REGIS CORP 10-Q

Item 1. Financial Statements REGIS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) (Dollars in thousands, except share data) December 31, 2020 June 30, 2020 ASSETS Current assets: Cash and cash equivalents $ 50,850 $ 113,667 Receivables, net 31,185 31,030 Inventories 51,483 62,597 Other current assets 17,226 19,138 Total current assets 150,744 226,432 Property and equipment, net 43,579 57,176 Goodwill (Note 9) 228,950 227,457 Other intangibles, net 4,532 4,579 Right of use asset (Note 10) 637,108 786,216 Other assets 40,237 40,934 Total assets $ 1,105,150 $ 1,342,794 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 36,922 $ 50,918 Accrued expenses 49,277 48,825 Short-term lease liability (Note 10) 127,649 137,271 Total current liabilities 213,848 237,014 Long-term debt, net (Note 11) 177,500 177,500 Long-term lease liability (Note 10) 540,930 680,454 Long-term financing liabilities (Note 11) 27,640 27,981 Other non-current liabilities 86,784 94,142 Total liabilities 1,046,702 1,217,091 Commitments and contingencies (Note 7) Shareholders’ equity: Common stock, $ 0.05 par value; issued and outstanding 35,768,086 and 35,625,716 common shares at December 31, 2020 and June 30, 2020, respectively 1,788 1,781 Additional paid-in capital 22,076 22,011 Accumulated other comprehensive income 8,786 7,449 Retained earnings 25,798 94,462 Total shareholders’ equity 58,448 125,703 Total liabilities and shareholders’ equity $ 1,105,150 $ 1,342,794 _______________________________________________________________________________ The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements. 2 REGIS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) For The Three And Six Months Ended December 31, 2020 And 2019 (Dollars and shares in thousands, except per share data amounts) Three Months Ended December 31, Six Months Ended December 31, 2020 2019 2020 2019 Revenues: Service $ 28,987 $ 101,805 $ 65,395 $ 243,746 Product 23,146 43,983 47,895 89,639 Royalties and fees 19,902 29,347 37,858 57,364 Franchise rental income (Note 10) 32,285 33,630 64,568 65,054 Total revenue 104,320 208,765 215,716 455,803 Operating expenses: Cost of service 22,097 67,358 50,620 157,840 Cost of product 17,203 27,258 33,572 53,585 Site operating expenses 10,350 26,330 23,589 59,272 General and administrative 26,690 32,691 52,837 73,316 Rent (Note 10) 12,902 20,495 26,127 44,759 Franchise rent expense 32,285 33,630 64,568 65,054 Depreciation and amortization 6,388 7,747 13,764 17,127 Long-lived asset impairment 3,160 — 8,984 — TBG mall location restructuring (Note 3) — 722 — 2,222 Total operating expenses 131,075 216,231 274,061 473,175 Operating loss ( 26,755 ) ( 7,466 ) ( 58,345 ) ( 17,372 ) Other (expense) income: Interest expense ( 3,701 ) ( 1,464 ) ( 7,463 ) ( 2,903 ) Loss from sale of salon assets to franchisees, net ( 3,226 ) ( 12,407 ) ( 3,888 ) ( 18,267 ) Interest income and other, net 403 2,869 517 3,040 Loss from continuing operations before income taxes ( 33,279 ) ( 18,468 ) ( 69,179 ) ( 35,502 ) Income tax benefit 400 1,948 1,035 4,804 Loss from continuing operations ( 32,879 ) ( 16,520 ) ( 68,144 ) ( 30,698 ) Income from discontinued operations, net of taxes (Note 3) — 79 — 452 Net loss $ ( 32,879 ) $ ( 16,441 ) $ ( 68,144 ) $ ( 30,246 ) Net loss per share: Basic and diluted: Loss from continuing operations $ ( 0.92 ) $ ( 0.46 ) $ ( 1.90 ) $ ( 0.85 ) Income from discontinued operations 0.00 0.00 0.00 0.01 Net loss per share, basic and diluted (1) $ ( 0.92 ) $ ( 0.46 ) $ ( 1.90 ) $ ( 0.84 ) Weighted average common and common equivalent shares outstanding: Basic and diluted 35,931 35,798 35,889 36,028 _______________________________________________________________________________ (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 unaudited Condensed Consolidated Financial Statements. 3 REGIS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS (Unaudited) For The Three And Six Months Ended December 31, 2020 And 2019 (Dollars in thousands) Three Months Ended December 31, Six Months Ended December 31, 2020 2019 2020 2019 Net loss $ ( 32,879 ) $ ( 16,441 ) $ ( 68,144 ) $ ( 30,246 ) Foreign currency translation adjustments 835 541 1,337 138 Comprehensive loss $ ( 32,044 ) $ ( 15,900 ) $ ( 66,807 ) $ ( 30,108 ) _______________________________________________________________________________ The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements. 4 REGIS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited) For The Three And Six Months Ended December 31, 2020 And 2019 (Dollars in thousands) Three Months Ended December 31, 2020 Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income Retained Earnings Total Shares Amount Balance, September 30, 2020 35,665,783 $ 1,783 $ 20,596 $ 7,951 $ 59,211 $ 89,541 Net loss — — — — ( 32,879 ) ( 32,879 ) Foreign currency translation — — — 835 — 835 Stock-based compensation — — 1,314 — — 1,314 Net restricted stock activity 102,303 5 166 — — 171 Minority interest — — — — ( 534 ) ( 534 ) Balance, December 31, 2020 35,768,086 $ 1,788 $ 22,076 $ 8,786 $ 25,798 $ 58,448 Three Months Ended December 31, 2019 Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income Retained Earnings Total Shares Amount Balance, September 30, 2019 35,548,036 $ 1,777 $ 20,880 $ 8,939 $ 252,143 $ 283,739 Net loss — — — — ( 16,441 ) ( 16,441 ) Foreign currency translation — — — 541 — 541 Exercise of SARs 1,500 — 28 — — 28 Stock-based compensation — — 332 — — 332 Net restricted stock activity 14,075 1 ( 10 ) — — ( 9 ) Minority interest — — — — ( 168 ) ( 168 ) Balance, December 31, 2019 35,563,611 $ 1,778 $ 21,230 $ 9,480 $ 235,534 $ 268,022 5 REGIS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited) For The Three And Six Months Ended December 31, 2020 And 2019 (Continued) (Dollars in thousands) Six Months Ended December 31, 2020 Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income Retained Earnings Total Shares Amount Balance, June 30, 2020 35,625,716 $ 1,781 $ 22,011 $ 7,449 $ 94,462 $ 125,703 Net loss — — — — ( 68,144 ) ( 68,144 ) Foreign currency translation — — — 1,337 — 1,337 Stock-based compensation — — 89 — — 89 Net restricted stock activity 142,370 7 ( 24 ) — — ( 17 ) Minority interest — — — — ( 520 ) ( 520 ) Balance, December 31, 2020 35,768,086 $ 1,788 $ 22,076 $ 8,786 $ 25,798 $ 58,448 Six Months Ended December 31, 2019 Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income Retained Earnings Total Shares Amount Balance, June 30, 2019 36,869,249 $ 1,843 $ 47,152 $ 9,342 $ 265,908 $ 324,245 Net loss — — — — ( 30,246 ) ( 30,246 ) Foreign currency translation — — — 138 — 138 Stock repurchase program ( 1,504,000 ) ( 75 ) ( 26,281 ) — — ( 26,356 ) Exercise of SARs 1,776 — 28 — — 28 Stock-based compensation — — 2,139 — — 2,139 Net restricted stock activity 196,586 10 ( 1,808 ) — — ( 1,798 ) Minority interest — — — — ( 128 ) ( 128 ) Balance, December 31, 2019 35,563,611 $ 1,778 $ 21,230 $ 9,480 $ 235,534 $ 268,022 _______________________________________________________________________________ The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements. 6 REGIS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) For The Six Months Ended December 31, 2020 And 2019 (Dollars in thousands) Six Months Ended December 31, 2020 2019 Cash flows from operating activities: Net loss $ ( 68,144 ) $ ( 30,246 ) Adjustments to reconcile net loss to cash used in operating activities: Non-cash adjustments related to discontinued operations — ( 586 ) Depreciation and amortization 11,123 14,484 Salon asset impairment — 2,643 Long-lived asset impairment 8,984 — Deferred income taxes ( 669 ) ( 6,380 ) Gain from sale of company headquarters, net — ( 2,513 ) Loss from sale of salon assets to franchisees, net 3,888 18,267 Stock-based compensation 89 2,139 Amortization of debt discount and financing costs 875 138 Other non-cash items affecting earnings 202 ( 243 ) Changes in operating assets and liabilities, excluding the effects of asset sales (1) ( 21,812 ) ( 17,032 ) Net cash used in operating activities ( 65,464 ) ( 19,329 ) Cash flows from investing activities: Capital expenditures ( 7,502 ) ( 17,576 ) Proceeds from sale of assets to franchisees 7,148 69,414 Costs associated with sale of salon assets to franchisees ( 222 ) ( 1,550 ) Proceeds from company-owned life insurance policies 1,200 — Proceeds from sale of company headquarters — 8,996 Net cash provided by investing activities 624 59,284 Cash flows from financing activities: Repayments of revolving credit facility — ( 30,000 ) Repurchase of common stock — ( 28,246 ) Taxes paid for shares withheld ( 212 ) ( 1,809 ) Minority interest buyout ( 562 ) — Distribution center lease payments ( 478 ) ( 480 ) Net cash used in financing activities ( 1,252 ) ( 60,535 ) Effect of exchange rate changes on cash and cash equivalents ( 68 ) 122 Decrease in cash, cash equivalents, and restricted cash ( 66,160 ) ( 20,458 ) Cash, cash equivalents and restricted cash: Beginning of period 122,880 92,379 End of period $ 56,720 $ 71,921 _______________________________________________________________________________ (1) Changes in operating assets and liabilities exclude assets and liabilities sold. The accompanying notes are an integral part of the unaudited Condensed Consolidated Financial Statements. 7 REGIS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The unaudited interim Condensed Consolidated Financial Statements of Regis Corporation (the "Company") as of December 31, 2020 and for the three and six months ended December 31, 2020 and 2019, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of December 31, 2020 and its consolidated results of operations, comprehensive loss, changes in shareholders' equity and cash flows for the interim periods. Adjustments consist only of normal recurring items, except for any discussed in the notes below. The results of operations and cash flows for any interim period are not necessarily indicative of results of operations and cash flows for the full year. The accompanying interim unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP). The unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2020 and other documents filed or furnished with the SEC during the current fiscal year. Impact of COVID-19 on Business Operations: During the period ended December 31, 2020, the global coronavirus pandemic ("COVID-19") had an adverse impact on operations, including prolonged government mandated salon closures in California and Ontario, in addition to other U.S. states and Canadian provinces. As of January 25, 2021, salons in California were allowed to re-open.The COVID-19 pandemic continues to impact salon guest visits resulting in a significant reduction in revenue and traffic. Due to the economic disruption caused by the COVID-19 pandemic, the Company faces a greater degree of uncertainty than normal in making judgments and estimates needed to apply the Company's significant accounting policies. Actual results and outcomes may differ from management's estimates and assumptions. 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 the 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. See Note 10 for further discussion related to the right of use asset impairment. Judgments made by management related to the expected useful lives of long-lived assets and the ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvement of the assets, changes in economic conditions, and changes in operating performance. As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause the Company to realize material impairment charges. Long-lived asset impairment charges, including right of use and salon property and equipment, of $ 3.2 and $ 9.0 million were recorded in the three and six months ended December 31, 2020, respectively, and is separately stated on the unaudited Condensed Consolidated Statement of Operations. Of the total long-lived asset impairment charges, $ 1.5 and $ 6.0 million, respectively, were allocated to the right of use asset and $ 1.7 and $ 3.0 million, respectively, were allocated to salon property and equipment. Long-lived salon property and equipment asset impairment charges of $ 1.1 and $ 2.6 million were recorded during the three and six months ended December 31, 2019, respectively, and are recorded in Depreciation and amortization in the unaudited Condensed Consolidated Statement of Operations. 8 Goodwill: As of December 31, 2020 and June 30, 2020, the Franchise reporting unit had $ 229.0 and $ 227.5 million, respectively, of goodwill. For further information, see Note 9 of the interim unaudited Condensed Consolidated Financial Statements. The Company assesses goodwill impairment on an annual basis, during the Company's fourth fiscal quarter, and between annual assessments if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below its carrying amount. An interim impairment analysis was not required in the three months ended December 31, 2020. The Company performs its annual impairment assessment as of April 30. For the fiscal year 2020 annual impairment assessment, due to the impact of the COVID-19 pandemic, the Company elected to forgo the optional Step 0 assessment and performed the quantitative impairment analysis on the Franchise reporting unit. The Company compared the carrying value of the reporting unit, including goodwill, to the estimated fair value. The result of the assessment indicated that the estimated fair value of the Company's reporting unit exceeded its carrying value by approximately 50 percent. For the goodwill impairment analysis, management utilized a combination of both a discounted cash flows approach and a market approach. The key assumptions utilized in the analysis were the number of salons to be sold to franchisees and the discount rate. If a future triggering event occurs or if during the Company's annual impairment assessment the fair value of the Franchise reporting unit has decreased significantly, it may result in a non-cash impairment charge to reduce the carrying value of goodwill. Depreciation: Depreciation expense in the three and six months ended December 31, 2020 includes $ 1.3 and $ 2.6 million of asset retirement obligations, which are cash expenses. Minority Interest: In December 2020, the Company purchased its non-controlling interest in Roosters from the minority shareholders. The Company paid $ 0.6 million to obtain 100 % ownership. The payment is recorded in cash used in financing activities on the unaudited Condensed Consolidated Statement of Cash Flows. 9 2. REVENUE RECOGNITION: 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 franchisees are included within product revenues in the unaudited Condensed Consolidated Statement of Operations and recorded at the time product is delivered to the franchisee. Payment for franchisee product revenue is generally collected within 30 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 unaudited Condensed 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 and entering into a sublease arrangement with the franchisee. The Company recognizes franchise rental income and expense when it is due to the landlord. The following table disaggregates revenue by timing of revenue recognition and is reconciled to reportable segment revenues as follows: Three Months Ended December 31, 2020 Three Months Ended December 31, 2019 Franchise Company-owned Franchise Company-owned (Dollars in thousands) Revenue recognized at a point in time: Service $ — $ 28,987 $ — $ 101,805 Product 14,236 8,910 16,864 27,119 Total revenue recognized at a point in time $ 14,236 $ 37,897 $ 16,864 $ 128,924 Revenue recognized over time: Royalty and other franchise fees $ 15,187 $ — $ 18,644 $ — Advertising fund fees 4,715 — 10,703 — Franchise rental income 32,285 — 33,630 — Total revenue recognized over time 52,187 — 62,977 — Total revenue $ 66,423 $ 37,897 $ 79,841 $ 128,924 10 Six Months Ended December 31, 2020 Six Months Ended December 31, 2019 Franchise Company-owned Franchise Company-owned (Dollars in thousands) Revenue recognized at a point in time: Service $ — $ 65,395 $ — $ 243,746 Product 27,978 19,917 29,969 59,670 Total revenue recognized at a point in time $ 27,978 $ 85,312 $ 29,969 $ 303,416 Revenue recognized over time: Royalty and other franchise fees $ 28,634 $ — $ 36,235 $ — Advertising fund fees 9,224 — 21,129 — Franchise rental income 64,568 — 65,054 — Total revenue recognized over time 102,426 — 122,418 — Total revenue $ 130,404 $ 85,312 $ 152,387 $ 303,416 Information about receivables, broker fees and deferred revenue subject to the amended revenue recognition guidance is as follows: December 31, 2020 June 30, 2020 Balance Sheet Classification (Dollars in thousands) Receivables from contracts with customers, net $ 27,457 $ 22,991 Accounts receivable, net Broker fees 20,345 20,516 Other assets Deferred revenue: Current Gift card liability $ 2,536 $ 2,543 Accrued expenses Deferred franchise fees unopened salons 69 77 Accrued expenses Deferred franchise fees open salons 5,854 5,537 Accrued expenses Total current deferred revenue $ 8,459 $ 8,157 Non-current Deferred franchise fees unopened salons $ 10,306 $ 11,855 Other non-current liabilities Deferred franchise fees open salons 33,674 33,623 Other non-current liabilities Total non-current deferred revenue $ 43,980 $ 45,478 11 Receivables relate primarily to payments due for royalties, franchise fees, advertising fees, rent, 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), primarily related to receivables from franchisees. The following table is a rollforward of the allowance for doubtful accounts for the period (in thousands): Balance as of June 30, 2020 $ 6,899 Provision for doubtful accounts (1) 1,627 Provision for franchisee rent (2) 853 Write-offs ( 632 ) Balance as of December 31, 2020 $ 8,747 _______________________________________________________________________________ (1) The provision for doubtful accounts is recognized as General and administrative expense in the unaudited Condensed Consolidated Statement of Operations. (2) The provision for franchisee rent is recognized as Rent in the unaudited Condensed Consolidated Statement of Operations. 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, 2020 $ 20,516 Additions 1,418 Amortization ( 1,565 ) Write-offs ( 24 ) Balance as of December 31, 2020 $ 20,345 Deferred revenue includes the gift card liability and deferred franchise fees for unopened salons and open salons. Gift card revenue for the three months ended December 31, 2020 and 2019 was $ 0.1 and $ 0.7 million, respectively, and for the six months ended December 31, 2020 and 2019 was $ 0.4 and $ 1.5 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 three months ended December 31, 2020 and 2019 was $ 1.6 and $ 1.3 million, respectively, and for the six months ended December 31, 2020 and 2019 was $ 3.3 and $ 2.4 million, respectively. Estimated revenue expected to be recognized in the future related to deferred franchise fees for open salons as of December 31, 2020 is as follows (in thousands): Remainder of 2021 $ 2,959 2022 5,799 2023 5,622 2024 5,387 2025 4,993 Thereafter 14,768 Total $ 39,528 12 3. TBG RESTRUCTURING AND DISCONTINUED OPERATIONS: 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). The Company classified the results of its mall-based business as discontinued operations in the unaudited Condensed Consolidated Statement of Operations. Included in discontinued operations in fiscal year 2020 are adjustments to actuarial assumptions related to the discontinued operations. Other than the items presented in the unaudited Consolidated Statement of Cash Flows, there were no other significant non-cash operating activities or non-cash investing activities related to discontinued operations for the six months ended December 31, 2020 and 2019. For the three and six months ended December 31, 2019, the Company recorded $ 0.7 and $ 2.2 million of professional fees and restructuring charges related to the Company assisting TBG with operating expenses to mitigate the risk of default associated with TBG's lease obligations. 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. As of December 31, 2020, prior to any mitigation efforts which may be available, the Company remains liable for up to approximately $ 14 million related to its mall-based salon lease commitments on the 77 salons that remain open, a $ 9 million reduction from June 30, 2020. The commitments are included in our lease liabilities. 4. EARNINGS PER SHARE: The Company’s basic earnings per share is calculated as net loss divided by weighted average common shares outstanding, excluding unvested outstanding stock options (SOs), restricted stock units (RSUs) and stock-settled performance units (PSUs). The Company’s diluted earnings per share is calculated as net loss 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 the three and six months ended December 31, 2020, there were 421,687 and 432,774 , respectively, and for the three and six months ended December 31, 2019 there were 1,322,308 and 1,338,634 , respectively, common stock equivalents of dilutive common stock excluded in the diluted earnings per share calculations due to the net loss from continuing operations. The computation of weighted average shares outstanding, assuming dilution, excluded 3,041,962 and 66,151 of stock-based awards during the three months ended December 31, 2020 and 2019, respectively, and 1,990,449 and 77,514 of stock-based awards during the six months ended December 31, 2020 and 2019, respectively, as they were not dilutive under the treasury stock method. 13 5. SHAREHOLDERS’ EQUITY: Stock-Based Employee Compensation: During the three and six months ended December 31, 2020, the Company granted various equity awards including RSUs, PSUs and SOs. A summary of equity awards granted is as follows: Three Months Ended December 31, 2020 Six Months Ended December 31, 2020 Restricted stock units 597,888 844,522 Performance-based restricted stock units — 62,290 Stock option units 1,458,680 1,458,680 The RSUs granted to employees during the three and six months ended December 31, 2020 vest in equal amounts over a three-year period subsequent to the grant date, cliff vest after a one-year period, cliff vest after a three-year period or cliff vest after a five-year period subsequent to the grant date. The CEO, who was appointed in October 2020, was granted 0.4 million "sign-on" RSUs that vest pro-rated over one year . The PSUs granted to employees have a three-year performance period ending June 30, 2023 linked to the Company's stock price reaching a specified volume weighted average closing price for a 50-day period that ends on June 30, 2023. The PSUs granted have a maximum vesting percentage of 200 % based on the level of performance achieved for the respective award. The SOs granted during the three and six months ended December 31, 2020 were granted in connection with the appointment of the Company's CEO and consists of options to purchase shares of the Company's common stock. The SOs are subject to both a four-year service-based vesting condition and a performance-based vesting condition. Additionally, 0.4 million SOs are matching options that vest on the fourth anniversary of employment up to the number of RSUs the CEO still holds of the "sign-on" RSUs. Total compensation cost for stock-based payment arrangements totaling $ 1.3 and $ 0.3 million for the three months ended December 31, 2020 and 2019, respectively, and $ 0.1 and $ 2.1 million for the six months ended December 31, 2020 and 2019, respectively, was recorded within General and administrative expense on the unaudited Condensed Consolidated Statement of Operations. In the six months ended December 31, 2020 stock compensation includes a $ 2.4 million benefit from the forfeiture of awards related to the departure of the Company's former CEO. Share Repurchases: During the six months ended December 31, 2020, the Company did no t repurchase shares under the previously approved stock repurchase program. During the six months ended December 31, 2019, the Company repurchased 1.5 million shares for $ 26.4 million under a previously approved stock repurchase program. At December 31, 2020, $ 54.6 million remains outstanding under the approved stock repurchase program. 14 6. INCOME TAXES: A summary of income tax benefits and corresponding effective tax rates is as follows: Three Months Ended December 31, Six Months Ended December 31, 2020 2019 2020 2019 (Dollars in thousands) Income tax benefit $ 400 $ 1,948 $ 1,035 $ 4,804 Effective tax rate 1.2 % 10.5 % 1.5 % 13.5 % The recorded tax provisions and effective tax rates for the three and six months ended December 31, 2020 were different than what would normally be expected primarily due to the impact of the deferred tax valuation allowance. The recorded tax provisions and effective tax rates for the three and six months ended December 31, 2019 were different than what would normally be expected primarily due to the impact of the deferred tax valuation allowance and global intangible low-taxed income ("GILTI"). The Company is no longer subject to IRS examinations for years before 2014. Furthermore, with limited exceptions, the Company is no longer subject to state and international income tax examinations by tax authorities for years before 2012. 7. COMMITMENTS AND CONTINGENCIES: 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 US 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 been 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, 2020 and December 31, 2020, $ 2.1 million was included within accrued expenses on the unaudited Condensed Consolidated Balance Sheet related to these class action lawsuits. In addition, our existing point of sale system supplier has challenged the development of certain parts of our technology systems in litigation brought in the Northern District of California, case No. 20-cv-02181-MMC. We have vigorously denied the allegations made by this third-party supplier and have asserted certain counterclaims against the third party. However, the dispute regarding our ownership and involvement of certain key personnel may be costly and distracting, and the outcome is currently uncertain. The Company has not recorded an expense related to damages in connection with these matters because any potential loss is not currently probable or reasonably estimable under U.S. GAAP. Additionally, the Company is unable to reasonably estimate the range of loss, if any, that may result from these matters. 15 8. CASH, CASH EQUIVALENTS AND RESTRICTED CASH: The table below reconciles the cash and cash equivalents balances and restricted cash balances, recorded in other current assets from the unaudited Condensed Consolidated Balance Sheet to the amount of cash, cash equivalents and restricted cash reported on the unaudited Condensed Consolidated Statement of Cash flows: December 31, 2020 June 30, 2020 (Dollars in thousands) Cash and cash equivalents $ 50,850 $ 113,667 Restricted cash, included in Other current assets (1) 5,870 9,213 Total cash, cash equivalents and restricted cash $ 56,720 $ 122,880 _______________________________________________________________________________ (1) 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. 9. GOODWILL: The table below contains details related to the Company's goodwill: Franchise Reporting Unit (Dollars in thousands) Goodwill, net at June 30, 2020 $ 227,457 Translation rate adjustments 1,493 Goodwill, net at December 31, 2020 $ 228,950 16 10. 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 an additional 5 to 10 year terms at the option of the Company. In addition to the obligation to make fixed rental payments for the 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 includes the following: Three Months Ended December 31, Six Months Ended December 31, 2020 2019 2020 2019 (Dollars in thousands) Minimum rent $ 10,484 $ 15,926 $ 20,205 $ 35,067 Percentage rent based on sales 2 550 75 1,847 Real estate taxes and other expenses 2,497 2,860 5,158 6,170 Lease termination expense (1) 1,087 38 6,638 79 Lease liability benefit (2) ( 2,226 ) — ( 8,286 ) — Corporate segment rent 653 720 1,375 1,005 Franchise segment non-reimbursable rent 405 401 962 591 Total $ 12,902 $ 20,495 $ 26,127 $ 44,759 _______________________________________________________________________________ (1) During the three and six months ended December 31, 2020, the Company terminated the leases for 98 and 229 company-owned salons, respectively, before the lease end dates. During the three and six months ended December 31, 2019, the Company terminated the leases for 20 and 57 company-owned salons, respectively, before the lease end dates. For the three and six months ended December 31, 2020, lease termination fees include $ 2.2 and $ 4.6 million, respectively, of early termination payments to close salons before lease end date and relieve the Company of future lease obligations. For the three and six months ended December 31, 2020, lease termination fees also include $( 1.1 ) and $ 2.0 million, respectively, of adjustments to accrued future lease payments for underperforming salons. The early termination payments made in the six months ended December 31, 2020 will save the Company approximately $ 4.3 million in future minimum rent plus associated real estate taxes and other lease expenses. (2) For the three and six months ended December 31, 2020, upon termination of previously impaired leases, the Company derecognized ROU assets of $ 3.0 and $ 10.1 million, respectively, and lease liabilities of $ 4.2 and $ 14.5 million, respectively, that resulted in a net gain of $ 1.2 and $ 4.4 million, respectively. In addition, the Company recognized a benefit from lease liabilities decreasing in excess of previously impaired ROU assets. The benefit recognized was $ 1.0 and $ 3.9 million in the three and six months ended December 31, 2020, respectively. The Company leases salon premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees. All lease costs are passed through to the franchisees. 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 unaudited Condensed Consolidated Statement of Operations. For the three months ended December 31, 2020 and 2019, franchise rental income and franchise rent expense were $ 32.3 and $ 33.6 million, respectively. For the six months ended December 31, 2020 and 2019, franchise rental income and franchise rent expense was $ 64.6 and $ 65.1 million. These leases generally have lease terms of approximately 5 years. Excluding underperforming salons we plan to close, leases are assumed to be renewed upon expiration. The Company expects to renew SmartStyle and Supercuts franchise leases upon expiration. Other leases are expected to be renewed by the franchisee upon expiration. This represents a Board approved change in estimate, which was intended to reduce lease exposure. The change in estimate resulted in a decrease to lease liabilities and right of use assets of $ 72.9 million, with no impact to net income. 17 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, including one lease term option when the lease is expected to be renewed. 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 ROU asset balance was $ 637.1 and $ 786.2 million as of December 31, 2020 and June 30, 2020, respectively. For leases classified as operating leases, expense for lease payments is recognized on a straight-line basis over the lease term, including the lease renewal option when the lease is expected to be renewed. 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 the original lease term. The weighted average remaining lease term was 6.50 and 6.87 years and the weighted average discount rate was 4.03 % and 3.95 % for all salon operating leases as of December 31, 2020 and June 30, 2020, respectively. A lessee’s ROU asset is subject to the same asset impairment guidance in ASC 360, Property, Plant, and Equipment, applied to other elements of property, plant, and equipment. The Company has identified its asset groups at the individual salon level as this represents the lowest level that identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. Poor salon performance, primarily due to the COVID-19 pandemic, resulted in an ASC 360-10-35-21 triggering event. As a result, management assessed all salon asset groups, which included the related ROU assets, for impairment in accordance with ASC 360. The first step in the impairment test under ASC 360 is to determine whether the long-lived assets are recoverable, which is determined by comparing the net carrying value of the salon asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset group. Estimating cash flows for purposes of the recoverability test is subjective and requires significant judgment. Estimated future cash flows used for the purposes of the recoverability test were based upon historical cash flows for the salons, adjusted for expected changes in future market conditions related to the COVID-19 pandemic, and other factors. The period of time used to determine the estimates of the future cash flows for the recoverability test was based on the remaining useful life of the primary asset of the group, which was the ROU asset in all cases. Step two of the long-lived asset impairment test requires that the fair value of the asset group be estimated when determining the amount of any impairment loss. For the salon asset groups that failed the recoverability test, an impairment loss was measured as the amount by which the carrying amount of the asset group exceeds its fair value. The Company applied the fair value guidance within ASC 820-10 to determine the fair value of the asset group from the perspective of a market-participant considering, among other things, appropriate discount rates, multiple valuation techniques, the most advantageous market, and assumptions about the highest and best use of the asset group. To determine the fair value of the salon asset groups, the Company utilized market-participant assumptions rather than the Company’s own assumptions about how it intends to use the asset group. The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include; the market rent of comparable properties based on recently negotiated leases as applicable, the asset group’s projected sales for properties with no recently negotiated leases, and a discount rate. 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 ultimate severity and longevity of the COVID-19 pandemic is unknown and 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. In the three and six months ended December 31, 2020, the Company recognized a long-lived impairment charge of $ 3.2 and $ 9.0 million, respectively, which included $ 1.5 and $ 6.0 million, respectively, related to the right of use assets, in the unaudited Condensed Consolidated Statement of Operations. The impairments recorded for the three and six months ended December 31, 2020 were primarily the result of triggering events identified on certain underperforming salons, salons that were identified to close in the year, and certain salons where franchisees are unable to fulfill their rent obligations. 18 As of December 31, 2020, future operating lease commitments, including one renewal option for leases expected to be renewed, to be paid and received by the Company were as follows: 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 Remainder of 2021 $ 61,792 $ 15,257 $ 914 $ 77,963 $ ( 61,792 ) $ 16,171 2022 114,759 25,415 1,483 141,657 ( 114,759 ) 26,898 2023 101,513 19,539 1,520 122,572 ( 101,513 ) 21,059 2024 88,919 14,647 1,558 105,124 ( 88,919 ) 16,205 2025 75,170 8,328 1,598 85,096 ( 75,170 ) 9,926 Thereafter 201,054 18,670 7,824 227,548 ( 201,054 ) 26,494 Total future obligations $ 643,207 $ 101,856 $ 14,897 $ 759,960 $ ( 643,207 ) $ 116,753 Less amounts representing interest 79,438 9,401 2,542 91,381 Present value of lease liabilities $ 563,769 $ 92,455 $ 12,355 $ 668,579 Less current lease liabilities 100,685 25,796 1,168 127,649 Long-term lease liabilities $ 463,084 $ 66,659 $ 11,187 $ 540,930 19 11. FINANCING ARRANGEMENTS: The Company’s long-term debt consists of the following: Revolving Credit Facility Maturity Date December 31, 2020 December 31, 2020 June 30, 2020 (Fiscal Year) (Interest rate %) (Dollars in thousands) Revolving credit facility 2023 5.00 % $ 177,500 $ 177,500 At December 31, 2020, cash and cash equivalents totaled $ 50.9 million. As of December 31, 2020, the Company has $ 177.5 million of outstanding borrowings under a $ 295.0 million revolving credit facility. At December 31, 2020, the Company has outstanding standby letters of credit under the revolving credit facility of $ 18.7 million, primarily related to the Company's self-insurance program. The unused available credit under the facility was $ 98.8 million as of December 31, 2020. The Company's liquidity, which includes the unused available balance under the credit facility and unrestricted cash and cash equivalents, totaled $ 149.7 million as of December 31, 2020. The revolving credit facility has a minimum liquidity covenant of $ 75.0 million. As of December 31, 2020, the Company had cash, cash equivalents and restricted cash of $ 56.7 million and current liabilities of $ 213.8 million. The Company is in compliance with all covenants and other requirements of the financing arrangements as of December 31, 2020 and believes it will continue to be in compliance for at least one year from our filing date. 20 Sale and Leaseback Transaction The Company’s long-term financing liabilities consists of the following: Maturity Date Interest Rate December 31, 2020 June 30, 2020 (Fiscal Year) (Dollars in thousands) Financial liability - Salt Lake City Distribution Center 2034 3.30 % $ 16,457 $ 16,773 Financial liability - Chattanooga Distribution Center 2034 3.70 % 11,183 11,208 Long- term financing liability $ 27,640 $ 27,981 In fiscal year 2019, the Company sold its Salt Lake City and Chattanooga Distribution Centers to an unrelated party. The Company is leasing the properties back for 15 years with the option to renew. As the Company plans to lease the property for more than 75% of its economic life, the sales proceeds received from the buyer-lessor are recognized as a financial liability. This financial liability is reduced based on the rental payments made under the lease that are allocated between principal and interest. As of December 31, 2020, the current portion of the Company’s lease liability was $ 1.0 million, which was recorded in accrued expenses on the unaudited Condensed Consolidated Balance Sheet. The weighted average remaining lease term was 13.1 years and the weighted average discount rate was 3.46 % for financing leases as of December 31, 2020. As of December 31, 2020, future lease payments due are as follows: Fiscal year Salt Lake City Distribution Center Chattanooga Distribution Center (Dollars in thousands) Remainder of 2021 $ 581 $ 409 2022 1,171 829 2023 1,186 842 2024 1,200 854 2025 1,215 867 Thereafter 10,683 8,414 Total $ 16,036 $ 12,215 The financing 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 financing liability. Total interest expense for the financing lease was $ 0.3 and $ 0.5 million for the three and six months ended December 31, 2020. 21 12. 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 December 31, 2020 and June 30, 2020, the estimated fair value of the Company’s cash, cash equivalents, restricted cash, receivables, accounts payable, debt and long-term financial liabilities approximated their carrying values. The estimated fair values 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 impairments were based on fair values using Level 3 inputs: Three Months Ended December 31, Six Months Ended December 31, 2020 2019 2020 2019 (Dollars in thousands) Long-lived asset impairment (1) $ 3,160 $ 1,126 $ 8,984 $ 2,643 _______________________________________________________________________________ (1) Long-lived asset impairment charges, including right of use and salon property and equipment, are separately stated on the unaudited Condensed Consolidated Statement of Operations for the three and six months ended December 31, 2020. Long-lived salon property and equipment asset impairment charges are recorded in Depreciation and amortization in the unaudited Condensed Consolidated Statement of Operations for the three and six months ended December 31, 2019. See Note 1 to the unaudited Condensed Consolidated Financial Statements. 22 13. SEGMENT INFORMATION: Segment information is prepared on the same basis that the chief operating decision maker reviews financial information for operational decision-making purposes. The Company’s reportable operating segments consisted of the following salons: December 31, 2020 June 30, 2020 FRANCHISE SALONS: SmartStyle/Cost Cutters in Walmart Stores 1,535 1,317 Supercuts 2,368 2,508 Portfolio Brands (1) 1,207 1,217 Total North American salons 5,110 5,042 Total International salons (2) 159 167 Total Franchise salons 5,269 5,209 as a percent of total Franchise and Company-owned salons 83.6 % 76.1 % COMPANY-OWNED SALONS: SmartStyle/Cost Cutters in Walmart Stores 466 751 Supercuts 154 210 Portfolio Brands (1) 340 505 Mall-based (3) 77 166 Total Company-owned salons 1,037 1,632 as a percent of total Franchise and Company-owned salons 16.4 % 23.9 % OWNERSHIP INTEREST LOCATIONS: Equity ownership interest locations 78 82 Grand Total, System-wide 6,384 6,923 _______________________________________________________________________________ (1) Portfolio Brands was previously referred to as Signature Style. (2) Canadian and Puerto Rican salons are included in the North American salon totals. (3) The mall-based salons were acquired from TBG on December 31, 2019. They are included in continuing operations under the Company-owned operating segment from January 1, 2020. As of December 31, 2020, the Franchise operating segment is comprised primarily of Supercuts ® , SmartStyle ® , Cost Cutters ® , First Choice Haircutters ® , Magicuts ® , and Roosters ® concepts and the Company-owned operating segment is comprised primarily of SmartStyle ® , Supercuts ® , Cost Cutters ® , and other regional trade names. 23 Financial information concerning the Company's reportable operating segments is shown in the following tables: Three Months Ended December 31, 2020 Franchise Company-owned Corporate Consolidated (Dollars in thousands) Revenues: Service $ — $ 28,987 $ — $ 28,987 Product 14,236 8,910 — 23,146 Royalties and fees 19,902 — — 19,902 Franchise rental income 32,285 — — 32,285 Total revenue 66,423 37,897 — 104,320 Operating expenses: Cost of service — 22,097 — 22,097 Cost of product 11,291 5,912 — 17,203 Site operating expenses 4,748 5,602 — 10,350 General and administrative 6,881 2,435 17,374 26,690 Rent 405 11,844 653 12,902 Franchise rent expense 32,285 — — 32,285 Depreciation and amortization 289 4,311 1,788 6,388 Long-lived asset impairment 94 3,066 — 3,160 Total operating expenses 55,993 55,267 19,815 131,075 Operating income (loss) 10,430 ( 17,370 ) ( 19,815 ) ( 26,755 ) Other (expense) income: Interest expense — — ( 3,701 ) ( 3,701 ) Loss from sale of salon assets to franchisees, net — — ( 3,226 ) ( 3,226 ) Interest income and other, net — — 403 403 Income (loss) from continuing operations before income taxes $ 10,430 $ ( 17,370 ) $ ( 26,339 ) $ ( 33,279 ) Three Months Ended December 31, 2019 Franchise Company-owned Corporate Consolidated (Dollars in thousands) Revenues: Service $ — $ 101,805 $ — $ 101,805 Product 16,864 27,119 — 43,983 Royalties and fees 29,347 — — 29,347 Franchise rental income 33,630 — — 33,630 Total revenue 79,841 128,924 — 208,765 Operating expenses: Cost of service — 67,358 — 67,358 Cost of product 13,072 14,186 — 27,258 Site operating expenses 10,704 15,626 — 26,330 General and administrative 8,976 7,547 16,168 32,691 Rent 401 19,374 720 20,495 Franchise rent expense 33,630 — — 33,630 Depreciation and amortization 210 5,938 1,599 7,747 TBG mall location restructuring 722 — — 722 Total operating expenses 67,715 130,029 18,487 216,231 Operating income (loss) 12,126 ( 1,105 ) ( 18,487 ) ( 7,466 ) Other (expense) income: Interest expense — — ( 1,464 ) ( 1,464 ) Loss from sale of salon assets to franchisees, net — — ( 12,407 ) ( 12,407 ) Interest income and other, net — — 2,869 2,869 Income (loss) from continuing operations before income taxes $ 12,126 $ ( 1,105 ) $ ( 29,489 ) $ ( 18,468 ) 24 Six Months Ended December 31, 2020 Franchise Company-owned Corporate Consolidated (Dollars in thousands) Revenues: Service $ — $ 65,395 $ — $ 65,395 Product 27,978 19,917 — 47,895 Royalties and fees 37,858 — — 37,858 Franchise rental income 64,568 — — 64,568 Total revenue 130,404 85,312 — 215,716 Operating expenses: Cost of service — 50,620 — 50,620 Cost of product 21,969 11,603 — 33,572 Site operating expenses 9,258 14,331 — 23,589 General and administrative 15,604 5,411 31,822 52,837 Rent 962 23,790 1,375 26,127 Franchise rent expense 64,568 — — 64,568 Depreciation and amortization 563 9,393 3,808 13,764 Long-lived asset impairment 704 8,280 — 8,984 Total operating expenses 113,628 123,428 37,005 274,061 Operating income (loss) 16,776 ( 38,116 ) ( 37,005 ) ( 58,345 ) Other (expense) income: Interest expense — — ( 7,463 ) ( 7,463 ) Loss from sale of salon assets to franchisees, net — — ( 3,888 ) ( 3,888 ) Interest income and other, net — — 517 517 Income (loss) from continuing operations before income taxes $ 16,776 $ ( 38,116 ) $ ( 47,839 ) $ ( 69,179 ) Six Months Ended December 31, 2019 Franchise Company-owned Corporate Consolidated (Dollars in thousands) Revenues: Service $ — $ 243,746 $ — $ 243,746 Product 29,969 59,670 — 89,639 Royalties and fees 57,364 — — 57,364 Franchise rental income 65,054 — — 65,054 Total revenue 152,387 303,416 — 455,803 Operating expenses: Cost of service — 157,840 — 157,840 Cost of product 23,352 30,233 — 53,585 Site operating expenses 21,130 38,142 — 59,272 General and administrative 17,333 17,697 38,286 73,316 Rent 591 43,163 1,005 44,759 Franchise rent expense 65,054 — — 65,054 Depreciation and amortization 370 12,045 4,712 17,127 TBG mall location restructuring 2,222 — — 2,222 Total operating expenses 130,052 299,120 44,003 473,175 Operating income (loss) 22,335 4,296 ( 44,003 ) ( 17,372 ) Other (expense) income: Interest expense — — ( 2,903 ) ( 2,903 ) Loss from sale of salon assets to franchisees, net — — ( 18,267 ) ( 18,267 ) Interest income and other, net — — 3,040 3,040 Income (loss) from continuing operations before income taxes $ 22,335 4,296 $ ( 62,133 ) $ ( 35,502 ) 25 14. REVISION OF SECOND QUARTER 2020 UNAUDITED RESULTS: During the fourth quarter of fiscal year 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. 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. 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 period. However, to facilitate comparisons among periods, the Company has decided to revise its previously issued second quarter unaudited condensed consolidated financial information. Three Months Ended December 31, 2019 As Previously Reported Adjustments As Revised (Dollars in thousands, except per share amounts) Loss from sale of salon assets to franchisees, net (1) $ ( 5,692 ) $ ( 6,715 ) $ ( 12,407 ) Interest income and other, net (2) 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 Six Months Ended December 31, 2019 As Previously Reported Adjustments As Revised (Dollars in thousands, except per share amounts) Loss from sale of salon assets to franchisees, net (1) $ ( 11,552 ) $ ( 6,715 ) $ ( 18,267 ) Interest income and other, net (2) 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 ) _______________________________________________________________________________ The Company revised the amounts originally reported for the second quarter of fiscal year 2020 for the following items: (1) 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 of fiscal year 2020. 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. (2) 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 of fiscal year 2020. Previously, the Company identified this error during the third quarter of fiscal year 2020 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. 26