What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2020-08-31 compared with 2019-08-27 · 790 added, 520 removed, 733 unchanged (64% of the section changed)

4 unchanged sentences

Consolidated Statement of Operations for each of the three years in the period ended June 30, 2020

Consolidated Statement of Comprehensive Income (Loss) for each of the three years in the period ended June 30, 2019

Consolidated Statement of Comprehensive (Loss) Income for each of the three years in the period ended June 30, 2020

Consolidated Statement of Shareholders' Equity for each of the three years in the period ended June 30, 2020

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Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Regis Corporation and its subsidiaries (the “Company”) as of June 30, 2019 and June 30, 2018, and the consolidated statements of operations, of comprehensive income (loss), of sharehoders’ equity, and of cash flows for each of the three years in the period ended June 30, 2019, including the related notes (collectively referred to as the “consolidated financial statements”).

We have audited the accompanying consolidated balance sheet of Regis Corporation and its subsidiaries (the “Company”) as of June 30, 2020 and 2019, and the related consolidated statements of operations, of comprehensive (loss) income, of shareholders' equity and of cash flows for each of the three years in the period ended June 30, 2020, including the related notes (collectively referred to as the “consolidated financial statements”).

We also have audited the Company's internal control over financial reporting as of June 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2019 and June 30, 2018 and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2019 in conformity with accounting principles generally accepted in the United States of America.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2020 in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for revenues from contracts with customers in 2019.

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases as of July 1, 2019.

Basis for Opinions

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Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Goodwill Impairment Assessment - Company-Owned Reporting Unit

As described in Notes 1 and 5 to the consolidated financial statements, the Company’s consolidated goodwill balance was $345.7 million at June 30, 2019, and the goodwill associated with the Company-owned reporting unit was $117.8 million.

The Company performs its annual impairment assessment as of April 30.

For the fiscal year 2019 annual impairment assessment, due to the transformational efforts completed during the year, the Company elected to forgo the optional Step 0 assessment and performed the quantitative impairment analysis on the Company-owned units.

The Company compared the carrying value of the reporting units, including goodwill, to their estimated fair value.

Management disclosed that the results of these assessments indicated that the estimated fair value of the Company’s reporting units exceeded their carrying value and the Company-owned reporting unit had headroom of approximately 20%.

The fair value of the Company-owned reporting unit was determined based on a discounted cash flow analysis.

The key assumptions used in determining fair value were the number and pace of salons sold to franchisees and proceeds for salon sales.

The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the Company-owned reporting unit is a critical audit matter are there was significant judgment by management when developing the fair value measurement of the reporting unit.

This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to management’s discounted future cash flow model and significant assumptions, including the number and pace of salons sold to franchisees and proceeds for salon sales.

In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained from these procedures.

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Goodwill Impairment Assessment as of March 31, 2020 – Franchise Reporting Unit

As described in Notes 1 and 5 to the consolidated financial statements, the Company’s consolidated goodwill balance was $227.5 million as of June 30, 2020, which is fully attributed to the Franchise reporting unit.

Management assesses goodwill impairment on an annual basis as of April 30, 2020, 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.

During the third quarter of fiscal year 2020, the Company determined a triggering event occurred, resulting in quantitative impairment tests performed over the goodwill.

This determination was made considering the reduced sales and profitability projections for the reporting unit, driven by the COVID-19 pandemic and related economic disruption.

As a result of the triggering event impairment testing, the Franchise reporting unit was determined to have a fair value that exceeded carrying value by approximately 50 percent.

The fair value of the Franchise reporting unit was determined based on a combination of a discounted cash flow model and a market model.

The significant assumptions used in determining fair value for the March 31, 2020 assessment were the, number of salons to be sold to franchisees and the discount rate.

Management subsequently updated the triggering event impairment assessment with its annual impairment test of the Franchise reporting unit as of April 30, 2020.

The principal considerations for our determination that performing procedures relating to the goodwill triggering event impairment assessment of the Franchise reporting unit is a critical audit matter are the significant judgment by management when determining the fair value measurement of the reporting unit, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to (i) management’s discounted cash flow model (ii) significant assumptions related to the number of salons to be sold to franchisees and the discount rate.

In addition, the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Company’s reporting units.

These procedures also included, among others, testing management’s process for determining fair value of the reporting unit;

evaluating the appropriateness of the discounted future cash flow model;

testing the completeness, accuracy, and relevance of underlying data used in the model;

and evaluating the significant assumptions used by management, including number and pace of salons sold to franchisees and proceeds for salon sales.

Evaluating management’s assumptions related to the number and pace of salons sold to franchisees and proceeds for salon sales involved evaluating whether the assumptions used by management were reasonable considering current and past performance of the reporting unit and industry data and whether these assumptions were consistent with evidence obtained in other areas of the audit.

Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted future cash flow model.

These procedures included testing the effectiveness of controls relating to management’s triggering event goodwill impairment assessment for the Franchise reporting unit, including controls over the valuation of the Franchise reporting unit.

These procedures also included, among others,(i) testing management’s process for determining fair value of the reporting unit;

(ii) evaluating the appropriateness of the discounted cash flow model;

(iii) testing the completeness, accuracy, and relevance of underlying data used in the model;

and (iv) evaluating the significant assumptions used by management relating to the number of salons to be sold to franchisees and the discount rate.

Evaluating management’s assumption related to the number of existing franchised salons and the number of salons to be sold to franchisees involved evaluating whether the assumption used by management were reasonable considering current and past performance of the reporting unit and whether these assumptions were consistent with evidence obtained in other areas of the audit.

Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted future cash flow model and the discount rate assumption.

Right of Use Asset Impairment Assessment for the Salon Asset Groups

As described in Notes 1 and 6 to the consolidated financial statements, the Company’s consolidated Right of Use Asset (ROUA) balance was $786.2 million as of June 30, 2020.

As a result of COVID-19 and the related store closures that occurred during the fourth fiscal quarter of 2020, management determined that a triggering event had occurred and was required to perform a quantitative impairment assessment in the fourth fiscal quarter fiscal 2020.

The Company first assessed all of its salon asset groups, which included the ROU assets, to determine if the carrying value was 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.

For the salon asset groups that failed the recoverability test, an impairment loss was measured as the amount by which the asset group exceeds its fair value.

As described by management, the results of this assessment indicated that the estimated fair value of a portion of the Company’s salon asset groups did not exceed the carrying value and an impairment charge was recorded in the amount of $17.4 million to the ROUA balance.

The fair value of the salon asset groups were determined from the perspective of a market participant considering various factors.

The significant judgments and assumptions used in determining the fair value of the salon asset groups were the market rent of comparable properties based on recently negotiated leases as applicable, asset group’s projected sales for fiscal years 2021 through 2023 for properties with no recently negotiated leases, and a discount rate.

The Company engaged a third-party valuation specialist to assist with significant inputs and assumptions utilized in the measurement of the impairment loss.

The principal considerations for our determination that performing procedures relating to the ROUA impairment assessment of the salon asset groups that failed the long-lived asset recoverability test is a critical audit matter are the significant judgement by management when developing the fair value measurement of the asset groups, which in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to (i) management’s methods and calculations and, (ii) significant judgments and assumptions related to the market rent of comparable properties based on recently negotiated leases as applicable, asset group’s projected sales for fiscal years 2021 through 2023 for properties with no recently negotiated leases, and the discount rate.

In addition, the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to management’s ROUA impairment assessment, including controls over the valuation of the salon asset groups.

These procedures also included, among others, (i) testing management’s process for developing the fair value of the salon asset groups;

(ii) evaluating the appropriateness of the market participant approach methods;

(iii) testing the completeness, accuracy, and relevance of underlying data used in the estimates;

and (iv) evaluating the significant judgments and assumptions used by management, which are the market rent of comparable properties based on recently negotiated leases, as applicable, asset group’s projected sales for fiscal years 2021 through 2023 for properties with no recently negotiated leases, and the discount rate.

Evaluating management’s judgments and assumptions relating to market rent of comparable properties of recently negotiated leases involved obtaining recently negotiated leases to evaluate whether the fair market monthly rent used in the method was consistent with the executed agreements.

Evaluating management’s assumptions relating to the market comparable properties based on asset group’s projected sales for fiscal years 2021 through 2023 sales involved evaluating whether the assumptions used by management were reasonable considering current and past performance of the asset group, industry data and whether these assumptions were consistent with evidence obtained in other areas of the audit.

Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s market participant approach methods and the discount rate assumption.

/s/ PricewaterhouseCoopers LLP

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Receivables, net 31,030 30,143

Inventories 62,597 77,322

Other current assets 19,138 33,216

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Property and equipment, net 57,176 78,090

Goodwill 227,457 345,718

Other intangibles, net 4,579 8,761

Long-term assets held for sale (Note 1)

Right of use asset (Note 6) 786,216 —

Other assets 40,934 34,170

Non-current assets held for sale (Note 1) — 5,276

Total assets $ 1,342,794 $ 682,837

LIABILITIES AND SHAREHOLDERS' EQUITY

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Accrued expenses 48,825 80,751

Short-term lease liability (Note 6) 137,271 —

Total current liabilities 237,014 128,283

Long-term debt, net 177,500 90,000

Long-term lease liability

Other noncurrent liabilities

Long-term lease liability (Note 6) 680,454 —

Long-term financing liabilities 27,981 28,910

Other non-current liabilities 94,142 111,399

Total liabilities 1,217,091 358,592

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Total liabilities and shareholders' equity $ 1,342,794 $ 682,837

_______________________________________________________________________________

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

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

2020 2019 2018

Service $ 331,538 $ 749,660 $ 899,345

Product 137,586 225,618 258,740

Royalties and fees 73,402 93,761 77,394

Franchise rental income (Note 6) 127,203 — —

Total revenue 669,729 1,069,039 1,235,479

Operating expenses:

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General and administrative 130,953 177,004 174,045

Rent (Note 6) 76,382 131,816 183,096

Franchise rent expense (Note 6) 127,203 — —

Depreciation and amortization 36,952 37,848 58,205

TBG Restructuring (Note 3)

Long-lived asset impairment (Note 1) 22,560 — —

TBG mall restructuring (Note 3) 2,333 21,816 —

Goodwill impairment (Note 1) 40,164 — —

Total operating expenses 815,067 1,091,158 1,240,618

Operating (loss) income

Operating loss ( 145,338 ) ( 22,119 ) ( 5,139 )

Other (expense) income:

Interest expense ( 7,522 ) ( 4,795 ) ( 10,492 )

Gain on sale of salon assets to franchisees

(Loss) gain from sale of salon assets to franchisees, net ( 27,306 ) 2,918 241

Interest income and other, net 3,353 1,729 5,199

(Loss) income from continuing operations before income taxes

Income tax benefit (expense)

Loss from continuing operations before income taxes ( 176,813 ) ( 22,267 ) ( 10,191 )

Income tax benefit 4,619 2,145 69,812

(Loss) income from continuing operations ( 172,194 ) ( 20,122 ) 59,621

Income (loss) from discontinued operations, net of income taxes (Note 3)

Income (loss) from discontinued operations, net of taxes (Note 3) 832 5,896 ( 53,185 )

Net (loss) income $ ( 171,362 ) $ ( 14,226 ) $ 6,436

Net income (loss) per share:

Net (loss) income per share:

(Loss) income from continuing operations $ ( 4.79 ) $ ( 0.48 ) $ 1.28

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Weighted average common and common equivalent shares outstanding:

Basic 35,936 41,829 46,517

Diluted 35,936 41,829 47,035

_______________________________________________________________________________

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REGIS CORPORATION

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME

(Dollars in thousands)

2020 2019 2018

Net (loss) income $ ( 171,362 ) $ ( 14,226 ) $ 6,436

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Foreign currency translation adjustments ( 1,462 ) 185 ( 168 )

Reclassification adjustments for losses included in net (loss) income (Note 2)

Reclassification adjustments for losses included in net income (Note 3) — — 6,152

Net current period foreign currency translation adjustments ( 1,462 ) 185 5,984

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Comprehensive (loss) income $ ( 173,255 ) $ ( 14,540 ) $ 12,756

_______________________________________________________________________________

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

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(Dollars in thousands, except share data)

Common Stock Additional

Capital Accumulated

Comprehensive

Income Retained

Earnings Total

Shares Amount

Balance, June 30, 2017 46,400,367 $ 2,320 $ 214,109 $ 3,336 $ 273,580 $ 493,345

Foreign currency translation adjustments

Exercise of SARs & stock options, net

Net income — — — — 6,436 6,436

Foreign currency translation

— — — 5,984 — 5,984

Stock repurchase program

( 1,469,057 ) ( 74 ) ( 24,724 ) — — ( 24,798 )

Exercise of SARs 33,342 2 ( 332 ) — — ( 330 )

Stock-based compensation — — 7,475 — — 7,475

Shares issued through franchise stock incentive program

522 — 7 — — 7

Recognition of deferred compensation (Note 11) — — — 336 — 336

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Balance, June 30, 2018 45,258,571 2,263 194,436 9,656 280,083 486,438

Foreign currency translation adjustments

Net loss — — — — ( 14,226 ) ( 14,226 )

Foreign currency translation

— — — 185 — 185

Stock repurchase program

Exercise of SARs & stock options, net

( 8,605,430 ) ( 431 ) ( 154,114 ) — — ( 154,545 )

Exercise of SARs 22,263 1 ( 222 ) — — ( 221 )

Stock-based compensation — — 9,003 — — 9,003

Shares issued through franchise stock incentive program

Recognition of deferred compensation (Note 11) — — — ( 499 ) — ( 499 )

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Minority interest (Note 1)

— — — — 51 51

Balance, June 30, 2019 36,869,249 1,843 47,152 9,342 265,908 324,245

Foreign currency translation adjustments (Note 1)

Net loss — — — — ( 171,362 ) ( 171,362 )

Foreign currency translation (Note 1)

— — — ( 1,462 ) — ( 1,462 )

Stock repurchase program

Exercise of SARs & stock options, net

( 1,504,000 ) ( 75 ) ( 26,281 ) — — ( 26,356 )

Exercise of SARs 1,776 — 28 — — 28

Stock-based compensation — — 3,275 — — 3,275

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Balance, June 30, 2020 35,625,716 $ 1,781 $ 22,011 $ 7,449 $ 94,462 $ 125,703

_______________________________________________________________________________

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

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(Dollars in thousands)

2020 2019 2018

Cash flows from operating activities:

Net income (loss)

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

Non-cash impairment related to discontinued operations

Net (loss) income $ ( 171,362 ) $ ( 14,226 ) $ 6,436

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

Non-cash adjustments related to discontinued operations ( 1,098 ) 306 38,826

Depreciation and amortization 33,101 33,261 39,433

Depreciation related to discontinued operations — — 3,738

Equity in loss of affiliated companies

Salon asset impairments 3,851 4,587 11,092

Long-lived asset impairment 22,560 — —

Deferred income taxes ( 3,934 ) ( 9,812 ) ( 80,241 )

Gain on life insurance proceeds — — ( 7,986 )

Gain from sale of salon assets to franchisees, net

Non-cash TBG restructuring charge (Note 3)

Loss on write down of inventories

Salon asset impairments (2)

Gain from sale of company headquarters, net ( 2,513 ) — —

Loss (gain) from sale of salon assets to franchisees, net 27,306 ( 2,918 ) ( 241 )

Non-cash TBG mall location restructuring charge (Note 3) — 21,008 —

Goodwill impairment 40,164 — —

Accumulated other comprehensive income reclassification adjustments (Note 3) — — 6,152

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Changes in operating assets and liabilities (1):

Receivables ( 3,902 ) ( 17,304 ) ( 12,081 )

Inventories ( 2,255 ) ( 8,492 ) 13,940

Income tax receivable ( 1,804 ) ( 703 ) 527

Other current assets 2,827 ( 783 ) 239

Other assets ( 10,094 ) ( 5,546 ) ( 11,229 )

Accounts payable 4,588 ( 5,836 ) ( 1,103 )

Accrued expenses ( 27,622 ) ( 20,158 ) ( 10,940 )

Other noncurrent liabilities

Net lease liabilities 276 — —

Other non-current liabilities 368 717 ( 6,027 )

Net cash (used in) provided by operating activities:

( 86,409 ) ( 17,524 ) 2,590

Cash flows from investing activities:

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Capital expenditures related to discontinued operations — — ( 1,171 )

Proceeds from sale of salon assets to franchisees

Proceeds from sale of company headquarters 8,996 — —

Proceeds from sale of assets to franchisees 91,616 94,787 11,582

Costs associated with sale of assets to franchisees ( 2,089 ) — —

Proceeds from company-owned life insurance policies — 24,617 18,108

Proceeds from sale of investment

Net cash (used in) provided by investing activities

Net cash provided by (used in) investing activities:

61,029 87,788 ( 1,052 )

Cash flows from financing activities:

Borrowings on revolving credit facilities

Repayments of long-term debt

Borrowings on revolving credit facility 213,000 — 90,000

Repayments of revolving credit facility ( 125,500 ) — ( 124,230 )

Repurchase of common stock ( 28,246 ) ( 152,661 ) ( 24,798 )

Proceeds from sale and lease back transactions

Sale and lease back transaction payments

Employee taxes paid for shares withheld

Proceeds from sale and leaseback transactions — 28,821 —

Sale and leaseback payments ( 769 ) ( 378 ) —

Taxes paid for shares withheld ( 2,320 ) ( 2,477 ) ( 2,413 )

Settlement of equity awards — — ( 794 )

Net cash used in financing activities

Net cash provided by (used in) financing activities:

56,165 ( 126,695 ) ( 62,235 )

Effect of exchange rate changes on cash and cash equivalents ( 284 ) 35 ( 514 )

(Decrease) increase in cash and cash equivalents

Cash and cash equivalents:

Increase (decrease) in cash, cash equivalents and restricted cash 30,501 ( 56,396 ) ( 61,211 )

Cash, cash equivalents and restricted cash:

Beginning of year 92,379 148,775 208,634

Cash and cash equivalents included in current assets held for sale — — 1,352

Beginning of year, total cash and cash equivalents

Beginning of year 92,379 148,775 209,986

End of year $ 122,880 $ 92,379 $ 148,775

(1) Changes in operating assets and liabilities exclude assets and liabilities sold or acquired.

In fiscal year 2017, $ 3.4 million of salon asset impairments were classified as discontinued operations.

There were no other significant non-cash activities related to discontinued operations in the years presented.

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

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Business Description:

Regis Corporation (the "Company") franchises, owns and operates hairstyling and hair care salons throughout the United States (U.S.), the United Kingdom (U.K.), Canada and Puerto Rico.

Regis Corporation (the "Company") franchises, owns and operates technology-enabled hairstyling and hair care salons throughout the United States (U.S.), the United Kingdom (U.K.), Canada and Puerto Rico.

The business is evaluated in two segments, Franchise salons and Company-owned salons.

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and Canada are primarily located in strip shopping centers or Walmart Supercenters.

All salons in the U.K.

Salons in the U.K.

are franchised locations and operate in leading department stores, mass merchants and high-street locations.

Substantially all of the hairstyling and hair care salons owned and operated by the Company in the U.S., Canada and Puerto Rico are located in leased space in strip shopping centers or Walmart Supercenters.

During the first quarter of fiscal year 2018, the Company sold substantially all of its mall-based salon business in North America, representing 858 salons, and substantially all of its previous International segment, representing 250 salons in the UK, to The Beautiful Group ("TBG"), an affiliate of Regent, a private equity firm based in Los Angeles, California who operated these locations as franchise locations until June 27, 2019.

See additional discussion on these discontinued operations in Note 3 to the Consolidated Financial Statements.

COVID-19 Impact:

During fiscal year 2020, the global coronavirus pandemic (COVID-19) had an adverse impact on operations, including the closure of all company-owned salons and almost all franchise locations from March 2020 due to government mandates.

Salons continued to be closed until April 23, 2020 when franchise salons began re-opening slowly, as government, state and local restrictions eased.

As of June 30, 2020 approximately 87 % of franchise salons were open.

Company-owned salons were closed through May 21, 2020 and are gradually re-opening.

As of June 30, 2020, approximately 54 % of company-owned salons were open.

As salons re-open, the Company is taking additional measures across its portfolio of franchise and company-owned salons to facilitate customer and employee safety.

As a result, COVID-19 has and will continue to negatively affect revenue and profitability.

To offset the loss of revenue, in April 2020, the Company implemented a furlough program for a substantial majority of the workforce across the corporate office, field support, and distribution centers;

and reductions in the pay for executives and other working employees.

The furlough program was in effect for the majority of the fiscal fourth quarter with a substantial majority returning to work in June 2020.

Despite actions taken to resume business operations, COVID-19, and the volatile regional and global economic conditions stemming from the pandemic, as well as reactions to future pandemics or resurgences of COVID-19, could potentially prolong and intensify the impact of the global crisis on our business.

The economic disruption due to COVID-19 was determined to be a triggering event and as a result, management assessed its long-term assets, including long-lived salon assets, right of use assets, goodwill and other intangibles for impairment.

Impairments were recorded related to long-lived salon assets (Note 7), right of use assets (Note 6), intangible assets (Note 4) and goodwill (Notes 1 and 5).

As the COVID-19 pandemic continues, management will reassess all long-term assets and further impairment may result.

Consolidation:

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As of June 30, 2020, total assets, total liabilities and total shareholders' equity of Roosters were $ 13.2 , $ 4.8 and $ 8.4 million, respectively.

As of June 30, 2018, total assets, total liabilities and total shareholders' equity of Roosters were $ 8.3 , $ 0.6 , and $ 7.7 million .

As of June 30, 2019, total assets, total liabilities and total shareholders' equity of Roosters were $ 9.6 , $ 1.7 , and $ 7.9 million, respectively.

Net income attributable to the non-controlling interest in Roosters was immaterial for fiscal years 2020, 2019 and 2018.

Shareholders' equity attributable to the non-controlling interest in Roosters was $ 1.0 million as of June 30, 2020 and 2019, respectively, and recorded within retained earnings on the Consolidated Balance Sheet.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company accounts for its investment in Empire Education Group, Inc.

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The Company wrote off its investment balance in EEG in fiscal year 2016.

During fiscal year 2020, the Company signed an agreement to sell its interest in EEG to the other shareholder.

The transaction is expected to close in fiscal year 2021, at which time the Company expects to record an immaterial non-operating gain.

Use of Estimates:

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

Actual results could differ from those estimates.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Cash and Cash Equivalents:

For the three months ended June 30, 2020, the impact of the decline in business activity brought about by the COVID-19 pandemic continues to evolve.

As a result, many of our estimates and assumptions required increased judgment and carry a higher degree of variability and volatility.

As events continue to evolve and additional information becomes available, our estimates may change materially in future periods.

Cash, Cash Equivalents and Restricted Cash:

Cash equivalents consist of investments in short-term, highly liquid securities having original maturities of three months or less, which are made as a part of the Company's cash management activity.

3 unchanged sentences

There were no checks outstanding in excess of related book cash balances at June 30, 2020 and 2019.

The Company has restricted cash primarily related to contractual obligations to collateralize its self-insurance programs.

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

The restricted cash balance is classified within other current assets on the Consolidated Balance Sheet.

Restricted cash within other current assets primarily relates to consolidated advertising cooperatives funds which can only be used to settle obligations of the respective cooperatives and contractual obligations to collateralize the Company's self-insurance programs.

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

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

(Dollars in thousands)

Cash and cash equivalents $ 113,667 $ 70,141

Restricted cash, included in other current assets 9,213 22,238

Total cash, cash equivalents and restricted cash $ 122,880 $ 92,379

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Receivables and Allowance for Doubtful Accounts:

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

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

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

The Company monitors the financial condition of its franchisees and records provisions for estimated losses on receivables when it believes franchisees are unable to make their required payments based on factors such as delinquencies and aging trends.

1 unchanged sentence

As of June 30, 2020, 2019 and 2018, the allowance for doubtful accounts was $ 6.9 , $ 2.0 and $ 1.2 million, respectively.

With the exception of the TBG restructuring (Note 3), activity in the allowance for doubtful accounts during fiscal years 2019, 2018 and 2017 was no t significant.

The allowance for doubtful accounts increased in fiscal year 2020 due to an increased risk in collecting franchise receivables due to decreased franchisee cash flows as a result of the government-mandated salon closures due to the COVID-19 pandemic.

Material movement was also recorded within the allowance for doubtful accounts in fiscal year 2019 due to the TBG restructuring activity.

See Notes 2 and 3 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K.

At June 30, 2018, the receivable balance also included $ 24.6 million related to the cash surrender value of company-owned life insurance policies surrendered prior to June 30, 2018.

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

Physical inventory counts are performed annually in the fourth quarter of the fiscal year for salons.

Physical inventory counts are performed primarily in the fourth quarter of the fiscal year for salons and throughout the year at the distribution centers.

Product and service inventories are adjusted based on the physical inventory counts.

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Estimates of the future demand for the Company's inventory and anticipated changes in formulas and packaging are some of the other factors used by management in assessing the net realizable value of inventories.

Activity in the inventory valuation reserves during fiscal years 2019 , 2018 and 2017 was no t significant.

Activity in the inventory valuation reserves during fiscal years 2020, 2019 and 2018 was not significant.

Property and Equipment:

Property and equipment are carried at cost, less accumulated depreciation and amortization.

Depreciation of property and equipment is computed using the straight-line method over their estimated useful asset lives ( 30 to 39 years for buildings, 10 years for improvements and three to ten years for equipment, furniture and software).

Depreciation of property and equipment is computed using the straight-line method over their estimated useful asset lives ( 30 to 39 years for buildings, 10 years or lease life for improvements and three to ten years or lease life for equipment, furniture and software).

Depreciation expense was $ 31.8 , $ 31.9 and $ 38.1 million in fiscal years 2020, 2019 and 2018, respectively.

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Estimated useful lives range from three to seven years .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Expenditures for maintenance and repairs and minor renewals and betterments, which do not improve or extend the life of the respective assets, are expensed.

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In March 2019, the Company announced that it had entered into a ten year lease for a new corporate headquarters and would be selling the land and buildings currently used for its headquarters.

The non-current assets held for sale represent the net book value of the land of $ 1.7 and $ 1.7 million and buildings of $ 3.6 and $ 4.9 million , as of June 30, 2019 and June 30, 2018, respectively.

No impairments were identified as of June 30, 2019.

Long-Lived Asset Impairment Assessments, Excluding Goodwill:

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

The non-current assets held for sale represent the net book value of the land of $ 1.7 million and buildings of $ 3.6 million as of June 30, 2019.

The sale was completed in December 2019 for proceeds of $ 9.0 million, resulting in a net gain on sale of $ 2.5 million, which was recorded in Interest income and other, net on the Condensed Consolidated Statement of Operations.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Right of Use Asset, Lease Liabilities and Rent Expense:

At contract inception, the Company determines whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time.

If the contract provides the Company the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, the Company considers it to be, or contain, a lease.

The Company leases its company-owned salons and some of its corporate facilities under operating leases.

The original terms of the salon leases range from 1 to 20 years with many leases renewable for additional 5 to 10 year terms at the option of the Company.

The right of use asset and lease liability includes one renewal options as leases for leases expected to be renewed.

The Company also has variable lease payments that are based on sales levels.

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

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

These leases, generally with terms of approximately 5 years, are expected to be renewed on expiration.

All additional lease costs are passed through to the franchisees.

Upon adopting Topic 842, the Company now records the rental payments due from franchisees as franchise rental income and the corresponding amounts owed to landlords as franchise rent expense on the Consolidated Statement of Operations.

For franchise and company-owned salon operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date.

The right of use (ROU) asset is initially and subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, less any accrued lease payments and unamortized lease incentives received, if any.

The Company’s consolidated Right of Use Asset (ROUA) balance was $ 786.2 million as of June 30, 2020.

As noted above, the ROU asset is a long-lived asset that is subject to impairment testing annually or as triggering events occur.

Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Generally, the non-lease components such as real estate taxes and other occupancy expenses are separate from rent expense within the lease and are not allocated to the lease liability.

The discount rate used to determine the present value of the lease payments is the Company's estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as the interest rate implicit in the lease cannot generally be determined.

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

For purposes of recognizing incentives and minimum rental expenses on a straight-line basis, the Company uses the date it obtains the legal right to use and control the leased space to begin amortization, which is generally when the Company enters the space and begins to make improvements in preparation of its intended use.

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

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

Salon Long-Lived Asset and Right of Use Asset Impairment Assessments:

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

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

Impairment is evaluated based on the sum of undiscounted estimated future cash flows expected to result from use of the long-lived assets.

If the undiscounted estimated cash flows are less than the carrying value of the assets, the Company calculates an impairment charge based on the estimated fair value of the assets.

The fair value of the long-lived assets is estimated using a discounted cash flow model based on the best information available, including salon level revenues and expenses.

Long-lived asset impairment charges are recorded within depreciation and amortization in the Consolidated Statement of Operations.

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

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

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

The fair value of the right of use asset is estimated by determining what a market participant would pay over the life of the primary asset in the group, discounted back to June 30, 2020.

See Note 6 for further discussion related to right of use asset impairment.

Judgments made by management related to the expected useful lives of long-lived assets and the ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance.

As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause the Company to realize material impairment charges.

Long-lived asset impairment charges related to continuing operations of $ 4.6 , $ 11.1 and $ 7.9 million were recorded during fiscal years 2019, 2018 and 2017, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Long-lived property and equipment asset impairment charges related to continuing operations of $ 3.9 , $ 4.6 and $ 11.1 million were recorded during fiscal years 2020, 2019 and 2018, respectively, are recorded in Depreciation and Amortization in the Consolidated Statement of Operations.

A long-lived asset, including right of use and salon property and equipment, impairment charge of $ 22.6 million was recorded during fiscal year 2020, and is separately stated on Consolidated Statement of Operations.

Of the total $ 22.6 million long-lived asset impairment charge, $ 17.4 million was allocated to the right of use asset and $ 5.2 million was allocated to salon property and equipment.

As of June 30, 2020 and 2019, the Franchise salons reporting unit had $ 227.5 and $ 227.9 million of goodwill and the Company-owned reporting unit had $ 0 and $ 117.8 million of goodwill, respectively.

See Note 5 to the Consolidated Financial Statements.

The Company assesses goodwill impairment on an annual basis, during the Company’s fourth fiscal quarter, 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.

The Company assesses goodwill impairment on an annual basis as of April 30, 2020, 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.

In fiscal year 2020, the Company adopted ASU 2017-04, which simplified the test for goodwill impairment.

Under this accounting standard, the Company performed its interim impairment test and annual impairment tests by comparing the fair value of a reporting unit to its carrying amount.

The Company then records an impairment charge for the amount that the carrying amount exceeds the fair value.

This eliminates Step 2 from the goodwill impairment test to simplify the subsequent measure of goodwill.

Prior to the adoption, the goodwill assessment involved 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 exceeded its carrying value, no further procedures were required.

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

In applying the goodwill impairment assessment, the Company could assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting units was less than its carrying value (Step 0).

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

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

The carrying value of each reporting unit is based on the assets and liabilities associated with the operations of the reporting unit, including allocation of shared or corporate balances among reporting units.

Allocations are generally based on the number of salons in each reporting unit as a percent of total company-owned salons or expenses of the reporting unit as a percent of total company expenses.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

Where available and as appropriate, comparative market multiples are used in conjunction with the results of the discounted cash flows.

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

During the fiscal year 2019, the Company did not experience any trigger events that required an interim goodwill analysis.

During the third quarter of fiscal year 2020, the Company determined a triggering event occurred, resulting in quantitative impairment tests performed over the goodwill.

This determination was made considering the reduced sales and profitability projections for the reporting units, driven by the COVID-19 pandemic and related economic disruption.

The triggering event experienced in the third quarter impacted both reporting units of the business, Franchise and Company-owned.

The Company engaged a third-party valuation specialist to perform an impairment analysis on the Franchise reporting unit of the business.

The Company-owned reporting unit is comprised of a portfolio of salons that the Company intends to sell to franchisees or close in the short-term as part of the transition to a fully-franchised model.

As a result, the Company-owned reporting unit has a limited life which allows the Company to perform its own impairment analysis on the Company-owned reporting unit.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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, and the discounted cash flows approach to evaluate the Company-owned reporting unit.

The discounted cash flow models reflect management's assumptions regarding revenue growth rates, economic and market trends including deterioration from the current COVID-19 pandemic, cost structure, and other expectations about the anticipated short-term and long-term operating results of the reporting units.

For the Franchise reporting unit, the number of salons to be sold to franchisees and the discount rate of 13 percent were significant assumptions utilized in the discounted cash flow.

For the Company-owned reporting unit, proceeds from the sale of salons to franchisees and number of salon venditions were the significant assumptions utilized in its discounted cash flow.

As a result of the impairment testing, the Franchise reporting unit, which has goodwill of $ 227.5 million, was determined to have a fair value that exceeded carrying value by approximately 50 percent.

The Company-owned reporting unit was determined to have a carrying value in excess of its fair value, resulting in a goodwill impairment charge of $ 40.2 million.

Prior to the COVID-19 pandemic, the Company had been derecognizing Company-owned goodwill as part of the calculation of gain or loss on the sale of salons to franchisees.

The Company-owned reporting unit has no remaining goodwill, so there will be no further derecognition of Company-owned goodwill.

The Company performed its annual impairment assessment as of April 30, 2020 and noted no significant changes to the carrying value or the fair value of the Franchise reporting unit which would indicate that the headroom dropped below the 50 percent determined as of March 31, 2020.

If a future triggering event analysis or the Company's annual impairment assessment indicates the fair value of the Franchise reporting unit has potentially fallen below more than the 50 percent headroom, we may be required to perform an updated impairment assessment which may result in a non-cash impairment charge to reduce the carrying value of goodwill.

Assessing goodwill for impairment requires management to make assumptions and to apply judgment, including forecasting future sales, future salon sales to franchisees and selecting appropriate discount rates, 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 of goodwill.

However, if actual results are not consistent with the estimates and assumptions used in the calculations, or if management is unable to expand its franchise base, the Company may be exposed to future impairment losses that could be material.

During the fiscal year 2019, 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.

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The Franchise reporting unit had substantial headroom and the Company-owned reporting unit had headroom of approximately 20 %.

The fair value of the Company-owned reporting unit was determined based on a discounted cash flow analysis.

The key assumptions used in determining fair value were the number and pace of salons sold to franchisees and proceeds from salon sales.

We selected the assumptions by considering our historical financial performance and trends, historical salon sale proceeds and estimated future salon sale activities.

The preparation of our fair value estimate includes uncertain factors and requires significant judgments and estimates which are subject to change.

There are a number of uncertain factors or events that exist which may result in a future triggering event and require an interim impairment analysis with respect to the carrying value of goodwill for the Company-owned reporting unit prior to our annual assessment.

These internal and external factors include but are not limited to the following:

Changes in the company-owned salon strategy,

Franchise expansion and sales opportunities,

Future market earnings multiples deterioration,

Our financial performance falls short of our projections due to internal operating factors,

Economic recession,

Reduced salon traffic,

Deterioration of industry trends,

Increased competition,

Inability to reduce general and administrative expenses as company-owned salon count potentially decreases,

Other factors causing our cash flow to deteriorate.

If the triggering event analysis indicates the fair value of the Company-owned reporting unit has potentially fallen below more than the 20 % headroom, we may be required to perform an updated impairment assessment which may result in a non-cash impairment charge to reduce the carrying value of goodwill.

As of June 30, 2019 , the Company's estimated fair value, as determined by the sum of our reporting units' fair value, reconciled within a reasonable range of our market capitalization, which included an assumed control premium of approximately 14 % .

Assessing goodwill for impairment requires management to make assumptions and to apply judgment, including forecasting future sales and expenses, and selecting appropriate discount rates, 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 of goodwill.

However, if actual results are not consistent with the estimates and assumptions used in the calculations, or if there are significant changes to the Company's planned strategy for company-owned salons, the Company may be exposed to future impairment losses that could be material.

Fiscal Year 2018

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The Company's reporting changed to two reporting units:

Company-owned and Franchise.

Franchise and Company-owned.

Prior to this change the Company had four reporting units:

North American Value, North American Premium, North American Franchise and International.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Pursuant to the change in operating segments, the Company performed a goodwill impairment assessment on its North American Value reporting unit.

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The North American Premium and International units did no t have any goodwill.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company performed its annual impairment assessment as of April 30.

For the fiscal year 2018 annual impairment assessment, due to the transformational efforts completed during the year, the Company elected to forgo the optional Step 0 assessment and performed the quantitative impairment analysis on the Company-owned and Franchise reporting units.

The Company compared the carrying value of the reporting units, including goodwill, to their estimated fair value.

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The assumptions used in determining fair value were similar to than those used in fiscal year 2019.

Fiscal Year 2017

During the fourth quarter of fiscal year 2017, the Company experienced a triggering event due to the redefining of its operating segments, which also coincided with the annual assessment date.

In connection with the change in operating segment structure, the Company changed its North American reporting units from two reporting units:

North American Value and North American Premium, to three reporting units:

North American Value, North American Franchise and North American Premium.

Pursuant to the change in operating segments, the Company performed a goodwill impairment assessment on its North American Value reporting unit.

The North American Premium and International units did not have any goodwill.

The Company compared the carrying value of the North American Value reporting unit, including goodwill, to its estimated fair value.

The fair value of the reporting unit exceeded its carrying value by a substantial margin, resulting in no goodwill impairment.

Investments In Affiliates:

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The Company accounts for these investments under the equity or cost method of accounting.

The Company's investments have no value as of June 30, 2019, 2018.

The Company's investments have no value as of June 30, 2020 and 2019.

Self-Insurance Accruals:

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

The liability represents the Company's estimate of the undiscounted ultimate cost of uninsured claims incurred as of the balance sheet date.

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

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

Although the Company does not expect the amounts ultimately paid to differ significantly from the estimates, self-insurance accruals could be affected if future claims experience differs significantly from historical trends and actuarial assumptions.

For fiscal years 2019 , 2018 and 2017 , the Company recorded (increases) decreases in expense for changes in estimates related to prior year open policy periods of $( 1.3 ) , $ 1.2 and $ 1.6 million , respectively.

For fiscal years 2020, 2019 and 2018, the Company recorded decreases (increases) in expense for changes in estimates related to prior year open policy periods of $ 3.1 , $( 1.3 ) and $ 1.2 million, respectively.

The Company updates loss projections quarterly and adjusts its liability to reflect updated projections.

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As certain claims can take years to settle, the Company has multiple policy periods open at any point in time.

As of June 30, 2019 , the Company had $ 10.1 and $ 23.6 million recorded in current liabilities and noncurrent liabilities, respectively, related to the Company's self-insurance accruals.

As of June 30, 2018 , the Company had $ 10.3 and $ 25.8 million recorded in current liabilities and noncurrent liabilities, respectively, related to the Company's self-insurance accruals.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Deferred Rent and Rent Expense:

The Company leases its salon locations under operating leases.

Rent expense is recognized on a straight-line basis over the lease term.

Tenant improvement allowances funded by landlord incentives, rent holidays and rent escalation clauses which provide for scheduled rent increases during the lease term or for rental payments commencing at a date other than the date of initial occupancy are recorded in the Consolidated Statements of Operations on a straight-line basis over the lease term (including one renewal period if renewal is reasonably assured based on the imposition of an economic penalty for failure to exercise the renewal option).

The difference between the rent due under the stated periods of the lease and the straight-line basis is recorded as deferred rent within accrued expenses and other noncurrent liabilities in the Consolidated Balance Sheet.

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

As of June 30, 2020, the Company had $ 8.5 and $ 20.3 million recorded in current liabilities and non-current liabilities, respectively, related to the Company's self-insurance accruals.

As of June 30, 2019, the Company had $ 10.1 and $ 23.6 million recorded in current liabilities and non-current liabilities, respectively, related to the Company's self-insurance accruals.

Revenue Recognition and Deferred Revenue:

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The Company defers franchise fees until the salon is open and then recognizes the revenue over the term of the franchise agreement.

See Note 2 to the Consolidated Financial Statements.

Product sales by the Company to its franchisees are included within product revenues on the Consolidated Statement of Operations and recorded at the time product is delivered to franchise locations.

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The following discussion provides the primary costs classified in each major expense category:

Beginning in the first quarter of fiscal year 2018, costs associated with field leaders that were previously recorded within Cost of Service and Site Operating expenses are now categorized within General and Administrative expense as a result of the field reorganization that took place in the first quarter of fiscal year 2018.

Previously, field leaders spent most of their time on the salon floor leading and mentoring stylists and serving guests.

As reorganized, field leaders now do not work on the salon floor daily.

As a result, field leader labor costs are now reported within General and Administrative expenses rather than Cost of Service and their travel costs are reported within General and Administrative expenses rather than Site Operating expenses.

This expense classification does not have a financial impact on the Company's reported operating income (loss), reported net (loss) income or cash flows from operations.

Cost of service— labor costs related to salon employees, costs associated with our field supervision (fiscal year 2017) and the cost of product used in providing service.

Cost of service— labor costs related to salon employees and the cost of product used in providing service.

Cost of product— cost of product sold to guests, labor costs related to selling retail product and the cost of product sold to franchisees.

Site operating— direct costs incurred by the Company's salons, such as advertising, workers' compensation, insurance, utilities, travel costs associated with our field supervision (fiscal year 2017) and janitorial costs.

General and administrative— costs associated with field supervision (fiscal years 2019 and 2018), costs associated with salon training, distribution centers and corporate offices (such as salaries and professional fees), including cost incurred to support franchise operations.

Site operating— direct costs incurred by the Company's salons, such as advertising, workers' compensation, insurance, utilities and janitorial costs.

General and administrative— costs associated with field supervision, costs associated with salon training, distribution centers and corporate offices (such as salaries and professional fees), including cost incurred to support franchise operations.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Consideration Received from Vendors:

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These programs primarily include volume rebates and promotion and advertising reimbursements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

With respect to volume rebates, the Company estimates the amount of rebate it will receive and accrues it as a reduction to the cost of inventory over the period in which the rebate is earned based upon historical purchasing patterns and the terms of the volume rebate program.

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Most maintain advertising funds that provide comprehensive advertising and sales promotion support.

Salons, both company-owned and franchise are required to participate in the advertising funds for the same salon concept.

The Company assists in the administration of the advertising funds.

However, a group of individuals consisting of franchisee representatives has control over all of the expenditures and operates the funds in accordance with franchise operating and other agreements.

Salons, both franchise and company-owned, are required to participate in the advertising funds for the same salon concept.

The Company assists in the administration of the advertising funds, however, a group of individuals consisting of franchisee representatives has control over all of the expenditures and operates the funds in accordance with franchise operating and other agreements.

Advertising fund contributions are expensed when the contribution is made.

The Company's advertising costs are included in site operating expenses in the Consolidated Statement of Operations and consist of the following:

2020 2019 2018

(Dollars in thousands)

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Total advertising costs $ 30,266 $ 68,583 $ 63,455

_____________________________________________________________________________

(1) Includes the refunding of $ 14.9 million of previously collected cooperative fees to franchisees as a direct result of the COVID-19 pandemic.

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

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Compensation expense is recognized on a straight-line basis over the requisite service period of the award (or to the date a participant becomes eligible for retirement, if earlier).

The Company uses option pricing methods that require the input of subjective assumptions, including the expected term, expected volatility, dividend yield and risk-free interest rate.

The Company uses fair value methods that require the input of subjective assumptions, including the expected term, expected volatility, dividend yield and risk-free interest rate.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company estimates the likelihood and the rate of achievement for performance sensitive stock-based awards at the end of each reporting period.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Income Taxes:

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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.

A valuation allowance is established for any portion of deferred tax assets that are not considered more likely than not to be realized.

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

The Company has a partial valuation allowance on its deferred tax assets amounting to $ 70.7 million and $ 68.6 million at June 30, 2019 and 2018 , respectively.

The Company assesses the realizability of its deferred tax assets on a quarterly basis and will reverse the valuation allowance and record a tax benefit when the Company generates sufficient sustainable pretax earnings to make the realizability of the deferred tax assets more likely than not.

In connection with the Tax Cuts and Jobs Act, the Company remeasured the deferred tax accounts for the federal rate reduction and recorded a partial valuation allowance release for a total benefit of $ 68.1 million during fiscal year 2018.

See Note 9 to the Consolidated Financial Statements.

The Company has a valuation allowance on its deferred tax assets of $ 122.4 and $ 70.7 million at June 30, 2020 and 2019, respectively.

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

Significant components of the valuation allowance which occurred during fiscal year 2020 are as follows:

• In connection with the Coronavirus Aid, Relief and Economic Security Act (CARES Act), NOLs resulting from accounting periods which straddled December 31, 2017 are now considered definite-lived NOLs.

Therefore, the Company established a valuation allowance against the U.S.

NOLs generated during its fiscal year 2018 and recorded a net tax expense of $ 14.7 million.

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

indefinite-lived taxable temporary differences to support realization of its U.S.

indefinite-lived NOLs and its existing U.S.

deferred tax assets that upon reversal are expected to generate indefinite-lived NOLs.

As a result, the Company recorded an additional $ 17.0 million valuation allowance on its U.S.

federal indefinite-lived deferred tax assets.

• The Company recognized a capital loss and established a corresponding valuation allowance of $ 14.9 million on investment outside basis previously impaired for financial accounting purposes.

The Company reserves for unrecognized tax benefits, interest and penalties related to anticipated tax audit positions in the U.S.

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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.

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 restricted stock awards and restricted stock units.

The Company's dilutive earnings per share is calculated as net income (loss) 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.

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

Net (Loss) Income Per Share:

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

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

Stock-based awards with exercise prices greater than the average market value of the Company's common stock are excluded from the computation of diluted earnings per share.

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Comprehensive (Loss) Income:

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

Foreign Currency Translation:

The balance sheet, statement of operations and statement of cash flows of the Company's international operations are measured using local currency as the functional currency.

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

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

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

During fiscal years 2019 , 2018 and 2017 , the foreign currency gain (loss) included in income (loss) from continuing operations was $ 0.1 , $( 0.1 ) and $ 0.1 million , respectively.

During fiscal years 2020, 2019 and 2018, the foreign currency (loss) gain included in (loss) income from continuing operations was $( 0.1 ), $ 0.1 and $( 0.1 ) million, respectively.

During fiscal year 2018, the Company recognized within discontinued operations a $ 6.2 million foreign currency translation loss in connection with the Company's liquidation of substantially all foreign entities with British pound denominated currencies.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Accounting Standards Recently Adopted by the Company:

Revenue from Contracts with Customers

In May 2014, the FASB issued amended guidance for revenue recognition which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers.

The Company retrospectively adopted these standards on July 1, 2018.

The impact of these standards was applied to all periods presented and the cumulative effect of applying the standard was recognized at the beginning of the earliest period presented.

See Note 2 to the unaudited Condensed Consolidated Financial Statements for additional information regarding the impact of the adoption of the revenue recognition guidance.

Restricted Cash

In November 2016, the FASB issued cash flow guidance requiring restricted cash and restricted cash equivalents to be included in the cash and cash equivalent balances in the statement of cash flows.

Transfers between cash and cash equivalents and restricted cash are no longer presented in the statement of cash flows and a reconciliation between the balance sheet and statement of cash flows must be disclosed.

The Company retrospectively adopted this guidance on July 1, 2018.

The impact of this standard was applied to all periods presented.

As a result of including restricted cash in the beginning and end of period balances, cash, cash equivalents and restricted cash presented in the statement of cash flows increased $ 22.2 , $ 38.4 and $ 37.6 million as of June 30, 2019, 2018, and 2017, respectively.

Statement of Cash Flows

In August 2016, the FASB issued updated cash flow guidance clarifying cash flow classification and presentation for certain items.

The Company retrospectively adopted this guidance on July 1, 2018.

The adoption of this standard did not have a material impact on the Company's consolidated statement of cash flows.

Accounting Standards Recently Issued But Not Yet Adopted by the Company:

Simplifying the Test for Goodwill Impairment

In fiscal year 2020, the Company adopted ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350)" for the interim impairment test performed due to the triggering event noted above, for the quarter ended March 31, 2020.

Under this accounting standard, the Company performed its interim impairment test and annual impairment tests by comparing the fair value of a reporting unit to its carrying amount.

The Company then records an impairment charge for the amount that the carrying amount exceeds the fair value.

This eliminates Step 2 from the goodwill impairment test to simplify the subsequent measure of goodwill.

In February 2016, the FASB issued updated guidance requiring organizations that lease assets to recognize the rights and obligations created by those leases on the Consolidated Balance Sheet.

The new standard is effective for the Company in the first quarter of fiscal year 2020, with early adoption permitted.

In July 2018, the FASB issued ASU 2018-11, which provides companies with the option to apply the new lease standard either at the beginning of the earliest comparative period presented or in the period of adoption.

The Company will elect this optional transition relief amendment that allows for a cumulative-effect adjustment in the period of adoption and will not restate prior periods.

The Company will also elect the package of practical expedients that do not require reassessment of whether existing contracts are or contain leases, lease classification or initial direct costs.

The Company has also made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet.

The Company is leveraging its lease management system to facilitate the adoption of this standard and is evaluating business processes and internal controls related to lease accounting to assist in the application of the new guidance.

The Company estimates adoption of the new standard will result in a right of use asset and lease liability of approximately $ 1.0 billion .

The right of use asset and lease liability reflect a present value of the Company's current minimum lease payments for existing operating leases primarily relating to real estate leases, over a lease term, which includes one option as options are reasonably assured of being exercised, discounted using a collateralized incremental borrowing rate.

The difference between the assets and liabilities will be attributable to the reclassification of certain existing lease-related assets and liabilities as an adjustment to the right-of-use assets.

The Company adopted ASU 2016-02, "Leases (Topic 842)" and all subsequent ASUs that modified Topic 842 as of July 1, 2019 using the modified retrospective method and elected the option to not restate comparative periods in the year of adoption.

The Company also elected the package of practical expedients that do not require reassessment of whether existing contracts are or contain leases, lease classification or initial direct costs.

The Company has also made an accounting policy election to keep leases with an initial term of 12 months or less off of the Consolidated Balance Sheet.

Under adoption of Topic 842, the Company recorded a right of use asset and lease liability of $ 980.8 and $ 993.7 million, respectively.

The difference between the assets and liabilities are attributable to the reclassification of certain existing lease-related assets and liabilities as an adjustment to the right of use assets.

The decrease in the right of use asset and lease liability from July 1, 2019 to June 30, 2020 was due to lease modifications and salon closures.

Additionally, the right of use asset was impaired in the fourth fiscal quarter.

The Lease Liability reflects a present value of the Company's current minimum lease payments for existing operating leases primarily relating to real estate leases, over a lease term which includes one option, as options are reasonably assured of being exercised, discounted using a collateralized incremental borrowing rate.

The Company will use the portfolio approach in applying the discount rate.

The accounting guidance for lessors will remain largely unchanged from previous guidance, with the exception of the presentation of rent expense that the Company passes through to certain franchisees.

The accounting guidance for lessors remained largely unchanged from previous guidance, with the exception of the presentation of rent payments that the Company passes through to franchisees (lessees).

These costs are generally paid by the Company and reimbursed by the franchisee.

Historically, these costs have been recorded on a net basis within rent expense in the consolidated statements of operations but will be presented gross upon adoption of the new guidance.

The Company expects the adoption of the new guidance will result in the recognition of additional franchise rental income and franchise rent expense of approximately $ 110 million annually beginning in fiscal year 2020.

The Company does not expect the adoption of the new guidance to have a material impact on net income, cash flows or compliance with debt agreements.

The Company continues to evaluate the impact the adoption of this new guidance will have on financial statement disclosures, in addition to evaluating business processes and internal controls related to lease accounting to assist in the ongoing application of the new guidance.

Historically, these costs have been recorded on a net basis within rent expense in the Consolidated Statements of Operations, but are now presented on a gross basis upon adoption of the new guidance.

The adoption of the new guidance resulted in the recognition of franchise rental income and franchise rent expense of $ 127.2 million during fiscal year 2020.

See Note 6 for further information about our transition to Topic 842 and the newly required disclosures.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Accounting Standards Recently Issued But Not Yet Adopted by the Company:

In June 2016, the FASB issued Accounting Standards Update (ASU) No.

2016-13 "Measurement of Credit Losses on Financial Instruments", which modifies the measurement of expected credit losses of certain financial instruments.

The Company will adopt the standard in the first quarter of 2021, as required, and does not expect the standard to materially affect consolidated net earnings, financial position, or cash flows.

The Company does not expect that any other recently issued accounting pronouncements will have a material effect on our financial statements .

REVENUE RECOGNITION:

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Gift card breakage, the amount of gift cards which will not be redeemed, is recognized proportional to redemptions using estimates based on historical redemption patterns.

Product sales by the Company to its franchisees are included within product revenues in the Condensed Consolidated Statement of Operations and recorded at the time product is delivered to the franchisee.

Payment for franchisee product revenue is generally collected within 30 days of delivery.

Product sales by the Company to its franchisees are included within product revenues in the Consolidated Statement of Operations and recorded at the time product is delivered to the franchisee.

Payment for franchisee product revenue is generally collected within 30 to 90 days of delivery.

Revenue recognized over time

Franchise revenues primarily include royalties, advertising fund fees, franchise fees and other fees.

Franchise revenues primarily include royalties, advertising fund cooperatives fees, franchise fees and other fees.

Royalty and advertising fund revenues represent sales-based royalties that are recognized in the period in which the sales occur.

Generally, royalty and advertising fund revenue is billed and collected monthly in arrears.

Advertising fund revenues and expenditures, which must be spent on marketing and related activities per the franchise agreements, are recorded on a gross basis within the Condensed Consolidated Statement of Operations.

Advertising fund revenues and expenditures, which must be spent on marketing and related activities per the franchise agreements, are recorded on a gross basis within the Consolidated Statement of Operations.

This increases both the gross amount of reported franchise revenue and site operating expense and generally has no impact on operating income and net income.

Franchise fees are billed and received upon the signing of the franchise agreement.

Upon adoption of the new revenue recognition guidance, recognition of these fees is deferred until the salon opening and is then recognized over the term of the franchise agreement, typically ten years .

Under previous guidance, the initial franchise fees were recognized in full upon salon opening.

Recognition of these fees is deferred until the salon opening and is then recognized over the term of the franchise agreement, typically ten years .

Franchise rental income is a result of the Company signing leases on behalf of franchisees as the primary obligor and entering into a sublease arrangement with the franchise.

The Company recognizes franchise rental income and expense when it is due to the landlord.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table disaggregates revenue by timing of revenue recognition and is reconciled to reportable segment revenues as follows:

Year ended June 30, 2019

Year ended June 30, 2018

Company-owned

(in thousands)

For the Year Ended June 30, 2020 For the Year Ended June 30, 2019

Franchise Company-owned Franchise Company-owned

(Dollars in thousands)

Revenue recognized at a point in time:

Service $ — $ 331,538 $ — $ 749,660

Product 52,421 85,165 59,905 165,713

Total revenue recognized at a point in time $ 52,421 $ 416,703 $ 59,905 $ 915,373

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Advertising fund fees 13,341 — 34,073 —

Franchise rental income 127,203 — — —

Total revenue recognized over time 200,605 — 93,761 —

Total revenue $ 253,026 $ 416,703 $ 153,666 $ 915,373

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

2020 June 30,

2019 Balance Sheet Classification

(in thousands)

Receivables from contracts with customers, net

Accounts receivable, net

(Dollars in thousands)

Receivables from contracts with customers, net $ 22,991 $ 23,210 Accounts receivable, net

Broker fees $ 20,516 $ 17,819 Other assets

Deferred revenue:

Gift card liability

Accrued expenses

Deferred franchise fees unopened salons

Accrued expenses

Deferred franchise fees open salons

Accrued expenses

Gift card liability $ 2,543 $ 3,050 Accrued expenses

Deferred franchise fees unopened salons 77 193 Accrued expenses

Deferred franchise fees open salons 5,537 4,164 Accrued expenses

Total current deferred revenue $ 8,157 $ 7,407

Deferred franchise fees unopened salons

Other non-current liabilities

Deferred franchise fees open salons

Other non-current liabilities

Deferred franchise fees unopened salons $ 11,855 $ 15,173 Other non-current liabilities

Deferred franchise fees open salons 33,623 24,194 Other non-current liabilities

Total non-current deferred revenue $ 45,478 $ 39,367

Receivables relate primarily to payments due for royalties, franchise fees, advertising fees, and sales of salon services and product.

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

As of June 30, 2019 and June 30, 2018 , the balance in the allowance for doubtful accounts was $ 2.0 million and $ 1.2 million , respectively.

Receivables relate primarily to payments due for royalties, franchise fees, advertising fees, franchise product sales and sales of salon services and product paid by credit card.

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

As of June 30, 2020 and 2019, the balance in the allowance for doubtful accounts was $ 6.9 and $ 2.0 million, respectively.

The increase is due to an increased risk in collecting franchise receivables due to decreased franchisee cash flows as a result of the government-mandated salon closures due to the COVID-19 pandemic.

The following table is a rollforward of the allowance for doubtful accounts for the periods indicated (in thousands):

Balance as of June 30, 2019 $ 2,025

Provision for doubtful accounts 5,958

Write-offs ( 1,084 )

Balance as of June 30, 2020 $ 6,899

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

These fees are paid upon the signing of the franchise agreement and recognized as General and Administrative expense over the term of the agreement.

The adoption of the amended revenue recognition guidance did not significantly change the Company's accounting for broker fees.

The following table is a rollforward of the broker fee balance for the periods indicated (in thousands):

Balance as of June 30, 2019 $ 17,819

Additions 5,606

Amortization ( 2,852 )

Write-offs ( 57 )

Balance as of June 30, 2020 $ 20,516

4 unchanged sentences

Estimated revenue expected to the recognized in the future related to deferred franchise fees for open salons as of June 30, 2020 is as follows (in thousands):

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The amended revenue recognition guidance impacted the Company's previously reported financial statements as follows:

CONSOLIDATED BALANCE SHEET

June 30, 2018

(Dollars in thousands)

Adjustments for new revenue recognition guidance

Current assets:

Cash and cash equivalents

Receivables, net

Other current assets

Total current assets

Property and equipment, net

Other intangibles, net

Non-current assets held for sale

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accounts payable

Accrued expenses

Total current liabilities

Long-term debt

Other noncurrent liabilities

Total liabilities

Commitments and contingencies

Shareholders’ equity:

Additional paid-in capital

Accumulated other comprehensive income

Retained earnings

Total shareholders’ equity

Total liabilities and shareholders’ equity

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CONSOLIDATED STATEMENT OF OPERATIONS

For The Twelve Months Ended June 30, 2018

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

Adjustments for new revenue recognition guidance

Royalties and fees

Operating expenses:

Cost of service

Cost of product

Site operating expenses

General and administrative

Depreciation and amortization

Total operating expenses

Operating income (loss)

Other (expense) income:

Interest expense

Gain from sale of salon assets to franchisees, net

Interest income and other, net

Loss from continuing operations before income taxes

Income tax benefit

Income from continuing operations

Loss from TBG discontinued operations, net of taxes

Net income (loss)

Net loss per share:

Income from continuing operations (1)

Loss from TBG discontinued operations

Net loss per share, basic (1)

Income from continuing operations (1)

Loss from TBG discontinued operations

Net loss per share, diluted (1)

Weighted average common and common equivalent shares outstanding:

_____________________________________________________________________________

(1) Total is a recalculation;

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Thereafter 13,648

Total $ 39,160

TBG DISCONTINUED OPERATIONS AND RESTRUCTURING

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In October 2017, the Company sold substantially all of its mall-based salon business in North America, representing 858 salons, to The Beautiful Group (TBG), an affiliate of Regent, a private equity firm based in Los Angeles, California, who operated these locations as franchise locations until June 2019.

In addition, the Company entered into a share purchase agreement for substantially all of its International segment, representing approximately 250 salons in the UK, with TBG who operates these locations as franchise locations.

The Company classified the results of its mall-based business and its International segment as a discontinued operation for all periods presented in the Condensed Consolidated Statement of Operations.

The operations of the mall-based business and International segment, which were previously recorded in the North American Value, North American Premium and International reporting segments, have been eliminated from ongoing operations of the Company.

In fiscal 2018, the Company fully reserved for an $ 11.7 million promissory note due from TBG which related to amounts due as part of the original transaction (working capital and prepaid rent) as this promissory note included forgiveness clauses if certain conditions were met, that the Company believed would be met.

In fiscal 2019, the Company fully reserved for amounts due from TBG, primarily related to notes and accounts receivable for inventory TBG purchased from the Company and outstanding royalties due.

In June 2019, the Company entered into a settlement agreement with TBG regarding the US and Canadian salons, which, among other things, substitutes the master franchise agreement for a license agreement.

Pursuant to the settlement agreement, the Company released and forgave TBG from amounts due related to inventory shipments, fees, services and accounts and notes receivables, plus accrued interest.

The Company had previously reserved for such amounts due from TBG in fiscal 2018 and fiscal 2019.

In addition, the Company entered into a share purchase agreement for substantially all of its International segment, representing approximately 250 salons in the UK, with TBG operating these locations as franchise locations until they were transferred to another franchisee in fiscal year 2020.

The Company classified the results of its mall-based business and its International segment as a discontinued operation for all periods presented in the Consolidated Statement of Operations.

In fiscal years 2018 and 2019, TBG salons were operating at a loss and TBG struggled to pay the Company for the receivables related to the original purchase agreements as well as royalty and product receivables.

The Company reserved for $ 11.7 million of receivables in fiscal 2018 and an additional $ 20.7 million of receivables in fiscal 2019.

In the second quarter of fiscal year 2020, TBG transferred 207 of its North American mall-based salons to the Company.

The 207 North American mall-based salons transferred were the salons that the Company was the guarantor of the lease obligation.

The transfer of the 207 mall-based salons occurred on December 31, 2019, so the operational results of these mall-based salons are included in the Consolidated Statement of Operations beginning in the third quarter.

The assets acquired and liabilities assumed were not material to the Consolidated Balance Sheet.

As of June 30, 2020, prior to any mitigation efforts which may be available, the Company remains liable for up to approximately $ 23 million related to its mall-based salon lease commitments on the 166 salons that remain open, a $ 18 million reduction from June 30, 2019.

The commitments are included in our lease liabilities.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following summarizes the results of TBG related charges and TBG discontinued operations for the periods presented:

2020 2019 2018

(Dollars in thousands)

Revenue $ — $ — $ 101,140

TBG Mall Restructuring:

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Other charges (2) (3) ( 1,063 ) 1,221 47,848

Loss from TBG discontinued operations, before taxes

(Income) loss from TBG discontinued operations, before taxes ( 1,063 ) 1,221 59,545

Income tax expense (benefit) on TBG discontinued operations (4) 231 ( 7,117 ) ( 6,360 )

Loss (income) from TBG discontinued operations, net of tax

In fiscal year 2019, the Company recorded professional fees related to the transaction as well as insurance adjustments associated with the discontinued operations.

(Income) loss from TBG discontinued operations, net of tax $ ( 832 ) $ ( 5,896 ) $ 53,185

_______________________________________________________________________________

(1) In fiscal year 2020, the Company recorded professional fees associated with the transfer of the mall salons back to the Company as TBG mall restructuring charges.

(2) In fiscal years 2020 and 2019, the Company recorded professional fees related to the transaction, as well as insurance adjustments associated with the discontinued operations.

(3) In fiscal year 2018, the Company recorded $ 43.0 million of asset impairment charges, $ 6.2 million of cumulative foreign currency translation adjustment, $ 3.6 million of loss from operations and $ 6.8 million of professional fees.

In fiscal year 2017, the Company recorded a loss from operations.

(4) Income taxes have been allocated to continuing and discontinued operations based on the methodology required by accounting for income taxes guidance.

The Company utilized the consolidation of variable interest entities guidance to determine whether or not TBG was a variable interest entity (VIE), and if so, whether the Company was the primary beneficiary of TBG.

The Company concluded that TBG is a VIE based on the fact that the equity investment at risk in TBG is not sufficient.

The Company determined that it is not the primary beneficiary of TBG based on its exposure to the expected losses of TBG and as it is not the variable interest holder that is most closely associated within the relationship and the significance of the activities of TBG.

The exposure to loss related to the Company's involvement with TBG is the carrying value of the amounts due from TBG and the guarantee of the operating leases.

As of June 30, 2019, prior to any mitigation efforts which may be available, the Company remains liable for up to $ 41 million associated with remaining TBG salon lease commitments, should TBG not perform.

The Company is also potentially liable for up to $ 2.2 million of payments to assist with operating expenses over the next six months.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SmartStyle restructuring :

3 unchanged sentences

A summary of costs associated with the SmartStyle salon restructuring for fiscal year 2018 is as follows:

Financial Line Item

Fiscal Year 2018

Financial Line Item Fiscal Year 2018

(Dollars in thousands)

Inventory reserves

Cost of Service

Inventory reserves

Cost of Product

General and administrative

Long-lived fixed asset impairment

Depreciation and amortization

Asset retirement obligation

Depreciation and amortization

Lease termination and other related closure costs

Deferred rent

Inventory reserves Cost of Service $ 656

Inventory reserves Cost of Product 586

Severance General and administrative 897

Long-lived fixed asset impairment Depreciation and amortization 5,460

Asset retirement obligation Depreciation and amortization 7,680

Lease termination and other related closure costs Rent 27,290

Deferred rent Rent ( 3,291 )

Total $ 39,278

In addition, the Company recorded approximately $ 1.9 million of other related costs to the SmartStyle restructuring, primarily warehouse related costs.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Foreign currency translation adjustment:

In fiscal year 2018, the Company incurred $ 6.2 million of cumulative foreign currency translation adjustment associated with the Company's liquidation of substantially all foreign entities with British pound denominated currencies.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

OTHER FINANCIAL STATEMENT DATA

2 unchanged sentences

Other current assets:

Prepaids $ 5,165 $ 9,527

Restricted cash 9,213 22,238

Other 4,760 1,451

$ 19,138 $ 33,216

Property and equipment:

2 unchanged sentences

Internal use software 71,212 67,465

306,574 406,191

Less accumulated depreciation and amortization ( 249,398 ) ( 328,101 )

$ 57,176 $ 78,090

Accrued expenses:

Payroll and payroll related costs $ 18,204 $ 34,909

Insurance 10,278 12,935

Rent and related real estate costs 4,179 6,332

Other noncurrent liabilities:

Other 16,164 26,575

$ 48,825 $ 80,751

Other non-current liabilities:

Deferred income taxes $ 13,916 $ 17,924

Deferred rent (1) — 14,006

Insurance 20,301 23,565

Deferred benefits 11,106 12,457

Deferred franchise fees 45,478 39,367

Other 3,341 4,080

$ 94,142 $ 111,399

_______________________________________________________________________________

(1) Upon adoption of ASC 842 in fiscal year 2020, the Company no longer reports deferred rent.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following provides additional information concerning other intangibles, net:

Weighted Average Amortization Periods (1)

Amortization (2)

Weighted Average Amortization Periods (1)

Amortization (2)

(Dollars in thousands)

Weighted Average Amortization Periods (1) Cost (2) Accumulated

Amortization (2) Net Weighted Average Amortization Periods (1) Cost (2) Accumulated

Amortization (2) Net

(In years) (Dollars in thousands) (In years) (Dollars in thousands)

Brand assets and trade names 33 $ 6,494 $ ( 3,609 ) $ 2,885 33 $ 6,909 $ ( 3,659 ) $ 3,250

1 unchanged sentence

Lease intangibles (3) 0 — — — 20 13,490 ( 10,065 ) 3,425

Other 20 874 ( 544 ) 330 20 883 ( 523 ) 360

Total 24 $ 16,926 $ ( 12,347 ) $ 4,579 22 $ 31,065 $ ( 22,304 ) $ 8,761

_______________________________________________________________________________

1 unchanged sentence

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

(3) A $ 2.5 million lease intangible impairment was recorded in the fourth fiscal quarter as a result of the COVID-19 triggering event.

Total amortization expense related to intangible assets during fiscal years 2020, 2019 and 2018 was approximately $ 1.3 million in each year.

As of June 30, 2019 , future estimated amortization expense related to intangible assets is estimated to be:

As of June 30, 2020, future estimated amortization expense related to intangible assets is estimated as follows (in thousands):

Thereafter 2,520

Total $ 4,579

The following provides supplemental disclosures of cash flow activity:

2020 2019 2018

(Dollars in thousands)

Cash paid (received) for:

Cash paid for:

Interest $ 7,390 $ 4,408 $ 7,022

Taxes and penalties, net 2,150 2,096 2,397

Noncash investing activities:

Non-cash investing activities:

Unpaid capital expenditures 2,569 3,873 9,209

1 unchanged sentence

The table below contains details related to the Company's goodwill:

Impairment (1)

Value (1) Accumulated

Impairment (3) Net Gross

Value (1) Accumulated

Impairment (2) Net

(Dollars in thousands)

Goodwill $ 341,721 $ ( 114,264 ) $ 227,457 $ 419,818 $ ( 74,100 ) $ 345,718

_______________________________________________________________________________

In fiscal year 2011, the Company realized a $ 74.1 million goodwill impairment loss associated with the Company-owned reporting unit (the previous North American Value reporting unit).

(1) The change in the gross carrying value of goodwill relates to goodwill derecognized for salons sold to franchisees and foreign currency translation adjustments.

(2) In fiscal year 2011, the Company realized a $ 74.1 million goodwill impairment loss associated with the Company-owned reporting unit (the previous North American Value reporting unit).

(3) In fiscal year 2020, the Company realized a $ 40.2 million goodwill impairment associated with the Company-owned reporting unit.

Prior to the COVID-19 pandemic, the Company had been derecognizing Company-owned goodwill as part of the calculation of gain or loss on the sale of salons to franchisees.

Following the goodwill impairment in fiscal year 2020, the Company-owned reporting unit has no remaining goodwill, so there will be no further derecognition of Company-owned goodwill.

The table below contains details related to the Company's goodwill:

Company-owned

Franchise Company-owned Consolidated

(Dollars in thousands)

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Derecognition related to sale of salon assets to franchisees (1) — ( 76,966 ) ( 76,966 )

Goodwill, net at June 30, 2018

Translation rate adjustments

Derecognition related to sale of salon assets to franchisees (1)

Goodwill impairment — ( 40,164 ) ( 40,164 )

Goodwill, net at June 30, 2020 $ 227,457 $ — $ 227,457

_______________________________________________________________________________

Goodwill is derecognized for salons sold to franchisees with positive cash flows.

The amount of goodwill derecognized is determined by a fraction (the numerator of which is the trailing-twelve months EBITDA of the salon being sold and the denominator of which is the estimated annualized EBITDA of the Company-owned reporting unit) that is applied to the total goodwill balance of the Company-owned reporting unit.

(1) Prior to the impairment charge, goodwill was derecognized for salons sold to franchisees with positive cash flows.

The amount of goodwill derecognized was determined by a fraction (the numerator of which is the trailing-twelve months EBITDA of the salon being sold and the denominator of which is the estimated annualized EBITDA of the Company-owned reporting unit) that is applied to the goodwill balance of the Company-owned reporting unit at the time of sale.

This methodology utilizing the trailing-twelve months of EBITDA as the unit of account is most representative of fair value for the derecognition calculation due to vendition strategies that may cause proceeds to not be representative of a market participant value.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

At contract inception, the Company determines whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time.

The Company leases its company-owned salons and some of its corporate facilities under operating leases.

The original terms of the salon leases range from 1 to 20 years with many leases renewable for additional 5 to 10 year terms at the option of the Company.

In addition to the obligation to make fixed rental payments for use of the salons, the Company also has variable lease payments that are based on sales levels.

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

Total rent expense includes the following:

2020 2019 2018

(Dollars in thousands)

Minimum rent (1) $ 60,703 $ 108,892 $ 157,828

Percentage rent based on sales 2,043 4,754 4,324

Real estate taxes and other expenses 13,636 18,170 20,944

Total $ 76,382 $ 131,816 $ 183,096

_______________________________________________________________________________

(1) Pursuant to ASC 420, fiscal year 2018 includes lease termination and other related closure costs of $ 27.3 million and a deferred rent benefit of $ 3.3 million related to restructuring of the company-owned SmartStyle portfolio that occurred in January 2018.

The Company also leases the premises in which the majority of its franchisees operate, where the Company retains the head lease primary obligation, and has entered into corresponding sublease arrangements with franchisees.

These leases, generally with terms of approximately 5 years, are expected to be renewed on expiration.

All lease related costs are passed through to the franchisees.

The Company retains the primary obligation for the head lease and upon adopting Topic 842, the Company records the rental payments due from franchisees as franchise rental income and the corresponding amounts owed to landlords as franchise rent expense on the Consolidated Statement of Operations.

In fiscal year 2020, franchise rental income and franchise rent expense were $ 127.2 million.

In April 2020, the FASB issued a question and answer document focused on the application of lease accounting guidance to lease concessions provided as a result of COVID-19 (the “Lease Modification Q&A”).

The Lease Modification Q&A provides entities with the option to elect to account for lease concessions as though the enforceable rights and obligations existed in the original lease when the total cash flows resulting from the modified lease are substantially similar to the cash flows in the original lease.

The Company elected this FASB relief for COVID-19-related rent concessions for the Walmart rent abatement received in April and May 2020 and has elected not to remeasure the related lease liability and right of use asset for Walmart leases.

The Walmart rent abatement was recognized as a reduction of variable rent expense of $ 2.7 million in the fourth fiscal quarter of 2020.

Additionally, included in accounts payable as of June 30, 2020 is approximately $ 20 million of rental payments that were due but the Company had not paid.

The Company has elected to account for these rent deferrals as if no changes to the lease contract were made and, as noted above, has increased its accounts payable as the lease payments accrue.

For franchise and company-owned salon operating leases, the lease liability is initially measured at the present value of the unpaid lease payments at the lease commencement date.

The Right of Use (ROU) asset is initially measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, less any accrued lease payments and unamortized lease incentives received, if any.

The Company’s consolidated Right of Use Asset (ROUA) balance was $ 786.2 million as of June 30, 2020.

For leases classified as operating leases, expense for lease payments is recognized on a straight-line basis over the lease term.

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

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

The weighted average remaining lease term was 6.87 years and the weighted-average discount rate was 3.95 % for all salon operating leases as of June 30, 2020.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A lessee’s right of use 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 for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities.

As a result of COVID-19 and the related store closures that occurred during the fourth fiscal quarter of 2020, the Company determined that a triggering event had occurred pursuant to ASC 360-10-35-21 given that there had been a significant adverse change in the business climate that could affect the value of its salon long-lived asset groups combined with a significant adverse change in the extent or manner in which the salon long-lived groups were being used.

As a result, management assessed all of its 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 COVID-19 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.

Step two of the long-lived asset impairment test requires that the fair value of the asset group be determined when calculating 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 fair value of the salon long-lived asset group is estimated using market participant methods based on the best information available.

The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include;

the market rent of comparable properties based on recently negotiated leases as applicable, the asset group’s projected sales for fiscal years 2021 through 2023 for properties with no recently negotiated leases, and a discount rate.

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.

Of the total $ 22.6 million long-lived asset impairment charge in the Consolidated Statement of Operations, $ 17.4 million related to the right of use asset included in the salon asset groups.

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.

However, the ultimate severity and longevity of the COVID-19 pandemic is unknown therefore, 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, 2020, future operating lease commitments to be paid and received by the Company were as follows:

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

2021 $ 121,149 $ 43,705 $ 1,781 $ 166,635 $ ( 121,149 ) $ 45,486

2022 110,951 36,628 1,410 148,989 ( 110,951 ) 38,038

2023 100,640 31,943 1,447 134,030 ( 100,640 ) 33,390

2024 90,649 28,057 1,484 120,190 ( 90,649 ) 29,541

2025 79,398 23,746 1,522 104,666 ( 79,398 ) 25,268

Thereafter 190,793 59,994 7,818 258,605 ( 190,793 ) 67,812

Total future obligations $ 693,580 $ 224,073 $ 15,462 $ 933,115 $ ( 693,580 ) $ 239,535

Less amounts representing interest 85,432 27,193 2,765 115,390

Present value of lease liabilities $ 608,148 $ 196,880 $ 12,697 $ 817,725

Less current lease liabilities 99,217 36,767 1,287 137,271

Long-term lease liabilities $ 508,931 $ 160,113 $ 11,410 $ 680,454

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FAIR VALUE MEASUREMENTS

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of June 30, 2019 and June 30, 2018, the estimated fair value of the Company’s cash, cash equivalents, restricted cash, receivables and accounts payable approximated their carrying values.

As of June 30, 2019 and 2018, the estimated fair value of the Company's debt was $ 90.0 million which approximated its carrying value.

As of June 30, 2020 and 2019, the estimated fair value of the Company’s cash, cash equivalents, restricted cash, receivables and accounts payable approximated their carrying values.

As of June 30, 2020, the estimated fair value of the Company's debt was $ 177.5 million, which approximated its carrying value.

As of June 30, 2020, the estimated fair value of the long-term financial liability was $ 28.0 million, which approximated its carrying value.

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The fair values of these assets are determined, when applicable, based on valuation techniques using the best information available, and may include quoted market prices, market comparables and discounted cash flow projections.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FAIR VALUE MEASUREMENTS (Continued)

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

2020 2019 2018

(Dollars in thousands)

Long-lived assets (1)

Goodwill $ 40,164 $ — $ —

Salon asset impairments (1) 3,851 4,587 11,092

Long-lived assets impairment (1) 22,560 — —

_______________________________________________________________________________

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The Company's long-term debt consists of the following:

Interest rate %

Maturity Date

(fiscal year)

(Dollars in thousands)

Revolving Credit Facility

The debt agreements contain covenants, including limitations on incurrence of debt, granting of liens, investments, merger or consolidation, certain restricted payments and transactions with affiliates.

In addition, the Company must adhere to specified fixed charge coverage and leverage ratios.

The Company was in compliance with all covenants and other requirements of our financing arrangements as of June 30, 2019 .

Maturity Date 2020 2019 2020 2019

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

Revolving credit facility 2023 5.50 % 3.65 % $ 177,500 $ 90,000

As of June 30, 2019 and 2018, the Company had $ 90.0 million of outstanding borrowings under a $ 295.0 million revolving credit facility.

The unsecured five -year revolving credit facility expires in March 2023 and includes, among other things, a maximum consolidated net leverage ratio covenant, a minimum fixed charge coverage ratio covenant, and certain restrictions on liens, investments and other indebtedness.

The revolving credit facility includes a $ 30.0 million subfacility for the issuance of letters of credit and a $ 30.0 million sublimit for swingline loans.

The Company may request an increase in revolving credit commitments under the facility of up to $ 150.0 million under certain circumstances.

The revolving credit facility has variable interest rates tied to LIBOR plus 1.25 % to 1.85 % and includes a facility fee of 0.25 % to 0.40 % .

Both the LIBOR credit spread and the facility fee are based on the Company's consolidated net leverage ratio.

In connection with entering into the revolving credit facility, the Company terminated its previous $ 200.0 million revolving credit facility.

As a result of terminating the $ 200.0 million revolving credit facility, the Company recognized $ 0.1 million of additional interest expense related to unamortized commitment fees during the fiscal year 2018.

At June 30, 2019 , the Company has outstanding standby letters of credit under the Revolving Credit Facility of $ 21.5 million primarily related to the Company's self-insurance program, therefore, unused available credit under the facility was $ 183.5 million .

At June 30, 2020, cash, cash equivalents and marketable securities totaled $ 113.7 million.

As of June 30, 2020, the Company had $ 177.5 million of outstanding borrowings under a $ 295.0 million revolving credit facility.

At June 30, 2020, the Company had outstanding standby letters of credit under the revolving credit facility of $ 21.0 million, primarily related to the Company's self-insurance program.

The unused available credit under the facility was $ 96.5 million at June 30, 2020.

The Company increased its outstanding borrowings from June 30, 2019 to June 30, 2020 by making a draw on the credit facility of $ 183.0 million in March of 2020.

The $ 183.0 million draw was done to increase the Company's cash position and preserve financial flexibility as the Company experienced significant business interruption due to the COVID-19 pandemic.

In the fourth quarter of fiscal year 2020, the Company repaid $ 125.5 million.

As of June 30, 2020, the Company had cash, cash equivalents and restricted cash of $ 122.9 million and current liabilities of $ 237.0 million.

In May of 2020, the Company amended its $ 295.0 million revolving credit facility that expires in March 2023.

The amendment to the revolving credit facility provides relief for the maximum consolidated net leverage ratio covenant and the minimum fixed charge coverage ratio covenant.

Without such amendment, the Company would have been in violation of the covenants as of March 31, 2020, which could have resulted in default.

Under the new terms of the amendment, the Company is required to maintain a minimum liquidity of not less than $ 75.0 million, and provides the Company's lenders security in the Company's assets, adds additional guarantors and grants a first priority lien and security interest to the lenders in substantially all of the Company’s and the guarantors’ existing and future property.

The amendment also increases the applicable interest rate margins and facility fees applicable to the loans and inserts a 1.25 % LIBOR floor.

The applicable margin for loans bearing interest at LIBOR ranges from 3.75 %- 4.25 %, the applicable margin for loans bearing interest at the base rate ranges from 2.75 %- 3.25 % and the facility fee ranges from 0.5 %- 0.75 %, each depending on average utilization of the revolving line of credit.

This amendment gives the Company flexibility throughout the uncertainty generated by the business disruption caused by the COVID-19 pandemic, as well as the Company's navigation through its strategic transformation.

The Company was in compliance with all covenants and other requirements of the financing arrangements as of June 30, 2020 and believes it will continue to be in compliance for at least one year from our filing date.

Senior Term Notes

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Sale and Leaseback Transactions

In fiscal year 2019, the Company sold its Salt Lake City and Chattanooga Distribution Centers to an unrelated party.

The Company is leasing the properties back for 15 years with the option to renew.

As the Company plans to lease the property for more than 75 % of its economic life, the sales proceeds received from the buyer-lessor are recognized as a financial liability.

This financial liability is reduced based on the rental payments made under the lease that are allocated between principal and interest.

As of June 30, 2019 , the current portion of the Company’s lease liabilities was $ 0.9 million .

The Company’s long-term lease liability consists of the following:

Maturity Date

Interest Rate

(Fiscal Year)

(Dollars in thousands)

Maturity Date Interest Rate June 30,

2020 June 30,

(Fiscal year) (Dollars in thousands)

Financial liability - Salt Lake City Distribution Center 2034 3.30 % $ 16,773 $ 17,354

Financial liability - Chattanooga Distribution Center 2034 3.70 % 11,208 11,556

Long-term lease liability

Long-term financing liabilities $ 27,981 $ 28,910

In fiscal year 2019, the Company sold its Salt Lake City and Chattanooga Distribution Centers to an unrelated party.

The Company is leasing the properties back for 15 years with the option to renew.

As the Company plans to lease the property for more than 75% of its economic life, the sales proceeds received from the buyer-lessor are recognized as a financial liability.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

This financial liability is reduced based on the rental payments made under the lease that are allocated between principal and interest.

As of June 30, 2020, the current portion of the Company’s lease liabilities was $ 0.9 million, which was recorded in accrued expenses on the Consolidated Balance Sheet.

The weighted average remaining lease term was 13.6 years and the weighted-average discount rate was 3.46 % for financing leases as of June 30, 2020.

As of June 30, 2020, future lease payments due are as follows:

Salt Lake City

The lease liability does not include interest.

Fiscal year Salt Lake City Distribution Center Chattanooga Distribution Center

(Dollars in thousands)

2021 $ 1,157 $ 817

2022 1,171 829

2023 1,186 842

2024 1,200 854

2025 1,215 867

Thereafter 10,683 8,414

Total $ 16,612 $ 12,623

These lease payments were not impacted by the adoption of ASC 842.

The financing lease liability does not include interest.

Future lease payments above are due per the lease agreement and include embedded interest.

Therefore, the total payments do not equal the liability.

The Company was in compliance with all covenants and requirements of its financing arrangements as of and during the year ended June 30, 2019 .

Total interest expense for the financing leases was $ 0.7 million for the year ended June 30, 2020, including a one-time $ 0.4 million credit to interest related to 75 % of the April and May rent being waived due to the COVID-19 pandemic.

COMMITMENTS AND CONTINGENCIES

Operating Leases:

The Company leases most of its company-owned salons and some of its corporate facilities under operating leases.

The original terms of the salon leases range from 1 to 20 years , with many leases renewable for additional 5 to 10 years terms at the option of the Company.

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

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

These leases, generally with terms of approximately five years , are expected to be renewed on expiration.

All additional lease costs are passed through to the franchisees.

Sublease income was $ 37.3 , $ 34.0 and $ 31.5 million in fiscal years 2019 , 2018 and 2017 , respectively.

Rent expense on premises subleased was $ 37.0 , $ 33.6 and $ 31.1 million in fiscal years 2019 , 2018 and 2017 , respectively.

In most cases, the amount of rental income related to sublease arrangements with franchisees approximates the amount of rent expense from the primary lease, thereby having no net impact on rent expense or net (loss) income.

However, in limited cases, the Company charges a 10.0 % mark-up in its sublease arrangements.

The net rental income resulting from such arrangements totaled $ 0.3 , $ 0.4 , and $ 0.4 million for fiscal years 2019 , 2018 and 2017 , respectively, and was classified in the royalties and fees caption of the Consolidated Statement of Operations.

The Company has a sublease arrangement for a leased building the Company previously occupied.

The aggregate amount of lease payments to be made over the remaining lease term are approximately $ 2.3 million .

The amount of rental income approximates the amount of rent expense, thereby having no material impact on rent expense or net income (loss).

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Total rent expense, excluding rent expense on premises subleased to franchisees, includes the following:

(Dollars in thousands)

Minimum rent (1)

Percentage rent based on sales

Real estate taxes and other expenses

_______________________________________________________________________________

Fiscal year 2018 includes lease termination and other related closure costs of $ 27.3 million and a deferred rent benefit of $ 3.3 million related to the restructuring of the company-owned SmartStyle portfolio that occurred in January 2018.

As of June 30, 2019 , future minimum lease payments (excluding percentage rents based on sales) due under existing noncancelable operating leases are as follows:

(Dollars in thousands)

Total minimum lease payments

Contingencies:

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Although the actions are being vigorously defended, the Company could in the future incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period.

The Company is a defendant in two wage and hour lawsuits in California.

The first, a class action in U.S.

District Court, alleges various violations of the California Labor Code, including but not limited to failure to pay wages, failure to permit rest breaks, failure to pay all wages due on termination of employment, waiting time penalties, failure to provide accurate wage statements and violation of the business and professions code.

This case has preliminarily settled, pending approval of the court and class, for $ 2.1 million.

The second, a class action filed in California Superior Court, alleges various violations of the California Labor Code as well as PAGA penalties.

Barring successful objection from plaintiffs’ attorneys to the first class action, the second case will be subsumed into the first case’s settlement.

As of June 30, 2019 and 2020, $ 1.5 and $ 2.1 million, respectively, was included within accrued expenses on the Condensed Consolidated Balance Sheet related to these class action lawsuits.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

2020 2019 2018

(Dollars in thousands)

(Loss) income before income taxes:

Loss before income taxes

$ ( 165,260 ) $ ( 17,513 ) $ ( 16,604 )

International ( 11,553 ) ( 4,754 ) 6,413

The (benefit) provision for income taxes consists of:

$ ( 176,813 ) $ ( 22,267 ) $ ( 10,191 )

The benefit for income taxes consists of:

2020 2019 2018

(Dollars in thousands)

$ ( 925 ) $ ( 519 ) $ 2,151

International 238 1,069 1,894

( 3,353 ) ( 2,303 ) ( 73,728 )

International ( 579 ) ( 392 ) ( 129 )

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

$ ( 4,619 ) $ ( 2,145 ) $ ( 69,812 )

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

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

2020 2019 2018

statutory rate 21.0 % 21.0 % 28.0 %

2 unchanged sentences

Foreign income taxes at other than U.S.

rates ( 0.6 ) 0.9 ( 0.5 )

Work opportunity tax credits 0.4 7.2 15.2

2 unchanged sentences

Stock-based compensation 0.1 2.2 ( 15.8 )

Capital loss 15.0 — —

Other, net (2) ( 1.7 ) ( 8.7 ) ( 0.6 )

2.6 % 9.6 % 685.0 %

_______________________________________________________________________________

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

(2) The ( 1.7 )% of Other, net in fiscal year 2020 includes the rate impact of goodwill derecognition and impairment and miscellaneous items of ( 1.2 )% and ( 0.6 )%, respectively.

Miscellaneous items do not include the rate impact of any items in excess of 5 % of computed tax.

The ( 8.7 )% of Other, net in fiscal year 2019 includes the rate impact of goodwill derecognition and miscellaneous items of ( 5.9 )% and ( 2.8 )%, respectively.

1 unchanged sentence

The ( 0.6 )% of Other, net in fiscal year 2018 does not include the rate impact of any items in excess of 5 % of computed tax.

The other 1.4 % of Other, net in fiscal year 2017 includes the rate impact of meals and entertainment expense disallowance, adjustments resulting from charitable contributions, officer life insurance and miscellaneous items of 6.3 % , 10.0 % , ( 7.8 )% and ( 7.1 )% , respectively.

Miscellaneous items do not include any items in excess of 5% of computed tax.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6 unchanged sentences

Tax credit carryforwards 37,072 36,966

Capital loss carryforwards 14,978 —

Deferred franchise fees 9,342 7,508

Financial lease liability

Operating lease liabilities 202,940 —

Financing lease liabilities 7,157 7,387

Other 8,214 8,709

Subtotal $ 354,008 $ 124,290

Valuation allowance ( 122,447 ) ( 70,707 )

2 unchanged sentences

Goodwill and intangibles $ ( 40,904 ) $ ( 62,378 )

Operating lease assets ( 197,304 ) —

Other ( 7,269 ) ( 9,129 )

Total deferred tax liabilities $ ( 245,477 ) $ ( 71,507 )

Net deferred tax liability $ ( 13,916 ) $ ( 17,924 )

On December 22, 2017, the U.S.

government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”).

In connection with the Tax Act, the Company recorded a provisional net tax benefit of $ 68.1 million in continuing operations for the twelve months ended June 30, 2018.

During the six months ended December 31, 2018, the Company made no adjustments to this provisional tax benefit and finalized its accounting related to the Tax Act.

The net tax benefit is primarily attributable to the impact of the corporate rate reduction on our deferred tax assets and liabilities along with a partial release of the U.S.

valuation allowance.

The benefit recognized on current losses and the partial valuation allowance release is solely attributable to tax reform and the law change that allows for the indefinite carryforward of net operating losses ("NOLs") arising in tax years ending after December 31, 2017.

Prior law limited the carryforward period to 20 years.

As a result of the new tax rules, companies can now consider its indefinite lived deferred tax liabilities as a source of income to support the realization of its existing deferred tax assets that upon reversal are expected to generate indefinite lived NOLs.

Consequently, the Company was able to remove the valuation allowance associated with these deferred tax assets.

The Company continues to maintain a valuation allowance on the historical balance of its finite lived federal NOLs, tax credits and various state tax attributes.

Changes in interpretations, assumptions, and guidance regarding the new tax legislation, as well as the potential for technical corrections to the Tax Act, could have a material impact to the Company’s effective tax rate in future periods.

Significant components of the valuation allowance which occurred during fiscal year 2020 are as follows:

• On March 27, 2020, the U.S.

government enacted the Coronavirus Aid, Relief and Economic Security Act (CARES Act) in response to the COVID-19 pandemic.

The CARES Act included several significant business tax provisions that, among other items, eliminated the taxable income limit and granted business a five-year carryback for certain net operating losses (NOLs), accelerated refunds of previously generated corporate alternative minimum tax (AMT) credits, temporarily loosened the business interest limitation under section 163(j) and corrected certain provisions under the Tax Cuts and Jobs Act (TCJA).

In connection with the CARES Act, NOLs resulting from accounting periods which straddled December 31, 2017 are now considered definite-lived NOLs.

Therefore, the Company established a U.S.

valuation allowance against the NOLs generated during its fiscal year 2018 and recorded a net tax expense of $ 14.7 million in continuing operations.

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

indefinite-lived taxable temporary differences to support realization of its U.S.

indefinite-lived NOLs and its existing U.S.

deferred tax assets that upon reversal are expected to generate indefinite-lived NOLs.

As a result, the Company recorded an additional $ 17.0 million valuation allowance on its U.S.

federal indefinite-lived deferred tax assets.

• The Company further recognized a capital loss and established a corresponding valuation allowance of $ 14.9 million on investment outside basis previously impaired for financial accounting purposes.

The Company also expects to receive a refund of approximately $ 1.4 million due to accelerated refunds of AMT credits as a result of the CARES Act.

At June 30, 2020, the Company has tax effected federal, state, Canada, and U.K.

1 unchanged sentence

The Company's federal loss carryforward consists of $ 27.3 million that will expire from fiscal years 2034 to 2038 and $ 16.3 million that has no expiration.

The state loss carryforwards will expire from fiscal years 2020 to 2039.

The state loss carryforwards consist of $ 15.7 million that will expire from fiscal years 2021 to 2040 and $ 1.0 million that has no expiration.

The Canada loss carryforward will expire from fiscal years 2036 to 2040.

loss carryforward has no expiration.

The Company's tax credit carryforward of $ 36.9 million consists of $ 35.7 million that will expire from fiscal years 2030 to 2039, $ 0.5 million that will expire from fiscal years 2020 to 2029 and $ 0.7 million of carryforward that has no expiration date.

As of June 30, 2019, the Company has not provided deferred taxes on approximately $ 4.4 million of undistributed earnings of attributable to its international subsidiaries that have been considered to be reinvested indefinitely.

The Company has multiple avenues to repatriate these earnings tax efficiently and therefore it does not expect to incur significant U.S.

or foreign income taxes upon repatriation.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company's tax credit carryforward of $ 37.1 million primarily consist of Work Opportunity Tax Credits that will expire from fiscal years 2031 to 2040.

The Company's capital loss carryforward of $ 14.9 million will expire in fiscal year 2025.

We consider the earnings of certain non-U.S.

subsidiaries to be indefinitely invested outside the United States.

Accordingly, we have not recorded deferred taxes related to the U.S.

federal and state income taxes and foreign withholding taxes on approximately $ 30.3 million of undistributed earnings of foreign subsidiaries which have been reinvested outside the United States.

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

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

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A rollforward of the unrecognized tax benefits is as follows:

2020 2019 2018

(Dollars in thousands)

Balance at beginning of period $ 2,763 $ 3,027 $ 1,388

Additions based on tax positions related to the current year

Additions/(reductions) based on tax positions of prior years

Additions based on tax positions related to the current year, primarily salon vendition activity and tax positions related to a capital loss 11,985 287 553

(Reductions)/additions based on tax positions of prior years ( 223 ) ( 154 ) 1,608

Reductions on tax positions related to the expiration of the statute of limitations ( 480 ) ( 397 ) ( 177 )

Settlements — — ( 345 )

Balance at end of period $ 14,045 $ 2,763 $ 3,027

1 unchanged sentence

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

During the fiscal years 2019, 2018 and 2017, we recorded interest and penalties of approximately $ 0.1 million as additions to the accrual net of the respective reversal of previously accrued interest and penalties.

During each of the fiscal years 2020, 2019 and 2018, the Company recorded interest and penalties of approximately $ 0.1 million as additions to the accrual, net of the respective reversal of previously accrued interest and penalties.

As of June 30, 2020, the Company had accrued interest and penalties related to unrecognized tax benefits of $ 1.1 million.

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The Company maintains a defined contribution 401(k) plan, the Regis Retirement Savings Plan (RRSP).

The RRSP is a defined contribution profit sharing plan with a 401(k) feature that is intended to qualify under Section 401(a) of the Internal Revenue Code (Code) and is subject to the Employee Retirement Income Security Act of 1974 (ERISA).

The RRSP is a defined contribution profit sharing plan with a 401(k) feature that is intended to qualify under Section 401(a) of the Internal Revenue Code (the Code) and is subject to the Employee Retirement Income Security Act of 1974 (ERISA).

The 401(k) portion of the RRSP is a cash or deferred arrangement intended to qualify under section 401(k) of the Code and under which eligible employees may elect to contribute a percentage of their eligible compensation.

19 unchanged sentences

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

Expense associated with the deferred compensation contracts included in general and administrative expenses on the Consolidated Statement of Operations totaled zero , $ 0.2 , and $ 0.2 million for fiscal years 2019 , 2018 and 2017 , respectively.

Expense associated with the deferred compensation contracts included in general and administrative expenses on the Consolidated Statement of Operations totaled zero for fiscal years 2020 and 2019, and $ 0.2 million for fiscal year 2018.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2 unchanged sentences

Current portion (included in accrued liabilities) $ 302 $ 1,183

Long-term portion (included in other noncurrent liabilities)

The accumulated other comprehensive income (loss) for the deferred compensation contracts, consisting of primarily unrecognized actuarial income, was $ 0.5 and $ 1.0 million at June 30, 2019 and 2018 , respectively.

Long-term portion (included in other non-current liabilities) 4,637 4,416

$ 4,939 $ 5,599

The accumulated other comprehensive (loss) income for the deferred compensation contracts, consisting of primarily unrecognized actuarial income, was $ 0.1 and $ 0.5 million at June 30, 2020 and 2019, respectively.

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 expenses on the Consolidated Statement of Operations totaled $ 0.4 , $ 0.4 and $ 0.3 million for fiscal years 2020, 2019 and 2018, respectively.

Related obligations totaled $ 2.6 million at June 30, 2019 and 2018 , with $ 0.5 million within accrued expenses at June 30, 2019 and 2018 , and the remainder included in other noncurrent liabilities in the Consolidated Balance Sheet.

In connection with the passing of former employees in fiscal years 2019, 2018 and 2017, the Company received 24.6 , $ 18.1 and $ 0.9 million, respectively, in life insurance proceeds.

The Company recorded gains of zero , $ 8.0 and $ 0.1 million in fiscal years 2019, 2018 and 2017, respectively, in general and administrative in the Consolidated Statement of Operations associated with the proceeds.

Related obligations totaled $ 2.4 million at June 30, 2020 and 2019, with $ 0.5 million within accrued expenses at June 30, 2020 and 2019, and the remainder included in other non-current liabilities in the Consolidated Balance Sheet.

In connection with the passing of former employees, the Company received zero life insurance proceeds in fiscal year 2020, and the Company received $ 24.6 and $ 18.1 million in fiscal years 2019 and 2018, respectively, in life insurance proceeds.

The Company recorded gains of zero in fiscal years 2020 and 2019 and $ 8.0 million in fiscal year 2018 in general and administrative in the Consolidated Statement of Operations associated with the proceeds.

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 restricted stock awards (RSAs), 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.

The Company’s basic earnings per share is calculated as net (loss) income divided by weighted average common shares outstanding, excluding unvested outstanding restricted stock awards (RSAs), restricted stock units (RSUs) and stock-settled performance units (PSUs).

The Company’s diluted earnings per share is calculated as net (loss) 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.

For fiscal years 2019 and 2017, 1,341,421 and 728,223 of common stock equivalents of dilutive common stock, respectively were not included in the diluted earnings per share calculation due to net loss from continuing operations.

For fiscal years 2020 and 2019, 963,456 and 1,341,421 of common stock equivalents of dilutive common stock, respectively, were excluded from the diluted earnings per share calculation due to net loss from continuing operations.

For fiscal year 2018, 518,236 common stock equivalents of dilutive common stock were included in the diluted earnings per share calculation due to net income from continuing operations.

The computation of weighted average shares outstanding, assuming dilution, excluded the following stock-based awards as they were not dilutive under the treasury stock method:

2020 2019 2018

Equity-based compensation awards 315,312 118,246 634,292

6 unchanged sentences

All unvested awards are subject to forfeiture in event of termination of employment, unless accelerated.

SAR and RSU awards granted under the 2018 Plan generally include various acceleration terms, including upon retirement for participants aged sixty-two years or older or who are aged fifty-five or older and have 15 years of continuous service.

SAR and RSU awards granted under the 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Plan generally include various acceleration terms, including upon retirement for participants aged sixty-two years or older or who are aged fifty-five or older and have 15 years of continuous service.

The Company also has outstanding awards under the 2016 Long Term Incentive Plan (the 2016 Plan), although the 2016 Plan terminated in October 2018 and no additional awards have since been or will be made under the 2016 Plan.

3 unchanged sentences

Under the 2018 Plan, 2016 Plan and the 2004 Plan, stock-based awards are granted at an exercise price or initial value equal to the fair market value on the date of grant.

There were no SARs granted in fiscal year 2020.

Using the fair value of each grant on the date of grant, the weighted average fair values per stock-based compensation award granted during fiscal years 2020, 2019 and 2018 were as follows:

RSAs & RSUs (2)

(1) The fair value of SARs granted are estimated on the date of grant using the Black-Scholes-Merton (BSM) option valuation model.

The significant assumptions used in determining the estimated fair value of SARs granted during fiscal year 2017 were as follows:

Risk-free interest rate of 1.99 % , expected term of 6.5 years, expected volatility of 31.5 % and no dividend yield.

2020 2019 2018

RSUs (1) $ 16.48 $ 21.12 $ 13.43

PSUs (1) 12.09 14.05 15.74

_______________________________________________________________________________

(1) The fair value of market-based RSUs and PSUs granted are estimated on the date of grant using a Monte Carlo valuation model.

The significant assumptions used in determining the estimated fair value of the market-based awards granted during fiscal years 2020, 2019 and 2018 were as follows:

2020 2019 2018

Risk-free interest rate 1.43 % 2.31 - 2.68 %

1.66 - 2.59 %

Expected volatility 33.9 % 34.2 - 34.6 %

33.4 - 37.1 %

Expected dividend yield — % — % — %

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

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

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

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

Estimated expected life was based on an analysis of historical stock awards granted data which included analyzing grant activity including grants exercised, expired and canceled.

The expected dividend yield is determined based on the Company's annual dividend amount as a percentage of the strike price at the time of the grant.

The Company uses historical data to estimate pre-vesting forfeiture rates.

Stock-based compensation expense was as follows:

2020 2019 2018

(Dollars in thousands)

SARs $ — $ 1,497 $ 2,252

RSAs, RSUs, & PSUs 3,275 7,506 6,017

2 unchanged sentences

Total stock-based compensation expense, net of tax $ 2,587 $ 7,112 $ 6,533

_______________________________________________________________________________

(1) Federal statutory income tax rate of 21% utilized in fiscal years 2020, 2019 and 2018.

No income tax benefit associated with fiscal year 2017 due to the full valuation allowance.

Total compensation cost for stock-based payment arrangements for fiscal years 2018 and 2017 includes $ 1.3 and $ 5.4 million related to the termination of former executive officers.

Stock Appreciation Rights & Stock Options:

The Company recorded a stock compensation benefit of $ 1.6 million in fiscal year 2020 related to performance awards that did not meet the vesting requirements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock Appreciation Rights & Stock Options:

SARs and stock options granted under the 2018 Plan, 2016 Plan and the 2004 Plan generally vest ratably over a three to five year period on each of the annual grant date anniversaries and expire ten years from the grant date.

SARs granted subsequent to fiscal year 2012 vest ratably over a three year period with the exception of the April 2017 grant to the Chief Executive Officer, which vests in full after two years .

Activity for all of our outstanding SARs and stock options is as follows:

(in thousands)

Exercise Price

Contractual Life

SARs granted subsequent to fiscal year 2012 vest ratably over a three year period with the exception of the April 2017 grant to the Chief Executive Officer, which vested in full after two years .

Activity for all the Company's outstanding SARs and stock options is as follows:

(in thousands) Weighted

Exercise Price Weighted-

Contractual Life Aggregate

Intrinsic Value

1 unchanged sentence

Outstanding balance at June 30, 2019 1,321 10 $ 11.97

Granted — — —

Forfeited/Expired ( 36 ) ( 9 ) 16.69

Exercised — ( 1 ) 18.61

Outstanding balance at June 30, 2020 1,285 — $ 11.79 6.08 $ ( 4,639 )

4 unchanged sentences

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.

Activity for all of our RSUs is as follows:

(in thousands)

Aggregate Intrinsic

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

(in thousands) Weighted

Fair Value Aggregate Intrinsic

(in thousands)

Outstanding balance at June 30, 2019 850 $ 16.42

Granted 257 16.48

Forfeited ( 166 ) 17.29

Vested ( 235 ) 11.88

Outstanding balance at June 30, 2020 706 $ 17.72 $ 5,775

2 unchanged sentences

As of June 30, 2020, there was $ 3.8 million of unrecognized expense related to RSUs that is expected to be recognized over a weighted-average period of 1.75 years.

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Activity for all of our PSUs is as follows:

(in thousands)

Aggregate Intrinsic

Activity for all of the Company's PSUs is as follows:

(in thousands) Weighted

Fair Value Aggregate Intrinsic

(in thousands) (1)

Outstanding balance at June 30, 2019 980 $ 14.10

Granted 74 12.09

Forfeited ( 165 ) 14.57

Vested ( 179 ) 12.93

Outstanding balance at June 30, 2020 710 $ 13.90 $ 5,808

3 unchanged sentences

(1) Includes actual or expected payout rates as set forth in the performance criteria.

In connection with the termination of former executive officers, the Company settled certain PSUs for cash of $ 0.8 million and $ 3.2 million during fiscal year 2018 and 2017, respectively.

In connection with the termination of former executive officers, the Company settled certain PSUs for cash of $ 0.8 million during fiscal year 2018.

PSUs granted in fiscal year 2020 have a performance period of three years , after which they will vest to the extent earned.

Future compensation expense for these unvested awards could reach a maximum of $ 4.7 million to be recognized over 2.2 years , if the maximum performance metrics are achieved.

There was $ 0.3 million of total unrecognized compensation expense related to the unvested awards to be recognized over 2.2 years.

PSUs granted in fiscal year 2019 have a performance period of three years , after which they will vest to the extent earned.

Future compensation expense for these unvested awards could reach a maximum of $ 1.1 million to be recognized over 1.2 years , if the maximum performance metrics are achieved.

PSUs granted in fiscal year 2017 had a performance period of three years .

They have been earned and will vest three years from the initial grant date.

As of June 30, 2019 , there was less than $ 0.1 million of expense related to the fiscal 2017 PSUs that is expected to be recognized over a weighted-average period of 0.2 years .

There was $ 3.3 million of total unrecognized compensation expense related to the unvested awards to be recognized over 1.2 years.

PSUs granted in fiscal year 2018 have a performance period of three years , ending June 30, 2020.

As of June 30, 2020, these awards have not been earned and will not vest to the extent earned.

As a result, the Company recorded a benefit of $ 1.6 million in fiscal year 2020.

SHAREHOLDERS' EQUITY

13 unchanged sentences

The components of accumulated other comprehensive income are as follows:

2020 2019 2018

(Dollars in thousands)

2 unchanged sentences

Accumulated other comprehensive income $ 7,449 $ 9,342 $ 9,656

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SEGMENT INFORMATION

14 unchanged sentences

SmartStyle, Supercuts, Cost Cutters and other regional trade names operating in the United States, Canada and Puerto Rico are generally within the Company-owned salons segment.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Financial information concerning the Company's reportable operating segments is shown in the following table:

For the Year Ended June 30, 2020

Company-owned

Corporate (1)

Franchise Company - owned Corporate (1)

(Dollars in thousands)

Service $ — $ 331,538 $ — $ 331,538

Product 52,421 85,165 — 137,586

Royalties and fees 73,402 — — 73,402

Franchise rental income 127,203 — — 127,203

253,026 416,703 — 669,729

Operating expenses:

3 unchanged sentences

General and administrative 33,725 24,638 72,590 130,953

Rent 872 72,921 2,589 76,382

Franchise rent expense 127,203 — — 127,203

Depreciation and amortization 922 29,113 6,917 36,952

Long-lived asset impairment 1,712 20,848 — 22,560

TBG restructuring 2,333 — — 2,333

Goodwill impairment — 40,164 — 40,164

Total operating expenses 220,140 512,831 82,096 815,067

4 unchanged sentences

Interest income and other, net — — 3,353 3,353

Income (loss) from continuing operations before income taxes and equity in loss of affiliated companies

Income (loss) from continuing operations before income taxes $ 32,886 $ ( 96,128 ) $ ( 113,571 ) $ ( 176,813 )

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Year Ended June 30, 2019

Company-owned

Corporate (1)

Franchise Company-owned Corporate (1)

(Dollars in thousands)

Service $ — $ 749,660 $ — $ 749,660

Product 59,905 165,713 — 225,618

Royalties and fees 93,761 — — 93,761

153,666 915,373 — 1,069,039

Operating expenses:

3 unchanged sentences

General and administrative 32,888 57,219 86,897 177,004

Rent 740 130,214 862 131,816

Depreciation and amortization 762 28,263 8,823 37,848

TBG restructuring 21,816 — — 21,816

Total operating expenses 137,524 857,052 96,582 1,091,158

4 unchanged sentences

Interest income and other, net — — 1,729 1,729

Income (loss) from continuing operations before income taxes and equity in loss of affiliated companies

Income (loss) from continuing operations before income taxes $ 16,142 $ 58,321 $ ( 96,730 ) $ ( 22,267 )

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the Year Ended June 30, 2018

Company-owned

Corporate (1)

Franchise Company - owned Corporate (1)

(Dollars in thousands)

Service $ — $ 899,345 $ — $ 899,345

Product 53,703 205,037 — 258,740

Royalties and fees 77,394 — — 77,394

131,097 1,104,382 — 1,235,479

Operating expenses:

3 unchanged sentences

General and administrative 25,880 67,163 81,002 174,045

Rent 269 181,869 958 183,096

Depreciation and amortization 365 48,508 9,332 58,205

5 unchanged sentences

Interest income and other, net — — 5,199 5,199

Income (loss) from continuing operations before income taxes and equity in loss of affiliated companies

Income (loss) from continuing operations before income taxes $ 35,637 $ 50,516 $ ( 96,344 ) $ ( 10,191 )

_______________________________________________________________________________

3 unchanged sentences

and all other countries in aggregate were as follows:

Equipment, Net

2020 2019 2018

Revenues Property and

Equipment, Net Total

Revenues Property and

Equipment, Net Total

Revenues Property and

Equipment, Net

(Dollars in thousands)

$ 613,652 $ 56,532 $ 972,994 $ 75,789 $ 1,132,041 $ 95,956

Other countries 56,077 644 96,045 2,301 103,438 3,332

Total $ 669,729 $ 57,176 $ 1,069,039 $ 78,090 $ 1,235,479 $ 99,288

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

QUARTERLY FINANCIAL DATA (UNAUDITED)

Refer to Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 in this Form 10-K for explanations of items which impacted fiscal years 2019 and 2018 revenues, operating and net income (loss).

Summarized quarterly data for fiscal years 2020 and 2019 follows:

Quarter Ended

September 30 December 31 March 31 (1) June 30 (2) Year Ended

(Dollars in thousands, except per share amounts)

Revenues $ 247,038 $ 208,765 $ 153,783 $ 60,143 $ 669,729

Cost of service and product revenues, excluding depreciation and amortization 116,809 94,616 76,496 19,056 306,977

Operating income (loss)

Income (loss) from continuing operations

Income (loss) from discontinued operations

Net income (loss)

Income (loss) from continuing operations per share, basic (e)

Income (loss) from discontinued operations per share, basic (e)

Net income (loss) per share, basic (e)

Income (loss) from continuing operations per share, diluted (e)

Income (loss) from discontinued operations per share, diluted (e)

Net income (loss) per share, diluted (e)

Operating loss ( 9,906 ) ( 7,466 ) ( 59,399 ) ( 68,567 ) ( 145,338 )

Loss from continuing operations ( 14,178 ) ( 16,520 ) ( 67,842 ) ( 73,654 ) ( 172,194 )

Income from discontinued operations 373 79 301 79 832

Net loss ( 13,805 ) ( 16,441 ) ( 67,541 ) ( 73,575 ) ( 171,362 )

Loss from continuing operations per share, basic (4) ( 0.39 ) ( 0.46 ) ( 1.89 ) ( 2.05 ) ( 4.79 )

Income from discontinued operations per share, basic (4) 0.01 — 0.01 — 0.02

Net loss per share, basic (4) ( 0.38 ) ( 0.46 ) ( 1.88 ) ( 2.05 ) ( 4.77 )

Loss from continuing operations per share, diluted (4) ( 0.39 ) ( 0.46 ) ( 1.89 ) ( 2.05 ) ( 4.79 )

Income from discontinued operations per share, diluted (4) 0.01 — 0.01 — 0.02

Net loss per share, diluted (4) ( 0.38 ) ( 0.46 ) ( 1.88 ) ( 2.05 ) ( 4.77 )

Quarter Ended

September 30 (b)

December 31 (c)

September 30 December 31 March 31 (3) June 30 Year Ended

(Dollars in thousands, except per share amounts)

Revenues $ 287,835 $ 274,671 $ 258,343 $ 248,190 $ 1,069,039

Cost of service and product revenues, excluding depreciation and amortization 153,678 151,281 142,799 133,885 581,643

Operating income (loss) 3,429 ( 1,551 ) ( 22,162 ) ( 1,835 ) ( 22,119 )

Income from continuing operations

Loss from discontinued operations(b)

Net income (loss)

Income from continuing operations per share, basic

Loss from discontinued operations per share, basic

Net income (loss) per share, basic (e)

Income (loss) from continuing operations per share, diluted (e)

Income (loss) from discontinued operations per share, diluted

Net income (loss) per share, diluted (e)

(Loss) income from continuing operations ( 463 ) 417 ( 14,811 ) ( 5,265 ) ( 20,122 )

(Loss) income from discontinued operations ( 264 ) 6,113 178 ( 131 ) 5,896

Net (loss) income ( 727 ) 6,530 ( 14,633 ) ( 5,396 ) ( 14,226 )

(Loss) income from continuing operations per share, basic (4) ( 0.01 ) 0.01 ( 0.37 ) ( 0.14 ) ( 0.48 )

(Loss) income from discontinued operations per share, basic (4) ( 0.01 ) 0.14 — — 0.14

Net (loss) income per share, basic (4) ( 0.02 ) 0.15 ( 0.36 ) ( 0.14 ) ( 0.34 )

(Loss) income from continuing operations per share, diluted (4) ( 0.01 ) 0.01 ( 0.37 ) ( 0.14 ) ( 0.48 )

(Loss) income from discontinued operations per share, diluted (4) ( 0.01 ) 0.14 — — 0.14

Net (loss) income per share, diluted (4) ( 0.02 ) 0.15 ( 0.36 ) ( 0.14 ) ( 0.34 )

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

_______________________________________________________________________________

(1) During the third quarter of fiscal year 2020, the Company recorded a $ 40.2 million goodwill impairment charge related to the Company-owned reporting unit (see revision explanation below).

(2) During the fourth quarter of fiscal year 2020, government-mandated salon closures in response to the COVID-19 pandemic significantly reduced operating income.

Additionally, the economic disruption caused by COVID-19 triggered a $ 22.6 million long-lived asset impairment charge.

(3) During the third quarter of fiscal year 2019, the Company recorded a $ 20.7 million restructuring charge related to TBG mall locations.

The reserve was a non-cash charge to reserve for notes and receivables due from TBG.

During the first quarter of fiscal year 2018, the Company recorded $ 33.8 million of one-time asset impairments and other non-recurring costs associated with the October 2017 sale of substantially all of its North American mall-based salons and its UK business.

These impairments and costs and the result of operations for the salons sold, were classified in discontinued operations.

Results of operations for the North American mall-based business and the UK have been classified as a discontinued operation for all periods presented.

During the second quarter of fiscal year 2018, the Company recorded $ 68.9 million of non-cash, one-time, tax benefits related to the enactment of the Tax Cuts and Jobs Act ("Tax Reform"), partially offset by $ 37.6 million of one-time lease termination and other non-recurring costs associated with the recently announced restructuring of the Company's SmartStyle salon portfolio, and $ 3.5 million of other one-time costs.

During the fourth quarter of fiscal year 2018, the Company identified and recorded $ 2.0 million in non-cash fixed asset impairment charges within discontinued operations.

These fixed asset impairment charges should have been recorded in the first quarter of fiscal year 2018.

Because this error was not material to the period in which it originated or the fourth quarter, the Company corrected it in the fourth quarter of fiscal year 2018.

(4) Total is an annual recalculation;

line items calculated quarterly may not sum to total.

Line items may not sum due to rounding.

Revision of Second and Third Quarter 2020 Unaudited Results:

During the fourth quarter of 2020, the Company identified an error in the calculation of the goodwill derecognition associated with the sale of salons to franchisees in the second quarter and third quarter.

In the second quarter, goodwill derecognition was understated by $ 6.7 million, resulting in the loss from the sale of salons to franchisees and net loss being understated and goodwill being overstated by $ 6.7 million.

During the third quarter, goodwill derecognition was overstated by $ 2.35 million.

As of March 31, 2020, the Company fully impaired its remaining Company-owned goodwill with the amount of goodwill impairment being overstated by $ 4.4 million in the third quarter.

The Company assessed the applicable guidance issued by the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) and concluded these misstatements were not material, individually or in the aggregate, to the Company’s Unaudited Condensed Consolidated Financial Statements for the aforementioned interim periods.

However, to facilitate comparisons among periods, the company has decided to revise its previously issued second and third quarter unaudited condensed consolidated financial information.

Three months ended December 31, 2019

As Previously Reported Adjustments (1) As Revised

(Dollars in thousands, except per share amounts)

Loss from sale of salon assets to franchisees, net (a) $ ( 5,692 ) $ ( 6,715 ) $ ( 12,407 )

Interest income and other, net (b) 4,346 ( 1,477 ) 2,869

Loss from continuing operations before income taxes ( 10,276 ) ( 8,192 ) ( 18,468 )

Income tax benefit 795 1,153 1,948

Net loss ( 9,402 ) ( 7,039 ) ( 16,441 )

Net loss per share ( 0.26 ) ( 0.20 ) ( 0.46 )

Comprehensive loss ( 8,861 ) ( 7,039 ) ( 15,900 )

Goodwill as of December 31, 2019 293,019 ( 6,715 ) 286,304

Other assets as of December 31, 2019 38,144 1,477 36,667

Other non-current liabilities as of December 31, 2019 95,979 ( 1,153 ) 94,826

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Three months ended March 31, 2020

As Previously Reported Adjustments (2) As Revised

(Dollars in thousands, except per share amounts)

Rent expense (d) $ 19,243 $ ( 578 ) $ 18,665

Goodwill impairment (c) 44,529 ( 4,365 ) 40,164

Operating loss ( 64,342 ) 4,943 ( 59,399 )

Loss from sale of salon assets to franchisees, net ( 10,208 ) 2,350 ( 7,858 )

Interest income and other, net ( 1,329 ) 1,477 148

Loss from continuing operations before income taxes ( 77,591 ) 8,770 ( 68,821 )

Income tax benefit 2,253 ( 1,274 ) 979

Net loss ( 75,037 ) 7,496 ( 67,541 )

Net loss per share ( 2.10 ) 0.22 ( 1.88 )

Comprehensive loss ( 77,519 ) 7,496 ( 70,023 )

Short term lease liability as of March 31, 2020 149,482 ( 578 ) 148,904

Other non-current liabilities as of March 31, 2020 92,698 121 92,819

Six months ended December 31, 2019

As Previously Reported Adjustments (1) As Revised

(Dollars in thousands, except per share amounts)

Loss from sale of salon assets to franchisees, net $ ( 11,552 ) $ ( 6,715 ) $ ( 18,267 )

Interest income and other, net 4,517 ( 1,477 ) 3,040

Loss from continuing operations before income taxes ( 27,310 ) ( 8,192 ) ( 35,502 )

Income tax benefit 3,651 1,153 4,804

Net loss ( 23,207 ) ( 7,039 ) ( 30,246 )

Net loss per share ( 0.64 ) ( 0.20 ) ( 0.84 )

Comprehensive loss ( 23,069 ) ( 7,039 ) ( 30,108 )

Nine months ended March 31, 2020

As Previously Reported Adjustments (2) As Revised

(Dollars in thousands, except per share amounts)

Rent expense $ 64,002 $ ( 578 ) $ 63,424

Goodwill impairment 44,529 ( 4,365 ) 40,164

Operating loss ( 81,714 ) 4,943 ( 76,771 )

Loss from sale of salon assets to franchisees, net ( 21,760 ) ( 4,365 ) ( 26,125 )

Interest income and other, net 3,188 — 3,188

Loss from continuing operations before income taxes ( 104,901 ) 578 ( 104,323 )

Income tax benefit 5,904 ( 121 ) 5,783

Net loss ( 98,244 ) 457 ( 97,787 )

Net loss per share ( 2.73 ) 0.01 ( 2.72 )

Comprehensive loss ( 100,588 ) 457 ( 100,131 )

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

_______________________________________________________________________________

(1) The Company revised the amounts originally reported for the second quarter of fiscal year 2020 for the following items:

(a) Recorded an additional $ 6.7 million loss from the sale of salons to franchisees, net that should have been recorded in the second quarter.

The error in the Company's goodwill derecognition estimation calculation was identified in the fourth quarter.

The goodwill derecognition was understated which understated the loss of the sale of salons to franchisees, net.

The error impacted the three and six months ended December 31, 2019.

(b) Recorded a reduction to the gain on the sale of a building, included in interest income and other, net related to the sale of the Company's headquarters which occurred in the second quarter.

Previously, the Company identified this error during the third quarter and recorded and disclosed the correction in the third quarter as an out-of-period adjustment.

The correction applies to the three and six months ended December 31, 2019.

(2) The Company revised the amounts originally reported for the third quarter of fiscal year 2020 for the following items:

As of March 31, 2020 the Company impaired its remaining Company-owned goodwill, with the amount of goodwill impairment being overstated by $ 4.4 million.

As the second quarter error which understated goodwill derecognition was not identified until the fourth quarter, goodwill impairment and loss from the sale of salons to franchisees, net were misstated in the third quarter.

The Company recorded a $ 4.4 million decrease to goodwill impairment and a $ 2.4 million decrease to loss from the sale of salon assets to franchisees, net to correct the error.

Net loss for the nine months ended March 31, 2020 was not misstated.

However, goodwill impairment and the loss from the sales of salons to franchisees, net were misstated in the nine months ended March 31, 2020 with goodwill impairment overstated by $ 4.4 million and loss from the sale of salons to franchisees, net understated by $ 4.4 million.

(d) Adjusted third quarter rent expense to include a $ 0.6 million benefit to rent expense that related to leases signed in the third quarter, but not identified until the fourth quarter.

The net loss for the three and nine months were both impacted by the misstatement.

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