REVENUE RECOGNITION:

In May 2014, the FASB issued amended guidance for revenue recognition which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The Company adopted the amended revenue recognition guidance, ASC Topic 606, on July 1, 2018 using the full retrospective transition method which required the adjustment of each prior reporting period presented. The adjusted amounts include the application of a practical expedient that permitted the Company to reflect the aggregate effect of all modifications that occurred prior to fiscal year 2017 when identifying the satisfied and unsatisfied performance obligation, determining the transaction price and allocating the transaction price to the satisfied and unsatisfied performance obligation. As a result of adopting this new standard the Company is providing its updated revenue recognition policies.

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 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 its franchisees are included within product revenues in the 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 days of delivery.

Revenue recognized over time

Franchise revenues primarily include royalties, advertising fund fees, franchise fees and other fees. Royalty and advertising revenues represent sales-based royalties that are recognized in the period in which the sales occur. Generally, royalty and advertising revenue is billed and collected monthly in arrears. Advertising revenues and expenditures, which must be spent on marketing and related activities per the franchise agreement, are recorded on a gross basis within the 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. Upon adoption of the new revenue recognition guidance, recognition of these fees is deferred until the salon opening and is then recognized over the term of the franchise agreement, typically ten years. Under previous guidance the initial franchise fees were recognized in full upon salon opening.

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



	Three Months Ended September 30, 2018				Three Months Ended September 30, 2017
	Company-owned		Franchise		Company-owned		Franchise
	(in thousands)
Revenue recognized at a point in time:
Service	$	207,848	$	—	$	235,630	$	—
Product	41,962		15,629		53,236		7,722
Total revenue recognized at a point in time	$	249,810	$	15,629	$	288,866	$	7,722

Revenue recognized over time:
Royalty and other franchise fees	$	—	$	14,420	$	—	$	12,150
Advertising fund fees	—		7,976		—		6,726
Total revenue recognized over time	$	—	$	22,396	$	—	$	18,876
Total revenue	$	249,810	$	38,025	$	288,866	$	26,598

Information about receivables, broker fees and deferred revenue subject to the amended revenue recognition guidance is as follows:



	September 30, 2018		June 30, 2018		Balance Sheet Classification
	(in thousands)
Receivables from contracts with customers, net	$	23,004	$	21,504	Accounts receivable, net
Broker fees	$	14,657	$	14,002	Other assets

Deferred revenue:
Current
Gift card liability	$	2,974	$	3,320	Accrued expenses
Deferred franchise fees unopened salons	1,714		2,306		Accrued expenses
Deferred franchise fees open salons	3,221		3,030		Accrued expenses
Total current deferred revenue	$	7,909	$	8,656
Non-current
Deferred franchise fees unopened salons	$	12,062	$	11,161	Other non-current liabilities
Deferred franchise fees open salons	19,134		18,346		Other non-current liabilities
Total non-current deferred revenue	$	31,196	$	29,507

Receivables relate primarily to payments due for royalties, franchise fees, advertising fees, and sales of salon services and product. The receivable balance is presented net of an allowance for expected losses (i.e., doubtful accounts), primarily related to receivables from franchisees. As of September 30, 2018 and June 30, 2018, the balance in the allowance for doubtful accounts was $1.6 million and $1.2 million, respectively. Activity in the period was not significant. 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 adoption of the amended revenue recognition guidance did not significantly change the Company's accounting for broker fees.

The following table is a rollforward of the broker fee balance for the periods indicated (in thousands):



Balance as of June 30, 2018	$	14,002
Additions	1,285
Amortization	(628		)
Write-offs	(2		)
Balance as of September 30, 2018	$	14,657

Deferred revenue includes the gift card liability, deferred franchise fees for unopened salons and open salons. Gift card revenue for the three months ended September 30, 2018 and 2017 was $1.0 million and $1.4 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 September 30, 2018 and 2017 was $0.9 million and $0.6 million, respectively. Estimated revenue expected to the recognized in the future related to deferred franchise fees for open salons as of September 30, 2018 is as follows (in thousands):



Remainder of 2019	$	2,391
2020	3,133
2021	3,044
2022	2,924
2023	2,748
Thereafter	8,115
Total	$	22,355

The amended revenue recognition guidance impacted the Company's previously reported financial statements as follows:

CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)

June 30, 2018

(Dollars in thousands)



			Adjustments for new revenue recognition guidance
	Previously		Franchise			Advertising		Gift Card
	Reported		Fees			Funds		Breakage			Taxes			Adjusted
ASSETS
Current assets:
Cash and cash equivalents	$	110,399	$	—		$	—	$	—		$	—		$	110,399
Receivables, net	52,430													52,430
Inventories	79,363													79,363
Other current assets	47,867													47,867
Total current assets	290,059		—			—		—			—			290,059

Property and equipment, net	105,860													105,860
Goodwill	412,643													412,643
Other intangibles, net	10,557													10,557
Other assets	37,616													37,616
Total assets	$	856,735	$	—		$	—	$	—		$	—		$	856,735

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	57,738	$	—		$	—	$	—		$	—		$	57,738
Accrued expenses	97,630		3,030					56						100,716
Total current liabilities	155,368		3,030			—		56			—			158,454

Long-term debt	90,000													90,000
Other noncurrent liabilities	107,875		18,346								(4,378		)	121,843
Total liabilities	353,243		21,376			—		56			(4,378		)	370,297
Commitments and contingencies (Note 7)
Shareholders’ equity:
Common stock	2,263													2,263
Additional paid-in capital	194,436													194,436
Accumulated other comprehensive income	9,568		88											9,656
Retained earnings	297,225		(21,464		)			(56		)	4,378			280,083

Total shareholders’ equity	503,492		(21,376		)	—		(56		)	4,378			486,438

Total liabilities and shareholders’ equity	$	856,735	$	—		$	—	$	—		$	—		$	856,735

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

For The Three Months Ended September 30, 2017

(Dollars and shares in thousands, except per share data amounts)



				Adjustments for new revenue recognition guidance
	Previously			Franchise			Advertising		Gift Card
	Reported			Fees			Funds		Breakage			Taxes			Adjusted
Revenues:
Service	$	235,559		$	—		$	—	$	71		$	—		$	235,630
Product	60,940								18						60,958
Royalties and fees	13,374			(1,224		)	6,726								18,876
	309,873			(1,224		)	6,726		89			—			315,464
Operating expenses:
Cost of service	139,836														139,836
Cost of product	30,162														30,162
Site operating expenses	33,303						6,726								40,029
General and administrative	35,166														35,166
Rent	42,416														42,416
Depreciation and amortization	12,255														12,255
Total operating expenses	293,138			—			6,726		—			—			299,864

Operating income	16,735			(1,224		)	—		89			—			15,600

Other (expense) income:
Interest expense	(2,138		)												(2,138		)
Gain from sale of salon assets to franchisees, net	122														122
Interest income and other, net	905								(485		)				420

Income from continuing operations before income taxes	15,624			(1,224		)	—		(396		)	—			14,004

Income tax expense	(4,832		)									(727		)	(5,559		)

Income from continuing operations	10,792			(1,224		)	—		(396		)	(727		)	8,445

Loss from discontinued operations, net of taxes	(33,767		)												(33,767		)

Net loss	$	(22,975	)	$	(1,224	)	$	—	$	(396	)	$	(727	)	$	(25,322	)

Net loss per share:
Basic:
Income from continuing operations	$	0.23													$	0.18
Loss from discontinued operations	(0.72		)												(0.72		)
Net loss per share, basic (1)	$	(0.49	)												$	(0.54	)
Diluted:
Income from continuing operations	$	0.23													$	0.18
Loss from discontinued operations	(0.72		)												(0.72		)
Net loss per share, diluted (1)	$	(0.49	)												$	(0.54	)

Weighted average common and common equivalent shares outstanding:
Basic	46,677														46,677
Diluted	46,900														46,900

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(1)Total is a recalculation; line items calculated individually may not sum to total due to rounding.