REGIS CORP 10-Q

Item 1. Financial Statements REGIS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) (Dollars in thousands, except share data) March 31, 2021 June 30, 2020 ASSETS Current assets: Cash and cash equivalents $ 34,510 $ 113,667 Receivables, net 31,254 31,030 Inventories 38,221 62,597 Other current assets 14,082 19,138 Total current assets 118,067 226,432 Property and equipment, net 27,080 57,176 Goodwill (Note 9) 229,221 227,457 Other intangibles, net 4,186 4,579 Right of use asset (Note 10) 629,006 786,216 Other assets 40,423 40,934 Total assets $ 1,047,983 $ 1,342,794 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 28,840 $ 50,918 Accrued expenses 51,164 48,825 Short-term lease liability (Note 10) 123,224 137,271 Total current liabilities 203,228 237,014 Long-term debt, net (Note 11) 177,500 177,500 Long-term lease liability (Note 10) 536,234 680,454 Long-term financing liabilities (Note 11) — 27,981 Other non-current liabilities 81,517 94,142 Total liabilities 998,479 1,217,091 Commitments and contingencies (Note 7) Shareholders’ equity: Common stock, $ 0.05 par value; issued and outstanding 35,789,825 and 35,625,716 common shares at March 31, 2021 and June 30, 2020, respectively 1,789 1,781 Additional paid-in capital 23,672 22,011 Accumulated other comprehensive income 9,092 7,449 Retained earnings 14,951 94,462 Total shareholders’ equity 49,504 125,703 Total liabilities and shareholders’ equity $ 1,047,983 $ 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 Nine Months Ended March 31, 2021 And 2020 (Dollars and shares in thousands, except per share data amounts) Three Months Ended March 31, Nine Months Ended March 31, 2021 2020 2021 2020 Revenues: Service $ 24,645 $ 78,387 $ 90,040 $ 322,133 Product 20,770 34,877 68,665 124,516 Royalties and fees 23,535 8,698 61,393 66,062 Franchise rental income (Note 10) 31,317 31,821 95,885 96,875 Total revenue 100,267 153,783 315,983 609,586 Operating expenses: Cost of service 15,821 54,824 66,441 212,664 Cost of product 21,268 21,672 54,840 75,257 Site operating expenses 13,366 3,660 36,955 62,932 General and administrative 24,582 31,871 77,419 105,187 Rent (Note 10) 8,001 18,665 34,128 63,424 Franchise rent expense 31,317 31,821 95,885 96,875 Depreciation and amortization 3,620 10,359 17,384 27,486 Long-lived asset impairment 833 — 9,817 — TBG mall location restructuring (Note 3) — 146 — 2,368 Goodwill impairment — 40,164 — 40,164 Total operating expenses 118,808 213,182 392,869 686,357 Operating loss ( 18,541 ) ( 59,399 ) ( 76,886 ) ( 76,771 ) Other (expense) income: Interest expense ( 3,163 ) ( 1,712 ) ( 10,626 ) ( 4,615 ) Loss from sale of salon assets to franchisees, net ( 4,575 ) ( 7,858 ) ( 8,463 ) ( 26,125 ) Interest income and other, net 15,099 148 15,616 3,188 Loss from continuing operations before income taxes ( 11,180 ) ( 68,821 ) ( 80,359 ) ( 104,323 ) Income tax benefit 333 979 1,368 5,783 Loss from continuing operations ( 10,847 ) ( 67,842 ) ( 78,991 ) ( 98,540 ) Income from discontinued operations, net of taxes (Note 3) — 301 — 753 Net loss $ ( 10,847 ) $ ( 67,541 ) $ ( 78,991 ) $ ( 97,787 ) Net loss per share: Basic and diluted: Loss from continuing operations $ ( 0.30 ) $ ( 1.89 ) $ ( 2.20 ) $ ( 2.74 ) Income from discontinued operations 0.00 0.01 0.00 0.02 Net loss per share, basic and diluted (1) $ ( 0.30 ) $ ( 1.88 ) $ ( 2.20 ) $ ( 2.72 ) Weighted average common and common equivalent shares outstanding: Basic and diluted 36,011 35,815 35,929 35,958 _______________________________________________________________________________ (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 Nine Months Ended March 31, 2021 And 2020 (Dollars in thousands) Three Months Ended March 31, Nine Months Ended March 31, 2021 2020 2021 2020 Net loss $ ( 10,847 ) $ ( 67,541 ) $ ( 78,991 ) $ ( 97,787 ) Foreign currency translation adjustments 306 ( 2,482 ) 1,643 ( 2,344 ) Comprehensive loss $ ( 10,541 ) $ ( 70,023 ) $ ( 77,348 ) $ ( 100,131 ) _______________________________________________________________________________ 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 Nine Months Ended March 31, 2021 And 2020 (Dollars in thousands) Three Months Ended March 31, 2021 Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income Retained Earnings Total Shares Amount Balance, December 31, 2020 35,768,086 $ 1,788 $ 22,076 $ 8,786 $ 25,798 $ 58,448 Net loss — — — — ( 10,847 ) ( 10,847 ) Foreign currency translation — — — 306 — 306 Exercise of SARs 3,775 — ( 24 ) — — ( 24 ) Stock-based compensation — — 1,703 — — 1,703 Net restricted stock activity 17,964 1 ( 83 ) — — ( 82 ) Balance, March 31, 2021 35,789,825 $ 1,789 $ 23,672 $ 9,092 $ 14,951 $ 49,504 Three Months Ended March 31, 2020 Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income Retained Earnings Total Shares Amount Balance, December 31, 2019 35,563,611 $ 1,778 $ 21,230 $ 9,480 $ 235,534 $ 268,022 Net loss — — — — ( 67,541 ) ( 67,541 ) Foreign currency translation — — — ( 2,482 ) — ( 2,482 ) Stock-based compensation — — ( 25 ) — — ( 25 ) Net restricted stock activity 2,595 — ( 19 ) — — ( 19 ) Minority interest — — — — 38 38 Balance, March 31, 2020 35,566,206 $ 1,778 $ 21,186 $ 6,998 $ 168,031 $ 197,993 5 REGIS CORPORATION CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited) For The Three And Nine Months Ended March 31, 2021 And 2020 (Continued) (Dollars in thousands) Nine Months Ended March 31, 2021 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 — — — — ( 78,991 ) ( 78,991 ) Foreign currency translation — — — 1,643 — 1,643 Exercise of SARs 3,775 — ( 24 ) — — ( 24 ) Stock-based compensation — — 1,792 — — 1,792 Net restricted stock activity 160,334 8 ( 107 ) — — ( 99 ) Minority interest — — — — ( 520 ) ( 520 ) Balance, March 31, 2021 35,789,825 $ 1,789 $ 23,672 $ 9,092 $ 14,951 $ 49,504 Nine Months Ended March 31, 2020 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 — — — — ( 97,787 ) ( 97,787 ) Foreign currency translation — — — ( 2,344 ) — ( 2,344 ) Stock repurchase program ( 1,504,000 ) ( 75 ) ( 26,281 ) — — ( 26,356 ) Exercise of SARs 1,776 — 28 — — 28 Stock-based compensation — — 2,114 — — 2,114 Net restricted stock activity 199,181 10 ( 1,827 ) — — ( 1,817 ) Minority interest — — — — ( 90 ) ( 90 ) Balance, March 31, 2020 35,566,206 $ 1,778 $ 21,186 $ 6,998 $ 168,031 $ 197,993 _______________________________________________________________________________ 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 Nine Months Ended March 31, 2021 And 2020 (Dollars in thousands) Nine Months Ended March 31, 2021 2020 Cash flows from operating activities: Net loss $ ( 78,991 ) $ ( 97,787 ) Adjustments to reconcile net loss to cash used in operating activities: Non-cash adjustments related to discontinued operations — ( 967 ) Depreciation and amortization 13,968 23,635 Salon asset impairment — 3,851 Long-lived asset impairment 9,817 — Deferred income taxes ( 806 ) ( 6,469 ) Inventory reserve 6,875 — Gain from disposal of distribution center assets ( 14,878 ) — Gain from sale of company headquarters, net — ( 2,513 ) Loss from sale of salon assets to franchisees, net 8,463 26,125 Goodwill impairment — 40,164 Stock-based compensation 1,792 2,114 Amortization of debt discount and financing costs 1,313 206 Other non-cash items affecting earnings 183 ( 442 ) Changes in operating assets and liabilities, excluding the effects of asset sales (1) ( 27,743 ) ( 38,938 ) Net cash used in operating activities ( 80,007 ) ( 51,021 ) Cash flows from investing activities: Capital expenditures ( 9,609 ) ( 32,331 ) Proceeds from sale of assets to franchisees 7,743 87,916 Costs associated with sale of salon assets to franchisees ( 242 ) ( 1,887 ) Proceeds from company-owned life insurance policies 1,200 — Proceeds from sale of company headquarters — 8,996 Net cash (used in) provided by investing activities ( 908 ) 62,694 Cash flows from financing activities: Borrowings on revolving credit facility — 213,000 Repayments of revolving credit facility — ( 30,000 ) Repurchase of common stock — ( 28,246 ) Taxes paid for shares withheld ( 316 ) ( 1,968 ) Minority interest buyout ( 562 ) — Distribution center lease payments ( 724 ) ( 677 ) Net cash (used in) provided by financing activities ( 1,602 ) 152,109 Effect of exchange rate changes on cash and cash equivalents 6 ( 379 ) (Decrease) increase in cash, cash equivalents, and restricted cash ( 82,511 ) 163,403 Cash, cash equivalents and restricted cash: Beginning of period 122,880 92,379 End of period $ 40,369 $ 255,782 _______________________________________________________________________________ (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 March 31, 2021 and for the three and nine months ended March 31, 2021 and 2020, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of March 31, 2021 and its consolidated results of operations, comprehensive loss, 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 March 31, 2021, 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 during the three and nine months ended March 31, 2021. 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. Inventory: The Company has inventory valuation reserves for excess and obsolete inventories, or other factors that may render inventories unmarketable at their historical costs. For the three and nine months ended March 31, 2021, the Company recorded $ 5.3 and $ 6.9 million of inventory excess and obsolescence charges, respectively. The increase in the reserve in the three months ended March 31, 2021 was related to management's decision to exit its product sales business and wind down operations at the Company's two distribution centers. The expense was recorded to Cost of product in the unaudited Condensed Consolidated Statement of Operations and is a non-cash add back to Net loss on the unaudited Condensed Consolidated Statement of Cash Flows. 8 Salon Long-Lived Asset and Right of Use Asset Impairment Assessments: The Company assesses impairment of long-lived salon assets and right of use (ROU) 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 salon cash flows are compared to the carrying value of the salon assets. If the undiscounted estimated cash flows are less than the carrying value of the assets, the Company calculates an impairment charge based on the 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 of the unaudited Condensed Consolidated Financial Statements for further discussion related to the ROU 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 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 ROU and salon property and equipment, of $ 0.8 and $ 9.8 million were recorded in the three and nine months ended March 31, 2021, respectively, on the unaudited Condensed Consolidated Statement of Operations. Of the total long-lived asset impairment charges, $ 0.3 and $ 6.3 million, respectively, were allocated to the ROU asset and $ 0.5 and $ 3.5 million, respectively, were allocated to salon property and equipment. Long-lived salon property and equipment asset impairment charges of $ 1.2 and $ 3.9 million were recorded during the three and nine months ended March 31, 2020, respectively, and are recorded in Depreciation and amortization in the unaudited Condensed Consolidated Statement of Operations. 9 Goodwill: As of March 31, 2021 and June 30, 2020, the Franchise reporting unit had $ 229.2 and $ 227.5 million, respectively, of goodwill. For further information, see Note 9 of the 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 and nine months ended March 31, 2021. The COVID-19 pandemic, which began in March 2020, was an interim triggering event in fiscal year 2020. The Company assessed its goodwill as of March 31, 2020 and determined that the Company-owned goodwill was fully impaired. As a result, the Company recorded a goodwill impairment charge of $ 40.2 million in the three and nine months ended March 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 that reduces the carrying value of goodwill. Depreciation: Depreciation expense in the three and nine months ended March 31, 2021 includes $ 0.8 and $ 3.4 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. 10 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, including sales of the hardware related to our proprietary cloud-based management and point-of-sale commerce solution, 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. The gross presentation increases both the 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 March 31, 2021 Three Months Ended March 31, 2020 Franchise Company-owned Franchise Company-owned (Dollars in thousands) Revenue recognized at a point in time: Service $ — $ 24,645 $ — $ 78,387 Product 13,079 7,691 15,318 19,559 Total revenue recognized at a point in time $ 13,079 $ 32,336 $ 15,318 $ 97,946 Revenue recognized over time: Royalty and other franchise fees $ 17,955 $ — $ 16,487 $ — Advertising fund fees (refunds), net (1) 5,580 — ( 7,789 ) — Franchise rental income 31,317 — 31,821 — Total revenue recognized over time 54,852 — 40,519 — Total revenue $ 67,931 $ 32,336 $ 55,837 $ 97,946 _______________________________________________________________________________ (1) Fiscal year 2020 includes the refund of $ 14.9 million of previously collected cooperative advertising fees. Cooperative advertising fees were not refunded in fiscal year 2021. 11 Nine Months Ended March 31, 2021 Nine Months Ended March 31, 2020 Franchise Company-owned Franchise Company-owned (Dollars in thousands) Revenue recognized at a point in time: Service $ — $ 90,040 $ — $ 322,133 Product 41,057 27,608 45,287 79,229 Total revenue recognized at a point in time $ 41,057 $ 117,648 $ 45,287 $ 401,362 Revenue recognized over time: Royalty and other franchise fees $ 46,589 $ — $ 52,721 $ — Advertising fund fees 14,804 — 13,341 — Franchise rental income 95,885 — 96,875 — Total revenue recognized over time 157,278 — 162,937 — Total revenue $ 198,335 $ 117,648 $ 208,224 $ 401,362 Information about receivables, broker fees and deferred revenue subject to the current revenue recognition guidance is as follows: March 31, 2021 June 30, 2020 Balance Sheet Classification (Dollars in thousands) Receivables from contracts with customers, net $ 22,106 $ 22,991 Accounts receivable, net Broker fees 19,599 20,516 Other assets Deferred revenue: Current Gift card liability $ 2,336 $ 2,543 Accrued expenses Deferred franchise fees unopened salons 80 77 Accrued expenses Deferred franchise fees open salons 5,929 5,537 Accrued expenses Total current deferred revenue: $ 8,345 $ 8,157 Non-current Deferred franchise fees unopened salons $ 7,656 $ 11,855 Other non-current liabilities Deferred franchise fees open salons 33,001 33,623 Other non-current liabilities Total non-current deferred revenue $ 40,657 $ 45,478 12 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) 792 Provision for franchisee rent (2) 907 Write-offs ( 1,436 ) Balance as of March 31, 2021 $ 7,162 _______________________________________________________________________________ (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 1,573 Amortization ( 2,369 ) Write-offs ( 121 ) Balance as of March 31, 2021 $ 19,599 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 March 31, 2021 and 2020 was $ 0.3 and $ 0.8 million, respectively, and for the nine months ended March 31, 2021 and 2020 was $ 0.7 and $ 2.3 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 three months ended March 31, 2021 and 2020 was $ 1.6 and $ 1.4 million, respectively, and for the nine months ended March 31, 2021 and 2020 was $ 4.9 and $ 3.8 million, respectively. Estimated revenue expected to be recognized in the future related to deferred franchise fees for open salons as of March 31, 2021 is as follows (in thousands): Remainder of 2021 $ 1,505 2022 5,901 2023 5,725 2024 5,483 2025 5,092 Thereafter 15,224 Total $ 38,930 13 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 nine months ended March 31, 2021 and 2020. For the three and nine months ended March 31, 2020, the Company recorded $ 0.1 and $ 2.4 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 March 31, 2021, prior to any mitigation efforts which may be available, the Company remains liable for up to approximately $ 12 million related to its mall-based salon lease commitments on the 62 salons that remain open, an $ 11 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 nine months ended March 31, 2021, there were 972,485 and 511,970 , respectively, and for the three and nine months ended March 31, 2020 there were 663,636 and 1,145,053 , 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 1,261,200 and 670,997 of stock-based awards during the three months ended March 31, 2021 and 2020, respectively, and 2,240,743 and 174,698 of stock-based awards during the nine months ended March 31, 2021 and 2020, respectively, as they were not dilutive under the treasury stock method. 14 5. SHAREHOLDERS’ EQUITY: Stock-Based Employee Compensation: During the three and nine months ended March 31, 2021, the Company granted various equity awards including RSUs, PSUs and SOs. A summary of equity awards granted is as follows: Three Months Ended March 31, 2021 Nine Months Ended March 31, 2021 Restricted stock units 47,303 891,825 Performance-based restricted stock units — 62,290 Stock option units — 1,458,680 The RSUs granted to employees during the three and nine months ended March 31, 2021 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 nine months ended March 31, 2021 were granted in connection with the appointment of the Company's CEO and consist 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 $ 1.7 and $ 0.0 million for the three months ended March 31, 2021 and 2020, respectively, and $ 1.8 and $ 2.1 million for the nine months ended March 31, 2021 and 2020, respectively, was recorded within General and administrative expense on the unaudited Condensed Consolidated Statement of Operations. In the nine months ended March 31, 2021, 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 nine months ended March 31, 2021, the Company did no t repurchase shares under the previously approved stock repurchase program. During the nine months ended March 31, 2020, the Company repurchased 1.5 million shares for $ 26.4 million under a previously approved stock repurchase program. At March 31, 2021, $ 54.6 million remains outstanding under the approved stock repurchase program. 15 6. INCOME TAXES: A summary of income tax benefits and corresponding effective tax rates is as follows: Three Months Ended March 31, Nine Months Ended March 31, 2021 2020 2021 2020 (Dollars in thousands) Income tax benefit $ 333 $ 979 $ 1,368 $ 5,783 Effective tax rate 3.0 % 1.4 % 1.7 % 5.5 % The recorded tax provisions and effective tax rates for the three and nine months ended March 31, 2021 and 2020 were different than what would normally be expected primarily due to the impact of the deferred tax valuation allowance. 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 March 31, 2021, $ 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. 16 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: March 31, 2021 June 30, 2020 (Dollars in thousands) Cash and cash equivalents $ 34,510 $ 113,667 Restricted cash, included in Other current assets (1) 5,859 9,213 Total cash, cash equivalents and restricted cash $ 40,369 $ 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 1,764 Goodwill, net at March 31, 2021 $ 229,221 17 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 term 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 March 31, Nine Months Ended March 31, 2021 2020 2021 2020 (Dollars in thousands) Minimum rent $ 8,400 $ 13,571 $ 28,605 $ 48,638 Percentage rent based on sales 3 298 78 2,145 Real estate taxes and other expenses 1,989 3,672 7,147 9,842 Lease termination (benefit) expense (1) ( 154 ) 44 6,484 123 Lease liability benefit (2) ( 3,009 ) — ( 11,295 ) — Corporate segment rent 671 904 2,046 1,909 Franchise segment non-reimbursable rent 101 176 1,063 767 Total $ 8,001 $ 18,665 $ 34,128 $ 63,424 _______________________________________________________________________________ (1) During the three and nine months ended March 31, 2021, the Company terminated the leases for 15 and 244 company-owned salons, respectively, before the lease end dates. During the three and nine months ended March 31, 2020, the Company terminated the leases for 3 and 60 company-owned salons, respectively, before the lease end dates. For the three and nine months ended March 31, 2021, lease termination fees include $ 0.3 and $ 4.9 million, respectively, of early termination payments to close salons before the lease end date to relieve the Company of future lease obligations. For the three and nine months ended March 31, 2021, lease termination fees also include $( 0.5 ) and $ 1.5 million, respectively, of adjustments to accrue future lease payments for salons that are no longer operating. The early termination payments made in the nine months ended March 31, 2021 decreased the future minimum rent liability by $ 9.5 million plus saved the Company from the associated real estate taxes and other lease expenses. (2) For the three and nine months ended March 31, 2021, upon termination of previously impaired leases, the Company derecognized ROU assets of $ 3.2 and $ 13.3 million, respectively, and lease liabilities of $ 5.2 and $ 19.7 million, respectively, that resulted in a net gain of $ 2.0 and $ 6.4 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 $ 4.9 million in the three and nine months ended March 31, 2021, 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 March 31, 2021 and 2020, franchise rental income and franchise rent expense were $ 31.3 and $ 31.8 million, respectively. For the nine months ended March 31, 2021 and 2020, franchise rental income and franchise rent expense were $ 95.9 and $ 96.9 million. These leases generally have lease terms of approximately 5 years. 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 that occurred in the second quarter of fiscal year 2021 and 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. 18 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 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 $ 629.0 and $ 786.2 million as of March 31, 2021 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 6.44 and 6.87 years and the weighted average discount rate was 4.07 % and 3.95 % for all salon operating leases as of March 31, 2021 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 underperforming salon asset groups, which included the related ROU assets, for impairment in accordance with ASC 360. The first step in the impairment test under ASC 360 is to determine whether the long-lived assets are recoverable, which is determined by comparing the net carrying value of the salon asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset group. Estimating cash flows for purposes of the recoverability test is subjective and requires significant judgment. Estimated future cash flows used for the purposes of the recoverability test were based upon historical cash flows for the salons, adjusted for expected changes in future market conditions related to the COVID-19 pandemic, and other factors. The period of time used to determine the estimates of the future cash flows for the recoverability test was based on the remaining useful life of the primary asset of the group, which was the ROU asset in all cases. 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 nine months ended March 31, 2021, the Company recognized a long-lived impairment charge of $ 0.8 and $ 9.8 million, respectively, which included $ 0.3 and $ 6.3 million, respectively, related to the right of use assets, in the unaudited Condensed Consolidated Statement of Operations. The impairments recorded for the three and nine months ended March 31, 2021 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 were unable to fulfill their rent obligations. 19 As of March 31, 2021, future operating lease commitments, including one renewal option for leases expected to be renewed, to be paid and received by the Company were as follows (in thousands): 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 $ 30,985 $ 6,537 $ 976 $ 38,498 $ ( 30,985 ) $ 7,513 2022 116,803 22,514 3,566 142,883 ( 116,803 ) 26,080 2023 103,418 16,936 3,550 123,904 ( 103,418 ) 20,486 2024 91,108 11,803 3,616 106,527 ( 91,108 ) 15,419 2025 77,655 5,911 3,683 87,249 ( 77,655 ) 9,594 Thereafter 216,156 12,559 27,331 256,046 ( 216,156 ) 39,890 Total future obligations $ 636,125 $ 76,260 $ 42,722 $ 755,107 $ ( 636,125 ) $ 118,982 Less amounts representing interest 78,998 6,462 10,189 95,649 Present value of lease liabilities $ 557,127 $ 69,798 $ 32,533 $ 659,458 Less current lease liabilities 99,351 21,705 2,168 123,224 Long-term lease liabilities $ 457,776 $ 48,093 $ 30,365 $ 536,234 20 11. FINANCING ARRANGEMENTS: The Company’s long-term debt consists of the following: Revolving Credit Facility Maturity Date March 31, 2021 March 31, 2021 June 30, 2020 (Fiscal Year) (Interest rate %) (Dollars in thousands) Revolving credit facility 2023 5.00 % $ 177,500 $ 177,500 At March 31, 2021, cash and cash equivalents totaled $ 34.5 million. As of March 31, 2021, the Company has $ 177.5 million of outstanding borrowings under a $ 295.0 million revolving credit facility. At March 31, 2021, 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 March 31, 2021. The Company's liquidity, which includes the unused available balance under the credit facility and unrestricted cash and cash equivalents, totaled $ 133.3 million as of March 31, 2021. The revolving credit facility has a minimum liquidity covenant of $ 75.0 million. As of March 31, 2021, the Company had cash, cash equivalents and restricted cash of $ 40.4 million and current liabilities of $ 203.2 million. The Company is in compliance with all covenants and other requirements of the financing arrangements as of March 31, 2021 and believes it will continue to be in compliance for at least one year from our filing date. Sale and Leaseback Transaction The Company’s long-term financing liabilities consists of the following: Maturity Date Interest Rate March 31, 2021 June 30, 2020 (Fiscal Year) (Dollars in thousands) Financial liability - Salt Lake City Distribution Center 2034 3.30 % $ — $ 16,773 Financial liability - Chattanooga Distribution Center 2034 3.70 % — 11,208 Long- term financing liability $ — $ 27,981 In fiscal year 2019, the Company sold its Salt Lake City and Chattanooga Distribution Centers to an unrelated party. At the time of the sale, the transactions were considered failed sale and leaseback transactions, as the Company had planned to lease the property for more than 75% of its economic life. The sale proceeds received from the buyer-lessor were recognized as a financial liability, which was reduced based on the rental payments made under the lease that were allocated between principal and interest. In the third quarter of fiscal year 2021, as a result of the Company exiting its wholesale product sales business, the Company informed the landlord of its intention to exit the leased spaces. Because the Company no longer plans to lease the distribution centers for the majority of the assets’ useful lives, these transactions are subsequently considered sale and leaseback transactions. As a result, the Company derecognized the financial liability of $ 28.5 million and the carrying value of the related assets of $ 13.6 million and recognized a gain of $ 14.9 million for the difference between the liability and asset. The gain on distribution centers was recorded to Interest income and other, net in the unaudited Condensed Consolidation Statement of Operations. As the leases for the two distribution centers meet the sale and leaseback criteria, the Company recognized a right of use asset and lease liability of $ 20.3 million on the unaudited Condensed Consolidated Balance Sheet as of March 31, 2021. 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 March 31, 2021 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 March 31, Nine Months Ended March 31, 2021 2020 2021 2020 (Dollars in thousands) Goodwill $ — $ 40,164 $ — $ 40,164 Long-lived asset impairment (1) 833 1,208 9,817 3,851 _______________________________________________________________________________ (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 nine months ended March 31, 2021. 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 nine months ended March 31, 2020. 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: March 31, 2021 June 30, 2020 FRANCHISE SALONS: SmartStyle/Cost Cutters in Walmart Stores 1,569 1,317 Supercuts 2,357 2,508 Portfolio Brands (1) 1,233 1,217 Total North American salons 5,159 5,042 Total International salons (2) 158 167 Total Franchise salons 5,317 5,209 as a percent of total Franchise and Company-owned salons 86.6 % 76.1 % COMPANY-OWNED SALONS: SmartStyle/Cost Cutters in Walmart Stores 373 751 Supercuts 124 210 Portfolio Brands (1) 267 505 Mall-based (3) 62 166 Total Company-owned salons 826 1,632 as a percent of total Franchise and Company-owned salons 13.4 % 23.9 % OWNERSHIP INTEREST LOCATIONS: Equity ownership interest locations 78 82 Grand Total, System-wide 6,221 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 March 31, 2021, 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 March 31, 2021 Franchise Company-owned Corporate Consolidated (Dollars in thousands) Revenues: Service $ — $ 24,645 $ — $ 24,645 Product 13,079 7,691 — 20,770 Royalties and fees 23,535 — — 23,535 Franchise rental income 31,317 — — 31,317 Total revenue 67,931 32,336 — 100,267 Operating expenses: Cost of service — 15,821 — 15,821 Cost of product 11,148 10,120 — 21,268 Site operating expenses 5,600 7,766 — 13,366 General and administrative 7,450 1,525 15,607 24,582 Rent 101 7,229 671 8,001 Franchise rent expense 31,317 — — 31,317 Depreciation and amortization 333 1,687 1,600 3,620 Long-lived asset impairment 22 811 — 833 Total operating expenses 55,971 44,959 17,878 118,808 Operating income (loss) 11,960 ( 12,623 ) ( 17,878 ) ( 18,541 ) Other (expense) income: Interest expense — — ( 3,163 ) ( 3,163 ) Loss from sale of salon assets to franchisees, net — — ( 4,575 ) ( 4,575 ) Interest income and other, net — — 15,099 15,099 Income (loss) from continuing operations before income taxes $ 11,960 $ ( 12,623 ) $ ( 10,517 ) $ ( 11,180 ) Three Months Ended March 31, 2020 Franchise Company-owned Corporate Consolidated (Dollars in thousands) Revenues: Service $ — $ 78,387 $ — $ 78,387 Product 15,318 19,559 — 34,877 Royalties and fees 8,698 — — 8,698 Franchise rental income 31,821 — — 31,821 Total revenue 55,837 97,946 — 153,783 Operating expenses: Cost of service — 54,824 — 54,824 Cost of product 11,452 10,220 — 21,672 Site operating expenses ( 7,789 ) 11,449 — 3,660 General and administrative 8,657 4,566 18,648 31,871 Rent 176 17,585 904 18,665 Franchise rent expense 31,821 — — 31,821 Depreciation and amortization 292 9,799 268 10,359 TBG mall location restructuring 146 — — 146 Goodwill impairment — 40,164 — 40,164 Total operating expenses 44,755 148,607 19,820 213,182 Operating income (loss) 11,082 ( 50,661 ) ( 19,820 ) ( 59,399 ) Other (expense) income: Interest expense — — ( 1,712 ) ( 1,712 ) Loss from sale of salon assets to franchisees, net — — ( 7,858 ) ( 7,858 ) Interest income and other, net — — 148 148 Income (loss) from continuing operations before income taxes $ 11,082 $ ( 50,661 ) $ ( 29,242 ) $ ( 68,821 ) 24 Nine Months Ended March 31, 2021 Franchise Company-owned Corporate Consolidated (Dollars in thousands) Revenues: Service $ — $ 90,040 $ — $ 90,040 Product 41,057 27,608 — 68,665 Royalties and fees 61,393 — — 61,393 Franchise rental income 95,885 — — 95,885 Total revenue 198,335 117,648 — 315,983 Operating expenses: Cost of service — 66,441 — 66,441 Cost of product 33,117 21,723 — 54,840 Site operating expenses 14,858 22,097 — 36,955 General and administrative 23,055 6,936 47,428 77,419 Rent 1,063 31,019 2,046 34,128 Franchise rent expense 95,885 — — 95,885 Depreciation and amortization 896 11,080 5,408 17,384 Long-lived asset impairment 726 9,091 — 9,817 Total operating expenses 169,600 168,387 54,882 392,869 Operating income (loss) 28,735 ( 50,739 ) ( 54,882 ) ( 76,886 ) Other (expense) income: Interest expense — — ( 10,626 ) ( 10,626 ) Loss from sale of salon assets to franchisees, net — — ( 8,463 ) ( 8,463 ) Interest income and other, net — — 15,616 15,616 Income (loss) from continuing operations before income taxes $ 28,735 $ ( 50,739 ) $ ( 58,355 ) $ ( 80,359 ) Nine Months Ended March 31, 2020 Franchise Company-owned Corporate Consolidated (Dollars in thousands) Revenues: Service $ — $ 322,133 $ — $ 322,133 Product 45,287 79,229 — 124,516 Royalties and fees 66,062 — — 66,062 Franchise rental income 96,875 — — 96,875 Total revenue 208,224 401,362 — 609,586 Operating expenses: Cost of service — 212,664 — 212,664 Cost of product 34,804 40,453 — 75,257 Site operating expenses 13,341 49,591 — 62,932 General and administrative 25,990 22,263 56,934 105,187 Rent 767 60,748 1,909 63,424 Franchise rent expense 96,875 — — 96,875 Depreciation and amortization 662 21,844 4,980 27,486 TBG mall location restructuring 2,368 — — 2,368 Goodwill impairment — 40,164 — 40,164 Total operating expenses 174,807 447,727 63,823 686,357 Operating income (loss) 33,417 ( 46,365 ) ( 63,823 ) ( 76,771 ) Other (expense) income: Interest expense — — ( 4,615 ) ( 4,615 ) Loss from sale of salon assets to franchisees, net — — ( 26,125 ) ( 26,125 ) Interest income and other, net — — 3,188 3,188 Income (loss) from continuing operations before income taxes $ 33,417 ( 46,365 ) $ ( 91,375 ) $ ( 104,323 ) 25 14. REVISION OF 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. During the third quarter, goodwill derecognition was overstated by $ 2.4 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 March 31, 2020 As Previously Reported Adjustments As Revised (Dollars in thousands, except per share amounts) Rent expense (1) $ 19,243 $ ( 578 ) $ 18,665 Goodwill impairment (2) 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 ) 26 Nine Months Ended March 31, 2020 As Previously Reported Adjustments As Revised (Dollars in thousands, except per share amounts) Rent expense (1) $ 64,002 $ ( 578 ) $ 63,424 Goodwill impairment (2) 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 ) _______________________________________________________________________________ The Company revised the amounts originally reported for the third quarter of fiscal year 2020 for the following items: (1) Adjusted third quarter rent expense includes a $ 0.6 million benefit related to leases signed in the third quarter, but not identified until the fourth quarter. The net loss for the three and nine months ended March 31, 2020 were both impacted by the misstatement. (2) 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. 27