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 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 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 December 31, 2018				Three Months Ended December 31, 2017
	Company-owned		Franchise		Company-owned		Franchise
	(in thousands)
Revenue recognized at a point in time:
Service	$	190,419	$	—	$	223,278	$	—
Product	43,831		17,818		56,764		15,068
Total revenue recognized at a point in time	$	234,250	$	17,818	$	280,042	$	15,068

Revenue recognized over time:
Royalty and other franchise fees	$	—	$	14,736	$	—	$	12,260
Advertising fund fees	—		7,867		—		6,479
Total revenue recognized over time	$	—	$	22,603	$	—	$	18,739
Total revenue	$	234,250	$	40,421	$	280,042	$	33,807



	Six Months Ended December 31, 2018				Six Months Ended December 31, 2017
	Company-owned		Franchise		Company-owned		Franchise
	(in thousands)
Revenue recognized at a point in time:
Service	$	398,267	$	—	$	458,908	$	—
Product	85,793		33,447		110,000		22,790
Total revenue recognized at a point in time	$	484,060	$	33,447	$	568,908	$	22,790

Revenue recognized over time:
Royalty and other franchise fees	$	—	$	29,156	$	—	$	24,410
Advertising fund fees	—		15,843		—		13,205
Total revenue recognized over time	$	—	$	44,999	$	—	$	37,615
Total revenue	$	484,060	$	78,446	$	568,908	$	60,405

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



	December 31, 2018		June 30, 2018		Balance Sheet Classification
	(in thousands)
Receivables from contracts with customers, net	$	17,861	$	21,504	Accounts receivable, net
Broker fees	$	15,584	$	14,002	Other assets

Deferred revenue:
Current
Gift card liability	$	4,613	$	3,320	Accrued expenses
Deferred franchise fees unopened salons	172		2,306		Accrued expenses
Deferred franchise fees open salons	3,428		3,030		Accrued expenses
Total current deferred revenue	$	8,213	$	8,656
Non-current
Deferred franchise fees unopened salons	$	13,472	$	11,161	Other non-current liabilities
Deferred franchise fees open salons	20,112		18,346		Other non-current liabilities
Total non-current deferred revenue	$	33,584	$	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 December 31, 2018 and June 30, 2018, the balance in the allowance for doubtful accounts was $2.0 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	2,752
Amortization	(1,158		)
Write-offs	(12		)
Balance as of December 31, 2018	$	15,584

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, 2018 and 2017 was $1.1 million and $1.3 million, respectively, and for the six months ended December 31, 2018 and 2017 was $2.2 million and $2.7 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, 2018 and 2017 was $0.8 million and $0.7 million, respectively, and for the six months ended December 31, 2018 and 2017 was $1.7 million and $1.3 million. Estimated revenue expected to the recognized in the future related to deferred franchise fees for open salons as of December 31, 2018 is as follows (in thousands):



Remainder of 2019	$	1,643
2020	3,326
2021	3,238
2022	3,118
2023	2,941
Thereafter	9,274
Total	$	23,540

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:			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 December 31, 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	$	223,214		$	—		$	—	$	64		$	—	$	223,278
Product	71,816			—			—		16			—		71,832
Royalties and fees	13,485			(1,225		)	6,479		—			—		18,739
	308,515			(1,225		)	6,479		80			—		313,849
Operating expenses:
Cost of service	134,850			—			—		—			—		134,850
Cost of product	39,864			—			—		—			—		39,864
Site operating expenses	32,119			—			6,479		—			—		38,598
General and administrative	48,592			—			—		—			—		48,592
Rent	65,473			—			—		—			—		65,473
Depreciation and amortization	24,951			—			—		—			—		24,951
Total operating expenses	345,849			—			6,479		—			—		352,328

Operating income	(37,334		)	(1,225		)	—		80			—		(38,479		)

Other (expense) income:
Interest expense	(2,169		)	—			—		—			—		(2,169		)
Gain from sale of salon assets to franchisees, net	(104		)	—			—		—			—		(104		)
Interest income and other, net	2,466			—			—		(447		)	—		2,019

Income from continuing operations before income taxes	(37,141		)	(1,225		)	—		(367		)	—		(38,733		)

Income tax expense	76,462			—			—		—			4,363		80,825

Income from continuing operations	39,321			(1,225		)	—		(367		)	4,363		42,092

Loss from discontinued operations, net of taxes	(6,601		)	—			—		—			—		(6,601		)

Net loss	$	32,720		$	(1,225	)	$	—	$	(367	)	$	4,363	$	35,491

Net loss per share:
Basic:
Income from continuing operations	$	0.84		$	(0.03	)	$	0.00	$	(0.01	)	$	0.09	$	0.90
Loss from discontinued operations	(0.14		)	0.00			0.00		0.00			0.00		(0.14		)
Net loss per share, basic (1)	$	0.70		$	(0.03	)	$	0.00	$	(0.01	)	$	0.09	$	0.76
Diluted:
Income from continuing operations	$	0.83		$	(0.03	)	$	0.00	$	(0.01	)	$	0.09	$	0.89
Loss from discontinued operations	(0.14		)	0.00			0.00		0.00			0.00		(0.14		)
Net loss per share, diluted (1)	$	0.69		$	(0.03	)	$	0.00	$	(0.01	)	$	0.09	$	0.75

Weighted average common and common equivalent shares outstanding:
Basic	46,821			46,821			46,821		46,821			46,821		46,821
Diluted	47,314			47,314			47,314		47,314			47,314		47,314

_____________________________________________________________________________

(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 Six Months Ended December 31, 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	$	458,773		$	—		$	—	$	135		$	—	$	458,908
Product	132,756			—			—		34			—		132,790
Royalties and fees	26,859			(2,449		)	13,205		—			—		37,615
	618,388			(2,449		)	13,205		169			—		629,313
Operating expenses:
Cost of service	274,686			—			—		—			—		274,686
Cost of product	70,026			—			—		—			—		70,026
Site operating expenses	65,422			—			13,205		—			—		78,627
General and administrative	83,758			—			—		—			—		83,758
Rent	107,889			—			—		—			—		107,889
Depreciation and amortization	37,206			—			—		—			—		37,206
Total operating expenses	638,987			—			13,205		—			—		652,192

Operating income	(20,599		)	(2,449		)	—		169			—		(22,879		)

Other (expense) income:
Interest expense	(4,307		)	—			—		—			—		(4,307		)
Gain from sale of salon assets to franchisees, net	18			—			—		—			—		18
Interest income and other, net	3,371			—			—		(932		)	—		2,439

Income from continuing operations before income taxes	(21,517		)	(2,449		)	—		(763		)	—		(24,729		)

Income tax expense	71,630			—			—		—			3,636		75,266

Income from continuing operations	50,113			(2,449		)	—		(763		)	3,636		50,537

Loss from discontinued operations, net of taxes	(40,368		)	—			—		—			—		(40,368		)

Net loss	$	9,745		$	(2,449	)	$	—	$	(763	)	$	3,636	$	10,169

Net loss per share:
Basic:
Income from continuing operations	$	1.07		$	(0.05	)	$	0.00	$	(0.02	)	$	0.08	$	1.08
Loss from discontinued operations	(0.86		)	0.00			0.00		0.00			0.00		(0.86		)
Net loss per share, basic (1)	$	0.21		$	(0.05	)	$	0.00	$	(0.02	)	$	0.08	$	0.22
Diluted:
Income from continuing operations	$	1.07		$	(0.05	)	$	0.00	$	(0.02	)	$	0.08	$	1.07
Loss from discontinued operations	(0.86		)	0.00			0.00		0.00			0.00		(0.86		)
Net loss per share, diluted (1)	$	0.21		$	(0.05	)	$	0.00	$	(0.02	)	$	0.08	$	0.22

Weighted average common and common equivalent shares outstanding:
Basic	46,719			46,719			46,719		46,719			46,719		46,719
Diluted	47,053			47,053			47,053		47,053			47,053		47,053

_____________________________________________________________________________

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