REGIS CORP 10-K

Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements: Report of Independent Registered Public Accounting Firm 51 Consolidated Balance Sheet as of June 30, 2020 and 2019 55 Consolidated Statement of Operations for each of the three years in the period ended June 30, 2020 56 Consolidated Statement of Comprehensive (Loss) Income for each of the three years in the period ended June 30, 2020 57 Consolidated Statement of Shareholders' Equity for each of the three years in the period ended June 30, 2020 58 Consolidated Statement of Cash Flows for each of the three years in the period ended June 30, 2020 59 Notes to Consolidated Financial Statements 60 50 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Regis Corporation Opinions on the Financial Statements and Internal Control over Financial Reporting 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, 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 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 The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 51 Table of Contents Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters 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. 52 Table of Contents 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 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. 53 Table of Contents /s/ PricewaterhouseCoopers LLP Minneapolis, Minnesota August 31, 2020 We have served as the Company’s auditor since at least 1990. We have not been able to determine the specific year we began serving as auditor of the Company. 54 Table of Contents REGIS CORPORATION CONSOLIDATED BALANCE SHEET (Dollars in thousands, except per share data) June 30, 2020 2019 ASSETS Current assets: Cash and cash equivalents $ 113,667 $ 70,141 Receivables, net 31,030 30,143 Inventories 62,597 77,322 Other current assets 19,138 33,216 Total current assets 226,432 210,822 Property and equipment, net 57,176 78,090 Goodwill 227,457 345,718 Other intangibles, net 4,579 8,761 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 Current liabilities: Accounts payable $ 50,918 $ 47,532 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 (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 Commitments and contingencies (Note 9) Shareholders' equity: Common stock, $ 0.05 par value; issued and outstanding, 35,625,716 and 36,869,249 common shares at June 30, 2020 and 2019, respectively 1,781 1,843 Additional paid-in capital 22,011 47,152 Accumulated other comprehensive income 7,449 9,342 Retained earnings 94,462 265,908 Total shareholders' equity 125,703 324,245 Total liabilities and shareholders' equity $ 1,342,794 $ 682,837 _______________________________________________________________________________ The accompanying notes are an integral part of the Consolidated Financial Statements. 55 Table of Contents REGIS CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (Dollars and shares in thousands, except per share data) Fiscal Years 2020 2019 2018 Revenues: 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: Cost of service 222,279 452,827 530,582 Cost of product 84,698 128,816 140,623 Site operating expenses 71,543 141,031 154,067 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 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 ( 145,338 ) ( 22,119 ) ( 5,139 ) Other (expense) income: Interest expense ( 7,522 ) ( 4,795 ) ( 10,492 ) (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 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 taxes (Note 3) 832 5,896 ( 53,185 ) Net (loss) income $ ( 171,362 ) $ ( 14,226 ) $ 6,436 Net (loss) income per share: Basic: (Loss) income from continuing operations $ ( 4.79 ) $ ( 0.48 ) $ 1.28 Income (loss) from discontinued operations 0.02 0.14 ( 1.14 ) Net (loss) income per share, basic (1) $ ( 4.77 ) $ ( 0.34 ) $ 0.14 Diluted: (Loss) income from continuing operations $ ( 4.79 ) $ ( 0.48 ) $ 1.27 Income (loss) from discontinued operations 0.02 0.14 ( 1.13 ) Net (loss) income per share, diluted (1) $ ( 4.77 ) $ ( 0.34 ) $ 0.14 Weighted average common and common equivalent shares outstanding: Basic 35,936 41,829 46,517 Diluted 35,936 41,829 47,035 _______________________________________________________________________________ (1) Total is a recalculation; line items calculated individually may not sum to total due to rounding. The accompanying notes are an integral part of the Consolidated Financial Statements. 56 Table of Contents REGIS CORPORATION CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME (Dollars in thousands) Fiscal Years 2020 2019 2018 Net (loss) income $ ( 171,362 ) $ ( 14,226 ) $ 6,436 Other comprehensive (loss) income, net of tax: Foreign currency translation adjustments during the period: Foreign currency translation adjustments ( 1,462 ) 185 ( 168 ) Reclassification adjustments for losses included in net income (Note 3) — — 6,152 Net current period foreign currency translation adjustments ( 1,462 ) 185 5,984 Recognition of deferred compensation ( 431 ) ( 499 ) 336 Other comprehensive (loss) income ( 1,893 ) ( 314 ) 6,320 Comprehensive (loss) income $ ( 173,255 ) $ ( 14,540 ) $ 12,756 _______________________________________________________________________________ The accompanying notes are an integral part of the Consolidated Financial Statements. 57 Table of Contents REGIS CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Dollars in thousands, except share data) Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income Retained Earnings Total Shares Amount Balance, June 30, 2017 46,400,367 $ 2,320 $ 214,109 $ 3,336 $ 273,580 $ 493,345 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 Net restricted stock activity 293,397 15 ( 2,099 ) — — ( 2,084 ) Minority interest (Note 1) — — — — 67 67 Balance, June 30, 2018 45,258,571 2,263 194,436 9,656 280,083 486,438 Net loss — — — — ( 14,226 ) ( 14,226 ) Foreign currency translation — — — 185 — 185 Stock repurchase program ( 8,605,430 ) ( 431 ) ( 154,114 ) — — ( 154,545 ) Exercise of SARs 22,263 1 ( 222 ) — — ( 221 ) Stock-based compensation — — 9,003 — — 9,003 Recognition of deferred compensation (Note 11) — — — ( 499 ) — ( 499 ) Net restricted stock activity 193,845 10 ( 1,951 ) — — ( 1,941 ) Minority interest (Note 1) — — — — 51 51 Balance, June 30, 2019 36,869,249 1,843 47,152 9,342 265,908 324,245 Net loss — — — — ( 171,362 ) ( 171,362 ) Foreign currency translation (Note 1) — — — ( 1,462 ) — ( 1,462 ) Stock repurchase program ( 1,504,000 ) ( 75 ) ( 26,281 ) — — ( 26,356 ) Exercise of SARs 1,776 — 28 — — 28 Stock-based compensation — — 3,275 — — 3,275 Recognition of deferred compensation (Note 11) — — — ( 431 ) — ( 431 ) Net restricted stock activity 258,691 13 ( 2,163 ) — — ( 2,150 ) Minority interest (Note 1) — — — — ( 84 ) ( 84 ) 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. 58 Table of Contents REGIS CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands) Fiscal Years 2020 2019 2018 Cash flows from operating activities: 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 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 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 Stock-based compensation 3,275 9,003 8,269 Amortization of debt discount and financing costs 398 275 4,080 Other non-cash items affecting earnings ( 539 ) ( 903 ) ( 294 ) 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 ) 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: Capital expenditures ( 37,494 ) ( 31,616 ) ( 29,571 ) Capital expenditures related to discontinued operations — — ( 1,171 ) 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 Net cash provided by (used in) investing activities: 61,029 87,788 ( 1,052 ) Cash flows from financing activities: 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 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 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 ) 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 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. The accompanying notes are an integral part of the Consolidated Financial Statements. 59 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Description: 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. See Note 15 to the Consolidated Financial Statements. Franchised salons throughout the U.S. and Canada are primarily located in strip shopping centers or Walmart Supercenters. 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, malls or Walmart Supercenters. 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: The Consolidated Financial Statements include the accounts of the Company and its subsidiaries after the elimination of intercompany accounts and transactions. All material subsidiaries are wholly owned. The Company consolidates variable interest entities where it has determined it is the primary beneficiary of those entities' operations. Variable Interest Entities : The Company has interests in certain privately-held entities through arrangements that do not involve voting interests. Such entities, known as a variable interest entity (VIE), are required to be consolidated by its primary beneficiary. The Company evaluates whether or not it is the primary beneficiary for each VIE using a qualitative assessment that considers the VIE's purpose and design, the involvement of each of the interest holders and the risk and benefits of the VIE. As of June 30, 2020, the Company has one VIE, Roosters MGC International LLC (Roosters), where the Company is the primary beneficiary. The Company owns an 84.0 % ownership interest in Roosters. 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, 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. 60 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Company accounts for its investment in Empire Education Group, Inc. (EEG) as an equity investment under the voting interest model, as the Company has granted the other shareholder of EEG an irrevocable proxy to vote a certain number of the Company’s shares such that the other shareholder of EEG has voting control of EEG’s common stock, as well as the right to appoint four of the five members of EEG’s Board of Directors. The Company wrote off its investment balance in EEG in fiscal year 2016. 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. 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. The carrying values of these assets approximate their fair market values. The Company primarily utilizes a cash management system with a series of separate accounts consisting of lockbox accounts for receiving cash, concentration accounts that funds are moved to and several "zero balance" disbursement accounts for funding of payroll and accounts payable. As a result of the Company's cash management system, checks issued, but not presented to the banks for payment, may create negative book cash balances. There were no checks outstanding in excess of related book cash balances at June 30, 2020 and 2019. 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: June 30, 2020 2019 (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 61 Table of Contents 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), related to receivables from the Company's franchisees. The Company monitors the financial condition of its franchisees and records provisions for estimated losses on receivables when it believes franchisees are unable to make their required payments based on factors such as delinquencies and aging trends. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses related to existing accounts and notes receivables. As of June 30, 2020, 2019 and 2018, the allowance for doubtful accounts was $ 6.9 , $ 2.0 and $ 1.2 million, respectively. 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. The Company received these proceeds in July 2018. Inventories: Inventories of finished goods consist principally of hair care products for retail product sales. A portion of inventories are also used for salon services consisting of hair color, hair care products including shampoo and conditioner and hair care treatments including permanents, neutralizers and relaxers. Inventories are stated at the lower of cost or market, with cost determined on a weighted average cost basis. 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. During the fiscal year, cost of retail product sold to salon guests is determined based on the weighted average cost of product sold, adjusted for an estimated shrinkage factor. The cost of product used in salon services is determined by applying an estimated percentage of total cost of service to service revenues. These estimates are updated quarterly based on cycle count results for the distribution centers, service sales mix, discounting, special promotions and other factors. The Company has inventory valuation reserves for excess and obsolete inventories, or other factors that may render inventories unmarketable at their historical costs. 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 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 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. The Company capitalizes both internal and external costs of developing or obtaining computer software for internal use. Costs incurred to develop internal-use software during the application development stage are capitalized, while data conversion, training and maintenance costs associated with internal-use software are expensed as incurred. Estimated useful lives range from three to seven years . Expenditures for maintenance and repairs and minor renewals and betterments, which do not improve or extend the life of the respective assets, are expensed. All other expenditures for renewals and betterments are capitalized. The assets and related depreciation and amortization accounts are adjusted for property retirements and disposals with the resulting gain or loss included in operating income. Fully depreciated or amortized assets remain in the accounts until retired from service. Non-Current Assets Held for Sale: 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 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. 62 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Right of Use Asset, Lease Liabilities and Rent Expense: At contract inception, the Company determines whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides the Company the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, the Company considers it to be, or contain, a lease. The Company leases its company-owned salons and some of its corporate facilities under operating leases. The original terms of the salon leases range from 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. 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. 63 Table of Contents 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. Goodwill: 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 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. 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. 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. The Company engages third-party valuation consultants to assist in evaluating the Company's estimated fair value calculations. Following is a description of the goodwill impairment assessments for each of the fiscal years: Fiscal 2020 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. 64 Table of Contents 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. Fiscal 2019 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. 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 Franchise and Company-owned reporting units. The Company compared the carrying value of the reporting units, including goodwill, to their estimated fair value. The results of these assessments indicated that the estimated fair value of the Company's reporting units exceeded their carrying value. The Franchise reporting unit had substantial headroom and the Company-owned reporting unit had headroom of approximately 20 %. Fiscal Year 2018 During the first quarter of fiscal year 2018, the Company experienced a triggering event due to the redefining of its operating segments as the Company's mall-based business and International segment met the criteria to be classified as held for sale and as a discontinued operation as of September 30, 2017. The Company's reporting changed to two reporting units: 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. Pursuant to the change in operating segments, the Company performed a goodwill impairment assessment on its North American Value reporting unit. The Company assessed qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit was less than their carrying values (Step 0). The Company determined it is “more-likely-than-not” that the carrying value of the reporting unit was less than the fair value. Accordingly, the Company did not perform a quantitative analysis. Based on the changes to the operating segment structure, there was no goodwill reallocated from the North American Value reporting unit related to the mall-based business that was subsequently sold as the mall-based business previously included in the North American Value reporting unit was projected to incur future losses. The Company did not perform a goodwill impairment assessment for the North American Franchise reporting unit during the first quarter of fiscal year 2018, as this reporting unit was not impacted by the triggering event. The North American Premium and International units did no t have any goodwill. 65 Table of Contents 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 Franchise and Company-owned reporting units. The Company compared the carrying value of the reporting units, including goodwill, to their estimated fair value. The results of these assessments indicated that the estimated fair value of our reporting units exceeded their carrying value. The Franchise reporting unit had substantial headroom and the Company-owned reporting unit had headroom of approximately 24 %. The fair value of the Company-owned reporting unit was determined based on a discounted cash flow analysis and comparable market multiples. The assumptions used in determining fair value were similar to than those used in fiscal year 2019. Investments In Affiliates: The Company has equity investments in securities of certain privately held entities. 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, 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 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 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. The updated loss projections consider new claims and developments associated with existing claims for each open policy period. As certain claims can take years to settle, the Company has multiple policy periods open at any point in time. As of June 30, 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: Franchise revenues primarily include royalties, advertising fund fees and initial franchise fees. Royalties and advertising fund revenues represent sales-based royalties that are recognized as revenue in the period in which the sales occur. The Company defers franchise fees until the salon is open and then recognizes the revenue over the term of the franchise agreement. See Note 2 to the Consolidated Financial Statements. Product sales by the Company to its franchisees are included within product revenues on the Consolidated Statement of Operations and recorded at the time product is delivered to franchise locations. Company-owned salon revenues are recognized at the time when the services are provided. Product revenues are recognized when the guest receives and pays for the merchandise. Classification of Expenses: The following discussion provides the primary costs classified in each major expense category: 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 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. 66 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Consideration Received from Vendors: The Company receives consideration for a variety of vendor-sponsored programs. These programs primarily include volume rebates and promotion and advertising reimbursements. With respect to volume rebates, the Company estimates the amount of rebate it will receive and accrues it as a reduction to the cost of inventory over the period in which the rebate is earned based upon historical purchasing patterns and the terms of the volume rebate program. A quarterly analysis is performed in order to ensure the estimated rebate accrued is reasonable and any necessary adjustments are recorded. Shipping and Handling Costs: Shipping and handling costs are incurred to store, move and ship product from the Company's distribution centers to franchise and company-owned locations and include an allocation of internal overhead. Such shipping and handling costs related to product shipped to company-owned locations are included in site operating expenses in the Consolidated Statement of Operations. Shipping and handling costs related to shipping product to franchise locations totaled $ 8.6 , $ 7.7 and $ 6.1 million during fiscal years 2020, 2019 and 2018, respectively, and are included within general and administrative expenses on the Consolidated Statement of Operations. Any amounts billed to franchisees for shipping and handling are included in product revenues within the Consolidated Statement of Operations. Advertising and Advertising Funds: Advertising costs consist of the Company’s corporate funded advertising costs, the Company’s advertising fund contributions and Franchisee’s advertising fund contributions. Corporate funded advertising costs are expensed as incurred. The Company has various franchising programs supporting certain of its franchise salon concepts. Most maintain advertising funds that provide comprehensive advertising and sales promotion support. 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: Fiscal Years 2020 2019 2018 (Dollars in thousands) Corporate funded advertising costs $ 13,210 $ 21,581 $ 19,803 Advertising fund contributions from company-owned salons 3,715 12,929 16,834 Advertising fund contributions from franchisees (1) 13,341 34,073 26,818 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. As of June 30, 2020 and 2019, approximately $ 4.3 and $ 23.6 million, respectively, representing the advertising funds' assets and liabilities were recorded within total assets and total liabilities in the Company's Consolidated Balance Sheet. Stock-Based Employee Compensation Plans: The Company recognizes stock-based compensation expense based on the fair value of the awards at the grant date. Compensation expense is recognized on a straight-line basis over the requisite service period of the award (or to the date a participant becomes eligible for retirement, if earlier). The Company uses fair value methods that require the input of subjective assumptions, including the expected term, expected volatility, dividend yield and risk-free interest rate. 67 Table of Contents 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. Changes in the estimated rate of achievement can have a significant effect on the recorded stock-based compensation expense as the effect of a change in the estimated achievement level is recognized in the period the change occurs. Sales Taxes: Sales taxes are recorded on a net basis (rather than as both revenue and an expense) within the Company's Consolidated Statement of Operations. Income Taxes: Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the Consolidated Financial Statements or income tax returns. Deferred income tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using currently enacted tax rates in effect for the years in which the differences are expected to reverse. We recognize deferred tax assets to the extent 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 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. and other tax jurisdictions based on an estimate of whether additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of these liabilities would result in tax benefits being recognized in the period in which it is determined that the liabilities are no longer necessary. If the estimate of unrecognized tax benefits, interest and penalties proves to be less than the ultimate assessment, additional expenses would result. Inherent in the measurement of deferred balances are certain judgments and interpretations of tax laws and published guidance with respect to the Company's operations. Income tax expense is primarily the current tax payable for the period and the change during the period in certain deferred tax assets and liabilities. See Note 10 to the Consolidated Financial Statements in Part II, Item 8, of this Form 10-K. 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. 68 Table of Contents 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 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. Translation adjustments arising from the use of differing exchange rates from period to period are included in accumulated other comprehensive income within shareholders' equity. Statement of Operations accounts are translated at the average rates of exchange prevailing during the year. 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. Accounting Standards Recently 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. Leases 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 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 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 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. 69 Table of Contents 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 . 2. REVENUE RECOGNITION: 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 adopted the amended revenue recognition guidance, ASC Topic 606, on July 1, 2018 using the full retrospective transition method which required the adjustment of each prior reporting period presented. As a result of adopting this new standard, the Company is providing its updated revenue recognition policies. Revenue Recognition and Deferred Revenue: Revenue recognized at point of sale Company-owned salon revenues are recognized at the time when the services are provided. Product revenues for company-owned salons are recognized when the guest receives and pays for the merchandise. Revenues from purchases made with gift cards are also recorded when the guest takes possession of the merchandise or services are provided. Gift cards issued by the Company are recorded as a liability (deferred revenue) upon sale and recognized as revenue upon redemption by the customer. 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 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 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 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. 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. 70 Table of Contents 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: 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 Revenue recognized over time: Royalty and other franchise fees $ 60,061 $ — $ 59,688 $ — 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 Information about receivables, broker fees and deferred revenue subject to the revenue recognition guidance is as follows: June 30, 2020 June 30, 2019 Balance Sheet Classification (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: Current 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 Non-current 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, 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 71 Table of Contents 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 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 Deferred revenue includes the gift card liability and deferred franchise fees for unopened salons and open salons. Gift card revenue for the years ended June 30, 2020 and 2019 was $ 2.4 and $ 5.3 million, respectively. Deferred franchise fees related to open salons are generally recognized on a straight-line basis over the term of the franchise agreement. Franchise fee revenue for the twelve months ended June 30, 2020 and 2019 was $ 5.2 and $ 3.6 million, respectively. 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): 2021 $ 5,471 2022 5,351 2023 5,174 2024 4,939 2025 4,577 Thereafter 13,648 Total $ 39,160 3. TBG DISCONTINUED OPERATIONS AND RESTRUCTURING The Beautiful Group (TBG) : 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 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. 72 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following summarizes the results of TBG related charges and TBG discontinued operations for the periods presented: Fiscal Years 2020 2019 2018 (Dollars in thousands) Revenue $ — $ — $ 101,140 TBG Mall Restructuring: Accounts and notes receivable reserves — 20,711 — Other charges (1) 2,333 1,105 — Total TBG mall restructuring $ 2,333 $ 21,816 $ — TBG Discontinued Operations: Working capital and prepaid rent receivable reserve — — 11,697 Other charges (2) (3) ( 1,063 ) 1,221 47,848 (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 ) (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. (4) Income taxes have been allocated to continuing and discontinued operations based on the methodology required by accounting for income taxes guidance. SmartStyle restructuring : In January 2018, the Company closed 597 non-performing company-owned SmartStyle salons. The 597 non-performing salons generated negative cash flow of approximately $ 15 million during the twelve months ended September 30, 2017. The action delivers on the Company's commitment to restructure its salon portfolio to improve shareholder value and position the Company for long-term growth. A summary of costs associated with the SmartStyle salon restructuring for fiscal year 2018 is as follows: Financial Line Item Fiscal Year 2018 (Dollars in thousands) 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. Substantially all related costs associated with the SmartStyle salon restructuring requiring cash outflow were complete as of June 30, 2018. 73 Table of Contents 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. 74 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. OTHER FINANCIAL STATEMENT DATA The following provides additional information concerning selected balance sheet accounts: June 30, 2020 2019 (Dollars in thousands) 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: Buildings and improvements 36,379 29,165 Equipment, furniture and leasehold improvements 198,983 309,561 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 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. 75 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following provides additional information concerning other intangibles, net: June 30, 2020 2019 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 Franchise agreements 19 9,558 ( 8,194 ) 1,364 19 9,783 ( 8,057 ) 1,726 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) All intangible assets have been assigned an estimated finite useful life and are amortized on a straight-line basis over the number of years that approximate their expected period of benefit (ranging from three to 40 years). (2) The change in the gross carrying value and accumulated amortization of other intangible assets is impacted by foreign currency. (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, 2020, future estimated amortization expense related to intangible assets is estimated as follows (in thousands): 2021 $ 467 2022 438 2023 425 2024 363 2025 366 Thereafter 2,520 Total $ 4,579 The following provides supplemental disclosures of cash flow activity: Fiscal Years 2020 2019 2018 (Dollars in thousands) Cash paid for: Interest $ 7,390 $ 4,408 $ 7,022 Taxes and penalties, net 2,150 2,096 2,397 Non-cash investing activities: Unpaid capital expenditures 2,569 3,873 9,209 76 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. GOODWILL The table below contains details related to the Company's goodwill: June 30, 2020 2019 Gross Carrying Value (1) Accumulated Impairment (3) Net Gross Carrying Value (1) Accumulated Impairment (2) Net (Dollars in thousands) Goodwill $ 341,721 $ ( 114,264 ) $ 227,457 $ 419,818 $ ( 74,100 ) $ 345,718 _______________________________________________________________________________ (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: Franchise Company-owned Consolidated (Dollars in thousands) Goodwill, net at June 30, 2019 $ 227,928 $ 117,790 $ 345,718 Translation rate adjustments ( 471 ) ( 660 ) ( 1,131 ) Derecognition related to sale of salon assets to franchisees (1) — ( 76,966 ) ( 76,966 ) Goodwill impairment — ( 40,164 ) ( 40,164 ) Goodwill, net at June 30, 2020 $ 227,457 $ — $ 227,457 _______________________________________________________________________________ (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. 77 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. LEASES At contract inception, the Company determines whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides the Company the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, the Company considers it to be, or contain, a lease. The Company leases its company-owned salons and some of its corporate facilities under operating leases. The original terms of the salon leases range from 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: June 30, 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 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. 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. 78 Table of Contents 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. 79 Table of Contents 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 80 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. FAIR VALUE MEASUREMENTS Fair value measurements are categorized into one of three levels based on the lowest level of significant input used: Level 1 (unadjusted quoted prices in active markets); Level 2 (observable market inputs available at the measurement date, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data). Assets and Liabilities Measured at Fair Value on a Recurring Basis As of June 30, 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. The estimated fair value of the Company's debt and long-term financial liability are based on Level 2 inputs. Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis We measure certain assets, including the Company’s equity method investments, tangible fixed and other assets and goodwill, at fair value on a nonrecurring basis when they are deemed to be other than temporarily impaired. The fair values of these assets are determined, when applicable, based on valuation techniques using the best information available, and may include quoted market prices, market comparables and discounted cash flow projections. The following impairment charges were based on fair values using Level 3 inputs: Fiscal Year 2020 2019 2018 (Dollars in thousands) Goodwill $ 40,164 $ — $ — Salon asset impairments (1) 3,851 4,587 11,092 Long-lived assets impairment (1) 22,560 — — _______________________________________________________________________________ (1) See Note 1 to the Consolidated Financial Statements. 81 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. FINANCING ARRANGEMENTS The Company's long-term debt consists of the following: Revolving Credit Facility June 30, 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 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 In fiscal year 2018, the Company redeemed all of its 5.5 % senior term notes that were due December 2019 (Senior Term Notes) for $ 124.2 million, which included a $ 1.2 million premium. The Company utilized $ 90.0 million under the revolving credit facility and cash on hand of $ 34.2 million to repay the Senior Term Notes. As a result of redeeming the Senior Term Notes, the Company recorded $ 1.7 million of additional interest expense related to the unamortized debt discount and debt issuance costs during the fiscal year 2018. Sale and Leaseback Transactions The Company’s long-term lease liability consists of the following: Maturity Date Interest Rate June 30, 2020 June 30, 2019 (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 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. 82 Table of Contents 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: 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. 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. 9. COMMITMENTS AND CONTINGENCIES Contingencies: The Company is self-insured for most workers' compensation, employment practice liability and general liability. Workers' compensation and general liability losses are subject to per occurrence and aggregate annual liability limitations. The Company is insured for losses in excess of these limitations. The Company is also self-insured for health care claims for eligible participating employees subject to certain deductibles and limitations. The Company determines its liability for claims incurred but not reported on an actuarial basis. Litigation and Settlements: The Company is a defendant in various lawsuits and claims arising out of the normal course of business. Like certain other large retail employers, the Company has been faced with allegations of purported class-wide consumer and wage and hour violations. Litigation is inherently unpredictable and the outcome of these matters cannot presently be determined. 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. 83 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. INCOME TAXES The components of loss from continuing operations before income taxes are as follows: Fiscal Years 2020 2019 2018 (Dollars in thousands) Loss before income taxes U.S. $ ( 165,260 ) $ ( 17,513 ) $ ( 16,604 ) International ( 11,553 ) ( 4,754 ) 6,413 $ ( 176,813 ) $ ( 22,267 ) $ ( 10,191 ) The benefit for income taxes consists of: Fiscal Years 2020 2019 2018 (Dollars in thousands) Current: U.S. $ ( 925 ) $ ( 519 ) $ 2,151 International 238 1,069 1,894 Deferred: U.S. ( 3,353 ) ( 2,303 ) ( 73,728 ) International ( 579 ) ( 392 ) ( 129 ) $ ( 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: Fiscal Years 2020 2019 2018 U.S. statutory rate 21.0 % 21.0 % 28.0 % State income taxes, net of federal income tax benefit 4.0 0.5 14.8 Valuation allowance (1) ( 29.4 ) ( 14.5 ) 560.8 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 Deferred tax rate remeasurement — — 99.0 Uncertain tax positions ( 6.2 ) 1.0 ( 15.9 ) 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. Miscellaneous items do not include any items in excess of 5 % of computed tax. 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. 84 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The components of the net deferred tax assets and liabilities are as follows: June 30, 2020 2019 (Dollars in thousands) Deferred tax assets: Deferred rent $ — $ 3,816 Payroll and payroll related costs 9,903 11,696 Net operating loss carryforwards 64,402 48,208 Tax credit carryforwards 37,072 36,966 Capital loss carryforwards 14,978 — Deferred franchise fees 9,342 7,508 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 ) Total deferred tax assets $ 231,561 $ 53,583 Deferred tax liabilities: 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 ) 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. net operating loss carryforwards of approximately $ 43.6 , $ 16.7 , $ 3.8 and $ 0.3 million, respectively. 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 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. The U.K. loss carryforward has no expiration. 85 Table of Contents 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. and Luxembourg as well as states, cities, and provinces within these jurisdictions. The Company is no longer subject to IRS examinations for years before 2014. With limited exceptions, the Company is no longer subject to state and international income tax examination by tax authorities for years before 2012. A rollforward of the unrecognized tax benefits is as follows: Fiscal Years 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, 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 If the Company were to prevail on all unrecognized tax benefits recorded, a net benefit of approximately $ 1.3 million would be recorded in the effective tax rate. Interest and penalties associated with unrecognized tax benefits are recorded within income tax expense. 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. This amount is not included in the gross unrecognized tax benefits noted above. It is reasonably possible the amount of the unrecognized tax benefit with respect to certain of our unrecognized tax positions will increase or decrease during the next fiscal year. However, an estimate of the amount or range of the change cannot be made at this time. 86 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. BENEFIT PLANS Regis Retirement Savings Plan: The Company maintains a defined contribution 401(k) plan, the Regis Retirement Savings Plan (RRSP). The RRSP is a defined contribution profit sharing plan with a 401(k) feature that is intended to qualify under Section 401(a) of the Internal Revenue Code (the Code) and is subject to the Employee Retirement Income Security Act of 1974 (ERISA). The 401(k) portion of the RRSP is a cash or deferred arrangement intended to qualify under section 401(k) of the Code and under which eligible employees may elect to contribute a percentage of their eligible compensation. Employees who are 18 years of age or older and who were not highly compensated employees as defined by the Code during the preceding RRSP year are eligible to participate in the RRSP commencing with the first day of the month following their completion of one month of service. The discretionary employer contribution profit sharing portion of the RRSP is a noncontributory defined contribution component covering full-time and part-time employees of the Company who have at least one year of eligible service, defined as 1,000 hours of service during the RRSP year, are employed by the Company on the last day of the RRSP year and are employed at Salon Support, distribution centers, as field leaders, artistic directors or consultants, and that are not highly compensated employees as defined by the Code. Participants' interest in the noncontributory defined contribution component become 20.0 % vested after completing two years of service with vesting increasing 20.0 % for each additional year of service, and with participants becoming fully vested after six full years of service. Nonqualified Deferred Salary Plan: The Company maintains a Nonqualified Deferred Salary Plan (Executive Plan), which covers Company officers and all other employees who are highly compensated as defined by the Code. The discretionary employer contribution portion of the Executive Plan is a profit sharing component in which a participant's interest becomes 20.0 % vested after completing two years of service with vesting increasing 20.0 % for each additional year of service, and with participants becoming fully vested after six full years of service. Certain participants within the Executive Plan also receive a matching contribution from the Company. Regis Individual Secured Retirement Plan (RiSRP): The Company maintains a Regis Individual Secured Retirement Plan (RiSRP), pursuant to which eligible employees may use post-tax dollars to purchase life insurance benefits. Salon Support employees at the director level and above, as well as regional vice presidents, are eligible to participate. The Company may make discretionary contributions on behalf of participants within the RiSRP, which may be calculated as a matching contribution. The participant is the owner of the life insurance policy under the RiSRP. Stock Purchase Plan: The Company has an employee stock purchase plan (ESPP) available to qualifying employees. Under the terms of the ESPP, eligible employees may purchase the Company's common stock through payroll deductions. The Company contributes an amount equal to 15.0 % of the purchase price of the stock to be purchased on the open market and pays all expenses of the ESPP and its administration, not to exceed an aggregate contribution of $ 11.8 million. As of June 30, 2020, the Company's cumulative contributions to the ESPP totaled $ 11.1 million. Deferred Compensation Contracts: The Company has unfunded deferred compensation contracts covering certain current and former key executives. Effective June 30, 2012, these contracts were amended and the benefits were frozen. 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. 87 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The table below presents the projected benefit obligation of these deferred compensation contracts in the Consolidated Balance Sheet: June 30, 2020 2019 (Dollars in thousands) Current portion (included in accrued liabilities) $ 302 $ 1,183 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 $ 2.4 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. 12. EARNINGS 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 (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 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: Fiscal Year 2020 2019 2018 Equity-based compensation awards 315,312 118,246 634,292 13. STOCK-BASED COMPENSATION The Company grants long-term equity-based awards under the 2018 Long Term Incentive Plan (the 2018 Plan). The 2018 Plan, which was approved by the Company's shareholders at its 2018 Annual Meeting, provides for the granting of nonqualified stock options, equity-based stock appreciation rights (SARs), RSAs, RSUs and PSUs, as well as cash-based performance grants, to employees and non-employee directors of the Company. Under the 2018 Plan, a maximum of 3,818,895 shares are approved for issuance. The 2018 Plan incorporates a fungible share design, under which full value awards (such as RSUs and PSUs) count against the shares reserved for issuance at a rate 2.0 times higher than appreciation awards (such as SARs and stock options). As of June 30, 2020, a maximum of 3,774,266 shares were available for grant under the 2018 Plan. All unvested awards are subject to forfeiture in event of termination of employment, unless accelerated. SAR and RSU awards granted under the 2018 88 Table of Contents 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. The 2016 Plan provided for the granting of SARs, RSAs, RSUs and PSUs, as well as cash-based performance grants, to employees and non-employee directors of the Company. The Company also has outstanding awards under the Amended and Restated 2004 Long Term Incentive Plan (the 2004 Plan), although the 2004 Plan terminated in October 2016 and no additional awards have since been or will be made under the 2004 Plan. The 2004 Plan provided for the granting of nonqualified stock options, SARs, RSAs, RSUs and PSUs, as well as cash-based performance grants, to employees and non-employee directors of the Company. Under the 2018 Plan, 2016 Plan and the 2004 Plan, stock-based awards are granted at an exercise price or initial value equal to the fair market value on the date of grant. 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: Fiscal Years 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: Fiscal Years 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 market-based RSUs and PSUs granted. Expected volatility is established based on historical volatility of the Company's stock price. The Company uses historical data to estimate pre-vesting forfeiture rates. Stock-based compensation expense was as follows: Fiscal Years 2020 2019 2018 (Dollars in thousands) SARs $ — $ 1,497 $ 2,252 RSAs, RSUs, & PSUs 3,275 7,506 6,017 Total stock-based compensation expense (recorded in G&A) 3,275 9,003 8,269 Less: Income tax benefit (1) ( 688 ) ( 1,891 ) ( 1,736 ) 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. 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. 89 Table of Contents 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 vested in full after two years . Activity for all the Company's outstanding SARs and stock options is as follows: Shares (in thousands) Weighted Average Exercise Price Weighted- Average Remaining Contractual Life Aggregate Intrinsic Value (in thousands) SARs Stock Options 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 ) Exercisable at June 30, 2020 1,285 — $ 11.79 6.08 $ ( 4,639 ) Unvested awards, net of estimated forfeitures — — $ — — $ — Restricted Stock Units: RSUs granted to employees under the 2018 Plan, 2016 Plan and 2004 Plan generally vest ratably over a three to five year period on each of the annual grant date anniversaries or vest entirely after a three or five year period. 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 the Company's RSUs is as follows: Shares/Units (in thousands) Weighted Average Grant Date Fair Value Aggregate Intrinsic Value (in thousands) RSUs Outstanding balance at June 30, 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 Vested at June 30, 2020 263 $ 15.94 $ 2,151 Unvested awards, net of estimated forfeitures 381 $ 18.68 $ 3,117 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. 90 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Performance Share Units: PSUs are grants of restricted stock units which are earned based on the achievement of performance goals established by the Compensation Committee over a performance period. Activity for all of the Company's PSUs is as follows: Shares/Units (in thousands) Weighted Average Grant Date Fair Value Aggregate Intrinsic Value (in thousands) (1) PSUs 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 Vested at June 30, 2020 — $ — $ — Unvested awards, net of estimated forfeitures 396 $ 13.34 $ 3,239 _______________________________________________________________________________ (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 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. 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. 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. 14. SHAREHOLDERS' EQUITY Authorized Shares and Designation of Preferred Class: The Company has 100.0 million shares of capital stock authorized, par value $ 0.05 , of which all outstanding shares, and shares available under the Stock Option Plans, have been designated as common. Shareholders' Rights Plan: The Company previously had a shareholders' rights plan, which expired by its terms in December 2016. Share Repurchase Program: In May 2000, the Company's Board approved a stock repurchase program with no stated expiration date. Originally, the program authorized up to $ 50.0 million to be expended for the repurchase of the Company's stock. The Board elected to increase this maximum to $ 100.0 million in August 2003, to $ 200.0 million in May 2005, to $ 300.0 million in April 2007, to $ 350.0 million in April 2015, to $ 400.0 million in September 2015, to $ 450.0 million in January 2016, and to $ 650.0 million in August 2018. All repurchased shares become authorized but unissued shares of the Company. The timing and amounts of any repurchases depends on many factors, including the market price of the common stock and overall market conditions. As of June 30, 2020, 30.0 million shares have been cumulatively repurchased for $ 595.4 million, and $ 54.6 million remained outstanding under the approved stock repurchase program. 91 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Accumulated Other Comprehensive Income: The components of accumulated other comprehensive income are as follows: June 30, 2020 2019 2018 (Dollars in thousands) Foreign currency translation $ 7,391 $ 8,853 $ 8,668 Unrealized gain on deferred compensation contracts 58 489 988 Accumulated other comprehensive income $ 7,449 $ 9,342 $ 9,656 92 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 15. SEGMENT INFORMATION Segment information is prepared on the same basis the chief operating decision maker reviews financial information for operational decision-making purposes. During the first quarter of fiscal year 2018, the Company redefined its operating segments to reflect how the chief operating decision maker evaluates the business as a result of the sale of the mall-based business and International segment sale. See Note 1 to the Consolidated Financial Statements. The Company now reports its operations in two operating segments: Franchise salons and Company-owned salons. The Company's operating segments are its reportable operating segments. Prior to this change, the Company had four operating segments: North American Value, North American Premium, North American Franchise, and International. The Company did not operate under the realigned operating segment structure prior to the first quarter of fiscal year 2018. The Franchise salons reportable operating segment is comprised of 5,209 franchised salons located mainly in strip center locations and Walmart Supercenters. Franchise salons offer high quality, convenient and value priced hair care and beauty services and retail products. This segment operates primarily in the United States and Canada and primarily includes the Supercuts, SmartStyle, Cost Cutters, First Choice Haircutters, Roosters and Magicuts concepts. The Company-owned salons reportable operating segment is comprised of 1,632 company-owned salons located mainly in strip center locations and Walmart Supercenters. Company-owned salons offer high quality, convenient and value priced hair care and beauty services and retail products. SmartStyle, Supercuts, Cost Cutters and other regional trade names operating in the United States, Canada and Puerto Rico are generally within the Company-owned salons segment. Financial information concerning the Company's reportable operating segments is shown in the following table: For the Year Ended June 30, 2020 Franchise Company - owned Corporate (1) Consolidated (Dollars in thousands) Revenues: 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: Cost of service — 222,279 — 222,279 Cost of product 40,032 44,666 — 84,698 Site operating expenses 13,341 58,202 — 71,543 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 Operating income (loss) 32,886 ( 96,128 ) ( 82,096 ) ( 145,338 ) Other (expense) income: Interest expense — — ( 7,522 ) ( 7,522 ) Gain from sale of salon assets to franchisees, net — — ( 27,306 ) ( 27,306 ) Interest income and other, net — — 3,353 3,353 Income (loss) from continuing operations before income taxes $ 32,886 $ ( 96,128 ) $ ( 113,571 ) $ ( 176,813 ) 93 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the Year Ended June 30, 2019 Franchise Company-owned Corporate (1) Consolidated (Dollars in thousands) Revenues: 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: Cost of service — 452,827 — 452,827 Cost of product 47,219 81,597 — 128,816 Site operating expenses 34,099 106,932 — 141,031 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 Operating income (loss) 16,142 58,321 ( 96,582 ) ( 22,119 ) Other (expense) income: Interest expense — — ( 4,795 ) ( 4,795 ) Gain from sale of salon assets to franchisees, net — — 2,918 2,918 Interest income and other, net — — 1,729 1,729 Income (loss) from continuing operations before income taxes $ 16,142 $ 58,321 $ ( 96,730 ) $ ( 22,267 ) 94 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the Year Ended June 30, 2018 Franchise Company - owned Corporate (1) Consolidated (Dollars in thousands) Revenues: 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: Cost of service — 530,582 — 530,582 Cost of product 42,128 98,495 — 140,623 Site operating expenses 26,818 127,249 — 154,067 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 Total operating expenses 95,460 1,053,866 91,292 1,240,618 Operating income (loss) 35,637 50,516 ( 91,292 ) ( 5,139 ) Other (expense) income: Interest expense — — ( 10,492 ) ( 10,492 ) Gain from sale of salon assets to franchisees, net — — 241 241 Interest income and other, net — — 5,199 5,199 Income (loss) from continuing operations before income taxes $ 35,637 $ 50,516 $ ( 96,344 ) $ ( 10,191 ) _______________________________________________________________________________ (1) Corporate consists primarily of unallocated general and administrative expenses, including expenses associated with salon support, depreciation and amortization related to our corporate headquarters and unallocated insurance, benefit and compensation programs, including stock-based compensation. The Company's chief operating decision maker does not evaluate reportable segments using assets and capital expenditure information. Total revenues and property and equipment, net associated with business operations in the U.S. and all other countries in aggregate were as follows: June 30, 2020 2019 2018 Total Revenues Property and Equipment, Net Total Revenues Property and Equipment, Net Total Revenues Property and Equipment, Net (Dollars in thousands) U.S. $ 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 95 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 16. QUARTERLY FINANCIAL DATA (UNAUDITED) 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) 2020 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 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 December 31 March 31 (3) June 30 Year Ended (Dollars in thousands, except per share amounts) 2019 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 ) (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 ) 96 Table of Contents 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. (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 97 Table of Contents 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 ) 98 Table of Contents 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: (c) During the third quarter goodwill derecognition was overstated by $ 2.4 million. 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. 99 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.