REGIS CORP 10-K

Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements: Reports of Independent Registered Public Accounting Firms 50 Consolidated Balance Sheet as of June 30, 2021 and 2020 54 Consolidated Statement of Operations for each of the three years in the period ended June 30, 2021 55 Consolidated Statement of Comprehensive Loss for each of the three years in the period ended June 30, 2021 56 Consolidated Statement of Shareholders' Equity for each of the three years in the period ended June 30, 2021 57 Consolidated Statement of Cash Flows for each of the three years in the period ended June 30, 2021 58 Notes to Consolidated Financial Statements 59 49 Table of Contents 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. 50 Table of Contents Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. We performed the following procedures: a. 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 b. tested the Company-owned salon impairment analyses as follows: i. evaluated the completeness of the population of Company-owned salon locations determined to be impaired , ii. evaluated and tested management's models and processes for developing the undiscounted and discounted cash flows, iii. 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 c. assessed the reasonableness of management’s ability to forecast future sales by comparing past projections to actual financial statement results d. 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 51 Table of Contents 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 52 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Regis Corporation 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 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 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. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Minneapolis, Minnesota August 31, 2020 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. 53 Table of Contents REGIS CORPORATION CONSOLIDATED BALANCE SHEET (Dollars in thousands, except per share data) June 30, 2021 2020 ASSETS Current assets: Cash and cash equivalents $ 19,191 $ 113,667 Receivables, net 27,372 31,030 Inventories 22,993 62,597 Other current assets 17,103 19,138 Total current assets 86,659 226,432 Property and equipment, net 23,113 57,176 Goodwill (Note 5) 229,582 227,457 Other intangibles, net 3,761 4,579 Right of use asset (Note 6) 611,880 786,216 Other assets 41,388 40,934 Total assets $ 996,383 $ 1,342,794 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 27,157 $ 50,918 Accrued expenses 54,857 48,825 Short-term lease liability (Note 6) 116,471 137,271 Total current liabilities 198,485 237,014 Long-term debt, net (Note 8) 186,911 177,500 Long-term lease liability (Note 6) 518,866 680,454 Long-term financing liabilities (Note 8) — 27,981 Other non-current liabilities 75,075 94,142 Total liabilities 979,337 1,217,091 Commitments and contingencies (Note 9) Shareholders' equity: Common stock, $ 0.05 par value; issued and outstanding, 35,795,844 and 35,625,716 common shares at June 30, 2021 and 2020, respectively 1,790 1,781 Additional paid-in capital 25,102 22,011 Accumulated other comprehensive income 9,543 7,449 Retained (deficit) earnings ( 19,389 ) 94,462 Total shareholders' equity 17,046 125,703 Total liabilities and shareholders' equity $ 996,383 $ 1,342,794 ______________________________________________________________________________ The accompanying notes are an integral part of the Consolidated Financial Statements. 54 Table of Contents REGIS CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (Dollars and shares in thousands, except per share data) Fiscal Years 2021 2020 2019 Revenues: Service $ 108,120 $ 331,538 $ 749,660 Product 91,544 137,586 225,618 Royalties and fees 88,057 73,402 93,761 Franchise rental income (Note 6) 127,392 127,203 — Total revenue 415,113 669,729 1,069,039 Operating expenses: Cost of service 79,144 222,279 452,827 Cost of product 79,167 84,698 128,816 Site operating expenses 51,463 71,543 141,031 General and administrative 105,433 130,953 177,004 Rent (Note 6) 40,930 76,382 131,816 Franchise rent expense (Note 6) 127,392 127,203 — Depreciation and amortization 22,713 36,952 37,848 Long-lived asset impairment (Note 1) 13,023 22,560 — TBG mall location restructuring (Note 3) — 2,333 21,816 Goodwill impairment (Note 1) — 40,164 — Total operating expenses 519,265 815,067 1,091,158 Operating loss ( 104,152 ) ( 145,338 ) ( 22,119 ) Other (expense) income: Interest expense ( 13,813 ) ( 7,522 ) ( 4,795 ) (Loss) gain from sale of salon assets to franchisees, net ( 16,696 ) ( 27,306 ) 2,918 Interest income and other, net 15,902 3,353 1,729 Loss from continuing operations before income taxes ( 118,759 ) ( 176,813 ) ( 22,267 ) Income tax benefit 5,428 4,619 2,145 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 and diluted 35,956 35,936 41,829 _____________________________________________________________________________ (1) Total is a recalculation; line items calculated individually may not sum to total due to rounding. The accompanying notes are an integral part of the Consolidated Financial Statements. 55 Table of Contents REGIS CORPORATION CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS (Dollars in thousands) Fiscal Years 2021 2020 2019 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 income (loss) 2,094 ( 1,893 ) ( 314 ) Comprehensive loss $ ( 111,237 ) $ ( 173,255 ) $ ( 14,540 ) _______________________________________________________________________________ The accompanying notes are an integral part of the Consolidated Financial Statements. 56 Table of Contents REGIS CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Dollars in thousands, except share data) Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income Retained Earnings (Deficit) Total Shares Amount Balance, June 30, 2018 45,258,571 $ 2,263 $ 194,436 $ 9,656 $ 280,083 $ 486,438 Net loss — — — — ( 14,226 ) ( 14,226 ) Foreign currency translation — — — 185 — 185 Stock repurchase program ( 8,605,430 ) ( 431 ) ( 154,114 ) — — ( 154,545 ) Exercise of SARs 22,263 1 ( 222 ) — — ( 221 ) Stock-based compensation — — 9,003 — — 9,003 Recognition of deferred compensation (Note 11) — — — ( 499 ) — ( 499 ) Net restricted stock activity 193,845 10 ( 1,951 ) — — ( 1,941 ) Minority interest (Note 1) — — — — 51 51 Balance, June 30, 2019 36,869,249 1,843 47,152 9,342 265,908 324,245 Net loss — — — — ( 171,362 ) ( 171,362 ) Foreign currency translation — — — ( 1,462 ) — ( 1,462 ) Stock repurchase program ( 1,504,000 ) ( 75 ) ( 26,281 ) — — ( 26,356 ) Exercise of SARs 1,776 — 28 — — 28 Stock-based compensation — — 3,275 — — 3,275 Recognition of deferred compensation (Note 11) — — — ( 431 ) — ( 431 ) Net restricted stock activity 258,691 13 ( 2,163 ) — — ( 2,150 ) Minority interest (Note 1) — — — — ( 84 ) ( 84 ) Balance, June 30, 2020 35,625,716 1,781 22,011 7,449 94,462 125,703 Net loss — — — — ( 113,331 ) ( 113,331 ) Foreign currency translation (Note 1) — — — 1,888 — 1,888 Exercise of SARs 3,775 — ( 24 ) — — ( 24 ) Stock-based compensation — — 3,254 — — 3,254 Recognition of deferred compensation (Note 11) — — — 206 — 206 Net restricted stock activity 166,353 9 ( 139 ) — — ( 130 ) Minority interest (Note 1) — — — — ( 520 ) ( 520 ) Balance, June 30, 2021 35,795,844 $ 1,790 $ 25,102 $ 9,543 $ ( 19,389 ) $ 17,046 _______________________________________________________________________________ The accompanying notes are an integral part of the Consolidated Financial Statements. 57 Table of Contents REGIS CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands) Fiscal Years 2021 2020 2019 Cash flows from 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 (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 ) Inventory reserve 12,068 — — Gain from disposal of distribution center assets ( 14,997 ) — — Gain from sale of company headquarters, net — ( 2,513 ) — Loss (gain) from sale of salon assets to franchisees, net 16,696 27,306 ( 2,918 ) Non-cash TBG mall location restructuring charge (Note 3) — — 21,008 Goodwill impairment — 40,164 — Stock-based compensation 3,254 3,275 9,003 Amortization of debt discount and financing costs 1,839 398 275 Other non-cash items affecting earnings ( 351 ) ( 539 ) ( 903 ) Changes in operating assets and liabilities (1): Receivables ( 279 ) ( 3,902 ) ( 17,304 ) Inventories 17,879 ( 2,255 ) ( 8,492 ) Income tax receivable 1,295 ( 1,804 ) ( 703 ) Other current assets 1,658 2,827 ( 783 ) Other assets ( 2,896 ) ( 10,094 ) ( 5,546 ) Accounts payable ( 21,669 ) 4,588 ( 5,836 ) Accrued expenses 5,296 ( 27,622 ) ( 20,158 ) Net lease liabilities ( 19,248 ) 276 — Other non-current liabilities ( 14,603 ) 368 717 Net cash used in operating activities: ( 99,883 ) ( 86,409 ) ( 17,524 ) Cash flows from investing activities: Capital expenditures ( 11,475 ) ( 37,494 ) ( 31,616 ) Proceeds from sale of company headquarters — 8,996 — Proceeds from sale of assets to franchisees 8,437 91,616 94,787 Costs associated with sale of assets to franchisees ( 261 ) ( 2,089 ) — Proceeds from company-owned life insurance policies 1,200 — 24,617 Net cash (used in) provided by investing activities: ( 2,099 ) 61,029 87,788 Cash flows from financing activities: Borrowings on revolving credit facility 10,000 213,000 — Repayments of revolving credit facility ( 589 ) ( 125,500 ) — Repurchase of common stock — ( 28,246 ) ( 152,661 ) Proceeds from sale and leaseback transactions — — 28,821 Minority interest buyout ( 562 ) — — Distribution center lease payments ( 724 ) ( 769 ) ( 378 ) Taxes paid for shares withheld ( 348 ) ( 2,320 ) ( 2,477 ) Net cash provided by (used in) financing activities: 7,777 56,165 ( 126,695 ) Effect of exchange rate changes on cash and cash equivalents 477 ( 284 ) 35 (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 End of year $ 29,152 $ 122,880 $ 92,379 _______________________________________________________________________________ (1) Changes in operating assets and liabilities exclude assets and liabilities sold or acquired. The accompanying notes are an integral part of the Consolidated Financial Statements. 58 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Description: 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. Salons are located in leased space in strip shopping centers, malls or Walmart. COVID-19 Impact: 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: The Consolidated Financial Statements include the accounts of the Company and its subsidiaries after the elimination of intercompany accounts and transactions. All material subsidiaries are wholly owned. The Company consolidates variable interest entities where it has determined it is the primary beneficiary of those entities' operations. Variable Interest Entities : The Company has interests in certain privately-held entities through arrangements that do not involve voting interests. Such entities, known as a variable interest 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, 2021, the Company has no VIE's where the Company is the primary beneficiary. The Company has an investment in Empire Education Group, Inc. (EEG). 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. 59 Table of Contents 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. 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: Cash equivalents consist of investments in short-term, highly liquid securities having original maturities of three months or less, which are made as a part of the Company's cash management activity. The carrying values of these assets approximate their fair market values. The Company primarily utilizes a cash management system with a series of separate accounts consisting of lockbox accounts for receiving cash, concentration accounts that funds are moved to, and several "zero balance" disbursement accounts for funding of payroll and accounts payable. As a result of the Company's cash management system, checks issued, but not presented to the banks for payment, may create negative book cash balances. There were no checks outstanding in excess of related book cash balances at June 30, 2021 and 2020. Restricted cash within other current assets primarily relates to consolidated advertising cooperatives funds, which can only be used to settle obligations of the respective cooperatives and contractual obligations to collateralize the Company's self-insurance programs. The self-insurance restricted cash arrangement can be canceled by the Company at any time if substituted with letters of credit. The table below reconciles the cash and cash equivalents balances and restricted cash balances, recorded within other current assets on the Consolidated Balance Sheet to the amount of cash, cash equivalents and restricted cash reported on the Consolidated Statement of Cash Flows: June 30, 2021 2020 (Dollars in thousands) Cash and cash equivalents $ 19,191 $ 113,667 Restricted cash, included in other current assets 9,961 9,213 Total cash, cash equivalents and restricted cash $ 29,152 $ 122,880 60 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Receivables and Allowance for Doubtful Accounts: The receivable balance on the Company's Consolidated Balance Sheet primarily includes 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. The Company monitors the financial condition of its franchisees and records provisions for estimated losses on receivables when it believes franchisees are unable to make their required payments based on factors such as delinquencies and aging trends. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses related to existing accounts and notes receivables. As of June 30, 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 2021 due to lower franchisees sales increasing the risk of default. See Note 2 to the Consolidated Financial Statements. Inventories: Inventories of finished goods consist principally of hair care products for retail product sales. A portion of inventories are also used for salon services consisting of hair color, hair care products including shampoo and conditioner and hair care treatments including permanents, neutralizers and relaxers. Inventories are stated at the lower of cost or market, with cost determined on a weighted average cost basis. Physical inventory counts are performed primarily in the fourth quarter of the fiscal year for salons and throughout the year at the distribution centers. Product and service inventories are adjusted based on the physical inventory counts. During the fiscal year, cost of retail product sold to salon guests is determined based on the weighted average cost of product sold, adjusted for an estimated shrinkage factor. The cost of product used in salon services is determined by applying an estimated percentage of total cost of service to service revenues. These estimates are updated quarterly based on cycle count results for the distribution centers, service sales mix, discounting, special promotions and other factors. The Company has inventory valuation reserves for excess and obsolete inventories, or other factors that may render inventories unmarketable at their historical costs. 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 (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. Costs incurred to develop internal-use software during the application development stage are capitalized, while data conversion, training and maintenance costs associated with internal-use software are expensed as incurred. Estimated useful lives range from three to seven years . Expenditures for maintenance and repairs and minor renewals and betterments, which do not improve or extend the life of the respective assets, are expensed. All other expenditures for renewals and betterments are capitalized. The assets and related depreciation and amortization accounts are adjusted for property retirements and disposals with the resulting gain or loss included in operating income. Fully depreciated or amortized assets remain in the accounts until retired from service. 61 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Right of Use Asset, Lease Liabilities and Rent Expense: At contract inception, the Company determines whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides the Company the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, the Company considers it to be, or contain, a lease. The Company leases its company-owned salons and some of its corporate facilities under operating leases. The original terms of the salon leases range from 1 to 20 years with many leases renewable for 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 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. 62 Table of Contents 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. Factors considered in deciding when to perform an impairment review include significant under-performance of an individual salon in relation to expectations, significant economic or geographic trends, and significant changes or planned changes in our use of the assets. The first step is to assess recoverability, and in doing that, the undiscounted cash flows are compared to the carrying value. If the undiscounted estimated cash flows are less than the carrying value of the assets, the Company calculates an impairment charge based on the difference between the carrying value of the asset group and its fair value. The fair value of the salon long-lived asset group is estimated using market participant methods based on the best information available. The fair value of the right of use asset is estimated by determining what a market participant would pay over the life of the primary asset in the group, discounted back to June 30, 2021. See Note 6 for further discussion related to right of use asset impairment. 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. 63 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Goodwill: 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. The Company assesses goodwill impairment on an annual basis as of April 30, and between annual assessments if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Goodwill impairment assessments are performed at the reporting unit level, which is the same as the Company's operating segments. In fiscal year 2020, the Company adopted ASU 2017-04, which simplified the test for goodwill impairment. Under this accounting standard, the Company performed its interim impairment test and annual impairment tests by comparing the fair value of a reporting unit to its carrying amount. The Company then records an impairment charge for the amount that the carrying amount exceeds the fair value. This eliminates Step 2 from the goodwill impairment test to simplify the subsequent measure of goodwill. Prior to the adoption, the goodwill assessment involved a one-step comparison of the reporting unit's fair value to its carrying value, including goodwill (Step 1). If the reporting unit's fair value exceeded its carrying value, no further procedures were required. However, if the reporting unit's fair value was less than the carrying value, an impairment charge was recorded for the difference between the fair value and carrying value of the reporting unit. In applying the goodwill impairment assessment, the Company could assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting units was less than its carrying value (Step 0). Qualitative factors could include, but were not limited to, economic, market and industry conditions, cost factors and overall financial performance of the reporting unit. If after assessing these qualitative factors, the Company determined it is "more-likely-than-not" that the carrying value was less than the fair value, then performing Step 1 of the goodwill impairment assessment was unnecessary. The carrying value of each reporting unit is based on the assets and liabilities associated with the operations of the reporting unit, including allocation of shared or corporate balances among reporting units. Allocations are generally based on the number of salons in each reporting unit as a percent of total company-owned salons or expenses of the reporting unit as a percent of total company expenses. The Company calculates estimated fair values of the reporting units based on discounted cash flows utilizing estimates in annual revenue, service and product margins, fixed expense rates, allocated corporate overhead, franchise and company-owned salon counts, proceeds from the sale of company-owned salons to franchisees and long-term growth rates for determining terminal value. Where available and as appropriate, comparative market multiples are used in conjunction with the results of the discounted cash flows. The Company engages third-party valuation consultants to assist in evaluating the Company's estimated fair value calculations. Following is a description of the goodwill impairment assessments for each of the fiscal years: Fiscal 2021 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. 64 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Fiscal 2020 During the third quarter of fiscal year 2020, the Company determined a triggering event occurred, resulting in quantitative impairment tests performed over the goodwill. This determination was made considering the reduced sales and profitability projections for the reporting units, driven by the COVID-19 pandemic and related economic disruption. The triggering event experienced in the third quarter impacted both reporting units of the business, Franchise and Company-owned. The Company engaged a third-party valuation specialist to perform an impairment analysis on the Franchise reporting unit of the business. The Company-owned reporting unit is comprised of a portfolio of salons that the Company intends to sell to franchisees or close in the short-term as part of the transition to a fully-franchised model. As a result, the Company-owned reporting unit has a limited life which allows the Company to perform its own impairment analysis on the Company-owned reporting unit. For the goodwill impairment analysis, management utilized a combination of both a discounted cash flows approach and market approach to evaluate the Franchise reporting unit, and the discounted cash flows approach to evaluate the Company-owned reporting unit. The discounted cash flow models reflect management's assumptions regarding revenue growth rates, economic and market trends including deterioration from the current COVID-19 pandemic, cost structure, and other expectations about the anticipated short-term and long-term operating results of the reporting units. For the Franchise reporting unit, the number of salons to be sold to franchisees and the discount rate of 13 percent were significant assumptions utilized in the discounted cash flow. For the Company-owned reporting unit, proceeds from the sale of salons to franchisees and number of salon venditions were the significant assumptions utilized in its discounted cash flow. As a result of the impairment testing, the Franchise reporting unit was determined to have a fair value that exceeded carrying value by approximately 50 percent. The Company-owned reporting unit was determined to have a carrying value in excess of its fair value, resulting in a goodwill impairment charge of $ 40.2 million. Prior to the COVID-19 pandemic, the Company had been derecognizing Company-owned goodwill as part of the calculation of gain or loss on the sale of salons to franchisees. The Company-owned reporting unit has no remaining goodwill, so there will be no further derecognition of Company-owned goodwill. The Company performed its annual impairment assessment as of April 30, 2020 and noted no significant changes to the carrying value or the fair value of the Franchise reporting unit, which would indicate that the headroom dropped below the 50 percent determined as of March 31, 2020. If a future triggering event analysis or the Company's annual impairment assessment indicates the fair value of the Franchise reporting unit has potentially fallen below more than the 50 percent headroom, we may be required to perform an updated impairment assessment 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. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions it uses to calculate impairment losses of goodwill. However, if actual results are not consistent with the estimates and assumptions used in the calculations, or if management is unable to expand its franchise base, the Company may be exposed to future impairment losses that could be material. Fiscal 2019 During fiscal year 2019, the Company did not experience any triggering events that required an interim goodwill analysis. The Company performed its annual impairment assessment as of April 30. For the fiscal year 2019 annual impairment assessment, due to the transformational efforts completed during the year, the Company elected to forgo the optional Step 0 assessment and performed the quantitative impairment analysis on the Franchise and Company-owned reporting units. The Company compared the carrying value of the reporting units, including goodwill, to their estimated fair value. The results of these assessments indicated that the estimated fair value of the Company's reporting units exceeded their carrying value. The Franchise reporting unit had substantial headroom and the Company-owned reporting unit had headroom of approximately 20 percent. Investments In Affiliates: The Company has equity investments in securities of certain privately held entities. The Company accounts for these investments under the equity or cost method of accounting. The Company's investments have no value as of June 30, 2021 and 2020. 65 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Self-Insurance Accruals: The Company uses a combination of third-party insurance and self-insurance for a number of risks including workers' compensation, health insurance, employment practice liability and general liability claims. The liability represents the Company's estimate of the undiscounted ultimate cost of uninsured claims incurred as of the Consolidated Balance Sheet date. The Company estimates self-insurance liabilities using a number of factors, primarily based on independent third-party actuarially-determined amounts, historical claims experience, estimates of incurred but not reported claims, demographic factors and severity factors. Although the Company does not expect the amounts ultimately paid to differ significantly from the estimates, self-insurance accruals could be affected if future claims experience differs significantly from historical trends and actuarial assumptions. For fiscal years 2021, 2020 and 2019, the Company recorded decreases (increases) in expense for changes in estimates related to prior year open policy periods of $ 3.6 , $ 3.1 and $( 1.3 ) million, respectively. The Company updates loss projections quarterly and adjusts its liability to reflect updated projections. The updated loss projections consider new claims and developments associated with existing claims for each open policy period. As certain claims can take years to settle, the Company has multiple policy periods open at any point in time. As of June 30, 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: Franchise revenues primarily include royalties, advertising fund fees and initial franchise fees. Royalties and advertising fund revenues represent sales-based royalties that are recognized as revenue in the period in which the sales occur. The Company defers franchise fees until the salon is open and then recognizes the revenue over the term of the franchise agreement. See Note 2 to the Consolidated Financial Statements. Product sales by the Company to its franchisees are included within product revenues on the Consolidated Statement of Operations and recorded at the time product is delivered to franchise locations. Company-owned salon revenues are recognized at the time when the services are provided. Product revenues are recognized when the guest receives and pays for the merchandise. Classification of Expenses: The following discussion provides the primary costs classified in each major expense category: Cost of service— labor costs related to salon employees and the cost of product used in providing service. Cost of product— cost of product sold to guests, labor costs related to selling retail product, 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 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: The Company receives consideration for a variety of vendor-sponsored programs. These programs primarily include volume rebates and promotion and advertising reimbursements. With respect to volume rebates, the Company estimates the amount of rebate it will receive and accrues it as a reduction to the cost of inventory over the period in which the rebate is earned based upon historical purchasing patterns and the terms of the volume rebate program. A quarterly analysis is performed in order to ensure the estimated rebate accrued is reasonable and any necessary adjustments are recorded. 66 Table of Contents 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: Advertising costs consist of the Company's corporate funded advertising costs, the Company's advertising fund contributions and franchisee's advertising fund contributions. Corporate funded advertising costs are expensed as incurred. The Company has various franchising programs supporting certain of its franchise salon concepts. Most maintain advertising funds that provide comprehensive advertising and sales promotion support. 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. The Company's advertising costs are included in site operating expenses in the Consolidated Statement of Operations and consist of the following: Fiscal Years 2021 2020 2019 (Dollars in thousands) Corporate funded advertising costs $ 7,015 $ 13,210 $ 21,581 Advertising fund contributions from company-owned salons 897 3,715 12,929 Advertising fund contributions from franchisees (1) 22,023 13,341 34,073 Total advertising costs $ 29,935 $ 30,266 $ 68,583 _____________________________________________________________________________ (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. As of June 30, 2021 and 2020, approximately $ 9.9 and $ 4.3 million, respectively, representing the advertising funds' assets and liabilities were recorded within total assets and total liabilities in the Company's Consolidated Balance Sheet. Stock-Based Employee Compensation Plans: The Company recognizes stock-based compensation expense based on the fair value of the awards at the grant date. Compensation expense is recognized on a straight-line basis over the requisite service period of the award (or to the date a participant becomes eligible for retirement, if earlier). The Company uses fair value methods that require the input of subjective assumptions, including the expected term, expected volatility, dividend yield and risk-free interest rate. 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. 67 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Sales Taxes: Sales taxes are recorded on a net basis (rather than as both revenue and an expense) within the Company's Consolidated Statement of Operations. Income Taxes: Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the Consolidated Financial Statements or income tax returns. Deferred income tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using currently enacted tax rates in effect for the years in which the differences are expected to reverse. We recognize deferred tax assets to the extent we believe these assets are more likely than not to be realized. The Company evaluates all evidence, including recent financial performance, the existence of cumulative year losses and our forecast of future taxable income, to assess the need for a valuation allowance against our deferred tax assets. While the determination of whether or not to record a valuation allowance is not fully governed by a specific objective test, accounting guidance places significant weight on recent financial performance. The Company has a valuation allowance on its deferred tax assets of $ 192.5 and $ 122.4 million at June 30, 2021 and 2020, respectively. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make necessary adjustments to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. Significant components of the valuation allowance which occurred during fiscal year 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. Therefore, the Company established a valuation allowance against the U.S. NOLs generated during its fiscal year 2018 and recorded a net tax expense of $ 14.7 million. • The Company determined that it no longer had sufficient U.S. indefinite-lived taxable temporary differences to support realization of its U.S. indefinite-lived NOLs and its existing U.S. deferred tax assets that upon reversal are expected to generate indefinite-lived NOLs. As a result, the Company recorded an additional $ 17.0 million valuation allowance on its U.S. federal indefinite-lived deferred tax assets. • The Company recognized a capital loss and established a corresponding valuation allowance of $ 14.9 million on investment outside basis previously impaired for financial accounting purposes. The Company reserves for unrecognized tax benefits, interest and penalties related to anticipated tax audit positions in the U.S. and other tax jurisdictions based on an estimate of whether additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of these liabilities would result in tax benefits being recognized in the period in which it is determined that the liabilities are no longer necessary. If the estimate of unrecognized tax benefits, interest and penalties proves to be less than the ultimate assessment, additional expenses would result. Inherent in the measurement of deferred balances are certain judgments and interpretations of tax laws and published guidance with respect to the Company's operations. Income tax expense is primarily the current tax payable for the period and the change during the period in certain deferred tax assets and liabilities. See Note 10 to the Consolidated Financial Statements. 68 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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: The Consolidated Balance Sheet, Consolidated Statement of Operations and Consolidated Statement of Cash Flows of the Company's international operations are measured using local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rates in effect at each Balance Sheet date. Translation adjustments arising from the use of differing exchange rates from period to period are included in accumulated other comprehensive income within shareholders' equity. Statement of Operations accounts are translated at the average rates of exchange prevailing during the year. During fiscal years 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. 69 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Accounting Standards Recently Adopted by the Company: Simplifying the Test for Goodwill Impairment In fiscal year 2020, the Company adopted ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350)" for the interim impairment test performed due to the triggering event noted above, for the quarter ended March 31, 2020. Under this accounting standard, the Company performed its interim impairment test and annual impairment tests by comparing the fair value of a reporting unit to its carrying amount. The Company then records an impairment charge for the amount that the carrying amount exceeds the fair value. This eliminates Step 2 from the goodwill impairment test to simplify the subsequent measure of goodwill. Leases In 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. The Company has also made an accounting policy election to keep leases with an initial term of 12 months or less off of the Consolidated Balance Sheet. Under adoption of Topic 842, the Company recorded a right of use asset and lease liability of $ 980.8 and $ 993.7 million, respectively. The difference between the assets and liabilities are attributable to the reclassification of certain existing lease-related assets and liabilities as an adjustment to the right of use assets. The decrease in the right of use asset and lease liability from July 1, 2019 to June 30, 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, 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. 70 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. REVENUE RECOGNITION: Revenue Recognition and Deferred Revenue: Revenue recognized at point of sale Company-owned salon revenues are recognized at the time when the services are provided. Product revenues for company-owned salons are recognized when the guest receives and pays for the merchandise. Revenues from purchases made with gift cards are also recorded when the guest takes possession of the merchandise or services are provided. Gift cards issued by the Company are recorded as a liability (deferred revenue) upon sale and recognized as revenue upon redemption by the customer. Gift card breakage, the amount of gift cards which will not be redeemed, is recognized proportional to redemptions using estimates based on historical redemption patterns. Product sales 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. Revenue recognized over time Franchise revenues primarily include royalties, advertising fund cooperatives fees, franchise fees and other fees. Royalty and advertising fund revenues represent sales-based royalties that are recognized in the period in which the sales occur. Generally, royalty and advertising fund revenue is billed and collected monthly in arrears. Advertising fund revenues and expenditures, which must be spent on marketing and related activities per the franchise agreements, are recorded on a gross basis within the Consolidated Statement of Operations. This 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 and entering into a sublease arrangement with the franchise. The Company recognizes franchise rental income and expense when it is due to the landlord. 71 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table disaggregates revenue by timing of revenue recognition and is reconciled to reportable segment revenues as follows: 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) Revenue recognized at a point in time: Service $ — $ 108,120 $ — $ 331,538 $ — $ 749,660 Product 56,699 34,845 52,421 85,165 59,905 165,713 Total revenue recognized at a point in time $ 56,699 $ 142,965 $ 52,421 $ 416,703 $ 59,905 $ 915,373 Revenue recognized over time: Royalty and other franchise fees $ 66,034 $ — $ 60,061 $ — $ 59,688 $ — Advertising fund fees 22,023 — 13,341 — 34,073 — Franchise rental income 127,392 — 127,203 — — — Total revenue recognized over time 215,449 — 200,605 — 93,761 — Total revenue $ 272,148 $ 142,965 $ 253,026 $ 416,703 $ 153,666 $ 915,373 Information about receivables, broker fees and deferred revenue subject to the revenue recognition guidance is as follows: June 30, 2021 June 30, 2020 Balance Sheet Classification (Dollars in thousands) Receivables from contracts with customers, net $ 19,112 $ 22,991 Accounts receivable, net Broker fees 19,254 20,516 Other assets Deferred revenue: Current Gift card liability $ 2,240 $ 2,543 Accrued expenses Deferred franchise fees unopened salons 40 77 Accrued expenses Deferred franchise fees open salons 5,884 5,537 Accrued expenses Total current deferred revenue $ 8,164 $ 8,157 Non-current Deferred franchise fees unopened salons $ 6,571 $ 11,855 Other non-current liabilities Deferred franchise fees open salons 32,365 33,623 Other non-current liabilities Total non-current deferred revenue $ 38,936 $ 45,478 72 Table of Contents 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. The following table is a rollforward of the allowance for doubtful accounts for the periods indicated (in thousands): Balance as of June 30, 2020 $ 6,899 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 _____________________________________________________________________________ (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. These fees are paid upon the signing of the franchise agreement and recognized as General and administrative expense over the term of the agreement. The following table is a rollforward of the broker fee balance for the periods indicated (in thousands): Balance as of June 30, 2020 $ 20,516 Additions 2,112 Amortization ( 3,180 ) Write-offs ( 194 ) Balance as of June 30, 2021 $ 19,254 Deferred revenue includes the gift card liability and deferred franchise fees for unopened salons and open salons. Gift card revenue for the years ended June 30, 2021, 2020 and 2019 was $ 0.9 , $ 2.4 and $ 5.3 million, respectively. Deferred franchise fees related to open salons are generally recognized on a straight-line basis over the term of the franchise agreement. Franchise fee revenue for the 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): 2022 $ 5,884 2023 5,820 2024 5,585 2025 5,208 2026 4,734 Thereafter 11,018 Total $ 38,249 73 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. TBG DISCONTINUED OPERATIONS AND RESTRUCTURING The Beautiful Group (TBG) : In October 2017, the Company sold substantially all of its mall-based salon business in North America, representing 858 salons, to The Beautiful Group (TBG), an affiliate of Regent, a private equity firm based in Los Angeles, California. 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 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 of fiscal year 2020. The assets acquired and liabilities assumed were not material to the Consolidated Balance Sheet. As of June 30, 2021, prior to any mitigation efforts which may be available, the Company remains liable for up to approximately $ 9 million related to its mall-based salon lease commitments on the 43 salons that remain open, a $ 14 million reduction from June 30, 2020. The commitments are included in our lease liabilities. The following summarizes the results of TBG related charges and TBG discontinued operations for the periods presented: Fiscal Years 2021 2020 2019 (Dollars in thousands) TBG mall restructuring: Accounts and notes receivable reserves $ — $ — $ 20,711 Other charges (1) — 2,333 1,105 Total TBG mall restructuring $ — $ 2,333 $ 21,816 TBG discontinued operations: (Income) loss from TBG discontinued operations, before taxes (2) $ — $ ( 1,063 ) $ 1,221 Income tax expense (benefit) from TBG discontinued operations (3) — 231 ( 7,117 ) Income from TBG discontinued operations, net of tax $ — $ ( 832 ) $ ( 5,896 ) _______________________________________________________________________________ (1) In fiscal year 2020, the Company recorded professional fees associated with the transfer of the mall salons back to the Company as TBG mall restructuring charges. (2) In fiscal years 2020 and 2019, the Company recorded professional fees related to the transaction, as well as insurance adjustments associated with the discontinued operations. (3) Income taxes have been allocated to continuing and discontinued operations based on the methodology required by accounting for income taxes guidance. 74 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. OTHER FINANCIAL STATEMENT DATA The following provides additional information concerning selected balance sheet accounts: June 30, 2021 2020 (Dollars in thousands) Other current assets: Prepaid assets $ 4,121 $ 5,165 Restricted cash 9,961 9,213 Other 3,021 4,760 Total other current assets $ 17,103 $ 19,138 Property and equipment: Buildings and improvements $ 8,251 $ 36,379 Equipment, furniture and leasehold improvements 29,102 198,983 Internal use software 41,927 71,212 Total property and equipment 79,280 306,574 Less accumulated depreciation and amortization ( 56,167 ) ( 249,398 ) Total property and equipment, net $ 23,113 $ 57,176 Accrued expenses: Payroll and payroll related costs $ 16,176 $ 18,204 Insurance 7,525 10,278 Rent and related real estate costs 11,197 4,179 Other 19,959 16,164 Total accrued expenses $ 54,857 $ 48,825 Other non-current liabilities: Deferred income taxes $ 10,650 $ 13,916 Insurance 12,722 20,301 Deferred benefits 10,028 11,106 Deferred franchise fees 38,936 45,478 Other 2,739 3,341 Total other non-current liabilities $ 75,075 $ 94,142 75 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following provides additional information concerning other intangibles, net: June 30, 2021 2020 Weighted Average Amortization Periods (1) Cost (2) Accumulated Amortization (2) Net Weighted Average Amortization Periods (1) Cost (2) Accumulated Amortization (2) Net (In years) (Dollars in thousands) (In years) (Dollars in thousands) Brand assets and trade names 35 $ 6,040 $ ( 3,568 ) $ 2,472 33 $ 6,494 $ ( 3,609 ) $ 2,885 Franchise agreements 19 10,099 ( 8,901 ) 1,198 19 9,558 ( 8,194 ) 1,364 Other 20 366 ( 275 ) 91 20 874 ( 544 ) 330 Total 24 $ 16,505 $ ( 12,744 ) $ 3,761 24 $ 16,926 $ ( 12,347 ) $ 4,579 _______________________________________________________________________________ (1) All intangible assets have been assigned an estimated finite useful life and are amortized on a straight-line basis over the number of years that approximate their expected period of benefit (ranging from three to 40 years). (2) The change in the gross carrying value and accumulated amortization of other intangible assets is impacted by foreign currency. 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): 2022 $ 398 2023 386 2024 323 2025 327 2026 312 Thereafter 2,015 Total $ 3,761 The following provides supplemental disclosures of cash flow activity: Fiscal Years 2021 2020 2019 (Dollars in thousands) Cash paid (received) for: Interest $ 11,940 $ 7,390 $ 4,408 Taxes and penalties, net ( 2,636 ) 2,150 2,096 Non-cash investing activities: Unpaid capital expenditures 312 2,569 3,873 76 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 5. GOODWILL The table below contains details related to the Company's goodwill: June 30, 2021 2020 Gross Carrying Value (1) Accumulated Impairment (2) Net Gross Carrying Value (1) Accumulated Impairment (2) Net (Dollars in thousands) Goodwill $ 343,846 $ ( 114,264 ) $ 229,582 $ 341,721 $ ( 114,264 ) $ 227,457 _______________________________________________________________________________ (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). In fiscal year 2020, the Company realized a $ 40.2 million goodwill impairment associated with the Company-owned reporting unit. Prior to the COVID-19 pandemic, the Company had been derecognizing Company-owned goodwill as part of the calculation of gain or loss on the sale of salons to franchisees. Following the goodwill impairment in fiscal year 2020, the Company-owned reporting unit has no remaining goodwill, so there will be no further derecognition of Company-owned goodwill. The table below contains details related to the Company's goodwill (in thousands): Franchise Reporting Unit Goodwill, net at June 30, 2020 $ 227,457 Translation rate adjustments 2,125 Goodwill, net at June 30, 2021 $ 229,582 77 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. LEASES At contract inception, the Company determines whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides the Company the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, the Company considers it to be, or contain, a lease. The Company leases its company-owned salons and some of its corporate facilities under operating leases. The original terms of the salon leases range from 1 to 20 years with many leases renewable for an additional 5 to 10 year term at the option of the Company. In addition to the obligation to make fixed rental payments for the use of the salons, the Company also has variable lease payments that are based on sales levels. For most leases, the Company is required to pay real estate taxes and other occupancy expenses. Total Rent includes the following: June 30, 2021 2020 2019 (Dollars in thousands) Minimum rent $ 33,596 $ 57,819 $ 108,892 Percentage rent based on sales 8 2,043 4,754 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) 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. The Company records the rental payments due from franchisees as franchise rental income and the corresponding amounts owed to landlords as franchise rent expense on the Consolidated Statement of Operations. In fiscal year 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). The Lease Modification Q&A provides entities with the option to elect to account for lease concessions as though the enforceable rights and obligations existed in the original lease when the total cash flows resulting from the modified lease are substantially similar to the cash flows in the original lease. The Company elected this FASB relief for COVID-19-related rent concessions for the Walmart rent abatement received in April and May 2020 and has elected not to remeasure the related lease liability and right of use asset for Walmart leases. The Walmart rent abatement was recognized as a reduction of variable rent expense of $ 2.7 million in the fourth fiscal quarter of 2020. Additionally, included in accounts payable as of June 30, 2020 is approximately $ 20 million of rental payments that were due, but the Company had not paid. The Company 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. 78 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 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. For leases classified as operating leases, expense for lease payments is recognized on a straight-line basis over the lease term, including the lease renewal option when the lease is expected to be renewed. Generally, the non-lease components, such as real estate taxes and other occupancy expenses, are separate from rent expense within the lease and are not included in the measurement of the lease liability because these charges are variable. The discount rate used to determine the present value of the lease payments is the Company's estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as the interest rate implicit in the lease cannot generally be determined. The Company uses the portfolio approach in applying the discount rate based on the original lease term. The weighted average remaining lease term was 6.44 and 6.87 years and the weighted average discount rate was 4.11 % 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. 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 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. The first step in the impairment test under ASC 360 is to determine whether the long-lived assets are recoverable, which is determined by comparing the net carrying value of the salon asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset group. Estimating cash flows for purposes of the recoverability test is subjective and requires significant judgment. Estimated future cash flows used for the purposes of the recoverability test were based upon historical cash flows for the salons, adjusted for expected changes in future market conditions related to the COVID-19 pandemic, and other factors. The period of time used to determine the estimates of the future cash flows for the recoverability test was based on the remaining useful life of the primary asset of the group, which was the ROU asset in all cases. Step two of the long-lived asset impairment test requires that the fair value of the asset group be estimated when determining the amount of any impairment loss. For the salon asset groups that failed the recoverability test, an impairment loss was measured as the amount by which the carrying amount of the asset group exceeds its fair value. The Company applied the fair value guidance within ASC 820-10 to determine the fair value of the asset group from the perspective of a market-participant considering, among other things, appropriate discount rates, multiple valuation techniques, the most advantageous market, and assumptions about the highest and best use of the asset group. To determine the fair value of the salon asset groups, the Company utilized market-participant assumptions rather than the Company's own assumptions about how it intends to use the asset group. The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include; the market rent of comparable properties based on recently negotiated leases as applicable, the asset group's projected sales for properties with no recently negotiated leases, and a discount rate. The fair value of the salon long-lived asset group is estimated using market participant methods based on the best information available. The significant judgments and assumptions utilized to determine the fair value of the salon asset groups include; the market rent of comparable properties based on recently negotiated leases as applicable, the asset group's projected sales for fiscal years 2021 through 2023 for properties with no recently negotiated leases, and a discount rate. The Company engaged a third-party valuation specialist to assist with the research related to inputs used in their determination of the fair value of the ROU asset which included providing information related to significant inputs and assumptions utilized in the measurement of the impairment loss. 79 Table of Contents 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. 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. 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 2022 $ 127,656 $ 8,997 $ 3,566 $ 140,219 $ ( 127,656 ) $ 12,563 2023 112,604 7,268 3,550 123,422 ( 112,604 ) 10,818 2024 98,764 4,738 3,616 107,118 ( 98,764 ) 8,354 2025 83,259 1,881 3,683 88,823 ( 83,259 ) 5,564 2026 70,393 938 3,681 75,012 ( 70,393 ) 4,619 Thereafter 168,279 780 23,657 192,716 ( 168,279 ) 24,437 Total future obligations $ 660,955 $ 24,602 $ 41,753 $ 727,310 $ ( 660,955 ) $ 66,355 Less amounts representing interest 81,713 448 9,812 91,973 Present value of lease liabilities $ 579,242 $ 24,154 $ 31,941 $ 635,337 Less current lease liabilities 105,946 8,430 2,095 116,471 Long-term lease liabilities $ 473,296 $ 15,724 $ 29,846 $ 518,866 80 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. FAIR VALUE MEASUREMENTS Fair value measurements are categorized into one of three levels based on the lowest level of significant input used: Level 1 (unadjusted quoted prices in active markets); Level 2 (observable market inputs available at the measurement date, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data). Assets and Liabilities Measured at Fair Value on a Recurring Basis As of June 30, 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. 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 We measure certain assets, including the Company's equity method investments, tangible fixed and other assets and goodwill, at fair value on a nonrecurring basis when they are deemed to be other than temporarily impaired. The fair values of these assets are determined, when applicable, based on valuation techniques using the best information available, and may include quoted market prices, market comparables and discounted cash flow projections. The following impairment charges were based on fair values using Level 3 inputs: Fiscal Year 2021 2020 2019 (Dollars in thousands) Goodwill impairment $ — $ 40,164 $ — Long-lived asset impairment (1) 9,494 22,560 — Salon asset impairment (1) 3,529 3,851 4,587 _______________________________________________________________________________ (1) See Note 1 to the Consolidated Financial Statements. 81 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 8. FINANCING ARRANGEMENTS The Company's long-term debt consists of the following: Revolving Credit Facility June 30, Maturity Date 2021 2020 2021 2020 (Fiscal year) (Interest rate %) (Dollars in thousands) Revolving credit facility 2023 5.00 % 5.50 % $ 186,911 $ 177,500 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'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. 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 financing liabilities consists of the following: Maturity Date Interest Rate June 30, 2021 June 30, 2020 (Fiscal year) (Dollars in thousands) 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. 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). 82 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 9. COMMITMENTS AND CONTINGENCIES Contingencies: The Company is self-insured for most workers' compensation, employment practice liability and general liability. Workers' compensation and general liability losses are subject to per occurrence and aggregate annual liability limitations. The Company is insured for losses in excess of these limitations. The Company is also self-insured for health care claims for eligible participating employees subject to certain deductibles and limitations. The Company determines its liability for claims incurred but not reported on an actuarial basis. Litigation and Settlements: The Company is a defendant in various lawsuits and claims arising out of the normal course of business. Like certain other large retail employers, the Company has been faced with allegations of purported class-wide consumer and wage and hour violations. Litigation is inherently unpredictable, and the outcome of these matters cannot presently be determined. Although the actions are being vigorously defended, the Company could in the future, incur judgments or enter into settlements of claims that could have a material adverse effect on its results of operations in any particular period. 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. 83 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. INCOME TAXES The components of loss from continuing operations before income taxes are as follows: Fiscal Years 2021 2020 2019 (Dollars in thousands) Loss before income taxes U.S. $ ( 153,962 ) $ ( 165,260 ) $ ( 17,513 ) International 35,203 ( 11,553 ) ( 4,754 ) $ ( 118,759 ) $ ( 176,813 ) $ ( 22,267 ) The benefit for income taxes consists of: Fiscal Years 2021 2020 2019 (Dollars in thousands) Current: U.S. $ ( 620 ) $ ( 925 ) $ ( 519 ) International ( 1,421 ) 238 1,069 Deferred: U.S. ( 3,701 ) ( 3,353 ) ( 2,303 ) International 314 ( 579 ) ( 392 ) $ ( 5,428 ) $ ( 4,619 ) $ ( 2,145 ) The benefit for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory rate to loss from continuing operations before income taxes, as a result of the following: Fiscal Years 2021 2020 2019 U.S. statutory rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal income tax benefit 7.6 4.0 0.5 Valuation allowance (1) ( 58.3 ) ( 29.4 ) ( 14.5 ) Foreign income taxes at other than U.S. rates 8.5 ( 0.6 ) 0.9 Work opportunity tax credits 0.2 0.4 7.2 Uncertain tax positions 0.2 ( 6.2 ) 1.0 Stock-based compensation ( 0.6 ) 0.1 2.2 Capital loss — 15.0 — Loss on investment in Luxembourg 26.8 — — Other, net (2) ( 0.8 ) ( 1.7 ) ( 8.7 ) 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. 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. 84 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The components of the net deferred tax assets and liabilities are as follows: June 30, 2021 2020 (Dollars in thousands) Deferred tax assets: Payroll and payroll related costs $ 8,523 $ 9,903 Net operating loss carryforwards 145,823 64,402 Tax credit carryforwards 37,433 37,072 Capital loss carryforwards 14,179 14,978 Deferred franchise fees 10,153 9,342 Operating lease liabilities 154,255 202,940 Financing lease liabilities — 7,157 Other 12,608 8,214 Subtotal 382,974 354,008 Valuation allowance ( 192,522 ) ( 122,447 ) Total deferred tax assets $ 190,452 $ 231,561 Deferred tax liabilities: Goodwill and intangibles $ ( 43,375 ) $ ( 40,904 ) Operating lease assets ( 150,573 ) ( 197,304 ) Other ( 7,154 ) ( 7,269 ) Total deferred tax liabilities ( 201,102 ) ( 245,477 ) Net deferred tax liability $ ( 10,650 ) $ ( 13,916 ) 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. government enacted the Coronavirus Aid, Relief and Economic Security Act (CARES Act) in response to the COVID-19 pandemic. The CARES Act included several significant business tax provisions that, among other items, eliminated the taxable income limit and granted business a five-year carryback for certain net operating losses (NOLs), accelerated refunds of previously generated corporate alternative minimum tax (AMT) credits, temporarily loosened the business interest limitation under section 163(j) and corrected certain provisions under the Tax Cuts and Jobs Act (TCJA). • In connection with the CARES Act, NOLs resulting from accounting periods which straddled December 31, 2017 are now considered definite-lived NOLs. Therefore, the Company established a U.S. valuation allowance against the NOLs generated during its fiscal year 2018 and recorded a net tax expense of $ 14.7 million in continuing operations. • The Company determined that it no longer had sufficient U.S. indefinite-lived taxable temporary differences to support realization of its U.S. indefinite-lived NOLs and its existing U.S. deferred tax assets that upon reversal are expected to generate indefinite-lived NOLs. As a result, the Company recorded an additional $ 17.0 million valuation allowance on its U.S. federal indefinite-lived deferred tax assets. • The Company further recognized a capital loss and established a corresponding valuation allowance of $ 14.9 million on investment outside basis previously impaired for financial accounting purposes. 85 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) At June 30, 2021, the Company has tax-effected federal, state, Canada, and U.K. net operating loss carryforwards of approximately $ 112.3 , $ 26.9 , $ 6.1 and $ 0.5 million, respectively. The Company's federal loss carryforward consists of $ 27.3 million that will expire from fiscal years 2034 to 2038 and $ 85.0 million that has no expiration. The state loss carryforwards consist of $ 23.5 million that will expire from fiscal years 2022 to 2041 and $ 3.4 million that has no expiration. The Canada loss carryforward will expire from fiscal years 2036 to 2041. The U.K. loss carryforward has no expiration. 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. The Company's capital loss carryforward of $ 14.2 million will expire in fiscal year 2025. We consider the earnings of certain non-U.S. 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 $ 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. The Company files tax returns and pays tax primarily in the U.S., Canada, the U.K. and Luxembourg as well as states, cities, and provinces within these jurisdictions. The Company is no longer subject to 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. A rollforward of the unrecognized tax benefits is as follows: Fiscal Years 2021 2020 2019 (Dollars in thousands) Balance at beginning of period $ 14,045 $ 2,763 $ 3,027 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 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 ) Balance at end of period $ 13,858 $ 14,045 $ 2,763 If the Company were to prevail on all unrecognized tax benefits recorded, a net benefit of approximately $ 0.9 million would be recorded in the effective tax rate. Interest and penalties associated with unrecognized tax benefits are recorded within income tax expense. During each of the fiscal years 2021, 2020 and 2019, the Company recorded interest and penalties of approximately $ 0.1 million as additions to the accrual, net of the respective reversal of previously accrued interest and penalties. As of June 30, 2021, the Company had accrued interest and penalties related to unrecognized tax benefits of $ 0.9 million. This amount is not included in the gross unrecognized tax benefits noted above. It is reasonably possible the amount of the unrecognized tax benefit with respect to certain of our unrecognized tax positions will increase or decrease during the next fiscal year. However, an estimate of the amount or range of the change cannot be made at this time. 86 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 11. BENEFIT PLANS Regis Retirement Savings Plan: The Company maintains a defined contribution 401(k) plan, the Regis Retirement Savings Plan (RRSP). The RRSP is a defined contribution profit sharing plan with a 401(k) feature that is intended to qualify under Section 401(a) of the Internal Revenue Code (the Code) and is subject to the Employee Retirement Income Security Act of 1974 (ERISA). The 401(k) portion of the RRSP is a cash or deferred arrangement intended to qualify under section 401(k) of the Code and under which eligible employees may elect to contribute a percentage of their eligible compensation. Employees who are 18 years of age or older and who were not highly compensated employees as defined by the Code during the preceding RRSP year are eligible to participate in the RRSP commencing with the first day of the month following their completion of one month of service. The discretionary employer contribution profit sharing portion of the RRSP is a noncontributory defined contribution component covering full-time and part-time employees of the Company who have at least one year of eligible service, defined as 1,000 hours of service during the RRSP year, are employed by the Company on the last day of the RRSP year and are 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 with participants becoming fully vested after six full years of service. Certain participants within the Executive Plan also receive a matching contribution from the Company. Regis Individual Secured Retirement Plan (RiSRP): The Company maintains a Regis Individual Secured Retirement Plan (RiSRP), pursuant to which eligible employees may use post-tax dollars to purchase life insurance benefits. Salon Support employees at the director level and above qualify. The Company may make discretionary contributions on behalf of participants within the RiSRP, which may be calculated as a matching contribution. The participant is the owner of the life insurance policy under the RiSRP. Stock Purchase Plan: The Company has an employee stock purchase plan (ESPP) available to qualifying employees. Under the terms of the ESPP, eligible employees may purchase the Company's common stock through payroll deductions. The Company contributes an amount equal to 15.0 % of the purchase price of the stock to be purchased on the open market and pays all expenses of the ESPP and its administration, not to exceed an aggregate contribution of $ 11.8 million. As of June 30, 2021, the Company's cumulative contributions to the ESPP totaled $ 11.2 million. 87 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Deferred Compensation Contracts: The Company has unfunded deferred compensation contracts covering certain current and former key executives. Effective June 30, 2012, these contracts were amended and the benefits were frozen. Expense associated with the deferred compensation contracts included in general and administrative expenses on the Consolidated Statement of Operations totaled zero for fiscal years 2021, 2020, and 2019. The table below presents the projected benefit obligation of these deferred compensation contracts in the Consolidated Balance Sheet: June 30, 2021 2020 (Dollars in thousands) Current portion (included in accrued liabilities) $ 1,660 $ 302 Long-term portion (included in other non-current liabilities) 3,115 4,637 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 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. 88 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. EARNINGS PER SHARE The Company's basic earnings per share is calculated as net loss divided by weighted average common shares outstanding, excluding unvested outstanding stock options (SOs), restricted stock units (RSUs) and stock-settled performance units (PSUs). The Company's diluted earnings per share is calculated as net 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. The computation of weighted average shares outstanding, assuming dilution, excluded the following stock-based awards as they were not dilutive under the treasury stock method: Fiscal Year 2021 2020 2019 Equity-based compensation awards 2,322,006 315,312 118,246 89 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 13. STOCK-BASED COMPENSATION The Company grants long-term equity-based awards under the 2018 Long Term Incentive Plan (the 2018 Plan). The 2018 Plan, which was approved by the Company's shareholders at its 2018 Annual Meeting, provides for the granting of nonqualified stock options (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 SOs). 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 Plan generally include various acceleration terms, including upon retirement for participants aged sixty-two years or older or who are aged fifty-five or older and have 15 years of continuous service. The Company also has outstanding awards under the 2016 Long Term Incentive Plan (the 2016 Plan), although the 2016 Plan terminated in October 2018 and no additional awards have since been or will be made under the 2016 Plan. The 2016 Plan provided for the granting of SARs, RSAs, RSUs and PSUs, as well as cash-based performance grants, to employees and non-employee directors of the Company. The Company also has outstanding awards under the Amended and Restated 2004 Long Term Incentive Plan (the 2004 Plan), although the 2004 Plan terminated in October 2016 and no additional awards have since been or will be made under the 2004 Plan. The 2004 Plan provided for the granting of nonqualified stock options, SARs, RSAs, RSUs and PSUs, as well as cash-based performance grants, to employees and non-employee directors of the Company. Under the 2018 Plan, 2016 Plan and the 2004 Plan, stock-based awards are granted at an exercise price or initial value equal to the fair market value on the date of grant. There were no SARs granted in fiscal year 2021. Using the fair value of each grant on the date of grant, the weighted average fair values per stock-based compensation award granted during fiscal years 2021, 2020 and 2019 were as follows: Fiscal Years 2021 2020 2019 SOs (1) $ 2.89 $ — $ — RSUs (1) 7.15 16.48 21.12 PSUs (1) 5.83 12.09 14.05 _______________________________________________________________________________ (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. The significant assumptions used in determining the estimated fair value of the market-based awards granted during fiscal years 2021, 2020 and 2019 were as follows: Fiscal Years 2021 2020 2019 Risk-free interest rate 0.16 - 0.78 % 1.43 % 2.31 - 2.68 % Expected volatility 44.9 - 66.8 % 33.9 % 34.2 - 34.6 % 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 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. 90 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Stock-based compensation expense was as follows: Fiscal Years 2021 2020 2019 (Dollars in thousands) 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 Less: Income tax benefit (1) — ( 688 ) ( 1,891 ) Total stock-based compensation expense, net of tax $ 3,254 $ 2,587 $ 7,112 _______________________________________________________________________________ (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 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: Shares (in thousands) Weighted Average Exercise Price Weighted Average Remaining Contractual Life Aggregate Intrinsic Value (in thousands) SARs SOs Outstanding balance at June 30, 2020 1,285 — $ 11.79 Granted — 1,459 6.53 Forfeited/Expired ( 187 ) — 14.74 Exercised ( 57 ) — 10.84 Outstanding balance at June 30, 2021 1,041 1,459 $ 8.52 7.77 $ 2,100 Exercisable at June 30, 2021 1,041 — $ 11.32 5.67 $ ( 2,040 ) 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. 91 Table of Contents 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 one , three or five year period subsequent to the grant date. The CEO, who was appointed in October 2020, was granted 0.4 million "sign-on" RSUs that vest pro-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. Activity for all the Company's RSUs is as follows: Shares/Units (in thousands) Weighted Average Grant Date Fair Value Aggregate Intrinsic Value (in thousands) RSUs Outstanding balance at June 30, 2020 706 $ 17.72 Granted 896 7.15 Forfeited ( 231 ) 16.00 Vested ( 196 ) 16.12 Outstanding balance at June 30, 2021 1,175 $ 10.30 $ 10,998 Vested at June 30, 2021 262 $ 13.76 $ 2,452 Unvested awards, net of estimated forfeitures 800 $ 8.87 $ 7,488 As of June 30, 2021, there was $ 3.2 million of unrecognized expense related to RSUs that is expected to be recognized over a weighted average period of 1.80 years. 92 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Performance Share Units: PSUs are grants of restricted stock units which are earned based on the achievement of performance goals established by the Compensation Committee over a performance period. Activity for all of the Company's PSUs is as follows: Shares/Units (in thousands) Weighted Average Grant Date Fair Value Aggregate Intrinsic Value (in thousands) PSUs Outstanding balance at June 30, 2020 710 $ 13.90 Granted 62 5.83 Forfeited ( 602 ) 13.52 Vested ( 6 ) 25.11 Outstanding balance at June 30, 2021 164 $ 12.56 $ 1,535 Vested at June 30, 2021 — $ — $ — Unvested awards, net of estimated forfeitures 141 $ 10.81 $ 1,320 PSUs granted in fiscal year 2021 have a performance period of three years , after which they will vest to the extent earned. There was $ 0.2 million of total unrecognized compensation expense related to the unvested awards to be recognized over 2.2 years. PSUs granted in fiscal year 2020 have a performance period of three years , after which they will vest to the extent earned. There was $ 0.2 million of total unrecognized compensation expense related to the unvested awards to be recognized over 1.2 years. PSUs granted in fiscal year 2019 have a performance period of three years , ending June 30, 2021. As of June 30, 2021, these awards have not been earned and will not vest. 93 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 14. SHAREHOLDERS' EQUITY Authorized Shares and Designation of Preferred Class: The Company has 100.0 million shares of capital stock authorized, par value $ 0.05 , of which all outstanding shares, and shares available under the Stock Option Plans, have been designated as common. Share Repurchase Program: In May 2000, the Company's Board approved a stock repurchase program with no stated expiration date. Originally, the program authorized up to $ 50.0 million to be expended for the repurchase of the Company's stock. The Board elected to increase this maximum to $ 100.0 million in August 2003, to $ 200.0 million in May 2005, to $ 300.0 million in April 2007, to $ 350.0 million in April 2015, to $ 400.0 million in September 2015, to $ 450.0 million in January 2016, and to $ 650.0 million in August 2018. All repurchased shares become authorized but unissued shares of the Company. The timing and amounts of any repurchases depends on many factors, including the market price of the common stock and overall market conditions. As of June 30, 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. Accumulated Other Comprehensive Income: The components of accumulated other comprehensive income are as follows: June 30, 2021 2020 2019 (Dollars in thousands) Foreign currency translation $ 9,279 $ 7,391 $ 8,853 Unrealized gain on deferred compensation contracts 264 58 489 Accumulated other comprehensive income $ 9,543 $ 7,449 $ 9,342 94 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 15. SEGMENT INFORMATION Segment information is prepared on the same basis the chief operating decision maker reviews financial information for operational decision-making purposes. 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 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. SmartStyle, Supercuts, Cost Cutters and other regional trade names operating in the United States, Canada and Puerto Rico are generally within the Company-owned salons segment. Financial information concerning the Company's reportable operating segments is shown in the following table: For the Year Ended June 30, 2021 Franchise Company - owned Corporate (1) Consolidated (Dollars in thousands) Revenues: Service $ — $ 108,120 $ — $ 108,120 Product 56,699 34,845 — 91,544 Royalties and fees 88,057 — — 88,057 Franchise rental income 127,392 — — 127,392 272,148 142,965 — 415,113 Operating expenses: Cost of service — 79,144 — 79,144 Cost of product 46,449 32,718 — 79,167 Site operating expenses 22,121 29,342 — 51,463 General and administrative 31,364 8,934 65,135 105,433 Rent 2,395 35,832 2,703 40,930 Franchise rent expense 127,392 — — 127,392 Depreciation and amortization 1,049 14,730 6,934 22,713 Long-lived asset impairment 726 12,297 — 13,023 Total operating expenses 231,496 212,997 74,772 519,265 Operating income (loss) 40,652 ( 70,032 ) ( 74,772 ) ( 104,152 ) Other (expense) income: Interest expense — — ( 13,813 ) ( 13,813 ) Loss from sale of salon assets to franchisees, net — — ( 16,696 ) ( 16,696 ) Interest income and other, net — — 15,902 15,902 Income (loss) from continuing operations before income taxes $ 40,652 $ ( 70,032 ) $ ( 89,379 ) $ ( 118,759 ) 95 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the Year Ended June 30, 2020 Franchise Company-owned Corporate (1) Consolidated (Dollars in thousands) Revenues: Service $ — $ 331,538 $ — $ 331,538 Product 52,421 85,165 — 137,586 Royalties and fees 73,402 — — 73,402 Franchise rental income 127,203 — — 127,203 253,026 416,703 — 669,729 Operating expenses: Cost of service — 222,279 — 222,279 Cost of product 40,032 44,666 — 84,698 Site operating expenses 13,341 58,202 — 71,543 General and administrative 33,725 24,638 72,590 130,953 Rent 872 72,921 2,589 76,382 Franchise rent expense 127,203 — — 127,203 Depreciation and amortization 922 29,113 6,917 36,952 Long-lived asset impairment 1,712 20,848 — 22,560 TBG restructuring 2,333 — — 2,333 Goodwill impairment — 40,164 — 40,164 Total operating expenses 220,140 512,831 82,096 815,067 Operating income (loss) 32,886 ( 96,128 ) ( 82,096 ) ( 145,338 ) Other (expense) income: Interest expense — — ( 7,522 ) ( 7,522 ) Loss from sale of salon assets to franchisees, net — — ( 27,306 ) ( 27,306 ) Interest income and other, net — — 3,353 3,353 Income (loss) from continuing operations before income taxes $ 32,886 $ ( 96,128 ) $ ( 113,571 ) $ ( 176,813 ) 96 Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) For the Year Ended June 30, 2019 Franchise Company - owned Corporate (1) Consolidated (Dollars in thousands) Revenues: Service $ — $ 749,660 $ — $ 749,660 Product 59,905 165,713 — 225,618 Royalties and fees 93,761 — — 93,761 153,666 915,373 — 1,069,039 Operating expenses: Cost of service — 452,827 — 452,827 Cost of product 47,219 81,597 — 128,816 Site operating expenses 34,099 106,932 — 141,031 General and administrative 32,888 57,219 86,897 177,004 Rent 740 130,214 862 131,816 Depreciation and amortization 762 28,263 8,823 37,848 TBG restructuring 21,816 — — 21,816 Total operating expenses 137,524 857,052 96,582 1,091,158 Operating income (loss) 16,142 58,321 ( 96,582 ) ( 22,119 ) Other (expense) income: Interest expense — — ( 4,795 ) ( 4,795 ) Gain from sale of salon assets to franchisees, net — — 2,918 2,918 Interest income and other, net — — 1,729 1,729 Income (loss) from continuing operations before income taxes $ 16,142 $ 58,321 $ ( 96,730 ) $ ( 22,267 ) _______________________________________________________________________________ (1) Corporate consists primarily of unallocated general and administrative expenses, including expenses associated with salon support, depreciation and amortization related to our corporate headquarters and unallocated insurance, benefit and compensation programs, including stock-based compensation. The Company's chief operating decision maker does not evaluate reportable segments using assets and capital expenditure information. Total revenues and property and equipment, net associated with business operations in the U.S. and all other countries in aggregate were as follows: June 30, 2021 2020 2019 Total Revenues Property and Equipment, Net Total Revenues Property and Equipment, Net Total Revenues Property and Equipment, Net (Dollars in thousands) U.S. $ 383,965 $ 23,014 $ 613,652 $ 56,532 $ 972,994 $ 75,789 Other countries 31,148 99 56,077 644 96,045 2,301 Total $ 415,113 $ 23,113 $ 669,729 $ 57,176 $ 1,069,039 $ 78,090 97 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.