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 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 its 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 days of delivery.

Revenue recognized over time

Franchise revenues primarily include royalties, advertising fund 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. 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 March 31, 2019				Three Months Ended March 31, 2018
	Company-owned		Franchise		Company-owned		Franchise
	(in thousands)
Revenue recognized at a point in time:
Service	$	181,809	$	—	$	222,022	$	—
Product	39,427		14,339		49,980		14,931
Total revenue recognized at a point in time	$	221,236	$	14,339	$	272,002	$	14,931

Revenue recognized over time:
Royalty and other franchise fees	$	—	$	14,339	$	—	$	12,322
Advertising fund fees	—		8,429		—		6,528
Total revenue recognized over time	—		22,768		—		18,850
Total revenue	$	221,236	$	37,107	$	272,002	$	33,781



	Nine Months Ended March 31, 2019				Nine Months Ended March 31, 2018
	Company-owned		Franchise		Company-owned		Franchise
	(in thousands)
Revenue recognized at a point in time:
Service	$	580,076	$	—	$	680,930	$	—
Product	125,220		47,786		159,980		37,721
Total revenue recognized at a point in time	$	705,296	$	47,786	$	840,910	$	37,721

Revenue recognized over time:
Royalty and other franchise fees	$	—	$	43,495	$	—	$	36,733
Advertising fund fees	—		24,272		—		19,732
Total revenue recognized over time	—		67,767		—		56,465
Total revenue	$	705,296	$	115,553	$	840,910	$	94,186

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



	March 31, 2019		June 30, 2018		Balance Sheet Classification
	(in thousands)
Receivables from contracts with customers, net	$	23,904	$	21,504	Accounts receivable, net
Broker fees	$	16,904	$	14,002	Other assets

Deferred revenue:
Current
Gift card liability	$	3,439	$	3,320	Accrued expenses
Deferred franchise fees unopened salons	137		2,306		Accrued expenses
Deferred franchise fees open salons	3,767		3,030		Accrued expenses
Total current deferred revenue	$	7,343	$	8,656
Non-current
Deferred franchise fees unopened salons	$	13,941	$	11,161	Other non-current liabilities
Deferred franchise fees open salons	21,943		18,346		Other non-current liabilities
Total non-current deferred revenue	$	35,884	$	29,507

Receivables relate primarily to payments due for royalties, franchise fees, advertising fees, and sales of salon services and product. The receivables balance is presented net of an allowance for expected losses (i.e., doubtful accounts), primarily related to receivables from franchisees. As of March 31, 2019 and June 30, 2018, the balance in the allowance for doubtful accounts was $15.7 and $1.2 million, respectively. The increase in the allowance for doubtful accounts is due to reserving for $12.7 million of TBG receivables in the three months ended March 31, 2019 (see Note 3). 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	4,393
Amortization	(1,484		)
Write-offs	(7		)
Balance as of March 31, 2019	$	16,904

Deferred revenue includes the gift card liability and deferred franchise fees for unopened salons and open salons. Gift card revenue for the three months ended March 31, 2019 and 2018 was $1.8 and $1.9 million, respectively, and for the nine months ended March 31, 2019 and 2018 was $4.0 and $4.6 million, respectively. Deferred franchise fees related to open salons are generally recognized on a straight-line basis over the term of the franchise agreement. Franchise fee revenue for the three months ended March 31, 2019 and 2018 was $0.9 and $0.7 million, respectively, and for the nine months ended March 31, 2019 and 2018 was $2.6 and $2.0 million. Estimated revenue expected to the recognized in the future related to deferred franchise fees for open salons as of March 31, 2019 is as follows (in thousands):



Remainder of 2019	$	840
2020	3,631
2021	3,543
2022	3,423
2023	3,246
Thereafter	11,027
Total	$	25,710

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	99,288		—			—		—			—			99,288
Goodwill	412,643		—			—		—			—			412,643
Other intangibles, net	10,557		—			—		—			—			10,557
Other assets	37,616		—			—		—			—			37,616
Non-current assets held for sale (Note 1)	6,572		—			—		—			—			6,572
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:			0
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 March 31, 2018

(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	$	221,926		$	—		$	—	$	96		$	—	$	222,022
Product	64,887			—			—		24			—		64,911
Royalties and fees	13,988			(1,666		)	6,528		—			—		18,850
	300,801			(1,665		)	6,527		120			—		305,783
Operating expenses:
Cost of service	132,081			—			—		—			—		132,081
Cost of product	37,139			—			—		—			—		37,139
Site operating expenses	31,021			—			6,527		—			—		37,548
General and administrative	45,727			—			—		—			—		45,727
Rent	39,391			—			—		—			—		39,391
Depreciation and amortization	9,558			—			—		—			—		9,558
Total operating expenses	294,917			—			6,527		—			—		301,444

Operating income	5,884			(1,665		)	—		120			—		4,339

Other (expense) income:
Interest expense	(5,095		)	—			—		—			—		(5,095		)
Gain from sale of salon assets to franchisees, net	237			—			—		—			—		237
Interest income and other, net	1,548			—			—		(53		)	—		1,495

Income from continuing operations before income taxes	2,574			(1,665		)	—		67			—		976

Income tax expense	2,225			—			—		—			384		2,609

Income from continuing operations	4,799			(1,665		)	—		67			384		3,585

Loss from TBG discontinued operations, net of taxes	(10,605		)	—			—		—			—		(10,605		)

Net loss	$	(5,806	)	$	(1,665	)	$	—	$	67		$	384	$	(7,020	)

Net loss per share:
Basic:
Income from continuing operations (1)	$	0.10		$	(0.04	)	$	0.00	$	0.00		$	0.01	$	0.08
Loss from TBG discontinued operations	(0.23		)	0.00			0.00		0.00			0.00		(0.23		)
Net loss per share, basic (1)	$	(0.12	)	$	(0.04	)	$	0.00	$	0.00		$	0.01	$	(0.15	)
Diluted:
Income from continuing operations (1)	$	0.10		$	(0.04	)	$	0.00	$	0.00		$	0.01	$	0.08
Loss from TBG discontinued operations	(0.22		)	0.00			0.00		0.00			0.00		(0.22		)
Net loss per share, diluted (1)	$	(0.12	)	$	(0.04	)	$	0.00	$	0.00		$	0.01	$	(0.15	)

Weighted average common and common equivalent shares outstanding:
Basic	46,612			46,612			46,612		46,612			46,612		46,612
Diluted	47,153			47,153			47,153		47,153			47,153		47,153

_____________________________________________________________________________

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

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)

For The Nine Months Ended March 31, 2018

(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	$	680,699		$	—		$	—	$	231		$	—	$	680,930
Product	197,643			—			—		58			—		197,701
Royalties and fees	40,847			(4,114		)	19,732		—			—		56,465
	919,189			(4,114		)	19,732		289			—		935,096
Operating expenses:
Cost of service	406,767			—			—		—			—		406,767
Cost of product	107,165			—			—		—			—		107,165
Site operating expenses	96,443			—			19,732		—			—		116,175
General and administrative	129,485			—			—		—			—		129,485
Rent	147,280			—			—		—			—		147,280
Depreciation and amortization	46,764			—			—		—			—		46,764
Total operating expenses	933,904			—			19,732		—			—		953,636

Operating income	(14,715		)	(4,114		)	—		289			—		(18,540		)

Other (expense) income:
Interest expense	(9,402		)	—			—		—			—		(9,402		)
Gain from sale of salon assets to franchisees, net	255			—			—		—			—		255
Interest income and other, net	4,919			—			—		(985		)	—		3,934

Income from continuing operations before income taxes	(18,943		)	(4,114		)	—		(696		)	—		(23,753		)

Income tax expense	73,855			—			—		—			4,020		77,875

Income from continuing operations	54,912			(4,114		)	—		(696		)	4,020		54,122

Loss from TBG discontinued operations, net of taxes	(50,973		)	—			—		—			—		(50,973		)

Net loss	$	3,939		$	(4,114	)	$	—	$	(696	)	$	4,020	$	3,149

Net loss per share:
Basic:
Income from continuing operations (1)	$	1.18		$	(0.09	)	$	0.00	$	(0.01	)	$	0.09	$	1.16
Loss from TBG discontinued operations	(1.09		)	0.00			0.00		0.00			0.00		(1.09		)
Net loss per share, basic (1)	$	0.08		$	(0.09	)	$	0.00	$	(0.01	)	$	0.09	$	0.07
Diluted:
Income from continuing operations (1)	$	1.17		$	(0.09	)	$	0.00	$	(0.01	)	$	0.09	$	1.15
Loss from TBG discontinued operations	(1.08		)	0.00			0.00		0.00			0.00		(1.08		)
Net loss per share, diluted (1)	$	0.08		$	(0.09	)	$	0.00	$	(0.01	)	$	0.09	$	0.07

Weighted average common and common equivalent shares outstanding:
Basic	46,684			46,684			46,684		46,684			46,684		46,684
Diluted	47,093			47,093			47,093		47,093			47,093		47,093

_____________________________________________________________________________

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