What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-08-26 compared with 2020-08-31 · 393 added, 577 removed, 946 unchanged (51% of the section changed)

1 unchanged sentence

Index to Consolidated Financial Statements:

Report of Independent Registered Public Accounting Firm

Reports of Independent Registered Public Accounting Firms

Consolidated Balance Sheet as of June 30, 2021 and 2020

Consolidated Statement of Operations for each of the three years in the period ended June 30, 2021

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

Consolidated Statement of Comprehensive Loss for each of the three years in the period ended June 30, 2021

Consolidated Statement of Shareholders' Equity for each of the three years in the period ended June 30, 2021

2 unchanged sentences

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Regis Corporation

Opinion on the financial statements

We have audited the accompanying consolidated balance sheet of Regis Corporation (a Minnesota Corporation) and subsidiaries (the "Company") as of June 30, 2021, the related consolidated statements of operations, comprehensive loss, shareholders' equity, and cash flows for the year then ended, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2021, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company’s internal control over financial reporting as of June 30, 2021 based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"), and our report dated August 26, 2021 expressed an unqualified opinion.

Basis for opinion

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Critical audit matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

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

Right of Use Asset Impairment Assessment for the Company-Owned Salon Asset Groups

As described in Notes 1 and 15 to the consolidated financial statements, the Company operates in two reportable segments, Company-owned salons and Franchise salons.

Note 6 describes the Company’s Right of Use Assets ("ROU asset"), a portion of which relates to Company-owned salons.

Management determined that triggering events had occurred related to Company-owned salons and was required to perform quantitative impairment assessments during fiscal year 2021.

The Company first assessed its Company-owned salon asset groups at the individual salon level, which included the ROU assets, to determine if the carrying value was recoverable.

Recoverability is determined by comparing the net carrying value of the salon asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset group.

For the Company-owned salon asset groups that failed the recoverability test, an impairment loss was measured as the amount by which the ROU asset within the asset group exceeded its fair value, which was determined using a discounted cash flow methodology.

As described by management, the results of this assessment indicated that the estimated fair value of certain Company-owned salon asset groups did not exceed the carrying value and an impairment expense was recorded to the ROU asset balance.

We identified the evaluation of the impairment of ROU asset balances at the Company-owned salon asset group level as a critical audit matter.

Subjective auditor judgment was required to evaluate, for each Company-owned salon asset group:

(i) the assumptions used by management to calculate the undiscounted future cash flow, (ii) management's method to determine the fair value and, (iii) significant judgments and assumptions related to the fair value determination, including the discount rate, the market rent of comparable properties based on recently negotiated leases, as applicable, the projected sales for fiscal years 2022 through 2023 and market capitalization rate for properties with no recently negotiated leases.

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

We performed the following procedures:

evaluated the design and tested the operating effectiveness of relevant controls relating to management’s impairment assessment of the ROU asset balances related to Company-owned salons, including controls over the valuation of the Company-owned salon asset groups

tested the Company-owned salon impairment analyses as follows:

evaluated the completeness of the population of Company-owned salon locations determined to be impaired ,

evaluated and tested management's models and processes for developing the undiscounted and discounted cash flows,

select ed a sample of Company-owned salons to test the appropriateness of management's methodology and significant assumptions noted above, and the accuracy of the computations and data used for both the undiscounted and discounted cash flow analyses

assessed the reasonableness of management’s ability to forecast future sales by comparing past projections to actual financial statement results

performed sensitivity analyses of the significant assumptions to evaluate the impact on the fair value of each of the Company-owned salons resulting from changes in the underlying assumptions.

/s/ GRANT THORNTON LLP

We have served as the Company’s auditor since 2021.

Minneapolis, Minnesota

August 26, 2021

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Regis Corporation

Opinion on internal control over financial reporting

We have audited the internal control over financial reporting of Regis Corporation (a Minnesota corporation) and subsidiaries (the "Company") as of June 30, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2021, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated financial statements of the Company as of and for the year ended June 30, 2021, and our report dated August 26, 2021 expressed an unqualified opinion on those financial statements.

Basis for opinion

The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting ("Management's Report").

Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

Definition and limitations of internal control over financial reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ GRANT THORNTON LLP

Minneapolis, Minnesota

August 26, 2021

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Regis Corporation

Opinions on the Financial Statements and Internal Control over Financial Reporting

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

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

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

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

Opinion on the Financial Statements

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

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

Change in Accounting Principle

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

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A.

Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audits also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Critical Audit Matters

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

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

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

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

Management assesses goodwill impairment on an annual basis as of April 30, 2020, and between annual assessments if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Right of Use Asset Impairment Assessment for the Salon Asset Groups

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

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

The Company first assessed all of its salon asset groups, which included the ROU assets, to determine if the carrying value was recoverable, which is determined by comparing the net carrying value of the salon asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset group.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

1 unchanged sentence

August 31, 2020

We have served as the Company’s auditor since at least 1990.

We served as the Company's auditor from at least 1990 to 2020.

We have not been able to determine the specific year we began serving as auditor of the Company.

9 unchanged sentences

Property and equipment, net 23,113 57,176

Goodwill 227,457 345,718

Goodwill (Note 5) 229,582 227,457

Other intangibles, net 3,761 4,579

1 unchanged sentence

Other assets 41,388 40,934

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

Total assets $ 996,383 $ 1,342,794

5 unchanged sentences

Total current liabilities 198,485 237,014

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

Long-term debt, net (Note 8) 186,911 177,500

Long-term lease liability (Note 6) 518,866 680,454

Long-term financing liabilities 27,981 28,910

Long-term financing liabilities (Note 8) — 27,981

Other non-current liabilities 75,075 94,142

6 unchanged sentences

Accumulated other comprehensive income 9,543 7,449

Retained earnings 94,462 265,908

Retained (deficit) earnings ( 19,389 ) 94,462

Total shareholders' equity 17,046 125,703

20 unchanged sentences

Long-lived asset impairment (Note 1) 13,023 22,560 —

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

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

Goodwill impairment (Note 1) — 40,164 —

7 unchanged sentences

Income tax benefit 5,428 4,619 2,145

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

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

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

Net (loss) income per share:

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

Income (loss) from discontinued operations 0.02 0.14 ( 1.14 )

Net (loss) income per share, basic (1) $ ( 4.77 ) $ ( 0.34 ) $ 0.14

(Loss) income from continuing operations $ ( 4.79 ) $ ( 0.48 ) $ 1.27

Income (loss) from discontinued operations 0.02 0.14 ( 1.13 )

Net (loss) income per share, diluted (1) $ ( 4.77 ) $ ( 0.34 ) $ 0.14

Loss from continuing operations ( 113,331 ) ( 172,194 ) ( 20,122 )

Income from discontinued operations, net of income taxes (Note 3) — 832 5,896

Net loss $ ( 113,331 ) $ ( 171,362 ) $ ( 14,226 )

Net loss per share:

Basic and diluted:

Loss from continuing operations $ ( 3.15 ) $ ( 4.79 ) $ ( 0.48 )

Income from discontinued operations — 0.02 0.14

Net loss per share, basic and diluted (1) $ ( 3.15 ) $ ( 4.77 ) $ ( 0.34 )

Weighted average common and common equivalent shares outstanding:

Basic 35,936 41,829 46,517

Diluted 35,936 41,829 47,035

Basic and diluted 35,956 35,936 41,829

_____________________________________________________________________________

3 unchanged sentences

REGIS CORPORATION

CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME

CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS

(Dollars in thousands)

2021 2020 2019

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

Other comprehensive (loss) income, net of tax:

Foreign currency translation adjustments during the period:

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

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

Net loss $ ( 113,331 ) $ ( 171,362 ) $ ( 14,226 )

Other comprehensive income (loss), net of tax:

Net current period foreign currency translation adjustments 1,888 ( 1,462 ) 185

Recognition of deferred compensation 206 ( 431 ) ( 499 )

Other comprehensive (loss) income ( 1,893 ) ( 314 ) 6,320

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

Other comprehensive income (loss) 2,094 ( 1,893 ) ( 314 )

Comprehensive loss $ ( 111,237 ) $ ( 173,255 ) $ ( 14,540 )

_______________________________________________________________________________

7 unchanged sentences

Income Retained

Earnings Total

Earnings (Deficit) Total

Shares Amount

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

Net income — — — — 6,436 6,436

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

Foreign currency translation

4 unchanged sentences

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

Shares issued through franchise stock incentive program

522 — 7 — — 7

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

17 unchanged sentences

— — — 1,888 — 1,888

Stock repurchase program

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

Exercise of SARs 3,775 — ( 24 ) — — ( 24 )

11 unchanged sentences

Cash flows from operating activities:

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

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

Net loss $ ( 113,331 ) $ ( 171,362 ) $ ( 14,226 )

Adjustments to reconcile net loss to net cash used in operating activities:

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

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

Depreciation related to discontinued operations — — 3,738

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

Depreciation and amortization (Note 1) 17,871 33,101 33,261

Salon asset impairment — 3,851 4,587

Long-lived asset impairment 13,023 22,560 —

Deferred income taxes ( 3,388 ) ( 3,934 ) ( 9,812 )

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

Inventory reserve 12,068 — —

Gain from disposal of distribution center assets ( 14,997 ) — —

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

2 unchanged sentences

Goodwill impairment — 40,164 —

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

Stock-based compensation 3,254 3,275 9,003

11 unchanged sentences

Other non-current liabilities ( 14,603 ) 368 717

Net cash (used in) provided by operating activities:

Net cash used in operating activities:

( 99,883 ) ( 86,409 ) ( 17,524 )

1 unchanged sentence

Capital expenditures ( 11,475 ) ( 37,494 ) ( 31,616 )

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

Proceeds from sale of company headquarters — 8,996 —

2 unchanged sentences

Proceeds from company-owned life insurance policies 1,200 — 24,617

Net cash provided by (used in) investing activities:

Net cash (used in) provided by investing activities:

( 2,099 ) 61,029 87,788

4 unchanged sentences

Proceeds from sale and leaseback transactions — — 28,821

Sale and leaseback payments ( 769 ) ( 378 ) —

Minority interest buyout ( 562 ) — —

Distribution center lease payments ( 724 ) ( 769 ) ( 378 )

Taxes paid for shares withheld ( 348 ) ( 2,320 ) ( 2,477 )

Settlement of equity awards — — ( 794 )

Net cash provided by (used in) financing activities:

1 unchanged sentence

Effect of exchange rate changes on cash and cash equivalents 477 ( 284 ) 35

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

(Decrease) increase in cash, cash equivalents and restricted cash ( 93,728 ) 30,501 ( 56,396 )

Cash, cash equivalents and restricted cash:

Beginning of year 122,880 92,379 148,775

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

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

End of year $ 29,152 $ 122,880 $ 92,379

_______________________________________________________________________________

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

3 unchanged sentences

Business Description:

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

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

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

See Note 15 to the Consolidated Financial Statements.

Franchised salons throughout the U.S.

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

Salons in the U.K.

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

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

Salons are located in leased space in strip shopping centers, malls or Walmart.

COVID-19 Impact:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

During fiscal years 2021 and 2020, the global coronavirus pandemic (COVID-19) had an adverse impact on operations, including government-mandated salon closures in the fourth quarter of fiscal year 2020 and other prolonged closures, particularly in California and Ontario, in fiscal year 2021.

The COVID-19 pandemic continues to impact salon guest visits resulting in a significant reduction in revenue and traffic.

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

Consolidation:

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The Company has interests in certain privately-held entities through arrangements that do not involve voting interests.

Such entities, known as a variable interest entity (VIE), are required to be consolidated by its primary beneficiary.

Such entities, known as a variable interest entities (VIE), are required to be consolidated by its primary beneficiary.

The Company evaluates whether or not it is the primary beneficiary for each VIE using a qualitative assessment that considers the VIE's purpose and design, the involvement of each of the interest holders and the risk and benefits of the VIE.

As of June 30, 2020, the Company has one VIE, Roosters MGC International LLC (Roosters), where the Company is the primary beneficiary.

The Company owns an 84.0 % ownership interest in Roosters.

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

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

(EEG) as an equity investment under the voting interest model, as the Company has granted the other shareholder of EEG an irrevocable proxy to vote a certain number of the Company’s shares such that the other shareholder of EEG has voting control of EEG’s common stock, as well as the right to appoint four of the five members of EEG’s Board of Directors.

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

As of June 30, 2021, the Company has no VIE's where the Company is the primary beneficiary.

The Company has an investment in Empire Education Group, Inc.

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

The transaction is expected to close in fiscal year 2022, at which time the Company expects to record an immaterial non-operating gain.

Until the transaction closes, the Company continues to account for EEG as an equity investment under the voting interest model.

The Company has granted the other shareholder of EEG an irrevocable proxy to vote a certain number of the Company's shares such that the other shareholder of EEG has voting control of EEG's common stock, as well as the right to appoint four of the five members of EEG's Board of Directors.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Use of Estimates:

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

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

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

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

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.

Cash, Cash Equivalents and Restricted Cash:

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Receivables and Allowance for Doubtful Accounts:

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

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

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

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As of June 30, 2021, 2020 and 2019, the allowance for doubtful accounts was $ 7.8 , $ 6.9 and $ 2.0 million, respectively.

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

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

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

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

The Company received these proceeds in July 2018.

The allowance for doubtful accounts increased in fiscal year 2021 due to lower franchisees sales increasing the risk of default.

See Note 2 to the Consolidated Financial Statements.

Inventories of finished goods consist principally of hair care products for retail product sales.

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The Company has inventory valuation reserves for excess and obsolete inventories, or other factors that may render inventories unmarketable at their historical costs.

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

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

In fiscal year 2021, the Company announced it would transition away from its wholesale product distribution model in favor of a third-party distribution model.

As a result, the Company plans to exit its two distribution centers in fiscal year 2022.

To facilitate the exit, the Company is selling inventory at discounts and disposing of hard to sell products.

Additionally, the reduction in company-owned salons decreases the Company's ability to re-distribute inventory from closed locations to other salons to be sold or used.

These two factors resulted in a significant increase in inventory write-offs and an overall increase in the inventory valuation reserve during fiscal year 2021.

The fiscal year 2021 non-cash inventory write-off charge of $ 12.1 million was recorded to Cost of product in the Consolidated Statement of Operations.

The inventory valuation reserve as of June 30, 2021 and 2020 was $ 11.8 million and $ 1.2 million, respectively.

Property and Equipment:

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

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

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

Depreciation expense was $ 17.1 , $ 31.8 and $ 31.9 million in fiscal years 2021, 2020 and 2019, respectively.

Depreciation expense for fiscal year 2021 includes $ 4.7 million of asset retirement obligations, which is a cash expense.

Fiscal years 2020 and 2019 had no asset retirement obligations.

The Company capitalizes both internal and external costs of developing or obtaining computer software for internal use.

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Fully depreciated or amortized assets remain in the accounts until retired from service.

Non-Current Assets Held for Sale:

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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

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

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

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

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

All additional lease costs are passed through to the franchisees.

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

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

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

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

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

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

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

The 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.

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 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 Consolidated Statement of Operations.

For 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 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 $ 611.9 and $ 786.2 million as of June 30, 2021 and 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 original lease term.

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

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

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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 in fiscal year 2020 and 2021, primarily due to the COVID-19 pandemic, resulted in ASC 360-10-35-21 triggering events.

As a result, management assessed underperforming salon asset groups, which included the related ROU assets, for impairment in accordance with ASC 360.

The 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.

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

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

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

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, the asset group's projected sales for properties and a discount rate.

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

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

the market rent of comparable properties, the asset group's projected sales for fiscal years 2021 through 2023, and a discount rate.

The Company engaged a third-party valuation specialist to assist with the research related to inputs used in their determination of the fair value of the ROU asset, which included providing information related to significant inputs and assumptions utilized in the measurement of the impairment loss.

For fiscal year 2021, the Company recognized a long-lived asset impairment charge of $ 13.0 million, which included $ 9.5 million related to ROU assets on the Consolidated Statement of Operations.

For fiscal year 2020, the Company recognized a long-lived asset impairment charge of $ 22.6 million, which included a right of use asset impairment of $ 17.4 million.

A long-lived asset impairment charge was no t recognized in fiscal year 2019.

The impairment loss for each salon asset group that was recognized was allocated among the long-lived assets of the group on a pro-rata basis using their relative carrying amounts.

Additionally, the impairment losses did not reduce the carrying amount of an individual asset below its fair value, including for the ROU assets included in the salon asset groups.

Assessing the long-lived assets for impairment requires management to make assumptions and to apply judgment which can be affected by economic conditions and other factors that can be difficult to predict.

The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions it uses to calculate impairment losses for its long-lived asset, including its ROU assets.

However, the ultimate severity and longevity of the COVID-19 pandemic is unknown;

therefore, if actual results are not consistent with the estimates and assumptions used in the calculations, the Company may be exposed to future impairment losses that could be material.

Our projections of future operating performance do not anticipate future salon closures due to the COVID-19 pandemic.

See Note 6 to the Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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

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

As of June 30, 2021 and 2020, the Franchise reporting unit had $ 229.6 and $ 227.5 million of goodwill and the Company-owned reporting unit had no goodwill for both periods.

See Note 5 to the Consolidated Financial Statements.

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

During fiscal year 2021, the Company did not experience any triggering events that required an interim goodwill analysis.

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

For the fiscal year 2021 annual impairment assessment, the Company performed a Step 1 impairment test for the Franchise reporting unit.

The Company compared the carrying value of the Franchise reporting unit, including goodwill, to the estimated fair value.

The results of this assessments indicated that the estimated fair value of the Company's Franchise reporting unit significantly exceeded the carrying value.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the goodwill impairment analysis, management utilized a combination of both a discounted cash flows approach and market approach to evaluate the Franchise reporting unit, and the discounted cash flows approach to evaluate the Company-owned reporting unit.

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

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

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

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

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

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

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

Assessing goodwill for impairment requires management to make assumptions and to apply judgment, including forecasting future sales, future salon sales to franchisees and selecting appropriate discount rates, which can be affected by economic conditions and other factors that can be difficult to predict.

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

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

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

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

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The results of these assessments indicated that the estimated fair value of the Company's reporting units exceeded their carrying value.

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

Fiscal Year 2018

During the first quarter of fiscal year 2018, the Company experienced a triggering event due to the redefining of its operating segments as the Company's mall-based business and International segment met the criteria to be classified as held for sale and as a discontinued operation as of September 30, 2017.

The Company's reporting changed to two reporting units:

Franchise and Company-owned.

Prior to this change the Company had four reporting units:

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

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

The Company assessed qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit was less than their carrying values (Step 0).

The Company determined it is “more-likely-than-not” that the carrying value of the reporting unit was less than the fair value.

Accordingly, the Company did not perform a quantitative analysis.

Based on the changes to the operating segment structure, there was no goodwill reallocated from the North American Value reporting unit related to the mall-based business that was subsequently sold as the mall-based business previously included in the North American Value reporting unit was projected to incur future losses.

The Company did not perform a goodwill impairment assessment for the North American Franchise reporting unit during the first quarter of fiscal year 2018, as this reporting unit was not impacted by the triggering event.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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

The results of these assessments indicated that the estimated fair value of our reporting units exceeded their carrying value.

The Franchise reporting unit had substantial headroom and the Company-owned reporting unit had headroom of approximately 24 %.

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

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

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

Investments In Affiliates:

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The Company's investments have no value as of June 30, 2021 and 2020.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Self-Insurance Accruals:

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

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

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

As of June 30, 2021, the Company had $ 6.8 and $ 12.7 million recorded in current liabilities and non-current liabilities, respectively, related to the Company's workers' compensation and general liability self-insurance accruals.

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

Revenue Recognition and Deferred Revenue:

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

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

Cost of product— cost of product sold to guests, labor costs related to selling retail product, the cost of product sold to franchisees and reserve for excess and obsolete inventory.

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Consideration Received from Vendors:

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A quarterly analysis is performed in order to ensure the estimated rebate accrued is reasonable and any necessary adjustments are recorded.

Shipping and Handling Costs:

Shipping and handling costs are incurred to store, move and ship product from the Company's distribution centers to franchise and company-owned locations and include an allocation of internal overhead.

Such shipping and handling costs related to product shipped to company-owned locations are included in site operating expenses in the Consolidated Statement of Operations.

Shipping and handling costs related to shipping product to franchise locations totaled $ 8.6 , $ 7.7 and $ 6.1 million during fiscal years 2020, 2019 and 2018, respectively, and are included within general and administrative expenses on the Consolidated Statement of Operations.

Any amounts billed to franchisees for shipping and handling are included in product revenues within the Consolidated Statement of Operations.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Distribution Costs:

Distribution costs are incurred to store, move and ship product from the Company's distribution centers to salons and includes distribution center overhead.

Such distribution costs related to product shipped to company-owned locations are included in site operating expenses in the Consolidated Statement of Operations.

Distribution costs, including distribution center overhead, related to shipping product to franchise locations totaled $ 12.1 , $ 8.6 and $ 7.7 million during fiscal years 2021, 2020 and 2019, respectively, and are included within general and administrative expenses on the Consolidated Statement of Operations.

Advertising and Advertising Funds:

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

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

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

All salons are required to participate in the advertising funds for the same salon concept.

The Company administers the advertising funds in accordance with franchise operating and other agreements.

Advertising fund contributions are expensed when the contribution is made.

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

(1) Fiscal year 2020 includes the refunding of $ 14.9 million of previously collected cooperative fees to franchisees as a direct result of the COVID-19 pandemic.

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Changes in the estimated rate of achievement can have a significant effect on the recorded stock-based compensation expense as the effect of a change in the estimated achievement level is recognized in the period the change occurs.

Interest Income and Other, Net:

In December 2019, the Company sold the land and buildings associated with the Company's former headquarters for proceeds of $ 9.0 million, resulting in a net gain on sale of $ 2.5 million, which was recorded in Interest income and other, net on the Consolidated Statement of Operations.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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Deferred income tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using currently enacted tax rates in effect for the years in which the differences are expected to reverse.

We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized.

We recognize deferred tax assets to the extent we believe these assets are more likely than not to be realized.

The Company evaluates all evidence, including recent financial performance, the existence of cumulative year losses and our forecast of future taxable income, to assess the need for a valuation allowance against our deferred tax assets.

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Significant components of the valuation allowance which occurred during fiscal year 2021 are as follows:

• The Company recognized a tax loss on its investment in Luxembourg and established a corresponding valuation allowance of $ 34.4 million.

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

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

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Income tax expense is primarily the current tax payable for the period and the change during the period in certain deferred tax assets and liabilities.

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

Net (Loss) Income Per Share:

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

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

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

See Note 10 to the Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Comprehensive (Loss) Income:

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

Net Loss Per Share:

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

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

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

Due to the Company's net loss, basic and dilutive earnings per share are equal.

Comprehensive Loss:

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

Foreign Currency Translation:

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

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

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

During fiscal years 2021, 2020 and 2019, the foreign currency gain (loss) included in loss from continuing operations was $ 0.3 , $( 0.1 ) and $ 0.1 million, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Accounting Standards Recently Adopted by the Company:

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

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

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

In fiscal year 2020, the Company adopted ASU 2016-02, "Leases (Topic 842)" and all subsequent ASUs that modified Topic 842 using the modified retrospective method and elected the option to not restate comparative periods in the year of adoption.

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

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

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

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

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

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

The decrease in the right of use asset and lease liability from July 1, 2019 to June 30, 2021 was due to lease modifications, impairment and salon closures.

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

The Company uses the portfolio approach in applying the discount rate.

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

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

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

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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

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

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

REVENUE RECOGNITION:

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

The Company adopted the amended revenue recognition guidance, ASC Topic 606, on July 1, 2018 using the full retrospective transition method which required the adjustment of each prior reporting period presented.

As a result of adopting this new standard, the Company is providing its updated revenue recognition policies.

Revenue Recognition and Deferred Revenue:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Franchise Company-owned Franchise Company-owned

Year Ended June 30, 2021 Year Ended June 30, 2020 Year Ended June 30, 2019

Franchise Company-owned Franchise Company-owned Franchise Company-owned

(Dollars in thousands)

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Total non-current deferred revenue $ 38,936 $ 45,478

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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

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

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

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Provision for doubtful accounts (1) 509

Provision for franchisee rent (2) 1,920

Write-offs ( 1,554 )

Balance as of June 30, 2021 $ 7,774

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

_____________________________________________________________________________

(1) The provision for doubtful accounts is recognized as General and administrative expense in the Consolidated Statement of Operations.

(2) The provision for franchisee rent is recognized as Rent in the Consolidated Statement of Operations.

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

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Deferred franchise fees related to open salons are generally recognized on a straight-line basis over the term of the franchise agreement.

Franchise fee revenue for the twelve months ended June 30, 2020 and 2019 was $ 5.2 and $ 3.6 million, respectively.

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

Franchise fee revenue for the years ended June 30, 2021, 2020 and 2019 was $ 6.6 , $ 5.2 and $ 3.6 million, respectively.

Estimated revenue expected to be recognized in the future related to deferred franchise fees for open salons as of June 30, 2021 is as follows (in thousands):

Thereafter 11,018

Total $ 38,249

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

TBG DISCONTINUED OPERATIONS AND RESTRUCTURING

The Beautiful Group (TBG) :

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

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

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

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

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

The Company classified the results of its mall-based business and its International segment as discontinued operations for the periods TBG owned the salons in the Consolidated Statement of Operations.

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

The Company reserved $ 20.7 million of receivables in fiscal year 2019.

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

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

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

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

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The commitments are included in our lease liabilities.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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(Dollars in thousands)

Revenue $ — $ — $ 101,140

TBG mall restructuring:

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TBG discontinued operations:

Working capital and prepaid rent receivable reserve — — 11,697

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

(Income) loss from TBG discontinued operations, before taxes (2) $ — $ ( 1,063 ) $ 1,221

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

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

Income tax expense (benefit) from TBG discontinued operations (3) — 231 ( 7,117 )

Income from TBG discontinued operations, net of tax $ — $ ( 832 ) $ ( 5,896 )

_______________________________________________________________________________

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

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

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

SmartStyle restructuring :

In January 2018, the Company closed 597 non-performing company-owned SmartStyle salons.

The 597 non-performing salons generated negative cash flow of approximately $ 15 million during the twelve months ended September 30, 2017.

The action delivers on the Company's commitment to restructure its salon portfolio to improve shareholder value and position the Company for long-term growth.

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

Financial Line Item Fiscal Year 2018

(Dollars in thousands)

Inventory reserves Cost of Service $ 656

Inventory reserves Cost of Product 586

Severance General and administrative 897

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

Asset retirement obligation Depreciation and amortization 7,680

Lease termination and other related closure costs Rent 27,290

Deferred rent Rent ( 3,291 )

Total $ 39,278

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

Substantially all related costs associated with the SmartStyle salon restructuring requiring cash outflow were complete as of June 30, 2018.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Foreign currency translation adjustment:

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

OTHER FINANCIAL STATEMENT DATA

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Other current assets:

Prepaids $ 5,165 $ 9,527

Prepaid assets $ 4,121 $ 5,165

Restricted cash 9,961 9,213

Other 3,021 4,760

$ 19,138 $ 33,216

Total other current assets $ 17,103 $ 19,138

Property and equipment:

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Internal use software 41,927 71,212

306,574 406,191

Total property and equipment 79,280 306,574

Less accumulated depreciation and amortization ( 56,167 ) ( 249,398 )

$ 57,176 $ 78,090

Total property and equipment, net $ 23,113 $ 57,176

Accrued expenses:

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Other 19,959 16,164

$ 48,825 $ 80,751

Total accrued expenses $ 54,857 $ 48,825

Other non-current liabilities:

Deferred income taxes $ 10,650 $ 13,916

Deferred rent (1) — 14,006

Insurance 12,722 20,301

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Other 2,739 3,341

$ 94,142 $ 111,399

_______________________________________________________________________________

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

Total other non-current liabilities $ 75,075 $ 94,142

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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Franchise agreements 19 10,099 ( 8,901 ) 1,198 19 9,558 ( 8,194 ) 1,364

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

Other 20 366 ( 275 ) 91 20 874 ( 544 ) 330

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

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

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

Total amortization expense related to intangible assets during fiscal year 2021 was approximately $ 0.8 million and in fiscal years 2020 and 2019 was approximately $ 1.3 million in both years.

As of June 30, 2021, future estimated amortization expense related to intangible assets is estimated as follows (in thousands):

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(Dollars in thousands)

Cash paid for:

Cash paid (received) for:

Interest $ 11,940 $ 7,390 $ 4,408

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_______________________________________________________________________________

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

(1) The change in the gross carrying value of goodwill relates foreign currency translation adjustments.

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

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

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

Franchise Company-owned Consolidated

(Dollars in thousands)

The table below contains details related to the Company's goodwill (in thousands):

Franchise Reporting Unit

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

Translation rate adjustments 2,125

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

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

Goodwill, net at June 30, 2021 $ 229,582

_______________________________________________________________________________

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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

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 expense includes the following:

Total Rent includes the following:

2021 2020 2019

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Real estate taxes and other expenses 8,644 12,868 16,445

Lease termination expense (1) 13,606 191 123

Lease liability benefit (2) ( 20,022 ) — —

Corporate segment rent 2,703 2,589 862

Franchise segment non-reimbursable rent 2,395 872 740

Total $ 40,930 $ 76,382 $ 131,816

_______________________________________________________________________________

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

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

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

All lease related costs are passed through to the franchisees.

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

(1) During fiscal year 2021, the Company terminated the leases for 402 company-owned salons before the lease end dates.

For the fiscal year ended June 30, 2021, lease termination fees include $ 8.3 million of early termination payments to close salons before the lease end date to relieve the Company of future lease obligations.

For the fiscal year ended June 30, 2021, lease termination fees also include $ 5.3 million of adjustments to accrue future lease payments for salons that are no longer operating.

The early termination payments made during the fiscal year ended June 30, 2021 decreased the future minimum rent liability by $ 15.7 million plus saved the Company from the associated real estate taxes, other lease expenses and loss incurred operating the salons.

(2) For the fiscal year ended June 30, 2021, upon termination of previously impaired leases, the Company derecognized ROU assets of $ 18.3 million and lease liabilities of $ 31.1 million that resulted in a net gain of $ 12.8 million.

In addition, the Company recognized a benefit of $ 7.1 million from lease liabilities decreasing in excess of previously impaired ROU assets for the fiscal year ended June 30, 2021.

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 franchisees.

In fiscal year 2021, franchise rental income and franchise rent expense were $ 127.4 million.

These leases generally have lease terms of approximately five years .

The Company expects to renew SmartStyle and some 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.

All lease related costs are passed through to the franchisees.

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

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

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

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

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

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

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

The Company treated these deferrals as if no change to the underlying lease had been made as of June 30, 2020.

If the rent was subsequently forgiven or modified, the Company accounted for the change as a lease modification upon execution of the amended terms.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 $ 611.9 and $ 786.2 million as of June 30, 2021 and 2020, respectively.

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A lessee’s right of use asset is subject to the same asset impairment guidance in ASC 360, Property, Plant, and Equipment, applied to other elements of property, plant, and equipment.

The Company has identified its asset groups at the individual salon level as this represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities.

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

As a result, management assessed all of its salon asset groups, which included the related ROU assets, for impairment in accordance with ASC 360.

The 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 4.11 % and 3.95 % for all salon operating leases as of June 30, 2021 and 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.

Poor salon performance in fiscal years 2020 and 2021, primarily due to the COVID-19 pandemic, resulted in ASC 360-10-35-21 triggering events.

As a result, management assessed underperforming salon asset groups, which included the related ROU assets, for impairment in accordance with ASC 360.

Estimating cash flows for purposes of the recoverability test is subjective and requires significant judgment.

Step two of the long-lived asset impairment test requires that the fair value of the asset group be determined when calculating the amount of any impairment loss.

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.

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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.

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

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The Company engaged a third-party valuation specialist to assist with the research related to inputs used in their determination of the fair value of the ROU asset which included providing information related to significant inputs and assumptions utilized in the measurement of the impairment loss.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For fiscal year 2021, the Company recognized a long-lived impairment charge of $ 13.0 million, which included $ 9.5 million related to ROU assets on the Consolidated Statement of Operations.

Impairment related to ROU assets for fiscal year 2020 was $ 17.4 million.

The impairment loss for each salon asset group that was recognized was allocated among the long-lived assets of the group on a pro-rata basis using their relative carrying amounts.

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However, the ultimate severity and longevity of the COVID-19 pandemic is unknown, therefore, if actual results are not consistent with the estimates and assumptions used in the calculations, the Company may be exposed to future impairment losses that could be material.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of June 30, 2020, future operating lease commitments to be paid and received by the Company were as follows:

As of June 30, 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

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

As of June 30, 2021 and 2020, the estimated fair value of the Company's cash, cash equivalents, restricted cash, receivables, inventory, deferred compensation assets and accounts payable approximated their carrying values.

As of June 30, 2021, the estimated fair value of the Company's debt was $ 186.9 million, which approximated its carrying value.

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

The estimated fair value of the Company's debt and long-term financial liability are based on Level 2 inputs.

The estimated fair value of the Company's debt is based on Level 2 inputs.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

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(Dollars in thousands)

Goodwill $ 40,164 $ — $ —

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

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

Goodwill impairment $ — $ 40,164 $ —

Long-lived asset impairment (1) 9,494 22,560 —

Salon asset impairment (1) 3,529 3,851 4,587

_______________________________________________________________________________

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Revolving credit facility 2023 5.00 % 5.50 % $ 186,911 $ 177,500

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

At June 30, 2021, cash and cash equivalents totaled $ 19.2 million.

As of June 30, 2021, the Company had $ 186.9 million of outstanding borrowings under a $ 294.4 million revolving credit facility.

The credit facility decreased $ 0.6 million from $ 295.0 million as of June 30, 2020, in accordance with the bulk sale provisions in the agreement, due to the sale of secured inventory related to our transition to third party vendors.

At June 30, 2021, the Company had 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 $ 88.8 million at June 30, 2021.

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

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

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

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

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

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

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

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

The Company's liquidity per the agreement includes the unused available balance under the credit facility, unrestricted cash and cash equivalents and the shortfall in the gap in expected proceeds from the sale of salon assets of $ 20.9 million as of June 30, 2021.

Total liquidity per the agreement was $ 128.9 million as of June 30, 2021.

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

Under the new terms of the amendment, the Company is required to maintain a minimum liquidity of $ 75.0 million and provides the Company's lenders security in the Company's assets, adds additional guarantors and grants a first priority lien and security interest to the lenders in substantially all of the Company's and the guarantors' existing and future property.

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

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

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

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

Senior Term Notes

In fiscal year 2018, the Company redeemed all of its 5.5 % senior term notes that were due December 2019 (Senior Term Notes) for $ 124.2 million, which included a $ 1.2 million premium.

The Company utilized $ 90.0 million under the revolving credit facility and cash on hand of $ 34.2 million to repay the Senior Term Notes.

As a result of redeeming the Senior Term Notes, the Company recorded $ 1.7 million of additional interest expense related to the unamortized debt discount and debt issuance costs during the fiscal year 2018.

The Company was in compliance with all covenants and other requirements of the financing arrangements as of June 30, 2021 and believes it will continue to be in compliance for at least one year from the filing date.

Sale and Leaseback Transactions

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

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

Maturity Date Interest Rate June 30,

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(Fiscal year) (Dollars in thousands)

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

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

Financial liability - Salt Lake City Distribution Center 2034 N/A $ — $ 16,773

Financial liability - Chattanooga Distribution Center 2034 N/A — 11,208

Long-term financing liabilities $ — $ 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.

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 decision to exit the Company's 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 $ 13.5 million and recognized a gain of $ 15.0 million for the difference between the liability and asset.

The gain on distribution centers was recorded to Interest income and other, net in the Consolidated 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 on the Consolidated Balance Sheet (See Note 6 to the Consolidated Financial Statements).

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

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

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

Fiscal year Salt Lake City Distribution Center Chattanooga Distribution Center

(Dollars in thousands)

2021 $ 1,157 $ 817

2022 1,171 829

2023 1,186 842

2024 1,200 854

2025 1,215 867

Thereafter 10,683 8,414

Total $ 16,612 $ 12,623

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

The financing lease liability does not include interest.

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

Therefore, the total payments do not equal the liability.

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

COMMITMENTS AND CONTINGENCIES

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

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

The first, a class action in U.S.

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

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

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

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

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

In addition, our existing point-of-sale system supplier had 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.

The Company and the supplier entered into an agreement, effective June 25, 2021, that provided for the dismissal of the lawsuit and set forth a commercial services agreement pursuant to which the supplier will assist in the transfer of franchise salons from its point-of-sale system to the Company's salon management system, Opensalon ® Pro.

Under the agreement, the Company expects to pay the supplier between $ 3.0 and $ 5.0 million over two years .

The Company recorded $ 3.0 million in general and administrative expense on the Consolidated Statement of Operations and an accrual of $ 3.0 million on the Consolidated Balance Sheet, which represent the low end of the estimated cost range.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

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

statutory rate to loss from continuing operations before income taxes, as a result of the following:

2021 2020 2019

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Work opportunity tax credits 0.2 0.4 7.2

Deferred tax rate remeasurement — — 99.0

Uncertain tax positions 0.2 ( 6.2 ) 1.0

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Capital loss — 15.0 —

Loss on investment in Luxembourg 26.8 — —

Other, net (2) ( 0.8 ) ( 1.7 ) ( 8.7 )

2.6 % 9.6 % 685.0 %

Effective tax rate 4.6 % 2.6 % 9.6 %

_______________________________________________________________________________

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

(2) The ( 0.8 )% of Other, net in fiscal year 2021 does not include the rate impact of any items in excess of 5% of computed tax.

The ( 1.7 )% of Other, net in fiscal year 2020 includes the rate impact of goodwill derecognition and impairment and miscellaneous items of ( 1.2 )% and ( 0.5 )%, respectively.

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

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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Deferred tax assets:

Deferred rent $ — $ 3,816

Payroll and payroll related costs $ 8,523 $ 9,903

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Significant components of the valuation allowance which occurred during fiscal year 2021 are as follows:

• The Company recognized a tax loss on its investment in Luxembourg and established a corresponding valuation allowance of $ 34.4 million.

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

• On March 27, 2020, the U.S.

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

At June 30, 2021, the Company has tax-effected federal, state, Canada, and U.K.

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loss carryforward has no expiration.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company's tax credit carryforward of $ 37.4 million primarily consist of Work Opportunity Tax Credits that will expire from fiscal years 2031 to 2041.

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

subsidiaries to be indefinitely invested outside the United States.

subsidiaries to be indefinitely invested outside the U.S.

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

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

federal and state income taxes and foreign withholding taxes on approximately $ 11.1 million of undistributed earnings of foreign subsidiaries, which have been reinvested outside the U.S.

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

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and Luxembourg as well as states, cities, and provinces within these jurisdictions.

The Company is no longer subject to IRS examinations for years before 2014.

The Company is no longer subject to Internal Revenue Service examinations for years before 2014.

With limited exceptions, the Company is no longer subject to state and international income tax examination by tax authorities for years before 2012.

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Additions based on tax positions related to the current year, primarily salon vendition activity and tax positions related to a capital loss 292 11,985 287

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

Additions/(reductions) based on tax positions of prior years 50 ( 223 ) ( 154 )

Reductions on tax positions related to the expiration of the statute of limitations ( 529 ) ( 480 ) ( 397 )

Settlements — — ( 345 )

Balance at end of period $ 13,858 $ 14,045 $ 2,763

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Employees who are 18 years of age or older and who were not highly compensated employees as defined by the Code during the preceding RRSP year are eligible to participate in the RRSP commencing with the first day of the month following their completion of one month of service.

The discretionary employer contribution profit sharing portion of the RRSP is a noncontributory defined contribution component covering full-time and part-time employees of the Company who have at least one year of eligible service, defined as 1,000 hours of service during the RRSP year, are employed by the Company on the last day of the RRSP year and are employed at Salon Support, distribution centers, as field leaders, artistic directors or consultants, and that are not highly compensated employees as defined by the Code.

Participants' interest in the noncontributory defined contribution component become 20.0 % vested after completing two years of service with vesting increasing 20.0 % for each additional year of service, and with participants becoming fully vested after six full years of service.

The discretionary employer contribution profit sharing portion of the RRSP is a noncontributory defined contribution component covering full-time and part-time employees of the Company who have at least one year of eligible service, defined as 1,000 hours of service during the RRSP year, are employed by the Company on the last day of the RRSP year and are Salon Support employees, distribution center employees, field leaders, artistic directors or consultants, and that are not highly compensated employees as defined by the Code.

Participants' interest in the noncontributory defined contribution component become 20.0 % vested after completing two years of service with vesting increasing 20.0 % for each additional year of service with participants becoming fully vested after six full years of service.

Nonqualified Deferred Salary Plan:

The Company maintains a Nonqualified Deferred Salary Plan (Executive Plan), which covers Company officers and all other employees who are highly compensated as defined by the Code.

The discretionary employer contribution portion of the Executive Plan is a profit sharing component in which a participant's interest becomes 20.0 % vested after completing two years of service with vesting increasing 20.0 % for each additional year of service, and with participants becoming fully vested after six full years of service.

The discretionary employer contribution portion of the Executive Plan is a profit sharing component in which a participant's interest becomes 20.0 % vested after completing two years of service with vesting increasing 20.0 % for each additional year of service with participants becoming fully vested after six full years of service.

Certain participants within the Executive Plan also receive a matching contribution from the Company.

1 unchanged sentence

The Company maintains a Regis Individual Secured Retirement Plan (RiSRP), pursuant to which eligible employees may use post-tax dollars to purchase life insurance benefits.

Salon Support employees at the director level and above, as well as regional vice presidents, are eligible to participate.

Salon Support employees at the director level and above qualify.

The Company may make discretionary contributions on behalf of participants within the RiSRP, which may be calculated as a matching contribution.

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As of June 30, 2021, the Company's cumulative contributions to the ESPP totaled $ 11.2 million.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Deferred Compensation Contracts:

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Effective June 30, 2012, these contracts were amended and the benefits were frozen.

Expense associated with the deferred compensation contracts included in general and administrative expenses on the Consolidated Statement of Operations totaled zero for fiscal years 2020 and 2019, and $ 0.2 million for fiscal year 2018.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The table below presents the projected benefit obligation of these deferred compensation contracts in the Consolidated Balance Sheet:

2 unchanged sentences

Long-term portion (included in other non-current liabilities) 3,115 4,637

$ 4,939 $ 5,599

The accumulated other comprehensive (loss) income for the deferred compensation contracts, consisting of primarily unrecognized actuarial income, was $ 0.1 and $ 0.5 million at June 30, 2020 and 2019, respectively.

Total $ 4,775 $ 4,939

The accumulated other comprehensive loss for the deferred compensation contracts, consisting of primarily unrecognized actuarial income, was $ 0.3 and $ 0.1 million at June 30, 2021 and 2020, respectively.

The Company had previously agreed to pay the former Vice Chairman and his spouse an annual benefit for life.

Costs associated with this benefit included in general and administrative expenses on the Consolidated Statement of Operations totaled $ 0.4 , $ 0.4 and $ 0.3 million for fiscal years 2020, 2019 and 2018, respectively.

Related obligations totaled $ 2.4 million at June 30, 2020 and 2019, with $ 0.5 million within accrued expenses at June 30, 2020 and 2019, and the remainder included in other non-current liabilities in the Consolidated Balance Sheet.

In connection with the passing of former employees, the Company received zero life insurance proceeds in fiscal year 2020, and the Company received $ 24.6 and $ 18.1 million in fiscal years 2019 and 2018, respectively, in life insurance proceeds.

The Company recorded gains of zero in fiscal years 2020 and 2019 and $ 8.0 million in fiscal year 2018 in general and administrative in the Consolidated Statement of Operations associated with the proceeds.

Costs associated with this benefit included in general and administrative expenses on the Consolidated Statement of Operations totaled $ 0.4 million for fiscal years 2021, 2020 and 2019.

Related obligations totaled $ 2.3 and $ 2.4 million at June 30, 2021 and 2020, respectively, with $ 0.5 million within accrued expenses at June 30, 2021 and 2020, and the remainder included in other non-current liabilities in the Consolidated Balance Sheet.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

EARNINGS PER SHARE

The Company’s basic earnings per share is calculated as net (loss) income divided by weighted average common shares outstanding, excluding unvested outstanding restricted stock awards (RSAs), restricted stock units (RSUs) and stock-settled performance units (PSUs).

The Company’s diluted earnings per share is calculated as net (loss) income divided by weighted average common shares and common share equivalents outstanding, which includes shares issued under the Company’s stock-based compensation plans.

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 income divided by weighted average common shares and common share equivalents outstanding, which includes shares issued under the Company's stock-based compensation plans.

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

As the Company is in a net loss basic earnings per share is equivalent to dilutive earnings per share.

For fiscal years 2021, 2020 and 2019, 636,310 , 963,456 and 1,341,421 of common stock equivalents of dilutive common stock, respectively, were excluded from the diluted earnings per share calculation due to net loss from continuing operations.

For fiscal year 2018, 518,236 common stock equivalents of dilutive common stock were included in the diluted earnings per share calculation due to net income from continuing operations.

The computation of weighted average shares outstanding, assuming dilution, excluded the following stock-based awards as they were not dilutive under the treasury stock method:

1 unchanged sentence

Equity-based compensation awards 2,322,006 315,312 118,246

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

STOCK-BASED COMPENSATION

The Company grants long-term equity-based awards under the 2018 Long Term Incentive Plan (the 2018 Plan).

The 2018 Plan, which was approved by the Company's shareholders at its 2018 Annual Meeting, provides for the granting of nonqualified stock options, equity-based stock appreciation rights (SARs), RSAs, RSUs and PSUs, as well as cash-based performance grants, to employees and non-employee directors of the Company.

The 2018 Plan, which was approved by the Company's shareholders at its 2018 Annual Meeting, provides for the granting of nonqualified stock options (SOs), equity-based stock appreciation rights (SARs), restricted stock units (RSUs) and stock-settled performance units (PSUs), as well as cash-based performance grants, to employees and non-employee directors of the Company.

Under the 2018 Plan, a maximum of 3,818,895 shares are approved for issuance.

The 2018 Plan incorporates a fungible share design, under which full value awards (such as RSUs and PSUs) count against the shares reserved for issuance at a rate 2.0 times higher than appreciation awards (such as SARs and stock options).

As of June 30, 2021, a maximum of 3,341,011 shares were available for grant under the 2018 Plan.

All unvested awards are subject to forfeiture in event of termination of employment, unless accelerated.

SAR and RSU awards granted under the 2018

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Plan generally include various acceleration terms, including upon retirement for participants aged sixty-two years or older or who are aged fifty-five or older and have 15 years of continuous service.

SAR and RSU awards granted under the 2018 Plan generally include various acceleration terms, including upon retirement for participants aged sixty-two years or older or who are aged fifty-five or older and have 15 years of continuous service.

The Company also has outstanding awards under the 2016 Long Term Incentive Plan (the 2016 Plan), although the 2016 Plan terminated in October 2018 and no additional awards have since been or will be made under the 2016 Plan.

6 unchanged sentences

2021 2020 2019

SOs (1) $ 2.89 $ — $ —

RSUs (1) 7.15 16.48 21.12

1 unchanged sentence

_______________________________________________________________________________

(1) The fair value of market-based SOs granted are estimated on the date of grant using either a Monte Carlo valuation model or a Black-Scholes valuation model.

The fair value of market-based RSUs and PSUs granted are estimated on the date of grant using a Monte Carlo valuation model.

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Expected dividend yield — % — % — %

Expected term of share options 7.0 years N/A N/A

The risk-free interest rate is determined based on the U.S.

Treasury rates approximating the expected life of the market-based RSUs and PSUs granted.

Treasury rates approximating the expected life of the market-based SOs, RSUs and PSUs granted.

Expected volatility is established based on historical volatility of the Company's stock price.

The Company uses historical data to estimate pre-vesting forfeiture rates.

The expected term is the mid-point between shares vesting and expiration.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock-based compensation expense was as follows:

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(Dollars in thousands)

SARs $ — $ 1,497 $ 2,252

RSAs, RSUs, & PSUs 3,275 7,506 6,017

SARs & SOs $ 456 $ — $ 1,497

RSUs & PSUs 2,798 3,275 7,506

Total stock-based compensation expense (recorded in G&A) 3,254 3,275 9,003

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_______________________________________________________________________________

(1) Federal statutory income tax rate of 21% utilized in fiscal years 2020, 2019 and 2018.

The Company recorded a stock compensation benefit of $ 1.6 million in fiscal year 2020 related to performance awards that did not meet the vesting requirements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(1) Federal statutory income tax rate utilized of 0% due to a valuation allowance in fiscal year 2021 and of 21% utilized in fiscal years 2020 and 2019.

Stock Appreciation Rights & Stock Options:

SARs and stock options granted under the 2018 Plan, 2016 Plan and the 2004 Plan generally vest ratably over a three to five year period on each of the annual grant date anniversaries and expire ten years from the grant date.

SARs granted subsequent to fiscal year 2012 vest ratably over a three year period with the exception of the April 2017 grant to the Chief Executive Officer, which vested in full after two years .

Activity for all the Company's outstanding SARs and stock options is as follows:

SARs and SOs granted under the 2018 Plan, 2016 Plan and the 2004 Plan generally vest ratably over a three to five year period on each of the annual grant date anniversaries and expire ten years from the grant date.

SARs granted subsequent to fiscal year 2012 vest ratably over a three year period with the exception of the April 2017 grant to the former Chief Executive Officer, which vested in full after two years .

The SOs granted during fiscal year 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 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.

Activity for all the Company's outstanding SARs and SOs is as follows:

(in thousands) Weighted

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Unvested awards, net of estimated forfeitures — 1,459 $ 6.53 9.27 $ 4,129

As of June 30, 2021, there was $ 2.5 million of unrecognized expense related to SOs that is to be recognized over a weighted average period of 4.09 years.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Restricted Stock Units:

RSUs granted to employees under the 2018 Plan, 2016 Plan and 2004 Plan generally vest ratably over a three to five year period on each of the annual grant date anniversaries or vest entirely after a three or five year period.

The CEO, who was appointed in October 2020, was granted 0.4 million "sign-on" RSUs that vest pro-rata over one year .

RSUs granted to non-employee directors under the 2018 Plan, 2016 Plan and 2004 Plan generally vest in equal monthly amounts over a one year period from the Company's previous annual shareholder meeting date and distributions are deferred until the director's board service ends.

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Unvested awards, net of estimated forfeitures 141 $ 10.81 $ 1,320

_______________________________________________________________________________

(1) Includes actual or expected payout rates as set forth in the performance criteria.

In connection with the termination of former executive officers, the Company settled certain PSUs for cash of $ 0.8 million during fiscal year 2018.

PSUs granted in fiscal year 2021 have a performance period of three years , after which they will vest to the extent earned.

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PSUs granted in fiscal year 2019 have a performance period of three years , ending June 30, 2021.

As of June 30, 2020, these awards have not been earned and will not vest to the extent earned.

As a result, the Company recorded a benefit of $ 1.6 million in fiscal year 2020.

As of June 30, 2021, these awards have not been earned and will not vest.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SHAREHOLDERS' EQUITY

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The Company has 100.0 million shares of capital stock authorized, par value $ 0.05 , of which all outstanding shares, and shares available under the Stock Option Plans, have been designated as common.

Shareholders' Rights Plan:

The Company previously had a shareholders' rights plan, which expired by its terms in December 2016.

Share Repurchase Program:

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As of June 30, 2021, 30.0 million shares have been cumulatively repurchased for $ 595.4 million, and $ 54.6 million remained outstanding under the approved stock repurchase program.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Accumulated Other Comprehensive Income:

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Segment information is prepared on the same basis the chief operating decision maker reviews financial information for operational decision-making purposes.

During the first quarter of fiscal year 2018, the Company redefined its operating segments to reflect how the chief operating decision maker evaluates the business as a result of the sale of the mall-based business and International segment sale.

See Note 1 to the Consolidated Financial Statements.

The Company now reports its operations in two operating segments:

Franchise salons and Company-owned salons.

The Company's operating segments are its reportable operating segments.

Prior to this change, the Company had four operating segments:

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

The Company did not operate under the realigned operating segment structure prior to the first quarter of fiscal year 2018.

The Franchise salons reportable operating segment is comprised of 5,209 franchised salons located mainly in strip center locations and Walmart Supercenters.

The Franchise reportable operating segment is comprised of 5,563 franchised salons located mainly in strip center locations and Walmart.

Franchise salons offer high quality, convenient and value priced hair care and beauty services and retail products.

This segment operates primarily in the United States and Canada and primarily includes the Supercuts, SmartStyle, Cost Cutters, First Choice Haircutters, Roosters and Magicuts concepts.

The Company-owned salons reportable operating segment is comprised of 1,632 company-owned salons located mainly in strip center locations and Walmart Supercenters.

The Company-owned salons reportable operating segment is comprised of 276 company-owned salons located mainly in strip center locations and Walmart.

Company-owned salons offer high quality, convenient and value priced hair care and beauty services and retail products.

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Long-lived asset impairment 726 12,297 — 13,023

TBG restructuring 2,333 — — 2,333

Goodwill impairment — 40,164 — 40,164

Total operating expenses 231,496 212,997 74,772 519,265

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Interest expense — — ( 13,813 ) ( 13,813 )

Gain from sale of salon assets to franchisees, net — — ( 27,306 ) ( 27,306 )

Loss from sale of salon assets to franchisees, net — — ( 16,696 ) ( 16,696 )

Interest income and other, net — — 15,902 15,902

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Royalties and fees 73,402 — — 73,402

Franchise rental income 127,203 — — 127,203

253,026 416,703 — 669,729

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Rent 872 72,921 2,589 76,382

Franchise rent expense 127,203 — — 127,203

Depreciation and amortization 922 29,113 6,917 36,952

Long-lived asset impairment 1,712 20,848 — 22,560

TBG restructuring 2,333 — — 2,333

Goodwill impairment — 40,164 — 40,164

Total operating expenses 220,140 512,831 82,096 815,067

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Interest expense — — ( 7,522 ) ( 7,522 )

Gain from sale of salon assets to franchisees, net — — 2,918 2,918

Loss from sale of salon assets to franchisees, net — — ( 27,306 ) ( 27,306 )

Interest income and other, net — — 3,353 3,353

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Depreciation and amortization 762 28,263 8,823 37,848

TBG restructuring 21,816 — — 21,816

Total operating expenses 137,524 857,052 96,582 1,091,158

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Total $ 415,113 $ 23,113 $ 669,729 $ 57,176 $ 1,069,039 $ 78,090

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized quarterly data for fiscal years 2020 and 2019 follows:

Quarter Ended

September 30 December 31 March 31 (1) June 30 (2) Year Ended

(Dollars in thousands, except per share amounts)

Revenues $ 247,038 $ 208,765 $ 153,783 $ 60,143 $ 669,729

Cost of service and product revenues, excluding depreciation and amortization 116,809 94,616 76,496 19,056 306,977

Operating loss ( 9,906 ) ( 7,466 ) ( 59,399 ) ( 68,567 ) ( 145,338 )

Loss from continuing operations ( 14,178 ) ( 16,520 ) ( 67,842 ) ( 73,654 ) ( 172,194 )

Income from discontinued operations 373 79 301 79 832

Net loss ( 13,805 ) ( 16,441 ) ( 67,541 ) ( 73,575 ) ( 171,362 )

Loss from continuing operations per share, basic (4) ( 0.39 ) ( 0.46 ) ( 1.89 ) ( 2.05 ) ( 4.79 )

Income from discontinued operations per share, basic (4) 0.01 — 0.01 — 0.02

Net loss per share, basic (4) ( 0.38 ) ( 0.46 ) ( 1.88 ) ( 2.05 ) ( 4.77 )

Loss from continuing operations per share, diluted (4) ( 0.39 ) ( 0.46 ) ( 1.89 ) ( 2.05 ) ( 4.79 )

Income from discontinued operations per share, diluted (4) 0.01 — 0.01 — 0.02

Net loss per share, diluted (4) ( 0.38 ) ( 0.46 ) ( 1.88 ) ( 2.05 ) ( 4.77 )

Quarter Ended

September 30 December 31 March 31 (3) June 30 Year Ended

(Dollars in thousands, except per share amounts)

Revenues $ 287,835 $ 274,671 $ 258,343 $ 248,190 $ 1,069,039

Cost of service and product revenues, excluding depreciation and amortization 153,678 151,281 142,799 133,885 581,643

Operating income (loss) 3,429 ( 1,551 ) ( 22,162 ) ( 1,835 ) ( 22,119 )

(Loss) income from continuing operations ( 463 ) 417 ( 14,811 ) ( 5,265 ) ( 20,122 )

(Loss) income from discontinued operations ( 264 ) 6,113 178 ( 131 ) 5,896

Net (loss) income ( 727 ) 6,530 ( 14,633 ) ( 5,396 ) ( 14,226 )

(Loss) income from continuing operations per share, basic (4) ( 0.01 ) 0.01 ( 0.37 ) ( 0.14 ) ( 0.48 )

(Loss) income from discontinued operations per share, basic (4) ( 0.01 ) 0.14 — — 0.14

Net (loss) income per share, basic (4) ( 0.02 ) 0.15 ( 0.36 ) ( 0.14 ) ( 0.34 )

(Loss) income from continuing operations per share, diluted (4) ( 0.01 ) 0.01 ( 0.37 ) ( 0.14 ) ( 0.48 )

(Loss) income from discontinued operations per share, diluted (4) ( 0.01 ) 0.14 — — 0.14

Net (loss) income per share, diluted (4) ( 0.02 ) 0.15 ( 0.36 ) ( 0.14 ) ( 0.34 )

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

_______________________________________________________________________________

(1) During the third quarter of fiscal year 2020, the Company recorded a $ 40.2 million goodwill impairment charge related to the Company-owned reporting unit (see revision explanation below).

(2) During the fourth quarter of fiscal year 2020, government-mandated salon closures in response to the COVID-19 pandemic significantly reduced operating income.

Additionally, the economic disruption caused by COVID-19 triggered a $ 22.6 million long-lived asset impairment charge.

(3) During the third quarter of fiscal year 2019, the Company recorded a $ 20.7 million restructuring charge related to TBG mall locations.

The reserve was a non-cash charge to reserve for notes and receivables due from TBG.

(4) Total is an annual recalculation;

line items calculated quarterly may not sum to total.

Line items may not sum due to rounding.

Revision of Second and Third Quarter 2020 Unaudited Results:

During the fourth quarter of 2020, the Company identified an error in the calculation of the goodwill derecognition associated with the sale of salons to franchisees in the second quarter and third quarter.

In the second quarter, goodwill derecognition was understated by $ 6.7 million, resulting in the loss from the sale of salons to franchisees and net loss being understated and goodwill being overstated by $ 6.7 million.

During the third quarter, goodwill derecognition was overstated by $ 2.35 million.

As of March 31, 2020, the Company fully impaired its remaining Company-owned goodwill with the amount of goodwill impairment being overstated by $ 4.4 million in the third quarter.

The Company assessed the applicable guidance issued by the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB) and concluded these misstatements were not material, individually or in the aggregate, to the Company’s Unaudited Condensed Consolidated Financial Statements for the aforementioned interim periods.

However, to facilitate comparisons among periods, the company has decided to revise its previously issued second and third quarter unaudited condensed consolidated financial information.

Three months ended December 31, 2019

As Previously Reported Adjustments (1) As Revised

(Dollars in thousands, except per share amounts)

Loss from sale of salon assets to franchisees, net (a) $ ( 5,692 ) $ ( 6,715 ) $ ( 12,407 )

Interest income and other, net (b) 4,346 ( 1,477 ) 2,869

Loss from continuing operations before income taxes ( 10,276 ) ( 8,192 ) ( 18,468 )

Income tax benefit 795 1,153 1,948

Net loss ( 9,402 ) ( 7,039 ) ( 16,441 )

Net loss per share ( 0.26 ) ( 0.20 ) ( 0.46 )

Comprehensive loss ( 8,861 ) ( 7,039 ) ( 15,900 )

Goodwill as of December 31, 2019 293,019 ( 6,715 ) 286,304

Other assets as of December 31, 2019 38,144 1,477 36,667

Other non-current liabilities as of December 31, 2019 95,979 ( 1,153 ) 94,826

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Three months ended March 31, 2020

As Previously Reported Adjustments (2) As Revised

(Dollars in thousands, except per share amounts)

Rent expense (d) $ 19,243 $ ( 578 ) $ 18,665

Goodwill impairment (c) 44,529 ( 4,365 ) 40,164

Operating loss ( 64,342 ) 4,943 ( 59,399 )

Loss from sale of salon assets to franchisees, net ( 10,208 ) 2,350 ( 7,858 )

Interest income and other, net ( 1,329 ) 1,477 148

Loss from continuing operations before income taxes ( 77,591 ) 8,770 ( 68,821 )

Income tax benefit 2,253 ( 1,274 ) 979

Net loss ( 75,037 ) 7,496 ( 67,541 )

Net loss per share ( 2.10 ) 0.22 ( 1.88 )

Comprehensive loss ( 77,519 ) 7,496 ( 70,023 )

Short term lease liability as of March 31, 2020 149,482 ( 578 ) 148,904

Other non-current liabilities as of March 31, 2020 92,698 121 92,819

Six months ended December 31, 2019

As Previously Reported Adjustments (1) As Revised

(Dollars in thousands, except per share amounts)

Loss from sale of salon assets to franchisees, net $ ( 11,552 ) $ ( 6,715 ) $ ( 18,267 )

Interest income and other, net 4,517 ( 1,477 ) 3,040

Loss from continuing operations before income taxes ( 27,310 ) ( 8,192 ) ( 35,502 )

Income tax benefit 3,651 1,153 4,804

Net loss ( 23,207 ) ( 7,039 ) ( 30,246 )

Net loss per share ( 0.64 ) ( 0.20 ) ( 0.84 )

Comprehensive loss ( 23,069 ) ( 7,039 ) ( 30,108 )

Nine months ended March 31, 2020

As Previously Reported Adjustments (2) As Revised

(Dollars in thousands, except per share amounts)

Rent expense $ 64,002 $ ( 578 ) $ 63,424

Goodwill impairment 44,529 ( 4,365 ) 40,164

Operating loss ( 81,714 ) 4,943 ( 76,771 )

Loss from sale of salon assets to franchisees, net ( 21,760 ) ( 4,365 ) ( 26,125 )

Interest income and other, net 3,188 — 3,188

Loss from continuing operations before income taxes ( 104,901 ) 578 ( 104,323 )

Income tax benefit 5,904 ( 121 ) 5,783

Net loss ( 98,244 ) 457 ( 97,787 )

Net loss per share ( 2.73 ) 0.01 ( 2.72 )

Comprehensive loss ( 100,588 ) 457 ( 100,131 )

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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(1) The Company revised the amounts originally reported for the second quarter of fiscal year 2020 for the following items:

(a) Recorded an additional $ 6.7 million loss from the sale of salons to franchisees, net that should have been recorded in the second quarter.

The error in the Company's goodwill derecognition estimation calculation was identified in the fourth quarter.

The goodwill derecognition was understated which understated the loss of the sale of salons to franchisees, net.

The error impacted the three and six months ended December 31, 2019.

(b) Recorded a reduction to the gain on the sale of a building, included in interest income and other, net related to the sale of the Company's headquarters which occurred in the second quarter.

Previously, the Company identified this error during the third quarter and recorded and disclosed the correction in the third quarter as an out-of-period adjustment.

The correction applies to the three and six months ended December 31, 2019.

(2) The Company revised the amounts originally reported for the third quarter of fiscal year 2020 for the following items:

As of March 31, 2020 the Company impaired its remaining Company-owned goodwill, with the amount of goodwill impairment being overstated by $ 4.4 million.

As the second quarter error which understated goodwill derecognition was not identified until the fourth quarter, goodwill impairment and loss from the sale of salons to franchisees, net were misstated in the third quarter.

The Company recorded a $ 4.4 million decrease to goodwill impairment and a $ 2.4 million decrease to loss from the sale of salon assets to franchisees, net to correct the error.

Net loss for the nine months ended March 31, 2020 was not misstated.

However, goodwill impairment and the loss from the sales of salons to franchisees, net were misstated in the nine months ended March 31, 2020 with goodwill impairment overstated by $ 4.4 million and loss from the sale of salons to franchisees, net understated by $ 4.4 million.

(d) Adjusted third quarter rent expense to include a $ 0.6 million benefit to rent expense that related to leases signed in the third quarter, but not identified until the fourth quarter.

The net loss for the three and nine months were both impacted by the misstatement.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data