BASIS OF PRESENTATION

3 Months Ended

Mar. 31, 2020

BASIS OF PRESENTATION The accompanying unaudited Consolidated Financial Statements, which have been prepared in accordance with the applicable rules of the Securities and Exchange Commission ("SEC"), include all adjustments (of a normal and recurring nature) that management considers necessary to fairly state the Company's results of operations, financial position and cash flows. The December 31, 2019 Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the

United States of America (“U.S. GAAP”). These interim Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Footnotes included in the Company’s audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on March 25, 2020 (the "2019 10-K"). Interim results are not necessarily indicative of the results that may be expected for the remainder of the year ending December 31, 2020.

The preparation of the financial statements in conformity with GAAP requires management to make estimates 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. Management bases these estimates on assumptions that it believes to be reasonable under the circumstances, including considerations for the impact from the outbreak of the COVID-19 pandemic on the Company's business due to various global macroeconomic, operational and supply chain risks as a result of COVID-19. Actual results could differ from the original estimates, requiring adjustments to these balances in future periods.

Recently Adopted Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-used software. This standard is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Accordingly, the Company has adopted this ASU in the first quarter of 2020, which did not have a material impact on its Consolidated Financial Statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments, which introduces a new model to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. This standard is effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company has adopted this ASU in the first quarter of 2020, which did not have a material impact on its Consolidated Financial Statements.

The majority of the Company's domestic store and e-commerce revenues are received as cash at the point of sales. The majority of the Company's franchise and wholesale revenues are billed with varying terms for payment. An allowance for credit losses is established based on the aging of the accounts receivable balances, financial condition of our franchisees and other third-party customers, historical write-off experience and current and future economic and market conditions.

The allowance for credit losses related to accounts receivable as of March 31, 2020 and changes for the three months then ended are as follows:


(in thousands)	Balance at December 31, 2019		Charged to costs and expenses		Deduction		Balance at March 31, 2020
Vendor allowance⁽¹⁾	$	14,033	$	5,439	$	(6,707)	$	12,765
Trade accounts receivable allowance ⁽²⁾	8,615		9,224		(3,214)		14,625

(1) Changes to vendor allowance reserves are recorded as cost of sales on the Consolidated Statement of Operations.

(2) Changes to trade accounts receivable allowance are recorded as selling, general and administrative on the Consolidated Statement of Operations

The Company recognized a $8.7 million allowance for credit losses for its franchisees and other third-party customers and $4.6 million vendor allowance reserves during the three months ended March 31, 2020 based on the current and estimated adverse impacts from the COVID-19. Refer to Note 15. "Subsequent Events" for more information on the uncertainty that exists regarding the impacts of COVID-19.

Recently Issued Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes, which simplifies accounting for income taxes by eliminating certain exceptions to ASC 740 related to the general approach for intraperiod tax allocation, methodology for calculating income taxes in an interim period and recognition of deferred taxes when there are investment ownership changes. The new guidance also simplifies aspects of accounting for franchise taxes and interim period effects of enacted changes in tax laws or rates. The new guidance provides clarification on accounting for transactions that result in a step-up in the tax basis of goodwill and allocation of consolidated income tax expense to separate financial statements of entities not subject to income tax. This ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, and early adoption is permitted. The Company is evaluating the impact this standard will have on its Consolidated Financial Statements and related disclosures.