company-owned salon expense increased $26.0 million, or 509.8%, during fiscal year 2025, as a result of the strategic Alline Acquisition. Depreciation and Amortization The decrease of $0.9 million, or 23.1%, in depreciation and amortization during fiscal year 2025 was primarily due to company-owned salon closures, partially offset by the Alline Acquisition. Long-Lived Asset Impairment The Company recorded long-lived asset impairment charges of $0.4 million and $0.8 million in fiscal years 2025 and 2024, respectively. The decrease 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 $5.1 million decrease in interest expense during fiscal year 2025 was primarily due to less debt outstanding. 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 Other, net improved $2.0 million in fiscal year 2025, primarily due to unclaimed property and corporate office sublease income. Income Tax Benefit (Expense) During fiscal year 2025, the Company recognized an income tax benefit of $115.5 million with a corresponding effective tax rate of (7,519.3)% primarily due to the partial release of the valuation allowance on our deferred tax assets, compared to recognizing an income tax expense of $0.9 million, with a corresponding effective tax rate of 1.0% during fiscal year 2024. See Note 10 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. Income from Discontinued Operations, net of tax The Company recorded income from discontinued operations, net of tax of $6.5 million and $2.0 million in fiscal years 2025 and 2024, respectively. Income in fiscal year 2025 is due to proceeds from the sale of OSP related to the number of salons migrating to the Zenoti platform, partially offset by a non-cash income tax expense allocated to discontinued operations, and income in fiscal year 2024 is due to the receipt of sales proceeds related to the sale of OSP that had previously been held back for general indemnity provisions. See Note 3 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. 33 Table of Contents Results of Operations by Segment Based on our internal management structure, we report two segments: franchise salons and company-owned salons. See Note 15 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. Significant results of continuing operations are discussed below with respect to each of these segments. Franchise Salons Fiscal Years 2025 2024 2023 2025 2024 (Dollars in millions) (Decrease) Increase (1) Royalties $ 58.2 $ 64.1 $ 66.0 $ (5.9) $ (1.9) Fees 9.7 10.2 11.3 (0.5) (1.1) Product sales to franchisees — 0.4 2.8 (0.4) (2.4) Advertising fund contributions 21.9 25.7 31.7 (3.8) (6.0) Franchise rental income 76.6 95.3 111.4 (18.7) (16.1) Total franchise revenue (1) $ 166.4 $ 195.7 $ 223.2 $ (29.3) $ (27.5) Franchise same-store sales (2) (0.6) % 0.6 % 4.4 % Franchise adjusted EBITDA $ 28.4 $ 27.8 $ 25.1 $ 0.6 $ 2.7 Total franchise salons 3,647 4,391 4,795 (744) (404) _______________________________________________________________________________ (1) Total is a recalculation; line items calculated individually may not sum to total due to rounding. (2) Franchise same-store sales are calculated as the total change in sales for franchise locations that were open on a specific day of the week during the current period and the corresponding prior period. Year-to-date franchise same-store sales are the sum of the franchise same-store sales computed on a daily basis. Franchise salons that do not report daily sales are excluded from same-store sales. Franchise same-store sales are calculated in local currencies to remove foreign currency fluctuations from the calculation. Fiscal Year Ended June 30, 2025, Compared with Fiscal Year Ended June 30, 2024 Franchise Revenue Franchise revenue decreased $29.3 million during fiscal year 2025. The decrease in franchise revenue was primarily due to the decrease in franchise rental income, royalties, and advertising fund collections as a result of lower salon count, primarily driven by the Alline portfolio moving to the Company-owned segment. During fiscal year 2025, franchisees constructed (net of relocations) and closed 18 and 448 franchise salons, respectively. Franchise Adjusted EBITDA During fiscal year 2025, franchise adjusted EBITDA totaled $28.4 million, an improvement of $0.6 million compared to fiscal year 2024. The improvement is primarily due to a decrease in general and administrative expense, partially offset by lower royalties and fees. 34 Table of Contents Company-Owned Salons Fiscal Years 2025 2024 2023 2025 2024 (Dollars in millions) Increase (Decrease) (1) Total revenue $ 43.7 $ 7.3 $ 10.1 $ 36.4 $ (2.8) Company-owned salon adjusted EBITDA $ 3.2 $ (0.3) $ (1.8) $ 3.5 $ 1.5 Total company-owned salons 294 17 68 277 (51) _______________________________________________________________________________ (1) Total is a recalculation; line items calculated individually may not sum to total due to rounding. Fiscal Year Ended June 30, 2025, Compared with Fiscal Year Ended June 30, 2024 Company-Owned Salon Revenue Company-owned salon revenue improved $36.4 million in fiscal year 2025, primarily due to the Alline Acquisition, partially offset by the closure of loss-generating company-owned salons. Company-Owned Salon Adjusted EBITDA During fiscal year 2025, company-owned salon adjusted EBITDA improved $3.5 million, primarily due to the Alline Acquisition, partially offset by the wind-down of underperforming company-owned stores. Recent Accounting Pronouncements Recent accounting pronouncements are discussed in Note 1 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. 35 Table of Contents LIQUIDITY AND CAPITAL RESOURCES 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 (the 2024 Credit Agreement). 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. The agreement was amended in December 2024 in connection with the Alline Acquisition (the December 2024 Amendment). See Note 8 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. Sources of Liquidity Funds generated by operating activities, available cash and cash equivalents and our borrowing agreements are our most significant sources of liquidity. The Company believes it has sufficient liquidity, cash on hand, and borrowing capacity to meet its obligations in the next twelve months and until maturity of the credit agreement in June 2029. As of June 30, 2025, cash and cash equivalents were $17.0 million, with $16.0 million and $1.0 million within the United States and Canada, respectively. As of June 30, 2025, the Company's borrowing arrangements include a $118.9 million term loan, $5.4 million of paid-in-kind interest, 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, 2025, the unused available credit under the revolving credit facility was $19.0 million and total liquidity per the agreement was $25.9 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. Uses of Cash The Company closely manages its liquidity and capital resources. The Company's liquidity requirements depend on key variables, including the performance of the business, the level of investment needed to support its business strategies, credit facilities and borrowing arrangements, and working capital management. The Company has a disciplined approach to capital allocation, which focuses on ensuring we can meet our interest obligations and investing in key priorities to support the Company's strategic plan as discussed within Part I, Item 1. Additional information about the Company's current use of cash is described under "Sources of Liquidity." Cash Requirements The Company's most significant contractual cash requirements as of June 30, 2025, were lease commitments and interest payments. See Notes 6 and 8 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K for further detail. 36 Table of Contents Cash Flows Cash Flows from Operating Activities During fiscal year 2025, cash provided by operating activities was $13.7 million. Cash provided by operations improved year over year due primarily to an $8.4 million build in restricted ad fund cash, our lower cost structure, less cash used for working capital, and lower cash interest. Cash Flows from Investing Activities During fiscal year 2025, cash used in investing activities of $11.5 million was primarily related to $18.6 million used in the Alline Acquisition, partially offset by $8.5 million received related to the sale of OSP. Cash Flows from Financing Activities During fiscal year 2025, cash provided by financing activities of $3.6 million was primarily a result of proceeds from issuance of long-term debt, partially offset by net payments on the revolving credit facility. 37 Table of Contents Financing Arrangements Financing activities are discussed in Note 8 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. Derivative activities are discussed in Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk." The Company's financing arrangements consist of the following: Twelve months ended June 30, 2025 2024 2025 2024 (Cash interest rate %) (Dollars in thousands) Term loan (1) 9.14% 9.68% $ 118,875 $ 105,000 Deferred financing fees (12,174) (14,244) Paid-in-kind interest 5,376 53 Term loan, net 112,077 90,809 Revolving credit facility (1) 9.14% 9.68% 1,030 10,237 Fair value of warrants issued to lenders (2,314) (1,501) Total debt, net $ 110,793 $ 99,545 less: Long-term debt, current portion (1,100) — Long-term debt, net $ 109,693 $ 99,545 _______________________________________________________________________________ (1) The term loan and revolving credit facility mature 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 which includes a $25.0 million revolving credit facility, a term loan of $105.0 million with a $10.0 million minimum liquidity covenant that expires in June 2029. On December 19, 2024, the Company amended the 2024 Credit Agreement for an additional $15.0 million term loan. The 2024 Credit Agreement, as amended, includes typical provisions and financial covenants, including leverage and fixed-charge coverage ratio covenants. As of June 30, 2025, the unused available credit under the revolving credit facility was $19.0 million, outstanding letters of credit were $6.0 million, and total liquidity per the agreement was $25.9 million. The interest rate on the 2024 Credit Agreement is based on the 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' equity (deficit) at fiscal year end, was as follows: As of June 30, Debt to Capitalization (1) 2025 40.3 % 2024 67.0 % 2023 125.1 % _______________________________________________________________________________ (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, 2025, compared to June 30, 2024, was primarily due to higher total shareholder's equity as of June 30, 2025, as a result of earnings during the 2025 period. 38 Table of Contents Contractual Obligations and Commercial Commitments On-Balance Sheet Obligations Our debt obligations are primarily composed of our 2024 Credit Agreement, as amended, at June 30, 2025. Non-current deferred benefits of $5.6 million includes $1.6 million related to a non-qualified deferred salary plan, a salary deferral program of $1.6 million and a bonus deferral plan of $2.4 million related to established contractual payment obligations under retirement and severance agreements for a small number of employees. See Note 4 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. Operating leases primarily represent long-term obligations for the rental of salons, including leases for company-owned locations, as well as salon franchisee lease obligations, which are reimbursed to the Company by franchisees. Regarding franchisee subleases, we generally retain the right to the related salon assets, net of any outstanding obligations, in the event of a default by a franchise owner. Declines in system-wide revenue in certain brands over the past few years have increased the risk of default by franchisees, which may be material. The Company has unfunded deferred compensation contracts covering certain management and executive personnel. We cannot predict the timing or amount of future payments related to these contracts. See Note 11 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. As of June 30, 2025, we have liabilities for uncertain tax positions. We are not able to reasonably estimate the amount by which the liabilities will increase or decrease over time; however, at this time, we do not expect a significant payment related to these obligations within the next fiscal year. See Note 10 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. Off-Balance Sheet Arrangements Under the 2024 Credit Agreement, as amended, 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. We are a party to a variety of contractual agreements that we may be obligated to indemnify the other party for certain matters, which indemnities may be secured by operation of law or otherwise, in the ordinary course of business. These contracts primarily relate to our commercial contracts, operating leases and other real estate contracts, financial agreements, agreements to provide services and agreements to indemnify officers, directors, and employees in the performance of their work. While our aggregate indemnification obligation could result in a material liability, we are not aware of any current matter that we expect will result in a material liability. We do not have any unconditional purchase obligations or significant other commercial commitments such as standby repurchase obligations. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet financial arrangements or other contractually narrow or limited purposes at June 30, 2025. 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. 39 Table of Contents Dividends The Company has not declared a quarterly dividend payment since December 2013. Share Repurchase Program In May 2000, the Board approved a stock repurchase program with no stated expiration date. Since that time and through June 30, 2025, the Board has authorized $650.0 million to be expended for the repurchase of the Company's stock under this program. All repurchased shares become authorized but unissued shares of the Company. The timing and amounts of any repurchases depend on many factors, including the market price of the common stock and overall market conditions. During fiscal year 2025, the Company did not repurchase shares. As of June 30, 2025, 1.5 million shares have been cumulatively repurchased for $595.4 million, and $54.6 million remained authorized for repurchase. The Company does not anticipate repurchasing shares of common stock for the foreseeable future. 40 Table of Contents CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States. In preparing the Consolidated Financial Statements, we are required to make various judgments, estimates and assumptions that could have a significant impact on the results reported in the Consolidated Financial Statements. We base these estimates on historical experience and other assumptions believed to be reasonable under the circumstances. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the accounting estimates are made, and (2) other materially different estimates could have been reasonably made or material changes in the estimates are reasonably likely to occur from period to period. Changes in these estimates could have a material effect on our Consolidated Financial Statements. Our significant accounting policies can be found in Note 1 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. We believe the following accounting policies are most critical to aid in fully understanding and evaluating our reported financial condition and results of operations. Goodwill As of June 30, 2025, and 2024, the franchise reporting unit had $173.2 million and $173.1 million of goodwill, respectively, and the company-owned segment had $10.3 million goodwill relating to the Alline Acquisition as of June 30, 2025. See Note 5 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. The Company assesses goodwill impairment on an annual basis as of April 30, and between annual assessments if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Goodwill impairment assessments are performed at the reporting unit level, which is the same as the Company's operating segments. The goodwill assessment involves a one-step comparison of the reporting unit's fair value to its carrying value, including goodwill (Step 1). If the reporting unit's fair value exceeds its carrying value, no further procedures are required. However, if the reporting unit's fair value is less than the carrying value, an impairment charge is recorded for the difference between the fair value and carrying value of the reporting unit. In applying the goodwill impairment assessment, the Company may assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting units is less than its carrying value (Step 0). Qualitative factors may include, but are not limited to, economic, market and industry conditions, cost factors, and overall financial performance of the reporting unit. If after assessing these qualitative factors, the Company determines it is more likely than not that the carrying value is less than the fair value, then performing Step 1 of the goodwill impairment assessment is unnecessary. The carrying value of each reporting unit is based on the assets and liabilities associated with the operations of the reporting unit, including allocation of shared or corporate balances among reporting units. Allocations are generally based on the number of salons in each reporting unit as a percent of total salons or expenses of the reporting unit as a percentage of total company expenses. The Company calculates estimated fair values of the reporting units based on discounted cash flows utilizing estimates in annual revenue, fixed expense rates, allocated corporate overhead, franchise and company-owned salon counts, and long-term growth rates for determining terminal value. Where available and as appropriate, comparative market multiples are used in conjunction with the results of the discounted cash flows. The Company engages third-party valuation consultants to assist in evaluating the Company's estimated fair value calculations. See Note 1 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. 41 Table of Contents Long-Lived Assets, Excluding Goodwill The Company follows the guidance in ASC 360, Property, Plant, and Equipment and applies the guidance to property, plant, and equipment as well as right of use (ROU) assets. 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 2025, 2024, and 2023 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 and other factors. The period of time used to determine the estimates of the future cash flows for the recoverability test was based on the remaining useful life of the primary asset of the group, which was the ROU asset in all cases. The second step of the long-lived asset impairment test requires that the fair value of the asset group be estimated when determining the amount of any impairment loss. For the salon asset groups that failed the recoverability test, an impairment loss was measured as the amount by which the carrying amount of the asset group exceeds its fair value. The Company applied the fair value guidance within ASC 820-10 to determine the fair value of the asset group from the perspective of a market-participant considering, among other things, appropriate discount rates, multiple valuation techniques, the most advantageous market, and assumptions about the highest and best use of the asset group. To determine the fair value of the salon asset groups, the Company utilized market-participant assumptions rather than the Company's own assumptions about how it intends to use the asset group. The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include the market rent of comparable properties and a discount rate. The fair value of the salon long-lived asset group is estimated using market participant methods based on the best information available. The fair value of the 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, 2025. During fiscal years 2025, 2024, and 2023, the Company recognized long-lived asset impairment charges of $0.4 million, $0.8 million, and $0.1 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. Additionally, the impairment losses did not reduce the carrying amount of an individual asset below its fair value, including the ROU assets included in the salon asset groups. Assessing the long-lived assets for impairment requires management to make assumptions and to apply judgment which can be affected by economic conditions and other factors that can be difficult to predict. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions it uses to calculate impairment losses for its long-lived assets, including its ROU assets. If actual results are not consistent with the estimates and assumptions used in the calculations, the Company may be exposed to future impairment losses that could be material. 42 Table of Contents Income Taxes Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the Consolidated Financial Statements or income tax returns. Deferred income tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using currently enacted tax rates in effect for the years in which the differences are expected to reverse. We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. The Company evaluates all evidence, including recent financial performance, the existence of cumulative year losses and our forecast of future taxable income, to assess the need for a valuation allowance against our deferred tax assets. While the determination of whether to record a valuation allowance is not fully governed by a specific objective test, accounting guidance places significant weight on recent financial performance. The Company has a valuation allowance on its deferred tax assets amounting to $60.5 million and $181.8 million at June 30, 2025, and 2024, respectively. Significant changes to the valuation allowance that occurred during fiscal year 2025 are as follows: • We have determined that it is more likely than not that the majority of our U.S. federal and state deferred tax assets will be realizable as of June 30, 2025. In determining the need, or continued need, for a valuation allowance, we considered the weighting of the positive and negative evidence, which includes, among other things, recent historical income and losses, future growth, forecasted earnings and expected future taxable income. As of June 30, 2025, we achieved three years of cumulative U.S. income when considering pre-tax income adjusted for permanent differences and other comprehensive losses. Based on all available positive and negative evidence, having demonstrated sustained profitability, which is objective and verifiable, and taking into account anticipated future earnings, we concluded that it is more likely than not that the majority of our U.S. federal and state deferred tax assets will be realizable. As such, we released $110.2 million of our valuation allowance associated with the U.S. federal and state deferred tax assets. A valuation allowance will remain on certain U.S. tax credit carryforwards and state deferred tax assets in which we have concluded that it is more likely than not that they will expire unused. • We have determined that it is more likely than not that a portion of our Canadian deferred tax assets will be realizable as of June 30, 2025, and released $6.1 million of our Canadian valuation allowance. The Company reserves for unrecognized tax benefits, interest, and penalties related to anticipated tax audit positions in the U.S. and other tax jurisdictions based on an estimate of whether additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of these liabilities would result in tax benefits being recognized in the period in which it is determined that the liabilities are no longer necessary. If the estimate of unrecognized tax benefits, interest, and penalties proves to be less than the ultimate assessment, additional expenses would result. Inherent in the measurement of deferred balances are certain judgments and interpretations of tax laws and published guidance with respect to the Company's operations. Income tax expense is primarily the current tax payable for the period and the change during the period in certain deferred tax assets and liabilities. See Note 10 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. 43 Table of Contents