NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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1.
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BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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The unaudited interim Condensed Consolidated Financial Statements of Regis Corporation (the "Company") as of December 31, 2019 and for the three and six months ended December 31, 2019 and 2018, reflect, in the opinion of management, all adjustments necessary to fairly state the consolidated financial position of the Company as of December 31, 2019 and its consolidated results of operations, comprehensive (loss) income, changes in equity and cash flows for the interim periods. Adjustments consist only of normal recurring items, except for any discussed in the notes below. The results of operations and cash flows for any interim period are not necessarily indicative of results of operations and cash flows for the full year.
The accompanying interim unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all disclosures required by accounting principles generally accepted in the United States of America (GAAP). The unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2019 and other documents filed or furnished with the SEC during the current fiscal year.
Goodwill:
As of December 31, 2019 and June 30, 2019, the Franchise reporting unit had $228.1 and $227.9 million of goodwill and the Company-owned reporting unit had $65.0 and $117.8 million of goodwill, respectively. See Note 9 to the unaudited interim Condensed Consolidated Financial Statements. The Company assesses goodwill impairment on an annual basis, during the Company’s fourth fiscal quarter, and between annual assessments if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below its carrying amount. An interim impairment analysis was not required in the six months ended December 31, 2019.
The Company performs 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%. The fair value of the Company-owned reporting unit was determined based on a discounted cash flow analysis. The key assumptions used in determining fair value were the number and pace of salons sold to franchisees and proceeds from salon sales. Assumptions were based on historical financial performance and trends, historical salon sale proceeds and estimated future salon sale activities. The preparation of the fair value estimate includes uncertain factors and requires significant judgments and estimates which are subject to change.
There are a number of uncertain factors or events that exist which may result in a future triggering event and require an interim impairment analysis with respect to the carrying value of goodwill for the Company-owned reporting unit prior to the annual assessment. These internal and external factors include but are not limited to the following:
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•
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Changes in the company-owned salon strategy,
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•
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Salon closures or other restructuring,
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•
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Franchise expansion and sales opportunities,
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•
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Future market earnings multiples deterioration,
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•
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Financial performance falls short of projections due to internal operating factors,
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•
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Deterioration of industry trends,
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•
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Inability to reduce general and administrative expenses as company-owned salon count potentially decreases, and
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•
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Other factors causing cash flow to deteriorate.
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If the triggering event analysis indicates the fair value of the Company-owned reporting unit has potentially fallen below more than the 20% headroom, the Company may be required to perform an updated impairment assessment which may result in a non-cash impairment charge to reduce the carrying value of goodwill.
Assessing goodwill for impairment requires management to make assumptions and to apply judgment, including forecasting future sales and expenses, 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 there are significant changes to the Company's planned strategy for company-owned salons, the Company may be exposed to future impairment losses that could be material.
Non-Current Assets Held for Sale:
In March 2019, the Company announced that it had entered into a ten-year lease for a new corporate headquarters and would be selling the land and buildings currently used for its headquarters. The non-current assets held for sale represent the net book value of the land of $1.7 million and buildings of $3.6 million, as of June 30, 2019. The sale was completed in December 2019 for proceeds of $9.0 million, resulting in a net gain on sale of $4.0 million, which was recorded in Interest income and other, net on the Condensed Consolidated Statement of Operations.
Accounting Standards Recently Adopted by the Company:
Leases
The Company adopted ASU 2016-02, "Leases (Topic 842)” and all subsequent ASUs that modified Topic 842 as of July 1, 2019 using the modified retrospective method and elected the option to not restate comparative periods in the year of adoption. The Company also elected the package of practical expedients that do not require reassessment of whether existing contracts are or contain leases, lease classifications 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 the 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 Lease Liability reflects the present value of the Company's estimated future minimum lease payments over the lease term, which includes one option period, as options are reasonably assured of being exercised, are discounted using a collateralized incremental borrowing rate. The decrease in the Right of Use Asset and Lease Liability from July 1, 2019 to December 31, 2019 was due to lease modifications and salon closures.
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). Historically, these costs have been recorded on a net basis in the unaudited Condensed Consolidated Statements of Operations, but are now presented on a gross basis upon adoption of the new guidance. The adoption of the new guidance resulted in the recognition of franchise rental income and rent expense of $33.6 and $65.1 million during the three and six months ended December 31, 2019, respectively. See Note 10 for further information about our transition to Topic 842 and the newly required disclosures.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI), which provides the option to reclassify to retained earnings the tax effects resulting from the Tax Act related to items in AOCI. The Company adopted this guidance on July 1, 2019 and did not elect to reclassify the income tax effects from the Tax Act from AOCI to retained earnings as the impact was not material.
2. REVENUE RECOGNITION:
Revenue Recognition and Deferred Revenue:
Revenue recognized at point of sale
Company-owned salon revenues are recognized at the time when the services are provided. Product revenues for company-owned salons are recognized when the guest receives and pays for the merchandise. Revenues from purchases made with gift cards are also recorded when the guest takes possession of the merchandise or services are provided. Gift cards issued by the Company are recorded as a liability (deferred revenue) upon sale and recognized as revenue upon redemption by the customer. Gift card breakage, the amount of gift cards which will not be redeemed, is recognized proportional to redemptions using estimates based on historical redemption patterns. Product sales by the Company to franchisees are included within product revenues in the unaudited Condensed Consolidated Statement of Operations and recorded at the time product is delivered to the franchisee. Payment for franchisee product revenue is generally collected within 30 to 90 days of delivery.
Revenue recognized over time
Franchise revenues primarily include royalties, advertising fund cooperatives fees, franchise fees and other fees. Royalty and advertising fund revenues represent sales-based royalties that are recognized in the period in which the sales occur. Generally, royalty and advertising fund revenue is billed and collected monthly in arrears. Advertising fund revenues and expenditures, which must be spent on marketing and related activities per the franchise agreements, are recorded on a gross basis within the unaudited Condensed Consolidated Statement of Operations. This increases both the gross amount of reported franchise revenue and site operating expense and generally has no impact on operating income and net income. Franchise fees are billed and received upon the signing of the franchise agreement. Recognition of these fees is deferred until the salon opening and is then recognized over the term of the franchise agreement, typically ten years. Franchise rental income is a result of the Company signing leases on behalf of franchisees and entering into a sublease arrangement with the franchisee. The Company recognizes franchise rental income and expense when it is due to the landlord.
The following table disaggregates revenue by timing of revenue recognition and is reconciled to reportable segment revenues as follows:
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Three Months Ended December 31, 2019
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Three Months Ended December 31, 2018
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Franchise
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Company-owned
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Franchise
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Company-owned
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(Dollars in thousands)
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Revenue recognized at a point in time:
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Service
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$
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—
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$
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101,805
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$
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—
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$
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190,419
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Product
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16,864
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27,119
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17,818
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43,831
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Total revenue recognized at a point in time
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$
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16,864
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$
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128,924
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$
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17,818
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$
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234,250
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Revenue recognized over time:
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Royalty and other franchise fees
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$
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18,644
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$
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—
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$
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14,736
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$
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—
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Advertising fund fees
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10,703
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—
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7,867
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—
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Franchise rental income
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33,630
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—
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—
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—
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Total revenue recognized over time
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62,977
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—
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22,603
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—
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Total revenue
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$
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79,841
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$
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128,924
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$
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40,421
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$
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234,250
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Six Months Ended December 31, 2019
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Six Months Ended December 31, 2018
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Franchise
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Company-owned
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Franchise
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Company-owned
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(Dollars in thousands)
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Revenue recognized at a point in time:
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Service
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$
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—
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$
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243,746
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$
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—
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$
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398,267
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Product
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29,969
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59,670
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33,447
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85,793
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Total revenue recognized at a point in time
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$
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29,969
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$
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303,416
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$
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33,447
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$
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484,060
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Revenue recognized over time:
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Royalty and other franchise fees
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$
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36,235
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$
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—
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$
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29,156
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$
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—
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Advertising fund fees
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21,129
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—
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15,843
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—
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Franchise rental income
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65,054
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—
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—
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—
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Total revenue recognized over time
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122,418
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—
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44,999
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—
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Total revenue
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$
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152,387
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$
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303,416
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$
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78,446
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$
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484,060
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Information about receivables, broker fees and deferred revenue subject to the amended revenue recognition guidance is as follows:
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December 31,
2019
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June 30,
2019
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Balance Sheet Classification
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(Dollars in thousands)
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Receivables from contracts with customers, net
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$
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22,512
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$
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23,210
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Accounts receivable, net
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Broker fees
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$
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20,384
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$
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17,819
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Other assets
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Deferred revenue:
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Current
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Gift card liability
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$
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3,461
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$
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3,050
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Accrued expenses
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Deferred franchise fees unopened salons
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217
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193
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Accrued expenses
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Deferred franchise fees open salons
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5,042
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4,164
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Accrued expenses
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Total current deferred revenue
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$
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8,720
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$
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7,407
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Non-current
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Deferred franchise fees unopened salons
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$
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12,860
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$
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15,173
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Other non-current liabilities
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Deferred franchise fees open salons
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31,555
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24,194
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Other non-current liabilities
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Total non-current deferred revenue
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$
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44,415
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$
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39,367
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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), primarily related to receivables from franchisees. As of December 31, 2019 and June 30, 2019, the balance in the allowance for doubtful accounts was $1.9 and $2.0 million, respectively. Broker fees are the costs associated with using external brokers to identify new franchisees. These fees are paid upon the signing of the franchise agreement and recognized as General and Administrative expense over the term of the agreement.
The following table is a rollforward of the broker fee balance for the periods indicated (in thousands):
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Balance as of June, 30, 2019
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$
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17,819
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Additions
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3,938
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Amortization
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(1,341
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)
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Write-offs
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(32
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)
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Balance as of December, 31, 2019
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$
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20,384
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Deferred revenue includes the gift card liability and deferred franchise fees for unopened salons and open salons. Gift card revenue for the three months ended December 31, 2019 and 2018 was $0.7 and $1.1 million, respectively, and for the six months ended December 31, 2019 and 2018 was $1.5 and $2.2 million, respectively. Deferred franchise fees related to open salons are generally recognized on a straight-line basis over the term of the franchise agreement. Franchise fee revenue for the three months ended December 31, 2019 and 2018 was $1.3 and $0.8 million, respectively, and for the six months ended December 31, 2019 and 2018 was $2.4 and $1.7 million, respectively. Estimated revenue expected to be recognized in the future related to deferred franchise fees for open salons as of December 31, 2019 is as follows (in thousands):
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Remainder of 2020
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$
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2,364
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2021
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4,930
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2022
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4,810
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2023
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4,633
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2024
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4,398
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Thereafter
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15,462
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Total
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$
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36,597
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3.
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TBG RESTRUCTURING AND DISCONTINUED OPERATIONS:
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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), who operated these locations as franchise locations until June 2019. In June 2019, the Company entered into a settlement agreement with TBG regarding the North America salons, which, among other things, substituted the master franchise agreement for a license agreement. The Company classified the results of its mall-based business as discontinued operations in the Condensed Consolidated Statement of Operations. Included in discontinued operations in the fiscal years presented are adjustments to actuarial assumptions related to the discontinued operations and income tax benefits associated with the wind-down and transfer of legal entities in fiscal year 2019. Other than the items presented in the Consolidated Statement of Cash Flows, there were no other significant non-cash operating activities or non-cash investing activities related to discontinued operations for the six months ended December 31, 2019 and 2018.
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 not included on the Condensed Consolidated Statement of Operations. Also, the assets acquired and liabilities assumed were not material to the Condensed Consolidated Balance Sheet. Professional fees and other restructuring related charges of $0.7 and $2.2 million in the three and six months ended December 31, 2019, respectively,were recorded in the TBG restructuring line on the Condensed Consolidated Statement of Operations. As of December 31, 2019, prior to any mitigation efforts which may be available, the Company remains liable for up to approximately $30.0 million related to its mall-based salon lease commitments, an $11 million reduction from June 30, 2019.
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 (RSAs), restricted stock units (RSUs) and stock-settled performance units (PSUs). The Company’s diluted earnings per share is calculated as net loss divided by weighted average common shares and common share equivalents outstanding, which includes shares issued under the Company’s stock-based compensation plans. Stock-based awards with exercise prices greater than the average market price of the Company’s common stock are excluded from the computation of diluted earnings per share.
For the three and six months ended December 31, 2019, there were 1,322,308 and 1,338,634, respectively, and for the six months ended December 31, 2018 there were 903,107 common stock equivalents of dilutive common stock excluded in the diluted earnings per share calculations due to the net loss from continuing operations. For the three months ended December 31, 2018, there were 859,598 common stock equivalents of dilutive common stock included in the diluted earnings per share calculations due to the net income from continuing operations.
The computation of weighted average shares outstanding, assuming dilution, excluded 66,151 and 734,526 of stock-based awards during the three months ended December 31, 2019 and 2018, respectively, and 77,514 and 520,348 of stock-based awards during the six months ended December 31, 2019 and 2018, respectively, as they were not dilutive under the treasury stock method.
Stock-Based Employee Compensation:
During the three and six months ended December 31, 2019, the Company granted various equity awards including restricted stock units (RSUs) and performance-based restricted stock units (PSUs).
A summary of equity awards granted is as follows:
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For the Three Months Ended December 31, 2019
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For the Six Months Ended December 31, 2019
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Restricted stock units
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7,564
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193,640
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Performance-based restricted stock units
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22,694
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73,712
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The RSUs granted to employees during the three and six months ended December 31, 2019 vest in equal amounts over a three-year period subsequent to the grant date, cliff vest after a three-year period or cliff vest after a five-year period subsequent to the grant date.
The PSUs granted to employees have a three-year performance period ending June 30, 2022 linked to the Company's stock price reaching a specified volume weighted average closing price for a 50 day period that ends on June 30, 2022. The PSUs granted have a maximum vesting percentage of 200% based on the level of performance achieved for the respective award.
Total compensation cost for stock-based payment arrangements totaling $0.3 and $2.2 million for the three months ended December 31, 2019 and 2018, respectively, and $2.1 and $4.6 million for the six months ended December 31, 2019 and 2018, respectively, was recorded within general and administrative expense on the Condensed Consolidated Statement of Operations.
Share Repurchases:
During the six months ended December 31, 2019, the Company repurchased 1.5 million shares for $26.4 million under a previously approved stock repurchase program. At December 31, 2019, $54.6 million remains outstanding under the approved stock repurchase program.
A summary of income tax benefit (expense) and corresponding effective tax rates is as follows:
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For the Three Months Ended December 31,
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For the Six Months Ended December 31,
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2019
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2018
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2019
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2018
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(Dollars in thousands)
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Income tax benefit (expense)
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$
|
795
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$
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(454
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)
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$
|
3,651
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$
|
260
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Effective tax rate
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7.7
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%
|
|
52.1
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%
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13.4
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%
|
|
85.0
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%
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The recorded tax provisions and effective tax rates for the three and six months ended December 31, 2019 were different than normally expected primarily due to the impact of the deferred tax valuation allowance and global intangible low-taxed income ("GILTI"). The recorded tax provision and effective tax rate for the three and six months ended December 31, 2018 were different than normally expected primarily due to the impact of the deferred tax valuation allowance.
The Company is no longer subject to IRS examinations for years before 2013. Furthermore, with limited exceptions, the Company is no longer subject to state and international income tax examinations by tax authorities for years before 2012.
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7.
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COMMITMENTS AND CONTINGENCIES:
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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.
8. CASH, CASH EQUIVALENTS AND RESTRICTED CASH:
The table below reconciles the cash and cash equivalents balances and restricted cash balances, recorded in other current assets from the unaudited Condensed Consolidated Balance Sheet to the amount of cash, cash equivalents and restricted cash reported on the unaudited Condensed Consolidated Statement of Cash flows:
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December 31,
2019
|
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June 30,
2019
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(Dollars in thousands)
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Cash and cash equivalents
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$
|
49,783
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|
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$
|
70,141
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Restricted cash, included in Other current assets (1)
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22,138
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|
22,238
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Total cash, cash equivalents and restricted cash
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$
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71,921
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|
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$
|
92,379
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_______________________________________________________________________________
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(1)
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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.
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9. GOODWILL AND OTHER INTANGIBLES:
The table below contains details related to the Company's goodwill:
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Franchise
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Company-owned
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Consolidated
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(Dollars in thousands)
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Goodwill, net at June 30, 2019
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$
|
227,928
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|
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$
|
117,790
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|
|
$
|
345,718
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Translation rate adjustments
|
|
139
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|
|
(73
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)
|
|
66
|
|
Derecognition related to sale of salon assets to franchisees (1)
|
|
—
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|
|
(52,765
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)
|
|
(52,765
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)
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Goodwill, net at December 31, 2019
|
|
$
|
228,067
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|
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$
|
64,952
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|
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$
|
293,019
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_______________________________________________________________________________
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(1)
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Goodwill is derecognized for salons sold to franchisees with positive cash flows. The amount of goodwill derecognized is determined by a fraction (the numerator of which is the trailing-twelve months EBITDA of the salon being sold and the denominator of which is the estimated annualized EBITDA of the Company-owned reporting unit) that is applied to the total goodwill balance of the Company-owned reporting unit.
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The table below presents other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
June 30, 2019
|
|
|
Cost (1)
|
|
Accumulated
Amortization (1)
|
|
Net
|
|
Cost (1)
|
|
Accumulated
Amortization (1)
|
|
Net
|
|
|
(Dollars in thousands)
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand assets and trade names
|
|
$
|
6,938
|
|
|
$
|
(3,786
|
)
|
|
$
|
3,152
|
|
|
$
|
6,909
|
|
|
$
|
(3,659
|
)
|
|
$
|
3,250
|
|
Franchise agreements
|
|
9,817
|
|
|
(8,250
|
)
|
|
1,567
|
|
|
9,783
|
|
|
(8,057
|
)
|
|
1,726
|
|
Lease intangibles
|
|
13,495
|
|
|
(10,406
|
)
|
|
3,089
|
|
|
13,490
|
|
|
(10,065
|
)
|
|
3,425
|
|
Other
|
|
884
|
|
|
(533
|
)
|
|
351
|
|
|
883
|
|
|
(523
|
)
|
|
360
|
|
|
|
$
|
31,134
|
|
|
$
|
(22,975
|
)
|
|
$
|
8,159
|
|
|
$
|
31,065
|
|
|
$
|
(22,304
|
)
|
|
$
|
8,761
|
|
_______________________________________________________________________________
|
|
(1)
|
The change in the gross carrying value and accumulated amortization of other intangible assets is impacted by foreign currency.
|
10. RIGHT OF USE ASSET AND LEASE LIABILITIES
At contract inception, the Company determines whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. If the contract provides the Company the right to substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the identified asset, the Company considers it to be, or contain, a lease. The Company leases its company-owned salons and some of its corporate facilities under operating leases. The original terms of the salon leases range from 1 to 20 years with many leases renewable for additional 5 to 10 year terms at the option of the Company. The Company also has variable lease payments that are based on sales levels. For most leases, the Company is required to pay real estate taxes and other occupancy expenses. Total rent expense includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended December 31,
|
|
For the Six Months Ended December 31,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
(Dollars in thousands)
|
Minimum rent
|
$
|
16,937
|
|
|
$
|
28,859
|
|
|
$
|
36,498
|
|
|
58,774
|
|
Percentage rent based on sales
|
550
|
|
|
1,052
|
|
|
1,847
|
|
|
2,103
|
|
Real estate taxes and other expenses
|
3,008
|
|
|
4,731
|
|
|
6,414
|
|
|
9,743
|
|
|
$
|
20,495
|
|
|
$
|
34,642
|
|
|
$
|
44,759
|
|
|
$
|
70,620
|
|
The Company also leases the premises in which the majority of its franchisees operate and has entered into corresponding sublease arrangements with franchisees. These leases, generally with terms of approximately 5 years, are expected to be renewed on expiration. All additional lease costs are passed through to the franchisees. Upon adopting Topic 842, the Company now records the rental payments due from franchisees as franchise rental income and the corresponding amounts owed to landlords as franchise rent expense on the Condensed Consolidated Statement of Operations. For the three and six months ended December 31, 2019, franchise rental income was $33.6 and $65.1 million, respectively, and franchise rent expense was $33.6 and $65.1 million, respectively.
For company-owned and franchise salon operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date. The Right of Use (ROU) asset is initially and subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, less any accrued lease payments and unamortized lease incentives received, if any. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Generally, the non-lease components such as real estate taxes and other occupancy expenses are separate from rent expense within the lease and are not allocated to the lease liability.
The discount rate used to determine the present value of the lease payments is the Company's estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as the interest rate implicit in the lease cannot generally be determined. The Company uses the portfolio approach in applying the discount rate based on original lease term. The weighted average remaining lease term was 6.82 years and the weighted-average discount rate was 3.95 percent for all salon operating leases as of December 31, 2019.
As of December 31, 2019, future operating lease commitments to be paid and received by the Company were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
Leases for Franchise Salons
|
|
Leases for Company-owned Salons
|
|
Corporate Leases
|
|
Total Operating Lease Payments
|
|
Sublease Income To Be Received From Franchisees
|
|
Net Rent Commitments
|
Remainder of 2020
|
$
|
59,771
|
|
|
$
|
36,809
|
|
|
$
|
335
|
|
|
$
|
96,915
|
|
|
$
|
(59,771
|
)
|
|
$
|
37,144
|
|
2021
|
113,224
|
|
|
64,907
|
|
|
1,781
|
|
|
179,912
|
|
|
(113,224
|
)
|
|
66,688
|
|
2022
|
103,599
|
|
55,214
|
|
|
1,410
|
|
|
160,223
|
|
|
(103,599
|
)
|
|
56,624
|
|
2023
|
93,725
|
|
|
48,589
|
|
|
1,447
|
|
|
143,761
|
|
|
(93,725
|
)
|
|
50,036
|
|
2024
|
84,384
|
|
|
43,417
|
|
|
1,484
|
|
|
129,285
|
|
|
(84,384
|
)
|
|
44,901
|
|
Thereafter
|
224,482
|
|
|
111,327
|
|
|
9,339
|
|
|
345,148
|
|
|
(224,482
|
)
|
|
120,666
|
|
Total future obligations
|
$
|
679,185
|
|
|
$
|
360,263
|
|
|
$
|
15,796
|
|
|
$
|
1,055,244
|
|
|
$
|
(679,185
|
)
|
|
$
|
376,059
|
|
Less amounts representing interest
|
84,680
|
|
|
43,723
|
|
|
3,063
|
|
|
131,466
|
|
|
|
|
|
Present value of lease liabilities
|
$
|
594,505
|
|
|
316,540
|
|
|
12,733
|
|
|
923,778
|
|
|
|
|
|
Less current lease liabilities
|
96,249
|
|
|
59,218
|
|
|
687
|
|
|
156,154
|
|
|
|
|
|
Long-term lease liabilities
|
$
|
498,256
|
|
|
$
|
257,322
|
|
|
$
|
12,046
|
|
|
$
|
767,624
|
|
|
|
|
|
|
|
11.
|
FINANCING ARRANGEMENTS:
|
The Company’s long-term debt consists of the following:
Revolving Credit Facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity Date
|
|
Interest Rate
|
|
December 31,
2019
|
|
June 30,
2019
|
|
|
(Fiscal Year)
|
|
|
|
(Dollars in thousands)
|
Revolving credit facility
|
|
2023
|
|
3.65%
|
|
$
|
60,000
|
|
|
$
|
90,000
|
|
As of December 31, 2019 and June 30, 2019, the Company has $60.0 and $90.0 million, respectively, of outstanding borrowings under a $295.0 million revolving credit facility. At December 31, 2019 and June 30, 2019, the Company has outstanding standby letters of credit under the revolving credit facility of $21.5 million, primarily related to the Company's self-insurance program. The unused available credit under the facility was $213.5 and $183.5 million, as of December 31, 2019 and June 30, 2019, respectively. Amounts outstanding under the revolving credit facility are due at maturity in March 2023.
Sale and Leaseback Transaction
The Company’s long-term financing liabilities consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity Date
|
|
Interest Rate
|
|
December 31,
2019
|
|
June 30,
2019
|
|
|
(Fiscal Year)
|
|
|
|
(Dollars in thousands)
|
Financial liability - Salt Lake City Distribution Center
|
|
2034
|
|
3.30%
|
|
$
|
17,055
|
|
|
$
|
17,354
|
|
Financial liability - Chattanooga Distribution Center
|
|
2034
|
|
3.70%
|
|
11,430
|
|
|
11,556
|
|
Long- term financing liability
|
|
|
|
|
|
$
|
28,485
|
|
|
$
|
28,910
|
|
In fiscal year 2019, the Company sold its Salt Lake City and Chattanooga Distribution Centers to an unrelated party. The Company is leasing the properties back for 15 years with the option to renew. As the Company plans to lease the property for more than 75% of its economic life, the sales proceeds received from the buyer-lessor are recognized as a financial liability. This financial liability is reduced based on the rental payments made under the lease that are allocated between principal and interest. As of December 31, 2019, the current portion of the Company’s lease liability was $0.9 million which was recorded in accrued expenses on the unaudited Condensed Consolidated Balance Sheet. The weighted average remaining lease term was 14.1 years and the weighted-average discount rate was 3.46% for financing leases as of December 31, 2019.
As of December 31, 2019, future lease payments due are as follows:
|
|
|
|
|
|
|
|
|
|
Fiscal year
|
|
Salt Lake City Distribution Center
|
|
Chattanooga Distribution Center
|
|
|
(Dollars in thousands)
|
Remainder of 2020
|
|
$
|
574
|
|
|
$
|
403
|
|
2021
|
|
1,157
|
|
|
817
|
|
2022
|
|
1,171
|
|
|
829
|
|
2023
|
|
1,186
|
|
|
842
|
|
2024
|
|
1,200
|
|
|
854
|
|
Thereafter
|
|
11,899
|
|
|
9,282
|
|
Total
|
|
$
|
17,187
|
|
|
$
|
13,027
|
|
The financing liability does not include interest. Future lease payments above are due per the lease agreement and include embedded interest. Therefore, the total payments do not equal the financing liability. Total interest expense for the financing lease was $0.3 and $0.5 million for the three and six months ended December 31, 2019.
The Company was in compliance with all covenants and requirements of its financing arrangements as of and during the three and six months ended December 31, 2019.
12. FAIR VALUE MEASUREMENTS:
Fair value measurements are categorized into one of three levels based on the lowest level of significant input used: Level 1 (unadjusted quoted prices in active markets); Level 2 (observable market inputs available at the measurement date, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data).
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of December 31, 2019 and June 30, 2019, the estimated fair value of the Company’s cash, cash equivalents, restricted cash, receivables, accounts payable, debt and long-term financial liabilities approximated their carrying values. The estimated fair values of the Company's debt and long-term financial liability are based on Level 2 inputs.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We measure certain assets, including the Company’s equity method investments, tangible fixed and other assets and goodwill, at fair value on a nonrecurring basis when they are deemed to be other than temporarily impaired. The fair values of these assets are determined, when applicable, based on valuation techniques using the best information available, and may include quoted market prices, market comparables and discounted cash flow projections.
The following impairments were based on fair values using Level 3 inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended December 31,
|
|
For the Six Months Ended December 31,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
(Dollars in thousands)
|
Long-lived assets
|
|
$
|
1,126
|
|
|
$
|
472
|
|
|
$
|
2,643
|
|
|
$
|
2,303
|
|
13. SEGMENT INFORMATION:
Segment information is prepared on the same basis that the chief operating decision maker reviews financial information for operational decision-making purposes.
The Company’s reportable operating segments consisted of the following salons:
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
June 30,
2019
|
FRANCHISE SALONS:
|
|
|
|
|
SmartStyle/Cost Cutters in Walmart Stores
|
|
969
|
|
|
615
|
|
Supercuts
|
|
2,493
|
|
|
2,340
|
|
Signature Style
|
|
1,156
|
|
|
766
|
|
Total North American salons
|
|
4,618
|
|
|
3,721
|
|
Total International salons (1)
|
|
172
|
|
|
230
|
|
Total Franchise salons
|
|
4,790
|
|
|
3,951
|
|
as a percent of total Company-owned and Franchise salons
|
|
67.8
|
%
|
|
56.0
|
%
|
|
|
|
|
|
COMPANY-OWNED SALONS:
|
|
|
|
|
SmartStyle/Cost Cutters in Walmart Stores
|
|
1,159
|
|
|
1,550
|
|
Supercuts
|
|
262
|
|
|
403
|
|
Signature Style
|
|
649
|
|
|
1,155
|
|
Mall-based (2)
|
|
207
|
|
|
—
|
|
Total Company-owned salons
|
|
2,277
|
|
|
3,108
|
|
as a percent of total Company-owned and Franchise salons
|
|
32.2
|
%
|
|
44.0
|
%
|
|
|
|
|
|
OWNERSHIP INTEREST LOCATIONS:
|
|
|
|
|
|
|
|
|
|
Equity ownership interest locations
|
|
85
|
|
|
86
|
|
|
|
|
|
|
Grand Total, System-wide
|
|
7,152
|
|
|
7,145
|
|
____________________________________
|
|
(1)
|
Canadian and Puerto Rican salons are included in the North American salon totals.
|
|
|
(2)
|
The mall-based salons were acquired from TBG on December 31, 2019 resulting in no impact to the Statement of Operations for the three and six months ended December 31, 2019.
|
As of December 31, 2019, the Company-owned operating segment is comprised primarily of SmartStyle®, Supercuts®, Cost Cutters®, and other regional trade names and the Franchise operating segment is comprised primarily of Supercuts®, SmartStyle®, Cost Cutters®, First Choice Haircutters®, Roosters® and Magicuts® concepts.
Financial information concerning the Company's reportable operating segments is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended December 31, 2019
|
|
|
Franchise
|
|
Company-owned
|
|
Corporate
|
|
Consolidated
|
|
|
(Dollars in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
—
|
|
|
$
|
101,805
|
|
|
$
|
—
|
|
|
$
|
101,805
|
|
Product
|
|
16,864
|
|
|
27,119
|
|
|
—
|
|
|
43,983
|
|
Royalties and fees
|
|
29,347
|
|
|
—
|
|
|
—
|
|
|
29,347
|
|
Franchise rental income
|
|
33,630
|
|
|
—
|
|
|
—
|
|
|
33,630
|
|
Total revenue
|
|
79,841
|
|
|
128,924
|
|
|
—
|
|
|
208,765
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Cost of service
|
|
—
|
|
|
67,358
|
|
|
—
|
|
|
67,358
|
|
Cost of product
|
|
13,072
|
|
|
14,186
|
|
|
—
|
|
|
27,258
|
|
Site operating expenses
|
|
10,704
|
|
|
15,626
|
|
|
—
|
|
|
26,330
|
|
General and administrative
|
|
8,976
|
|
|
7,547
|
|
|
16,168
|
|
|
32,691
|
|
Rent
|
|
401
|
|
|
19,374
|
|
|
720
|
|
|
20,495
|
|
Franchise rent expense
|
|
33,630
|
|
|
—
|
|
|
—
|
|
|
33,630
|
|
Depreciation and amortization
|
|
210
|
|
|
5,938
|
|
|
1,599
|
|
|
7,747
|
|
TBG restructuring
|
|
722
|
|
|
—
|
|
|
—
|
|
|
722
|
|
Total operating expenses
|
|
67,715
|
|
|
130,029
|
|
|
18,487
|
|
|
216,231
|
|
Operating income (loss)
|
|
12,126
|
|
|
(1,105
|
)
|
|
(18,487
|
)
|
|
(7,466
|
)
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
(1,464
|
)
|
|
(1,464
|
)
|
Loss from sale of salon assets to franchisees, net
|
|
—
|
|
|
—
|
|
|
(5,692
|
)
|
|
(5,692
|
)
|
Interest income and other, net
|
|
—
|
|
|
—
|
|
|
4,346
|
|
|
4,346
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
12,126
|
|
|
$
|
(1,105
|
)
|
|
$
|
(21,297
|
)
|
|
$
|
(10,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended December 31, 2018
|
|
|
Franchise
|
|
Company-owned
|
|
Corporate
|
|
Consolidated
|
|
|
(Dollars in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
—
|
|
|
$
|
190,419
|
|
|
$
|
—
|
|
|
$
|
190,419
|
|
Product
|
|
17,818
|
|
|
43,831
|
|
|
—
|
|
|
61,649
|
|
Royalties and fees
|
|
22,603
|
|
|
—
|
|
|
—
|
|
|
22,603
|
|
Total revenue
|
|
40,421
|
|
|
234,250
|
|
|
—
|
|
|
274,671
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Cost of service
|
|
—
|
|
|
114,931
|
|
|
—
|
|
|
114,931
|
|
Cost of product
|
|
14,449
|
|
|
21,901
|
|
|
—
|
|
|
36,350
|
|
Site operating expenses
|
|
7,867
|
|
|
27,696
|
|
|
—
|
|
|
35,563
|
|
General and administrative
|
|
9,466
|
|
|
14,198
|
|
|
22,172
|
|
|
45,836
|
|
Rent
|
|
184
|
|
|
34,258
|
|
|
200
|
|
|
34,642
|
|
Depreciation and amortization
|
|
215
|
|
|
6,728
|
|
|
1,957
|
|
|
8,900
|
|
Total operating expenses
|
|
32,181
|
|
|
219,712
|
|
|
24,329
|
|
|
276,222
|
|
Operating income (loss)
|
|
8,240
|
|
|
14,538
|
|
|
(24,329
|
)
|
|
(1,551
|
)
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
(1,072
|
)
|
|
(1,072
|
)
|
Gain from sale of salon assets to franchisees, net
|
|
—
|
|
|
—
|
|
|
2,865
|
|
|
2,865
|
|
Interest income and other, net
|
|
—
|
|
|
—
|
|
|
629
|
|
|
629
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
8,240
|
|
|
$
|
14,538
|
|
|
$
|
(21,907
|
)
|
|
$
|
871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended December 31, 2019
|
|
|
Franchise
|
|
Company-owned
|
|
Corporate
|
|
Consolidated
|
|
|
(Dollars in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
—
|
|
|
$
|
243,746
|
|
|
$
|
—
|
|
|
$
|
243,746
|
|
Product
|
|
29,969
|
|
|
59,670
|
|
|
—
|
|
|
89,639
|
|
Royalties and fees
|
|
57,364
|
|
|
—
|
|
|
—
|
|
|
57,364
|
|
Franchise rental income
|
|
65,054
|
|
|
—
|
|
|
—
|
|
|
65,054
|
|
Total revenue
|
|
152,387
|
|
|
303,416
|
|
|
—
|
|
|
455,803
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Cost of service
|
|
—
|
|
|
157,840
|
|
|
—
|
|
|
157,840
|
|
Cost of product
|
|
23,352
|
|
|
30,233
|
|
|
—
|
|
|
53,585
|
|
Site operating expenses
|
|
21,130
|
|
|
38,142
|
|
|
—
|
|
|
59,272
|
|
General and administrative
|
|
17,333
|
|
|
17,697
|
|
|
38,286
|
|
|
73,316
|
|
Rent
|
|
591
|
|
|
43,163
|
|
|
1,005
|
|
|
44,759
|
|
Franchise rent expense
|
|
65,054
|
|
|
—
|
|
|
—
|
|
|
65,054
|
|
Depreciation and amortization
|
|
370
|
|
|
12,045
|
|
|
4,712
|
|
|
17,127
|
|
TBG restructuring
|
|
2,222
|
|
|
—
|
|
|
—
|
|
|
2,222
|
|
Total operating expenses
|
|
130,052
|
|
|
299,120
|
|
|
44,003
|
|
|
473,175
|
|
Operating income (loss)
|
|
22,335
|
|
|
4,296
|
|
|
(44,003
|
)
|
|
(17,372
|
)
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
(2,903
|
)
|
|
(2,903
|
)
|
Loss from sale of salon assets to franchisees, net
|
|
—
|
|
|
—
|
|
|
(11,552
|
)
|
|
(11,552
|
)
|
Interest income and other, net
|
|
—
|
|
|
—
|
|
|
4,517
|
|
|
4,517
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
22,335
|
|
|
$
|
4,296
|
|
|
$
|
(53,941
|
)
|
|
$
|
(27,310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended December 31, 2018
|
|
|
Franchise
|
|
Company-owned
|
|
Corporate
|
|
Consolidated
|
|
|
(Dollars in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
Service
|
|
$
|
—
|
|
|
$
|
398,267
|
|
|
$
|
—
|
|
|
$
|
398,267
|
|
Product
|
|
33,447
|
|
|
85,793
|
|
|
—
|
|
|
119,240
|
|
Royalties and fees
|
|
44,999
|
|
|
—
|
|
|
—
|
|
|
44,999
|
|
Total revenue
|
|
78,446
|
|
|
484,060
|
|
|
—
|
|
|
562,506
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Cost of service
|
|
—
|
|
|
236,428
|
|
|
—
|
|
|
236,428
|
|
Cost of product
|
|
26,862
|
|
|
41,669
|
|
|
—
|
|
|
68,531
|
|
Site operating expenses
|
|
15,843
|
|
|
56,541
|
|
|
—
|
|
|
72,384
|
|
General and administrative
|
|
17,130
|
|
|
30,579
|
|
|
45,854
|
|
|
93,563
|
|
Rent
|
|
278
|
|
|
69,944
|
|
|
398
|
|
|
70,620
|
|
Depreciation and amortization
|
|
373
|
|
|
14,785
|
|
|
3,944
|
|
|
19,102
|
|
Total operating expenses
|
|
60,486
|
|
|
449,946
|
|
|
50,196
|
|
|
560,628
|
|
Operating income (loss)
|
|
17,960
|
|
|
34,114
|
|
|
(50,196
|
)
|
|
1,878
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
(2,078
|
)
|
|
(2,078
|
)
|
Loss from sale of salon assets to franchisees, net
|
|
—
|
|
|
—
|
|
|
(1,095
|
)
|
|
(1,095
|
)
|
Interest income and other, net
|
|
—
|
|
|
—
|
|
|
989
|
|
|
989
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
17,960
|
|
|
34,114
|
|
|
$
|
(52,380
|
)
|
|
$
|
(306
|
)
|
14. SUBSEQUENT EVENT:
In January 2020, the Company borrowed $30.0 million under its revolving credit facility. Additionally, the Company signed an agreement to sell its investment in Empire Education Group in January 2020. Upon the closure of the transaction, the Company expects to record an immaterial non-operating gain and an income tax benefit.